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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, 2002
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)
750 East Park Dr., Harrisburg, PA 17111
- ---------------------------------------- -------------
(Address of Principal Executive Offices) (Zip Code)
(717) 920-1698
-------------------------------
(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, 2002
CAPITAL STOCK-COMMON 9,167,000
- -------------------- --------------------
(Title of Class) (Outstanding Shares)
COMMUNITY BANKS, INC. and SUBSIDIARIES
INDEX 10-Q
PART I
Financial Information......................................................... 3
Consolidated Interim Balance Sheets........................................... 4
Consolidated Interim Statements of Income..................................... 5
Consolidated Interim Statements of Changes in Stockholders' Equity............ 6
Consolidated Interim Statements of Cash Flows................................. 7
Notes to Consolidated Interim Financial Statements......................... 8-13
Management's Discussion and Analysis of Financial
Condition and Results of Operation..................................... 14-19
Quantitative and Qualitative Disclosures About Market Risk.................20-21
Controls and Procedures ..................................................... 22
PART II
Other Information and Signatures.......................................... 23-26
Exhibits.................................................................. 27-28
2
PART I - FINANCIAL INFORMATION
COMMUNITY BANKS, INC. and SUBSIDIARIES
The following financial information sets forth the operations of Community
Banks, Inc. and Subsidiaries for the three month and nine month periods ending
September 30, 2002 and 2001.
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.
3
COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Interim Balance Sheets
(Unaudited)
(Dollars in thousands except per share data)
September 30, December 31,
2001 2002
---- ----
ASSETS
Cash and due from banks..................................... $ 41,241 $ 44,764
Interest-bearing time deposits in other banks............... 1,565 1,372
Investment securities, available for sale................... 620,680 543,901
Total loans................................................. 904,614 857,278
Less: Allowance for loan losses......................... (12,769) (12,132)
-------------- ------------
Net loans..................................... 891,845 845,146
Premises and equipment, net................................. 23,257 22,640
Goodwill.................................................... 1,031 151
Identifiable intangible assets.............................. 747 817
Other real estate owned..................................... 684 631
Loans held for sale......................................... 7,161 10,479
Accrued interest receivable and other assets................ 38,617 39,833
-------------- ------------
Total assets........................................... $ 1,626,828 $ 1,509,734
============== ============
LIABILITIES
Deposits:
Demand (non-interest bearing)............................ $ 165,649 $ 160,387
Savings.................................................. 332,153 309,913
Time..................................................... 503,991 453,533
Time in denominations of $100,000 or more................ 113,602 79,392
-------------- ------------
Total deposits.......................................... 1,115,395 1,003,225
Short-term borrowings....................................... 73,729 60,002
Long-term debt.............................................. 295,771 322,155
Accrued interest payable and other liabilities.............. 13,883 13,103
-------------- ------------
Total liabilities........................................ 1,498,778 1,398,485
-------------- ------------
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; 9,411,000 and 9,412,000 shares
issued in 2002 and 2001, respectively.................... 47,059 44,839
Surplus..................................................... 46,083 35,906
Retained earnings........................................... 33,005 36,923
Accumulated other comprehensive income (loss),
net of tax (benefit) of $4,135 and $(2,167),
respectively........................................... 7,680 (4,024)
Less: Treasury stock of 244,000 and 125,000
shares at cost, respectively............................. (5,777) (2,395)
-------------- ------------
Total stockholders' equity................................ 128,050 111,249
-------------- ------------
Total liabilities and stockholders' equity................ $ 1,626,828 $ 1,509,734
============== ============
The accompanying notes are an integral part of the consolidated interim
financial statements.
