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, 1998
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 June 30, 1998.
CAPITAL STOCK-COMMON 6,561,017
(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 Changes in Stockholders' Equity........4
Consolidated Statements of Cash Flows.............................5
Notes to Consolidated Financial Statements........................6-9
Management's Discussion and Analysis of Financial
Condition and Results of Operation............................10-14
Part II
Other information and Signatures..................................15
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, 1998 and 1997.
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,
1998 1997
ASSETS
Cash and due from banks................... $ 19,847 $ 28,015
Interest-bearing time deposits in other
banks.................................. 1,479 2,406
Investment securities, available for sale
(market value)......................... 235,154 219,284
Fed funds sold............................ 4,475 2,100
Loans..................................... 470,285 456,460
Less: Unearned income.................... (11,374) (12,429)
Allowance for loan losses.......... (6,495) (6,270)
Net loans.......................... 452,416 437,761
Premises and equipment, net............... 14,396 13,963
Goodwill.................................. 786 906
Other real estate owned................... 745 866
Loans held for sale....................... 2,667 2,641
Accrued interest receivable and other
assets................................. 13,506 11,520
Total assets........................... $745,471 $719,462
======== ========
LIABILITIES
Deposits:
Demand................................. $ 43,329 $ 44,181
Savings................................ 241,353 226,377
Time................................... 243,848 248,998
Time in denominations of $100,000 or
more.................................. 25,055 30,199
Total deposits......................... 553,585 549,755
Short-term borrowings..................... 670 10,540
Long-term debt............................ 105,407 77,280
Accrued interest payable and other
liabilities............................ 8,975 7,874
Total liabilities...................... 668,637 645,449
STOCKHOLDERS' EQUITY
Preferred stock, no par value; 500,000
shares authorized; no shares issued
and outstanding........................ --- ---
Common stock-$5.00 par value; 20,000,000
shares authorized; 6,627,000 and
4,405,000 shares issued in 1998 and
1997, respectively..................... 33,134 22,026
Surplus................................... 17,942 28,647
Retained earnings......................... 23,928 21,219
Other accumulated comprehensive income,
net of tax of $1,518,000 and $1,668,000,
respectively............................ 2,946 3,237
Less: Treasury stock of 66,000 and
44,000 shares at cost.................. (1,116) (1,116)
Total stockholders' equity............. 76,834 74,013
Total liabilities and stockholders'
equity................................ $745,471 $719,462
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
All periods reflect the combined data of Community Banks, Inc. and the
Peoples State Bank.
-2-
<TABLE>
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars in thousands except per share data)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans................. $10,118 $ 9,369 $20,029 $18,566
Interest and dividends on investment
securities:
Taxable................................ 2,554 2,737 5,186 5,420
Exempt from federal income tax......... 890 589 1,651 1,019
Fed funds interest......................... 117 71 241 148
Other interest income...................... 23 22 51 41
Total interest income................. 13,702 12,788 27,158 25,194
Interest expense:
Interest on deposits:
Savings............................... 1,354 1,394 2,704 2,777
Time.................................. 3,273 3,368 6,550 6,636
Time in denominations of $100,000 or
more................................. 411 386 854 777
Interest on short-term borrowings and
long-term debt............................ 946 555 1,775 1,113
Fed funds purchased and repo interest...... 346 238 682 439
Total interest expense................ 6,330 5,941 12,565 11,742
Net interest income................... 7,372 6,847 14,593 13,452
Provision for loan losses.................. 231 290 424 680
Net interest income after provision
for loan losses...................... 7,141 6,557 14,169 12,772
Other income:
Trust department income............... 81 73 158 144
Service charges on deposit accounts... 398 324 729 623
Other service charges, commissions
and fees............................. 193 154 365 296
Investment security gains ............ 73 104 343 477
Income on insurance premiums.......... 146 142 277 286
Gains on mortgage sales............... 142 62 284 102
Other income.......................... 95 55 229 178
Total other income............... 1,128 914 2,385 2,106
Other expenses:
Salaries and employee benefits........ 2,529 2,325 5,041 4,562
Net occupancy expense................. 787 724 1,562 1,447
Operating expense of insurance
subsidiary.......................... 137 91 256 221
Other operating expense............... 1,432 1,448 2,958 2,753
Total other expense.............. 4,885 4,588 9,817 8,983
Income before income taxes....... 3,384 2,883 6,737 5,895
Provision for income taxes................. 920 831 1,896 1,740
Net income....................... $ 2,464 $ 2,052 $ 4,841 $ 4,155
======= ======= ======= =======
Earnings per share:
Basic................................... $ .38 $ .31 $ .74 $ .64
Diluted................................. $ .37 $ .31 $ .72 $ .62
Dividends paid per share................... $ .16 $ .12 $ .30 $ .23
Per share data has been adjusted to reflect stock dividends and splits.
