Item 1. Business:
Community Banks, Inc. (Corporation) is a bank holding company whose banking subsidiaries are Community Banks, N.A. (CBNA) and Peoples State Bank (PSB) and whose non-banking subsidiaries are Community Banks Investments, Inc. (CBII) and Community Banks Life Insurance Company, Inc. (CBLIC).
The Corporation conducts a full service commercial banking business and provides trust services in Adams County, Dauphin County, southern Luzerne County, Northumberland County, western Schuylkill County, Snyder County, and York County. The Corporation currently has 29 offices. There are 58 offices of commercial banks and savings and loan associations within its market area with which the Corporation competes. Deposits of the Corporation represent approximately 14% of the total deposits in the market area. The Corporation has 1 office in Adams County, 7 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 5 offices in York County. On March 31, 1998, Community Banks, Inc. completed its merger of the Peoples State Bank of East Berlin. PSB's banking offices are located in Dover, Hanover, and Manchester, Pennsylvania. The transaction was accounted for as a pooling of interests.
Like other depository institutions, the Corporation has been subjected to competition from brokerage firms, money market funds, consumer finance and credit card companies and other companies providing financial services and credit to consumers. As a result of federal legislation, regulatory restrictions previously imposed on the Bank with respect to establishing money market fund accounts have been eliminated and the Bank is now better able to compete with other financial institutions in its service area with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans.
During 1986 the Corporation formed CBLIC to provide credit life insurance to its consumer credit borrowers. Total premiums earned were $493,000 for the year ended December 31, 1998. During 1985 the Corporation formed CBII to make investments primarily in equity securities of other banks. Total assets of CBII at December 31, 1998 were $4,462,000.
The Corporation has approximately 400 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. A minimum required capital ratio at December 31, 1998, was 8 percent. The Bank's December 31, 1998 ratio approximated 14%. Subsequently, in August 1990 the board announced approval of capital to total assets (leverage) guidelines. This minimum leverage ratio was set at 4% and would apply only to those banking organizations receiving a regulatory composite 1 rating. Most banking organizations will be required to maintain a leverage ratio ranging from 1 to 2 percentage points above the minimum standard. The Corporation's leverage ratio at December 31, 1998, approximated 9%. Risk-based capital requirements replace previous capital guidelines which established minimum primary and total capital requirements.
The following summarizes the Corporation's capital adequacy position:
Required Bank Regulatory Capital (in thousands) December 31, 1998 December 31, 1998
Risk-based capital $81,767 14.0% $46,745 8.0% Leverage ratio (tier 1 capital) 74,813 8.8% 23,372 4.0%
Statistical Data:
Pages 19 through 21 of the Community Banks, Inc. Annual report to stockholders dated December 31, 1998 contain information concerning:
Financial Highlights
Average Balances, Effective Interest Differential, and Interest Yields for the three years ended December 31, 1998.
Rate/Volume Analysis for the two years ended December 31, 1998.
Appendix A attached to Part I contains information concerning:
Return on Equity and Assets for the five years ended December 31, 1998.
Amortized cost and Estimated Market Values of Investment Securities as of December 31, 1998, 1997, and 1996.
Maturity Distribution of Securities as of December 31, 1998 (Market Value).
Loan Account Composition as of December 31, 1998, 1997, 1996, 1995, and 1994.
Maturities and Sensitivity to Changes in Interest Rates for Commercial, Financial, and Agricultural Loans as of December 31, 1998.
Nonperforming Loans as of December 31, 1998, 1997, 1996, 1995, and 1994.
Loan Loss Experience for the five years ended December 31, 1998.
Loans Charged Off and Recovered for the five years ended December 31, 1998.
Allowance for Loan Losses as of December 31, 1998, 1997, 1996, 1995, and 1994.
Maturity Distribution of Time Deposits over $100,000 as of December 31, 1998.
Interest Rate Sensitivity as of December 31, 1998.
Item 2.