4
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,
------------- -------------
2002 2001 2002 2001
--------------------------- -------------------------
Interest income:
Interest and fees on loans..................................... $ 16,958 $ 17,520 $ 50,463 $ 52,900
Interest and dividends on investment securities:
Taxable..................................................... 5,000 4,884 14,773 14,644
Exempt from federal income tax.............................. 2,414 1,862 7,284 5,060
Federal funds interest......................................... 37 261 192 771
Other interest income.......................................... 4 40 23 91
---------- ---------- ---------- ----------
Total interest income....................................... 24,413 24,567 72,735 73,466
---------- ---------- ---------- -----------
Interest expense:
Interest on deposits:
Savings..................................................... 1,012 1,786 3,257 5,501
Time........................................................ 5,213 6,204 15,824 19,173
Time in denominations of $100,000 or more................... 911 1,057 2,848 3,109
Interest on short-term borrowings and long-term debt........... 4,234 3,900 12,606 11,422
Federal funds purchased and repo interest...................... 95 201 444 624
---------- ---------- ---------- -----------
Total interest expense...................................... 11,465 13,148 34,979 39,829
---------- ---------- ---------- ----------
Net interest income......................................... 12,948 11,419 37,756 33,637
Provision for loan losses......................................... 500 1,306 2,750 3,750
---------- ---------- ---------- ----------
Net interest income after provision for loan losses......... 12,448 10,113 35,006 29,887
---------- ---------- ---------- ----------
Other income:
Investment management and trust services....................... 260 180 765 480
Service charges on deposit accounts............................ 932 763 2,508 2,165
Other service charges, commissions and fees.................... 568 450 1,855 1,345
Investment security gains (losses)............................. 64 1,018 600 1,256
Insurance premium income and commissions....................... 331 349 1,513 1,051
Gains on loan sales............................................ 310 326 796 867
Other income................................................... 511 583 2,284 1,396
---------- ---------- ---------- -----------
Total other income.......................................... 2,976 3,669 10,321 8,560
---------- ---------- ---------- -----------
Other expenses:
Salaries and employee benefits................................. 5,638 4,497 15,968 13,729
Net occupancy expense.......................................... 1,528 1,259 4,333 3,994
Operating expense of insurance subsidiary...................... 222 178 574 515
Merger and restructuring related expenses...................... --- (115) --- 1,683
Other operating expense........................................ 2,175 2,468 8,138 7,150
---------- ---------- ---------- -----------
Total other expenses........................................ 9,563 8,287 29,013 27,071
---------- ---------- ---------- -----------
Income before income taxes.................................. 5,861 5,495 16,314 11,376
Income taxes ..................................................... 1,121 1,176 2,504 2,218
---------- ---------- ---------- -----------
Net income.................................................. $ 4,740 $ 4,319 $ 13,810 $ 9,158
========== ========== ========== ==========
Consolidated per share data:
Basic earnings per share....................................... $ .51 $ .47 $ 1.49 $ .99
Diluted earnings per share..................................... $ .50 $ .46 $ 1.46 $ .98
Dividends declared............................................. $ .18 $ .16 $ .52 $ .48
Per share data has been restated to reflect stock dividends.
The accompanying notes are an integral part of the consolidated interim
financial statements.
Certain amounts reported in the periods ending September 30, 2001 have been
reclassified to conform with the 2002 presentation. These reclassifications did
not impact the Corporation's financial condition or results of operations.
5
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, 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 $1,256 ...................... 2,930 2,930
--------
Total comprehensive income.......... 12,088
Cash dividends ($.47 per share).......... (4,376) (4,376)
5% stock dividend (426,000 shares)....... 2,130 6,773 (8,903)
Issuance of additional shares
(2,000 shares of common stock
canceled and 202,000 shares, net,
of treasury stock reissued............ (11) (22) (730) 4,091 3,328
------- ------- ------- -------- -------- --------
Balance, September 30, 2001.............. $44,845 $35,906 $33,872 $ 2,236 $ (1,841) $115,018
======= ======= ======= ======== ======== ========
Balance, January 1, 2002................. $44,839 $35,906 $36,923 $ (4,024) $ (2,395) $111,249
Comprehensive income:
Net income.......................... 13,810 13,810
Change in unrealized gain (loss)
on securities, net of tax of $6,302
and reclassification adjustment
of $600............................ 11,704 11,704
--------
Total comprehensive income.......... 25,514
Cash dividends ($.52 per share).......... (4,824) (4,824)
5% stock dividend (440,000 shares)....... 2,241 10,177 (12,418)
Purchases of treasury stock
(198,000 shares)...................... (5,142) (5,142)
Issuance of additional shares
( 81,000 net shares of treasury
stock reissued and 4,000 shares
of common stock canceled)............ (21) (486) 1,760 1,253
------- ------- ------- -------- -------- --------
Balance, September 30, 2002.............. $47,059 $46,083 $33,005 $ 7,680 $ (5,777) $128,050
======= ======= ======= ======== ======== ========
Per share data for all periods has been restated to reflect stock dividends. The
accompanying notes are an integral part of the consolidated interim financial
statements.
6
COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Interim Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Nine Months Ended
September 30,
---------------------------------------
2002 2001
---------------------------------------
Operating Activities:
Net income..................................................... $ 13,810 $ 9,158
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses.................................... 2,750 3,750
Depreciation and amortization................................ 2,040 3,410
Investment security gains.................................... (600) (1,256)
Loans originated for sale.................................... (39,811) (54,665)
Proceeds from sales of loans................................. 43,925 54,533
Gains on loan sales.......................................... (796) (867)
Change in other assets, net.................................. (2,408) (4,589)
Increase (decrease) in accrued interest payable and
other liabilities, net...................................... 780 2,100
---------- -----------
Net cash provided by operating activities.................... 19,690 11,574
---------- -----------
Investing Activities:
Net (increase) decrease in interest-bearing time
deposits in other banks....................................... (193) 440
Proceeds from sales of investment securities................... 117,267 59,142
Proceeds from maturities of investment securities.............. 57,081 84,744
Purchases of investment securities............................. (232,590) (232,918)
Net increase in total loans.................................... (52,165) (40,860)
Net increase in premises and equipment......................... (2,533) (2,498)
---------- -----------
Cash paid for acquisitions..................................... (880) (165)
---------- -----------
Net cash used by investing activities....................... (114,013) (132,115)
---------- -----------
Financing Activities:
Net increase in total deposits................................. 112,170 93,790
Net increase (decrease) in short-term borrowings............... 13,727 (27,790)
Proceeds from issuance of long-term debt....................... --- 57,831
Repayment of long-term debt.................................... (26,384) (694)
Cash dividends................................................. (4,824) (4,376)
Purchases of treasury stock.................................... (5,142) ---
Proceeds from issuance of common stock......................... 1,253 3,328
---------- -----------
Net cash provided by financing activities................... 90,800 122,089
---------- -----------
Increase (decrease) in cash and cash equivalents............. (3,523) 1,548
Cash and cash equivalents at beginning of period............... 44,764 48,446
---------- -----------
Cash and cash equivalents at end of period..................... $ 41,241 $ 49,994
========== ===========
The accompanying notes are an integral part of the consolidated interim
financial statements.
