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, 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 September 30, 2000
CAPITAL STOCK-COMMON 7,036,943
-------------------- --------------------
(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 nine month periods
ending September 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>
September 30, December 31,
2000 1999
------------- ------------
ASSETS
Cash and due from banks $ 33,532 $29,094
Interest-bearing time deposits in other banks 1,081 1,789
Investment securities, available for sale
(market value) 346,944 312,075
Fed funds sold 342 2,050
Loans 688,786 596,301
Less: Unearned income (3,775) (6,986)
Allowance for loan losses (8,254) (7,456)
------------- ------------
Net loans 676,757 581,859
Premises and equipment, net 17,475 15,385
Goodwill 243 424
Other real estate owned 555 405
Loans held for sale 4,197 4,004
Accrued interest receivable and other assets 27,897 24,739
------------- ------------
Total assets $1,109,023 $971,824
============= ============
LIABILITIES
Deposits:
Demand (non-interest bearing) $ 70,118 $ 55,330
Savings 286,106 266,464
Time 359,883 329,221
Time in denominations of $100,000 or more 75,722 42,421
------------- ------------
Total deposits 791,829 693,436
Short-term borrowings 13,261 3,338
Long-term debt 218,725 197,000
Accrued interest payable and other liabilities 7,981 6,696
Total liabilities 1,031,796 900,743
------------- ------------
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; 7,339,000 and 6,976,000
shares issued in 2000 and 1999, respectively 36,695 34,878
Surplus 29,107 24,259
Retained earnings 26,037 26,379
Accumulated other comprehensive income (loss)
net of tax (benefit) of $(4,658) and $(5,841),
respectively (8,650) (10,847)
Less: Treasury stock of 302,000 and 175,000
shares at cost (5,962) (3,588)
------------- ------------
Total stockholders' equity 77,227 71,081
------------- ------------
Total liabilities and stockholders' equity $1,109,023 $971,824
============= ============
</TABLE>
[FN]
The accompanying notes are an integral part of the consolidated
financial statements.
</FN>
-2-
<PAGE>
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(dollars in thousands except per share data)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2000 1999 2000 1999
----------------------- -----------------------
Interest income:
Interest and fees on loans $14,846 $11,747 $41,324 $33,837
Interest and dividends on investment securities:
Taxable 4,687 3,843 13,476 10,811
Exempt from federal income tax 1,088 1,123 3,153 3,550
Fed funds interest 19 29 269 179
Other interest income 9 22 39 54
------- ------- ------- -------
Total interest income 20,649 16,764 58,261 48,431
------- ------- ------- -------
Interest expense:
Interest on deposits:
Savings 1,076 1,400 3,983 4,064
Time 5,596 3,976 14,935 11,355
Time in denominations of $100,000 or more 1,035 475 2,361 1,394
Interest on short-term borrowings and long-term debt 3,081 1,884 8,106 5,592
Fed funds purchased and repo interest 326 381 895 1,073
------- ------- ------- -------
Total interest expense 11,114 8,116 30,280 23,478
------- ------- ------- -------
Net interest income 9,535 8,648 27,981 24,953
Provision for loan losses 613 220 1,429 787
------- ------- ------- -------
Net interest income after provision for loan losses 8,922 8,428 26,552 24,166
------- ------- ------- -------
Other income:
Trust department income 144 162 444 349
Service charges on deposit accounts 648 566 1,858 1,461
Other service charges, commissions and fees 489 298 1,250 758
Investment security gains (losses) 140 3 358 127
Income on insurance premiums 351 157 894 559
Gains on loan sales 90 94 248 508
Other income 169 153 503 467
------- ------- ------- -------
Total other income 2,031 1,433 5,555 4,229
------- ------- ------- -------
Other expenses:
Salaries and employee benefits 3,536 3,155 10,342 9,903
Net occupancy expense 1,028 836 2,990 2,470
Operating expense of insurance subsidiary 155 135 413 406
