SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarter Ended March 31, 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 March 31, 2000
CAPITAL STOCK-COMMON 7,094,000
- -------------------- -------------------
(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 periods ending March 31,
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>
March 31, December 31,
2000 1999
------------ ----------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 29,050 $ 29,094
Interest-bearing time deposits in other banks............... 897 1,789
Investment securities, available for sale
(Market value)........................................... 333,195 312,075
Fed funds sold.............................................. 8,945 2,050
Loans....................................................... 610,344 596,301
Less: Unearned income....................................... (6,181) (6,986)
Allowance for loan losses......................... (7,586) (7,456)
---------- ----------
Net loans......................................... 596,577 581,859
Premises and equipment, net................................. 15,965 15,385
Goodwill.................................................... 364 424
Other real estate owned..................................... 480 405
Loans held for sale......................................... 3,804 4,004
Accrued interest receivable and other assets................ 25,795 24,739
---------- ----------
Total assets........................................... $1,015,072 $971,824
============== ==============
LIABILITIES
Deposits:
Demand (non-interest bearing)............................ $ 62,391 $ 55,330
Savings.................................................. 282,567 266,464
Time..................................................... 347,506 329,221
Time in denominations of $100,000 or more................ 46,006 42,421
---------- ----------
Total deposits.......................................... 738,470 693,436
Short-term borrowings....................................... 4,530 3,338
Long-term debt.............................................. 192,000 197,000
Accrued interest payable and other liabilities.............. 7,171 6,969
---------- ----------
Total liabilities........................................ 942,171 900,743
---------- ----------
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; 7,331,000 and 6,976,000
shares issued in 2000 and 1999, respectively............. 36,655 34,878
Surplus..................................................... 29,063 24,259
Retained earnings........................................... 22,045 26,379
Accumulated other comprehensive income (loss)
net of tax (benefit) of $(5,526) and $(5,841),
respectively........................................... (10,263) (10,847)
Less: Treasury stock of 237,000 and 175,000
shares at cost........................................... (4,599) ( 3,588)
----------- -----------
Total stockholders' equity............................... 72,901 71,081
----------- -----------
Total liabilities and stockholders' equity................ $1,015,072 $971,824
=========== ===========
<FN>
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.
</FN>
</TABLE>
-2-
<PAGE>
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(dollars in thousands except per share data)
<TABLE>
Three Months Ended
March 31,
<S> <C> <C>
2000 1999
Interest income:
Interest and fees on loans.............................................................. $12,748 $10,934
Interest and dividends on investment securities:
Taxable.............................................................................. 4,292 3,266
Exempt from federal income tax....................................................... 1,030 1,164
Fed funds interest...................................................................... 186 94
Other interest income................................................................... 11 21
-------- --------
Total interest income.............................................................. 18,267 15,479
-------- --------
Interest expense:
Interest on deposits:
Savings.............................................................................. 1,439 1,325
Time................................................................................. 4,520 3,579
Time in denominations of $100,000 or more............................................ 643 431
Interest on short-term borrowings and long-term debt.................................... 2,331 1,843
Fed funds purchased and repo interest................................................... 311 345
-------- --------
Total interest expense............................................................... 9,244 7,523
-------- --------
Net interest income.................................................................. 9,023 7,956
Provision for loan losses............................................................... 316 276
-------- --------
Net interest income after provision for loan losses.................................. 8,707 7,680
-------- --------
Other income:
Trust department income.............................................................. 141 75
Service charges on deposit accounts.................................................. 568 411
Other service charges, commissions and fees.......................................... 409 214
Investment security gains............................................................ 168 153
Income on insurance premiums......................................................... 166 222
Gains on loan sales.................................................................. 65 276
Other income......................................................................... 202 107
-------- --------
Total other income................................................................ 1,719 1,458
-------- --------
Other expenses:
Salaries and employee benefits....................................................... 3,424 2,925
Net occupancy expense................................................................ 1,008 826
Operating expense of insurance subsidiary............................................ 87 168
Other operating expense.............................................................. 1,799 1,673
-------- --------
Total other expense............................................................... 6,318 5,592
-------- --------
Income before income taxes........................................................ 4,108 3,546
Provision for income taxes.............................................................. 1,007 864
-------- --------
Net income........................................................................ $ 3,101 $ 2,682
======== ========
Earnings per share:
Basic................................................................................ $ .44 $ .37
Diluted.............................................................................. $ .43 $ .36
Dividends paid per share................................................................ $ .15 $ .14
<FN>
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.
