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, 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 September 30, 1999.
CAPITAL STOCK-COMMON 6,819,167
(Title of Class) (Outstanding Shares)
<PAGE>
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
<PAGE>
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 nine month periods
ending September 30, 1999 and 1998.
In the opinion of management, the following Consolidated Balance Sheets and
related Consolidated Statements of Income, Changes in Stockholder's 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.
-1-
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands except per share data)
September 30, December 31,
1999 1998
<S> <C> <C>
ASSETS
Cash and due from banks...................... $ 24,668 $ 25,036
Interest-bearing time deposits in other
banks..................................... 2,992 1,258
Investment securities, available for sale
(market value)............................ 316,219 292,542
Fed funds sold............................... -- 2,208
Loans........................................ 575,374 512,280
Less: Unearned income....................... (6,754) (10,018)
Allowance for loan losses............. (7,365) (6,954)
Net loans............................. 561,255 495,308
Premises and equipment, net.................. 15,337 14,203
Goodwill..................................... 485 665
Other real estate owned...................... 336 625
Loans held for sale.......................... 3,385 3,319
Accrued interest receivable and other
assets.................................... 23,704 16,510
--------- ---------
Total assets.............................. $ 948,381 $ 851,674
========= =========
LIABILITIES
Deposits:
Demand.................................... $ 57,568 $ 50,038
Savings................................... 277,158 254,316
Time...................................... 322,084 265,884
Time in denominations of $100,000 or
more..................................... 36,219 25,667
--------- ---------
Total deposits............................ 693,029 595,905
Short-term borrowings........................ 13,159 7,910
Long-term debt............................... 161,000 161,000
Accrued interest payable and other
liabilities............................... 7,295 7,983
--------- ---------
Total liabilities......................... 874,483 772,798
--------- ---------
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...................................... 24,259 17,989
Retained earnings............................ 24,373 27,023
Other accumulated comprehensive income,
net of tax of $(3,460,000) and $1,437,000,
respectively............................... (6,425) 2,789
Less: Treasury stock of 156,000 and
105,000 shares at cost.................... (3,187) (2,082)
Total stockholders' equity................ 73,898 78,876
-------- --------
Total liabilities and stockholders'
equity.................................... $948,381 $851,674
======== ========
</TABLE>
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-
<PAGE>
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars in thousands except per share data)
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
-------------------- -------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans..................... $11,747 $10,453 $33,837 $30,482
Interest and dividends on investment
securities:
Taxable.................................... 3,843 2,900 10,811 8,086
Exempt from federal income tax............. 1,123 1,014 3,550 2,665
Fed funds interest............................. 29 161 179 402
Other interest income.......................... 22 14 54 65
------- ------- ------- -------
Total interest income..................... 16,764 14,542 48,431 41,700
------- ------- ------- -------
Interest expense:
Interest on deposits:
Savings................................... 1,400 1,417 4,064 4,121
Time...................................... 3,976 3,388 11,355 9,938
Time in demonimations of $100,000 or
more..................................... 475 356 1,394 1,210
Interest on short-term borrowings and
long-term debt................................ 1,884 1,427 5,592 3,202
Fed funds purchased and repo interest.......... 381 329 1,073 1,011
------- ------ ------- -------
Total interest expense.................... 8,116 6,917 23,478 19,482
------- ------ ------- -------
Net interest income....................... 8,648 7,625 24,953 22,218
Provision for loan losses...................... 220 487 787 911
------- ------ ------- -------
Net interest income after provision
for loan losses.......................... 8,428 7,138 24,166 21,307
------- ------ ------- -------
Other income:
Trust department income.................. 162 79 349 237
Service charges on deposit accounts....... 566 416 1,461 1,145
Other service charges, commissions
and fees................................. 298 196 758 561
Investment security gains ................ 3 224 127 567
Income on insurance premiums.............. 157 172 559 449
Gains on loan sales....................... 94 131 508 415
Other income............................. 153 108 467 337
------- ------ ------- -------
Total other income................... 1,433 1,326 4,229 3,711
------- ------ ------- -------
Other expenses:
Salaries and employee benefits............ 3,155 2,610 9,093 7,651
Net occupancy expense..................... 836 821 2,470 2,383
Operating expense of insurance
subsidiary.............................. 135 87 406 343
Other operating expense................... 1,759 1,502 5,050 4,460
------- ------ ------- -------
Total other expense.................. 5,885 5,020 17,019 14,837
------- ------ ------- -------
Income before income taxes........... 3,976 3,444 11,376 10,181
Provision for income taxes..................... 869 868 2,668 2,764
------- ------ ------- -------
Net income........................... $ 3,107 $ 2,576 $ 8,708 $ 7,417
======= ====== ======= =======
Earnings per share:
Basic....................................... $ .45 $ .37 $ 1.27 $ 1.08
Diluted .................................... $ .45 $ .37 $ 1.25 $ 1.06
Dividends paid per share....................... $ .16 $ .15 $ .47 $ .44
</TABLE>
Per share data has been adjusted to reflect stock dividends and splits.
