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, 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 September 30, 2001
CAPITAL STOCK-COMMON 8,871,000
- -------------------- --------------
(Title of Class) (Outstanding Shares)
COMMUNITY BANKS, INC. and SUBSIDIARIES
INDEX 10-Q
PART I
Financial Information.........................................................1
Consolidated Interim Balance Sheets...........................................2
Consolidated Interim Statements of Income.....................................3
Consolidated Interim Statements of Changes in Stockholders' Equity............4
Consolidated Interim Statements of Cash Flows.................................5
Notes to Consolidated Interim Financial Statements.........................6-10
Management's Discussion and Analysis of Financial
Condition and Results of Operation.....................................11-17
PART II
Other Information and Signatures.............................................18
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, 2001 and 2000.
In the opinion of management, the following interim 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
COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Interim Balance Sheets
(Unaudited)
(Dollars in thousands except per share data)
September 30, December 31,
2001 2000
------------- -------------
ASSETS
Cash and due from banks..................................... $ 31,739 $ 42,166
Interest-bearing time deposits in other banks............... 2,128 2,568
Investment securities, available for sale
(fair value)............................................. 482,956 389,819
Federal funds sold.......................................... 18,255 6,280
Loans....................................................... 855,897 818,858
Less: Unearned income....................................... (2,848) (3,984)
Allowance for loan losses......................... (11,789) (10,328)
------------- -------------
Net loans......................................... 841,260 804,546
Premises and equipment, net................................. 22,334 21,587
Intangible assets........................................... 991 1,059
Other real estate owned..................................... 534 416
Loans held for sale......................................... 3,718 2,719
Accrued interest receivable and other assets................ 42,279 37,553
------------- -------------
Total assets........................................... $1,446,194 $1,308,713
============= =============
LIABILITIES
Deposits:
Demand (non-interest bearing)............................ $ 158,029 $ 155,796
Savings.................................................. 309,556 257,178
Time..................................................... 464,222 426,573
Time in denominations of $100 or more.................... 81,224 79,694
------------- -------------
Total deposits.......................................... 1,013,031 919,241
Short-term borrowings....................................... 8,303 36,093
Long-term debt.............................................. 296,750 239,613
Accrued interest payable and other liabilities.............. 13,092 9,788
------------- -------------
Total liabilities........................................ 1,331,176 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; 8,969,000 and 8,545,000
shares issued in 2001 and 2000, respectively............. 44,845 42,726
Surplus..................................................... 35,906 29,155
Retained earnings........................................... 33,872 38,723
Accumulated other comprehensive income (loss),
net of tax (benefit) of $1,204 and $(374),
respectively........................................... 2,236 (694)
Less: Treasury stock of 98,000 and 300,000
shares at cost, respectively............................. (1,841) (5,932)
------------- -------------
Total stockholders' equity............................... 115,018 103,978
------------- -------------
Total liabilities and stockholders' equity................ $1,446,194 $1,308,713
============= =============
All periods reflect the combined data of Community Banks, Inc. and The Glen Rock
State Bank. The accompanying notes are an integral part of the consolidated
interim financial statements.
2
COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Interim Statements of Income
(Unaudited)
(Dollars in thousands except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ------------------------
2001 2000 2001 2000
-------------------------- ------------------------
Interest income:
Interest and fees on loans........................................ $17,520 $17,376 $52,900 $48,730
Interest and dividends on investment securities:
Taxable........................................................ 4,884 5,344 14,644 15,470
Exempt from federal income tax................................. 1,862 1,176 5,060 3,420
Federal funds interest........................................... 261 94 771 435
Other interest income............................................. 40 14 91 46
-------- -------- -------- --------
Total interest income....................................... 24,567 24,004 73,466 68,101
-------- -------- -------- --------
Interest expense:
Interest on deposits:
Savings........................................................ 1,786 1,509 5,501 5,177
Time........................................................... 6,204 6,472 19,173 17,454
Time in denominations of $100 or more.......................... 1,057 1,154 3,109 2,684
Interest on short-term borrowings and long-term debt.............. 3,900 3,598 11,422 9,577
Federal funds purchased and repo interest......................... 201 326 624 897
-------- -------- -------- --------
Total interest expense........................................ 13,148 13,059 39,829 35,789
-------- -------- -------- --------
Net interest income............................................ 11,419 10,945 33,637 32,312
Provision for loan losses......................................... 1,306 658 3,750 1,544
-------- -------- -------- --------
Net interest income after provision for loan losses........... 10,113 10,287 29,887 30,768
-------- -------- -------- --------
Other income:
Investment management and trust services....................... 147 144 430 444
Service charges on deposit accounts............................ 861 698 2,450 2,014
Other service charges, commissions and fees.................... 452 517 1,442 1,410
Investment security gains...................................... 1,018 140 1,256 358
Insurance premium income and commissions....................... 408 405 1,051 965
Gains on loan sales............................................ 326 92 867 250
Other income................................................... 457 264 1,064 794
-------- -------- -------- --------
Total other income.......................................... 3,669 2,260 8,560 6,235
-------- -------- -------- --------
Other expenses:...................................................
