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, 2000
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, 2000
CAPITAL STOCK-COMMON 7,069,653
-------------------- --------------------
(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.....................................10-14
PART II
Other Information and Signatures.............................................15
<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 six month periods
ending June 30, 2000 and 1999.
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.
-1-
<PAGE>
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands except per share data)
<TABLE>
<S> <C> <C>
June 30, December 31,
2000 1999
------------ ------------
ASSETS
Cash and due from banks $ 30,356 $ 29,094
Interest-bearing time deposits in other banks 1,014 1,789
Investment securities, available for sale
(Market value) 345,629 312,075
Fed funds sold --- 2,050
Loans 658,881 596,301
Less: Unearned income (5,247) (6,986)
Allowance for loan losses (7,936) (7,456)
----------- -----------
Net loans 645,698 581,859
Premises and equipment, net 16,865 15,385
Goodwill 304 424
Other real estate owned 544 405
Loans held for sale 2,682 4,004
Accrued interest receivable and other assets 32,953 24,739
----------- -----------
Total assets $1,076,045 $ 971,824
=========== ===========
LIABILITIES
Deposits:
Demand (non-interest bearing) $ 69,169 $ 55,330
Savings 279,017 266,464
Time 364,826 329,221
Time in denominations of $100,000 or more 49,784 42,421
----------- -----------
Total deposits 762,796 693,436
Short-term borrowings 13,616 3,338
Long-term debt 218,000 197,000
Accrued interest payable and other liabilities 7,542 6,969
----------- -----------
Total liabilities 1,001,954 900,743
----------- -----------
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; 7,335,000 and 6,976,000
shares issued in 2000 and 1999, respectively 36,673 34,878
Surplus 29,090 24,259
Retained earnings 24,065 26,379
Accumulated other comprehensive income (loss)
net of tax (benefit) of $(5,717) and $(5,841),
respectively (10,618) (10,847)
Less: Treasury stock of 265,000 and 175,000
shares at cost (5,119) (3,588)
----------- -----------
Total stockholders' equity 74,091 71,081
----------- -----------
Total liabilities and stockholders' equity $1,076,045 $ 971,824
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-2-
<PAGE>
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(dollars in thousands except per share data)
<TABLE>
<S> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
-------------------- --------------------
Interest income:
Interest and fees on loans $13,730 $11,156 $26,478 $22,090
Interest and dividends on investment securities:
Taxable 4,497 3,702 8,789 6,968
Exempt from federal income tax 1,035 1,263 2,065 2,427
Fed funds interest 64 56 250 150
Other interest income 19 11 30 32
------- ------- ------- -------
Total interest income 19,345 16,188 37,612 31,667
------- ------- ------- -------
Interest expense:
Interest on deposits:
Savings 1,468 1,339 2,907 2,664
Time 4,819 3,800 9,339 7,379
Time in denominations of $100,000 or more 683 488 1,326 919
Interest on short-term borrowings and long-term debt 2,694 1,865 5,025 3,708
Fed funds purchased and repo interest 258 347 569 692
------- ------- ------- -------
Total interest expense 9,922 7,839 19,166 15,362
------- ------- ------- -------
Net interest income 9,423 8,349 18,446 16,305
Provision for loan losses 500 291 816 567
------- ------- ------- -------
Net interest income after provision for loan losses 8,923 8,058 17,630 15,738
Other income:
Trust department income 159 112 300 187
Service charges on deposit accounts 642 484 1,210 895
Other service charges, commissions and fees 352 246 761 460
Investment security gains (losses) 50 (29) 218 124
Income on insurance premiums 377 180 543 402
Gains on loan sales 93 138 158 414
Other income 132 207 334 314
------- ------- ------- -------
Total other income 1,805 1,338 3,524 2,796
Other expenses:
Salaries and employee benefits 3,382 3,013 6,806 5,938
Net occupancy expense 954 808 1,962 1,634
Operating expense of insurance subsidiary 171 103 258 271
Other operating expense 1,958 1,618 3,757 3,291
-------- -------- -------- --------
Total other expense 6,465 5,542 12,783 11,134
-------- -------- -------- --------
Income before income taxes 4,263 3,854 8,371 7,400
Provision for income taxes 1,091 935 2,098 1,799
-------- -------- -------- --------
Net income $ 3,172 $ 2,919 $ 6,273 $ 5,601
======== ======== ======== ========
Basic $ .45 $ .41 $ .88 $ .78
Diluted $ .44 $ .40 $ .87 $ .76
Dividends paid per share $ .16 $ .15 $ .31 $ .30
</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.
