SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarter Ended March 31, 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 March 31, 1999.
CAPITAL STOCK-COMMON 6,845,746
(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
periods ending March 31, 1999 and 1998.
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.
Community Banks, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands except per share data)
March 31, December 31,
1999 1998
ASSETS
Cash and due from banks................... $ 22,074 $ 25,036
Interest-bearing time deposits in other
banks.................................. 2,034 1,258
Investment securities, available for sale
(market value)......................... 315,858 292,542
Fed funds sold............................ 6,755 2,208
Loans..................................... 533,138 512,280
Less: Unearned income.................... (8,830) (10,018)
Allowance for loan losses.......... (7,111) (6,954)
Net loans.......................... 517,197 495,308
Premises and equipment, net............... 14,285 14,203
Goodwill.................................. 605 665
Other real estate owned................... 629 625
Loans held for sale....................... 3,541 3,319
Accrued interest receivable and other
assets................................. 15,821 16,510
Total assets........................... $898,799 $851,674
======== ========
LIABILITIES
Deposits:
Demand................................. $ 52,934 $ 50,038
Savings................................ 259,631 254,316
Time................................... 293,210 265,884
Time in denominations of $100,000 or
more.................................. 35,574 25,667
Total deposits......................... 641,349 595,905
Short-term borrowings..................... 9,181 7,910
Long-term debt............................ 161,000 161,000
Accrued interest payable and other
liabilities............................ 8,117 7,983
Total liabilities...................... 819,647 772,798
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; 6,971,000 and
6,631,000 shares issued in 1999 and
1998, respectively..................... 34,855 33,157
Surplus................................... 24,093 17,989
Retained earnings......................... 20,889 27,023
Other accumulated comprehensive income,
net of tax of $958,000 and $1,437,000,
respectively............................ 1,780 2,789
Less: Treasury stock of 125,000 and
105,000 shares at cost................. (2,465) (2,082)
Total stockholders' equity............. 79,152 78,876
Total liabilities and stockholders'
equity................................ $898,799 $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.
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars in thousands except per share data)
Three Months Ended
March 31,
1999 1998
Interest income:
Interest and fees on loans................. $10,934 $ 9,911
Interest and dividends on investment
securities:
Taxable................................ 3,266 2,632
Exempt from federal income tax......... 1,164 761
Fed funds interest......................... 94 124
Other interest income...................... 21 28
Total interest income................. 15,479 13,456
Interest expense:
Interest on deposits:
Savings............................... 1,325 1,350
Time.................................. 3,579 3,277
Time in denominations of $100,000 or
more................................. 431 443
Interest on short-term borrowings and
long-term debt............................ 1,843 829
Fed funds purchased and repo interest...... 345 336
Total interest expense................ 7,523 6,235
Net interest income................... 7,956 7,221
Provision for loan losses.................. 276 193
Net interest income after provision
for loan losses...................... 7,680 7,028
Other income:
Trust department income............... 75 77
Service charges on deposit accounts... 411 331
Other service charges, commissions
and fees............................. 214 172
Investment security gains ............ 153 270
Income on insurance premiums.......... 222 131
Gains on mortgage sales............... 276 142
Other income.......................... 107 134
Total other income............... 1,458 1,257
Other expenses:
Salaries and employee benefits........ 2,925 2,512
Net occupancy expense................. 826 775
Operating expense of insurance
subsidiary.......................... 168 119
Other operating expense............... 1,673 1,526
Total other expense.............. 5,592 4,932
Income before income taxes....... 3,546 3,353
Provision for income taxes................. 864 976
Net income....................... $ 2,682 $ 2,377
======= =======
Earnings per share:
Basic................................... $ .39 $ .35
Diluted................................. $ .38 $ .33
Dividends paid per share................... $ .15 $ .13
Per share data has been adjusted to reflect stock dividends and splits.
A 5% stock dividend is payable April 15, 1999.
