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, 1999
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, 1999.
CAPITAL STOCK-COMMON 6,835,942
(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 (CTY) for the three month and
six month periods ending June 30, 1999 and 1998.
In the opinion of management, the following Consolidated Balance
Sheets and related Consolidated Statements of Income, Changes in
Stockholders' Equity, 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.
Community Banks, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands except per share data)
June 30, December 31,
1999 1998
ASSETS
Cash and due from banks................... $ 22,292 $ 25,036
Interest-bearing time deposits in other
banks.................................. 2,719 1,258
Investment securities, available for sale
(market value)......................... 317,064 292,542
Fed funds sold............................ --- 2,208
Loans..................................... 547,441 512,280
Less: Unearned income.................... (7,662) (10,018)
Allowance for loan losses.......... (7,307) (6,954)
Net loans.......................... 532,472 495,308
Premises and equipment, net............... 14,265 14,203
Goodwill.................................. 545 665
Other real estate owned................... 340 625
Loans held for sale....................... 4,290 3,319
Accrued interest receivable and other
assets................................. 22,838 16,510
Total assets........................... $916,825 $851,674
======== ========
LIABILITIES
Deposits:
Demand................................. $ 59,929 $ 50,038
Savings................................ 264,548 254,316
Time................................... 304,439 265,884
Time in denominations of $100,000 or
more.................................. 34,025 25,667
Total deposits......................... 662,941 595,905
Short-term borrowings..................... 10,986 7,910
Long-term debt............................ 161,000 161,000
Accrued interest payable and other
liabilities............................ 7,710 7,983
Total liabilities...................... 842,637 772,798
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; 6,976,000 and
6,631,000 shares issued in 1999 and
1998, respectively..................... 34,878 33,157
Surplus................................... 24,261 17,989
Retained earnings......................... 22,357 27,023
Other accumulated comprehensive income,
net of tax of $(2,405,000) and $1,437,000,
respectively............................ (4,466) 2,789
Less: Treasury stock of 140,000 and
105,000 shares at cost................. (2,842) (2,082)
Total stockholders' equity............. 74,188 78,876
Total liabilities and stockholders'
equity................................ $916,825 $851,674
======== ========
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.
<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,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans................. $11,156 $10,118 $22,090 $20,029
Interest and dividends on investment
securities:
Taxable................................ 3,702 2,554 6,968 5,186
Exempt from federal income tax......... 1,263 890 2,427 1,651
Fed funds interest......................... 56 117 150 241
Other interest income...................... 11 23 32 51
Total interest income................. 16,188 13,702 31,667 27,158
Interest expense:
Interest on deposits:
Savings............................... 1,339 1,354 2,664 2,704
Time.................................. 3,800 3,273 7,379 6,550
Time in denominations of $100,000 or
more................................. 488 411 919 854
Interest on short-term borrowings and
long-term debt............................ 1,865 946 3,708 1,775
Fed funds purchased and repo interest...... 347 346 692 682
Total interest expense................ 7,839 6,330 15,362 12,565
Net interest income................... 8,349 7,372 16,305 14,593
Provision for loan losses.................. 291 231 567 424
Net interest income after provision
for loan losses...................... 8,058 7,141 15,738 14,169
Other income:
Trust department income............... 112 81 187 158
Service charges on deposit accounts... 484 398 895 729
Other service charges, commissions
and fees............................. 246 193 460 365
Investment security gains (losses).... (29) 73 124 343
Income on insurance premiums.......... 180 146 402 277
Gains on loan sales................... 138 142 414 284
Other income.......................... 207 95 314 229
Total other income............... 1,338 1,128 2,796 2,385
Other expenses:
Salaries and employee benefits........ 3,013 2,529 5,938 5,041
Net occupancy expense................. 808 787 1,634 1,562
Operating expense of insurance
subsidiary.......................... 103 137 271 256
Other operating expense............... 1,618 1,432 3,291 2,958
Total other expense.............. 5,542 4,885 11,134 9,817
Income before income taxes....... 3,854 3,384 7,400 6,737
Provision for income taxes................. 935 920 1,799 1,896
Net income....................... $ 2,919 $ 2,464 $ 5,601 $ 4,841
======= ======= ======= =======
Earnings per share:
Basic................................... $ .43 $ .36 $ .82 $ .71
Diluted................................. $ .42 $ .36 $ .80 $ .69
Dividends paid per share................... $ .16 $ .15 $ .31 $ .29
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.
