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, 2001
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, 2001
CAPITAL STOCK-COMMON 8,364,000
- -------------------- ------------------------------
(Title of Class) (Outstanding Shares)
COMMUNITY BANKS, INC. and SUBSIDIARIES
INDEX 10-Q
PART I
Financial Information.........................................................1
Consolidated Balance Sheets.................................................. 2
Consolidated Statements of Income............................................ 3
Consolidated Statements of Changes in Stockholders' Equity................... 4
Consolidated Statements of Cash Flows........................................ 5
Notes to Consolidated Financial Statements.............................. 6-10
Management's Discussion and Analysis of Financial
Condition and Results of Operation................................... 11-16
PART II
Other Information and Signatures............................................ 17
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,
2001 and 2000.
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
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands except per share data)
March 31, December 31,
2001 2000
------------ ------------
ASSETS
Cash and due from banks..................................... $ 36,773 $ 42,166
Interest-bearing time deposits in other banks............... 1,321 2,568
Investment securities, available for sale
(market value)........................................... 414,623 389,819
Fed funds sold.............................................. 32,514 6,280
Loans....................................................... 821,600 818,858
Less: Unearned income....................................... (3,393) (3,984)
Allowance for loan losses......................... (11,657) (10,328)
----------- -----------
Net loans......................................... 806,550 804,546
Premises and equipment, net................................. 21,288 21,587
Goodwill.................................................... 123 183
Other real estate owned..................................... 447 416
Loans held for sale......................................... 6,572 2,719
Accrued interest receivable and other assets................ 38,181 38,429
----------- -----------
Total assets........................................... $1,358,392 $1,308,713
=========== ===========
LIABILITIES
Deposits:
Demand (non-interest bearing)............................ $ 146,849 $ 155,796
Savings.................................................. 276,503 257,178
Time..................................................... 457,181 426,573
Time in denominations of $100 or more.................... 72,840 79,694
----------- -----------
Total deposits.......................................... 953,373 919,241
Short-term borrowings....................................... 5,673 36,093
Long-term debt.............................................. 272,302 239,613
Accrued interest payable and other liabilities.............. 19,371 9,788
----------- -----------
Total liabilities........................................ 1,250,719 1,204,735
----------- -----------
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; 8,969 and 8,545
shares issued in 2001 and 2000, respectively............. 44,845 42,726
Surplus..................................................... 35,928 29,155
Retained earnings........................................... 29,097 38,723
Accumulated other comprehensive income (loss),
net of tax (benefit) of $692 and $(374),
respectively........................................... 1,285 (694)
Less: Treasury stock of 185,000 and 300,000
shares at cost, respectively............................. (3,482) (5,932)
----------- -----------
Total stockholders' equity............................... 107,673 103,978
----------- -----------
Total liabilities and stockholders' equity................ $1,358,392 $1,308,713
=========== ===========
<FN>
All periods reflect the combined data of Community Banks, Inc. and Glen Rock State Bank.
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
2
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(dollars in thousands except per share data)
Three Months Ended
March 31,
2001 2000
------- -------
Interest income:
Interest and fees on loans......................................... $17,707 $15,172
Interest and dividends on investment securities:
Taxable......................................................... 4,857 4,969
Exempt from federal income tax.................................. 1,475 1,120
Fed funds interest................................................. 305 218
Other interest income.............................................. 32 13
------- -------
Total interest income......................................... 24,376 21,492
------- -------
Interest expense:
Interest on deposits:
Savings.......................................................... 1,898 1,802
Time............................................................. 6,470 5,329
Time in denominations of $100 or more............................ 1,126 740
Interest on short-term borrowings and long-term debt................ 3,698 2,789
Fed funds purchased and repo interest............................... 209 313
------- -------
Total interest expense......................................... 13,401 10,973
------- -------
Net interest income.............................................. 10,975 10,519
Provision for loan losses........................................... 1,573 361
------- -------
Net interest income after provision for loan losses............. 9,402 10,158
------- -------
Other income:
Income from fiduciary related activities......................... 107 141
Service charges on deposit accounts.............................. 759 620
Other service charges, commissions and fees...................... 467 474
Investment security gains (losses)............................ (128) 168
Insurance premium income........................................ 257 166
Gains on loan sales............................................. 163 65
Other income.................................................... 358 303
------- -------
Total other income........................................... 1,983 1,937
------- -------
Other expenses:
Salaries and employee benefits.................................. 4,554 4,060
Net occupancy expense........................................... 1,375 1,146
Operating expense of insurance subsidiary....................... 139 87
Merger and restructuring related expenses....................... 1,899 ---
Other operating expense......................................... 2,645 2,158
------- -------
Total other expense.......................................... 10,612 7,451
------- -------
Income before income taxes................................... 773 4,644
Provision (benefit) for income taxes............................... (35) 1,154
------- -------
Net income................................................... $ 808 $ 3,490
======= =======
Earnings per share:
Basic............................................................ $ .09 $ .40
Diluted.......................................................... $ .09 $ .39
Dividends paid per share............................................ $ .16 $ .15
<FN>
All periods reflect the combined data of Community Banks, Inc. and Glen Rock
State Bank.
