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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-15786
-------
COMMUNITY BANKS, INC.
---------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2251762
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
750 East Park Drive, Harrisburg, PA 17111
- ---------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 920-1698
--------------
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $5 per share
------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendments to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No
----- ----
Aggregate market value of the Common Stock, $5 par value, held by non-affiliates
of the registrant, computed by reference to the closing price as of the close of
business on June 30, 2002: $241,849,611.
Number of shares of the Common Stock, $5 par value, outstanding as of the close
of business on March 1, 2003: 9,128,222 shares.
Documents Incorporated by Reference:
Portions of the Proxy Statement for the 2003 Annual Meeting of Shareholders of
Community Banks, Inc., incorporated by reference into Part III.
Item 15 contains portions of the Annual Report to Stockholders for the Fiscal
Year Ended December 31, 2002, incorporated by reference into Parts I, II, and
III.
2
COMMUNITY BANKS, INC. and SUBSIDIARIES
FORM 10-K
INDEX
PART I PAGE #
Item 1 Business 4-7
Item 2 Properties 8
Item 3 Legal Proceedings 9
Item 4 Submission of Matters to a Vote of Security Holders 9
Appendix A 9-19
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 20
Item 6 Selected Financial Data 20
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operation 20
Item 7A Quantitative and Qualitative Disclosures About Market Risk 21-23
Item 8 Financial Statements and Supplementary Data 23
Item 9 Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 24
PART III
Item 10 Directors and Executive Officers of the Registrant 25
Item 11 Executive Compensation 25
Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 25
Item 13 Certain Relationships and Related Transactions 25
Item 14 Controls and Procedures 25
PART IV
Item 15 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 26-27
SIGNATURES 28-31
3
PART I
Item 1. Business:
-----------------
Community Banks, Inc. (the "Corporation" or "Community") is a financial
holding company whose banking subsidiary is Community Banks and whose
non-banking subsidiaries are Community Bank Investments, Inc. (CBII), Community
Banks Life Insurance Company, Inc. (CBLIC), and CMTY Capital Trust I. The
subsidiaries of Community Banks are UDNB Investments, Inc.; PSB Realty Co.,
Inc.; The Sentinel Agency, LLC; Community Banks Insurance Services, LLC; CB
Services, LLC; and CB Financial Services, LLC.
On January 1, 2002, Community consolidated the charters of its banking
subsidiaries under the name Community Banks, pursuant to regulatory approvals.
Prior to that time, Community's separate banking organizations operated as
Peoples State Bank (PSB), a state chartered bank with offices throughout York
and Adams Counties; and Community Banks, N.A. (CBNA), a federally chartered bank
headquartered in Dauphin County with offices in central and northeastern
Pennsylvania. The consolidation was designed to facilitate a regional
operational focus that would ease regulatory burdens while, at the same time,
continuing a philosophy of local decision-making.
Community conducts a full service commercial banking business and provides
trust services in Adams County, Cumberland County, Dauphin County, southern
Luzerne County, Northumberland County, western Schuylkill County, Snyder County,
and York County in Pennsylvania and Carroll County in Maryland. Community
currently has 44 offices. There are almost 640 offices of commercial banks and
savings and loan associations within its market area with which Community
competes. Deposits of Community represent approximately 5.3% of the total
deposits in the market area. Community has 3 offices in Adams County, 2 offices
in Cumberland County, 9 offices in Dauphin County, 3 offices in Luzerne County,
2 offices in Northumberland County, 8 offices in Schuylkill County, 1 office in
Snyder County, and 15 offices in York County, Pennsylvania and 1 office in
Carroll County, Maryland.
Like other depository institutions, Community has been subjected to
competition from brokerage firms, money market funds, consumer finance and
credit card companies and other companies providing financial services and
credit to consumers.
Over the years, Community has formed a number of special purpose
subsidiaries. During December 2002, Community formed CMTY Capital Trust I to
execute a pooled trust preferred issuance of $15 million. During 1986, Community
formed CBLIC to provide credit life insurance to its consumer credit borrowers.