</FN>
</TABLE>
-3-
<PAGE>
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands except per share data)
<TABLE>
Three Month Periods Ended March 31
Accumulated
Other
Common Retained Comprehensive Treasury Total
Stock Surplus Earnings Income Stock Equity
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999................. $33,157 $17,989 $27,023 $2,789 $(2,082) $78,876
Comprehensive income:
Net income......................... 2,682 2,682
Change in unrealized gain (loss)
on securities, net of tax of $(543)
and reclassification adjustment
of $153......................... (1,009) (1,009)
---------
Total comprehensive income.......... 1,673
Cash dividends ($.14 per share).......... (1,043) (1,043)
5% stock dividend (332,000 shares) 1,660 6,062 (7,722)
Purchases of treasury stock
(20,000 shares)....................... (463) (463)
Issuance of additional shares
(8,000) shares........................ 38 42 (51) 80 109
------- ------- ------- ------- ------- -------
Balance, March 31, 1999.................. $34,855 $24,093 $20,889 $1,780 $(2,465) $79,152
======= ======= ======= ====== ======== =======
Balance, January 1, 2000................. $34,878 $24,259 $26,379 $(10,847) $(3,588) $71,081
Comprehensive income:
Net income.......................... 3,101 3,101
Change in unrealized gain (loss)
on securities, net of tax of $315
and reclassification adjustment
of $168 ......................... 584 584
-------
Total comprehensive income.......... 3,685
Cash dividends ($.15 per share).......... (1,083) (1,083)
5% stock dividend (348,000 shares) 1,740 4,612 (6,352)
Purchases of treasury stock
(51,000 shares)....................... (1,011) (1,011)
Issuance of additional shares
(7,000 shares)........................ 37 192 229
------- ------- ------- ------- ------- -------
Balance, March 31, 2000.................. $36,655 $29,063 $22,045 $(10,263) $(4,599) $72,901
======= ======= ======= ======== ======= =======
<FN>
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.
</FN>
</TABLE>
-4-
<PAGE>
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
<TABLE>
Three Months Ended
March 31,
2000 1999
-------------------------------------
<S> <C> <C>
Operating Activities:
Net income..................................................... $ 3,101 $ 2,682
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses.................................... 316 276
Provision for depreciation and amortization.................. 103 388
Amortization of goodwill..................................... 60 60
Investment security gains.................................... (168) (153)
Loans originated for sale.................................... (3,588) (12,191)
Proceeds from sale of loans.................................. 3,853 12,245
Gains on mortgage sales...................................... (65) (276)
Change in other assets, net.................................. (1,161) 685
Increase in accrued interest payable and other
liabilities, net............................................ 202 613
------- -------
Net cash provided by operating activities.................... 2,653 4,329
------- -------
Investing Activities:
Net (increase) decrease in interest-bearing time
deposits in other banks....................................... 892 (776)
Proceeds from sales of investment securities................... 5,243 3,575
Proceeds from maturities of investment securities.............. 2,134 9,753
Purchases of investment securities............................. (27,064) (37,979)
Net increase in total loans.................................... (15,319) (22,165)
Purchases of premises and equipment............................ (1,049) (470)
------- -------
Net cash used by investing activities....................... (35,163) (48,062)
------- -------
Financing Activities:
Net increase in total deposits................................. 45,034 45,444
Net increase (decrease) in short-term borrowings............... 1,192 1,271
Proceeds from issuance of long-term debt....................... 10,000 ---
Repayment of long-term debt.................................... (15,000) ---
Cash dividends................................................. (1,083) (1,043)
Purchases of treasury stock.................................... (1,011) (463)
Proceeds from issuance of common stock......................... 229 109
------- -------
Net cash provided by financing activities................... 39,361 45,318
------- -------
Increase in cash and cash equivalents........................ 6,851 1,585
Cash and cash equivalents at beginning of period............... 31,144 27,244
-------- --------
Cash an cash equivalents at end of period...................... $37,995 $28,829
======== ========
<FN>
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.
