SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarter Ended September 30, 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 September 30, 1998.
CAPITAL STOCK-COMMON 6,528,507
(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............................10-15
Part II
Other information and Signatures..................................16
PART I - FINANCIAL INFORMATION
COMMUNITY BANKS, INC. and SUBSIDIARIES
The following financial information sets forth the operations of
Community Banks, Inc. and Subsidiaries for the three month and nine
month periods ending September 30, 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)
September 30, December 31,
1998 1997
ASSETS
Cash and due from banks................... $ 21,499 $ 28,015
Interest-bearing time deposits in other
banks.................................. 1,119 2,406
Investment securities, available for sale
(market value)......................... 266,289 219,284
Fed funds sold............................ 5,025 2,100
Loans..................................... 492,709 456,460
Less: Unearned income.................... (11,267) (12,429)
Allowance for loan losses.......... (6,779) (6,270)
Net loans.......................... 474,663 437,761
Premises and equipment, net............... 14,416 13,963
Goodwill.................................. 725 906
Other real estate owned................... 672 866
Loans held for sale....................... 746 2,641
Accrued interest receivable and other
assets................................. 14,943 11,520
Total assets........................... $800,097 $719,462
======== ========
LIABILITIES
Deposits:
Demand................................. $ 46,381 $ 44,181
Savings................................ 252,039 226,377
Time................................... 254,730 248,998
Time in denominations of $100,000 or
more.................................. 31,499 30,199
Total deposits......................... 584,649 549,755
Short-term borrowings..................... 2,271 10,540
Long-term debt............................ 126,000 77,280
Accrued interest payable and other
liabilities............................ 8,662 7,874
Total liabilities...................... 721,582 645,449
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; 6,631,000 and
4,405,000 shares issued in 1998 and
1997, respectively..................... 33,156 22,026
Surplus................................... 17,986 28,647
Retained earnings......................... 25,434 21,219
Other accumulated comprehensive income,
net of tax of $2,038 and $1,668,
respectively............................ 3,956 3,237
Less: Treasury stock of 103,000 and
44,000 shares at cost.................. (2,017) (1,116)
Total stockholders' equity............. 78,515 74,013
Total liabilities and stockholders'
equity................................ $800,097 $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 Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans................. $10,453 $ 9,641 $30,482 $28,207
Interest and dividends on investment
securities:
Taxable................................ 2,900 3,015 8,086 8,435
Exempt from federal income tax......... 1,014 689 2,665 1,708
Fed funds interest......................... 161 103 402 251
Other interest income...................... 14 19 65 60
Total interest income................. 14,542 13,467 41,700 38,661
Interest expense:
Interest on deposits:
Savings............................... 1,417 1,394 4,121 4,171
Time.................................. 3,388 3,401 9,938 10,037
Time in denominations of $100,000 or
more................................. 356 384 1,210 1,161
Interest on short-term borrowings and
long-term debt............................ 1,427 681 3,202 1,794
Fed funds purchased and repo interest...... 329 408 1,011 847
Total interest expense................ 6,917 6,268 19,482 18,010
Net interest income................... 7,625 7,199 22,218 20,651
Provision for loan losses.................. 487 340 911 1,020
Net interest income after provision
for loan losses...................... 7,138 6,859 21,307 19,631
Other income:
Trust department income............... 79 107 237 251
Service charges on deposit accounts... 416 352 1,145 975
Other service charges, commissions
and fees............................. 196 153 561 449
Investment security gains ............ 224 86 567 563
Income on insurance premiums.......... 172 150 449 436
Gains on mortgage sales............... 131 31 415 133
Other income.......................... 108 114 337 292
Total other income............... 1,326 993 3,711 3,099
Other expenses:
Salaries and employee benefits........ 2,610 2,403 7,651 6,965
Net occupancy expense................. 821 730 2,383 2,177
Operating expense of insurance
subsidiary.......................... 87 104 343 325
Other operating expense............... 1,502 1,441 4,460 4,194
Total other expense.............. 5,020 4,678 14,837 13,661
Income before income taxes....... 3,444 3,174 10,181 9,069
Provision for income taxes................. 868 931 2,764 2,671
Net income....................... $ 2,576 $ 2,243 $ 7,417 $ 6,398
======= ======= ======= =======
Earnings per share:
Basic................................... $ .39 $ .34 $ 1.13 $ .98
Diluted................................. $ .39 $ .34 $ 1.11 $ .96
Dividends paid per share................... $ .16 $ .12 $ .46 $ .35
Per share data has been adjusted to reflect stock dividends and splits.