7
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, 11, and 12 of the 2001 Annual Report to shareholders.
8
2. Investment Securities
---------------------
The amortized cost and fair values of investment securities at September
30, 2002 and December 31, 2001 were as follows:
September 30, 2002
------------------
Amortized Fair
Cost Value
---- -----
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies.............................................................. $ 129,189 $ 132,166
Mortgage-backed U.S. government agencies................................. 163,486 167,025
Obligations of states and political subdivisions......................... 171,884 178,628
Corporate securities..................................................... 95,520 93,783
Equity securities........................................................ 47,368 49,078
---------- -----------
Total............................................................... $ 607,447 $ 620,680
========== ===========
December 30, 2001
-----------------
Amortized Fair
Cost Value
---- -----
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies.............................................................. $ 144,640 $ 142,544
Mortgage-backed U.S. government agencies................................. 74,403 74,370
Obligations of states and political subdivisions......................... 172,223 169,993
Corporate securities..................................................... 99,561 98,405
Equity securities........................................................ 57,846 58,589
----------- -----------
Total............................................................... $ 548,673 $ 543,901
========== ===========
9
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,
2002 2001 2001
---- ---- ----
Balance, January 1................................... $ 12,132 $ 10,328 $ 10,328
Provision for loan losses............................ 2,750 5,080 3,750
Loan charge-offs..................................... (2,623) (3,776) (2,664)
Recoveries........................................... 510 500 375
--------- --------- ---------
Balance, September 30, 2002, December 31,
2001, and September 30, 2001........................ $ 12,769 $ 12,132 $ 11,789
========= ========= =========
RISK ELEMENTS (a)
September 30, December 31, September 30,
2002 2001 2001
---- ---- ----
Loans on which accrual of interest has been
discontinued:
Commercial, financial and agricultural.................... $ 3,636 $ 3,783 $ 3,347
Mortgages................................................. 4,667 6,952 6,860
Other..................................................... 337 355 463
--------- --------- ---------
8,640 11,090 10,670
Other real estate.............................................. 684 631 534
--------- --------- ----------
Total non-performing assets............................. 9,324 11,721 11,204
Loans past due 90 days or more and still accruing interest:
Commercial, financial and agricultural.................... 278 1,002 563
Mortgages................................................ 381 405 113
Personal installment...................................... 12 239 29
Other..................................................... 20 13 3
--------- --------- ----------
691 1,659 708
--------- --------- ---------
Total risk elements..................................... $ 10,015 $ 13,380 $ 11,912
========= ========= =========
(a) The determination to discontinue the accrual of interest on non-performing
loans is made on the individual case basis. Such factors as the character and
size of the loan, quality of the collateral and the historical creditworthiness
of the borrower and/or guarantors are considered by management in assessing the
collectibility of such amounts.
Impaired Loans
- --------------
At September 30, 2002 and December 31, 2001, the recorded investment in
loans for which impairment has been recognized totaled $5,965,000 and
$8,558,000, respectively. The valuation allowance for impaired loans totaled
$1,278,000 and $1,835,000 at September 30, 2002 and December 31, 2001,
respectively. For the nine months ended September 30, 2002, the average recorded
investment in impaired loans approximated $6,498,000. The average balance for
the nine months ended September 30, 2001, approximated $6,884,000. Interest
recognized on impaired loans on the cash basis for the nine month periods ending
September 30, 2002 and 2001 was not significant.
10
4. Statement of Cash Flows
-----------------------
Cash and cash equivalents include cash and due from banks and federal funds
sold. The company made cash payments of $2,854,000 and $1,697,000 and
$35,560,000 and $39,625,000 for income taxes and interest, respectively, for
each of the nine month periods ended September 30, 2002 and 2001.
Excluded from the consolidated statements of cash flows for the periods
ended September 30, 2002 and 2001 was the effect of certain non-cash activities.
The company acquired real estate through foreclosure totaling $2,716,000 and
$396,000, respectively.
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,
--------------------------------------------------------------------
2002 2001
--------------------------------------------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
--------------------------------------------------------------------
(In thousands except per share data) Basic EPS:
Income available to common stockholders................ $ 4,740 9,228 $ .51 $4,319 9,279 $.47
======= ===== ====== ====
Effect of Dilutive Securities: ........................