</FN>
</TABLE>
-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
periods ended March 31, 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 investmen securities at March
31, 2000 and December 31, 1999 were as follows:
<TABLE>
March 31,
2000
<S> <C> <C>
Estimated
Amortized Fair
Cost Value
--------- ---------
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies....................................... $135,626 $127,088
Mortgage-backed U.S. government agencies......... 70,671 67,634
Obligations of states and political subdivisions. 85,131 80,542
Corporate securities............................. 37,894 38,099
Equity securities................................ 19,662 19,832
--------- ---------
Total............................................ $348,984 $333,195
======== =========
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>
Three Months Ended Year Ended Three Months Ended
March 31, December 31, March 31,
2000 1999 1999
------------------ ------------ ------------------
<S> <C> <C> <C>
Balance, January 1................. $7,456 $6,954 $6,954
Provision for loan losses.......... 316 1,298 276
Loan charge-offs................... (305) (1,232) (223)
Recoveries......................... 119 436 104
-------- -------- --------
Balance, March 31, 2000, December 31,
1999, and March 31, 1999........... $7,586 $7,456 $7,111
======== ======== ========
NONPERFORMING LOANS (a) AND OTHER REAL ESTATE
March 31, December 31, March 31,
2000 1999 1999
---------- -------------- ----------
Loans past due 90 days or more and still
accruing interest:
Commercial, financial and agricultural...... $29 $ 146 ---
Mortgages................................... 648 147 $ 451
Personal installment........................ 69 73 133
Other....................................... --- 12 14
---------- -------------- ----------
746 378 598
---------- -------------- ----------
Loans renegotiated with borrowers.............. 238 254 250
---------- -------------- ----------
Loans on which accrual of interest has been
discontinued:
Commercial, financial and agricultural...... 198 435 1,031
Mortgages................................... 3,049 3,079 2,208
Other....................................... 277 222 227
---------- -------------- ----------
3,524 3,736 3,466
Other real estate.............................. 480 405 629
---------- -------------- ----------
Total....................................... $4,988 $4,773 $4,943
========== ============== ==========
<FN>
(a) The determination to discontinue the accrual of interest on nonperforming
loans is made on the individual case basis. Such factors as the character and
size of the loan, quality of the collateral and the historical creditworthiness
of the borrower and/or guarantors are considered by management in assessing the
collectibility of such amounts.
Impaired Loans
At March 31, 2000 and December 31, 1999, the Corporation recorded no investment
in impaired loans or related valuation allowance. For the three month periods
ended March 31, 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 three month periods ended March 31, 2000 and
1999.
</FN>
</TABLE>
-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 $1,005,000 and $680,000 and $9,131,000
and $7,224,000 for income taxes and interest, respectively, for each of the
three month periods ended March 31, 2000 and 1999.
Excluded from the consolidated statements of cash flows for the periods ended
March 31, 2000 and 1999 was the effect of certain non-cash activities. The
company acquired real estate through foreclosure totaling $285,000 and $303,000,
respectively. The company also recorded a decrease in deferred tax assets of
$315,000 in 2000. A decrease in deferred tax liabilities of $235,000 was
recognized in 1999. These variations related to the effects of changes in net
unrealized gain (loss) on investment securities available for sale.
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 March 31
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............ $3,101 7,126 $.44 $2,682 7,188 $.37
Effect of Dilutive Securities:..................... ====== ===== ====== =====
Incentive stock options outstanding................ 109 160
------ ------
Diluted EPS:
Income available to common stockholders &
assumed conversion............................... $3,101 7,235 $.43 $2,682 7,348 $.36
====== ===== ====== =====
<FN>
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.
</FN>
</TABLE>
-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 March
31, 2000, 1999, and 1998
(dollars in thousands)
<TABLE>
March 31 March 31, March 31,
---------------------------------------------------------------------------------------------
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........... $ 24,604 $ 21,662 $ 19,126
-------- -------- --------
Earning Assets:
Interest-bearing deposits
In other banks................... 1,226 $ 11 3.6% 1,517 $ 21 5.61% 3.102 $ 28 3.66%
-------- -------- --------
Investment securities:
Taxable........................... 240,357 4,292 7.18 212,423 3,266 6.24 158,297 2,632 6.74
Tax-exempt(b)..................... 79,999 1,585 7.97 81,032 1,791 8.96 53,788 1,153 8.69
-------- -------- --------
Total investment
securities........................ 320,356 293,455 212,085
-------- -------- --------
Federal funds sold................. 12,685 186 5.90 8,307 94 4.59 8,637 124 5.82
-------- -------- --------
Loans, net of unearned