A three for two stock split was paid May 8, 1998.
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>
Nine Month Periods Ended September 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...................... 6,398 6,398
Change in unrealized gain (loss)
on securities, net of tax of
$697,000...................... 1,353 1,353
Total comprehensive income..... 7,751
Cash dividends........................ (2,300) (2,300)
5% stock dividend..................... 723 3,905 (4,628)
Purchase of treasury stock............ (695) (695)
Issuance of additional shares......... 248 2,343 (112) 2,479
Balance, September 30, 1997........... $21,925 $27,872 $21,114 $ 1,519 $ (1,116) $71,314
======= ======= ======= ======= ======= =======
Balance, January 1, 1998.............. $22,026 $28,647 $21,219 $ 3,237 $(1,116) $74,013
Comprehensive income:
Net income...................... 7,417 7,417
Change in unrealized gain (loss)
on securities, net of tax of
$370,000 .................... 719 719
Total comprehensive income..... 8,136
Cash dividends........................ (3,059) (3,059)
3 for 2 stock split................... 11,024 (11,024)
Purchase of treasury stock............ (901) (901)
Issuance of additional shares......... 106 363 (143) 326
Balance, September 30, 1998........... $33,156 $17,986 $25,434 $ 3,956 $(2,017) $78,515
======= ======= ======= ======= ======= =======
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)
Nine Months Ended
September 30,
1998 1997
Operating Activities:
Net income...................................... $ 7,417 $ 6,398
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses.................... 911 1,020
Provision for depreciation and amortization.. 1,211 1,111
Amortization of goodwill..................... 181 180
Investment security gains.................... (567) (563)
Loans originated for sale.................... (21,390) (4,896)
Proceeds from sale of loans.................. 23,700 6,319
Gains on mortgage sales...................... (415) (133)
Increase in other assets..................... (2,577) (996)
Increase in accrued interest payable
and other liabilities....................... 418 452
Net cash provided by operating activities.. 8,889 8,892
Investing Activities:
Net decrease in interest-bearing time
deposits in other banks........................ 1,287 149
Proceeds from sales of investment
securities..................................... 11,565 32,936
Proceeds from maturities of investment
securities..................................... 71,974 19,153
Purchases of investment securities.............. (128,888) (87,712)
Net increase in total loans..................... (38,465) (20,343)
Purchases of premises and equipment............. (1,664) (2,319)
Net cash used by investing activities...... (84,191) (58,136)
Financing Activities:
Net increase in total deposits.................. 34,894 22,994
Net decrease in short-term borrowings........... (8,269) (9,026)
Proceeds from issuance of long-term debt........ 51,731 35,413
Repayment of long-term debt..................... (3,011) (5,005)
Cash dividends.................................. (3,059) (2,300)
Purchases of treasury stock..................... (901) (695)
Proceeds from issuance of common stock.......... 326 2,479
Net cash provided by financing
activities................................ 71,711 43,860
Decrease in cash and cash equivalents...... (3,591) (5,384)
Cash and cash equivalents at beginning of period... 30,115 23,699
Cash and cash equivalents at end of period......... $26,524 $18,315
======= =======
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 nine month periods ended September 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 September 30, 1998 and December 31, 1997, were as follows:
September 30,
1998
Estimated
Amortized Fair
Cost Value
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies............................... $ 69,090 $ 70,070
Mortgage-backed U.S. government
agencies................................ 80,954 82,055
Obligations of states and political
subdivisions............................ 81,026 83,690
Corporate securities..................... 20,499 20,451
Equity securities........................ 8,726 10,023
Total.............................. $260,295 $266,289
======== ========
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>
Nine months ended Year Ended Nine Months ended
September 30, December 31, September 30,
1998 1997 1997
<S> <C> <C> <C>
Balance, January 1.................. $6,270 $5,561 $5,561
Provision for loan losses........... 911 1,317 1,020
Loan charge-offs.................... (793) (1,466) (1,077)