Salaries and employee benefits................................. 4,497 4,164 13,729 12,236
Net occupancy expense.......................................... 1,259 1,196 3,994 3,499
Operating expense of insurance subsidiary...................... 178 155 515 413
Merger and restructuring related expenses...................... (115) -- 1,683 --
Other operating expense........................................ 2,468 2,230 7,150 6,644
-------- -------- -------- --------
Total other expense......................................... 8,287 7,745 27,071 22,792
-------- -------- -------- --------
Income before income taxes.................................. 5,495 4,802 11,376 14,211
Provision for income taxes........................................ 1,176 1,215 2,218 3,597
-------- -------- -------- --------
Net income.................................................. $ 4,319 $ 3,587 $ 9,158 $10,614
======== ======== ======== ========
Earnings per share:
Basic.......................................................... $ .49 $ .41 $ 1.04 $ 1.22
Diluted........................................................ $ .48 $ .41 $ 1.03 $ 1.20
Dividends paid per share.......................................... $ .17 $ .15 $ .49 $ .44
All periods reflect the combined data of Community Banks, Inc. and The 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 interim
financial statements.
3
COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Interim Statements of Changes in Stockholders' Equity
(Dollars in thousands except per share data)
Nine Month Periods Ended September 30
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......................... 10,614 10,614
Change in unrealized gain (loss)
on securities, net of tax of $1,382
and reclassification adjustment
of $358 ........................ 2,566 2,566
---------
Total comprehensive income.......... 13,180
Cash dividends ($.44 per share).......... (3,845) (3,845)
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 (81) 232
------- ------- ------- --------- -------- ---------
Balance, September 30, 2000.............. $42,720 $29,107 $36,768 $ (9,131) $ (5,962) $ 93,502
======= ======= ======= ========= ======== =========
Balance, January 1, 2001................. $42,726 $29,155 $38,723 $ (694) $ (5,932) $ 103,978
Comprehensive income:
Net income.......................... 9,158 9,158
Change in unrealized gain (loss)
on securities, net of tax of $1,578
and reclassification adjustment
of $1,256.......................... 2,930 2,930
---------
Total comprehensive income.......... 12,088
Cash dividends ($.49 per share).......... (4,376) (4,376)
5% stock dividend (426,000 shares)....... 2,130 6,773 (8,903)
Issuance of additional shares
(202,000 net shares of treasury
stock reissued and 2,000 shares
of common stock cancelled) ......... (11) (22) (730) 4,091 3,328
------- ------- ------- --------- -------- ---------
Balance, September 30, 2001.............. $44,845 $35,906 $33,872 $ 2,236 $ (1,841) $115,018
======= ======= ======= ========= ======== =========
All periods reflect the combined data of Community Banks, Inc. and The 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 interim financial statements.
