August 11, 1994
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Sirs:
Enclosed are eight (8) copies or our 10-Q reports for the period
ending June 30, 1994.
Sincerely yours,
Terry L. Burrows
Executive Vice President
TB/dr
Enclosures
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarter Ended June 30, 1994
No. 0-15786
(Commission File Number)
COMMUNITY BANKS, INC.
(Exact Name of Registrant as Specified in its Charter)
PENNSYLVANIA 23-2251762
(State of Incorporation) (IRS Employer ID Number)
150 Market Street, Millersburg, PA 17061
(Address of Principal Executive Offices) (Zip Code)
(717) 692-4781
(Registrant's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Number of Shares Outstanding as of June 30, 1994.
CAPITAL STOCK-COMMON 1,687,755
(Title of Class) (Outstanding Shares)
COMMUNITY BANKS, INC. and SUBSIDIARIES
Index 10-Q
Part I
Financial Information..............................................1
Consolidated Balance Sheets........................................2
Consolidated Statements of Income..................................3
Consolidated Statements of Cash Flows..............................4
Notes to Consolidated Financial Statements.........................5-6
Management's Discussion and Analysis of Financial
Condition and Results of Operation..............................7-9
Part II
Other information and Signatures....................................10
PART I - FINANCIAL INFORMATION
COMMUNITY BANKS, INC. and SUBSIDIARIES
The following financial information sets forth the operations of
Community Banks, Inc. and Subsidiaries for the three month and six
month periods ending June 30, 1994 and 1993.
In the opinion of Management, the following Consolidated Balance
Sheets and related Consolidated Statements of Income and Cash Flows
reflect all adjustments (consisting of normal recurring accrual
adjustments) necessary to present fairly the financial position and
results of operations for such periods.
-1-
Community Banks, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands except per share data)
June 30, December 31,
1994 1993
ASSETS
Cash and due from banks................... $ 10,997 $ 9,626
Interest-bearing time deposits in other
banks.................................. 990 576
Investment securities held to maturity
(market value of $87,248 as of
December 31, 1993)..................... --- 84,668
Investment securities, available for sale
(market value of $105,885 and $17,531
as of June 30, 1994, and December
31, 1993, respectively)................ 105,885 16,708
Loans..................................... 175,989 167,421
Less: Unearned income.................... (7,729) (7,389)
Allowance for loan losses.......... (1,919) (1,837)
Net loans.......................... 166,341 158,195
Premises and equipment, net............... 6,550 5,851
Goodwill.................................. 1,750 1,871
Other real estate owned................... 324 366
Loans held for sale....................... 285 4,096
Accrued interest receivable and other
assets................................. 5,972 2,766
Total assets........................... $299,094 $284,723
======== ========
LIABILITIES
Deposits:
Demand................................. $ 21,897 $ 18,586
Savings................................ 117,354 107,791
Time................................... 108,769 108,754
Time in denominations of $100,000 or
more.................................. 8,704 8,161
Total deposits......................... 256,724 243,292
Short-term borrowings..................... 3,268 1,205
Long-term debt............................ 7,000 9,000
Accrued interest payable and other
liabilities............................ 1,827 1,692
Subordinated capital notes................ 15 31
Total liabilities...................... 268,834 255,220
STOCKHOLDERS' EQUITY
Preferred stock, no par value; 500,000
shares authorized; no shares issued
and outstanding........................ --- ---
Common stock-$5.00 par value; 5,000,000
shares authorized; 1,690,406 and
1,682,234 shares issued in 1994 and
1993, respectively..................... 8,452 8,411
Surplus................................... 9,851 9,740
Retained earnings......................... 12,709 11,405
Net unrealized loss on investment
securities available for sale, net of tax (699) ---
Less: Treasury stock of 2,651 shares at
cost................................... (53) (53)
Total stockholders' equity............. 30,260 29,503
Total liabilities and stockholders'
equity................................ $299,094 $284,723
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
-2-
<TABLE>
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars in thousands except per share data)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans................. $ 3,604 $ 3,576 $ 7,081 $ 7,124
Interest and dividends on investment
securities:
Taxable............................... 1,138 1,145 2,197 2,406
Exempt from federal income tax........ 465 437 934 879