Recoveries.......................... 391 858 700
Balance, September 30, 1998, December
31, 1997, and September 30, 1997... $6,779 $6,270 $6,204
====== ====== ======
NONPERFORMING LOANS (a) AND OTHER REAL ESTATE
September 30, December 31, September 30,
1998 1997 1997
Loans past due 90 days or more
and still accruing interest:
Commercial, financial and
agricultural................... --- $ 53 ---
Mortgages....................... $497 405 $588
Personal installment............ 271 72 388
Other........................... 20 21 16
788 551 992
Loans renogotiated with borrowers.. 247 NONE 527
Loans on which accrual of interest
has been discontinued:
Commercial, financial and
agricultural.................... 916 926 1,048
Mortgages........................ 2,763 3,388 3,142
Other............................ 335 300 277
4,014 4,614 4,467
Other real estate................... 672 866 1,194
Total............................ $5,721 $6,031 $7,180
====== ====== ======
(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 September 30, 1998 and December 31, 1997 the Corporation recorded no investment in
impaired loans or related valuation allowance. For the nine month periods ended September
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 nine month
periods ended September 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 $3,485,000 and
$1,990,000 and $19,608,000 and $16,976,000 for income taxes and interest,
respectively, for each of the nine month periods ended September 30, 1998
and 1997.
Excluded from the consolidated statements of cash flows for the
periods ended September 30, 1998 and 1997 was the effect of certain non-cash
activities. The company acquired real estate through foreclosure totalling
$652,000 and $749,000, respectively. The company also recorded an increase
in deferred tax liabilities of $370,000 in 1998. An increase in deferred tax
liabilities of $2,050,000 was 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 September 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... $2,576 6,552 $.39 $2,243 6,511 $.34
Effect of Dilutive Securities: ==== ====
Incentive stock options outstanding....... 138 172
Diluted EPS:
Income available to common stockholders
& assumed conversion................... $2,576 6,690 $.39 $2,243 6,683 $.34
====== ===== ==== ====== ===== ====
Nine Months Ended September 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... $7,417 6,547 $1.13 $6,398 6,515 $.98
Effect of Dilutive Securities: ===== ====
Incentive stock options outstanding....... 154 162
Diluted EPS:
Income available to common stockholders
& assumed conversion................... $7,417 6,701 $1.11 $6,398 6,677 $.96
====== ===== ===== ====== ===== ====
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
nine months of 1998 was $1,676,000 or 8.5% greater than 1997. Total
interest income for the first nine months increased $3,039,000 or 7.9%
while total interest expense increased $1,472,000 or 8.2% 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 $66,467,000 or 10.5%
while average interest bearing liabilities increased $52,491,000 or
9.3% for the first nine months of 1998 over the comparable period of
1997. Impacting the increase in average earning assets were increases in
average loan balances of 9.0%. The average yields realized on earning
assets for the first nine months approximated 8.0% and 8.2% in 1998 and
1997, respectively. The average costs of interest-bearing liabilities
approximated 4.2% and 4.3%, respectively. Net interest margins, on a tax
equivalent basis for the first nine months approximated 4.5% and 4.7% in
1998 and 1997, respectively. The provision for loan losses charged to
income decreased 10.7% in 1998. Total loans past due 90 days and still
accruing interest, non-performing loans, and other real estate
approximated $5,721,000 and $7,180,000, respectively, as of September
30, 1998 and September 30, 1997. The balance of the allowance for loan
losses increased from $6,204,000 at September 30, 1997 to $6,779,000 at
September 30, 1998.
Total other income for the first nine months of 1998 was $612,000
or 19.7% more than total other income for the first nine months of 1997.
Affecting this change were increases in service charges on deposit
accounts and other service charges, commissions, and fees of $282,000.
In addition, security gains of $567,000 and $563,000 were recognized in
1998 and 1997, respectively. Gains recognized on mortgage sales totalled
$415,000 and $133,000 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
September 30, 1998 totalled $746,000. The market value of these loans
approximated book value at that time.
