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 September 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 September 30, 1994.
CAPITAL STOCK-COMMON 1,687,975
(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 nine
month periods ending September 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)
September 30, December 31,
1994 1993
ASSETS
Cash and due from banks................... $ 10,669 $ 9,626
Interest-bearing time deposits in other
banks.................................. 901 576
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 $103,214 and $17,531
as of September 30, 1994, and December
31, 1993, respectively)................ 103,214 16,708
Loans..................................... 186,521 167,421
Less: Unearned income.................... (8,188) (7,389)
Allowance for loan losses.......... (2,049) (1,837)
Net loans.......................... 176,284 158,195
Premises and equipment, net............... 6,582 5,851
Goodwill.................................. 1,690 1,871
Other real estate owned................... 338 366
Loans held for sale....................... 246 4,096
Accrued interest receivable and other
assets................................. 5,845 2,766
Total assets........................... $305,769 $284,723
======== ========
LIABILITIES
Deposits:
Demand................................. $ 21,789 $ 18,586
Savings................................ 121,623 107,791
Time................................... 108,168 108,754
Time in denominations of $100,000 or
more.................................. 8,486 8,161
Total deposits......................... 260,066 243,292
Short-term borrowings..................... 5,999 1,205
Long-term debt............................ 7,000 9,000
Accrued interest payable and other
liabilities............................ 1,934 1,692
Subordinated capital notes................ 15 31
Total liabilities...................... 275,014 255,220
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; 1,690,626 and
1,682,234 shares issued in 1994 and
1993, respectively..................... 8,453 8,411
Surplus................................... 9,853 9,740
Retained earnings......................... 13,434 11,405
Net unrealized loss on investment
securities available for sale, net of tax (932) ---
Less: Treasury stock of 2,651 shares at
cost................................... (53) (53)
Total stockholders' equity............. 30,755 29,503
Total liabilities and stockholders'
equity................................ $305,769 $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 Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans................. $ 3,812 $ 3,533 $ 10,893 $ 10,657
Interest and dividends on investment
securities:
Taxable............................... 1,160 1,096 3,357 3,502
Exempt from federal income tax........ 468 448 1,402 1,327
Other interest income...................... 14 52 58 87
Total interest income................. 5,454 5,129 15,710 15,573
Interest expense:
Interest on deposits:
Savings............................... 660 648 1,874 2,016
Time.................................. 1,232 1,371 3,744 4,137
Time in denominations of $100,000 or
more................................. 100 111 293 303
Interest on short-term borrowings and
long-term debt............................ 121 121 368 366
Interest on subordinated capital notes..... -- 1 1 3
Total interest expense................ 2,113 2,252 6,280 6,825
Net interest income................... 3,341 2,877 9,430 8,748
Provision for loan losses.................. 159 174 393 522
Net interest income after provision
for loan losses...................... 3,182 2,703 9,037 8,226
Other income:
Trust department income............... 46 48 136 146
Service charges on deposit accounts... 188 156 501 440
Other service charges, commissions
and fees............................. 61 55 184 174
Investment security gains (losses).... 59 (7) 380 138
Income on insurance premiums.......... 101 120 296 378
Gains on mortgage sales............... 31 266 182 666
Other income.......................... 51 32 126 69
Total other income............... 537 670 1,805 2,011
Other expenses:
Salaries and employee benefits........ 1,075 973 3,131 2,889
Net occupancy expense................. 315 267 985 809
Operating expense of insurance
subsidiary.......................... 75 82 217 262
Other operating expense............... 865 707 2,515 2,280
Total other expense.............. 2,330 2,029 6,848 6,240
Income before income taxes....... 1,389 1,344 3,994 3,997
Provision for income taxes................. 326 337 926 991
Net income....................... $ 1,063 $ 1,007 $ 3,068 $ 3,006
========== ========== ========= =========
Average number of fully diluted shares
outstanding............................... 2,060,795 2,044,009 2,060,759 2,039,273
========== ========= ========= =========
Earnings per share:
Primary................................. $ .52 $ .50 $ 1.52 $ 1.49
Fully diluted earnings per share $ .52 $ .49 $ 1.49 $ 1.47
Dividends paid per share................... $ .167 $ .157 $ .500 $ .448
<FN>
Per share data for 1993 has been restated to include a 20 percent stock
dividend effective November 29, 1994.