Total premiums earned were $862,000 for the year ended December 31, 2002. During
1985, Community formed CBII to make investments primarily in equity securities
of other banks. Total assets of CBII at December 31, 2002 were $5,742,000.
Community and its subsidiaries have approximately 550 full and part-time
employees and considers its employee relations to be satisfactory.
Supervision and Regulation of Community
---------------------------------------
The banking industry is subject to extensive state and federal regulation.
Proposals to change laws and regulations governing the banking industry are
frequently raised in Congress, in state legislatures, and in various bank
regulatory agencies. The likelihood and timing that any such changes may have on
Community are difficult to determine with any certainty. Changes in laws or
regulations, or changes in the interpretation of laws or regulations, may have a
material impact on the business, operations and earnings of Community.
4
Community Banks, Inc. is registered as a financial holding company with the
Federal Reserve Board in accordance with the requirements of the
Gramm-Leach-Bliley Act (the "GLB Act"). The GLB Act enables broad-scale
consolidation among banks, securities forms and insurance companies for eligible
bank holding companies that have elected and maintain "financial holding
company" status. Financial holding companies can offer virtually any type of
financial service, including banking, securities underwriting, insurance (both
agency and underwriting) and merchant banking. If a bank holding company does
not become a financial holding company, it will be limited to those activities
previously determined by the Federal Reserve Board to be permissible; i.e.,
"closely related to banking" under the standard set forth in the Bank Holding
Company Act. In order to become a financial holding company, all of a bank
holding company's bank subsidiaries must be well capitalized and well managed
and have a rating under the Community Reinvestment Act (the "CRA") of at least
"satisfactory."
Community is subject to regulation by the Federal Reserve Board. The
Federal Reserve Board requires regular reports from Community and is authorized
to make regular examinations of Community and its subsidiaries. Community's bank
subsidiary is subject to supervision and regulation, and is examined regularly,
by the Federal Reserve Board and the state banking departments in the states in
which it operates. Community and its direct non-banking subsidiaries are
affiliates, within the meaning of the GLB Act, of Community's subsidiary bank
and its subsidiaries. As a result, the subsidiary bank and its subsidiaries are
subject to restrictions on loans or extensions of credit to, purchase of assets
from, investments in, and transactions with Community and its direct non-banking
subsidiaries and on certain other transactions with them or involving their
securities.
Capital Adequacy
----------------
The Federal Reserve Board and the FDIC have adopted risk-based capital
adequacy guidelines for financial holding companies and banks under their
supervision. Under these guidelines, "Tier 1 capital" and "Total capital" as a
percentage of risk-weighted assets and certain off-balance sheet instruments
must be at least 4% and 8%, respectively. The regulators have also imposed a
leverage standard, which focuses on the institution's ratio of Tier 1 capital to
average total assets, adjusted for goodwill and certain other items, to
supplement their risk-based ratios. This minimum leverage ratio was set at 3%
and would apply only to those banking organizations receiving a regulatory
composite 1 rating. Most banking organizations will be required to maintain a
leverage ratio ranging from 1 to 2 percentage points above minimum standard.
Community Banks is also subject to various regulatory capital requirements
administered by federal and state banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on Community's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, each
subsidiary bank must meet specific capital guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgements by the regulators
about components risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
requires Community Banks to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2002, that
Community Banks has met all capital adequacy requirements to which they are
subject.
5
The following table summarizes Community's capital adequacy position:
At December 31, 2002
- ------------------------------------------------------------------------------------------------------------
Tier 1 Capital Total Risk-Based Capital Leverage
Ratio (A) Ratio(B) Ratio (C)
- ------------------------------------------------------------------------------------------------------------
Required Minimum 4.0% 8.0% 4.0%
Well Capitalized 6.0 10.0 5.0
Community Banks, Inc. 11.2 12.3 8.2
(A) Tier 1 capital divided by year-end risk-adjusted assets, as defined by the
risk-based capital guidelines.
(B) Total capital divided by year-end
risk-adjusted assets.