4
COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Interim Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Nine Months Ended
September 30,
2001 2000
--------------------------------------
Operating Activities:
Net income..................................................... $ 9,158 $ 10,614
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses.................................... 3,750 1,544
Depreciation and amortization................................ 3,410 2,541
Net decrease in intangible assets............................ 68 181
Investment security gains.................................... (1,256) (358)
Loans originated for sale.................................... (54,665) (14,912)
Proceeds from sales of loans................................. 54,533 14,969
Gains on loan sales.......................................... (867) (250)
Change in other assets, net.................................. (4,822) (6,141)
Increase in accrued interest payable and other
liabilities, net............................................ 2,100 1,076
--------- ---------
Net cash provided by operating activities.................... 11,409 9,264
--------- ---------
Investing Activities:
Net decrease in interest-bearing time
deposits in other banks....................................... 440 673
Proceeds from sales of investment securities................... 59,142 7,512
Proceeds from maturities of investment securities.............. 84,744 8,142
Purchases of investment securities............................. (232,918) (44,417)
Net increase in total loans.................................... (40,860) (101,603)
Net increase in premises and equipment......................... (2,498) (4,271)
--------- ---------
Net cash used by investing activities....................... (131,950) (133,964)
--------- ---------
Financing Activities:
Net increase in total deposits................................. 93,790 100,778
Net decrease in short-term borrowings.......................... (27,790) (629)
Proceeds from issuance of long-term debt....................... 57,831 142,360
Repayment of long-term debt.................................... (694) (109,000)
Cash dividends................................................. (4,376) (3,845)
Purchases of treasury stock.................................... -- (2,374)
Proceeds from issuance of common stock......................... 3,328 232
--------- ---------
Net cash provided by financing activities................... 122,089 127,522
--------- ---------
Increase in cash and cash equivalents........................ 1,548 2,822
Cash and cash equivalents at beginning of period............... 48,446 37,117
--------- ---------
Cash and cash equivalents at end of period..................... $ 49,994 $ 39,939
========= =========
All periods reflect the combined data of Community Banks, Inc. and The Glen Rock
State Bank. The accompanying notes are an integral part of the consolidated
interim financial statements.
5
COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Interim Financial Statements
(Unaudited)
(Dollars in thousands)
1. Accounting Policies
These financial statements have been prepared in accordance with
instructions for Form 10-Q and therefore do not include certain information or
footnotes necessary for the presentation of financial condition, results of
operations, stockholders' equity, and cash flows in conformity with accounting
principles generally accepted in the United States of America. However, in the
opinion of management, the consolidated financial statements reflect all
adjustments (which consist of normal recurring accruals) necessary for a fair
presentation of the results for the unaudited periods.
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 The
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 September 30, 2000
---------------------------------
(dollars in thousands expect per share data)
CTY GR Combined
----------------------------------------------------------
Interest income........................................ $20,649 $3,355 $24,004
Interest expense....................................... 11,114 1,945 13,059
----------------------------------------------------------
Net interest income.................................... 9,535 1,410 10,945
Loan loss provision.................................... 613 45 658
Other income........................................... 2,031 229 2,260
Other expense.......................................... 6,602 1,143 7,745
----------------------------------------------------------
Income before taxes.................................... 4,351 451 4,802
Taxes.................................................. 1,108 107 1,215
----------------------------------------------------------
Net income............................................. $ 3,243 $ 344 $ 3,587
=========================================================
Earnings per common share:
Basic $ .44 $ .26 $ .41
Diluted $ .43 $ .26 $ .41
Per share data has been adjusted to reflect a five percent stock dividend paid
April 30, 2001.
6
Consolidated Interim Statements of Income
Included in the Consolidated Interim Statements of Income for the nine
months ended September 30, 2001 are merger and restructuring related charges
totaling $1.7 million. The following summarizes the components of the merger and
restructuring expenses charged to operations during 2001 and the remaining
accrual balance at September 30, 2001. A portion of the original accrual was
subsequently reversed due in part to changes in personnel obligations and
availability of alternative positions.