</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, 1998.............. $22,028 $28,645 $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) and reclassification
adjustment of $343........... (291) (291)
Total comprehensive income..... 4,550
3 for 2 stock split................... 11,024 (11,024) ---
Cash dividends........................ (2,012) (2,012)
Issuance of additional shares......... 82 321 (120) 283
Balance, June 30, 1998. .............. $33,134 $17,942 $23,928 $ 2,946 $ (1,116) $76,834
======= ======= ======= ======= ======= =======
Balance, January 1, 1999.............. $33,157 $17,989 $27,023 $ 2,789 $(2,082) $78,876
Comprehensive income:
Net income...................... 5,601 5,601
Change in unrealized gain (loss)
on securities, net of tax of
$(3,907) and reclassification
adjustment of $124.......... (7,255) (7,255)
Total comprehensive income..... (1,654)
Cash dividends........................ (2,163) (2,163)
5% stock dividend..................... 1,616 6,080 (7,696)
Purchase of treasury stock............ (1,139) (1,139)
Issuance of additional shares......... 105 192 (408) 379 268
Balance, June 30, 1999. .............. $34,878 $24,261 $22,357 $(4,466) $(2,842) $74,188
======= ======= ======= ======= ======= =======
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.
</TABLE>
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
Six Months Ended
June 30,
1999 1998
Operating Activities:
Net income...................................... $ 5,601 $ 4,841
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses.................... 567 424
Provision for depreciation and amortization.. 811 787
Amortization of goodwill..................... 120 120
Investment security gains.................... (124) (343)
Loans originated for sale.................... (24,572) (15,253)
Proceeds from sales of loans................. 24,015 15,511
Gains on loan sales.......................... (414) (284)
Increase in other assets..................... (3,638) (1,239)
Increase in accrued interest payable
and other liabilities....................... 1,164 1,251
Net cash provided by operating activities.. 3,530 5,815
Investing Activities:
Net increase (decrease) in interest-bearing time
deposits in other banks........................ (1,461) 927
Proceeds from sales of investment
securities..................................... 25,782 1,647
Proceeds from maturities of investment
securities..................................... 20,565 48,914
Purchases of investment securities.............. (81,842) (66,529)
Net increase in total loans..................... (37,731) (15,705)
Purchases of premises and equipment............. (873) (1,220)
Net cash used by investing activities...... (75,560) (31,966)
Financing Activities:
Net increase in total deposits.................. 67,036 3,830
Net increase (decrease) in short-term borrowings 3,076 (9,870)
Proceeds from issuance of long-term debt........ -- 31,138
Repayment of long-term debt..................... -- (3,011)
Cash dividends.................................. (2,163) (2,012)
Purchases of treasury stock..................... (1,139) --
Proceeds from issuance of common stock.......... 268 283
Net cash provided by financing
activities................................ 67,078 20,358
Increase (decrease) in cash and cash
equivalents............................... (4,952) (5,793)
Cash and cash equivalents at beginning of period... 27,244 30,115
Cash and cash equivalents at end of period......... $22,292 $24,322
======= =======
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.
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, 1999 and
1998.
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 pages 10 and 11 of the 1998 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.
