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, 1995
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, 1995.
CAPITAL STOCK-COMMON 2,028,985
(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........................5-7
Management's Discussion and Analysis of Financial
Condition and Results of Operation.............................8-10
Part II
Other information and Signatures..................................11
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, 1995 and 1994.
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,
1995 1994
ASSETS
Cash and due from banks................... $ 13,176 $ 12,152
Interest-bearing time deposits in other
banks.................................. 1,041 645
Investment securities, available for sale
(market value of $92,949 and $99,249
as of June 30, 1995, and December
31, 1994, respectively)................ 92,949 99,249
Loans..................................... 207,307 190,792
Less: Unearned income.................... (10,675) (8,522)
Allowance for loan losses.......... (2,181) (2,069)
Net loans.......................... 194,451 180,201
Premises and equipment, net............... 6,658 6,589
Goodwill.................................. 1,509 1,629
Other real estate owned................... 422 338
Loans held for sale....................... 1,398 35
Accrued interest receivable and other
assets................................. 5,932 6,283
Total assets........................... $317,536 $307,121
======== ========
LIABILITIES
Deposits:
Demand................................. $ 22,156 $ 24,343
Savings................................ 110,777 115,104
Time................................... 120,138 108,593
Time in denominations of $100,000 or
more.................................. 9,963 8,072
Total deposits......................... 263,034 256,112
Short-term borrowings..................... 7,278 11,709
Long-term debt............................ 11,000 7,000
Accrued interest payable and other
liabilities............................ 2,161 1,933
Subordinated capital notes................ --- 15
Total liabilities...................... 283,473 276,769
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; 2,031,636 and
2,027,918 shares issued in 1995 and
1994, respectively..................... 10,158 10,140
Surplus................................... 9,873 9,839
Retained earnings......................... 13,749 12,443
Net unrealized gain (loss) on investment
securities available for sale, net of tax 336 (2,017)
Less: Treasury stock of 2,651 shares at
cost................................... (53) (53)
Total stockholders' equity............. 34,063 30,352
Total liabilities and stockholders'
equity................................ $317,536 $307,121
======== ========
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)
Three Months Ended Six Months Ended
June 30, June 30
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans................. $ 4,603 $ 3,604 $ 8,857 $ 7,081
Interest and dividends on investment
securities:
Taxable............................... 1,068 1,138 2,215 2,197
Exempt from federal income tax........ 398 465 842 934
Other interest income...................... 22 15 32 44
Total interest income................. 6,091 5,222 11,946 10,256
Interest expense:
Interest on deposits:
Savings............................... 645 622 1,292 1,214
Time.................................. 1,592 1,248 2,983 2,512
Time in denominations of $100,000 or
more................................. 122 97 251 193
Interest on short-term borrowings and
long-term debt............................ 203 127 380 247
Interest on subordinated capital notes..... -- -- -- 1
Total interest expense................. 2,562 2,094 4,906 4,167
Net interest income................... 3,529 3,128 7,040 6,089
Provision for loan losses.................. 168 159 290 234
Net interest income after provision
for loan losses...................... 3,361 2,969 6,750 5,855
Other income:
Trust department income............... 51 43 98 90
Service charges on deposit accounts... 196 168 375 313
Other service charges, commissions
and fees............................. 56 81 119 123
Investment security gains ............ 38 160 74 321
Income on insurance premiums.......... 135 97 263 195
Gains on mortgage sales............... 48 2 66 151
Other income.......................... 53 39 69 75
Total other income............... 577 590 1,064 1,268
Other expenses:
Salaries and employee benefits........ 1,187 1,022 2,334 2,056
Net occupancy expense................. 339 325 670 670
Operating expense of insurance
subsidiary.......................... 102 88 204 142
Other operating expense............... 906 842 1,788 1,650
Total other expense.............. 2,534 2,277 4,996 4,518
Income before income taxes....... 1,404 1,282 2,818 2,605
Provision for income taxes................. 352 302 700 600
Net income....................... $ 1,052 $ 980 $ 2,118 $ 2,005
========== ========== ========== ==========
Average number of fully diluted shares
outstanding............................... 2,054,575 2,063,212 2,052,942 2,061,049
========== ========= ========= =========
Earnings per share:
Primary................................. $ .52 $ .48 $ 1.04 $ .99
Fully diluted........................... $ .51 $ .47 $ 1.03 $ .97
Dividends paid per share................... $ .200 $ .167 $ .400 $ .333
<FN>
Earnings per share have been restated to reflect stock dividends.