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 Changes in Stockholders' Equity
(Dollars in thousands except per share data)
<CAPTION>
Three Month Periods Ended March 31
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...................... 2,377 2,377
Change in unrealized gain (loss)
on securities, net of tax of
$(235) and reclassification
adjustment of $270........... (456) (456)
Total comprehensive income..... (1,921)
Cash dividends........................ (923) (923)
Issuance of additional shares......... 18 231 (91) 158
Balance, March 31, 1998............... $22,046 $28,876 $22,582 $ 2,781 $ (1,116) $75,169
======= ======= ======= ======= ======= =======
Balance, January 1, 1999.............. $33,157 $17,989 $27,023 $ 2,789 $(2,082) $78,876
Comprehensive income:
Net income...................... 2,682 2,682
Change in unrealized gain (loss)
on securities, net of tax of
$(543) and reclassification
adjustment of $153.......... (1,009) (1,009)
Total comprehensive income..... 1,673
Cash dividends........................ (1,043) (1,043)
5% stock dividend..................... 1,660 6,062 (7,722)
Purchase of treasury stock............ (463) (463)
Issuance of additional shares......... 38 42 (51) 80 109
Balance, March 31, 1999............... $34,855 $24,093 $20,889 $ 1,780 $(2,465) $79,152
======= ======= ======= ======= ======= =======
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)
Three Months Ended
March 31,
1999 1998
Operating Activities:
Net income...................................... $ 2,682 $ 2,377
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses.................... 276 193
Provision for depreciation and amortization.. 388 388
Amortization of goodwill..................... 60 60
Investment security gains.................... (153) (270)
Loans originated for sale.................... (12,191) (8,395)
Proceeds from sale of loans.................. 12,245 7,681
Gains on mortgage sales...................... (276) (142)
Decrease (increase) in other assets.......... 685 (736)
Increase in accrued interest payable
and other liabilities....................... 613 105
Net cash provided by operating activities.. 4,329 1,261
Investing Activities:
Net increase (decrease) in interest-bearing time
deposits in other banks........................ (776) 366
Proceeds from sales of investment
securities..................................... 3,575 396
Proceeds from maturities of investment
securities..................................... 9,753 31,577
Purchases of investment securities.............. (37,979) (30,205)
Net increase in total loans..................... (22,165) (200)
Purchases of premises and equipment............. ( 470) (507)
Net cash used by investing activities...... (48,062) 1,427
Financing Activities:
Net increase in total deposits.................. 45,444 8,586
Net increase (decrease) in short-term borrowings 1,271 (7,899)
Proceeds from issuance of long-term debt........ -- 3,000
Repayment of long-term debt..................... -- (3,011)
Cash dividends.................................. (1,043) (923)
Purchases of treasury stock..................... (463) --
Proceeds from issuance of common stock.......... 109 158
Net cash provided by financing
activities................................ 45,318 (89)
Increase in cash and cash equivalents...... 1,585 2,599
Cash and cash equivalents at beginning of period... 27,244 30,115
Cash and cash equivalents at end of period......... $28,829 $32,714
======= =======
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 periods ended March 31, 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 March 31, 1999 and December 31, 1998, were as follows:
March 31,
1999
Estimated
Amortized Fair
Cost Value
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies............................... $106,388 $106,279
Mortgage-backed U.S. government
agencies................................ 76,696 76,479
Obligations of states and political
subdivisions............................ 87,337 88,815
Corporate securities..................... 29,061 29,312
Equity securities........................ 13,638 14,973
Total.............................. $313,120 $315,858
======== ========
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:
<CAPTION>
Three months ended Year Ended Three Months ended
March 31, December 31, March 31,
1999 1998 1998
<S> <C> <C> <C>
Balance, January 1.................. $6,954 $6,270 $6,270
Provision for loan losses........... 276 1,464 193
Loan charge-offs.................... (223) (1,258) (279)
Recoveries.......................... 104 478 166
Balance, March 31, 1999, December
31, 1998, and March 31, 1998....... $7,111 $6,954 $6,350
====== ====== ======
NONPERFORMING LOANS (a) AND OTHER REAL ESTATE
March 31, December 31, March 31,
1999 1998 1998
Loans past due 90 days or more
and still accruing interest:
Commercial, financial and
agricultural................... --- $ 47 $331
Mortgages....................... $451 353 413
Personal installment............ 133 34 230
Other........................... 14 7 15
598 441 989
Loans renegotiated with borrowers.. 250 298 NONE
Loans on which accrual of interest
has been discontinued:
Commercial, financial and
agricultural.................... 1,031 866 637
Mortgages........................ 2,208 2,282 3,381
Other............................ 227 282 363
3,466 3,430 4,381
Other real estate................... 629 625 906
Total............................ $4,943 $4,744 $6,276
====== ====== ======
(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 March 31, 1999 and December 31, 1998 the Corporation recorded no investment in
impaired loans or related valuation allowance. For the three month periods ended March 31,
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 three month
periods ended March 13, 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 $680,000 and $575,000
and $7,224,000 and $6,365,000 for income taxes and interest, respectively,
for each of the three month periods ended March 31, 1999 and 1998.