Remaining
Original Incurred Accrual Accrual
Accrual to-Date Reversal at 9/30/01
------- -------- -------- ----------
Merger costs:
Employee severance benefits $ 508 $ 374 $ (99) $ 35
Legal and professional fees 287 252 (35) --
Conversion costs 220 175 (45) --
Asset disposal 107 107 -- --
Printing costs 63 58 (5) --
Other 174 142 (32) --
Restructuring costs:
Employee severance benefits
(merger related) 540 540 -- --
------ ------ ------ ------
$1,899 $1,648 $(216) $ 35
====== ====== ====== ======
7
2. Investment Securities
The amortized cost and estimated fair values of investment securities at
September 30, 2001 and December 31, 2000 were as follows:
September 30,
2001
Estimated
Amortized Fair
Cost Value
------------- -------------
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies.............................................................. $ 81,257 $ 81,561
Mortgage-backed U.S. government agencies................................. 98,152 99,515
Obligations of states and political subdivisions......................... 157,233 160,078
Corporate securities..................................................... 89,936 88,510
Equity securities........................................................ 52,938 53,292
---------- ----------
Total............................................................... $479,516 $482,956
========== ==========
December 31,
2000
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:
Nine Months Ended Year Ended Nine Months Ended
September 30, December 31, September 30,
2001 2000 2000
----------------- ------------ -----------------
Balance, January 1................................... $10,328 $ 8,976 $8,976
Provision for loan losses............................ 3,750 2,863 1,544
Loan charge-offs..................................... (2,664) (1,925) (984)
Recoveries........................................... 375 414 336
-------- -------- --------
Balance, September 30, 2001, December 31,
2000, and September 30, 2000........................ $11,789 $10,328 $9,872
======== ======== ========
NONPERFORMING LOANS (a) AND OTHER REAL ESTATE
September 30, December 31, September 30,
2001 2000 2000
----------------- ------------ -----------------
Loans past due 90 days or more and still
accruing interest:
Commercial, financial and agricultural.................... $ 563 $ 8 $ 328
Mortgages................................................ 113 495 241
Personal installment...................................... 29 98 250
Other..................................................... 3 11 --
--------- -------- -------
708 612 819
--------- -------- -------
Loans renegotiated with borrowers.............................. -- 205 207
--------- -------- -------
Loans on which accrual of interest has been
discontinued:
Commercial, financial and agricultural.................... 3,347 2,042 2,780
Mortgages................................................. 6,860 3,445 3,624
Other..................................................... 463 356 358
--------- -------- -------
10,670 5,843 6,762
--------- -------- -------
Other real estate.............................................. 534 416 578
--------- -------- -------
Total..................................................... $11,912 $7,076 $8,366
========= ======== =======
<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 September 30, 2001 and December 31, 2000, the recorded investment in
loans for which impairment has been recognized totaled $8,377,000 and
$2,877,000, respectively, none of which related to loans requiring a valuation
allowance. For the nine months ended September 30, 2001, the average recorded
investment in impaired loans approximated $6,884,000. The average balance for
2000 approximated $2,630,000. Interest recognized on impaired loans on the cash
basis for the nine month periods ending September 30, 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 $1,697,000 and $3,645,000 and
$39,625,000 and $35,386,000 for income taxes and interest, respectively, for
each of the nine month periods ended September 30, 2001 and 2000.
Excluded from the consolidated statements of cash flows for the periods
ended September 30, 2001 and 2000 was the effect of certain non-cash activities.
The company acquired real estate through foreclosure totaling $396,000 and
$465,000, respectively. The company also recorded a decrease in deferred tax
assets of $374,000 and an increase in deferred tax liabilities of $1,204,000 in
2001. A decrease in deferred tax assets of $1,382,000 was recognized in 2000.
These are 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 September 30,
----------------------------------------------------------------
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....................... $4,319 8,837 $.49 $3,587 8,674 $.41
Effect of Dilutive Securities: ............................... ===== === ===== ===
Incentive stock options outstanding........................... 168 123
------ -----
Diluted EPS:
Income available to common stockholders &
assumed conversion......................................... $4,319 9,005 $.48 $3,587 8,797 $.41
===== === ===== ===
Nine Months Ended September 30,
----------------------------------------------------------------
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....................... $9,158 8,773 $1.04 $10,614 8,709 $1.22
Effect of Dilutive Securities: ............................... ===== ==== ===== ====
Incentive stock options outstanding........................... 148 111
------ ------
Diluted EPS:
Income available to common stockholders &
assumed conversion......................................... $9,158 8,921 $1.03 $10,614 8,820 $1.20
===== === ===== ===
Per share data has been adjusted to reflect stock dividends and splits.