The accompanying notes are an integral part of the consolidated financial
statements.
All periods reflect the combined data of Community Banks, Inc. and The
Peoples State Bank.
-3-
</TABLE>
<TABLE>
Community Banks, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands except per share data)
<CAPTION>
Six Month Periods Ended June 30
Accumulated
Other
Common Retained Comprehensive Treasury Total
Stock Surplus Earnings Income Stock Equity
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997.............. $20,954 $21,624 $21,756 $ 166 $ (421) $64,079
Comprehensive income:
Net income...................... 4,155 4,155
Change in unrealized gain (loss)
on securities, net of tax of
$64,000....................... 125 125
Total comprehensive income..... 4,280
Cash dividends........................ (1,518) (1,518)
5% stock dividend..................... 723 3,905 (4,628)
Purchase of treasury stock............ (695) (695)
Issuance of additional shares......... 233 2,108 (61) 2,280
Balance, June 30, 1997................ $21,910 $27,637 $19,704 $ 291 $ (1,116) $68,426
======= ======= ======= ======= ======= =======
Balance, January 1, 1998.............. $22,026 $28,647 $21,219 $ 3,237 $(1,116) $74,013
Comprehensive income:
Net income...................... 4,841 4,841
Change in unrealized gain (loss)
on securities, net of tax of
($150,000).................... (291) (291)
Total comprehensive income..... 4,550
Cash dividends........................ (2,012) (2,012)
3 for 2 stock split................... 11,024 (11,024)
Issuance of additional shares......... 84 319 (120) 283
Balance, June 30, 1998................ $33,134 $17,942 $23,928 $ 2,946 $(1,116) $76,834
======= ======= ======= ======= ======= =======
Per share data for all periods has been restated to reflect stock dividends and splits.
The accompanying notes are an integral part of the consolidated financial statements.
All periods reflect the combined data of Community Banks, Inc. and The Peoples State Bank.
-4-
</TABLE>
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
Six Months Ended
June 30,
1998 1997
Operating Activities:
Net income...................................... $ 4,841 $ 4,155
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses.................... 424 680
Provision for depreciation and amortization.. 787 740
Amortization of goodwill..................... 120 120
Investment security gains.................... (343) (477)
Loans originated for sale.................... (15,253) (6,125)
Proceeds from sale of loans.................. 15,511 4,971
Gains on mortgage sales...................... (284) (102)
Increase in other assets..................... (1,239) (330)
Increase (decrease) in accrued interest payable
and other liabilities....................... 1,251 (137)
Net cash provided by operating activities.. 5,815 3,495
Investing Activities:
Net decrease (increase) in interest-bearing time
deposits in other banks........................ 927 (47)
Proceeds from sales of investment
securities..................................... 1,647 29,981
Proceeds from maturities of investment
securities..................................... 48,914 12,923
Purchases of investment securities.............. (66,529) (58,539)
Net increase in total loans..................... (15,705) (11,336)
Purchases of premises and equipment............. (1,220) (1,540)
Net cash used by investing activities...... (31,966) (28,558)
Financing Activities:
Net increase in total deposits.................. 3,830 24,912
Net decrease in short-term borrowings........... (9,870) (5,944)
Proceeds from issuance of long-term debt........ 31,138 19,995
Repayment of long-term debt..................... (3,011) (5,005)
Cash dividends.................................. (2,012) (1,518)
Purchases of treasury stock..................... --- (695)
Proceeds from issuance of common stock.......... 283 2,280
Net cash provided by financing
activities................................ 20,358 34,025
Decrease in cash and cash equivalents...... (5,793) 8,962
Cash and cash equivalents at beginning of period... 30,115 23,699
Cash and cash equivalents at end of period......... $24,322 $32,661
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
All periods reflect the combined data of Community Banks, Inc. and The
Peoples State Bank.