Incentive stock options outstanding.................... 213 176
----- -----
Diluted EPS:
Income available to common stockholders &
assumed conversion.................................. $ 4,740 9,441 $. 50 $4,319 9,455 $.46
======= ===== ====== ====
Nine Months Ended September 30,
--------------------------------------------------------------------
2002 2001
--------------------------------------------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
--------------------------------------------------------------------
(In thousands except per share data) Basic EPS:
Income available to common stockholders................ $13,810 9,249 $1.49 $9,158 9,212 $.99
======= ===== ====== ====
Effect of Dilutive Securities: .......................
Incentive stock options outstanding.................... 211 155
----- -----
Diluted EPS:
Income available to common stockholders &
assumed conversion................................. $13,810 9,460 $1.46 $9,158 9,367 $.98
======= ===== ====== ====
Per share and share data has been adjusted to reflect stock dividends.
11
6. Goodwill and Identifiable Intangible Assets
-------------------------------------------
In September 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires companies to use the purchase method of
accounting for all business combinations initiated after June 30, 2001 and
addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination. SFAS No. 142, which the
Corporation adopted on January 1, 2002, addresses the initial recognition and
measurement of intangible assets acquired outside a business combination and the
recognition and measurement of goodwill and other intangible assets subsequent
to acquisition. Under the new standard, goodwill is no longer amortized but,
instead, is tested at least annually for impairment. Other intangible assets
continue to be amortized over their useful lives. During the second quarter of
2002, the Corporation assessed its goodwill and determined that there was no
impairment of the recorded amount, which is not considered material.
Goodwill
- --------
The costs of acquired companies in excess of the fair value of net assets
at acquisition date is recorded as goodwill. As of September 30, 2002, goodwill
of $1,031,000 was included on the consolidated interim balance sheets. Through
December 31, 2001, goodwill was amortized on a straight-line basis over 15
years. The following table sets forth reported net earnings and EPS, as adjusted
to exclude goodwill amortization expense:
Nine Months Ended September 30, 2001
------------------------------------
(in thousands, except per share amounts)
Net earnings, as reported $ 9,158
Net earnings, as adjusted............ 9,339
EPS, as reported:
Basic............................. $ .99
Diluted........................... .98
EPS, as adjusted:
Basic............................. $ 1.01
Diluted..................................... 1.00
Per share data has been restated to reflect the 5% stock dividend paid
April 30, 2002.
Identifiable Intangible Assets
- ------------------------------
The following table sets forth the gross carrying amount, accumulated
amortization and net carrying amount of identifiable intangible assets as of:
September 30, 2002 December 31, 2001
------------------ -----------------
(in thousands)
Gross carrying amount................ $ 1,101 $ 1,116
Accumulated amortization............. (354) (299)
--------- --------
Net carrying amount.................. $ 747 $ 817
========= ========
Identifiable intangible assets relate to acquisition of branch offices from
other banks and are amortized over their assumed useful lives.
Amortization expense associated with identifiable intangible assets was
$18,000 for each of the three months ended September 30, 2002 and 2001.
Estimated amortization expense for existing identifiable intangible assets is
$73,000 for each of the fiscal years ending December 31, 2002 through December
31, 2010 and thereafter decreasing through December 31, 2014.
12
7. Recent Accounting Developments
------------------------------
Statement of Financial Accounting Standards No. 147, "Acquisition of
Certain Financial Institutions" (FASB "147") provides guidance on accounting for
the acquisition of certain financial institutions. FASB 147 addresses and
resolves inconsistencies bewtween FASB Statements No. 72 and 142. The provisions
of FASB 147 are effective after September 30, 2002. Management does not
anticipate the implementation of this statement to have a material impact on the
Corporation's consolidated financial position or consolidated results of
operations.
13
COMMUNITY BANKS, INC. AND SUBSIDIARIES
Management's Discussion of Financial Condition and Results of Operations
- ------------------------------------------------------------------------
Overview
Community Banks, Inc. (Community) is a financial holding company whose
wholly-owned subsidiaries include Community Banks, Community Bank Investments,
Inc. (CBII) and Community Banks Life Insurance Co. (CBLIC). Community Banks
provides a wide range of services through its network of offices in Adams,
Cumberland, Dauphin, Luzerne, Northumberland, Schuylkill, Snyder, and York
counties in Pennsylvania.
The purpose of this review is to provide additional information necessary
to fully understand the consolidated financial condition and results of
operations of Community. Throughout this review, net interest income and the
yield on earning assets are stated on a fully taxable-equivalent basis and
balances represent average daily balances unless otherwise indicated. In
addition, income statement comparisons are based on the first nine months of
2002 compared to the same period of 2001 unless otherwise indicated.
Forward-Looking Statements
Periodically, Community has made and will continue to make statements that
may include forward-looking information. The Corporation cautions that
forward-looking information disseminated through financial presentations should
not be construed as guarantees of future performance. Furthermore, actual
results may differ from expectations contained in such forward-looking
information as a result of factors that are not predictable. Examples of factors
that may not be predictable or may be out of management's control include: the
effect of prevailing economic conditions; unforeseen or dramatic changes in the
general interest rate environment; actions or changes in policies of the Federal
Reserve Board and other government agencies; and business risk associated with
the management of the credit extension function and fiduciary activities. Each
of these factors could affect estimates, assumptions, uncertainties and risk
used to develop forward-looking information, and could cause actual results to
differ materially from management's expectations regarding future performance.