Item 2. Properties:
The Corporation owns no real property except through its subsidiary banks. CBNA owns the following buildings: 150 Market Street, Millersburg, Pennsylvania (its corporate headquarters); 13-23 South Market Street, Elizabethville, Pennsylvania; 3679 Peters Mountain Road, Halifax, Pennsylvania; 906 N. River Road, Halifax, Pennsylvania; 800 Peters Mountain Road, Dauphin, Pennsylvania; Main and Market Streets, Lykens, Pennsylvania; Route 209, Porter Township, Schuylkill County, Pennsylvania; 29 E. Main Street, Tremont, Schuylkill County, Pennsylvania; Second and Carroll Streets, St. Clair, Schuylkill County, Pennsylvania; R.D. 3, Mill Creek Manor, Pottsville, Schuylkill County, Pennsylvania; 300 East Independence Street, Shamokin, Northumberland County, Pennsylvania; Route 61, R.D. 1, Orwigsburg, Schuylkill County, Pennsylvania; One South Arch Street, Milton, Northumberland County, Pennsylvania; 22 S. Church Street, Hazleton, Luzerne County, Pennsylvania; 702 West Main Street, Valley View, Schuylkill County, Pennsylvania; 735 Center Street, Ashland, Schuylkill County, Pennsylvania; P.O. Box 44, Gordon, Schuylkill County, Pennsylvania; 436 Main Street, Lavelle, Schuylkill County, Pennsylvania; and 9-11 N. Centre Street, Pottsville, Schuylkill County, Pennsylvania; and One Westside Drive, Shamokin Dam, Snyder County, Pennsylvania. In addition thereto, CBNA leases an office at Main Street, Pillow, Pennsylvania, pursuant to a lease which, with renewal options, will extend to the year 2008. Also, the Bank leases offices at Route 93, Conyngham, Luzerne County, Pennsylvania; 77 Airport Road, Hazleton, Luzerne County, Pennsylvania; and 6700 Derry Street, Rutherford, Dauphin County, Pennsylvania.
All the buildings used by CBNA are free-standing and are used exclusively for banking purposes with the exception of offices and retail space rented at the St. Clair, Milton, Pottsville and Hazleton locations.
PSB owns the following buildings: 100 E. King Street, East Berlin, Pennsylvania; and 3421 Carlisle Road, Dover, Pennsylvania. In addition thereto, PSB leases and office at 600 Carlisle Street, Hanover, Pennsylvania, pursuant to a lease which, with renewal options, will extend to the year 2006. PSB also owns real property through its subsidiary, PSB Realty, at the following locations: 1191 Eichelberger Street, Hanover, Pennsylvania; 155 Glen Drive, Manchester, Pennsylvania; and 1345 Baltimore Street, Hanover, Pennsylvania.
All the Buildings used by PSB are free-standing and are used exclusively for banking purposes with the exception of offices and retail space rented at the Carlisle Street, Hanover location.
From time to time, the subsidiary banks also acquire real estate by virtue of foreclosure proceedings, which real estate is disposed of in the usual and ordinary course of business as expeditiously as is prudently possible.
Item 3.
Item 3. Legal Proceedings:
There are no material pending legal actions, other than routine litigation incidental to the business of the Corporation, to which the Corporation is a party.
Item 4.
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 1998.
APPENDIX A
APPENDIX A Continued
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
The Corporation's loan activity is principally with customers located within the local market area. The Corporation continues to maintain a diversified loan portfolio and has no significant loan concentration in any economic sector. Changes in loan demand in 1998 resulted in increases in commercial, financial, and agricultural loans and personal-installment loans of 22.8% and 10.8%, respectively. Real estate loans increased 12.1% during this same period. Commercial, financial, and agricultural loans represented 12.8% of total loans at December 31, 1998 and consist principally of commercial lending secured by financial assets of businesses including account receivables, inventories and equipment, and, in most cases, include liens or real estate. Real estate construction and mortgage loans are primarily 1 to 4 family residential loans secured by residential properties within the bank's market area. Personal- installment loans comprised 19.0% of total loans at December 31, 1998 and consist principally of secured loans for items such as automobiles, property improvement, household and other consumer goods. The Corporation continues to sell fixed rate mortgages in the secondary market to avoid associated interest rate risk. Historically, relative credit risk of commercial, financial and agricultural loans has generally been greater than that of other types of loans.