</FN>
The accompanying notes are an integral part of the consolidated financial
statements.
-3-
</TABLE>
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
Six Months Ended
June 30,
1995 1994
Operating Activities:
Net income...................................... $ 2,118 $ 2,005
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses.................... 290 234
Provision for depreciation and amortization.. 456 401
Amortization of goodwill..................... 120 121
Investment security gains.................... (74) (321)
Gains on mortgage sales...................... (66) (151)
Decrease (increase) in other assets.......... (688) 647
Increase in accrued interest payable
and other liabilities....................... 55 135
Net cash provided by operating activities.. 2,211 3,071
Investing Activities:
Net increase in interest-bearing time
deposits in other banks........................ (396) (414)
Proceeds from sales of investment
securities..................................... 161 831
Proceeds from maturities of investment
securities..................................... 10,171 12,031
Purchases of investment securities.............. (477) (17,781)
Proceeds from sales of loans.................... 3,497 7,179
Net increase in total loans..................... (19,334) (15,408)
Purchases of premises and equipment............. (525) (1,068)
Net cash used by investing activities...... (6,903) (14,630)
Financing Activities:
Net increase in total deposits.................. 6,922 13,432
Net increase (decrease) in short-term borrowings (4,431) 2,063
Net increase (decrease) in long-term debt....... 4,000 (2,000)
Repayment of subordinated capital notes......... (15) (16)
Cash dividends.................................. (812) (675)
Proceeds from issuance of common stock.......... 52 126
Net cash provided by financing activities.. 5,716 12,930
Increase in cash and cash
equivalents............................... 1,024 1,371
Cash and cash equivalents at beginning of period... 12,152 9,626
Cash and cash equivalents at end of period......... $13,176 $10,997
======= =======
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, 1995 and
1994.
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 9 of the 1994 Annual Report to shareholders, except for the adoption
of Statements of Financial Accounting Standards No. 114 and 118 effective
January 1, 1995, which had no impact on the provision for loan losses or the
allowance for loan losses.
2. Investment Securities
The amortized cost and estimated market values of investment
securities at June 30, 1995 and December 31, 1994, were as follows:
1995
Estimated
Amortized Market
Cost Value
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies............................... $15,733 $15,641
Mortgage-backed U.S. government
agencies................................ 41,056 40,628
Obligations of states and political
subdivisions............................ 29,043 29,403
Corporate securities..................... 3,517 3,629
Equity securities........................ 3,091 3,648
Total.............................. $92,440 $92,949
======= =======
1994
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies............................... $ 18,807 $ 17,832
Mortgage-backed U.S. government
agencies................................ 43,926 41,900
Obligations of states and political
subdivisions............................ 33,185 32,733
Corporate securities..................... 3,518 3,499
Equity securities........................ 2,869 3,285
Total.............................. $102,305 $ 99,249
======== ========
-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,
1995 1994
Balance, January 1.................. $2,069 $1,837
Provision for loan losses........... 290 462
Loan charge-offs.................... (277) (577)
Recoveries.......................... 99 347
Balance, June 30, 1995 and
December 31, 1994.................. $2,181 $2,069
====== ======
NONPERFORMING LOANS (a) AND OTHER REAL ESTATE
June 30, December 31,
1995 1994
Loans past due 90 days or more
and still accruing interest:
Commercial, financial and
agricultural................... $ 62 $ 152
Mortgages....................... 98 114
Personal installment............ 105 59
Other........................... 9 1
274 326
Loans renegotiated with the borrowers NONE NONE
Loans on which accrual of interest
has been discontinued:
Commercial, financial and
agricultural.................... 279 327
Mortgages........................ 737 475
Other............................ 60 30
1,076 832
Other real estate................... 422 338
Total............................ $1,772 $1,496
====== ======
(a) The determination to discontinue the accrual of interest on
nonperforming loans is made on the individual case basis. Such factors as
the character and size of the loan, quality of the collateral and the
historical creditworthiness of the borrower and/or guarantors are considered
by management in assessing the collectibility of such amounts.
Impaired Loans
In May, 1993, the Financial Accounting Standards Accounting Board
issued SFAS 114, "Accounting by Creditors for Impairment of a Loan," amended
by SFAS 118. These statements, which the Company has adopted effective
January 1, 1995, had no effect on the Company's allowance for loan losses.