Critical Accounting Policies
The following is a summary of those accounting policies that the
Corporation considers to be most important to the portrayal of its financial
condition and results of operations as they require management's most difficult
judgments as a result of the need to make estimates about the effects of matters
that are inherently uncertain.
Provision and Allowance for Loan Losses - The allowance for loan losses is
evaluated on a regular basis by management and is based upon management's
periodic review of the collectibility of the loans in light of historical
experience, the nature and volume of the loan portfolio, adverse situations that
may affect the borrower's ability to repay, estimated value of any underlying
collateral and prevailing economic conditions. This evaluation is inherently
subjective as it requires estimates that are susceptible to significant revision
as additional information becomes available.
Impairment is measured on a loan by loan basis for commercial and
construction loans over $250,000 by either the present value of expected future
cash flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the loan is
collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Corporation does not separately
identify individual consumer and residential loans for impairment disclosures.
Loans continue to be classified as impaired unless they are brought fully
current and the collection of scheduled interest and principal is considered
probable. When an impaired loan or portion of an impaired loan is determined to
be uncollectible, the portion deemed uncollectible is charged against the
related valuation allowance, and subsequent recoveries, if any, are credited to
the valuation allowance.
14
Management's Discussion, Continued
- ----------------------------------
Summary of Financial Results
Community Banks, Inc., the parent company of CommunityBanks, reported
record profit performance for both the third quarter and the nine months ended
September 30, 2002. Earnings per share for the third quarter reached $0.50
compared to $0.46 in same period of 2001, an increase of nearly 9%. Net income
grew almost 10% to $4.7 million versus $4.3 million in the year earlier period.
This performance resulted in a return on average assets (ROA) of 1.17% and a
return on average equity (ROE) of 15.09%, nearly equal to the ROA of 1.21% and
ROE of 15.18% recorded in the third quarter of 2001.
Net income reached $13.8 million for the first three quarters of 2002 and
ROA and ROE performance were 1.18% and 15.63%, respectively. Earnings per share
for the first nine months of 2002 reached $1.46 compared to $0.98 in 2001, an
increase of 49%. Performance in 2001 had been affected by special charges
associated with the acquisition of Glen Rock State Bank in March of 2001.
Despite the sluggish national economy, Community was able to report
meaningful improvements in net interest income, the single largest source of
revenue for most financial institutions. Interest rates, which are a key driver
of revenues from net interest income, continued to decline to levels that have
not been seen for decades. Community seeks to maximize net interest income under
a variety of interest rate environments, and reflected an increase of nearly 15%
between the third quarter of 2001 and the same period of 2002. Community was
also able to record a lower provision for loan losses between the two periods,
which is consistent with the reduction in the level of problem loans and the
steady improvement in overall credit quality metrics since the end of 2001. At
the same time, operating expenses have remained constant with the overall level
of revenue, resulting in the increase in both earnings per share and net income.
The economies within the markets served by Community Banks have not been
measurably influenced by national recessionary trends, and some sectors have
been able to sustain moderate economic growth. These factors, combined with
changes in the competitive landscape, have permitted continued growth in loan
and deposit volumes in the third quarter, though at a pace slightly below that
of the first half of 2002. This growth was fueled by continuing demand for
middle market and small business lending, combined with sustained growth in
consumer borrowing. Likewise, growth in deposit volumes has continued throughout
the year. At the end of the quarter, loans exceeded $900 million and deposits
reached over $1.1 billion. Likewise, overall asset levels topped $1.6 billion as
of September 30, 2002.
Despite the reported improvement in net interest income, management
recognizes that further declines in interest rates could serve to constrain the
pace of growth in revenue from net interest income. Community's balance sheet
posture has been restructured in anticipation of higher future interest rates.
Prospects for more significant margin improvement may be hampered if rates were
to decline substantially from their current levels. However, management is
confident that extended periods of additional rate declines are unlikely, and
believes that it is properly positioned to take advantage of a gradual increase
in the overall level of interest rates.
15
Management's Discussion, Continued
- ----------------------------------
Average Statement of Condition
The average balance sheets for the nine months ended September 30, 2002 and 2001
were as follows (in thousands):
Change
2002 2001 Volume %
- -------------------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 38,386 $ 35,399 $ 2,987 8%
Federal funds sold and other 16,931 23,907 (6,976) (29)%
Investments 565,898 425,556 140,342 33%
Loans 882,621 829,016 53,605 6%
Allowance for loan losses 12,706 11,573 1,133 10%
- -------------------------------------------------------------------------------------------------------------------------
Net loans 869,915 817,443 52,472 6%
Goodwill and identifiable intangibles 1,087 988 99 10%
Loans held for resale 6,509 3,314 3,195 96%
Other assets 64,068 62,660 1,408 2%
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,562,794 $ 1,369,267 193,527 14%
- -------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits $ 164,145 $ 148,056 $ 16,089 11%
Interest-bearing deposits 918,245 821,766 96,479 12%
Short-term borrowings 51,641 6,117 45,524 744%
Long-term debt 298,789 273,229 25,560 9%
Other liabilities 11,876 10,588 1,288 12%
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,444,696 1,259,756 184,940 15%
- -------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY 118,098 109,511 8,587 8%
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,562,794 $ 1,369,267 $ 193,527 14%
- -------------------------------------------------------------------------------------------------------------------------
Balance sheet trends for the first nine months of 2002 reflect continued
growth in the deposit base accompanied by less robust trends for loan growth.