Other interest income...................... 15 25 44 35
Total interest income................. 5,222 5,183 10,256 10,444
Interest expense:
Interest on deposits:
Savings............................... 622 656 1,214 1,368
Time.................................. 1,248 1,365 2,512 2,766
Time in denominations of $100,000 or
more................................. 97 99 193 192
Interest on short-term borrowings and
long-term debt............................ 127 132 247 245
Interest on subordinated capital notes..... --- 1 1 2
Total interest expense................ 2,094 2,253 4,167 4,573
Net interest income................... 3,128 2,930 6,089 5,871
Provision for loan losses.................. 159 174 234 348
Net interest income after provision
for loan losses...................... 2,969 2,756 5,855 5,523
Other income:
Trust department income............... 43 49 90 98
Service charges on deposit accounts... 168 151 313 284
Other service charges, commissions
and fees............................. 81 84 123 119
Investment security gains............. 160 10 321 145
Income on insurance premiums.......... 97 116 195 258
Gains on mortgage sales............... 2 239 151 400
Other income.......................... 39 14 75 37
Total other income............... 590 663 1,268 1,341
Other expenses:
Salaries and employee benefits........ 1,022 975 2,056 1,916
Net occupancy expense................. 325 266 670 542
Operating expense of insurance
subsidiary.......................... 88 105 142 180
Other operating expense............... 842 800 1,650 1,573
Total other expense.............. 2,277 2,146 4,518 4,211
Income before income taxes....... 1,282 1,273 2,605 2,653
Provision for income taxes................. 302 325 600 654
Net income....................... $ 980 $ 948 $ 2,005 $ 1,999
========== ========== ======== =======
Average number of fully diluted shares
outstanding............................... 1,719,343 1,698,938 1,717,541 1,697,326
========== ========= ========= =========
Earnings per share:
Primary................................. $ .58 $ .57 $ 1.19 $ 1.19
Fully diluted earnings per share $ .57 $ .56 $ 1.17 $ 1.18
Dividends paid per share................... $ .200 $ .188 $ .400 $ .362
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
-3-
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
Six Months Ended
June 30,
1994 1993
Operating Activities:
Net income...................................... $ 2,005 $ 1,999
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses.................... 234 348
Provision for depreciation and amortization.. 401 331
Amortization of goodwill..................... 121 120
Investment security gains.................... (321) (145)
Gains on mortgage sales...................... (151) (400)
Decrease (increase) in other assets.......... 647 (339)
Increase (decrease) in accrued interest
payable and other liabilities............... 135 (344)
Net cash provided by operating activities.. 3,071 1,570
Investing Activities:
Net Increase in interest-bearing time
deposits in other banks........................ (414) (1,344)
Proceeds from sales of investment
securities..................................... 831 267
Proceeds from maturities of investment
securities..................................... 12,031 9,646
Purchases of investment securities.............. (17,781) (2,791)
Proceeds from sales of loans.................... 7,179 9,870
Net increase in total loans..................... (15,408) (19,517)
Purchases of premises and equipment............. (1,068) (485)
Net cash used by investing activities...... (14,630) (4,354)
Financing Activities:
Net increase in total deposits.................. 13,432 824
Net increase (decrease) in short-term borrowings 2,063 (208)
Increase (decrease) in long-term debt........... (2,000) 3,000
Repayment of subordinated capital notes......... (16) (15)
Cash dividends.................................. (675) (606)
Proceeds from issuance of common stock.......... 126 84
Net cash used by financing activities...... 12,930 3,079
Increase in cash and cash equivalents...... 1,371 295
Cash and cash equivalents at beginning of period... 9,626 11,451
Cash and cash equivalents at end of period......... $10,997 $11,746
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
-4-
Community Banks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands)
1. Accounting Policies
The information contained in this report is unaudited and is
subject to future adjustments. However, in the opinion of management, the
information reflects all adjustments necessary for a fair statement of
results for the three month and six month periods ended June 30, 1994 and
1993.
The accounting policies of Community Banks, Inc. and subsidiaries,
as applied in the consolidated interim financial statements presented herein,
are substantially the same as those followed on an annual basis as presented
on page 10 of the 1993 Annual Report to shareholders.
