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, 1996
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 Sections 12, 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, 1996.
CAPITAL STOCK-COMMON 2,610,397
(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........................5-8
Management's Discussion and Analysis of Financial
Condition and Results of Operation.............................9-11
Part II
Other information and Signatures..................................12
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, 1996 and 1995.
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,
1996 1995
ASSETS
Cash and due from banks................... $ 15,851 $ 14,870
Interest-bearing time deposits in other
banks.................................. 1,029 434
Investment securities, available for sale
(market value)......................... 118,894 117,426
Federal funds sold........................ 6,400 2,215
Loans..................................... 245,605 243,308
Less: Unearned income.................... (10,986) (11,671)
Allowance for loan losses.......... (2,614) (2,574)
Net loans.......................... 232,005 229,063
Premises and equipment, net............... 7,913 7,657
Goodwill.................................. 1,328 1,388
Other real estate owned................... 287 302
Loans held for sale....................... 2,510 2,206
Accrued interest receivable and other
assets................................. 6,466 6,261
Total assets........................... $392,683 $381,822
======== ========
LIABILITIES
Deposits:
Demand................................. $ 28,056 $ 28,337
Savings................................ 145,881 133,004
Time................................... 150,334 150,908
Time in denominations of $100,000 or
more.................................. 11,707 11,848
Total deposits......................... 335,978 324,097
Short-term borrowings..................... 807 1,016
Long-term debt............................ 7,000 7,000
Accrued interest payable and other
liabilities............................ 3,021 3,709
Total liabilities...................... 346,806 335,822
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; 2,614,304 and
2,611,409 shares issued in 1996 and
1995, respectively..................... 13,071 13,057
Surplus................................... 8,408 8,381
Retained earnings......................... 23,771 22,951
Net unrealized gain on investment
securities available for sale, net of tax 680 1,664
Less: Treasury stock of 3,907 shares at
cost................................... (53) (53)
Total stockholders' equity............. 45,877 46,000
Total liabilities and stockholders'
equity................................ $392,683 $381,822
======== ========
All periods reflect the combined data of Community Banks, Inc. and the
Citizens' National Bank of Ashland.
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
1996 1995
Interest income:
Interest and fees on loans................. $ 5,529 $ 4,813
Interest and dividends on investment
securities:
Taxable............................... 1,359 1,469
Exempt from federal income tax........ 442 576
Other interest income...................... 93 36
Total interest income................. 7,423 6,894
Interest expense:
Interest on deposits:
Savings............................... 760 780
Time.................................. 2,053 1,667
Time in denominations of $100,000 or
more................................. 155 144
Interest on short-term borrowings and
long-term debt............................ 114 177
Total interest expense................. 3,082 2,768
Net interest income................... 4,341 4,126
Provision for loan losses.................. 202 122
Net interest income after provision
for loan losses...................... 4,139 4,004
Other income:
Trust department income............... 67 47
Service charges on deposit accounts... 220 197
Other service charges, commissions
and fees............................. 45 74
Investment security gains ............ 147 36
Income on insurance premiums.......... 133 128
Gains on mortgage sales............... --- 18
Other income.......................... 32 27
Total other income............... 644 527
Other expenses:
Salaries and employee benefits........ 1,507 1,343
Net occupancy expense................. 471 371
Operating expense of insurance
subsidiary.......................... 87 102
Other operating expense............... 975 1,046
Total other expense.............. 3,040 2,862
Income before income taxes....... 1,743 1,669
Provision for income taxes................. 397 396
Net income....................... $ 1,346 $ 1,273
========== ==========
Average number of fully diluted shares
outstanding............................... 2,897,851 2,892,380
========== =========
Earnings per share:
Primary................................. $ .47 $ .45
Fully diluted........................... $ .46 $ .44
Dividends paid per share................... $ .18 $ .17
Per share data has been adjusted to reflect a 10 percent stock dividend
payable May 30, 1996.
All periods reflect the combined data of Community Banks, Inc. and the
Citizens' National Bank of Ashland.