Other operating expense 1,883 1,759 5,640 5,050
------- ------- ------- -------
Total other expense 6,602 5,885 19,385 17,019
------- ------- ------- -------
Income before income taxes 4,351 3,976 12,722 11,376
Provision for income taxes 1,108 869 3,206 2,668
------- ------- ------- -------
Net income $ 3,243 $ 3,107 $ 9,516 $ 8,708
======= ======= ======= =======
Earnings per share:
Basic $ .46 $ .43 $ 1.34 $ 1.21
Diluted $ .45 $ .43 $ 1.32 $ 1.19
Dividends paid per share $ .16 $ .15 $ .47 $ .45
</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>
Nine Month Periods Ended September 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 8,708 8,708
Change in unrealized gain (loss)
on securities, net of tax of $(4,961)
and reclassification adjustment
of $127 (9,214) (9,214)
--------
Total comprehensive income (506)
Cash dividends ($.45 per share) (3,254) (3,254)
5% stock dividend (332,000 shares) 1,660 6,062 (7,722)
Net increase in treasury stock
(64,000 shares) (1,484) (1,484)
Issuance of additional shares
(21,000 shares) 61 208 (382) 379 266
------- ------- ------- ------- ------- -------
Balance, September 30, 1999 $34,878 $24,259 $24,373 $ (6,425) $(3,187) $71,081
======= ======= ======= ======= ======= =======
Balance, January 1, 2000 $34,878 $24,259 $26,379 $(10,847) $(3,588) $71,081
Comprehensive income:
Net income 9,516 9,516
Change in unrealized gain (loss)
on securities, net of tax of $1,183
and reclassification adjustment
of $358 2,197 2,197
-------
Total comprehensive income 11,713
Cash dividends ($.47 per share) (3,383) (3,383)
5% stock dividend (348,000 shares) 1,740 4,612 (6,352)
Net increase in treasury stock
(127,000 shares) (2,374) (2,374)
Issuance of additional shares
(15,000 shares) 77 236 (123) 190
------- ------- ------- ------- ------- -------
Balance, September 30, 2000 $36,695 $29,107 $26,037 $(8,650) $(5,962) $77,227
======= ======= ======= ======= ======= =======
</TABLE>
Per share data for all periods has been restated to reflect stoc
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>
Nine Months Ended
September 30,
<S> <C> <C>
--------------------------
2000 1999
--------------------------
Operating Activities:
Net income $ 9,516 $ 8,708
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,429 787
Provision for depreciation and amortization 2,352 1,227
Amortization of goodwill 181 180
Investment security gains (358) (127)
Loans originated for sale (14,912) (25,913)
Proceeds from sale of loans 14,967 26,355
Gains on mortgage sales (248) (508)
Change in other assets, net (4,026) (2,955)
Increase in accrued interest payable and other
liabilities, net 1,012 749
--------- ---------
Net cash provided by operating activities 9,913 8,503
--------- ---------
Investing Activities:
Net (increase) decrease in interest-bearing time
deposits in other banks 708 (1,734)
Proceeds from sales of investment securities 7,512 37,513
Proceeds from maturities of investment securities 4,751 24,070
Purchases of investment securities (44,417) (99,244)
Net increase in total loans (96,792) (67,224)
Purchases of premises and equipment (3,419) (2,361)
--------- ---------
Net cash used by investing activities (131,657) (108,980)
--------- ---------
Financing Activities:
Net increase in total deposits 98,393 97,124
Net increase (decrease) in short-term borrowings 9,923 5,249
Proceeds from issuance of long-term debt 130,725 ---
Repayment of long-term debt (109,000) ---
Cash dividends (3,383) (3,254)
Net increase in treasury stock (2,374) (1,484)
Proceeds from issuance of common stock 190 266
--------- ---------
Net cash provided by financing activities 124,474 97,901
--------- ---------
Increase in cash and cash equivalents 2,730 (2,576)
Cash and cash equivalents at beginning of period 31,144 27,244
--------- ---------
Cash and cash equivalents at end of period $33,874 $24,668
========= =========
</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 i 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, 2000 and 1999.