Deposit growth, which was particularly strong during the first quarter of 2002,
continued at a more sustainable pace during the second and third quarters as
Community successfully improved its deposit market share through its competitive
product mix. Growth was particularly evident in its "no penalty CD" product as
well as some longer-term certificate of deposit categories. The pace of loan
growth, which remained steady during the second and third quarters, slowed
somewhat as measured against the first quarter 2002 and full year 2001 pace.
Community also engaged in limited use of low cost borrowings and increased its
investment holdings to increase net interest income during the period.
16
Management's Discussion, Continued
- ----------------------------------
Net Interest Income
The following table summarizes, on a fully taxable equivalent basis,
changes in net interest income and net interest margin for the nine months ended
September 30, 2002 and 2001 (in thousands):
2002 2001 Increase (Decrease)
Amount Yield/rate Amount Yield/rate Amount Yield/rate
- -------------------------------------------------------------------------------------------------------------------------
Interest income $ 77,076 7.02% $ 76,471 7.98% $ 605 (.96)
Interest expense 34,979 3.69% 39,829 4.84% (4,850) (1.15)
- -------------------------------------------------------------------------------------------------------------------------
Net interest income $ 42,097 $ 36,642 $ 5,455
Interest spread 3.33% 3.14% .19
Impact of noninterest funds .50% .68% (.18)
- -------------------------------------------------------------------------------------------------------------------------
Net interest margin 3.83% 3.82% .01
- -------------------------------------------------------------------------------------------------------------------------
Community's major source of revenue is derived from intermediation
activities and is reflected as net interest income. Net interest income
represents the difference between interest income on earning assets and interest
expense on deposits and borrowed funds, and is heavily dependent on the volume
and composition of earning assets and interest bearing liabilities as well as
the yield or rate earned or paid on these earning assets or funding sources.
Net interest income increased $5.4 million or 14.9% in 2002 compared to
2001. Both earning asset and interest-bearing liability levels increased and a
decline in funding costs outpaced a decline in asset yields. As such, the net
interest spread increased 19 basis points.
Interest income increased $605,000 or less than 1% during 2002 and was
influenced by an increase in earning assets of approximately $187 million while
the yield on loans and investments decreased in line with a general decline in
overall rates.
Interest expense declined $4.9 million or 12.2%, as interest bearing
liabilities increased approximately $168 million while the benefit of a lower
interest rate environment resulted in a decrease in the total rate paid on
funding sources of 115 basis points.
Given the reduction in interest rates since last year, the contribution
from noninterest funding sources declined from 68 basis points to 50 basis
points and offset the improvement in interest spread.
In isolating third quarter 2002 performance, net interest margin exhibited
a decline from the levels achieved in the first quarter of 2002 and improved
slightly over the level of the second quarter. Third quarter net interest margin
reached 3.78% compared to 3.96% in the first quarter and 3.76% in the second
quarter. Within the scope of its asset/liability management policy, Community
has repositioned its balance sheet posture in anticipation of a gradual rise in
interest rates.. Expectations are such that further substantial declines in
overall interest rates are considered to be unlikely and that Community is well
positioned to benefit from a measured increase in the rate environment in late
2002 and 2003.
Provision for Loan Losses
Community remains attuned to the influence of unfolding economic conditions
and their potential impact on credit conditions and the adequacy of the reserve
for loan losses. The provision for loan losses charged to income in 2002 was
$2.8 million compared to $3.8 million in 2001. Net loan charge-offs in 2002 were
$2.1 million compared to $2.3 million in 2001. Net loan charge-offs as a
percentage of average net loans approximated .24% and .28% during 2002 and 2001,
respectively. Total risk elements decreased from $13.4 million at December 31,
2001, to $10.0 million at September 30, 2002.
17
Management's Discussion, Continued
- ----------------------------------
Non-Interest Income
The strategic initiatives Community has undertaken to meet customer needs
and provide access to expanded financial services through their distribution
network continues to be a critical driver of Community's performance.
Non-interest income exclusive of security gains increased $2.4 million or 33.1%
in 2002 compared to 2001.
After the first quarter of 2001, Community acquired ownership interest in
two title insurance companies that operate within the Corporation's geographic
footprint. Increases in insurance premium income and commissions of $462,000 or
44.0% for 2002 are a reflection of the increase in title insurance activities as
well as additional credit life and accident and health insurance premiums
attributable to consumer loan demand. Year to date increases for 2002 in credit
insurance revenues were partially offset by the establishment of a reserve of
approximately $300,000 for certain refundable credit insurance fees that was
recorded during the third quarter.