APPENDIX A Continued
APPENDIX A Continued
The allowance for loan losses is based upon management's continuing evaluation of the loan portfolio. A review as to loan quality, current macro-economic conditions and delinquency status is performed at least on a quarterly basis. The provision for loan losses is adjusted quarterly based upon current review. The table on page 10 presents an allocation by loan categories of the allowance for loan losses at December 31 for the last five years. In retrospect, the specific allocation in any particular category may prove excessive or inadequate and consequently may be reallocated in the future to reflect the then current condition. Accordingly, the entire allowance is available to absorb losses in any category.
As discussed in the Corporation's Annual Report, the Corporation adopted SFAS 114, as amended by SFAS 118, on January 1, 1995. The adoption of SFAS 114 did not result in any additional provision for loan losses.
The provision for loan losses totalled $1,464,000 for the year ended December 31, 1998 compared to $1,317,000, $1,567,000, $1,078,000, and $1,912,000 for the years ended December 31, 1997, 1996, 1995, and 1994, respectively. The relationship of the allowance for loan losses to loans at year end approximated 1.38% compared to ratios of 1.36% to 1.42% for the previous four years. In reviewing the adequacy of the allowance for loan losses, management considered the relationship of nonaccrual loans, other real estate owned, and accruing loans contractually past due 90 days or more to total assets. This relationship approximated .56%, .93%, 1.03%, .99%, and 1.13% at year-end 1998, 1997, 1996, 1995, and 1994, respectively.
APPENDIX A Continued
MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE (dollars in thousands) as of December 31, 1998 Remaining to Maturity: Less than three months $ 6,620 Three months to six months 3,117 Six months to twelve months 6,233 More than twelve months 9,697 $25,667 =======
APPENDIX A Continued
INTEREST RATE SENSITIVITY
The excess of interest-earning assets over interest-bearing liabilities which are expected to mature or reprice within a given period is commonly referred to as the "GAP" for that period. For an institution with a negative GAP, the amount of income earned on its assets fluctuates less than the cost of its liabilities in response to changes in the prevailing rates of interest during the period. Accordingly, in a period of decreasing interest rates, institutions with a negative GAP will experience a smaller decrease in the yield on their assets than in the cost of their liabilities. Conversely, in a period of rising interest rates, institutions with a negative GAP face a smaller increase in the yield on their assets than in the cost of their liabilities. A decreasing interest rate environment is favorable to institutions with a negative GAP because more of their liabilities than their assets adjust during the period and, accordingly, the decrease in the cost of their liabilities is greater than the decrease in the yield on their assets.
The 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, 1998.
Significant maturity/repricing assumptions (based on internal analysis) include the presentation of all savings and NOW accounts as being 62% interest rate sensitive. Equity securities are reflected in the shortest time interval. Assumed paydowns on mortgage-backed securities and loans have also been included in all time intervals.
The following table sets forth the scheduled repricing or maturity of the Corporation's interest-earning assets and interest-bearing liabilities at December 31, 1998.
Forward-Looking Statements:
Certain statements in this document may be considered to be "forward-looking statements" as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995, such as statements that include the words "expect", "estimate", "project", "anticipate", "should", "intend", "probability", "risk", "target", "objective", and similar expressions or variations on such expressions. In particular, this document includes forward-looking statements relating, but not limited to, the Corporation's potential exposures to various types of market risks such as interest rate risk and credit risk. Such statements are subject to certain risks and uncertainties. For example, certain of the market risk disclosures are dependent on choices about key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and could be materially different from what actually occurs in the future. As a result, actual income gains and losses could materially differ from those that have been estimated. Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to: general economic conditions in market areas which the Corporation has significant business activities or investments; the monetary and interest rate policies of the Board of Governors of the Federal Reserve System; inflation; deflation; unanticipated turbulence in interest rates; changes in laws, environments; natural disasters; the inability to hedge certain risks economically; the adequacy of loan reserves; acquisitions or restructurings' technological changes; in consumer spending and savings habits; and the success of the Corporation in managing the risks involved in the foregoing.