The accountingpolicies 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 investmen securities at
September 30, 2000 and December 31, 1999 were as follows:
<TABLE>
September 30,
2000
-------------
<S> <C> <C>
Estimated
Amortized Fair
Cost Value
--------- ---------
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies $138,401 $129,606
Mortgage-backed U.S. government agencies 66,344 64,603
Obligations of states and political subdivisions 94,755 92,422
Corporate securities 39,655 38,884
Equity securities 21,097 21,429
-------- --------
Total $360,252 $346,944
======== ========
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>
Nine Months Ended Year Ended Nine Months Ended
September 30, December 31, September 30,
2000 1999 1999
----------------- ----------------- -----------------
Balance, January 1 $7,456 $6,954 $6,954
Provision for loan losses 1,429 1,298 787
Loan charge-offs (945) (1,232) (742)
Recoveries 314 436 366
------ ------ ------
Balance, September 30, 2000, December 31,
1999, and September 30, 1999 $8,254 $7,456 $7,365
====== ====== ======
NONPERFORMING LOANS (a) AND OTHER REAL ESTATE
September 30, December 31, September 30,
2000 1999 1999
----------------- ----------------- -----------------
Loans past due 90 days or more and still
accruing interest:
Commercial, financial and agricultural $ 328 $ 146 $ 10
Mortgages 241 147 565
Personal installment 250 73 163
Other --- 12 25
------ ------ ------
819 378 763
------ ------ ------
Loans renegotiated with borrowers 207 254 253
------ ------ ------
Loans on which accrual of interest has been
discontinued:
Commercial, financial and agricultural 1,485 435 464
Mortgages 3,552 3,079 2,525
Other 358 222 280
------ ------ ------
5,395 3,736 3,269
------ ------ ------
Other real estate 555 405 336
------ ------ ------
Total $6,976 $4,773 $4,621
====== ====== ======
</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, 2000 and December 31, 1999, the recorded investment in
loans for which impairment has been recognized in accordance with FAS 114
totalled $5,602,000and $3,990,000, respectively, none of which related to loans
requiring a valuation allowance. For the nine months ended September 30, 2000,
the average recorded investment in impaired loans approximated $4,725,000. The
average balance for 1999 approximated $3,736,000. Interest recognized on
impaired loans on the cash basis for the nine month periods ending September 30,
2000 and 1999 was not significant.
-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 $3,325,000 and $3,075,000 and
$29,714,000 and $23,325,000 for income taxes and interest, respectively, for
each of the nine month periods ended September 30, 2000 and 1999.
Excluded from the consolidated statements of cash flows for the periods
ended September 30, 2000 and 1999 was the effect of certain non-cash activities.
The company acquired real estate through foreclosure totaling $465,000 and
$490,000, respectively. The company also recorded a decrease in deferred tax
assets of $1,183,000 in 2000. An increase in deferred tax assets of $3,460,000
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>
<S> <C> <C>
Three Months Ended September 30,
-------------------------------------------------------------
2000 1999
-------------------------------------------------------------
<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 $3,243 7,056 $.46 $3,107 7,175 $.43
Effect of Dilutive Securities: ====== ====== ====== ======
Incentive stock options outstanding 117 122
----- -----
Diluted EPS:
Income available to common stockholders &
assumed conversion $3,243 7,173 $.45 $3,107 7,297 $.43
====== ====== ====== ======
Three Months Ended September 30,
-------------------------------------------------------------
2000 1999
-------------------------------------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
-------------------------------------------------------------
(In thousands except per share data)
Basic EPS:
Income available to common stockholders $9,516 7,089 $1.34 $8,708 7,182 $1.21
Effect of Dilutive Securities: ====== ====== ====== ======
Incentive stock options outstanding 106 132
----- -----
Diluted EPS:
Income available to common stockholders &
assumed conversion $9,516 7,195 $1.32 $8,708 7,314 $1.19
====== ====== ====== ======
</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
September 30, 2000, 1999, and 1998
(dollars in thousands)
<TABLE>
<S> <C> <C> <C>
September 30, September 30, September 30,
-------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------------------------
<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 $ 27,370 $ 23,181 $ 20,730
-------- -------- --------
Earning Assets:
Interest-bearing deposits
in other banks 748 $ 9 4.79% 2,011 $ 22 4.34% 1,117 $ 14 4.97%
-------- -------- --------
Investment securities:
Taxable 262,957 4,687 7.09 229,883 3,843 6.63 179,426 2,900 6.41
Tax-exempt (b) 82,220 1,674 8.10 84,116 1,728 8.15 76,079 1,536 8.01
Total investment
securities 345,177 313,999 255,505
-------- -------- --------
Federal funds sold 1,174 19 6.44 2,304 29 4.99 11,780 161 5.42
-------- -------- --------