Per share data has been adjusted to reflect stock dividends and splits.
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
3
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands except per share data)
Three Month Periods Ended March 31
Accumulated
Other
Common Retained Comprehensive Treasury Total
Stock Surplus Earnings Income Stock Equity
-------- --------- ---------- ------------- -------- --------
Balance, January 1, 2000................. $40,903 $24,259 $36,432 $(11,697) $ (3,588) $ 86,309
Comprehensive income:
Net income......................... 3,490 3,490
Change in unrealized gain (loss)
on securities, net of tax of $332
and reclassification adjustment
of $168 ........................ 617 617
---------
Total comprehensive income.......... 4,107
Cash dividends ($.15 per share).......... (1,236) (1,236)
5% stock dividend (348,000 shares)....... 1,740 4,612 (6,352)
Net increase in treasury stock
(51,000 shares)....................... (1,011) (1,011)
Issuance of additional shares
(7,000 shares)........................ 37 192 229
------- ------- ------- -------- -------- ---------
Balance, March 31, 2000.................. $42,680 $29,063 $32,334 $(11,080) $ (4,599) $ 88,398
======= ======= ======= ======== ======== =========
Balance, January 1, 2001................. $42,726 $29,155 $38,723 $ (694) $ (5,932) $103,978
Comprehensive income:
Net income.......................... 808 808
Change in unrealized gain (loss)
on securities, net of tax of $1,066
and reclassification adjustment
of $(128) ....................... 1,979 1,979
---------
Total comprehensive income.......... 2,787
Cash dividends ($.16 per share).......... (1,372) (1,372)
5% stock dividend (426,000 shares)....... 2,130 6,773 (8,903)
Issuance of additional shares
( 2,000 shares of common stock
and 115,000 shares, net, of
treasury stock ) ................... (11) (159) 2,450 2,280
------- ------- ------- -------- -------- ---------
Balance, March 31, 2001.................. $44,845 $35,928 $29,097 $ 1,285 $ (3,482) $107,673
======= ======= ======= ======== ======== =========
<FN>
All periods reflect the combined data of Community Banks, Inc. and Glen Rock
State Bank. 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.
</FN>
4
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
Three Months Ended
March 31,
2001 2000
-------- --------
Operating Activities:
Net income..................................................... $ 808 $ 3,490
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses.................................... 1,573 361
Depreciation and amortization................................ 221 85
Amortization of goodwill..................................... 60 60
Investment security gains.................................... 128 (168)
Loans originated for sale.................................... (11,400) (3,588)
Proceeds from sale of loans.................................. 7,710 3,853
Gains on loan sales.......................................... (163) (65)
Change in other assets, net.................................. 48 (3,199)
Increase in accrued interest payable and other
liabilities, net............................................ 8,891 290
---------- ----------
Net cash provided by operating activities.................... 7,876 1,119
---------- ----------
Investing Activities:
Net (increase) decrease in interest-bearing time
deposits in other banks....................................... 1,247 556
Proceeds from sales of investment securities................... 20,418 5,243
Proceeds from maturities of investment securities.............. 10,780 8,485
Purchases of investment securities............................. (52,568) (32,933)
Net increase in total loans.................................... (3,782) (18,684)
Net increase in premises and equipment......................... (439) (1,286)
---------- ----------
Net cash used by investing activities....................... (24,344) (38,619)
---------- ----------
Financing Activities:
Net increase in total deposits................................. 34,132 46,546
Net increase (decrease) in short-term borrowings............... (30,420) (11,561)
Proceeds from issuance of long-term debt....................... 33,048 40,986
Repayment of long-term debt.................................... (359) (26,950)
Cash dividends................................................. (1,372) (1,236)
Purchases of treasury stock.................................... --- (1,011)
Proceeds from issuance of common stock......................... 2,280 229
---------- ----------
Net cash provided by financing activities................... 37,309 47,003
---------- ----------
Increase in cash and cash equivalents........................ 20,841 9,503
Cash and cash equivalents at beginning of period............... 48,446 37,117
---------- ----------
Cash and cash equivalents at end of period..................... $69,287 $46,620
========== ==========
<FN>
All periods reflect the combined data of Community Banks, Inc. and Glen Rock State Bank.