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,
1996 1995
Operating Activities:
Net income...................................... $ 1,346 $ 1,273
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses.................... 202 122
Provision for depreciation and amortization.. 225 225
Amortization of goodwill..................... 60 60
Investment security gains.................... (147) (36)
Loans originated for sale.................... (304) (620)
Proceeds from sales of loans................. --- (1,258)
Gains on mortgage sales...................... --- (18)
Decrease (increase) in other assets.......... (205) 208
Increase (decrease) in accrued interest
payable and other liabilities............... (181) 46
Net cash provided by operating activities.. 996 2
Investing Activities:
Net decrease (increase) in interest-bearing time
deposits in other banks........................ (595) 64
Proceeds from sales of investment
securities..................................... 408 112
Proceeds from maturities of investment
securities..................................... 4,920 6,046
Purchases of investment securities.............. (8,140) (1,583)
Net increase in total loans..................... (3,129) (2,953)
Purchases of premises and equipment............. (481) (299)
Net cash used by investing activities...... (7,017) 1,387
Financing Activities:
Net increase in total deposits.................. 11,881 5,675
Net decrease in short-term borrowings........... (209) (6,741)
Repayment of subordinated capital notes......... --- (15)
Cash dividends.................................. (526) (496)
Proceeds from issuance of common stock.......... 41 48
Net cash provided by financing activities.. 11,187 (1,529)
Increase (decrease) in cash and cash
equivalents............................... 5,166 (140)
Cash and cash equivalents at beginning of period... 17,085 15,105
Cash and cash equivalents at end of period......... $22,251 $14,965
======= =======
All periods reflect the combined data of Community Banks, Inc. and the
Citizens' National Bank of Ashland.
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, 1996 and 1995.
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 1995 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 March 31, 1996 and December 31, 1995, were as follows:
1996
Estimated
Amortized Market
Cost Value
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies............................... $ 37,713 $ 37,712
Mortgage-backed U.S. government
agencies................................ 39,968 39,611
Obligations of states and political
subdivisions............................ 33,152 33,643
Corporate securities..................... 3,923 4,015
Equity securities........................ 3,108 3,913
Total.............................. $117,864 $118,894
======== ========
1995
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies............................... $ 27,719 $ 28,031
Mortgage-backed U.S. government
agencies................................ 45,888 46,153
Obligations of states and political
subdivisions............................ 34,067 34,941
Corporate securities..................... 3,990 4,123
Equity securities........................ 3,241 4,178
Total.............................. $114,905 $117,426
======== ========
-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,
1996 1995
Balance, January 1.................. $2,574 $2,347
Provision for loan losses........... 202 728
Loan charge-offs.................... (284) (840)
Recoveries.......................... 122 339
Balance, March 31, 1996 and
December 31, 1995.................. $2,614 $2,574
====== ======
NONPERFORMING LOANS (a) AND OTHER REAL ESTATE
March 31, December 31,
1996 1995
Loans past due 90 days or more
and still accruing interest:
Commercial, financial and
agricultural................... $ 8 $ 120
Mortgages....................... 162 558
Personal installment............ 212 236
Other........................... 15 ---
397 914
Loans renegotiated with the borrowers NONE NONE
Loans on which accrual of interest
has been discontinued:
Commercial, financial and
agricultural.................... 199 415
Mortgages........................ 1,484 1,245
Other............................ 165 99
1,848 1,759
Other real estate................... 287 302
Total............................ $2,532 $2,975
====== ======
(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
The Corporation adopted FAS 114 "Accounting by Creditors for Impairment
of a Loan", as amended by FAS 118, on January 1, 1995. Under the new
standard, a loan is considered impaired, based on current information and
events, if it is probable that the Corporation will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. For purposes of applying FAS 114,
larger groups of smaller-balance loans such as residential mortgage and
installment loans are collectively evaluated for impairment. Management has
established a smaller-dollar-value threshold of $200,000 for all loans.
Loans exceeding this threshold are evaluated in accordance with FAS 114. An
insignificant delay or shortfall in the amount of payments, when considered
6
independent of other factors, would not cause a loan to be rendered
impaired. Insignificant delays or shortfalls may include, depending on
specific facts and circumstances, those that are associated with temporary
operational downturns or seasonal business delays.
Management performs periodic reviews of its loans to identify impaired
loans. The measurement of impaired loans is based on the present value of
expected future cash flows discounted at the historical effective interest
rate, except that all collateral-dependent loans are measured for impairment
based on the fair value of the collateral. The adoption of FAS 114 did not
result in an additional provision for credit losses at January 1, 1995.
Loans continue to be classified as impaired unless they are brought
fully current and the collection of scheduled interest and principal is
considered probable. When an impaired loan or portion of impaired loan is
determined to be uncollectible, the portion deemed uncollectible is charged
against the related valuation allowance and subsequent recoveries, if any,
are credited to the valuation allowance. The company does not accrue
interest on impaired loans. While a loan is considered impaired, cash
payments received are applied to principal or interest depending upon
management's assessment of the ultimate collectibility of principal and
interest.