Quantitative and Qualitative Disclosures About Market Risk.
Community Banks, Inc. has only a limited involvement with derivative financial instruments and does not use them for trading purposes. The business of the Corporation and the composition of its balance sheet consists of investments in interest-earning assets (primarily loans, mortgage-backed securities and investment securities) which are primarily funded by interest-bearing liabilities (deposits and borrowings). Such financial instruments have varying levels of sensitivity to changes in market interest rates resulting in market risk. Other than loans which are originated and held for sale, all of the financial instruments of the Corporation are for other than trading purposes.
Interest rate sensitivity results when the maturity or repricing intervals are interest rate indices of the interest-earning assets, interest-bearing liabilities, and off-balance sheet financial instruments are different, creating a risk that changes in the level of market interest rates will result in disproportionate changes in the value of, and the net earnings generated from, 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 on investing in loans and securities (a substantial portion of which have adjustable-rate terms) which permit the Corporation to limit its exposure to interest rate sensitivity, together with credit risk, while at the same time achieving a positive interest rate spread from the difference between the interest-bearing liabilities.
Significant Assumptions Utilized in Managing Interest Rate Sensitivity
Managing the Corporation's exposure to interest rate sensitivity involves significant assumptions about the exercise of imbedded options and the relationship of various interest rate indices of certain financial instruments.
Imbedded Options
A substantial portion of the Corporation's loans and mortgage-backed securities and residential mortgage loans containing significant imbedded options which permit the borrower to prepay the principal balance of the loan prior to maturity ("prepayments") without penalty. A loan's propensity for prepayment is dependent upon a number of factors, including the current interest rate and interest rate index, (if any) of the loan, the financial ability of the borrower to refinance, the economic benefit to be obtained from refinancing, availability of refinancing at attractive terms, as well as economic and other factors in specific geographic areas which affect the sales and price levels of residential property. In a changing interest rate environment, prepayments may increase or decrease on fixed and adjustable-rate loans depending on the current relative levels and expectations of future short and long-term interest rates. Since a significant portion of 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 those with early call provisions, generally do not have significant imbedded options and repay pursuant to specific terms until maturity, While savings and checking deposits generally may be withdrawn upon the customer's request without prior notice, a continuing relationship with customers resulting in future deposits and withdrawals is generally predictable resulting in a dependable and uninterrupted source of funds. Time deposits generally have early withdrawal penalties, while term FHLB borrowings and subordinated notes have prepayment penalties, which discourage customer withdrawal of time deposits and prepayment of FHLB borrowings and subordinated notes prior to maturity.
Interest Rate Indices
The Corporation's loans and mortgage-backed securities are primarily indexed to the national interest indices. When such loans and mortgage-backed securities are funded by interest-bearing liabilities which are determined by other indices, primarily deposits and FHLB borrowings, a changing interest rate environment may result in different levels of changes in the different indices leading to disproportionate changes in the value of, and net earnings generated from, the 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.
Interest Rate Sensitivity Measurement
In addition to periodic gap reports comparing the sensitivity of interest- earning assets and interest-bearing liabilities to changes in interest rates, management also utilizes a quarterly report which measures the Corporation's exposure to interest rate risk. The model calculates the present value of assets, liabilities and equity at current interest rates, and at hypothetical higher and lower interest rates at one percent intervals. The present value of each major category of financial instrument is calculated by the model using estimated cash flows based on prepayments, early withdrawals, weighted average contractual rates and terms, and discount rates for similar financial instruments. The resulting present value of longer term fixed-rate financial instruments are more sensitive to change in a higher or lower interest rate scenario, while adjustable-rate financial instruments largely reflect only a change in present value representing the difference between the contractual and discounted rates until the next interest rate repricing date.