The Company does not accrue interest income on impaired loans and subsequent
cash payments received are applied to the outstanding principal balance or
recorded as interest income, depending upon management's assessment of the
ultimate collectibility of principal and interest.
The Company's impaired loans totalled $279,000 at June 30, 1995, and
had no related SFAS 114 allowance. For the first six months of 1995, the
average balance of impaired loans was not material. All interest income
recognized on impaired loans was recorded on the cash basis.
6
4. Statement of Cash Flows
Cash and cash equivalents include cash and due from banks and
federal funds sold. The company made cash payments of $820,000 and $570,000,
and $4,803,000 and $4,286,000 for income taxes and interest, respectively,
for each of the six month periods ended June 30, 1995 and 1994.
Excluded from the consolidated statements of cash flows for the
periods ended June 30, 1995 and 1994 was the effect of certain non-cash
activities. The company acquired real estate through foreclosure totalling
$209,000 and $146,000, respectively. The company also recorded an increase
(decrease) to deferred tax assets totalling $(1,039,000) and $360,000,
respectively, relating to the effects of changes in the net unrealized gain
(loss) on investment securities available for sale.
5. Merger
On July 5, 1995, the Company and the Citizens National Bank of
Ashland (Citizens) announced an agreement to merge the two companies. The
agreement, which requires the approval of certain regulatory agencies and
the stockholders of Citizens, provides that, upon consummation of the
merger, stockholders of Citizens will receive between 27.673 and 31.206
shares of the Company's common stock for each share issued and outstanding
Citizens common stock. The merger is expected to be accounted for as a
pooling of interests.
-7-
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 1995 was $895,000 or 15.3% greater than net interest
income after provision for loan losses for the first six months of 1994.
Total interest income increased 16.5% during the period while total
interest expense increased 17.7%. Average earning assets were
approximately 5.4% greater during the first six months of 1995 than the
first six months of 1994. Average loan balances increased 14.9% while
average investment securities decreased approximately 8.2% in 1995.
Average interest-bearing liabilities increased approximately 5.4%. The
average yields realized on earning assets approximated 8.2% and 7.6%
during the first six months of 1995 and 1994, respectively. The average
costs of interest-bearing liabilities approximated 3.9% and 3.5%,
respectively, for the same periods. Net interest margins on a tax
equivalent basis approximated 5.2% and 4.8% for the first six months of
1995 and 1994, respectively. The provision for loan losses charged to
income increased 23.9% in 1995. Total loans past due 90 days and still
accruing interest, non-performing loans, and other real estate
approximated $1,772,000 and $1,496,000, respectively, as of June 30,
1995 and December 31, 1994.
Total other income for the first six months of 1995 was $204,000 or
16.1% less than total other income for the first six months of 1994.
Security gains of $74,000 and $321,000 were recognized in 1995 and 1994,
respectively. Income on insurance premiums increased $68,000 or 34.9%
while gains on mortgage sales were $85,000 less in 1995. Loans held for
sale as of June 30, 1995 totalled $1,398,000. The market value of these
loans approximated book value at that time. Total other expenses during
this same period increased $478,000 or 10.6%. Contributing factors were
increases of $278,000 or 13.5% in salaries and employee benefits and
$62,000 in operating expenses of insurance subsidiary. Affecting these
increases were two new banking offices located in Hazleton and
Conyngham, Pennsylvania.
The provision for income taxes increased $100,000 for the first six
months of 1995 in comparison to the first six months of 1994. The
effective tax rates approximated 24.8% and 23.0% for the respective
periods. A decline in the relationship of tax-free income to taxable
income contributed to the 1995 increase.
The previously described factors contributed to a net increase of
$113,000 or 5.6% in net income for the six month period ended June 30,
1995.
The significant changes and related causes which occurred during
the three month period ending June 30, 1995 were generally consistent
with those described for the six month period ending June 30, 1995.
Gains on mortgage sales were $48,000 and $2,000, respectively, for the
three month periods ending June 30, 1995 and 1994. Investment security
gains were $38,000 and $160,000 for the three month periods ending June
30, 1995 and 1994, respectively.