At March 31, 1996, the Corporation recorded no investment in impaired
loans recognized in accordance with FAS 114 with no related FAS 114
valuation allowance. For the three month period ended March 31, 1996, the
average balance of impaired loans was negligible. The application of FASB
114 has not had any effect on the comparability of the non-performing loan
table in footnote 3 between the periods presented. The company recognized no
interest on impaired loans on the cash basis.
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 $60,000 and $70,000,
and $3,243,000 and $2,764,000 for income taxes and interest, respectively,
for the three month periods ended March 31, 1996 and 1995.
Excluded from the consolidated statements of cash flows for the
periods ended March 31, 1996 and 1995 was the effect of certain non-cash
activities. The company acquired real estate through foreclosure totalling
$2,000 for both periods. The company also recorded decreases to deferred tax
liabilities and deferred tax assets totalling $354,000 and $727,000,
respectively, relating to the effects of changes in the net unrealized gain
(loss) on investment securities available for sale.
5. Merger
On January 12, 1996, Community Banks, Inc., (Community) completed
its merger of Citizens National Bank of Ashland (Citizens). Citizens has
three banking offices which are located in Ashland, Gordon, and Lavelle,
Pennsylvania. Community issued 578,081 shares of common stock for all of the
outstanding common stock of Citizens. This transaction was accounted for as
-7-
a pooling of interests and combined unaudited financial information is as
follows:
Quarter Ended March 31, 1995
(dollars in thousands except per share data)
Community Citizens' Combined
Interest income $5,855 $1,039 $6,894
Interest expense 2,344 424 2,768
Net interest income 3,511 615 4,126
Loan loss provision 122 --- 122
Other income 487 40 527
Other expense 2,462 400 2,862
Income before taxes 1,414 255 1,669
Taxes 348 48 396
Net income $1,066 $207 $1,273
===============================================
Earnings per common share:
Net income $ 0.47 $0.33 $ 0.44
-8-
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 1996 was $135,000 or 3.4% greater than net interest
income after provision for loan losses for the first three months of
1995. Total interest income increased $529,000 or 7.7% during the period
while total interest expense increased $314,000 or 11.3%. Average
earning assets were approximately 4.4% greater during the first three
months of 1996 than the first three months of 1995. Average loan
balances increased 12.1% while average investment securities decreased
approximately 10.7% in 1996. Average interest-bearing liabilities
increased approximately 12.6%. Management chose to reduce CBI's
borrowings in 1995 and fund a significant portion of the increase in
loan balances with proceeds from maturities of investment securities.
The average yields realized on earning assets approximated 8.3% and 8.1%
during the first three months of 1996 and 1995, respectively. The
average costs of interest-bearing liabilities approximated 4.0% and
4.1%, respectively, for the same periods. Net interest margins on a tax
equivalent basis approximated 5.1% and 5.2% for the first three months
of 1996 and 1995, respectively. The provision for loan losses charged to
income increased 65.6% in 1996. Total loans past due 90 days and still
accruing interest, non-performing loans, and other real estate
approximated $2,532,000 and $2,975,000, respectively, as of March 31,
1996 and December 31, 1995. Significant declines have occurred in loans
past due 90 days or more and nonaccrual commercial, financial, and
agricultural loans.
Total other income for the first three months of 1996 was $117,000
or 22.2% more than total other income for the first three months of
1995. Affecting this change were security gains of $147,000 and $36,000
recognized in 1996 and 1995, respectively. No gains on mortgage sales
were recognized in 1996. Loans held for sale are comprised for the most
part of fixed-rate real estate and education loans extended specifically
for resale. Demand for these products has been lower in 1996 than 1995.
Typically, the relationship of the volume of loans sold to gains
recognized during a period is relatively constant and a larger volume
results in increased gains. Loans held for sale as of March 31, 1996
totalled $2,510,000. The market value of these loans approximated book
value at that time. Total other expenses for the first three months of
1996 increased 178,000 or 6.2%. Contributing factors were increases of
$164,000 or 12.2% in salaries and employee benefits and $100,000 in net
occupancy expense. Affecting these increases were two new banking
offices located in Hazleton and Rutherford, Pennsylvania.
The provision for income taxes was virtually unchanged for the
first three months of 1996 in comparison to the first three months of
1995. The effective tax rates approximated 22.8% and 23.7% for the
respective periods.