(C) Tier 1 capital divided by average total assets less
disallowed intangible assets.
Other Information
- -----------------
Community's internet address is www.communitybanks.com. Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act, are available through Community's website as soon as
reasonably practicable after filing such material with, or furnishing it to, the
Securities and Exchange Commission. Copies of such reports are also available at
no charge.
Statistical Data:
- ----------------
The following is hereby incorporated by reference:
Pages 28, 42, and 43 of the Community Banks, Inc. Annual Report to
stockholders for the year ended December 31, 2002 contain the following
information concerning:
Financial Highlights, Average Balances, Effective Interest
Differential, and Interest Yields for the three years ended December
31, 2002.
Rate/Volume Analysis for the two years ended December 31, 2002.
Appendix A attached to Part I contains information concerning:
Return on Equity and Assets for the five years ended December 31,
2002.
Amortized Cost and Estimated Market Values of Investment Securities as
of December 31, 2002, 2001, and 2000.
6
Maturity Distribution of Securities as of December 31, 2002 (Market
Value).
Loan Account Composition as of December 31, 2002, 2001, 2000, 1999,
and 1998.
Maturities and Sensitivity to Changes in Interest Rates for
Commercial, Financial, and Agricultural Loans as of December 31, 2002.
Risk Elements as of December 31, 2002, 2001, 2000, 1999, and 1998.
Loan Loss Experience for the five years ended December 31, 2002.
Loans Charged Off and Recovered for the five years ended December 31,
2002.
Allowance for Loan Losses as of December 31, 2002, 2001, 2000, 1999,
and 1998.
Maturity Distribution of Time Deposits over $100,000 as of December
31, 2002.
Maturity Distribution of all Time Deposits as of December 31, 2002.
Interest Rate Sensitivity as of December 31, 2002.
7
Item 2. Properties:
The Corporation owns no real property except through its subsidiary bank.
Community Banks owns the following buildings: 150 Market Street, Millersburg,
Dauphin County, Pennsylvania; 13-23 South Market Street, Elizabethville, Dauphin
County, Pennsylvania; 3679 Peters Mountain Road, Halifax, Dauphin County,
Pennsylvania; 906 North River Road, Halifax, Dauphin County, Pennsylvania; 800
Peters Mountain Road, Dauphin, Dauphin County, Pennsylvania; Main and Market
Streets, Lykens, Dauphin County, Pennsylvania; 29 East Main Street, Tower City,
Porter Township, Schuylkill County, Pennsylvania; 29 East Main Street, Tremont,
Schuylkill County, Pennsylvania; 2 North Second Street, St. Clair, Schuylkill
County, Pennsylvania; Port Carbon Highway, St. Clair, Schuylkill County,
Pennsylvania; 300 East Independence Street, Shamokin, Northumberland County,
Pennsylvania; 1251 Centre Turnpike, Orwigsburg, Schuylkill County, Pennsylvania;
One South Arch Street, Milton, Northumberland County, Pennsylvania; 30 S. Church
Street, Hazleton, Luzerne County, Pennsylvania; 702 West Main Street, Valley
View, Schuylkill County, Pennsylvania; Route 25, East Main Street, Valley View,
Schuylkill County, Pennsylvania; 735 Center Street, Ashland, Schuylkill County,
Pennsylvania; 9-11 N. Centre Street, Pottsville, Schuylkill County,
Pennsylvania; One Westside Drive, Shamokin Dam, Snyder County, Pennsylvania;
2796 Old Post Road, Linglestown, Dauphin County, Pennsylvania; 5060 Jonestown
Road, Lower Paxton, Dauphin County, Pennsylvania; 201 St. John's Church Road,
Camp Hill, Hampden Township, Cumberland County, Pennsylvania; 100 E. King
Street, East Berlin, Adams County, Pennsylvania; 3421 Carlisle Road, Dover, York
County, Pennsylvania; 29 N. Washington Street, Gettysburg, Adams County,
Pennsylvania; 57-59 Main Street, Glen Rock, York County, Pennsylvania; 234 N.