The following table reflects the estimated present value of assets, liabilities and equity financial instruments using the model for Community Banks, Inc. as of December 31, 1998 consolidated with the estimated present values of other financial instruments of the Corporation, at current interest rates and hypothetical higher and lower interest rates of one and two percent.
PART II
Item 5.
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters:
Incorporated by reference is the information appearing under the heading "Market for the Corporation's Common Stock and Related Securities Holder Matters" on page 3 of the Annual Report to Stockholders for the year ended December 31, 1998 (hereafter referred to as the "Annual Report").
Item 6.
Item 6. Selected Financial Data:
Incorporated by reference is the information appearing under the heading "Financial Highlights" on page 21 of the Annual Report.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations:
Incorporated by reference is the information appearing under the headings "Rate/Volume Analysis"; "Average Balances, Effective Interest Differential and Interest Yields"; and "Management's Discussion of Financial Condition and Results of Operations" on pages 22 through 26 of the Annual Report.
Item 8.
Item 8. Financial Statements and Supplementary Data:
The consolidated financial statements, together with the report thereon of PricewaterhouseCoopers LLP dated January 14, 1999, are incorporated by reference to pages 6 through 20 of the Annual Report.
Item 9.
Item 9. Disagreements on Accounting and Financial Disclosures:
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant:
The following table sets forth the name and age of each director of Community Banks, Inc. as well as the director's business experience, including occupation for the past 5 years, the period during which he has served as a director of the Bank, or its wholly-owned subsidiary, Community Banks, N.A. (Formerly Upper Dauphin National Bank), and the number and percentage of outstanding shares of Common Stock of the Bank beneficially owned by said directors as of December 31, 1998.
Percentage Business Experience Amount and of Including Principal Nature of Outstanding Occupation for the Director Beneficial Common Stock Name and Age Past Five Years Since (1) Ownership(2) Owned
Ernest L. Lowe Chairman-CBI 1990 37,998 (9) .58% Age 62 Pres/CEO Community Banks, N.A. Prior to 12/31/97 Ex. V.P. of CBI
Eddie L. Dunklebarger President/CEO 1998 92,785 (19) 1.42% Age 45 CBI & PSB Prior to 3/31/98 Pres/CEO of PSB
Thomas L. Miller Retired CEO of 1966 57,721 (10) .88% Age 66 CBI & CBNA
Kenneth L. Deibler Self-Employed 1966 34,703 (3) .53% Age 76 Insurance Broker Elizabethville, PA
Leon E. Kocher Chairman of the Board, 1963 27,206 .42% Age 86 Kocher Enterprise, Inc. Millersburg, PA
Robert W. Rissinger Sec./Treasurer 1968 242,365 (4) 3.71% Age 72 Alvord Polk Tool Co. (5) (cutting tools) Engle Rissinger Auto Group Millersburg, PA
Allen Shaffer Attorney-at-Law 1961 42,637 (7) .65% Age 73 Millersburg and Harrisburg, PA
James A. Ulsh Attorney-at-Law 1977 16,295 .25% Age 52 Mette, Evans & Woodside Harrisburg, PA
Samuel E. Cooper Retired Superintendent 1992 2,069 .03% Age 65 Warrior Run School District Turbotville, PA
Susan K. Nenstiel Regional Dir. of Dev. 1996 207 -- Age 47 Lutheran Welfare Serv. Hazleton, PA
Percentage Business Experience Amount and of Including Principal Nature of Outstanding Occupation for the Director Beneficial Common Stock Name and Age Past Five Years Since (1) Ownership(2) Owned
Ronald E. Boyer President, 1981 21,725 (6) .33% Age 61 Alvord-Polk Tool Co. (manufacturing of cutting tools) Millersburg, PA
Peter DeSoto CEO, J.T. Walker 1981 44,270 (14) .68% Age 59 Industries, Inc. (manufacturing of metal products) Elizabethville, PA
Thomas W. Long Partner, 1981 9,326 .14% Age 69 Millersburg Hardware Millersburg, PA
Donald L. Miller President, Miller Bros. 1981 88,003 1.35% Age 69 Dairy Millersburg, PA
Ray N. Leidich Retired Dentist 1985 67,476 (8) 1.03% Age 70 Tremont, PA
John W. Taylor, Jr. President-Air Brake 1998 18,930 (15) .29% Age 68 & Power Equip. Co.