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 September 30, 2001, 2000, and 1999 (dollars in thousands)
September 30, September 30, September 30,
----------------------------------------------------------------------------------------------------
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.... $ 40,113 $ 33,814 $ 27,274
---------- ---------- ----------
Earning Assets:
Interest-bearing deposits
in other banks........... 3,341 $ 40 4.75% 1,138 $ 14 4.89% 2,407 $ 28 4.62%
---------- ---------- ----------
Investment securities:
Taxable.................. 303,443 4,884 6.39 298,343 5,344 7.13 268,986 5,035 7.43
Tax-exempt (b)........... 147,390 2,865 7.71 89,704 1,809 8.02 91,751 1,875 8.11
---------- ---------- ----------
Total investment
securities............... 450,833 388,047 360,737
---------- ---------- ----------
Federal funds sold........ 27,302 261 3.79 5,926 94 6.31 4,615 72 6.19
---------- ---------- ----------
Loans, net of unearned
income (b)............... 844,898 17,620 8.27 782,793 17,440 8.86 671,380 13,511 7.98
---------- ------- ---- ---------- ------- ----- ---------- ------- -----
Total earning assets...... 1,326,374 $25,670 7.68 1,177,904 $24,701 8.34 1,039,139 $20,521 7.83
---------- ------- ---- ---------- ------- ----- ---------- ------- -----
Allowance for loan losses (12,108) (9,573) (8,961)
Premises, equipment, and
other assets............. 65,783 67,266 45,919
---------- ---------- ----------
Total assets............. $1,420,162 $1,269,411 $1,103,371
========== ========== ==========
Liabilities:
Demand deposits............ 152,331 73,004 65,241
---------- ---------- ----------
Interest-bearing liabilities:
Savings deposits.......... 308,318 1,786 2.30 336,965 1,509 1.78 302,794 1,730 2.27
---------- ---------- ----------
Time deposits:
$100 or greater.......... 80,087 78,762 44,142
Other.................... 466,621 424,477 397,473
---------- ---------- ----------
Total time deposits....... 546,708 7,261 5.27 503,239 7,626 6.03 441,615 5,337 4.79
---------- ---------- ----------
Total time and savings
deposits................. 855,026 840,204 744,409
Short-term borrowings..... 5,620 33 2.33 12,540 171 5.42 8,006 85 4.21
Long-term debt............ 282,172 4,068 5.72 241,861 3,753 6.17 185,950 2,515 5.37
---------- ------- ---- ---------- ------- ----- ---------- ------- -----
Total interest-bearing
liabilities............. 1,142,818 $13,148 4.56 1,094,605 $13,059 4.75 938,365 $ 9,667 4.09
---------- ------- ---- ---------- ------- ----- ---------- ------- -----
Accrued interest, taxes and
other liabilities....... 12,166 9,342 9,319
---------- ---------- ----------
Total liabilities....... 1,307,315 1,176,951 1,012,925
Stockholders' equity..... 112,847 92,460 90,446
---------- ---------- ----------
Total liabilities and
stockholders' equity $1,420,162 $1,269,411 $1,103,371
========== ========== ==========
Interest income to earning
assets................... 7.68% 8.34% 7.83%
Interest expense to earning
assets................... 3.93 4.41 3.69
---- ----- -----
Effective interest....
differential......... $12,522 3.75% $11,642 3.93% $10,854 4.14%
======= ==== ======= ===== ======= =====
<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>
All periods reflect the combined data of Community Banks, Inc. and The Glen Rock
State Bank.
11
Management's Discussion, Continued
This discussion represents management's analysis of the consolidated
financial condition and results of operations 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.
On June 27, 2001, the Corporation purchased The Sentinel Agency, Inc., a
title insurance agency located in Harrisburg, Pennsylvania. The acquisition was
accounted for under the purchase method of accounting for business combinations
and became a subsidiary of PSB.
RESULTS OF OPERATIONS
Net Interest Income:
The most significant source of operating revenue is net interest income.
Net interest income is the income which remains after deducting the interest
expense applicable to funds required to support 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. Net
interest income increased $1,325,000 or 4.1% during the first nine months of
2001 compared to the first nine months of 2000. Net interest income for the
third quarter of 2001 was $474,000 or 4.3% greater than the same period of 2000.
The table on page 11 presents average balances and taxable equivalent interest
income and interest expense for the three month periods ending September 30,
2001, 2000, and 1999. Net interest income on a tax equivalent basis (identified
as effective interest differential on page 11) increased $880,000 or 7.6% in the
third quarter of 2001 compared to the same period of 2000. Net interest margin
for the third quarter of 2001 was 3.75% compared to 3.93% in the third quarter
of 2000 and 4.14% in the third quarter of 1999. Interest income to earning
assets decreased from 8.34% in 2000 to 7.68% in 2001. Interest expense to
earning assets decreased from 4.41% to 3.93% during the same periods.