The accompanying notes are an integral part of the consolidated financial
statements.
All periods reflect the combined data of Community Banks, Inc. and The Peoples
State Bank.
-3-
<PAGE>
Community Banks, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands except per share data)
<TABLE>
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, 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 and reclassification
adjustment of $567.............. 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
======= ======= ======= ======= ======== =======
Balance, January 1, 1999................ $33,157 $17,989 $27,023 $ 2,789 $ (2,082) $78,876
Comprehensive income:
Net income........................ 8,708 8,708
Change in unrealized gain (loss)
on securities, net of tax of
$(4,961) and reclassification
adjustment of $127.............. (9,214) (9,214)
Total comprehensive income........ (506)
Cash dividends.......................... (3,254) (3,254)
5% stock dividend....................... 1,616 6,080 (7,696)
Purchases of treasury stock............. (1,484) (1,484)
Issuance of additional shares........... 105 190 (408) 379 266
------- ------- ------- ------- -------- --------
Balance, September 30, 1999............. $34,878 $24,259 $24,373 $(6,425) $ (3,187) $73,898
======= ======= ======= ======= ======== =======
</TABLE>
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-
<PAGE>
<TABLE>
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
Nine Months Ended
September 30,
-----------------
1999 1998
-----------------
<S> <C> <C>
Operating Activities:
Net income......................................... $ 8,708 $ 7,417
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses....................... 787 911
Provision for depreciation and amortization..... 1,227 1,211
Amortization of goodwill........................ 180 181
Investment security gains....................... (127) (567)
Loans originated for sale....................... (25,913) (21,390)
Proceeds from sale of loans..................... 26,355 23,700
Gains on mortgage sales......................... (508) (415)
Increase in other assets........................ (2,955) (2,577)
Increase in accrued interest payable
and other liabilities.......................... 749 418
--------- ---------
Net cash provided by operating activities..... 8,503 8,889
--------- ---------
Investing Activities:
Net increase (decrease) in interest-bearing time
deposits in other banks........................... (1,734) 1,287
Proceeds from sales of investment
securities........................................ 37,513 11,565
Proceeds from maturities of investment
securities........................................ 24,070 71,974
Purchases of investment securities................. (99,244) (128,888)
Net increase in total loans........................ (67,224) (38,465)
Purchases of premises and equipment................ (2,361) (1,664)
--------- ---------
Net cash used by investing activities......... (108,980) (84,191)
--------- ---------
Financing Activities:
Net increase in total deposits..................... 97,124 34,894
Net increase (decrease) in short-term borrowing.... 5,249 (8,269)
Proceeds from issuance of long-term debt........... -- 51,731
Repayment of long-term debt........................ -- (3,011)
Cash dividends..................................... (3,254) (3,059)
Purchases of treasury stock........................ (1,484) (901)
Proceeds from issuance of common stock............. 266 326
Net cash provided by financing
activities................................... 97,901 71,711
--------- ---------
Increase in cash and cash equivalents......... (2,576) (3,591)
Cash and cash equivalents at beginning of period...... 27,244 30,115
--------- ---------
Cash and cash equivalents at end of period............ $ 24,668 $ 26,524
========= =========
</TABLE>
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-
<PAGE>
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, 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.