Loans, net of unearned
income (b) 656,982 14,910 9.03 555,152 11,898 8.50 471,553 10,517 8.85
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total earning assets 1,004,081 $21,299 8.44 873,466 $17,520 7.96 739,955 $15,129 8.11
-------- -------- -------- -------- -------- -------- -------- -------- --------
Allowance for loans losses (7,987) (7,375) (6,562)
Premises, equipment, and
other assets 60,563 38,557 27,780
---------- -------- --------
Total assets $1,084,027 $927,829 $781,903
========== ======== ========
Liabilities:
Demand deposits 61,742 54,932 44,071
-------- -------- --------
Interest-bearing liabilities:
Savings deposits 282,412 1,076 1.52% 249,995 1,400 2.22% 249,737 1,417 2.25%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Time deposits:
$100,000 or greater 70,810 36,622 28,601
Other 362,142 334,514 248,632
-------- -------- --------
Total time deposits 432,952 6,631 6.09 371,136 4,451 4.76 277,233 3,744 5.36
-------- -------- --------
Total time and savings
deposits 715,364 621,131 526,970
Short-term borrowings 10,333 171 6.58 7,965 85 4.23 3,671 47 5.08
Long-term debt 212,111 3,236 6.07 161,000 2,180 5.37 121,816 1,709 5.57
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities 937,808 $11,114 4.71 790,096 $8,116 4.08 652,457 $6,917 4.21
-------- -------- -------- -------- -------- -------- -------- -------- --------
Accrued interest, taxes and
other liabilities 7,995 7,995 7,373
-------- -------- --------
Total liabilities 1,007,545 853,023 703,901
Stockholders' equity 76,482 74,806 78,002
-------- -------- --------
Total liabilities and
stockholders' equity $1,084,027 $927,829 $781,903
========== ======== ========
Interest income to earning
assets 8.44 7.96 8.11
Interest expense to earning
assets 4.40 3.69 3.71
-------- -------- --------
Effective interest
differential $10,185 4.04% 9,404 4.27% $8,212 4.40%
======== ======== ======== ======== ======== ========
</TABLE>
(a) Amortization of net deferred fees included in interest incom 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.
-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 2000 was $2,386,000 or 9.9% greater than 1999. Total interest income
for the first nine months increased $9,830,000 or 20.3% while total interest
expense increased $6,802,000 or 29.0% 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 $119,890,000 or 14.1% while average interest-bearing liabilities
increased $130,581,000 or 17.1% for the first nine months of 2000 over the
comparable period of 1999. Impacting the increase in average earning assets in
2000 was an increase in average investment securities of $25,413,000 or 8.2%.
Also affecting earning assets were increases in average loan balances of
$94,572,000 or 18.0%. Affecting the increase in average interest-bearing
liabilities were increases in average savings deposits of $10,317,000 or 3.9%,
increases in average time deposits of $77,236,000 or 18.9%, and increases in
average long- term debt of $41,989,000 or 26.1%. The average yields realized on
earning assets for the first nine months approximated 8.3% and 8.0% in 2000 and
1999, respectively. The average costs on interest-bearing liabilities
approximated 4.5% and 4.1% in 2000 and 1999, respectively. Net interest margins,
on a tax equivalent basis for the first nine months approximated 4.1% and 4.2%
in 2000 and 1999, respectively. The provision for loan losses charged to income
increased $642,000 or 81.6% in 2000. Total loans past due 90 days and still
accruing interest, non-performing loans, and other real estate approximated
$6,976,000 and $4,621,000, respectively, as of September 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 $7,365,000 at September
30, 1999 to $8,254,000 at September 30, 2000.
Total other income for the first nine months of 2000 was $1,326,000 or
31.4% more than total other income for the first nine months of 1999. Affecting
this change were increases in trust department income of $95,000 or 27.2% and
increases in service charges on deposit accounts and other service charges,
commissions, and fees of $889,000 or 40.1%. These changes reflect management's
continuing emphasis on sources of non-interest income. Investment security gains
increased $231,000 or 181.9% in 2000 while gains on mortgage sales decreased
$260,000 or 51.2%. Insurance premium income increased $335,000 or 59.9% while
all other income increased $36,000 or 7.7%. 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 September 30, 2000 totaled $4,197,000. The
market value of these loans approximated book value at that time.
Total other expenses for the first nine months of 2000 increased $2,366,000
or 13.9%. Contributing factors were increases of $1,249,000 or 13.7% in salaries
and employee benefits, $520,000 or 21.1% in net occupancy expense, and $590,000
or 11.7% 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 $538,000 or 20.2% for the first
nine months of 2000 in comparison to the first nine months of 1999. Affecting
this change was a decrease in the amount of tax-free income recognized in 2000.
The effective tax rates approximated 25.2% and 23.5% for the respective periods.