Total interest income on a tax equivalent basis increased $969,000 or 3.9%
in the third quarter of 2001, compared to an increase of $4,180,000 or 20.4% in
the third quarter of 2000. Interest and fees on loans on a tax equivalent basis
increased $180,000 or 1.0% in the third quarter of 2001. As indicated by the
table, the increase was primarily volume related as total average loans
increased $62,105,000 or 7.9%. The increase of $596,000 or 8.3% in tax
equivalent interest and dividends on investment securities was also primarily
volume related. The average balances of total investment securities increased
$62,786,000 or 16.2% while the average balances of tax exempt securities
increased $57,686,000 or 64.3% in 2001. Interest and fees on loans on a tax
equivalent basis increased $3,929,000 or 29.1% in the third quarter of 2000.
Much of this increase was volume related and caused by an increase in average
balances of $111,413,000 or 16.6%. The increase in the third quarter of 2000 of
$243,000 or 3.5% in tax equivalent interest and dividends on investment
securities was also volume related. The average balances of investment
securities increased $27,310,000 or 7.6% in 2000.
Total interest expense increased $89,000 or 0.7% in the third quarter of
2001, and $3,392,000 or 35.1% in the third quarter of 2000. A rate related
increase of $277,000 or 18.4% occurred in savings interest expense in 2001.
Significantly impacting the modest increase in interest expense in the third
quarter of 2001 was a rate related decline in the cost of total time deposits.
The 2001 increase in interest expense was also impacted by an increase of
$177,000 or 4.5% in borrowed funds interest expense. This increase in borrowed
funds interest expense was primarily volume driven as average balances increased
$33,391,000 or 13.1% in comparison to the third quarter of 2000. A significant
factor affecting the increase in the third quarter of 2000 was a volume related
increase of $2,289,000 or 42.9% in total time deposit interest expense. A volume
and rate driven increase of $1,324,000 or 50.9% in borrowed funds interest also
affected total interest expense in 2000.
12
Provision for Loan Losses:
The provision for loan losses charged to income in the first nine months of
2001 was $3,750,000 compared to $1,544,000 in the first nine months of 2000. The
provision for loan losses charged to income in the third quarter of 2001 was
$648,000 greater than the charge in the third quarter of 2000. Net loan
charge-offs were $2,289,000 for the first nine months of 2001 compared to
$648,000 for the comparable period of 2000. Net loan charge-offs as a percentage
of average net loans approximated .28% and .09% during the first nine months of
2001 and 2000, respectively. Affecting the increase in the provision for loan
losses in 2001 was an increase in total nonperforming loans and other real
estate of $3,545,000 or 42.4%. A portion of the provision charged to income in
2001 was associated with the growth of 10.5% in average net loans.
Other Income and Other Expenses:
Other income exclusive of security gains increased $1,427,000 or 24.3% in
the first nine months of 2001 compared to the same period of 2000. Other income
exclusive of security gains increased $531,000 or 25.0% in the third quarter of
2001 in comparison to the same period of 2000. The increases in 2001 of $436,000
or 21.6% in service charges on deposit accounts resulted from increased deposit
account balances and related ancillary services and management's renewed
emphasis on these functions. Gains and losses on debt securities result from the
Corporation's investment portfolio and balance sheet management strategies while
equity security gains and losses generally relate to holdings of other financial
institutions. Investment security gains of $1,018,000 recognized in the third
quarter of 2001 included $756,000 associated with equity securities primarily
held by a non-bank subsidiary, Community Banks Investments, Inc. The balance of
the gains related to the restructuring of investment security portfolios at the
two subsidiary banks. Most of the investment security gains recognized in 2000
were associated with equity securities of financial institutions. Increases in
insurance premium income of $86,000 or 8.9% through the first nine months of
2001 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 dramatically in the third quarter of 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 September 30, 2001 and 2000. The increase
in other income in 2001 of $270,000 or 34.0% was impacted by increases in the
cash surrender value of life insurance.
The increase in other expenses during the first nine months of 2001 of
$4,279,000 or 18.8% was significantly impacted by merger and restructuring
related expenses associated with the acquisition of The Glen Rock State Bank.
Increases in salaries and employee benefits of $1,493,000 or 12.2% and occupancy
expense of $495,000 or 14.1% were affected by the openings in 2000 of three new
banking offices, the GR merger, and the hiring of new personnel. The table on
page 7 provides additional detail associated with the merger and restructuring
related expenses recognized during the first quarter of 2001. Accrual reversals
of $101,000 and $115,000 associated with the merger and restructuring costs were
recognized during the second and third quarters of 2001. Most of this amount
related to changes in GR personnel obligations, savings of legal and
professional fees, and other associated costs. Other operating expense increased
$506,000 or 7.6% in 2001 compared to the first nine months of 2000. Affecting
these changes were the increases in banking facilities and additional marketing
and business development initiatives.