-3-
<PAGE>
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Dollars in thousands
except per share data)
<TABLE>
Six Month Periods Ended June 30
<S> <C> <C> <C> <C> <C> <C>
Accumulated
Other
Common Retained Comprehensive Treasury Total
Stock Surplus Earnings Income Stock Equity
-------------------------------------------------------------------------------
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 $124 (7,255) (7,255)
-------
Total comprehensive income (1,654)
Cash dividends ($.30 per share) (2,163) (2,163)
5% stock dividend (332,000 shares) 1,660 6,062 (7,722)
Net increase in treasury stock
(47,000 shares) (1,139) (1,139)
Issuance of additional shares
(13,000 shares) 61 21 (382) 379 268
------- ------- ------- ------- ------- -------
Balance, June 30, 1999 $34,878 $24,261 $22,357 $(4,466) $(2,842) $74,188
======= ======= ======= ======= ======= =======
Balance, January 1, 2000 $34,878 $24,259 $26,379 $(10,847) $(3,588) $71,081
Comprehensive income:
Net income 6,273 6,273
Change in unrealized gain (loss)
on securities, net of tax of $123
and reclassification adjustment
of $218 229 229
-------
Total comprehensive income 6,502
Cash dividends ($.31 per share) (2,235) (2,235)
5% stock dividend (348,000 shares) 1,740 4,612 (6,352)
Net increase in treasury stock
(90,000 shares) (1,531) (1,531)
Issuance of additional shares
(11,000 shares) 55 219 274
------- ------- ------- ------- ------- -------
Balance, June 30, 2000 $36,673 $29,090 $24,065 $(10,618) $(5,119) $74,091
======= ======= ======= ======= ======= =======
</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.
-4-
<PAGE>
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
<TABLE>
Six Months Ended
June 30,
---------------------------------------
2000 1999
<S> <C> <C>
---------------------------------------
Operating Activities:
Net income $ 6,273 $ 5,601
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 816 567
Provision for depreciation and amortization 1,730 811
Amortization of goodwill 120 120
Investment security gains (218) (124)
Loans originated for sale (10,454) (24,572)
Proceeds from sale of loans 11,934 24,015
Gains on mortgage sales (158) (414)
Change in other assets, net (8,021) (3,638)
Increase in accrued interest payable and other
liabilities, net 573 1,164
------- -------
Net cash provided by operating activities 2,595 3,530
------- -------
Investing Activities:
Net (increase) decrease in interest-bearing time
deposits in other banks 775 (1,461)
Proceeds from sales of investment securities 5,520 25,782
Proceeds from maturities of investment securities 3,319 20,565
Purchases of investment securities (42,663) (81,842)
Net increase in total loans (65,111) (37,731)
Purchases of premises and equipment (2,369) (873)
------- -------
Net cash used by investing activities (100,529) (75,560)
------- -------
Financing Activities:
Net increase in total deposits 69,360 67,036
Net increase (decrease) in short-term borrowings 10,278 3,076
Proceeds from issuance of long-term debt 115,000 ---
Repayment of long-term debt (94,000) ---
Cash dividends (2,235) (2,163)
Purchases of treasury stock (1,531) (1,139)
Proceeds from issuance of common stock 274 268
------- -------
Net cash provided by financing activities 97,146 67,078
------- -------
Increase in cash and cash equivalents (788) (4,952)
Cash and cash equivalents at beginning of period 31,144 27,244
------- -------
Cash and cash equivalents at end of period $30,356 $22,292
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-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 six month periods ended June 30, 2000 and 1999.
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 1999 Annual Report to shareholders.