Total other expenses for the first nine months of 1998 increased
$1,176,000 or 8.6%. Contributing factors were increases of $686,000 or
9.8% in salaries and employee benefits, $206,000 or 9.5% in net
occupancy expense, and $266,000 or 6.3% 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 $93,000 or 3.5% for the
first nine months of 1998 in comparison to the first nine months of
1997. Affecting this change was an increase in the relative amount of
tax-free income in 1998. The effective tax rates approximated 27.1% and
29.5% for the respective periods.
The previously described factors contributed to a net increase of
$1,019,000 or 15.9% in net income for the nine month period ended
September 30, 1998.
The significant changes and related causes which occurred during
the three month period ending September 30, 1998 were generally
consistent with those described for the nine month period ending
September 30, 1998. The provision for loan losses increased $147,000 and
investment security gains increased $138,000 in 1998. Gains on mortgage
sales were $131,000 and $31,000, respectively, for the three month
periods ending September, 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
September 30, 1998 December 31, 1997
(dollars in thousands)
Amount %
Funding Sources:
Deposits and borrowed funds:
Non-interest bearing............ $ 46,381 $ 2,200 5.0%
Interest bearing................ 538,268 32,694 6.5
Total deposits............... 584,649 34,894 6.3
Borrowed funds.................. 128,271 40,451 46.1
Other liabilities................ 8,662 788 10.0
Shareholders' equity............. 78,515 4,502 6.1
Total sources................. $800,097 $80,635 11.2%
======== ======= ====
Funding uses:
Interest earning assets:
Short-term investments.......... $ 6,144 $ 1,638 36.4%
Investment securities........... 266,289 47,005 21.4
Loans, net of unearned income... 481,442 37,411 8.4
Total interest earning assets. 753,875 86,054 12.9
Cash and due from banks.......... 21,499 (6,516) (23.3)
Other assets..................... 24,723 1,097 4.6
Total uses.................... $800,097 $80,635 11.2%
======== ======= =====
-11-
Management's Discussion, Continued
As of September 30, 1998 cash and due from banks was $6,516,000 or
23.3% less than it was at December 31, 1997. Interest-bearing time
deposits in other banks and investment securities increased $45,718,000
or 20.6% while fed funds sold increased $2,925,000. The approximate
market value of debt securities was $4,697,000 greater than amortized
cost at September 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 September 30, 1998 and December 31, 1997, management
classified investment securities with amortized costs and market values
of $260,295,000 and $266,289,000, and $214,379,000 and $219,284,000,
respectively, as available for sale. Net loans increased $36,902,000 or
8.4% from December 31, 1997 to September 30, 1998. Affecting this change
were increases in real estate loans of $24,565,000 and consumer loans of
$3,265,000. Commercial loans increased $4,835,000 during the period. The
allowance for loan losses approximated 1.41% of net loans at September
30, 1998 and December 31, 1997. Much of the increase in net premises and
equipment of $453,000 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
September 30, 1998 and December 31, 1997 these loans totalled $746,000
and $2,641,000, respectively. Affecting the increase of $3,423,000 in
accrued interest receivable and other assets was an increase in prepaid
expenses and deferred taxes. These factors contributed to an increase of
$80,635,000 or 11.2% in total assets from December 31, 1997 to September
30, 1998.
Total deposits increased $34,894,000 or 6.3% from December 31, 1997
to September 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 September 30, 1998 long-term debt totalling $126,000,000 included
borrowings from the Federal Home Loan Bank of Pittsburgh of $106,000,000
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 110% as of September 30, 1998.
-12-
Management's Discussion, Continued
As of September 30, 1998 the Corporation had risk-based capital in
excess of the fully implemented regulatory requirements, and tier 1 plus
tier 2 capital approximating 15% 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 September 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 September 30, 1997
(dollars in thousands except per share data)
Community Peoples Combined
Interest income............ $8,754 $4,713 $13,467
Interest expense........... 3,784 2,484 6,268
Net interest income........ 4,970 2,229 7,199
Loan loss provision........ 140 200 340
Other income............... 667 326 993
Other expense.............. 3,273 1,405 4,678
Income before taxes........ 2,224 950 3,174
Taxes...................... 630 301 931
Net income................. $1,594 $ 649 $2,243
========================================
Earnings per common share:
Basic $ .35 $ .29 $ .34
Diluted $ .35 $ .29 $ .34
-13-
Management's Discussion, Continued
For the Nine Months Ended September 30, 1997
(dollars in thousands except per share data)
Community Peoples Combined
Interest income............ $25,156 $13,505 $38,661
Interest expense........... 10,713 7,297 18,010
Net interest income........ 14,443 6,208 20,651
Loan loss provision........ 520 500 1,020
Other income............... 2,379 720 3,099
Other expense.............. 9,644 4,017 13,661
Income before taxes........ 6,658 2,411 9,069
Taxes...................... 1,902 769 2,671
Net income................. $ 4,756 $ 1,642 $6,398
========================================
Earnings per common share:
Basic $ 1.05 $ .75 $ .98
Diluted $ 1.03 $ .75 $ .96
Per share data has been adjusted to reflect a three for two stock split
payable May 8, 1998.