The previously described factors contributed to a net increase of
$73,000 or 5.7% in net income for the three month period ended March 31,
1996.
-9-
Management's Discussion, Continued
Financial Condition
As of March 31, 1996 cash and due from banks was $981,000 or 6.6%
greater than it was at December 31, 1995. As a result of decreased loan
demand, interest-bearing time deposits in other banks, investment
securities, and Federal funds sold increased $6,248,000 or 5.2% during
this same period. The approximate market value of debt securities was
$1,030,000 greater than amortized cost at March 31, 1996. The
approximate market value of debt securities was $2,521,000 more than
amortized cost at December 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, 1996
and December 31, 1995, management classified investment securities with
amortized costs and market values of $117,864,000 and $118,894,000, and
$114,905,000 and $117,426,000, respectively, as available for sale.
Gross unrealized gains and losses relating to debt securities
approximated $1,853,000 and $823,000, respectively, at March 31, 1996.
Net loans increased $2,942,000 or 1.3% from December 31, 1995 to March
31, 1996. Variable rate real estate loans secured by first liens and
commercial loans increased approximately $5,199,000 and $2,543,000
during the period. Most other types of loans experienced modest
increases or declines. The allowance for loan losses approximated 1.11%
of net loans at March 31, 1996 and December 31, 1995. Much of the
increase in net premises and equipment of $256,000 related to the new
banking offices. Goodwill continues to be amortized at an annualized
rate of $240,000. As previously noted, Community Banks, Inc. sells only
fixed-rate real estate and education loans specifically designated for
resale on the secondary market and at March 31, 1996 and December 31,
1995 these loans totalled $2,510,000 and $2,206,000, respectively.
Affecting the increase of $205,000 in accrued interest receivable and
other assets was an increase in accrued interest. These factors
contributed to an increase of $10,861,000 or 2.8% in total assets from
December 31, 1995 to March 31, 1996.
Total deposits increased $11,881,000 or 3.7% from December 31, 1995
to March 31, 1996. All of the increase can be attributed 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. Management reduced short-term borrowings
in 1996 in an attempt to better balance rate sensitive assets and
liabilities. At March 31, 1996 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 6.15%. Affecting the
decline in accrued interest payable and other liabilities was a
reduction in deferred tax liabilities of $507,000.
Based on a one year interval, rate sensitive assets to rate
sensitive liabilities approximated 100% as of March 31, 1996.
-10-
Management's Discussion, Continued
As of March 31, 1996 the Corporation had risk-based capital in
excess of the fully implemented regulatory requirements, and tier 1 plus
tier 2 capital approximated 19% of risk-weighted assets. 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 of $2,246,000, net of applicable income taxes,
as a separate component of equity. The increase recorded to
stockholders' equity at March 31, 1996 was $680,000, 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.
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, 1996.
Forward Outlook
Management is unaware of any regulatory recommendations which, if
implemented, would have a material effect on the liquidity, capital
resources, or operations of CBI. Marginal loan demand is anticipated for
the remainder of 1996 and management 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.
The Corporation is anticipating the maintenance of a favorable net
interest margin throughout the remainder of 1996.
Other Events
On April 22, 1996, the Corporation announced plans to repurchase up
to 130,500 or 5% of its outstanding common stock. The repurchases will
be made from time to time in open market transactions. The repurchased
shares will become Treasury shares and will be used for general
corporate purposes, including grants under its Employee Stock Option
Plans.
The Corporation has declared a 10% stock dividend payable May 30,
1996, to shareholders of record on May 15, 1996.
-11-
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 filed the following reports on Form 8-K
during the quarter ending March 31, 1996:
Report Dated January 12, 1996
Registrant reported the acquisition of the Citizens' National
Bank of Ashland. Incorporated by reference in Form 8-K/A-1 were
the Pro Forma Unaudited Consolidated Statements of Income for
the years December 31, 1993, 1994, and 1995; Pro Forma Unaudited
Combined Balance Sheet as of December 31, 1995; Pro Forma
Unaudited Capital Schedule as of December 31, 1995; and notes
to Unaudited Pro Forma Financial Information.
Report Dated February 1, 1996
Registrant reported that its common stock began trading on
the NASDAQ Small-Cap Market. The stock had previously traded
on the NASDAQ National Market System.
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 13, 1996 /S/ Thomas L. Miller
Thomas L. Miller
Chairman
(Chief Executive Officer)
Date May 13, 1996 /S/ Terry L. Burrows
Terry L. Burrows
Executive Vice-President
(Chief Financial Officer)
-12-
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