income (b)........................ 595,999 12,815 8.65 519,267 10,975 8.57 446,793 9,961 9.04
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total earning assets.............. 930,266 $18,889 8.10 822,546 $16,147 7.96 670,617 $13,898 8.40
-------- ------- ----- -------- ------- ----- -------- ------- -----
Allowance for loans losses......... (7,514) (7,054) (6,336)
Premises, equipment, and
other assets...................... 42,524 32,348 28,333
-------- -------- --------
Total assets...................... $989,880 $869,502 $711,740
======== ======== ========
Liabilities:
Demand deposits.................... 54,344 47,605 40,988
-------- -------- --------
Interest-bearing liabilities:
Savings deposits.................. 244,782 1,439 2.36% 255,043 1,325 2.11% 230,881 1,350 2.37%
-------- -------- --------
Time deposits:
$100,000 or greater............... 50,269 33,421 32,059
Other............................. 365,211 279,600 245,993
-------- -------- --------
Total time deposits................ 415,480 5,163 5.00 313,021 4,010 5.20 278,052 3,720 5.43
-------- -------- --------
Total time and savings
deposits.......................... 660,262 568,064 508,933
Short-term borrowings.............. 2,587 38 5.91 5,463 57 4.23 4,458 48 4.37
Long-term debt..................... 194,066 2,604 5.40 161,000 2,131 5.37 75,292 1,117 6.02
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-bearing
liabilities....................... 856,915 $ 9,244 4.34 734,527 $ 7,523 4.15 588,683 $ 6,235 4.30
-------- ------- ----- -------- ------- ----- -------- ------- -----
Accrued interest, taxes and
other liabilities................. 6,709 8,002 7,246
-------- -------- --------
Total liabilities................. 917,968 790,134 636,917
Stockholders' equity............... 71,912 79,368 74,823
-------- -------- --------
Total liabilities and
stockholders' equity.............. $989,880 $869,502 $711,740
======== ======== ========
Interest income to earning
assets............................ 8.17 7.96 8.40
Interest expense to earning
assets............................ 4.00 3.71 3.77
----- ----- -----
Effective interest
differential.................. $ 9,645 4.17% $ 8,624 4.25% $ 7,663 4.63%
======= ====== ======= ====== ======= ======
<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 three months
of 2000 was $1,027,000 or 13.4% greater than 1999. Total interest income for the
first three months increased $2,788,000 or 18.0% while total interest expense
increased $1,721,000 or 22.9% 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 $107,720,000 or 13.1% while average interest-bearing liabilities
increased $122,388,000 or 16.7% for the first three 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 $27,934,000 or
13.2%. Also affecting earning assets were increases in average loan balances of
$76,732,000 or 14.8%. Affecting the increase in average interest-bearing
liabilities were decreases in average savings deposits of $10,261,000 or 4.0%,
increases in average time deposits of $102,459,000 or 32.7%, and increases in
average long-term debt of $33,066,000 or 20.5%. The average yields realized on
earning assets for the first three months approximated 8.2% and 8.0% in 2000 and
1999, respectively. The average costs on interest-bearing liabilities
approximated 4.3% and 4.2% in 2000 and 1999, respectively. Net interest margins,
on a tax equivalent basis for the first three months approximated 4.2% and 4.3%
in 2000 and 1999, respectively. The provision for loan losses charged to income
increased $40,000 or 14.5% in 2000. Total loans past due 90 days and still
accruing interest, non-performing loans, and other real estate approximated
$4,988,000 and $4,943,000, respectively, as of March 31, 2000 and 1999. The
balance of the allowance for loan losses increased from $7,111,000 at March 31,
1999 to $7,586,000 at March 31, 2000.
Total other income for the first three months of 2000 was $261,000 or 17.9% more
than total other income for the first three months of 1999. Affecting this
change were increases in trust department income of $66,000 or 88.0% and
increases in service charges on deposit accounts and other service charges,
commissions, and fees of $352,000 or 56.3%. These changes reflect management's
continuing emphasis on sources of non-interest income. Investment security gains
increased $15,000 or 9.8% in 2000 while gains on mortgage sales decreased
$211,000 or 76.4%. Insurance premium income decreased $56,000 or 25.2% while all
other income increased $95,000 or 88.8%. 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 March 31, 2000 totaled $3,804,000. The market
value of these loans approximated book value at that time. The increase in other
income was affected by tax refunds.
Total other expenses for the first three months of 2000 increased $726,000 or
13.0%. Contributing factors were increases of $499,000 or 17.1% in salaries and
employee benefits, $182,000 or 22.0% in net occupancy expense, and $126,000 or
7.5% 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 $143,000 or 16.6% for the three months
of 2000 in comparison to the first three months of 1999. Affecting this change
was a decrease in the amount of tax-free income recognized in 2000. The
effective tax rates approximated 24.5% and 24.4% for the respective periods.
The previously described factors contributed to a net increase of $419,000 or
15.6% in net income for the three month period ended March 31, 2000.