2. Investment Securities
The amortized cost and estimated market values of investment
securities at June 30, 1999 and December 31, 1998, were as follows:
June 30,
1999
Estimated
Amortized Fair
Cost Value
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies............................... $122,910 $117,380
Mortgage-backed U.S. government
agencies................................ 66,034 64,543
Obligations of states and political
subdivisions............................ 90,505 89,161
Corporate securities..................... 30,353 30,528
Equity securities........................ 14,133 15,452
Total.............................. $323,935 $317,064
======== ========
December 31,
1998
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies............................... $ 78,800 $ 79,449
Mortgage-backed U.S. government
agencies................................ 82,887 83,260
Obligations of states and political
subdivisions............................ 85,771 87,676
Corporate securities..................... 27,574 27,459
Equity securities........................ 13,284 14,698
Total.............................. $288,316 $292,542
======== ========
<TABLE>
3. Allowance for loan losses
Changes in the allowance for loan losses are as follows:
Six months ended Year Ended Six Months ended
June 30, December 31, June 30,
1999 1998 1998
<S> <C> <C> <C>
Balance, January 1.................. $6,954 $6,270 $6,270
Provision for loan losses........... 567 1,464 424
Loan charge-offs.................... (410) (1,258) (498)
Recoveries.......................... 196 478 299
Balance, June 30, 1999, December
31, 1998, and June 30, 1998. ...... $7,307 $6,954 $6,495
====== ====== ======
NONPERFORMING LOANS (a) AND OTHER REAL ESTATE
June 30, December 31, June 30,
1999 1998 1998
Loans past due 90 days or more
and still accruing interest:
Commercial, financial and
agricultural................... $ 99 $ 47 $117
Mortgages....................... 774 353 455
Personal installment............ 142 34 289
Other........................... 15 7 12
1,030 441 873
Loans renegotiated with borrowers.. 251 248 245
Loans on which accrual of interest
has been discontinued:
Commercial, financial and
agricultural.................... 1,016 866 1,133
Mortgages........................ 2,260 2,282 2,510
Other............................ 245 282 342
3,521 3,430 3,985
Other real estate................... 340 625 745
Total............................ $5,142 $4,744 $5,848
====== ====== ======
(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, 1999 and December 31, 1998 the Corporation recorded no investment in
impaired loans or related valuation allowance. For the six month periods ended June 30, 1999
and 1998 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, 1999 and 1998.
</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 $1,825,000 and
$2,660,000 and $15,655,000 and $12,627,000 for income taxes and interest,
respectively, for each of the six month periods ended June 30, 1999 and
1998.
Excluded from the consolidated statements of cash flows for the
periods ended June 30, 1999 and 1998 was the effect of certain non-cash
activities. The company acquired real estate through foreclosure totalling
$357,000 and $626,000, respectively. An increase in deferred tax assets of
$2,405,000 and a decrease in deferred tax liabilities of $1,437,000 were
recognized in 1999. The company recorded a decrease in deferred tax
liabilities of $150,000 in 1998. 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:
Three Months Ended June 30,
1999 1998
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... $2,919 6,841 $.43 $2,464 6,761 $.36
Effect of Dilutive Securities: ==== ====
Incentive stock options outstanding....... 127 168
Diluted EPS:
Income available to common stockholders
& assumed conversion................... $2,919 6,968 $.42 $2,464 6,929 $.36
====== ===== ==== ====== ===== ====
Six Months Ended June 30,
1999 1998
Per-Share Per-Share
Income Shares Amount Income Shares Amount
(in thousands except per share data)
Basic EPS:
Income available to common stockholders... $5,601 6,844 $.82 $4,841 6,862 $.71
Effect of Dilutive Securities: ==== ====
Incentive stock options outstanding....... 132 169
Diluted EPS:
Income available to common stockholders
& assumed conversion................... $5,601 6,976 $.80 $4,841 7,031 $.69
====== ===== ==== ====== ===== ====
Per share data has been restated to reflect stock dividends and splits.
All periods reflect the combined data of Community Banks, Inc. and The Peoples State Bank.