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
5
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, 2001 and 2000.
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 2000 Annual Report to shareholders.
Other Events
On March 30, 2001, Community Banks, Inc. (CTY) completed its merger of Glen
Rock State Bank (GR). GR has five banking offices located in York County,
Pennsylvania. CTY issued 1,205,000 shares of common stock for all of the
outstanding common stock of GR. This transaction was accounted for as a pooling
of interests and combined unaudited financial information is as follows:
Quarter Ended March 31, 2000
(dollars in thousands expect per share data)
CTY GR Combined
Interest income........................................ $18,267 $3,225 $21,492
Interest expense....................................... 9,244 1,729 10,973
----------------------------------------------------
Net interest income.................................... 9,023 1,496 10,519
Loan loss provision.................................... 316 45 361
Other income........................................... 1,719 218 1,937
Other expense.......................................... 6,318 1,133 7,451
----------------------------------------------------
Income before taxes.................................... 4,108 536 4,644
Taxes.................................................. 1,007 147 1,154
----------------------------------------------------
Net income............................................. $ 3,101 $ 389 $ 3,490
..... ====================================================
Earnings per common share:
Basic $ .42 $ .29 $ .40
Diluted $ .41 $ .29 $ .39
Per share data has been adjusted to reflect a five percent stock dividend
payable April 30, 2001.
6
Consolidated Statements of Income
Included in the Consolidated Statements of Income for the three months
ended March 31, 2001 are merger and restructuring related charges totaling $1.9
million. The following summarizes the components of the charges accrued during
the first quarter of 2001.
Expense
(dollars in thousands)
Merger costs:
Employee severance benefits $ 508
Legal and professional fees 287
Conversion costs 220
Asset disposal 107
Printing costs 63
Other 174
Restructuring costs:
Employee severance benefits
(merger related) 540
-----
$1,899
=====
7
2. Investment Securities
The amortized cost and estimated fair values of investment securities at
March 31, 2001 and December 31, 2000 were as follows:
March 31,
2001
Estimated
Amortized Fair
Cost Value
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies.............................................................. $146,113 $146,095
Mortgage-backed U.S. government agencies................................. 71,663 72,338
Obligations of states and political subdivisions......................... 128,964 131,624
Corporate securities..................................................... 43,979 42,040
Equity securities........................................................ 21,927 22,526
-------- --------
Total............................................................... $412,646 $414,623
======== ========
December 31,
2001
Estimated
Amortized Fair
Cost Value
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies.............................................................. $147,422 $144,410
Mortgage-backed U.S. government agencies................................. 74,685 74,689
Obligations of states and political subdivisions......................... 102,741 104,173
Corporate securities..................................................... 42,350 42,498
Equity securities........................................................ 23,689 24,049
-------- --------
Total............................................................... $390,887 $389,819
======== ========
8
3. Allowance for loan losses
Changes in the allowance for loan losses are as follows:
Three Months Ended Year Ended Three Months Ended
March 31, December 31, March 31,
2001 2000 2000
------------------ ----------- ------------------
Balance, January 1................................... $10,328 $ 8,976 $8,976
Provision for loan losses............................ 1,573 2,863 361
Loan charge-offs..................................... (347) (1,925) (305)
Recoveries........................................... 103 414 119
--------- --------- --------
Balance, March 31, 2001, December 31,
2000, and March 31, 2000............................ $11,657 $10,328 $9,151
========= ========= ========
NONPERFORMING LOANS (a) AND OTHER REAL ESTATE
March 31, December 31, March 31,
2001 2000 2000
----------- ------------ -----------
Loans past due 90 days or more and still
accruing interest:
Commercial, financial and agricultural.................... $ 367 $ 8 $ 29
Mortgages................................................ 340 495 653
Personal installment...................................... 113 98 69
Other..................................................... --- 11 ---
-------- -------- --------
820 612 751
-------- -------- --------
Loans renegotiated with borrowers.............................. --- 205 238
-------- -------- --------
Loans on which accrual of interest has been
discontinued:
Commercial, financial and agricultural.................... 3,634 2,042 1,943
Mortgages................................................. 3,352 3,445 3,172
Other..................................................... 582 356 277
-------- -------- --------
7,568 5,843 5,392
-------- -------- --------
Other real estate.............................................. 447 416 480
-------- -------- --------
Total..................................................... $8,835 $7,076 $6,861
======== ======== ========
<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.