-6-
<PAGE>
2. Investment Securities
The amortized cost and estimated market values of investment securities at
September 30, 1999 and December 31, 1998, were as follows:
September 30,
1999
----
<TABLE>
Estimated
Amortized Fair
Cost Value
--------- ---------
<S> <C> <C>
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies.................................... $132,647 $126,559
Mortgage-backed U.S. government
agencies.................................... 64,232 62,302
Obligations of states and political
subdivsions................................. 83,078 79,458
Corporate securities.......................... 31,729 32,478
Equity securities............................. 14,418 15,422
-------- --------
Total................................... $326,104 $316,219
======== ========
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>
-7-
<PAGE>
3. Allowance for loan losses
Changes in the allowance for loan losses are as follows:
<TABLE>
Nine months ended Year Ended Nine Months ended
September 30, December 31, September 30,
1999 1998 1998
------------------ ------------- -----------------
<S> <C> <C> <C>
Balance, January 1........................ $6,954 $6,270 $6,270
Provision for loan losses................. 787 1,464 911
Loan charge-offs.......................... (742) (1,258) (793)
Recoveries................................ 366 478 391
------ ------ ------
Balance, September 30, 1999, December 31,
1998, and September 30, 1998............. $7,365 $6,954 $6,779
====== ====== ======
NONPERFORMING LOANS (a) AND OTHER REAL ESTATE
September 30, December 31, September 30,
1999 1998 1998
------------- ------------ -------------
Loans past due 90 days or more
and still accruing interest:
Commercial, financial and agricultural. $ 10 $ 47 ---
Mortgages.............................. 565 353 $ 497
Personal installment................... 163 34 271
Other.................................. 25 7 20
------ ------ ------
763 441 788
------ ------ ------
Loans renegotiated with borrowers......... 253 248 247
------ ------ ------
Loans on which accrual of interest
has been discontinued:
Commercial, financial and agricultural. 464 866 916
Mortgages.............................. 2,525 2,282 2,763
Other.................................. 280 282 335
------ ------ ------
3,269 3,430 4,014
------ ------ ------
Other real estate......................... 336 625 672
------ ------ ------
Total.................................. $4,621 $4,744 $5,721
====== ====== ======
</TABLE>
(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, 1999 and December 31, 1998 the Corporation recorded no
investment in impairedloans or related valuation allowance. For the nine month
periods ended September 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 nine month periods ended September 30, 1999 and
1998.
-8-
<PAGE>
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 $3,075,000 and $3,485,000 and
$23,325,000 and $19,608,000 for income taxes and interest, respectively, for
each of the nine month periods ended September 30, 1999 and 1998.
Excluded from the consolidated statements of cash flows for the periods
ended September 30, 1999 and 1998 was the effect of certain non-cash activities.
The company acquired real estate through foreclosure totalling $490,000 and
$652,000, respectively. The company also recorded increases in deferred tax
assets of $3,460,000 and a decrease in deferred tax liabilities of $1,437,000 in
1999. An increase in deferred tax liabilities of $370,000 was recognized in
1998. These variations related to the effects of changes in the net unrealized
gain (loss) on investment securites available for sale.