-6-
<PAGE>
2. Investment Securities
---------------------
The amortized cost and estimated market values of investment securities at June
30, 2000 and December 31, 1999 were as follows:
<TABLE>
<S> <C> <C>
June 30,
2000
--------------
Estimated
Amortized Fair
Cost Value
--------- ---------
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies $137,854 $128,350
Mortgage-backed U.S. government agencies 68,537 65,694
Obligations of states and political subdivisions 94,678 90,823
Corporate securities 39,730 39,477
Equity securities 21,165 21,285
--------- ---------
Total $361,964 $345,629
========= =========
December 31,
1999
---------------
Estimated
Amortized Fair
Cost Value
--------- ---------
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies $132,661 $123,919
Mortgage-backed U.S. government agencies 61,788 58,961
Obligations of states and political subdivisions 84,778 78,853
Corporate securities 31,739 31,876
Equity securities 17,797 18,466
--------- ---------
Total $328,763 $312,075
========= =========
</TABLE>
-7-
<PAGE>
3. Allowance for loan losses
-------------------------
Changes in the allowance for loan losses are as follows:
<TABLE>
<S> <C> <C> <C>
Six Months Ended Year Ended Six Months Ended
June 30, December 31, June 30,
2000 1999 1999
----------------- ----------------- -------------------
Balance, January 1 $7,456 $6,954 $6,954
Provision for loan losses 816 1,298 567
Loan charge-offs (538) (1,232) (410)
Recoveries 202 436 196
------ ------ ------
Balance, June 30, 2000, December 31,
1999, and June 30, 1999 $7,936 $7,456 $7,307
====== ====== ======
</TABLE>
NONPERFORMING LOANS (a) AND OTHER REAL ESTATE
<TABLE>
<S> <C> <C> <C>
June 30, December 31, June 30,
2000 1999 1999
---------- ---------------- --------
Loans past due 90 days or more and still
accruing interest:
Commercial, financial and agricultural $ 734 $ 146 $ 99
Mortgages 381 147 774
Personal installment 64 73 142
Other --- 12 15
------ ------ ------
1,179 378 1,030
====== ====== ======
Loans renegotiated with borrowers 236 254 251
------ ------ ------
Loans on which accrual of interest has been
discontinued:
Commercial, financial and agricultural 1,482 435 1,016
Mortgages 3,444 3,079 2,260
Other 385 222 245
------ ------ ------
5,311 3,736 3,521
------ ------ ------
Other real estate 544 405 340
------ ------ ------
Total $7,270 $4,773 $5,142
====== ====== ======
</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 June 30, 2000 and December 31, 1999, the Corporation identified no
impaired loans. For the six month periods ended June 30, 2000 and 1999, 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, 2000 and 1999.
-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 $2,215,000 and $1,825,000 and
$18,830,000 and $15,655,000 for income taxes and interest, respectively, for
each of the six month periods ended June 30, 2000 and 1999.
Excluded from the consolidated statements of cash flows for the periods
ended June 30, 2000 and 1999 was the effect of certain non-cash activities.
The company acquired real estate through foreclosure totaling $456,000 and
$357,000, respectively. The company also recorded a decrease in deferred tax
assets of $124,000 in 2000. 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. These variations related to the effects of changes in net unrealized
gain (loss) on investment securities available for sale.
5. Earnings Per Share:
-------------------
The following table sets forth the calculations of Basic and Diluted
Earnings Per Share for the periods indicated:
<TABLE>
Three Months Ended June 30,
----------------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per-Share Per-Share
Income Shares Amount Income Shares Amount
----------------------------------------------------------------------------------
(In thousands except per share data)
Basic EPS:
Income available to common stockholders $3,172 7,083 $.45 $2,919 7,183 $.41
Effect of Dilutive Securities: ====== ==== ====== ====
Incentive stock options outstanding 103 133
----- -----
Diluted EPS:
Income available to common stockholders &
assumed conversion $3,172 7,186 $.44 $2,919 7,316 $.40
====== ==== ====== ====
</TABLE>
<TABLE>
Six Months Ended June 30,
----------------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per-Share Per-Share
Income Shares Amount Income Shares Amount
(In thousands except per share data)
Basic EPS:
Income available to common stockholders $6,273 7,105 $.88 $5,601 7,186 $.78
Effect of Dilutive Securities: ====== ==== ====== ====
Incentive stock options outstanding 108 139
----- -----
Diluted EPS:
Income available to common stockholders &
assumed conversion $6,273 7,213 $.87 $5,601 7,325 $.76
====== ==== ====== ====
</TABLE>
Per share data has been adjusted to reflect stock dividends and splits.