The previously described factors contributed to a net increase of $808,000
or 9.3% in net income for the nine month period ended September 30, 2000.
The significant changes and related causes which occurred during the three
month period ending September 30, 2000 were generally consistent with those
described for the nine month period ending September 30, 2000. Net investment
security gains of $140,000 were recognized in the third quarter of 2000, while
net investment security gains of $3,000 were recognized in 1999. Gains on loan
sales were $90,000 and $94,000, respectively, for the three month periods ending
September 30, 2000 and 1999.
-11-
<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
September 30, 2000 December 31, 1999
------------------ -------------------
(dollars in thousands)
<S> <C> <C> <C>
Amount %
------ -
Funding Sources:
Deposits and borrowed funds:
Non-interest bearing $ 70,118 $ 14,788 26.7%
Interest-bearing 721,711 83,605 13.1
-------- -------- -----
Total deposits 791,829 98,393 14.2
Borrowed funds 231,986 31,648 15.8
Other liabilities 7,981 1,012 14.5
Shareholders' equity 77,227 6,146 8.6
---------- -------- -----
Total sources $1,109,023 $137,199 14.1%
========== ======== =====
Funding uses:
Interest earning assets:
Short-term investments $ 1,423 $(2,416) (62.9)%
Investment securities 346,944 34,869 11.2
Loans, net of unearned income 689,208 95,889 16.2
-------- -------- -----
Total interest earning assets 1,037,575 128,342 14.1
Cash and due from banks 33,532 4,438 15.3
Other assets 37,916 4,419 13.2
========== ======== =====
Total uses $1,109,023 $137,199 14.1%
========== ======== =====
</TABLE>
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<PAGE>
Management's Discussion, Continued
----------------------------------
As of September 30, 2000 cash and due from banks was $4,438,000 or 15.3%
greater than it was at December 31, 1999. Interest-bearing time deposits in
other banks and investment securities increased $34,161,000 or 10.9% while fed
funds sold decreased $1,708,000. The approximate market value of debt securities
was $12,976,000 less than amortized cost at September 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 September 30, 2000 and
December 31, 1999, management classified investment securities with amortized
costs and market values of $360,252,000 and $346,944,000 and $328,763,000 and
$312,075,000, respectively, as available for sale. Net loans increased
$94,898,000 or 16.3% from December 31, 1999 to September 30, 2000. Affecting
this change were increases in real estate loans of $62,844,000 or 16.6% and
commercial loans of $27,497,000 or 26.6%. The allowance for loan losses
approximated 1.20% and 1.27% of net loans at September 30, 2000 and December 31,
1999, respectively. The increase of $2,090,000 or 13.6% in premises and
equipment was affected by the establishment of new banking offices. Goodwill
continues to be amortized at an annualized rate of $240,000. As previously
noted, Community Banks, Inc. sells only fixed-rate real estate and education
loans specifically designated for resale on the secondary market and at
September 30, 2000 and December 31, 1999 these loans totaled $4,197,000 and
$4,004,000, respectively. Affecting the increase of $3,158,000 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 $1,183,000. These factors contributed to an increase of
$137,199,000 or 14.1% in total assets from December 31, 1999 to September 30,
2000.
Total deposits increased $98,393,000 or 14.2% from December 31, 1999 to
September 30, 2000. Contributing to this increase were increases of $14,788,000
or 26.7% in demand deposits, $19,642,000 or 7.4% in savings deposits and
$63,963,000 or 17.2% in total time deposits. New certificate of deposit products
affected the significant increase in time deposits.
At September 30, 2000 long-term debt totaling $218,725,000 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 5.92%.
Based on a one year interval, the relationship of rate sensitive assets to
rate sensitive liabilities approximated 95% as of September 30, 2000.
As of September 30, 2000 the Corporation had risk-based capital in excess
of the fully implemented regulatory requirements, and tier 1 plus tier 2 capital
approximated 11.2% 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.
-13-
<PAGE>
Management's Discussion, Continued
----------------------------------
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, 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.
-14-
<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, 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)
Date November 8, 2000 /S/ Eddie L. Dunklebarger
------------------ -------------------------
Eddie L. Dunklebarger
President
(Chief Executive Officer)
Date November 8, 2000 /S/ Terry L. Burrows
------------------ -------------------------
Terry L. Burrows
Executive Vice-President
(Chief Financial Officer)
-15-
<PAGE>