Community Banks Inc. and Subsidiaries
Management's Discussion of Financial Condition and Results of Operations
Average Balances, Effective Interest Differential and Interest Yields
Income and Rates on a Tax Equivalent Basis(b) for the Three months ended June 30, 1999, 1998, and 1997
(dollars in thousands)
June 30, June 30, June 30,
1999 1998 1997
Average Average Average
Interest Rates Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
Balance (c) Expense(a) Paid(a) Balance (c) Expense(a) Paid(a) Balance(c) Expense(a) Paid(a)
Assets:
Cash and due from banks...... $ 21,901 $ 19,932 $ 18,309
Earning Assets:
Interest-bearing deposits
in other banks......... 1,157 $ 11 3.81% 1,485 $ 23 6.21% 1,602 $ 22 5.51%
Investment securities:
Taxable................ 224,663 3,702 6.61 156,734 2,554 6.54 160,009 2,737 6.86
Tax-exempt(b) 96,096 1,943 8.11 66,460 1,348 8.14 44,577 892 8.03
Total investment
securities............. 320,759 223,194 204,586
Federal funds sold........ 4,622 56 4.86 9,756 117 4.81 5,316 71 5.36
Loans, net of unearned
income(b).............. 534,582 11,327 8.50 455,323 10,166 8.96 422,055 9,402 8.94
Total Earning Assets... 861,120 $17,039 7.94 689,758 $14,208 8.26 633,559 $13,124 8.31
Allowance for loan losses. (7,209) (6,420) (6,052)
Premises, equipment and
other assets........... 33,574 28,106 23,532
Total assets........... $909,386 $731,376 $669,348
======== ======== ========
Liabilities:
Demand deposits.............. 52,633 43,812 37,119
Interest-bearing liabilities:
Savings deposits.......... 275,360 1,339 1.95% 240,335 1,354 2.26% 226,250 1,394 2.47%
Time deposits:
$100,000 or greater.... 36,386 29,259 28,131
Other.................. 292,648 244,924 250,428
Total time deposits....... 329,034 4,288 5.23 274,183 3,684 5.39 278,559 3,754 5.41
Total time and savings
deposits............... 604,394 514,518 504,809
Short-term borrowings..... 5,271 56 4.26 6,538 80 4.91 4,677 44 3.77
Long-term debt............ 160,305 2,156 5.39 82,480 1,212 5.89 50,572 749 5.94
Total interest-bearing
liabilities......... 769,970 $7,839 4.08 603,536 $6,330 4.21 560,058 5,941 4.25
Accrued interest, taxes and
other liabilities...... 8,603 7,739 4,924
Total liabilities...... 831,206 655,087 602,101
Stockholders' equity...... 78,180 76,289 67,247
Total liabilities and
stockholders' equity $909,386 $731,376 $669,348
======== ======== ========
Interest income to earning
assets....................... 7.94 8.26 8.31
Interest expense to earning
assets....................... 3.65 3.68 3.76
Effective interest
differential........... $9,200 4.29% $7,878 4.58% $7,183 4.55%
====== ==== ====== ==== ====== ====
(a) Amortization of net deferred fees included in interest income and rate calculation. (b) Interest income
on all tax-exempt securities and loans have been adjusted to tax equivalent basis utilizing a Federal tax rate
of 35% in 1999 and 34% in 1998 and 1997. (c) Averages are a combination of monthly and daily averages.
</TABLE>
Management's Discussion, continued
Results of Operations
The most significant component of operating revenue is net
interest income. Net interest income is the interest income generated by
earning assets reduced by the interest expense applicable to
interest-bearing liabilities. Appropriate management of this
relationship in varying interest rate and economic environments is
critical to the Corporation.