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
-3-
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
Nine Months Ended
September 30,
1994 1993
Operating Activities:
Net income...................................... $ 3,068 $ 3,006
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses.................... 393 522
Provision for depreciation and amortization.. 542 497
Amortization of goodwill..................... 181 180
Investment security gains.................... (380) (138)
Gains on mortgage sales...................... (182) (666)
Increase in other assets..................... (2,571) (1,621)
Increase (decrease) in accrued interest
payable and other liabilities............... 242 (410)
Net cash provided by operating activities.. 1,293 1,370
Investing Activities:
Net decrease (increase) in interest-bearing time
deposits in other banks........................ (325) 1
Proceeds from sales of investment
securities..................................... 847 297
Proceeds from maturities of investment
securities..................................... 15,391 16,266
Purchases of investment securities.............. (19,130) (16,548)
Proceeds from sales of loans.................... 9,144 15,191
Net increase in total loans..................... (23,594) (24,150)
Purchases of premises and equipment............. (1,251) (679)
Net cash used by investing activities...... (18,918) ( 9,622)
Financing Activities:
Net increase in total deposits.................. 16,774 8,588
Net increase (decrease) in short-term borrowings 4,794 (88)
Net increase (decrease) in long-term debt....... (2,000) 2,000
Repayment of subordinated capital notes......... (16) (15)
Cash dividends.................................. (1,013) (921)
Proceeds from issuance of common stock.......... 129 89
Net cash used by financing activities...... 18,668 9,653
Increase in cash and cash equivalents...... 1,043 1,401
Cash and cash equivalents at beginning of period... 9,626 11,451
Cash and cash equivalents at end of period......... $10,669 $12,852
======= =======
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 nine month periods ended September 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 September 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............................... $ 18,771 $ 18,055
Mortgage-backed U.S. government
agencies................................ 45,934 44,542
Obligations of states and political
subdivisions............................ 33,794 33,888
Corporate securities..................... 3,518 3,554
Equity securities........................ 2,609 3,175
Total.............................. $104,626 $103,214
======== ========
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:
Nine months ended Year Ended
September 30, December 31,
1994 1993
Balance, January 1.................. $1,837 $1,589
Provision for loan losses........... 393 702
Loan charge-offs.................... (334) (687)
Recoveries.......................... 153 233
Balance, September 30, 1994 and
December 31, 1993.................. $2,049 $1,837
====== ======
NONPERFORMING LOANS (a) AND OTHER REAL ESTATE
September 30, December 31,
1994 1993
Loans past due 90 days or more
and still accruing interest:
Commercial, financial and
agricultural................... $ 160 $ 9
Mortgages....................... 357 87
Personal installment............ 93 99
Other........................... 4 9
614 204
Loans renegotiated with the borrowers NONE NONE
Loans on which accrual of interest
has been discontinued:
Commercial, financial and
agricultural.................... 849 50
Mortgages........................ 468 809
Other............................ 129 59
1,446 918
Other real estate................... 338 366
Total............................ $2,398 $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
nine months of 1994 was $811,000 or 9.9% greater than net interest
income after provision for loan losses for the first nine months of
1993. Total interest income increased 0.9% during the period while total
interest expense decreased 8.0%. Average earning assets were
approximately 6.7% greater during the first nine months of 1994 than the
first nine months of 1993. Average loan balances and average investment
securities both increased approximately 6.8% in 1994. Average
interest-bearing liabilities increased approximately 5.4% with most of
the increase occurring in savings accounts. In general, yields of
earning assets increased during the first nine months of 1994 while the
costs of interest-bearing liabilities declined. The average yields
realized on earning assets approximated 7.8% and 8.1% during the first
nine months of 1994 and 1993, respectively. The average costs of
interest-bearing liabilities approximated 3.5% and 3.9%, respectively,
for the same periods. Net interest margins on a tax equivalent basis
approximated 4.9% for the first nine months of 1994 and 1993. The
provision for loan losses charged to income decreased 24.7% in 1994.
Total loans past due 90 days and still accruing interest, non-performing
loans, and other real estate approximated $2,398,000 and $1,488,000,
respectively, as of September 30, 1994 and December 31, 1993. Most of
the increase related to one guaranteed loan which was not accruing
interest at September 30, 1994. Management does not anticipate
significant losses relating to the increase.