-5-
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, 1998 and
1997.
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 1997 Annual Report to shareholders.
Statement of Financial Accounting Standards (SFAS) 133, "Accounting
for Derivative Instruments and Hedging Activities" establishes standards for
recording derivative financial instruments on the balance sheet at their fair
value. This Statement requires changes in the fair value of derivatives be
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. Management
anticipates that the adoption of SFAS 133 will not have a significant effect
on the Corporation's financial condition or results of operations.
-6-
2. Investment Securities
The amortized cost and estimated market values of investment
securities at June 30, 1998 and December 31, 1997, were as follows:
June 30,
1998
Estimated
Amortized Fair
Cost Value
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies............................... $ 62,435 $ 62,716
Mortgage-backed U.S. government
agencies................................ 84,344 84,849
Obligations of states and political
subdivisions............................ 75,073 76,668
Corporate securities..................... 1,064 1,083
Equity securities........................ 7,774 9,838
Total.............................. $230,690 $235,154
======== ========
December 31,
1997
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies............................... $ 66,940 $ 67,389
Mortgage-backed U.S. government
agencies................................ 84,568 85,137
Obligations of states and political
subdivisions............................ 55,248 56,633
Corporate securities..................... 1,244 1,278
Equity securities........................ 6,379 8,847
Total.............................. $214,379 $219,284
======== ========
-7-
<TABLE>
3. Allowance for loan losses
Changes in the allowance for loan losses are as follows:
<CAPTION>
Six months ended Year Ended Six Months ended
June 30, December 31, June 30,
1998 1997 1997
<S> <C> <C> <C>
Balance, January 1.................. $6,270 $5,561 $5,561
Provision for loan losses........... 424 1,317 680
Loan charge-offs.................... (498) (1,466) (750)
Recoveries.......................... 299 858 404
Balance, June 30, 1998, December
31, 1997, and June 30, 1997........ $6,495 $6,270 $5,895
====== ====== ======
NONPERFORMING LOANS (a) AND OTHER REAL ESTATE
June 30, December 31, June 30,
1998 1997 1997
Loans past due 90 days or more
and still accruing interest:
Commercial, financial and
agricultural................... $117 $ 53 $ 72
Mortgages....................... 455 405 528
Personal installment............ 289 72 268
Other........................... 12 21 9
873 551 877
Loans renogotiated with borrowers.. 245 NONE NONE
Loans on which accrual of interest
has been discontinued:
Commercial, financial and
agricultural.................... 1,133 926 860
Mortgages........................ 2,510 3,388 3,776
Other............................ 342 300 294
3,985 4,614 4,930
Other real estate................... 745 866 1,143
Total............................ $5,848 $6,031 $6,950
====== ====== ======
(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
At June 30, 1998 and December 31, 1997 the Corporation recorded no investment in
impaired loans or related valuation allowance. For the six month periods ended June 30, 1998
and 1997 the average balance of impaired loans was negligible. In addition, the Corporation
recognized no interest on impaired loans on the cash basis for the six month periods ended
June 30, 1998 and 1997.
-8-
</TABLE>
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 $2,660,000 and
$1,532,000 and $12,627,000 and $11,053,000 for income taxes and interest,
respectively, for each of the six month periods ended June 30, 1998 and
1997.
Excluded from the consolidated statements of cash flows for the
periods ended June 30, 1998 and 1997 was the effect of certain non-cash
activities. The company acquired real estate through foreclosure totalling
$626,000 and $598,000, respectively. The company also recorded a decrease in
deferred tax liabilities of $150,000 in 1998. A decrease in deferred tax
assets of $49,000 and an increase in deferred tax liabilities of $16,000
were recognized in 1997. These variations related to the effects of changes
in the net unrealized gain (loss) on investment securities available for
sale.