-14-
Management's Discussion, Continued
Impact of The Year 2000 Issue
The "Year 2000 Issue" is the result of the possibility that
computer programs may be unable to properly recognize the year 2000.
This could result in a system failure or miscalculations causing
disruptions of operations, including among other things, a temporary
inability to process transactions, send invoices, or engage in similar
business activities.
Based on an ongoing assessment, the Corporation has determined that
it will need to modify or replace portions of its software and hardware
so that its computer systems will properly utilize dates beyond December
31, 1999. If such modifications and conversions are not made, or are not
completed on a timely basis, the Year 2000 Issue could have an adverse
impact on the operations of the Corporation. However, management
presently believes that as a result of modifications to existing
software and hardware and conversions to new software and hardware, the
Year 2000 Issue will be mitigated.
The Corporation's Year 2000 Action Plan has been categorized into
five phases: Awareness, Assessment, Testing, Validation, and
Implementation. The initial focus within those phases has been on
vendors and systems that are related to mission critical business
processes. Mission critical processes are defined as those areas of the
business whose continued operations are required in order to provide
basic banking services. Management is currently testing these mission
critical processes and plans to complete implementation by March 31,
1999. In addition, all other business processes subject to Y2K
remediation are expected to be completed prior to December 31, 1999.
Community Banks, Inc. has initiated formal communications with all
of its significant vendors and large commercial customers to determine
the extent to which it is vulnerable to those third parties' failure to
remediate their own Year 2000 Issue. To date, no material impact is
anticipated based upon responses to these communications. The
Corporation's estimated Year 2000 project costs include the costs and
time associated with the impact of a third party's Year 2000 Issue, and
are based on presently available information. For significant vendors,
management will validate that they are Year 2000 compliant by December
31, 1998, or make plans to switch to a new vendor or system that is
compliant. For large commercial loan customers, management will take
appropriate action based upon the customer's response.
The Corporation will utilize both internal and external resources
to reprogram or replace, and test software for Year 2000 modifications.
Cost incurred to date as well as for the 1998 fiscal year for the Year
2000 project are generally considered normal operating costs by the
Corporation. All Year 2000 conversion software and modifications are
being delivered and executed by the Corporation's various software
vendors with which the Corporation deals for its many different computer
processing and transaction functions. The Corporation does not
anticipate significant expenses incurred or charged to the Year 2000
Issue due to its many software, maintenance, and licensing agreements
with its software vendors. The cost to complete the internal process is
currently estimated to be less than $100,000.
Management believes that the Corporation's existing alternative
processing procedures will be available as a contingency alternative in
the unanticipated event that the Year 2000 Issue results in significant
disruption of normal business activities.
-15-
COMMUNITY BANKS, INC. and SUBSIDIARIES
PART II - OTHER INFORMATION AND SIGNATURES
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 September 30, 1998.
Reports Dated July 8, 1998
Community Banks, Inc. announced a stock repurchase program
effective July 8 through October 1 of 1998. Up to two percent of
outstanding shares could be purchased in open market transactions
as treasury shares to be used for general corporate purposes,
including grants under the Employee Stock Option Plan.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNITY BANKS, INC.
(Registrant)
Date November 11, 1998 /S/ Eddie L. Dunklebarger
Eddie L. Dunklebarger
President
(Chief Executive Officer)
Date November 11, 1998 /S/ Terry L. Burrows
Terry L. Burrows
Executive Vice-President
(Chief Financial Officer)
-16-
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