Earnings Per Share:
The following tables set forth the calculation of Basic and Diluted
Earnings Per Share for the periods indicated:
<TABLE>
Three Months Ended September 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. $3,107 6,833 $ .45 $2,576 6,880 $ .37
Effect of Dilutive Securities: ===== =====
Incentive stock options outstanding....... 117 145
----- -----
Diluted EPS:
Income available to common stockholders
& assumed conversion................... $3,107 6,950 $ .45 $2,576 7,025 $ .37
====== ===== ===== ====== ===== =====
Nine Months Ended September 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... $8,708 6,840 $1.27 $7,417 6,874 $1.08
Effect of Dilutive Securities: ===== =====
Incentive stock options outstanding....... 152 156
----- -----
Diluted EPS:
Income available to common stockholders
& assumed conversion................... $8,708 6,966 $1.25 $7,417 7,030 $1.06
====== ===== ===== ====== ===== =====
</TABLE>
Per share data has been adjusted to reflect stock dividends and splits. All
periods reflect the combined data of Community Banks, Inc. and The Peoples State
Bank.
-9-
<PAGE>
<TABLE>
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 September 30, 1998, and 1997
(dollars in thousands)
September 30, September 30, September 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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks....... $ 23,181 $ 20,730 $ 19,178
-------- -------- --------
Earning Assets:
Interest-bearing deposits
in other banks.......... 2,011 $ 22 4.34% 1,117 $ 14 4.97% 1,434 $ 19 5.26%
-------- -------- --------
Investment securities:
Taxable................. 229,883 3,843 6.63 179,426 2,900 6.41 171,838 3,015 6.96
Tax-exempt(b) 84,116 1,728 8.15 76,079 1,536 8.01 51,270 1,044 8.08
-------- -------- --------
Total investment securities. 313,999 255,505 223,108
-------- -------- --------
Federal funds sold........ 2,304 29 4.99 11,780 161 5.42 7,139 103 5.73
-------- -------- --------
Loans, net of unearned
income(b).............. 555,152 11,898 8.50 471,553 10,518 8.85 424,526 9,671 9.04
-------- -------- ---- -------- ------- ---- -------- ------- ----
Total Earning Assets... 873,466 $17,520 7.96 739,955 $15,129 8.11 656,207 $13,852 8.37
-------- -------- ---- -------- ------- ---- -------- ------- ----
Allowance for loan losses. (7,375) (6,562) (6,050)
Premises, equipment and
other assets........... 38,557 27,780 26,925
-------- -------- --------
Total assets........... $927,829 $781,903 $696,260
======== ======== ========
Liabilities:
Demand deposits.............. 54,932 44,071 39,017
-------- -------- --------
Interest-bearing liabilities:
Savings deposits.......... 249,995 1,400 2.22% 249,737 1,417 2.25% 229,796 1,394 2.41%
-------- -------- --------
Time deposits:
$100,000 or greater.... 36,622 28,601 27,726
Other.................. 334,514 248,632 249,511
-------- -------- --------
Total time deposits....... 371,136 4,451 4.76 277,233 3,744 5.36 277,237 3,785 5.42
-------- -------- --------
Total time and savings
deposits............... 621,131 526,970 507,033
Short-term borrowings..... 7,965 85 4.23 3,671 47 5.08 5,470 72 5.22
Long-term debt............ 161,000 2,180 5.37 121,816 1,709 5.57 69,403 1,017 5.81
-------- ------- ---- ------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities......... 790.096 $8,116 4.08 652,457 $6,917 4.21 581,906 6,268 4.27
-------- ------- ---- -------- ------- ---- -------- ------- ----
Accrued interest, taxes
and other liabilities.. 7,995 7,373 5,245
-------- -------- --------
Total liabilities...... 853,023 703,901 626,168
Stockholders' equity...... 74,806 78,002 70,092
-------- -------- --------
Total liabilities and
stockholders' equity $927,829 $781,903 $696,260
======== ======== ========
Interest income to earning
assets....................... 7.96 8.11 8.37
Interest expense to earning
assets....................... 3.69 3.71 3.79
---- ---- ----
Effective interest
differential........... $9,404 4.27% $8,212 4.40% $7,584 4.58%
====== ==== ====== ==== ====== ====
</TABLE>
(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.