<TABLE>
5. Earnings Per Share:
The following tables set forth the calculation of Basic and Diluted
Earnings Per Share for the periods indicated:
<CAPTION>
Three Months Ended June 30,
1998 1997
Per-Share Per-Share
Income Shares Amount Income Shares Amount
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to common stockholders... $2,464 6,551 $.38 $2,052 6,515 $.31
Effect of Dilutive Securities: ==== ====
Incentive stock options outstanding....... 160 169
Diluted EPS:
Income available to common stockholders
& assumed conversion................... $2,464 6,711 $.37 $2,052 6,684 $.31
====== ===== ==== ====== ===== ====
Six Months Ended June 30,
1998 1997
Per-Share Per-Share
Income Shares Amount Income Shares Amount
(in thousands except per share data)
Basic EPS:
Income available to common stockholders... $4,841 6,545 $.74 $4,155 6,518 $.64
Effect of Dilutive Securities: ==== ====
Incentive stock options outstanding....... 161 168
Diluted EPS:
Income available to common stockholders
& assumed conversion................... $4,841 6,706 $.72 $4,155 6,686 $.62
====== ===== ==== ====== ===== ====
Per share data has been adjusted to reflect a three for two stock split payable May 8,1998.
All periods reflect the combined data of Community Banks, Inc. and The Peoples State Bank.
-9-
</TABLE>
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 1998 was $1,397,000 or 10.9% greater than 1997. Total
interest income for the first six months increased $1,964,000 or 7.8%
while total interest expense increased $823,000 or 7.0% over the
comparable period of 1997. The amount of net interest income and total
interest income are dependent upon many factors including the volume of
earning assets and interest bearing liabilities, the level of and
changes in interest rates and levels of non-performing assets. The cost
of interest bearing liabilities changes with the amount of funds
necessary to support earning assets, the rates paid to attract and
maintain deposits, rates paid on borrowed funds and the level of
non-interest bearing demand deposits and equity capital. The increases
in net interest income and total interest income were impacted by an
increase in average earning assets of approximately $57,827,000 or 9.3%
while average interest bearing liabilities increased $59,280,000 or
10.7% for the first six months of 1998 over the comparable period of
1997. Impacting the increase in average earning assets were increases in
average loan balances of 8.4%. The average yields realized on earning
assets for the first six months approximated 8.2% and 8.3% in 1998 and
1997, respectively. The average costs of interest-bearing liabilities
approximated 4.1% and 4.2%, respectively. Net interest margins, on a tax
equivalent basis for the first six months approximated 4.6% and 4.8% in
1998 and 1997, respectively. The provision for loan losses charged to
income decreased 37.6% in 1998. Total loans past due 90 days and still
accruing interest, non-performing loans, and other real estate
approximated $5,848,000 and $6,950,000, respectively, as of June 30,
1998 and June 30, 1997. The balance of the allowance for loan losses
increased from $5,894,000 at June 30, 1997 to $6,495,000 at June 30,
1998.
Total other income for the first six months of 1998 was $279,000 or
13.2% more than total other income for the first six months of 1997.
Affecting this change were increases in service charges on deposit
accounts and other service charges, commissions, and fees of $175,000.
In addition, security gains of $343,000 and $477,000 were recognized in
1998 and 1997, respectively. Gains recognized on mortgage sales totalled
$284,000 and $102,000 in 1998 and 1997, respectively. 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 greater in 1998 than 1997. Loans held for sale as of
June 30, 1998 totalled $2,667,000. The market value of these loans
approximated book value at that time.
Total other expenses for the first six months of 1998 increased
$834,000 or 9.3%. Contributing factors were increases of $479,000 or
10.5% in salaries and employee benefits, $115,000 or 7.9% in net
occupancy expense, and $205,000 or 7.4% in other operating expense.
These increases were affected by the opening of new banking offices and
the recognition of certain retirement plan obligations.
The provision for income taxes increased $156,000 or 9.0% for the
first six months of 1998 in comparison to the first six months of 1997.