</FN>
Impaired Loans
At March 31, 2001 and December 31, 2000, the recorded investment in loans
for which impairment has been recognized totaled $5,027,000 and $2,877,000,
respectively, none of which related to loans requiring a valuation allowance.
For the three months ended March 31, 2001, the average recorded investment in
impaired loans approximated $3,952,000. The average balance for 2000
approximated $1,709,000. Interest recognized on impaired loans on the cash basis
for the three month periods ending March 31, 2001 and 2000 was not significant.
9
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 $862,000 and $1,005,000 and $13,260,000
and $10,989,000 for income taxes and interest, respectively, for each of the
three month periods ended March 31, 2001 and 2000.
Excluded from the consolidated statements of cash flows for the periods
ended March 31, 2001 and 2000 was the effect of certain non-cash activities. The
company acquired real estate through foreclosure totaling $205,000 and $285,000,
respectively. The company also recorded a decrease in deferred tax assets of
$374,000 and an increase in deferred tax liabilities of $692,000 in 2001. A
decrease in deferred tax assets of $332,000 was recognized in 2000. 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:
Three Months Ended March 31,
2001 2000
----------------------------------------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
----------------------------------------------------------------
(In thousands except per share data) Basic EPS:
Income available to common stockholders....................... $808 8,685 $.09 $3,490 8,748 $.40
Effect of Dilutive Securities: ==== ==== ====== ====
Incentive stock options outstanding........................... 111 114
----- -----
Diluted EPS:
Income available to common stockholders &
assumed conversion...................................... $808 8,796 $.09 $3,490 8,862 $.39
==== ==== ====== ====
<FN>
Per share data has been adjusted to reflect stock dividends and splits.
</FN>
10
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, 2001, 2000, and 1999 (dollars in thousands)
March 31, March 31, March 31,
--------------------------------------------------------------------------------------------
2001 2000 1999
--------------------------------------------------------------------------------------------
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..... $ 33,646 $ 27,022 $ 28,017
--------- --------- ---------
Earning Assets:
Interest-bearing deposits
in other banks.......... 2,427 $ 32 5.35% 1,381 $ 13 3.79% 1,517 $ 21 5.61%
--------- --------- ---------
Investment securities:
Taxable............... 276,440 4,857 7.13 279,207 4,969 7.16 245,056 3,742 6.19
Tax-exempt (b)........ 117,010 2,269 7.86 87,670 1,723 7.90 89,275 1,940 8.81
--------- --------- ---------
Total investment
securities.............. 393,450 366,877 334,331
--------- --------- ---------
Federal funds sold....... 24,713 305 5.01 15,831 218 5.54 10,586 137 5.25
--------- --------- ---------
Loans, net of unearned
income (b).............. 813,122 17,814 8.88 716,982 15,239 8.55 636,555 13,338 8.50
--------- ------- ---- --------- ------ ---- --------- ------- ----
Total earning assets.... 1,233,712 $25,277 8.31 1,101,071 $22,162 8.10 982,989 $19,178 7.91
--------- ------- ---- --------- ------ ---- --------- ------- ----
Allowance for loan losses (10,718) (9,049) (8,722)
Premises, equipment, and.