-9-
<PAGE>
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, 2000, 1999, and 1998
(dollars in thousands)
<TABLE>
June 30, June 30, June 30,
-------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 $ 25,714 $ 21,901 $19,932
-------- -------- -------
Earning Assets:
Interest-bearing deposits
in other banks 1,313 $ 19 5.82% 1,157 $ 11 3.81% 1,485 $ 23 6.21%
-------- -------- --------
Investment securities:
Taxable 251,206 4,497 7.20 224,663 3,702 6.61 156,734 2,554 6.54
Tax-exempt (b) 84,966 1,592 7.54 96,096 1,943 8.11 66,460 1,348 8.14
-------- -------- --------
Total investment
securities 336,172 320,759 223,194
-------- -------- --------
Federal funds sold 4,182 64 6.16 4,622 56 4.86 9,756 117 4.81
-------- -------- --------
Loans, net of unearned
income (b) 627,320 13,796 8.85 534,582 11,327 8.50 455,323 10,166 8.96
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total earning assets 968,987 $19,968 8.29 861,120 $17,039 7.94 689,758 $14,208 8.26
-------- ------- ---- -------- ------- ---- -------- ------- ----
Allowance for loans losses (7,749) (7,209) (6,420)
Premises, equipment, and
other assets 45,619 33,574 28,106
-------- -------- --------
Total assets $1,032,571 $909,386 $731,376
========= ======== ========
Liabilities:
Demand deposits 59,320 52,633 43,812
Interest-bearing liabilities:
Savings deposits 277,450 1,468 2.13% 275,360 1,339 1.95% 240,335 1,354 2.26%
-------- -------- --------
Time deposits:
$100,000 or greater 49,450 36,386 29,259
Other 353,841 292,648 244,924
-------- -------- --------
Total time deposits 403,291 5,502 5.49 329,034 4,288 5.23 274,183 3,684 5.39
Total time and savings
deposits 680,741 604,394 514,518
Short-term borrowings 8,488 117 5.54 5,271 56 4.26 6,538 80 4.91
Long-term debt 202,862 2,835 5.62 160,305 2,156 5.39 82,480 1,212 5.89
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities 892,091 $ 9,922 4.47 769,970 $7,839 4.08 603,536 $6,330 4.21
-------- ------- ---- -------- ------- ---- -------- ------- ----
Accrued interest, taxes and
other liabilities 7,143 8,603 7,739
-------- -------- --------
Total liabilities 958,554 831,206 655,087
Stockholders' equity 74,017 78,180 76,289
-------- -------- --------
Total liabilities and
stockholders' equity $1,032,571 $909,386 $731,376
========= ======== ========
Interest income to earning
assets 8.29 7.94 8.26
Interest expense to earning
assets 4.12 3.65 3.68
---- ---- ----
Effective interest
differential $10,046 4.17% $9,200 4.29% $7,878 4.58%
======= ==== ====== ==== ====== ====
<FN>
(a) Amortization of net deferred fees included in interest income and rate
calculations. (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
2000 and 1999, and 34% in 1998. (c)Averages are a combination of monthly and
daily averages.