Provision for Income Taxes:
An increase in the relationship of tax-free income to pre-tax income
resulted in a significant reduction in the Corporation's effective tax rate for
the first nine months of 2001. Effective tax rates approximated 19.5% and 25.3%
for the first nine months of 2001 and 2000, respectively.
Net Income:
The previously described factors contributed to a decline in net income of
$1.5 million or 13.7% for the nine months ended September 30, 2001 compared to
the first nine months of 2000. Net income for the three months ended September
30, 2001 increased $732,000 or 20.4% over the same period of 2000.
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
September 30, 2001 December 31, 2000
------------------ -----------------
(dollars in thousands)
Amount %
------ -
Funding Sources:
Deposits and borrowed funds:
Non-interest bearing........................................... $ 158,029 $ 2,233 1.4%
Interest-bearing............................................... 855,002 91,557 12.0
------------ ---------- ------
Total deposits.............................................. 1,013,031 93,790 10.2
Borrowed funds................................................. 305,053 29,347 10.6
Other liabilities.............................................. 13,092 3,304 33.8
Shareholders' equity........................................... 115,018 11,040 10.6
------------ ---------- ------
Total sources............................................... $1,446,194 $137,481 10.5%
============ ========== ======
Funding uses:
Interest-earning assets:
Short-term investments......................................... $ 20,383 $ 11,535 130.4%
Investment securities.......................................... 482,956 93,137 23.9
Loans, net of unearned income.................................. 856,767 39,174 4.8
------------ ---------- ------
Total interest-earning assets............................... 1,360,106 143,846 11.8
Cash and due from banks........................................ 31,739 (10,427) (24.7)
Other assets................................................... 54,349 4,062 8.1
------------ ---------- ------
Total uses.................................................. $1,446,194 $137,481 10.5%
============ ========== ======
14
Management's Discussion, Continued
Balance Sheet Data:
Balance sheet growth continued in 2001 with assets at September 30 reaching
$1.4 billion, an increase of $137.5 million or 10.5% 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.
As indicated by the table on page 11, average earning assets for the third
quarter of 2001 were $148.5 million or 12.6% greater than average earning assets
for the third quarter of 2000. Most of this change related to increases in
average total investment securities and average net loans of $62.8 million or
16.2% and $62.1 million or 7.9 %, respectively. Average interest bearing
liabilities increased $48.2 million or 4.4%. Average non-interest bearing demand
deposits increased $79.3 million or 108.7% for these same periods. Average
earning assets approximated 93.4% and 92.8% of total assets for the third
quarters of 2001 and 2000, 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's investment portfolio is actively managed and accordingly
all investment securities are classified 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 September 30, 2001 and December 31, 2000, management classified
investment securities with amortized costs and fair values of $479,516,000 and
$482,956,000 and $390,887,000 and $389,819,000, respectively, as available for
sale. Obligations of states and political subdivisions and corporate securities
experienced the largest increases in balances from year-end 2000 to September
30, 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 September 30, 2001 and December 31, 2000.
The net unrealized gain on investments available for sale, net of tax, at
September 30, 2001 was $2,236,000. At December 31, 2000, the net unrealized loss
on investments available for sale, net of tax was $694,000. These amounts were
accordingly reflected in shareholders' equity.
Net loans increased $36,714,000 or 4.6% from December 31, 2000 to September
30, 2001. During this period commercial loans increased $13,820,000 or 10.2%,
personal loans increased $8,324,000 or 7.5% , and loans secured by real estate
increased $11,089,000 or 2.0%.
The allowance for loan losses increased $1,461,000 or 14.1% from year-end
2000 to September 30, 2001. Total non-performing loans approximated $11,378,000
and $6,660,000, as of September 30, 2001 and December 31, 2000, respectively.
Contributing to the increase in non-performing loans in 2001 was an increase of
$1,860,000 in non-performing commercial loans and an increase of $3,033,000 in
non-performing mortgage 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 .82% and .54% at September 30, 2001 and
December 31, 2000, respectively. The allowance for loan losses to loans net of
unearned income approximated 1.38% and 1.27% at September 30, 2001 and December
31, 2000, respectively.