Harry B. Nell Retired Merchant 1998 34,480 (16) .53% Age 72
Earl L. Mummert Consulting Actuary 1998 32,643 (17) .50% Age 54 Conrad M. Siegel, Inc. Harrisburg
Wayne H. Mummert Retired U.S. Postal 1998 72,548 (18) 1.11% Age 65 Service/Farmer
(1) Includes service as a director of CBNA (formerly Upper Dauphin National Bank), a wholly-owned subsidiary of the bank, prior to 1983 and service as a director of the bank after 1983.
(2) The securities "beneficially owned" by an individual are determined in accordance with the definition of "beneficial ownership" set forth in the regulations of the Securities and Exchange Commission. Accordingly, they may include securities owned by or for, among others, the wife and/or children of the individual and any other relative who has the same home as such individual, as well as other securities as to which the individual has or shares voting or investment power or has the right to acquire under outstanding stock options within 60 days after December 31, 1998. Beneficial ownership may be disclaimed as to certain of the securities.
(3) Includes 2,802 shares owned by Mr. Deibler's grandchildren.
(4) Includes 6,310 shares owned by Alvord-Polk Tool Co., Inc. the stock of which is held 50% by Robert Rissinger and 50% by Ronald E. Boyer.
(5) Includes 14,062 shares owned by Engle Ford, Inc., 43,330 shares owned by Mr. Rissinger's spouse, Shirley Rissinger, and 10,578 shares owned by Engle Ford, Inc. Profit Sharing Plan.
(6) Includes 6,310 shares owned by Alvord-Polk Tool Co., Inc., the stock of which is held 50% by Robert W. Rissinger and 50% by Ronald E. Boyer, and 496 shares owned by Mr. Boyer's wife, Judith Boyer.
(7) Includes 7,270 shares owned by Mr. Shaffer's Retirement plan.
(8) Includes 33,738 shares owned by Dr. Leidich's wife, Dolores Leidich.
(9) Includes 180 shares owned by Mr. Lowe's wife, Barbara and 21 shares owned by Mr. Lowe's son and incentive stock options to acquire 31,373 shares.
(10) Includes incentive stock options to acquire 24,964 shares and 788 in his IRA.
(11) Includes incentive stock options to acquire 22,543 shares.
(12) Includes incentive stock options to acquire 13,068 shares and 142 shares registered to Mr. Lawley for his minor children.
(13) Includes incentive stock options to acquire 1,443 shares.
(14) Includes 97 shares owned by Mr. DeSoto's son.
(15) Includes 1,210 shares owned by Mr. Taylor's wife, LouAnn and 865 in his IRA.
(16) Includes 787 shares owned by Mr. Nell's wife, Helen and stock options to acquire 2,004 shares.
(17) Includes stock options to acquire 2,004 shares and 13,723 shares in Mr. Mummert's IRA.
(18) Includes stock options to acquire 2,004 shares and 16,380 shares owned by Mr. Mummert's, wife Shirley.
(19) Includes 298 shares owned by Mr. Dunklebarger's wife, Connie, 8,867 shares owned by Mr. Dunklebarger's children, 7,446 shares in his 401(k) plan, 6,336 shares in his IRA and 45,430 stock options (ISO and NQ's) to acquire shares.
(20) Includes 4,035 shares in his 401(k) plan and 14,272 (ISO and NQ) stock options to acquire shares.
(21) Includes 3,447 shares in his 401(k) plan and 7,487 shares in his IRA and 15,930 stock options to acquire shares.
Section 16(a) Beneficial Ownership Reporting Compliance
In 1998, to the knowledge of CBI, all Executive Officers and directors timely filed all reports with the Securities Exchange Commission, except Peter DeSoto who filed one Form 4 report, regarding one transaction two days late.