Net interest income after provision for loan losses for the first
six months of 1999 was $1,569,000 or 11.1% greater than 1998. Total
interest income for the first six months increased $4,509,000 or 16.6%
while total interest expense increased $2,797,000 or 22.3% over the
comparable period of 1998. 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 $161,541,000 or
23.8% while average interest bearing liabilities increased $155,025,000
or 25.9% for the first six months of 1999 over the comparable period of
1998. Impacting the increase in average earning assets in 1999 were
increases in average taxable investment securities of $58,587,000 or
37.1% and average tax-exempt investment securities of $28,735,000 or
46.6%. Also affecting earning assets were increases in average loan
balances of $75,882,000 or 16.8%. Affecting the increase in average
interest bearing liabilities were increases in average savings deposits
of $39,571,000 or 16.8%, time deposits less than $100,000 of $29,758,000
or 12.1%, and average long-term debt of $80,599,000 or 100.2%. The
average yields realized on earning assets for the first six months
approximated 8.0% and 8.3% in 1999 and 1998, 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 4.3% and 4.6% in 1999 and 1998,
respectively. The provision for loan losses charged to income increased
$143,000 or 33.7% in 1999. Total loans past due 90 days and still
accruing interest, non-performing loans, and other real estate
approximated $5,142,000 and $5,848,000, respectively, as of June 30,
1999 and 1998. The balance of the allowance for loan losses increased
from $6,495,000 at June 30, 1998 to $7,307,000 at June 30, 1999.
Total other income for the first six months of 1999 was $411,000 or
17.2% more than total other income for the first six months of 1998.
Affecting this change were increases in service charges on deposit
accounts and other service charges, commissions, and fees of $261,000.
Investment security gains declined $219,000 in 1999 while gains on
mortgage sales increased $130,000. Insurance premium income increased
$125,000 or 45.1%. 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 1999 than 1998.
Loans held for sale as of June 30, 1999 totalled $4,290,000. The market
value of these loans approximated book value at that time.
Total other expenses for the first six months of 1999 increased
$1,317,000 or 13.4%. Contributing factors were increases of $897,000 or
17.8% in salaries and employee benefits, $72,000 or 4.6% in net
occupancy expense, and $333,000 or 11.3% in other operating expense.
These increases were affected by the opening of new banking offices.
Management's Discussion, Continued
The provision for income taxes decreased $97,000 or 5.1% for the
first six months of 1999 in comparison to the first six months of 1998.
Affecting this change was an increase in the amount of tax-free income
recognized in 1999. The effective tax rates approximated 24.3% and 28.1%
for the respective periods.
The previously described factors contributed to a net increase of
$760,000 or 15.7% in net income for the six month period ended June 30,
1999.
The significant changes and related causes which occurred during
the three month period ending June 30, 1999 were generally consistent
with those described for the six month period ending June 30, 1999. Net
investment security losses of $29,000 were recognized in the second
quarter of 1999. Gains on loan sales were $138,000 and $142,000,
respectively, for the three month periods ending June 30, 1999 and 1998.
In addition, other income for the second quarter of 1999 was affected by
tax refunds.