</FN>
</TABLE>
-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 six
months of2000 was $1,892,000 or 12.0% greater than 1999. Total interest income
for the first six months increased $5,945,000 or 18.8% while total interest
expense increased $3,804,000 or 24.8% over the comparable period of 1999. The
amount of net interest income and total interest income are dependent on 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 $107,809,000 or 12.8% while average interest-bearing liabilities
increased $121,445,000 or 16.1% for the first six months of 2000 over the
comparable period of 1999. Impacting the increase in average earning assets in
2000 was an increase in average taxable investment securities of $25,959,000 or
12.0%. Also affecting earning assets were increases in average loan balances of
$84,697,000 or 16.1%. Affecting the increase in average interest-bearing
liabilities were increases in average savings deposits of $9,340,000 or 3.5%,
increases in average time deposits of $74,944,000 or 23.2%, and increases in
average long-term debt of $37,424,000 or 23.2%. The average yields realized on
earning assets for the first six months approximated 8.2% and 8.0% in 2000 and
1999, respectively. The average costs on interest-bearing liabilities
approximated 4.4% and 4.1% in 2000 and 1999, respectively. Net interest margins,
on a tax equivalent basis for the first six months approximated 4.2% and 4.3% in
2000 and 1999, respectively. The provision for loan losses charged to income
increased $249,000 or 43.9% in 2000. Total loans past due 90 days and still
accruing interest, non-performing loans, and other real estate approximated
$7,270,000 and $5,142,000, respectively, as of June 30, 2000 and 1999. A
significant portion of this increase is deemed to be temporary in nature. The
balance of the allowance for loan losses increased from $7,307,000 at June 30,
1999 to $7,936,000 at June 30, 2000.
Total other income for the first six months of 2000 was $728,000 or 26.0%
more than total other income for the first six months of 1999. Affecting this
change were increases in trust department income of $113,000 or 60.4% and
increases in service charges on deposit accounts and other service charges,
commissions, and fees of $616,000 or 45.5%. These changes reflect management's
continuing emphasis on sources of non-interest income. Investment security gains
increased $94,000 or 75.8% in 2000 while gains on mortgage sales decreased
$256,000 or 61.8%. Insurance premium income increased $141,000 or 35.1% while
all other income increased $20,000 or 6.4%. 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 lower in 2000 than
1999. Loans held for sale as of June 30, 2000 totaled $2,682,000. The market
value of these loans approximated book value at that time.
Total other expenses for the first six months of 2000 increased
$1,649,000 or 14.8%. Contributing factors were increases of $868,000 or 14.6% in
salaries and employee benefits, $328,000 or 20.1% in net occupancy expense, and
$466,000 or 14.2% 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 increased $299,000 or 16.6% for the
first six months of 2000 in comparison to the first six months of 1999.
Affecting this change was a decrease in the amount of tax-free income recognized
in 2000. The effective tax rates approximated 25.1% and 24.3% for the respective
periods.
The previously described factors contributed to a net increase of
$672,000 or 12.0% in net income for the six month period ended June 30, 2000.
The significant changes and related causes which occurre during the three
month period ending June 30, 2000 were generally consistent with those described
for the six month period ending June 30, 2000. Net investment security gains of
$50,000 were recognized in the second quarter of 2000, while net investment
security losses of $29,000 were recognized in 1999. Gains on loan sales were
$93,000 and $138,000, respectively, for the three month periods ending June 30,
2000 and 1999.
-11- d
<PAGE>
Management's Discussion, Continued
Financial Condition
The Corporation's financial condition can be examined in terms of
developing trends in its sources and uses of funds. These trends are the
result of both external environmental factors, such as changing economic
conditions, regulatory changes and competition, and internal environmental
factors such as management's evaluation as to the best use of funds under
these changing conditions.