None of the directors or nominee directors are directors of other companies with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934.
Executive Officers:
The following table sets forth the executive officers of Community Banks, Inc., their ages, their positions with Community Banks, Inc. and the beneficial ownership (as determined in accordance with the rules and regulations of the Securities and Exchange Commission) of Common Stock of the Bank by each of such persons as of December 31, 1998.
Amount and Percentage Principal Occupation Nature of of for the Past Five Beneficial Outstanding Name and Age Years Term (1) Ownership(2)Common Stock
Ernest L. Lowe Chairman-CBI 1985 37,998 (9) .58% Age 62 Pres/CEO Community Banks, N.A. Prior to 12/31/97 Ex. V.P. of CBI
Eddie L. Dunklebarger President/CEO 1998 92,785 (19) 1.42% Age 45 CBI & PSB Prior to 3/31/98 Pres/CEO of PSB
Terry L. Burrows Executive Vice President, 1977 20,251 (13) .31% Age 50 Chief Financial Officer
David E. Hawley Executive Vice President, 1975 23,088 (11) .35% Age 60 Corporate Property Officer
Robert W. Lawley Executive Vice President, 1980 13,266 (12) .20% Age 44 Chief Lending Officer
Anthony N. Leo Executive Vice President 1998 25,976 (20) .40% Age 38
Jeffrey M. Seibert Executive Vice President 1998 33,998 (21) .52% Age 39
(1) Initial year employed in this capacity.
The following is all shares beneficially owned by all directors and executive officers of the Bank as a group:
Amount and Nature of Beneficial Ownership
Percent Title of Class Direct Indirect of Class
Common 687,751 365,730 16.16%
Item 11.
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 4, 1999; and the information included therein with respect to this item is incorporated herein by reference.
Pension Plan:
CBNA maintains a pension plan for its employees. An employee becomes a participant in the pension plan on January 1 or July 1 after completion of one year of service (12 continuous months) and attainment of the age 21 years. The cost of the pension is actuarially determined and paid by the CBNA. The amount of monthly pension is equal to 1.15% of average monthly pay up to $650, plus .60% of average monthly pay in excess of $650, multiplied by the number of years of service completed by an employee. The years of service for the additional portion are limited to a maximum of 37. Average monthly pay is based upon the 5 consecutive plan years of highest pay preceding retirement. The maximum amount of annual compensation used in determining retirement benefits is $160,000. A participant is eligible for early retirement after attainment of the age of 60 years and the completion of 5 years of service. The early retirement benefit is the actuarial equivalent of the pension accrued to the date of early retirement. As of December 31, 1998, the following officers have been credited with the following years of service: Ernest L. Lowe-14 years of service, Robert W. Lawley-23 years of service, and Terry L. Burrows-25 years of service.
The amounts shown on the following table assume an annual retirement benefit for an employee who chose a straight-line annuity and who is presently 50 years old and who will retire at the age of 65 years.
Directors' Compensation:
Each director of CBI is paid a quarterly fee of $750.00. In addition, each outside director receives a fee of $250.00 for attendance at the regular quarterly meetings of the Board of Directors of CBI. Each director who is not an executive officer also receives $250.00 for attendance at each committee meeting of CBI.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management:
Refer to Item 10 on pages 16 through 19.
Item 13.
Item 13. Certain Relationships and Related Transactions:
(a) Transactions with Management and Others
Incorporated by reference is the information appearing in Note 12 (Related Parties) of Notes to Consolidated Financial Statements on page 16 of the Annual Report.