Financial Condition
As of June 30, 1995 cash and due from banks was $1,024,000 or 8.4%
greater than it was at December 31, 1994. As a result of increased loan
demand, interest-bearing time deposits in other banks and investment
securities decreased $5,904,000 or 5.9% during this
-8-
Management's Discussion, Continued
same period. The approximate market value of debt securities was $48,000
less than amortized cost at June 30, 1995. 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, 1995
and December 31, 1994, management classified investment securities with
amortized costs and market values of $92,440,000 and $92,949,000, and
$102,305,000 and $99,249,000, respectively, as available for sale. Gross
unrealized gains and losses relating to debt securities approximated
$1,028,000 and $1,076,000, respectively, at June 30, 1995. Net loans
increased $14,250,000 or 7.9% from December 31, 1994 to June 30, 1995.
The allowance for loan losses approximated 1.11% and 1.14% of net loans
at June 30, 1995 and December 31, 1994, respectively. Net premises and
equipment increased $69,000. Goodwill continues to be amortized at an
annualized rate of $240,000. Community Banks, Inc. sells only fixed-rate
real estate and education loans specifically designated for resale on
the secondary market. At June 30, 1995 and December 31, 1994 these loans
totalled $1,398,000 and $35,000, respectively. Affecting the decrease of
$351,000 in accrued interest receivable and other assets was a decline
in deferred taxes. These factors contributed to an increase of
$10,415,000 or 3.4% in total assets from December 31, 1994 to June 30,
1995.
Total deposits increased $6,922,000 or 2.7% from December 31, 1994
to June 30, 1995. All of the increase can be attributed to increases in
time deposits. It is management's philosophy to generally maintain
competitive but not overly-aggressive interest rates relative to
interest-bearing liabilities. A decrease in short-term borrowings of
$4,431,000 was offset by an increase of $4,000,000 in long-term debt. At
June 30, 1995 long-term debt totalling $11,000,000 was comprised
entirely of borrowings from the Federal Home Loan Bank of Pittsburgh at
a weighted average interest rate of 5.72%.
Based on a one year interval, rate sensitive assets to rate
sensitive liabilities approximated 91% as of June 30, 1995.
As of June 30, 1995 the Corporation had risk-based capital in
excess of the fully implemented regulatory requirements. Tier 1 plus
tier 2 capital exceeded 17% of risk-weighted assets as of June 30, 1995.
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 as available for sale and recorded the
increase to fair value as a separate component of equity. The increase
recorded to stockholders' equity at June 30, 1995 was $336,000, 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.
-9-
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, 1995.
Forward Outlook
Management anticipates strong loan demand for the remainder of 1995
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 1995.
-10-
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 2, 1995 for the purpose of considering and voting upon the following
matters:
1. To elect three (3) Directors: Leon E. Kocher, Robert W.
Rissinger, and William C. Troutman to serve until the 1999 Annual Meeting
of Shareholders.
Each director received affirmative votes representing at least 76.3%
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 4, 1995 /S/ Thomas L. Miller
Thomas L. Miller
Chairman
(Chief Executive Officer)
Date August 4, 1995 /S/ Terry L. Burrows
Terry L. Burrows
Executive Vice-President
(Chief Financial Officer)
-11-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 13,176
<INT-BEARING-DEPOSITS> 1,041
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 1,398
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 92,440
<INVESTMENTS-MARKET> 92,949
<LOANS> 196,632
<ALLOWANCE> 2,181
<TOTAL-ASSETS> 317,536
<DEPOSITS> 263,034
<SHORT-TERM> 7,278
<LIABILITIES-OTHER> 2,161
<LONG-TERM> 11,000
<COMMON> 10,158
0
0
<OTHER-SE> 23,905
<TOTAL-LIABILITIES-AND-EQUITY> 317,150
<INTEREST-LOAN> 8,857
<INTEREST-INVEST> 3,057
<INTEREST-OTHER> 32
<INTEREST-TOTAL> 11,946
<INTEREST-DEPOSIT> 4,526
<INTEREST-EXPENSE> 4,906
<INTEREST-INCOME-NET> 7,040
<LOAN-LOSSES> 290
<SECURITIES-GAINS> 74
<EXPENSE-OTHER> 4,996
<INCOME-PRETAX> 2,818
<INCOME-PRE-EXTRAORDINARY> 2,118
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,118
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.03
<YIELD-ACTUAL> 4.89
<LOANS-NON> 1,076
<LOANS-PAST> 274
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,069
<CHARGE-OFFS> 277
<RECOVERIES> 99
<ALLOWANCE-CLOSE> 2,181
<ALLOWANCE-DOMESTIC> 2,181
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