other assets.......... 60,134 52,353 39,375
--------- --------- ---------
Total assets.......... $1,316,774 $1,171,397 $1,041,659
========== ========== ==========
Liabilities:
Demand deposits............. 142,915 64,712 57,274
Interest-bearing liabilities:
Savings deposits......... 267,765 1,898 2.87 297,002 1,802 2.44 303,169 1,590 2.13
--------- --------- ---------
Time deposits:
$100 or greater....... 77,131 54,162 41,516
Other................. 442,303 431,499 345,510
--------- --------- ---------
Total time deposits...... 519,434 7,596 5.93 485,661 6,069 5.03 387,026 4,974 5.21
--------- --------- ---------
Total time and savings
deposits.............. 787,199 782,663 690,195
Short-term borrowings.... 5,779 46 3.23 2,824 40 5.70 5,463 57 4.23
Long-term debt........... 264,771 3,861 5.91 225,841 3,062 5.45 184,541 2,429 5.34
--------- ------- ---- --------- ------ ---- --------- ------- ----
Total interest-bearing
liabilities........ 1,057,749 $13,401 5.14 1,011,328 $10,973 4.36 880,199 $ 9,050 4.17
--------- ------- ---- --------- ------ ---- --------- ------- ----
Accrued interest, taxes and
other liabilities..... 9,294 7,962 9,115
--------- --------- ---------
Total liabilities..... 1,209,958 1,084,002 946,588
Stockholders' equity..... 106,816 87,395 95,071
--------- --------- ---------
Total liabilities and
stockholders' equity $1,316,774 $1,171,397 $1,041,659
========== ========== ==========
Interest income to earning
assets...................... 8.31% 8.10% 7.91%
Interest expense to earning
assets...................... 4.41 4.01 3.73
---- ---- ----
Effective interest
differential.......... $11,876 3.90% $11,189 4.09% $10,128 4.18%
======= ==== ======= ==== ======= ====
<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 a tax equivalent basis utilizing a Federal tax rate of 35%.
(c)Averages are a combination of monthly and daily averages.
</FN>
11
Management's Discussion, Continued
The following information represents management's discussion and analysis
of Community Banks, Inc. (Corporation) and its four wholly-owned subsidiaries:
Community Banks, N.A. (CBNA); Peoples State Bank (PSB); Community Banks
Investments, Inc. (CBII); and Community Banks Life Insurance Co. (CBLIC).
On March 30, 2001, Community Banks, Inc. completed its merger of The Glen
Rock State Bank (GR). GR has five banking offices located in York County,
Pennsylvania. The Corporation issued approximately 1,205,000 shares of common
stock for all of the outstanding common stock of GR. This transaction was
accounted for as a pooling of interests and combined unaudited financial
information is included in this report.
RESULTS OF OPERATIONS
Net Interest Income:
Net interest income, the most significant source of operating revenue,
increased $456,000 or 4.3% during the first three months of 2001 compared to the
first three months of 2000. Net interest income is the income which remains
after deducting the interest expense applicable to funds required to support the
earning assets from the total income generated by earning assets. The ability to
manage net interest income in varied economic environments is critical to the
success of the Corporation. The table on page 11 presents average balances and
taxable equivalent interest income and interest expense for the three month
periods ending March 31, 2001, 2000, and 1999. Net interest income margin for
2001 was 3.90% compared to 4.09% in 2000 and 4.18% in 1999. Interest income to
earning assets increased from 8.10% in 2000 to 8.31% in 2001. Interest expense
to earning assets increased from 4.01% in 2000 to 4.41% in 2001. The
relationship of net interest income to total income approximated 84.7% and 84.4%
in 2001 and 2000, respectively.
Total interest income on a tax equivalent basis increased $3,115,000 or
14.1% in the first three months of 2001, compared to an increase of $2,984,000
or 15.6% in 2000. Interest and fees on loans on a tax equivalent basis increased
$2,575,000 or 16.9% in 2001. As indicated by the table the increase was both
volume and rate related as total average loans increased $96,140,000 or 13.4%.
The increase of $434,000 or 6.5% in interest and dividends on investment
securities on a tax equivalent basis was primarily volume related. The average
balances of investment securities increased $26,573,000 or 7.2% while the
average balances of taxable securities decreased $2,767,000 or 1.0% in 2001.