(b) Certain Business Relationships
Allen Shaffer, a director of CBI, is an attorney practicing in Harrisburg and Millersburg, Pennsylvania, who has been retained in the last fiscal year by CBI and who CBI proposes to retain in the current fiscal year. James A. Ulsh, a director of CBI, is a shareholder/employee of the law firm of Mette, Evans, & Woodside, Harrisburg, Pennsylvania, which CBI has retained in the last fiscal year and proposes to retain in the current fiscal year. Thomas J. Carlyon, a director of CBNA, is a partner in the law firm of Carlyon & McNelis, Hazleton, Pennsylvania, which CBI has retained in the last fiscal year and proposes to retain in the current fiscal year. Earl L. Mummert, a director of CBI, is an actuarial consultant with Conrad M. Siegel, Inc., Harrisburg, Pennsylvania, which provides actuarial services to CBI.
All loans to directors and their business affiliates, executive officers and their immediate families were made by the subsidiary bank in the ordinary course of business, at the subsidiary bank's normal credit terms, including interest rates and collateralization prevailing at the time for comparable transactions with other non-related persons, and do not represent more than a normal risk of collection.
PART IV
Item 14
Item 14 Exhibits, Financial Statements Schedules and Reports on Form 8-K: Reference (page) Annual Form Report to 10-K Shareholders (a) (1) Consolidated Financial Statements Report of Independent Public Accountants -- 20
Balance Sheets as of December 31, 1998 and 1997 -- 6
Statements of Income for each of the three years ended December 31, 1998 -- 7
Statements of Changes in Stockholders' Equity for each of the three years ended December 31, 1998 -- 8
Statements of Cash Flows for each of the three years ended December 31, 1998 -- 9
Notes to Financial Statements -- 10-20
All other schedules are omitted since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule.
(3) Exhibits
(3) Articles of Incorporation and By-Laws. Incorporated by reference to the Proxy Statements dated April 14, 1987 and April 12, 1988 and Amendment 2 to Form S-2 dated May 13, 1987.
(13) Portions of the Annual Report to Security Holders incorporated by reference within this document is filed as part of this report.
(21) Subsidiaries of the Registrant (see Item 1, pages 2 and 3).
(b) The registrant filed Form 8-K, November 23, 1998, subsequent to announcing a stock repurchase program effective November 10, 1998. Up to five percent of outstanding shares could be repurchased pursuant to the program.
CONSENT OF INDEPENDENT ACCOUNTS
We consent to the incorporation by reference in the registration statements of Community Banks, Inc. on Form S-8 (File No. 0-15786 and File No. 33-24908) of our report, dated January 14, 1999 on our audits of the consolidated financial statements of Community Banks, Inc. as of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997, and 1996, which report is incorporated by reference in the Annual Report on Form 10-K.
PricewaterhouseCoopers, LLP
One South Market Square Harrisburg, Pennsylvania March 25, 1999
Signatures
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Community Banks, Inc.
By: Ernest L. Lowe _____ (Ernest L. Lowe) Chairman of the Board and Director
Date: March 5, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
/S/ Terry L. Burrows Ex. Vice President and 3/5/99 (Terry L. Burrows) Chief Financial Officer
/S/ Ronald E. Boyer Director 3/5/99 (Ronald E. Boyer)
/S/ Samuel E. Cooper Director 3/5/99 (Samuel E. Cooper)
/S/ Kenneth L. Deibler Director 3/5/99 (Kenneth L. Deibler)
/S/ Eddie L. Dunklebarger President & CEO and 3/5/99 (Eddie L. Dunklebarger) Director
/S/ Leon E. Kocher Director 3/5/99 (Leon E. Kocher)
/S/ Ray N. Leidich Director 3/5/99 (Ray N. Leidich)
/S/ Thomas L. Miller Director 3/5/99 (Thomas L. Miller)
/S/ Earl L. Mummert Director 3/5/99 (Earl L. Mummert)
/S/ Wayne H. Mummert Director 3/5/99 (Wayne H. Mummert)
/S/ Harry B. Nell Director 3/5/99 (Harry B. Nell)
/S/ Robert W. Rissinger Director 3/5/99 (Robert W. Rissinger)
/S/ Allen Shaffer Director 3/5/99 (Allen Shaffer)
/S/ John W. Taylor Director 3/5/99 (John W. Taylor)
/S/ James A. Ulsh _ Director 3/5/99 (James A. Ulsh)