-10-
<PAGE>
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 nine
months of 1999 was $2,859,000 or 13.4% greater than 1998. Total interest income
for the first nine months increased $6,731,000 or 16.1% while total interest
expense increased $3,996,000 or 20.5% 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 $150,841,000 or 21.5% while average interest bearing liabilities
increased $146,693,000 or 23.7% for the first nine 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 $55,542,000 or
33.7% and average tax-exempt investment securities of $21,844,000 or 32.9%. Also
affecting earning assets were increases in average loan balances of $78,018,000
or 17.0%. Affecting the increase in average interest bearing liabilities were
increases in average savings deposits of $24,645,000 or 10.2%, time deposits
less than $100,000 of $51,524,000 or 21.1%, and average long-term debt of
$65,161,000 or 68.0%. The average yields realized on earning assets for the
first nine months approximated 8.0% and 8.2% 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 nine
months approximated 4.3% and 4.5% in 1999 and 1998, respectively. The provision
for loan losses charged to income decreased $124,000 or 13.6% in 1999. Total
loans past due 90 days and still accruing interest, non-performing loans, and
other real estate approximated $4,621,000 and $5,721,000, respectively, as of
September 30, 1999 and 1998. The balance of the allowance for loan losses
increased from $6,779,000 at September 30, 1998 to $7,365,000 at September 30,
1999.
Total other income for the first nine months of 1999 was $518,000 or 14.0%
more than total other income for the first nine months of 1998. Affecting this
change were increases in trust department income of $112,000 or 47.3% and
increases in service charges on deposit accounts and other service charges,
commissions, and fees of $513,000 or 30.1%. Investment security gains declined
$440,000 in 1999 while gains on mortgage sales increased $93,000. Insurance
premium income increased $110,000 or 24.5%. 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 September 30, 1999 totalled $3,385,000. The
market value of these loans approximated book value at that time. The increase
in other income of $130,000 was affected by tax refunds.
Total other expenses for the first nine months of 1999 increased $2,182,000
or 14.7%. Contributing factors were increases of $1,442,000 or 18.8% in salaries
and employee benefits, $87,000 or 3.7% in net occupancy expense, and $590,000 or
13.2% in other operating expense. These increases were affected by the opening
of new banking offices and the employment of additional lending and trust
personnel..
The provision for income taxes decreased $96,000 or 3.5% for the first nine
months of 1999 in comparison to the first nine months of 1998. Affecting this
change was an increase in the amount of tax-free income recognized in 1999.
The effective tax rates approximated 23.5% and 27.1% for the respective periods.
The previously described factors contributed to a net increase of
$1,291,000 or 17.4% in net income for the nine month period ended September 30,
1999.
-11-
<PAGE>
Management's Discussion, Continued
- ----------------------------------
The significant changes and related causes which occurred during the
three month period ending September 30, 1999 were generally consistent with
those described for the nine month period ending September 30, 1999. Net
interest margins, on a tax equivalent basis, for the third quarters of 1999 and
1998 were 4.3% and 4.4%, respectively. Net investment security gains of $3,000
and $224,000 were recognized in the third quarter of 1999 and 1998,
respectively. Gains on loan sales were $94,000 and $131,000.
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.