Community derives revenue from the origination and sale of mortgage loans
into the secondary market. Gains on loan sales decreased $71,000 or 8.1% in 2002
as a result of decreased demand for fixed-rate real estate loans.
Other income increased in 2002 by $888,000 or 63.6% compared to 2001. More
than half of this increase was attributed to the gains realized from the sale of
two office locations and the effected deposit base. This sale was executed
pursuant to Community's ongoing analysis and rationalization of its current
office structure. Community is constantly monitoring the performance of its
office locations and will continue to consider expansion into markets with more
vibrant growth characteristics. Other income was also impacted by increases in
the cash surrender value of bank-owned life insurance policies.
Investment security gains of $600,000 were recognized during 2002 compared
to $1,256,000 in 2001. Such gains were realized pursuant to management's ongoing
effort to review investment holdings and portfolio strategy.
Non-Interest Expenses
The increase in salaries and employee benefits of $2.2 million or 16.3% for
2002 compared to 2001 was affected by a number of factors including the annual
merit increase, employees added through the expansion of Community's
distribution network and by expenses related to employees added in fee-based
activities such as title insurance and investment management services.
Other operating expense increased $988 million or 13.8% in 2002 compared to
2001. Affecting these changes were increases in banking facilities and
additional marketing and business development initiatives. During the third
quarter of 2002, Community reversed approximately $350,000 of previously accrued
amounts for legal expenses it had expected to incur in connection with certain
unasserted claims that had arisen in the ordinary course of business. In the
opinion of management, the resolution of related administrative legal
proceedings in this matter mitigates the potential for such claims and the
probability of financial loss is deemed to be remote.
Income Taxes
Income tax expense for 2002 was $2.5 million, resulting in an effective tax
rate of 15.3%. The Corporation increased its level of tax-exempt investment
during calendar 2001 and these investments will continue to favorably influence
the effective tax rate through their maturity dates.
18
Management's Discussion, Continued
- ----------------------------------
Stockholders' Equity
Capital strength has always been a critical metric with which to judge the
overall stability of a financial institution. A strong capital base is also a
prerequisite for sustaining franchise growth through both internal expansion and
strategic acquisition opportunities. Regulatory authorities impose constraints
and restrictions on bank capital levels that are designed to help ensure the
vitality of the nation's banking system.
The primary source of capital for Community is through earnings retention.
The Corporation's capital management and planning process is reviewed by its
Board of Directors and seeks to provide its shareholders with a sustainable
level of dividends that is considerate of a variety of factors, including the
prospects for sustainable core profit performance. Management of overall capital
levels requires the use of various techniques designed to meet or exceed
regulatory guidelines, to ensure suitable levels of capital for a given asset
base, and to provide an appropriate rate of return to shareholders. Community
uses a number of these techniques, including share repurchase, issuance of cash
dividends and regular stock dividends, to manage the level of capital to optimum
levels.
Community's regulatory capital measures, which include the leverage ratio,
"Tier 1" capital, and "Total capital" ratios, continued to be well in excess of
both regulatory minimums and the thresholds established for "well capitalized"
institutions. The following presentation of these ratios at September 30, 2002
and regulatory standards is provided:
September 30, "Well Regulatory
2002 Capitalized" Minimums
---- ------------ --------
Leverage ratio 7.34% 5% 4%
Tier 1 capital ratio 9.99% 6% 4%
Total risk-based capital ratio 11.14% 10% 8%
At September 30, 2002, total stockholders' equity reflected accumulated
other comprehensive income of $7.7 million compared to the accumulated other
comprehensive loss of $4.0 million reflected in total stockholder's equity at
year-end 2001. This increase can be attributed to the change in the net
unrealized gain (loss) on investment securities available for sale, net of
taxes. Much of this change was a function of declines in interest rates and
corresponding increases in fair values of debt securities. Community reissued
approximately 81,000 shares and purchased approximately 198,000 shares of
treasury stock during the first nine months of 2002. At September 30, 2002
treasury shares totaled 244,000. Community currently has board approval to
purchase an additional 53,000 shares.
19
COMMUNITY BANKS, INC. AND SUBSIDIARIES
Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------
Asset/Liability Management and Liquidity
The process by which financial institutions manage earning assets and
funding sources under different interest rate environments is called
asset/liability management. The primary goal of asset/liability management is to
increase net interest income through the prudent control of market risk,
liquidity, interest rate risk and capital. Two important barometers of
performance are net interest margin and liquidity. Widening interest spread
while controlling interest rate sensitivity increases net interest margin. The
adequacy of liquidity is determined by the ability to meet the cash flow
requirements of both depositors and customers requesting bank credit. The Board
of Directors governs and monitors asset/liability management processes and
delegates the responsibility for management of these processes to the corporate
Asset/Liability Management Committee (ALCO).
Liquidity is defined as the ability to meet maturing obligations and
customers' demand for funds on a continuous basis. Liquidity is sustained by
stable core deposits, a diversified mix of liabilities, strong credit perception
and the presence of sufficient assets convertible to cash without material loss
or disruption of normal operations. Community actively manages liquidity within
a defined range and has developed reasonable liquidity contingency plans,
ensuring availability of alternate funding sources to maintain adequate
liquidity under a variety of business conditions. The Corporation's investing
and financing activities are conducted within the overall constraints of its
liquidity management policy and practices.