Excluded from the consolidated statements of cash flows for the
periods ended March 31, 1999 and 1998 was the effect of certain non-cash
activities. The company acquired real estate through foreclosure totalling
$303,000 and $321,000, respectively. The company also recorded decreases in
deferred tax liabilities of $479,000 and $235,000 in 1999 and 1998,
respectively. 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 March 31,
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... $2,682 6,846 $.39 $2,377 6,865 $.35
Effect of Dilutive Securities: ==== ====
Incentive stock options outstanding....... 152 242
Diluted EPS:
Income available to common stockholders
& assumed conversion................... $2,682 6,998 $.38 $2,377 7,107 $.33
====== ===== ==== ====== ===== ====
Per share data has been adjusted to reflect a 5% stock dividend payable April 15, 1999.
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 March 31, 1999, 1998, and 1997
(dollars in thousands)
March 31, March 31, March 31,
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...... $ 21,662 $ 19,126 $ 17,678
Earning Assets:
Interest-bearing deposits
in other banks......... 1,517 $ 21 5.61% 3,102 $ 28 3.66% 1,898 $ 19 4.06%
Investment securities:
Taxable................ 212,423 3,266 6.24 158,297 2,632 6.74 160,222 2,683 6.79
Tax-exempt(b) 81,032 1,791 8.96 53,788 1,153 8.69 31,093 652 8.50
Total investment
securities............. 293,455 212,085 191,315
Federal funds sold........ 8,307 94 4.59 8,637 124 5.82 5,765 77 5.42
Loans, net of unearned
income(b).............. 519,267 10,975 8.57 446,793 9,961 9.04 413,213 9,219 9.05
Total Earning Assets... 822,546 $16,147 7.96 670,617 $13,898 8.40 612,191 $12,650 8.38
Allowance for loan losses. (7,054) (6,336) (5,745)
Premises, equipment and
other assets........... 32,348 28,333 25,490
Total assets........... $869,502 $711,740 $649,614
======== ======== ========
Liabilities:
Demand deposits.............. 47,605 40,988 34,836
Interest-bearing liabilities:
Savings deposits.......... 255,043 1,325 2.11% 230,881 1,350 2.37% 218,438 1,383 2.57%
Time deposits:
$100,000 or greater.... 33,421 32,059 29,093
Other.................. 279,600 245,993 244,395
Total time deposits....... 313,021 4,010 5.20 278,052 3,720 5.43 273,488 3,659 6.07
Total time and savings
deposits............... 568,064 508,933 491,926
Short-term borrowings..... 5,463 57 4.23 4,458 48 4.37 7,594 95 5.07
Long-term debt............ 161,000 2,131 5.37 75,292 1,117 6.02 45,729 664 5.89
Total interest-bearing
liabilities......... 734,527 $7,523 4.15 588,683 $6,235 4.30 545,249 5,801 4.31
Accrued interest, taxes and
other liabilities...... 8,002 7,246 4,638
Total liabilities...... 790,134 636,917 584,723
Stockholders' equity...... 79,368 74,823 64,891
Total liabilities and
stockholders' equity $869,502 $711,740 $649,614
======== ======== ========
Interest income to earning
assets....................... 7.96 8.40 8.38
Interest expense to earning
assets....................... 3.71 3.77 3.84
Effective interest
differential........... $8,624 4.25% $7,663 4.63% $6,849 4.54%
====== ==== ====== ==== ====== ====
(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
three months of 1999 was $652,000 or 9.3% greater than 1998. Total
interest income for the first three months increased $2,023,000 or 15.0%
while total interest expense increased $1,288,000 or 20.7% 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 $151,929,000 or
22.7% while average interest bearing liabilities increased $145,844,000
or 24.8% for the first three 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 $54,126,000 or
34.2% and average tax-exempt investment securities of $27,244,000 or
50.7%. Also affecting earning assets were increases in average loan
balances of $72,474,000 or 16.2%. Affecting the increase in average
interest bearing liabilities of $145,844,000 or 24.8% were increases in
average savings deposits of $24,162,000 or 10.5%, time deposits less
than $100,000 of $33,607,000 or 13.7%, and average long-term debt of
$85,708,000 or 113.8%. The average yields realized on earning assets for
the first three months approximated 8.0% and 8.4% in 1999 and 1998,
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 three months approximated 4.2% and 4.6%
in 1999 and 1998, respectively. The provision for loan losses charged to
income increased $83,000 or 43.0% in 1999. Total loans past due 90 days
and still accruing interest, non-performing loans, and other real estate
approximated $4,943,000 and $6,276,000, respectively, as of March 31,
1999 and 1998. The balance of the allowance for loan losses increased
from $6,350,000 at March 31, 1998 to $7,111,000 at March 31, 1999.