Affecting this change was an increase in the relative amount of tax-free
income in 1998. The effective tax rates approximated 28.1% and 29.5% for
the respective periods.
The previously described factors contributed to a net increase of
$686,000 or 16.5% in net income for the six month period ended June 30,
1998.
The significant changes and related causes which occurred during
the three month period ending June 30, 1998 were generally consistent
with those described for the six month period ending June 30, 1998.
Investment security gains declined in the second quarter of 1998. Gains
on mortgage sales were $142,000 and $62,000, respectively, for the three
month periods ending June 30, 1998 and 1997.
-10-
Management's Discussion, Continued
Financial Condition
The Corporation's financial condition can be examined in terms of
developing trends in its sources and uses of funds. These trends are the
result of both external environmental factors, such as changing economic
conditions, regulatory changes and competition, and internal
environmental factors such as Management's evaluation as to the best use
of funds under these changing conditions.
Increase (Decrease)
Balance since
June 30, 1998 December 31, 1997
(dollars in thousands)
Amount %
Funding Sources:
Deposits and borrowed funds:
Non-interest bearing............ $ 43,329 $ (852) (1.9)%
Interest bearing................ 510,256 4,682 .9
Total deposits............... 553,585 3,830 .7
Borrowed funds.................. 106,077 18,257 20.8
Other liabilities................ 8,975 1,101 14.0
Shareholders' equity............. 76,834 2,821 3.8
Total sources................. $745,471 $26,009 3.6%
======== ======= ====
Funding uses:
Interest earning assets:
Short-term investments.......... $ 5,954 $ 1,448 32.1%
Investment securities........... 235,154 15,870 7.2
Loans, net of unearned income... 458,911 14,880 3.4
Total interest earning assets. 700,019 32,198 4.8
Cash and due from banks.......... 19,847 (8,168) (29.2)
Other assets..................... 25,605 1,979 8.4
Total uses.................... $745,471 $26,009 3.6%
======== ======= =====
-11-
Management's Discussion, Continued
As of June 30, 1998 cash and due from banks was $8,168,000 or 29.2%
less than it was at December 31, 1997. Interest-bearing time deposits in
other banks and investment securities increased $14,943,000 or 6.7%
while fed funds sold increased $2,375,000. The approximate market value
of debt securities was $2,400,000 greater than amortized cost at June
30, 1998. The approximate market value of debt securities was $2,437,000
greater than amortized cost at December 31, 1997. 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, 1998
and December 31, 1997, management classified investment securities with
amortized costs and market values of $230,690,000 and $235,154,000, and
$214,379,000 and $219,284,000, respectively, as available for sale. Net
loans increased $14,655,000 or 3.3% from December 31, 1997 to June 30,
1998. Affecting this change were increases in real estate loans of
$8,649,000 and consumer loans of $2,019,000. Commercial loans increased
$3,604,000 during the period. The allowance for loan losses approximated
1.42% and 1.41% of net loans at June 30, 1998 and December 31, 1997.
Much of the increase in net premises and equipment of $433,000 related
to 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 June 30, 1998 and
December 31, 1997 these loans totalled $2,667,000 and $2,641,000,
respectively. Affecting the increase of $1,986,000 in accrued interest
receivable and other assets was an increase in prepaid expenses and
deferred taxes. These factors contributed to an increase of $26,009,000
or 3.6% in total assets from December 31, 1997 to June 30, 1998.
Total deposits increased $3,830,000 or 0.7% from December 31, 1997
to June 30, 1998. Most of this 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 decreased short-term borrowings and increased long-term
debt in 1998 in an attempt to better balance rate sensitive assets and
liabilities and enhance earnings through more effective use of equity.
At June 30, 1998 long-term debt totalling $105,407,000 included
borrowings from the Federal Home Loan Bank of Pittsburgh of $81,000,000
and repurchase agreements totalling $20,000,000 at a weighted average
interest rate of 5.56%.
Based on a one year interval, rate sensitive assets to rate
sensitive liabilities approximated 95% as of June 30, 1998.