<TABLE>
<S> <C> <C>
Increase (Decrease)
Balance Since
June 30, 2000 December 31, 1999
------------- -------------------
(dollars in thousands)
Amount %
------ --
Funding Sources:
Deposits and borrowed funds:
Non-interest bearing $ 69,169 $ 13,839 25.0%
Interest-bearing 693,627 55,521 8.7
-------- -------- -----
Total deposits 762,796 69,360 10.0
Borrowed funds 231,616 31,278 15.6
Other liabilities 7,542 573 8.2
Shareholders' equity 74,091 3,010 4.2
-------- -------- -----
Total sources $1,076,045 $104,221 10.7%
========= ======== =====
Funding uses:
Interest earning assets:
Short-term investments $ 1,014 $(2,825) (73.6)%
Investment securities 345,629 33,554 10.8
Loans, net of unearned income 656,316 62,997 10.6
-------- -------- ------
Total interest earning assets 1,002,959 93,726 10.3
Cash and due from banks 30,356 1,262 4.3
Other assets 42,730 9,233 27.6
-------- -------- ------
Total uses $1,076,045 $104,221 10.7%
========= ======== =====
</TABLE>
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Management's Discussion, Continued
----------------------------------
As of June 30, 2000 cash and due from banks was $1,262,000or 4.3% greater
than it was at December 31, 1999. Interest-bearing time deposits in other banks
and investment securities increased $32,779,000 or 10.4% while fed funds sold
decreased $2,050,000. The approximate market value of debt securities was
$16,455,000 less than amortized cost at June 30, 2000. The approximate market
value of debt securities was $17,357,000 less than amortized cost at December
31, 1999. 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, 2000 and December 31, 1999,
management classified investment securities with amortized costs and market
values of $361,964,000 and $345,629,000 and $328,763,000 and $312,075,000,
respectively, as available for sale. Net loans increased $63,839,000 or 11.0%
from December 31, 1999 to June 30, 2000. Affecting this change were increases in
real estate loans of $38,467,000 or 10.2%, consumer loans of $8,735,000 or 8.3%,
and commercial loans of $16,040,000 or 15.7%. The allowance for loan losses
approximated 1.21% and 1.27% of net loans at June 30, 2000 and December 31,
1999, 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, 2000 and December 31, 1999 these loans totaled $2,682,000
and $4,004,000, respectively. Affecting the increase of $8,214,000 in accrued
interest receivable and other assets were increases in bank owned life insurance
of $5,181,000 and a decrease in deferred tax assets associated with unrealized
securities losses of $124,000. These factors contributed to an increase of
$104,221,000 or 10.7% in total assets from December 31, 1999 to June 30, 2000.
Total deposits increased $69,360,000 or 10.0% from December 31, 1999 to
June 30, 2000. Contributing to this increase were increases of $13,839,000 or
25.0% in demand deposits, $12,553,000 or 4.7% in savings deposits and
$42,968,000 or 11.6% in total time deposits. New certificate of deposit products
affected the significant increase in time deposits.
At June 30, 2000 long-term debt totaling $218,000,000 included borrowings
from the Federal Home Loan Bank of Pittsburgh of $208,000,000 and repurchase
agreements totaling $10,000,000 at a weighted average interest rate of 5.84%.
Based on a one year interval, the relationship of rate sensitive assets to
rate sensitive liabilities approximated 93% as of June 30, 2000.
As of June 30, 2000 the Corporation had risk-based capital in excess of the
fully implemented regulatory requirements, and tier 1 plus tier 2 capital
approximated 11.5% 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.
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<PAGE>
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,
2000.
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 2000 and management will continue to carefully evaluate this
demand based on the creditworthiness of the borrower and relative strength of
the economy in the Corporation's market.
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<PAGE>
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 2, 2000 for the purpose of considering and voting upon the following
matters:
1. To elect four (4) directors: Thomas L. Miller, James A. Ulsh, Ronald E.
Boyer, and Peter Desoto, to serve until the 2004 annual meeting of shareholders.
Each director received affirmative votes representing at least 73% of the shares
outstanding.
2. Approval of the 2000 Directors' Stock Option Plan. The number of votes
cast for and against this issue were 3,922,000 and 689,000, respectively.
3. Approval of the 2000 Employees' Stock Purchase Plan. The number of
votes cast for and against this issue were 4,160,000 and 505,000, respectively.
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, 2000
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)NKS, INC.
Date August 8, 2000 /S/ Eddie L. Dunklebarger
------------------------ -------------------------
Eddie L. Dunklebarger
President
(Chief Executive Officer)
Date August 8, 2000 /S/ Terry L. Burrows
------------------------ -------------------------
Terry L. Burrows
Executive Vice-President
(Chief Financial Officer)
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