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 March 31, 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 March 31, 1995.
CAPITAL STOCK-COMMON 2,028,770
(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 periods
ending March 31, 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)
March 31, December 31,
1995 1994
ASSETS
Cash and due from banks................... $ 10,787 $ 12,152
Interest-bearing time deposits in other
banks.................................. 581 645
Investment securities, available for sale
(market value of $96,148 and $99,249
as of March 31, 1995, and December
31, 1994, respectively)................ 96,148 99,249
Loans..................................... 195,110 190,792
Less: Unearned income.................... (9,776) (8,522)
Allowance for loan losses.......... (2,143) (2,069)
Net loans.......................... 183,191 180,201
Premises and equipment, net............... 6,674 6,589
Goodwill.................................. 1,569 1,629
Other real estate owned................... 323 338
Loans held for sale....................... 1,931 35
Accrued interest receivable and other
assets................................. 5,946 6,283
Total assets........................... $307,150 $307,121
======== ========
LIABILITIES
Deposits:
Demand................................. $ 21,647 $ 24,343
Savings................................ 113,246 115,104
Time................................... 115,182 108,593
Time in denominations of $100,000 or
more.................................. 10,605 8,072
Total deposits......................... 260,680 256,112
Short-term borrowings..................... 4,968 11,709
Long-term debt............................ 7,000 7,000
Accrued interest payable and other
liabilities............................ 2,031 1,933
Subordinated capital notes................ --- 15
Total liabilities...................... 274,679 276,769
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; 2,031,421 and
2,027,918 shares issued in 1995 and
1994, respectively..................... 10,157 10,140
Surplus................................... 9,870 9,839
Retained earnings......................... 13,103 12,443
Net unrealized loss on investment
securities available for sale, net of tax (606) (2,017)
Less: Treasury stock of 2,651 shares at
cost................................... (53) (53)
Total stockholders' equity............. 32,471 30,352
Total liabilities and stockholders'
equity................................ $307,150 $307,121
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
-2-
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars in thousands except per share data)
Three Months Ended
March 31,
1995 1994
Interest income:
Interest and fees on loans................. $ 4,254 $ 3,477
Interest and dividends on investment
securities:
Taxable............................... 1,147 1,059
Exempt from federal income tax........ 444 469
Other interest income...................... 10 29
Total interest income................. 5,855 5,034
Interest expense:
Interest on deposits:
Savings............................... 647 592
Time.................................. 1,391 1,264
Time in denominations of $100,000 or
more................................. 129 96
Interest on short-term borrowings and
long-term debt............................ 177 120
Interest on subordinated capital notes..... -- 1
Total interest expense................ 2,344 2,073
Net interest income................... 3,511 2,961
Provision for loan losses.................. 122 75
Net interest income after provision
for loan losses...................... 3,389 2,886
Other income:
Trust department income............... 47 47
Service charges on deposit accounts... 179 145
Other service charges, commissions
and fees............................. 63 42
Investment security gains ............ 36 161
Income on insurance premiums.......... 128 98
Gains on mortgage sales............... 18 149
Other income.......................... 16 36
Total other income............... 487 678
Other expenses:
Salaries and employee benefits........ 1,147 1,034
Net occupancy expense................. 331 345
Operating expense of insurance
subsidiary.......................... 102 54
Other operating expense............... 882 808
Total other expense.............. 2,462 2,241
Income before income taxes....... 1,414 1,323
Provision for income taxes................. 348 298
Net income....................... $ 1,066 $ 1,025
========== ==========
Average number of fully diluted shares
outstanding............................... 2,051,355 2,061,287
========== =========
Earnings per share: 1]
Primary................................. $ .53 $ .51
Fully diluted........................... $ .52 $ .50
Dividends paid per share................... $ .200 $ .167
Earnings per share have been restated to reflect stock dividends.
The accompanying notes are an integral part of the consolidated financial
statements.
-3-
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
Three Months Ended
March 31,
1995 1994
Operating Activities:
Net income...................................... $ 1,066 $ 1,025
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses.................... 122 75
Provision for depreciation and amortization.. 198 205
Amortization of goodwill..................... 60 61
Investment security gains.................... (36) (161)
Gains on mortgage sales...................... (18) (149)
Decrease in other assets..................... 352 1,055
Increase in accrued interest payable
and other liabilities....................... 98 233
Net cash provided by operating activities.. 1,842 2,344
Investing Activities:
Net decrease (increase) in interest-bearing time
deposits in other banks........................ 64 (220)
Proceeds from sales of investment
securities..................................... 112 336
Proceeds from maturities of investment
securities..................................... 4,635 6,841
Purchases of investment securities.............. (214) (8,775)
Proceeds from sales of loans.................... 1,258 5,444
Net increase in total loans..................... (6,248) (6,207)
Purchases of premises and equipment............. (268) (552)
Net cash used by investing activities...... (661) ( 3,133)
Financing Activities:
Net increase in total deposits.................. 4,568 1,529
Net increase (decrease) in short-term borrowings (6,741) (511)
Net increase (decrease) in long-term debt....... --- ---
Repayment of subordinated capital notes......... (15) (16)
Cash dividends.................................. (406) (337)
Proceeds from issuance of common stock.......... 48 87
Net cash provided by financing activities.. (2,546) 752
Increase (decrease) in cash and cash
equivalents............................... (1,365) (37)
Cash and cash equivalents at beginning of period... 12,152 9,626
Cash and cash equivalents at end of period......... $10,787 $ 9,589
======= =======
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 periods ended March 31, 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. At March 31, 1995 impaired loans totalled $333,000
and no allowance for credit losses determined in accordance with these
statements was required. Cash payments on impaired loans are applied to
principal or recognized as interest income based on management's assessment
of ultimate collectibility of both principal and interest. Income recognized
during the first quarter relating to cash payments on impaired loans was not
material.