Interest and fees on loans on a tax equivalent basis increased $1,901,000 or
14.3% in 2000. Most of this increase was volume related and caused by an
increase in average balances of $80,427,000 or 12.6%. The increase of $1,010,000
or 17.8% in interest and dividends on investment securities was volume and rate
related. The average balances of investment securities increased $32,546,000 or
9.7% in 2000.
Total interest expense increased $2,428,000 or 22.1% in the first three
months of 2001, and $1,923,000 or 21.1% in 2000. A rate related increase of
$96,000 or 5.3% occurred in savings interest expense in 2001. Significantly
affecting the 2001 increase in interest expense was an increase of $1,527,000 or
25.2% in time deposit interest expense. The increase in time deposit interest
expense was caused by increased rates and volume. A volume and rate driven
increase of $805,000 or 26.0% in borrowed funds interest also affected total
interest expense in 2001. A significant factor affecting the 2000 increase was a
volume related increase of $1,095,000 or 22.0% in total time deposit interest
expense.
Provision for Loan Losses:
The provision for loan losses charged to income in the first three months
of 2001 was $1,573,000 compared to $361,000 in the first three months of 2000.
Net loan charge-offs for 2001 were $244,000 compared to $186,000 in 2000. Net
loan charge-offs as a percentage of average net loans approximated .03% during
the first three months of 2001 and 2000. Affecting the increase in the provision
for loan losses in 2001 was an increase in total nonperforming loans and other
real estate of $1,974,000 or 28.8%. Most of this increase related to one loan
relationship. A portion of the provision charged to income in 2001 was
associated with the growth of 13.4% in average net loans.
12
Management's Discussion, Continued
Other Income and Other Expenses:
Other income exclusive of security gains increased $342,000 or 19.3% in
2001. The increases in 2001 of $139,000 or 22.4% in service charges on deposit
accounts resulted from increased deposit account balances and related ancillary
services and management's renewed emphasis on these functions. Investment
security losses of $128,000 were recognized during the first quarter of 2001 to
restructure a portion of the portfolio and provide potential enhancements to
future earnings. Most of the investment security gains recognized in 2000 were
associated with equity securities of financial institutions held by CBII.
Increases in insurance premiums income of $91,000 or 54.8% are a reflection of
consumer loan demand and additional credit life and accident and health
insurance premiums realized at CBLIC. Gains on loan sales increased $98,000 or
150.8% in 2001 as a result of increased demand for fixed-rate real estate loans.
The fair value of loans held for sale approximated their carrying values at
March 31, 2001 and 2000. The increase in other income in 2001 of $55,000 or
18.2% was impacted by increases in life insurance policy premiums.
The increase in other expenses during the first quarter of 2001 of
$3,161,000 or 42.4% was significantly impacted by merger and restructuring
related expenses associated with the acquisition of the Glen Rock State Bank.
The 2001 increases in salaries and employee benefits of $494,000 or 12.2% and
occupancy expense of $229,000 or 20.0% were affected by the openings in 2000 of
three new banking offices and the hiring of new personnel. Occupancy expense for
the first quarter of 2001 was also impacted by the GR merger. The table on page
6 provides additional detail associated with the merger and restructuring
related expenses recognized during the first quarter of 2001. Other operating
expense increased $487,000 or 22.6% in 2001 compared to the first quarter of
2000. Affecting these changes were the increases in banking facilities and
additional marketing and business development initiatives.
Provision for Income Taxes:
The relationship of tax-free income to pre-tax income affects the provision
charged to income and resulted in a benefit for the three month period ending
March 31, 2001. The effective tax rate approximated 24.8% for the first quarter
of 2000.
Net Income:
The previously described factors contributed to a decline in net income of
$2.7 million or 76.8% for the three months ended March 31, 2001 compared to the
first three months of 2000. Core operating earnings increased 7.7% during the
same period. Core operating earnings exclude special charges (after tax) of $2.8
million in 2001 and security gains (after tax) of $.11 million in 2000.
Included in special charges during the first quarter of 2001 were the
merger and restructuring charges of $1.9 million described on page 6, an
additional loan loss provision of $1.0 million, other asset write-downs of $.25
million, investment security losses of $.13 million and other nonrecurring
accruals and charges. Annual savings related to the work force reduction should
approximate $.80 million of which 75% is projected to be recognized in 2001 and
100% in subsequent years.