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, 1999 December 31, 1998
(dollars in thousands)
Amount %
Funding Sources:
Deposits and borrowed funds:
Non-interest bearing............ $ 59,929 $ 9,891 19.8%
Interest bearing................ 603,012 57,145 10.5
Total deposits............... 662,941 67,036 11.2
Borrowed funds.................. 171,986 3,076 1.8
Other liabilities................ 7,710 (273) (3.4)
Shareholders' equity............. 74,188 (4,688) (5.9)
Total sources................. $916,825 $65,151 7.6%
======== ======= ===
Funding uses:
Interest earning assets:
Short-term investments.......... $ 2,719 $ (747) (21.6)%
Investment securities........... 317,064 24,522 8.4
Loans, net of unearned income... 544,069 38,488 7.6
Total interest earning assets. 863,852 62,263 7.8
Cash and due from banks.......... 22,292 (2,744) (11.0)
Other assets..................... 30,681 5,632 22.5
Total uses.................... $916,825 $65,151 7.6%
======== ======= =====
Management's Discussion, Continued
As of June 30, 1999 cash and due from banks was $2,744,000 or 11.0%
less than it was at December 31, 1998. Interest-bearing time deposits in
other banks and investment securities increased $25,983,000 or 8.8%
while fed funds sold decreased $2,208,000. The approximate market value
of debt securities was $8,190,000 less than amortized cost at June 30,
1999. The approximate market value of debt securities was $2,812,000
greater than amortized cost at December 31, 1998. 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, 1999
and December 31, 1998, management classified investment securities with
amortized costs and market values of $323,935,000 and $317,064,000, and
$288,316,000 and $292,542,000, respectively, as available for sale. Net
loans increased $37,164,000 or 7.5% from December 31, 1998 to June 30,
1999. Affecting this change were increases in real estate loans of
$14,503,000 or 4.3%, consumer loans of $6,463,000 or 7.2%, and
commercial loans of $13,817,000 or 21.6%. The allowance for loan losses
approximated 1.35% and 1.38% of net loans at June 30, 1999 and December
31, 1998, respectively. 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, 1999 and
December 31, 1998 these loans totalled $4,290,000 and $3,319,000,
respectively. Affecting the increase of $6,328,000 in accrued interest
receivable and other assets were increases in bank owned life insurance
of $2,285,000 and deferred tax assets associated with unrealized
securities losses of $2,405,000. These factors contributed to an
increase of $65,151,000 or 7.6% in total assets from December 31, 1998
to June 30, 1999.
Total deposits increased $67,036,000 or 11.2% from December 31,
1998 to June 30, 1999. Contributing to this increase were increases of
$9,891,000 or 19.8% in demand deposits, $10,232,000 or 4.0% in savings
deposits and $46,913,000 or 16.1% in total time deposits. New
certificate of deposit products affected the significant increase in
time deposits.
At June 30, 1999 long-term debt totalling $161,000,000 included
borrowings from the Federal Home Loan Bank of Pittsburgh of $141,000,000
and repurchase agreements totalling $20,000,000 at a weighted average
interest rate of 5.37%.
Based on a one year interval, rate sensitive assets to rate
sensitive liabilities approximated 97% as of June 30, 1999.
Management's Discussion, Continued
As of June 30, 1999 the Corporation had risk-based capital in
excess of the fully implemented regulatory requirements, and tier 1 plus
tier 2 capital approximated 13% 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, 1999.
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 Community Banks, Inc.. Adequate loan demand
is anticipated for the remainder of 1999 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 1999.
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.
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 modified or
replaced portions of its software and hardware so that its computer
systems will properly utilize dates beyond December 31, 1999. 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 has been 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 has substantially completed all five
phases for most mission critical processes. 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
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, 1999, 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 has utilized both internal and external resources
to reprogram or replace, and test software for Year 2000 modifications.
Costs incurred to date as well as for the six months ended June 30, 1999
for the Year 2000 project are generally considered normal operating
costs by the Corporation. All Year 2000 conversion software and
modifications have been 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 expense 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.
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
on May 4, 1999 for the purpose of considering and voting upon the following
matter:
1. To elect five (5) Directors: Leon E. Kocher, Robert W.
Rissinger, John W, Taylor, Jr., Susan K. Nenstiel, and Wayne H. Mummert, to
serve until the 2003 annual meeting of shareholders. Each director
received affirmative votes representing at least 78.2% of the shares
outstanding.
Item 6. Exhibits and Reports on Form 8-K/A1
(a) Exhibits - none
(b) Registrant was not required to file any reports
on Form 8-K during the quarter ending June 30, 1999.
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 12, 1999 /S/ Eddie L. Dunklebarger
Eddie L. Dunklebarger
President
(Chief Executive Officer)
Date August 12, 1999 /S/ Terry L. Burrows
Terry L. Burrows
Executive Vice-President
(Chief Financial Officer)
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