2. Investment Securities
The amortized cost and estimated market values of investment
securities at March 31, 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............................... $ 7,161 $ 7,031
Mortgage-backed U.S. government
agencies................................ 51,792 50,344
Obligations of states and political
subdivisions............................ 31,379 31,478
Corporate securities..................... 3,715 3,755
Equity securities........................ 3,019 3,540
Total.............................. $97,066 $96,148
======= =======
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:
Three months ended Year Ended
March 31, December 31,
1995 1994
Balance, January 1.................. $2,069 $1,837
Provision for loan losses........... 122 462
Loan charge-offs.................... (97) (577)
Recoveries.......................... 49 347
Balance, March 31, 1995 and
December 31, 1994.................. $2,143 $2,069
====== ======
NONPERFORMING LOANS (a) AND OTHER REAL ESTATE
March 31, December 31,
1995 1994
Loans past due 90 days or more
and still accruing interest:
Commercial, financial and
agricultural................... $ 87 $ 152
Mortgages....................... 186 114
Personal installment............ 98 59
Other........................... 11 1
382 326
Loans renegotiated with the borrowers NONE NONE
Loans on which accrual of interest
has been discontinued:
Commercial, financial and
agricultural.................... 333 327
Mortgages........................ 564 475
Other............................ 62 30
959 832
Other real estate................... 323 338
Total............................ $1,664 $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.
-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
three months of 1995 was $503,000 or 17.4% greater than net interest
income after provision for loan losses for the first three months of
1994. Total interest income increased 16.3% during the period while
total interest expense increased 13.1%. Average earning assets were
approximately 6.7% greater during the first three months of 1995 than
the first three months of 1994. Average loan balances increased 13.2%
while average investment securities decreased approximately 4.0% in
1995. Average interest-bearing liabilities increased approximately 6.1%.
The average yields realized on earning assets approximated 8.6% and 7.9%
during the first three months of 1995 and 1994, respectively. The
average costs of interest-bearing liabilities approximated 3.8% 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 three months
of 1995 and 1994, respectively. The provision for loan losses charged to
income increased 62.7% in 1995. Total loans past due 90 days and still
accruing interest, non-performing loans, and other real estate
approximated $1,664,000 and $1,496,000, respectively, as of March 31,
1995 and December 31, 1994.
Total other income for the first three months of 1995 was $191,000
or 28.2% less than total other income for the first three months of
1994. Security gains of $36,000 and $161,000 were recognized in 1995 and
1994, respectively. Income on insurance premiums increased $30,000 or
30.6% while gains on mortgage sales were $131,000 less in 1995. Loans
held for sale as of March 31, 1995 totalled $1,931,000. The market value
of these loans approximated book value at that time. Total other
expenses during this same period increased $221,000 or 9.9%.
Contributing factors were increases of $113,000 or 10.9% in salaries and
employee benefits and $48,000 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 $50,000 for the first
three months of 1995 in comparison to the first three months of 1994.
The effective tax rates approximated 24.6% and 22.5% 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
$41,000 or 4.0% in net income for the three month period ended March 31,
1995.
Financial Condition
As of March 31, 1995 cash and due from banks was $1,365,000 or
11.2% less than it was at December 31, 1994. This is a reflection of
Management's continuing efforts to control non-earning assets. As a
result of increased loan demand, interest-bearing time deposits in other
banks and investment securities decreased $3,165,000 or 3.2% during this
-7-
Management's Discussion, Continued
same period. The approximate market value of debt securities was
$918,000 less than amortized cost at March 31, 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 March
31, 1995 and December 31, 1994, management classified investment
securities with amortized costs and market values of $97,066,000 and
$96,148,000, and $102,305,000 and $99,249,000, respectively, as
available for sale. Gross unrealized gains and losses relating to debt
securities approximated $622,000 and $1,540,000, respectively, at March
31, 1995. Net loans increased $2,990,000 or 1.7% from December 31, 1994
to March 31, 1995. The allowance for loan losses approximated 1.16% and
1.14% of net loans at March 31, 1995 and December 31, 1994,
respectively. Net premises and equipment increased $85,000. 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 March 31,
1995 and December 31, 1994 these loans totalled $1,931,000 and $35,000,
respectively. Affecting the decrease of $337,000 in accrued interest
receivable and other assets was a decline in deferred taxes. These
factors contributed to an increase of $29,000 in total assets from
December 31, 1994 to March 31, 1995.
Total deposits increased $4,568,000 or 1.8% from December 31, 1994
to March 31, 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. Short-term borrowings decreased $6,741,000
from December 31, 1994 to March 31, 1995. At March 31, 1995 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%.
Based on a one year interval, rate sensitive assets to rate
sensitive liabilities approximated 84% as of March 31, 1995.
As of March 31, 1995 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 March 31,
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 decrease
recorded to stockholders' equity at March 31, 1995 was $606,000, 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 March 31, 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.
-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 May 5, 1995 /S/ Thomas L. Miller
Thomas L. Miller
Chairman
(Chief Executive Officer)
Date May 5, 1995 /S/ Terry L. Burrows
Terry L. Burrows
Executive Vice-President
(Chief Financial Officer)
-10-
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