Total other income for the first nine months of 1994 was $206,000
or 10.2% less than total other income for the first nine months of 1993.
Security gains of $380,000 and $138,000 were recognized in 1994 and
1993, respectively. Income on insurance premiums decrease $82,000 or
21.7% and gains on mortgage sales were $484,000 less in 1994. Loans held
for sale as of September 30, 1994 totalled $246,000. The market value of
these loans approximated book value at that time. Total other expenses
during this same period increased $608,000 or 9.7%. Contributing factors
were increases of $242,000 or 8.4% in salaries and employee benefits and
$176,000 or 21.8% in net occupancy expense. Affecting these increases
were two new banking offices located in Hazleton and Conyngham,
Pennsylvania.
The provision for income taxes decreased $65,000 for the first nine
months of 1994 in comparison to the first nine months of 1993. The
effective tax rates approximated 23.2% and 24.8% 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
$62,000 or 2.1% in net income for the nine month period ended September
30, 1994.
The significant changes and related causes which occurred during
the three month period ending September 30, 1994 were generally
consistent with those described for the nine month period ending
September 30, 1994. Gains on mortgage sales were not significant during
the three month period. Investment security gains (losses) were $59,000
and $(7,000) for the three months periods ending September 30, 1994 and
1993, respectively.
-7-
Management's Discussion, Continued
Financial Condition
As of September 30, 1994 cash and due from banks was $1,043,000 or
10.8% greater than it was at December 31, 1993. Interest-bearing time
deposits in other banks and investment securities increased $2,163,000
or 2.1% during this same period. The approximate market value of debt
securities was $1,978,000 less than amortized cost at September 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 September 30, 1994 and December 31, 1993, management
classified investment securities with amortized costs and market values
of $104,626,000 and $103,214,000, and $16,708,000 and $17,531,000,
respectively, as available for sale. Gross unrealized gains and losses
relating to debt securities approximated $820,000 and $2,798,000,
respectively, at September 30, 1994. Net loans increased $18,089,000 or
11.4% from December 31, 1993 to September 30, 1994. The allowance for
loan losses approximated 1.15% of net loans at September 30, 1994 and
December 31, 1993. Most of the increase of $731,000 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 September 30, 1994 and December 31,
1993 these loans totalled $246,000 and $4,096,000, respectively. This
decline resulted from reduced demand for fixed-rate real estate loans.
Affecting the increase of $3,079,000 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 $21,046,000 or
7.4% in total assets from December 31, 1993 to September 30, 1994.
Total deposits increased $16,774,000 or 6.9% from December 31, 1993
to September 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
$4,794,000 from December 31, 1993 to September 30, 1994 was partially
offset by a decline in long-term debt. At September 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 86% as of September 30, 1994.
As of September 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 September
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 September 30, 1994 was $932,000, 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 September 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 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 November 9, 1994 /S/ Thomas L. Miller
Thomas L. Miller
Chairman
(Chief Executive Officer)
Date November 9, 1994 /S/ Terry L. Burrows
Terry L. Burrows
Executive Vice-President
(Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1993
<PERIOD-END> SEP-30-1994
<CASH> 10,669
<INT-BEARING-DEPOSITS> 901
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 246
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 104,626
<INVESTMENTS-MARKET> 103,214
<LOANS> 178,333
<ALLOWANCE> 2,049
<TOTAL-ASSETS> 305,769
<DEPOSITS> 260,066
<SHORT-TERM> 5,999
<LIABILITIES-OTHER> 1,949
<LONG-TERM> 7,000
<COMMON> 8,453
0
0
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<INTEREST-INVEST> 4,759
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<INTEREST-TOTAL> 15,710
<INTEREST-DEPOSIT> 5,911
<INTEREST-EXPENSE> 6,280
<INTEREST-INCOME-NET> 9,430
<LOAN-LOSSES> 393
<SECURITIES-GAINS> 380
<EXPENSE-OTHER> 6,848
<INCOME-PRETAX> 3,994
<INCOME-PRE-EXTRAORDINARY> 3,068
<EXTRAORDINARY> 0
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<EPS-PRIMARY> 1.52
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<LOANS-NON> 1,446
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</TABLE>