Main Street, Loganville, York County, Pennsylvania; 16576 Susquehanna Trail
South, New Freedom, York County, Pennsylvania; Corner of Noss Road & Route 616,
York New Salem, York County, Pennsylvania; 3093 Cape Horn Road, Red Lion, York
County, Pennsylvania; 55 Wetzel Drive, Hanover, York County, Pennsylvania; 2685
South Queen St., York, York County, Pennsylvania; and 4501 Hanover Pike,
Manchester, Carroll County, Maryland.
In addition to the offices above, Community Banks leases offices at Main
Street, Pillow, Dauphin County, Pennsylvania, pursuant to a lease which, with
renewal options, will extend to the year 2008; 600 Carlisle Street, Hanover,
York County, Pennsylvania, pursuant to a lease which, with renewal options, will
extend to the year 2006; and 509 Greenbriar Road, York, York County,
Pennsylvania, pursuant to a lease which, with renewal options, will extend to
the year 2029. Also, the Bank leases offices at 390 E. Penn Drive, Enola,
Cumberland County, Pennsylvania; Route 93, Conyngham, Luzerne County,
Pennsylvania; 77 Airport Road, Hazleton, Luzerne County, Pennsylvania; 6700
Derry Street, Rutherford, Dauphin County, Pennsylvania; 16 N. George St., York,
York County, Pennsylvania; 2146 North Second Street, Harrisburg, Dauphin County,
Pennsylvania; and 750 East Park Drive, Harrisburg, Dauphin County, Pennsylvania.
Community Banks also owns real property through its subsidiary, PSB Realty,
at the following locations: 1191 Eichelberger Street, Hanover, York County,
Pennsylvania; 155 Glen Drive, Manchester, York County, Pennsylvania; 1345
Baltimore Street, Hanover, York County, Pennsylvania; 5625 York Road, New
Oxford, Adams County, Pennsylvania; and 2508 Eastern Boulevard, York, York
County, Pennsylvania.
From time to time, the subsidiary bank also acquires real estate by virtue
of foreclosure proceedings, such real estate is disposed of in the usual and
ordinary course of business as expeditiously as is prudently possible.
8
Item 3. Legal Proceedings:
- ---------------------------
There are no material pending legal actions, other than litigation
incidental to the business of the Corporation, to which the Corporation is a
party.
Item 4. Submission of Matters to a Vote of Security Holders:
- -------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of 2002.
APPENDIX A
- ----------
RETURN ON EQUITY AND ASSETS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, 2000, 1999, AND 1998
-----------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Return on average equity 15.46% 12.21% 15.08% 14.40% 12.22%
Return on average assets 1.17% .97% 1.12% 1.22% 1.21%
Average equity to average assets 7.55% 7.96% 7.45% 8.44% 9.88%
Dividend payout ratio 36.07% 43.25% 37.48% 36.70% 40.09%
9
APPENDIX A
- ----------
Continued
AMORTIZED COST AND ESTIMATED VALUES OF INVESTMENT SECURITIES
(dollars in thousands)
At December 31, 2002, 2001, and 2000
------------------------------------
2002 2001 2000
--------------------------------------------------------------------------------
Estimated Estimated Estimated
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
-------------------------------------------------------------------------------
Mortgage-backed U.S. government agencies $ 206,450 $ 210,825 $ 74,403 $ 74,370 $ 74,685 $ 74,689
U.S. Government corporations and agencies 130,947 134,334 144,640 142,544 147,422 144,410
Obligations of states and political sub-
divisions 172,391 177,135 172,223 169,993 102,741 104,173
Corporate securities 95,022 93,094 99,561 98,405 42,350 42,498
Equity securities 50,610 52,413 57,846 58,589 23,689 24,049
--------- --------- --------- --------- --------- ---------
Total $ 655,420 $ 667,801 $ 548,673 $ 543,901 $ 390,887 $ 389,819
========= ========= ========= ========= ========= =========
COMMUNITY BANKS, INC. AND SUBSIDIARIES
MATURITY DISTRIBUTION OF SECURITIES (Fair Value)
(dollars in thousands)
as of December 31, 2002
-----------------------
One Five Weighted
Within Through Through After Average Average
One Year Five Years Ten Years Ten Years Total Maturity Yield (a)
----------------------------------------------------------------------------------------
U.S. Government agencies $ 9,675 $ 44,159 $ 149,204 $ 142,121 $ 345,159 11yr. 7mos. 4.80%
Obligations of states and political
subdivisions 544 729 6,060 169,802 177,135 17yr. 6mos. 7.09%
Other 4,036 15,386 25,396 100,689 145,507 12yr. 11mos. 4.99%
---------- --------- --------- --------- ---------
Total $ 14,255 $ 60,274 $ 180,660 $ 412,612 $ 667,801 14yr. 2mos. 5.45%
========= ========= ========= ========= =========
Percentage of total 2.13% 9.03% 27.05% 61.79% 100.0%
==== ==== ===== ===== =====
Weighted average yield (a) 2.85% 4.94% 5.22% 5.71% 5.45%
==== ==== ==== ==== ====
(a) Weighted average yields were computed on a tax equivalent basis using a
federal tax rate of 35%.