The balance of loans held for sale at September 30, 2001 reflects an
increase in demand for fixed rate mortgage loans. Accrued interest receivable
and other assets were affected by an increases in earning assets and accounts
receivable associated with loan sales.
Total deposits increased $93,790,000 or 10.2% from December 31, 2000 to
September 30, 2001. Contributing to this increase were increases of $52,378,000
or 20.4% in savings deposits and $39,179,000 or 7.7% in time deposits. New
deposit products affected the increase in savings deposits.
15
Management's Discussion, Continued
A significant portion of short-term borrowings was converted to long-term
debt during the first quarter of 2001. At September 30, 2001 long-term debt
totaling $296,750,000 included borrowings from the Federal Home Loan Bank of
Pittsburgh of $280,476,000 and repurchase agreements totaling $16,274,000 at a
weighted average interest rate of 5.68%.
The increase of $3,304,000 or 33.8% in accrued interest payable and other
liabilities during the first nine months of 2001 was affected by an increase in
interest-bearing deposits and liabilities associated with the acquisition of The
Sentinel Agency.
Stockholders' Equity:
Total stockholders' equity increased $11,040,000 or 10.6% from December 31,
2000 to September 30, 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. Accumulated other comprehensive income (loss) reflected in
stockholder's equity changed from $(694,000) at year-end 2000 to $2,236,000 at
September 30, 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 62,000 shares of treasury stock during the
third quarter of 2001. At September 30, 2001 and December 31, 2000 treasury
shares totaled 98,000 and 300,000, respectively.
Liquidity:
The Corporation must maintain adequate liquid assets to meet the cash flow
requirements of its customers. Effective liquidity management ensures that the
Corporation has the ability to meet the cash needs of customers, provide a
cushion for unforseen obligations, and take advantage of market opportunities.
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.
Loan demand which is typically the Corporation's most significant investing
activity 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 nine months ended September 30, 2001, financing activities provided
cash of $122,089,000. Deposit growth and long-term debt accounted for the
largest portion of this funding source. Net cash used in investing activities
totaled $131,950,000. The primary use of funds in 2001 was a net increase in
investment securities of $89,032,000.
Forward Outlook:
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.
Financial institutions, 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 1.10% as of September 30, 2001.
16
Management's Discussion, Continued
Due to its asset sensitive posture, 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.
Recent Accounting Pronouncements:
On July 20, 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No.141 (FAS 141), Business
Combinations, and No.142 (FAS 142), Goodwill and Other Intangibles Assets.
FAS 141 supercedes Accounting Principles Board Opinion No.16 (APB 16),
Business Combinations. The most significant changes made by FAS 141 are: (1)
requiring that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, (2) establishing specific criteria
for the recognition of intangible assets separately from goodwill, and (3)
requiring unallocated negative goodwill to be written off immediately as an
extraordinary gain. Management has reviewed FAS 141 and has determined that the
statement has no effect on its current financial position or results of
operations.
FAS 142 supercedes APB 17, Intangible Assets. FAS 142 primarily addresses
the accounting for goodwill and intangible assets subsequent to their
acquisition. The most significant changes made by FAS 142 are: (1) goodwill and
indefinite lived intangible assets will no longer be amortized, (2) goodwill
will be tested for impairment at least annually at the reporting unit level, (3)
intangible assets deemed to have an indefinite life will be tested for
impairment at least annually, and (4) the amortization period of intangible
assets with finite lives will no longer be limited to forty years. The
provisions of FAS 142 will be effective for fiscal years beginning after
December 15, 2001. Management believes that the adoption of FAS 142 will have no
material impact on the Corporation's financial condition or results of
operations.
17
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 filed the following reports on Form 8-K during the quarter
ending September 30, 2001.
Report Dated June 30, 2001
--------------------------
Registrant announced its earnings for the period ending June 30, 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 hereunto duly authorized.
COMMUNITY BANKS, INC.
(Registrant)
Date November 9, 2001 /S/ Eddie L. Dunklebarger
---------------------- -------------------------
Eddie L. Dunklebarger
Chairman and President
(Chief Executive Officer)
Date November 9, 2001 /S/ Terry L. Burrows
---------------------- -------------------------
Terry L. Burrows
Executive Vice President
(Chief Financial Officer)
18