-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
March 31, 2000 December 31, 1999
---------------- ---------------------
(dollars in thousands)
Amount %
------ ---
Funding Sources:
Deposits and borrowed funds:
Non-interest bearing............................................ $ 62,391 $ 7,061 12.8%
Interest-bearing................................................ 676,079 37,973 6.0
--------- -------- -----
Total deposits................................................ 738,470 45,034 6.5
Borrowed funds.................................................. 196,530 (3,808) (1.9)
Other liabilities............................................... 7,171 202 2.9
Shareholders' equity............................................ 72,901 1,820 2.6
--------- -------- -----
Total sources................................................... $1,015,072 $43,248 4.5%
========= ======== =====
Funding uses:
Interest earning assets:
Short-term investments.......................................... $ 9,842 $6,003 156.4%
Investment securities........................................... 333,195 21,120 6.8
Loans, net of unearned income................................... 607,967 14,648 2.5
--------- -------- -----
Total interest earning assets.................................. 951,004 41,771 4.6
Cash and due from banks......................................... 29,050 (44) (0.2)
Other assets.................................................... 35,018 1,521 4.5
Total uses..................................................... $1,015,072 $43,248 4.5%
========= ======== =====
</TABLE>
-12-
<PAGE>
Management's Discussion, Continued
As of March 31, 2000 cash and due from banks was $44,000 or .2% less than it was
at December 31, 1999. Interest-bearing time deposits in other banks and
investment securities increased $20,228,000 or 6.4% while fed funds sold
increased $6,895,000. The approximate market value of debt securities was
$15,959,000 less than amortized cost at March 31, 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 March 31, 2000 and December 31, 1999,
management classified investment securities with amortized costs and market
values of $348,984,000 and $333,195,000 and $328,763,000 and $312,075,000,
respectively, as available for sale. Net loans increased $14,718,000 or 2.5%
from December 31, 1999 to March 31, 2000. Affecting this change were increases
in real estate loans of $8,754,000 or 2.3%, consumer loans of $2,920,000 or
2.8%, and commercial loans of $2,456,000 or 2.4%. The allowance for loan losses
approximated 1.26% and 1.27% of net loans at March 31, 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 March 31, 2000 and December 31, 1999 these loans totaled
$3,804,000 and $4,004,000, respectively. Affecting the increase of $1,056,000 in
accrued interest receivable and other assets were increases in bank owned life
insurance of $2,459,000 and deferred tax assets associated with unrealized
securities losses of $315,000. These factors contributed to an increase of
$43,248,000 or 4.5% in total assets from December 31, 1999 to March 31, 2000.
Total deposits increased $45,034,000 or 6.5% from December 31, 1999 to March 31,
2000. Contributing to this increase were increases of $7,061,000 or 12.8% in
demand deposits, $16,103,000 or 6.0% in savings deposits and $21,870,000 or 5.9%
in total time deposits. New certificate of deposit products affected the
significant increase in time deposits.
At March 31, 2000 long-term debt totaling $192,000,000 included borrowings from
the Federal Home Loan Bank of Pittsburgh of $182,000,000 and repurchase
agreements totaling $10,000,000 at a weighted average interest rate of 5.39%.
Based on a one year interval, the relationship of rate sensitive assets to rate
sensitive liabilities approximated 92% as of March 31, 2000.
As of March 31, 2000 the Corporation had risk-based capital in excess of the
fully implemented regulatory requirements, and tier 1 plus tier 2 capital
approximated 12% 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 March 31, 2000.
Forward Outlook
Management is unaware of any regulatory recommendations which, if implemented,
would have a material effect of 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.
The Corporation is anticipating the maintenance of a favorable net interest
margin throughout the remainder of 2000.
Other Events
On March 31, 1998, Community Banks Inc. (Community) completed its merger of The
Peoples State Bank (Peoples). Peoples had six banking offices located in York
and Adams Counties, Pennsylvania. Community issued 1,325,330 shares of common
stock for all the outstanding common stock of Peoples. The transaction was
accounted for as a pooling of interests and combined unaudited financial
information is included in this report.
-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 March 31, 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 May 10, 2000 /S/ Eddie L. Dunklebarger
-------------------------- -------------------------
Eddie L. Dunklebarger
President
(Chief Executive Officer)
Date May 10, 2000 /S/ Terry L. Burrows
--------------------------- ------------------------
Terry L. Burrows
Executive Vice-President
(Chief Financial Officer)
-15-
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<NAME> Community Banks, Inc.
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