Inflation
Community's ability to cope with the impact of inflation is best measured
by its ability to respond to changing interest rates and manage non-interest
income and expense. Within its ALCO processes, the Corporation manages the mix
of interest rate-sensitive assets and liabilities in order to limit the impact
of changing interest rates on net interest income. Inflation also has a direct
impact on non-interest income and expense such as service fee income, salary and
benefits expenses, and other overhead expenses. Inflationary pressures over the
last several years have been modest but this trend is subject to change.
Management will continue to monitor the potential for inflation and its impact
on the pricing of products and services.
20
COMMUNITY BANKS, INC. AND SUBSIDIARIES
FINANCIAL CONDITION
- -------------------
Community'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, 2002 December 31, 2001
------------------ -----------------
(dollars in thousands)
Amount %
------ --
Funding Sources:
Deposits and borrowed funds:
Non-interest bearing.................................... $ 165,649 $ 5,262 3.3 %
Interest-bearing........................................ 949,746 106,908 12.7
------------ ----------- ------
Total deposits...................................... 1,115,395 112,170 11.2
Borrowed funds.............................................. 369,500 (12,657) (3.3)
Other liabilities........................................... 13,883 780 6.0
Shareholders' equity........................................ 128,050 16,801 15.1
------------ ----------- ------
Total sources....................................... $ 1,626,828 $ 117,094 7.8 %
============ =========== ======
Funding uses:
Interest-earning assets:
Short-term investments.................................. $ 1,565 $ 193 14.1 %
Investment securities................................... 620,680 76,779 14.1
Loans, net of unearned income........................... 907,324 47,722 5.6
------------- ------------ -------
Total interest-earning assets....................... 1,529,569 124,694 8.9
Cash and due from banks..................................... 41,241 (3,523) (7.9)
Other assets................................................ 56,018 (4,077) (6.8)
------------- ------------ --------
Total uses.......................................... $ 1,626,828 $ 117,094 7.8 %
============ =========== ======
21
COMMUNITY BANKS, INC. AND SUBSIDIARIES
CONTROLS AND PROCEDURES
- -----------------------
Under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
the Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures within 90 days prior to the filing date of
this quarterly report. Based upon this evaluation, the Chief Executive Officer
and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are adequate and effective to ensure that material
information relating to the Company and its consolidated subsidiaries is made
known to them by others within those entities, particularly during the period in
which this quarterly report was prepared. There were no significant changes in
the Company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.
22
COMMUNITY BANKS, INC. and SUBSIDIARIES
PART II - OTHER INFORMATION AND SIGNATURES
Items 1,2,3,4 and 5 have been omitted since they are not applicable.
Item 6(a). Exhibits
--------
Exhibit # Description
- --------- -----------
99.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)
99.2 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)
Item 6(b). Reports on Form 8-K
-------------------
Registrant filed the following report on Form 8-K during the quarter
ending September 30, 2002:
Report Dated July 18, 2002
--------------------------
Registrant announced its earnings for the period ended June 30, 2002.
Report Dated September 24, 2002
-------------------------------
Registrant announced its intentions to open its first two Carroll County,
Maryland banking offices, subject to regulatory approval.
23
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 14, 2002 /s/ Eddie L. Dunklebarger
- ---- ----------------- -------------------------
Eddie L. Dunklebarger
Chairman and President
(Chief Executive Officer)
Date November 14, 2002 /s/ Donald F. Holt
- ---- ----------------- ------------------
Donald F. Holt
Executive Vice President
(Chief Financial Officer)
24
COMMUNITY BANKS, INC. and SUBSIDIARIES
CERTIFICATION OF DISCLOSURE
I, Eddie L. Dunklebarger, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Community Banks, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date November 14, 2002 /s/ Eddie L. Dunklebarger
- ---- ----------------- -------------------------
Eddie L. Dunklebarger
Chairman and President
(Chief Executive Officer)
25
COMMUNITY BANKS, INC. and SUBSIDIARIES
CERTIFICATION OF DISCLOSURE
I, Donald F. Holt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Community Banks, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a)designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the"Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date November 14, 2002 /s/ Donald F. Holt
- ---- ----------------- ------------------
Donald F. Holt
Executive Vice President
(Chief Financial Officer)
26
Exhibit 99.1
COMMUNITY BANKS, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Community Banks, Inc. (the
"Company") on Form 10-Q for the period ending September 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Eddie L. Dunklebarger, Chief Executive Officer, Chairman, and President of the
Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Eddie L. Dunklebarger
- --------------------------------------------------
Chief Executive Officer, Chairman, and President
November 14, 2002
27
Exhibit 99.2
COMMUNITY BANKS, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Community Banks, Inc. (the
"Company") on Form 10-Q for the period ending September 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Donald F. Holt, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Donald F. Holt
- --------------------------------------------------
Chief Financial Officer
November 14, 2002
28