Diluted earnings per common share (EPS) were $.09 and $.39 for the first
quarter of 2001 and 2000, respectively. Excluding special charges, CTY's diluted
EPS would have approximated $.41 and $.38 for the same periods.
13
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.
Increase (Decrease)
Balance Since
March 31, 2001 December 31, 2000
-------------- ------------------
(dollars in thousands)
Amount %
------ -
Funding Sources:
Deposits and borrowed funds:
Non-interest bearing........................................... $ 146,849 $ (8,947) (5.7) %
Interest-bearing............................................... 806,524 43,079 5.6
----------- -------- ----
Total deposits.............................................. 953,373 34,132 3.7
Borrowed funds................................................. 277,975 2,269 0.8
Other liabilities.............................................. 19,371 9,583 97.9
Shareholders' equity........................................... 107,673 3,695 3.6
----------- -------- ----
Total sources............................................... $1,358,392 $49,679 3.8 %
=========== ======== ====
Funding uses:
Interest earning assets:
Short-term investments......................................... $ 33,835 $24,987 282.4 %
Investment securities.......................................... 414,623 24,804 6.4
Loans, net of unearned income.................................. 824,779 7,186 0.9
----------- -------- ----
Total interest earning assets............................... 1,273,237 56,977 4.7
Cash and due from banks........................................ 36,773 (5,393) (12.8)
Other assets................................................... 48,382 (1,905) (3.8)
----------- -------- ----
Total uses.................................................. $1,358,392 $49,679 3.8 %
=========== ======== ====
14
Management's Discussion, Continued
Balance Sheet Data:
The Corporation's balance sheet continued to grow in 2001 with assets
reaching $1.4 billion, an increase of $49.7 million or 3.8% over year-end 2000.
As indicated by the table on page 14, deposits were the primary funding source,
while investments represented most of the use of funds. Average earning assets
(see page 10) for the first quarter of 2001 were $132.6 million or 12.0% greater
than average earning assets for the first quarter of 2000. Average interest
bearing liabilities increased $46.4 million or 4.6%. Average non-interest
bearing demand deposits increased $78.2 million or 120.8% for these same
periods. Average earning assets approximated 93.7% and 94.0%, respectively.
Changes in the composition of earning assets reflect management's attempt to
respond to fluctuating loan demand and corresponding policies relating to
liquidity and asset/liability management.
The Corporation actively manages its investment portfolio and accordingly
classifies all investment securities as available for sale. Under current
policy, if management has the intent and the Corporation has the ability at the
time of purchase to hold securities until maturity, securities are classified as
held-to-maturity investments and carried at amortized historical cost.
Securities to be held for indefinite periods of time and not intended to be held
to maturity are classified as available for sale and carried at fair 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, 2001 and December 31, 2000, management classified investment
securities with amortized costs and fair values of $412,646,000 and $414,623,000
and $390,887,000 and $389,819,000, respectively, as available for sale.
Obligations of states and political subdivisions experienced the largest
increases in balances from year-end 2000 to March 31, 2001. Affecting the
changes in unrealized gains and losses was a decline in interest rates in 2001.
No securities were considered held for trading purposes at March 31, 2001 and
December 31, 2000.
At March 31, 2000 the net unrealized gain on investments available for
sale, net of tax, was $1,285,000. At December 31, 2000, the net unrealized loss
on investments available for sale, net of tax was $694,000. These amounts were
reflected in shareholders' equity accordingly.
Net loans increased $2,004,000 or 0.2% from December 31, 2000 to March 31,
2001. Real estate related loans increased, while commercial and personal loans
decreased, during the first quarter of 2001.
The allowance for loan losses increased $1,329,000 or 12.9% from year-end
2000 to March 31, 2001. Total non-performing loans approximated $8,388,000 and
$6,660,000, as of March 31, 2001 and December 31, 2000, respectively.
Contributing to the increase in non-performing loans in 2001 was an increase of
$1,592,000 in non-performing commercial loans. The ratio of nonaccrual loans,
other real estate owned, restructured loans, and accruing loans contractually
past due 90 days or more to total assets approximated .65% and .54% at March 31,
2001 and December 31, 2000, respectively. The allowance for loan losses to loans
net of unearned income approximated 1.42% and 1.27% at March 31, 2001 and
December 31, 2000, respectively.