<TABLE>
Increse (Decrease)
Balance Since
September 30, 1999 December 31, 1998
------------------ -----------------
(dollars in thousands)
Amount %
------ ---
<S> <C> <C> <C>
Funding Sources:
Deposits and borrowed funds:
Non-interest bearing............. $ 57,568 $ 7,530 15.0%
Interest bearing................. 635,461 89,594 16.4
-------- -------- ----
Total deposits............... 693,029 97,124 16.3
Borrowed funds................... 174,159 5,249 3.1
Other liabilities................ 7,295 (688) (8.6)
Shareholder's equity............. 73,898 (4,978) (6.3)
Total sources................. $948,381 $ 96,707 11.4%
======== ======== ====
Funding uses:
Interest earning assets:
Short-term investments........... $ 2,992 $ (474) (13.7)
Investment securities............ 316,219 23,677 8.1
Loans, net of unearned income.... 572,005 66,424 13.1
-------- -------- ----
Total interest earning assets. 891,216 89,627 11.2
Cash and due from banks.......... 24,668 (368) (1.5)
Other assets..................... 32,497 7,448 29.7
-------- ---------- ----
Total uses.................... $948,381 $ 96,707 11.4%
======= ======== ====
</TABLE>
-12-
<PAGE>
Management's Discussion, Continued
- ----------------------------------
As of September 30, 1999 cash and due from banks was $368,000 or 1.5% less
than it was at December 31, 1998. Interest-bearing time deposits in other banks
and investment securities increased $25,411,000 or 8.6% while fed funds sold
decreased $2,208,000. The approximate market value of debt securities was
$10,889,000 less than amortized cost at September 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 September 30, 1999 and
December 31, 1998, management classified investment securities with amortized
costs and market values of $326,104,000 and $316,219,000, and $288,316,000 and
$292,542,000, respectively, as available for sale. Net loans increased
$65,947,000 or 13.3% from December 31, 1998 to September 30, 1999. Affecting
this change were increases in real estate loans of $31,084,000 or 9.2%, consumer
loans of $11,398,000 or 12.7%, and commercial loans of $28,230,000 or 44.2%. The
allowance for loan losses approximated 1.30% and 1.38% of net loans at September
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 September 30, 1999 and December 31,
1998 these loans totalled $3,385,000 and $3,319,000, respectively. Affecting the
increase of $7,194,000 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 $3,460,000. These factors
contributed to an increase of $96,707,000 or 11.4% in total assets from December
31, 1998 to September 30, 1999.
Total deposits increased $97,124,000 or 16.3% from December 31, 1998 to
September 30, 1999. Contributing to this increase were increases of $7,530,000
or 15.0% in demand deposits, $22,842,000 or 9.0% in savings deposits and
$66,752,000 or 22.9% in total time deposits. New certificate of deposit products
affected the significant increase in time deposits.
At September 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 September 30, 1999.
As of September 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.
-13-
<PAGE>
Management's Discussion, Continued
- ----------------------------------
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, 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). At the time of the merger, Peoples had six
banking offices 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.
-14-
<PAGE>
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 was 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 completed all five phases of its
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 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 nine months ended September 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 $150,000.
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-
<PAGE>
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 September 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 November 10, 1999 /S/ Eddie L. Dunklebarger
--------------------------------- -------------------------
Eddie L. Dunklebarger
President
(Chief Executive Officer)
Date November 10, 1999 /S/ Terry L. Burrows
--------------------------------- ---------------------
Terry L. Burrows
Executive Vice-President
(Chief Financial Officer)
-16-
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000714710
<NAME> Community Banks, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 24,668
<INT-BEARING-DEPOSITS> 2,992
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 3,885
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 326,104
<INVESTMENTS-MARKET> 316,219
<LOANS> 554,501
<ALLOWANCE> 7,365
<TOTAL-ASSETS> 948,381
<DEPOSITS> 693,029
<SHORT-TERM> 13,159
<LIABILITIES-OTHER> 7,295
<LONG-TERM> 161,000
<COMMON> 34,878
0
0
<OTHER-SE> 39,020
<TOTAL-LIABILITIES-AND-EQUITY> 948,381
<INTEREST-LOAN> 33,837
<INTEREST-INVEST> 14,361
<INTEREST-OTHER> 233
<INTEREST-TOTAL> 48,431
<INTEREST-DEPOSIT> 16,813
<INTEREST-EXPENSE> 23,478
<INTEREST-INCOME-NET> 24,953
<LOAN-LOSSES> 787
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 17,019
<INCOME-PRETAX> 11,376
<INCOME-PRE-EXTRAORDINARY> 8,708
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,708
<EPS-BASIC> 1.27
<EPS-DILUTED> 1.25
<YIELD-ACTUAL> 3.92
<LOANS-NON> 3,269
<LOANS-PAST> 763
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,954
<CHARGE-OFFS> 742
<RECOVERIES> 366
<ALLOWANCE-CLOSE> 7,365
<ALLOWANCE-DOMESTIC> 7,365
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