-12-
Management's Discussion, Continued
As of June 30, 1998 the Corporation had risk-based capital in
excess of the fully implemented regulatory requirements, and tier 1 plus
tier 2 capital approximated 16% of risk-weighted assets.
Liquidity
Liquidity is the ratio of net liquid assets to net liabilities. The
primary functions of asset/liability management are the assurance of
adequate liquidity and maintenance of an appropriate balance between
interest-sensitive earning assets and interest-bearing liabilities.
Liquidity management refers to the ability to meet the cash flow
requirements of depositors and borrowers.
A continuous review of net liquid assets is conducted to assure
appropriate cash flow to meet needs and obligations in a timely manner.
There was an adequate relationship of liquid assets to short-term
liabilities at June 30, 1998
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. Adequate loan demand is anticipated for
the remainder of 1998 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 1998.
Other Events
On March 31, 1998, Community Banks, Inc. (Community) completed its
merger of The Peoples State Bank (Peoples). Peoples has six banking
offices which are located in York and Adams Counties, Pennsylvania.
Community issued 1,325,330 shares of common stock for all of the
outstanding common stock of Peoples. This transaction was accounted for
as a pooling of interests and combined unaudited financial information
is included in this report.
For Three Months Ended June 30, 1997
(dollars in thousands except per share data)
Community Peoples Combined
Interest income............ $8,275 $4,513 $12,788
Interest expense........... 3,494 2,447 5,941
Net interest income........ 4,781 2,066 6,847
Loan loss provision........ 140 150 290
Other income............... 755 159 914
Other expense.............. 3,237 1,351 4,588
Income before taxes........ 2,159 724 2,883
Taxes...................... 621 210 831
Net income................. $1,538 $ 514 $2,052
========================================
Earnings per common share:
Basic $ .34 $ .23 $ .31
Diluted $ .33 $ .23 $ .31
-13-
Management's Discussion, Continued
For the Six Months Ended June 30, 1997
(dollars in thousands except per share data)
Community Peoples Combined
Interest income............ $16,402 $8,792 $25,194
Interest expense........... 6,929 4,813 11,742
Net interest income........ 9,473 3,979 13,452
Loan loss provision........ 380 300 680
Other income............... 1,712 394 2,106
Other expense.............. 6,371 2,612 8,983
Income before taxes........ 4,434 1,461 5,895
Taxes...................... 1,272 468 1,740
Net income................. $ 3,162 $ 993 $4,155
========================================
Earnings per common share:
Basic $ .70 $ .47 $ .64
Diluted $ .69 $ .47 $ .62
Per share data has been adjusted to reflect a three for two stock split
payable May 8, 1998.
-14-
-14-
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 26, 1998 for the purpose of considering and voting upon the following
matters:
1. To elect four (4) Directors: Kenneth L. Deibler, Allen
Shaffer, Ernest L. Lowe, and Earl L. Mummert, to serve until the 2002
Annual Meeting of Shareholders. Each director received affirmative votes
representing at least 75.05% of the shares outstanding.
2. To approve the 1998 Long-Term Incentive Plan. This proposal
received affirmative votes representing 84.75% of the shares
outstanding.
Item 6. Exhibits and Reports on Form 8-K/A1
(a) Exhibits - none
(b) Registrant filed the following reports
on Form 8-K during the quarter ending June 30, 1998.
Reports Dated March 31, 1998
Registrant reported the merger of the Peoples State Bank of
East Berlin. Incorporated by reference in Form 8-K/A-1 were the
Pro Forma Unaudited Consolidated Statements of Income for the
years 1994, 1995, and 1996, and nine months ended September 30,
1996, and 1997; Pro Forma Unaudited Combined Balance Sheet as of
September 30, 1997; Pro Forma Unaudited Capital Schedule
as of September 30, 1997; and notes to Unaudited Pro Forma
Financial Information.
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 11, 1998 /S/ Eddie L. Dunklebarger
Eddie L. Dunklebarger
President
(Chief Executive Officer)
Date August 11, 1998 /S/ Terry L. Burrows
Terry L. Burrows
Executive Vice-President
(Chief Financial Officer)
-15-
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