The increase in the balance of loans held for sale at March 31, 2001
reflects an increase in demand for fixed rate mortgage loans.
Total deposits increased $34,132,000 or 3.7% from December 31, 2000 to
March 31, 2001. Contributing to this increase were increases of $19,325,000 or
7.5% in savings deposits and $30,608,000 or 7.2% in time deposits. New
certificate of deposit products affected the increase in time deposits.
Management converted a significant portion of short-term borrowings to
long-term debt during the first quarter of 2001. At March 31, 2001 long-term
debt totaling $272,302,000 included borrowings from the Federal Home Loan Bank
of Pittsburgh of $259,820,000 and repurchase agreements totaling $12,482,000 at
a weighted average interest rate of 5.82%.
15
The increase of $9,583,000 or 97.9% in accrued interest payable and other
liabilities during the first quarter of 2001 was affected by purchases of
securities for which settlement had not occurred by March 31 and accrued merger
and restructuring related charges described on page 7.
Stockholders' Equity:
Stockholders' equity increased $3,695,000 or 3.6% from December 31, 2000 to
March 31, 2001. A portion of this increase can be attributed to the change in
the net unrealized gain (loss) on investment securities available for sale, net
of taxes. The accumulated other comprehensive income (loss) reflected in
stockholder's equity changed from $(694,000) at year-end 2000 to $1,285,000 at
March 31, 2001. Much of this change was a function of declines in interest rates
and corresponding increases in fair values of debt securities. The Corporation
reissued approximately 115,000 shares of treasury stock during the first quarter
of 2001. At March 31, 2001 and December 31, 2000 treasury shares totaled 185,000
and 300,000, respectively.
Liquidity:
The ability to meet the cash needs of customers, provide a cushion for
unforseen obligations, and take advantage of market opportunities requires
adequate liquidity. 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. A
continuous review of net liquid assets is conducted to assure appropriate cash
flow to meet needs and obligations in a timely manner.
The Corporation's most significant funding requirement is usually loan
demand which is primarily funded through deposit growth. Generally, any deposit
growth not used in funding loan demand is invested in short-term,
interest-bearing deposits or longer term investments. These short-term
investments as well as the investment portfolio securities are a source of
liquidity to fund loan demand.
For the three months ended March 31, 2001, financing activities provided
cash of $37,309,000. Deposit growth and long-term debt accounted for the largest
portion of this funding source.
Net cash used in investing activities totaled $24,344,000. The primary use
of funds in 2001 was the purchase of investment securities of $52,568,000.
Forward Outlook:
Certain forward-looking statements are incorporated in this document. These
statements which may relate to market risks, growth strategies, asset quality,
income growth, organizational structure, and other financial matters are subject
to various uncertainties. Accordingly, actual results may differ materially from
estimates incorporated in such statements.
Effects on Inflation:
All business enterprises are affected by the constantly changing economic
environment. Changes in the economy, however affect the banking industry
differently than other industries. A bank's assets and liabilities are primarily
monetary in nature and values are established without regard to future price
changes.
Also, banks, unlike industrial corporations are not required to provide for
large capital expenditures in the form of premises, equipment and inventory.
Interest rate changes and the actions of the Federal Reserve Board have a
greater impact on a bank's operations than do the effects of inflation. Although
occasional deviations may occur, it is management's policy to generally attempt
to maintain rate-sensitive assets at a level approximating rate-sensitive
liabilities. Based on a one-year parameter, this relationship approximated 115%
as of March 31, 2001.
Accordingly, management anticipates that any decline in interest rates
could negatively impact earnings of the Corporation. Conversely, management may
be able to increase rates on certain earning assets more rapidly than those of
interest-bearing liabilities if a significant increase in interest rates would
occur. This may result in an increase in the net interest margin of the
Corporation.
16
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, 2001.
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 11, 2001 /S/ Eddie L. Dunklebarger
-------------------------- -------------------------
Eddie L. Dunklebarger
President
(Chief Executive Officer)
Date May 11, 2001 /S/ Terry L. Burrows
-------------------------- -------------------------
Terry L. Burrows
Executive Vice-President
(Chief Financial Officer)
17