2. Investment Securities
The amortized cost and estimated market values of investment
securities at June 30, 1994 and December 31, 1993, were as follows:
1994
Estimated
Amortized Market
Cost Value
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies............................... $ 18,854 $ 18,286
Mortgage-backed U.S. government
agencies................................ 49,005 47,620
Obligations of states and political
subdivisions............................ 33,063 33,298
Corporate securities..................... 3,519 3,586
Equity securities........................ 2,503 3,095
Total.............................. $106,944 $105,885
======== ========
1993
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies............................... $ 4,192 $ 4,312
Mortgage-backed U.S. government
agencies................................ 58,764 59,444
Obligations of states and political
subdivisions............................ 32,216 33,805
Corporate securities..................... 3,370 3,570
Equity securities........................ 2,834 3,648
Total.............................. $101,376 $104,779
======== ========
-5-
3. Allowance for loan losses
Changes in the allowance for loan losses are as follows:
Six months ended Year Ended
June 30, December 31,
1994 1993
Balance, January 1.................. $1,837 $1,589
Provision for loan losses........... 234 702
Loan charge-offs.................... (272) (687)
Recoveries.......................... 120 233
Balance, June 30, 1994 and
December 31, 1993.................. $1,919 $1,837
====== ======
NONPERFORMING LOANS (a) AND OTHER REAL ESTATE
June 30, December 31,
1994 1993
Loans past due 90 days or more
and still accruing interest:
Commercial, financial and
agricultural................... $ 731 $ 9
Mortgages....................... 308 87
Personal installment............ 69 99
Other........................... 4 9
1,112 204
Loans renegotiated with the borrowers NONE NONE
Loans on which accrual of interest
has been discontinued:
Commercial, financial and
agricultural.................... 232 50
Mortgages........................ 427 809
Other............................ 86 59
745 918
Other real estate................... 324 366
Total............................ $2,181 $1,488
====== ======
(a) The determination to discontinue the accrual of interest on
nonperforming loans is made on the individual case basis. Such factors as
the character and size of the loan, quality of the collateral and the
historical creditworthiness of the borrower and/or guarantors are considered
by management in assessing the collectibility of such amounts.
-6-
Community Banks, Inc. and Subsidiaries
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
Net interest income after provision for loan losses for the first
six months of 1994 was $332,000 or 6.0% greater than net interest income
after provision for loan losses for the first six months of 1993. Total
interest income decreased 1.8% during the period while total interest
expense decreased 8.9%. Average earning assets were approximately 6.7%
greater during the first six months of 1994 than the first six months of
1993. Average loan balances and average investment securities increased
approximately 4.8% and 8.6%, respectively. Average interest-bearing
liabilities increased approximately 5.8% with most of the increase
occurring in savings accounts. Interest rates in general were lower in
1994 than 1993, and the decline in yields of earning assets during the
first six months of 1994 was less than the decline in costs of
interest-bearing liabilities. The average yield realized on earning
assets approximated 7.6% and 8.0% during the first six months of 1994
and 1993, respectively. The average cost of interest-bearing liabilities
approximated 3.5% and 4.0%, respectively, for the same periods. Net
interest margins on a tax equivalent basis approximated 4.8% and 4.9%,
respectively, for the first six months of 1994 and 1993. The provision
for loan losses charged to income decreased 33% in 1994. Total loans
past due 90 days and still accruing interest, non-performing loans, and
other real estate approximated $2,181,000 and $1,488,000, respectively,
as of June 30, 1994 and December 31, 1993. Most of the increase related
to one guaranteed loan which was past due more than 90 days at June 30,
1994. Management does not anticipate significant losses relating to the
increase.
Total other income for the first six months of 1994 was $73,000 or
5.4% less than total other income for the first six months of 1993.
Security gains of $321,000 and $145,000 were recognized in 1994 and
1993, respectively. Income on insurance premiums decrease $63,000 or
24.4%, and gains on mortgage sales were $249,000 less in 1994. Loans
held for sale as of June 30, 1994 totalled $285,000. The market value of
these loans approximated book value at that time. Total other expenses
during this same period increased $307,000 or 7.3%. Contributing factors
were increases of $140,000 or 7.3% in salaries and employee benefits and
$128,000 or 23.6% in net occupancy expense. Affecting these increases
were two new banking offices located in Hazleton and Conyngham,
Pennsylvania.
The provision for income taxes decreased $54,000 for the first six
months of 1994 in comparison to the first six months of 1993. The
effective tax rates approximated 23.0% and 24.7% for the respective
periods. The decrease in the effective tax rate for 1994 relates
primarily to the recognition of additional tax-free income.
The previously described factors contributed to a net increase of
$6,000 or 0.3% in net income for the six month period ended June 30,
1994.
The significant changes and related causes which occurred during
the three month period ending June 30, 1994 were generally consistent
with those described for the six month period ending June 30, 1994.
Gains on mortgage sales were not significant during the three month
period. Investment security gains were $160,000 and $10,000 for the
three month periods ending June 30, 1994 and 1993, respectively.