Total other income for the first three months of 1999 was $201,000
or 16.0% more than total other income for the first three months of
1998. Affecting this change were increases in service charges on deposit
accounts and other service charges, commissions, and fees of $122,000.
Investment security gains declined $117,000 in 1999 while gains on
mortgage sales increased $134,000. Insurance premium income increased
$91,000 or 69.5%. 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 March 31, 1999 totalled $3,541,000. The market
value of these loans approximated book value at that time.
Total other expenses for the first three months of 1999 increased
$660,000 or 13.4%. Contributing factors were increases of $413,000 or
16.4% in salaries and employee benefits, $51,000 or 6.6% in net
occupancy expense, and $147,000 or 9.6% 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 $112,000 or 11.5% for the
first three months of 1999 in comparison to the first three months of
1998. Affecting this change was an increase in the amount of tax-free
income recognized in 1999. The effective tax rates approximated 24.4%
and 29.1% for the respective periods.
The previously described factors contributed to a net increase of
$305,000 or 12.8% in net income for the three month period ended March
31, 1999.
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
March 31, 1999 December 31, 1998
(dollars in thousands)
Amount %
Funding Sources:
Deposits and borrowed funds:
Non-interest bearing............ $ 52,934 $ 2,896 5.8%
Interest bearing................ 588,415 42,548 7.8
Total deposits............... 641,349 45,444 7.6
Borrowed funds.................. 170,181 1,271 .8
Other liabilities................ 8,117 134 1.7
Shareholders' equity............. 79,152 276 .3
Total sources................. $898,799 $47,125 5.5%
======== ======= ===
Funding uses:
Interest earning assets:
Short-term investments.......... $ 8,789 $ 5,323 153.6%
Investment securities........... 315,858 23,316 8.0
Loans, net of unearned income... 524,308 22,046 4.4
Total interest earning assets. 848,955 50,685 6.3
Cash and due from banks.......... 22,074 (2,962) (11.8)
Other assets..................... 27,770 (598) 2.1
Total uses.................... $898,799 $47,125 5.5%
======== ======= =====
Management's Discussion, Continued
As of March 31, 1999 cash and due from banks was $2,962,000 or
11.8% less than it was at December 31, 1998. Interest-bearing time
deposits in other banks and investment securities increased $24,092,000
or 8.2% while fed funds sold increased $4,547,000. The approximate
market value of debt securities was $1,403,000 greater than amortized
cost at March 31, 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 March 31, 1999 and December 31, 1998, management classified
investment securities with amortized costs and market values of
$313,120,000 and $315,858,000, and $288,316,000 and $292,542,000,
respectively, as available for sale. Net loans increased $21,889,000 or
4.4% from December 31, 1998 to March 31, 1999. Affecting this change
were increases in real estate loans of $13,959,000 or 4.1%, consumer
loans of $2,355,000 or 2.3%, and commercial loans of $3,000,000 or 4.7%.
The allowance for loan losses approximated 1.36% and 1.38% of net loans
at March 31, 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 March 31, 1999 and December 31, 1998 these loans
totalled $3,541,000 and $3,319,000, respectively. Affecting the decrease
of $689,000 in accrued interest receivable and other assets was a
decrease in receivables related to loan sales. These factors contributed
to an increase of $47,125,000 or 5.5% in total assets from December 31,
1998 to March 31, 1999.
Total deposits increased $45,444,000 or 7.6% from December 31, 1998
to March 31, 1999. Contributing to this increase were increases of
$5,315,000 or 2.1% in savings deposits and $37,233,000 or 12.8% in total
time deposits. New certificate of deposit products affected the
significant increase in time deposits.
At March 31, 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 99 % as of March 31, 1999.
Management's Discussion, Continued
As of March 31, 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 March 31, 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 forthe remainder of 1999 and management will continue to
carefully evaluatethis demand based on the creditworthiness of the
borrower and therelative 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.
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 May 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
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 will utilize 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 three months ended March 31,
1999 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 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 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 March 31, 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 May 13, 1999 /S/ Eddie L. Dunklebarger
Eddie L. Dunklebarger
President
(Chief Executive Officer)
Date May 13, 1999 /S/ Terry L. Burrows
Terry L. Burrows
Executive Vice-President
(Chief Financial Officer)
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