-7-
Management's Discussion, Continued
Financial Condition
As of June 30, 1994 cash and due from banks was $1,371,000 or 14.2%
greater than it was at December 31, 1993. Interest-bearing time deposits
in other banks and investment securities increased $4,923,000 or 4.8%
during this same period. The approximate market value of debt securities
was $1,651,000 less than amortized cost at June 30, 1994. Securities to
be held for indefinite periods of time and not intended to be held to
maturity or on a long-term basis are classified as available for sale
and carried at market value. Securities held for indefinite periods of
time include securities that management intends to use as part of its
asset/liability management strategy and that may be sold in response to
changes in interest rates, resultant prepayment risk and other factors
related to interest rate and resultant prepayment risk changes. At June
30, 1994 and December 31, 1993, management classified investment
securities with amortized costs and market values of $106,944,000 and
$105,885,000, and $16,708,000 and $17,531,000, respectively, as
available for sale. Gross unrealized gains and losses relating to debt
securities approximated $876,000 and $2,527,000, respectively, at June
30, 1994. Net loans increased $8,146,000 or 5.1% from December 31, 1993
to June 30, 1994. The allowance for loan losses approximated 1.1% of net
loans at June 30, 1994 and December 31, 1993. Most of the increase of
$699,000 in net premises and equipment was related to the two new
banking offices. Goodwill continues to be amortized at an annualized
rate of $240,000. Community Banks, Inc. sells only fixed-rate real
estate loans specifically designated for resale on the secondary market.
At June 30, 1994 and December 31, 1993 these loans totalled $285,000 and
$4,096,000, respectively. This decline resulted from reduced demand for
fixed-rate real estate loans. Affecting the increase of $3,206,000 in
accrued interest receivable and other assets were increases in prepaid
expenses, accrued interest receivable, and the cash surrender value of
life insurance on key employees. These factors contributed to an
increase of $14,371,000 or 5.0% in total assets from December 31, 1993
to June 30, 1994.
Total deposits increased $13,432,000 or 5.5% from December 31, 1993
to June 30, 1994. Most of the change related to increases in savings
deposits. It is management's philosophy to generally maintain
competitive but not overly-aggressive interest rates relative to
interest-bearing liabilities. The increase in short-term borrowings of
$2,063,000 from December 31, 1993 to June 30, 1994 offset a similar
decline in long-term debt. At June 30, 1994 long-term debt totalling
$7,000,000 was comprised entirely of borrowings from the Federal Home
Loan Bank of Pittsburgh at a weighted average interest rate of 5.24%.
These borrowings were not a result of liquidity needs but rather an
attempt to take advantage of the existing interest rate climate.
Based on a one year interval, rate sensitive assets to rate
sensitive liabilities approximated 88% as of June 30, 1994.
As of June 30, 1994 the Corporation had risk-based capital in
excess of the fully implemented regulatory requirements. Tier 1 plus
tier 2 capital approximated 17% of risk-weighted assets as of June 30,
1994. Effective January 1, 1994, the Corporation adopted the provisions
of Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", which requires the
Corporation to reflect securities available and held for sale at fair
value on the balance sheet. Upon adoption, the Corporation classified
all investment securities held at January 1, 1994 as available for sale
and recorded the increase to fair value as a separate component of
equity. The decrease recorded to stockholders' equity at June 30, 1994
was $699,000, net of applicable income taxes. Management believes that
this action is necessary to provide for proper administration of the
investment portfolio and can be accommodated by the capitalization of
the Corporation.
-8-
Management's Discussion, Continued
Liquidity
Liquidity is the ratio of net liquid assets to net liabilities. The
primary functions of asset/liability management are the assurance of
adequate liquidity and maintenance of an appropriate balance between
interest-sensitive earning assets and interest-bearing liabilities.
Liquidity management refers to the ability to meet the cash flow
requirements of depositors and borrowers.
A continuous review of net liquid assets is conducted to assure
appropriate cash flow to meet needs and obligations in a timely manner.
There was an adequate relationship of liquid assets to short-term
liabilities at June 30, 1994.
Forward Outlook
Management anticipates increased loan demand for the remainder of
1994 and will continue to carefully evaluate this demand based on the
creditworthiness of the borrower and the relative strength of the
economy in the Corporation's market.
Management is anticipating the maintenance of a favorable net
interest margin throughout the remainder of 1994.
-9-
COMMUNITY BANKS, INC. and SUBSIDIARIES
PART II - OTHER INFORMATION AND SIGNATURES
Item 4. Submission of Matters to Vote of Security Holders
The annual meeting of shareholders of Community Banks, Inc. was
held May 3, 1994 for the purpose of considering and voting upon the
following matters:
1. To elect three (3) Directors: Kenneth L. Deibler,
Allen Shaffer, and Ernest L. Lowe to serve until the 1998 Annual Meeting of
Shareholders.
Each director received affirmative votes representing at least 80.2%
of the shares outstanding.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - none
(b) Registrant was not required to file any reports on Form 8-K
during the quarter for which this report is filed.
SIGNATURES
Pursuant to the requirements 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.
(Registrant)
Date August 5, 1994 /S/ Thomas L. Miller
Thomas L. Miller
Chairman
(Chief Executive Officer)
Date August 5, 1994 /S/ Terry L. Burrows
Terry L. Burrows
Executive Vice-President
(Chief Financial Officer)
-10-