The Corporation monitors investment performance and valuation on an ongoing
basis to evaluate investment quality. An investment which has experienced a
decline in market value considered to be other than temporary is written down to
its net realizable value and the amount of the write down is accounted for as a
realized loss.
10
APPENDIX A
- ----------
Continued
LOAN ACCOUNT COMPOSITION
(dollars in thousands)
as of December 31
-----------------
2002 2001 2000 1999 1998
--------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Commercial, financial and agricultural $ 122,608 13.6% $158,223 18.4% $135,612 16.6% $107,419 15.0% $105,416 16.7%
Real-estate-construction 15,693 1.7 21,225 2.5 22,403 2.7 17,003 2.4 17,643 2.8
Real estate-mortgage 657,655 72.6 554,354 64.5 540,639 66.0 464,680 65.0 390,152 62.0
Personal-installment 93,175 10.3 107,893 12.6 109,976 13.4 117,317 16.4 104,388 16.6
Other 16,252 1.8 17,209 2.0 10,228 1.3 8,583 1.2 12,169 1.9
--------- ------ -------- ----- -------- ----- -------- ----- -------- -----
905,383 100.0% 858,904 100.0% 818,858 100.0% 715,002 100.0% 629,768 100.0%
--------- ===== -------- ===== -------- ===== -------- ===== -------- =====
Less:
Unearned discount (815) (1,626) (3,984) (6,986) (10,018)
Reserve for loan losses (12,343) (12,132) (10,328) (8,976) (8,608)
--------- -------- -------- -------- --------
$ 892,225 $845,146 $804,546 $699,040 $611,142
========= ======== ======== ======== ========
The Corporation's loan activity is principally with customers located
within its local market area. The Corporation continues to maintain a
diversified loan portfolio and has no significant loan concentration in any
economic sector. Commercial, financial, and agricultural loans consist
principally of commercial lending secured by financial assets of businesses
including accounts receivable, inventories and equipment, and, in most cases,
include liens on real estate. Real estate construction and mortgage loans are
primarily 1 to 4 family residential loans secured by residential properties
within the bank's market area. Personal-installment loans consist principally of
secured loans for items such as automobiles, property improvement, household and
other consumer goods. The Corporation continues to sell fixed rate mortgages in
the secondary market to manage interest rate risk. Historically, relative credit
risk of commercial, financial and agricultural loans has generally been greater
than that of other types of loans.
11
APPENDIX A
- ----------
Continued
MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST
RATES FOR COMMERCIAL, FINANCIAL AND AGRICULTURAL
AND REAL-ESTATE CONSTRUCTION LOANS
(dollars in thousands)
as of December 31, 2002
-----------------------
Maturity Distribution
---------------------
One Year One to Over Five
Or Less Five Years Years Total
------- ---------- ----- -----
Commercial, financial and $ 99,292 $ 89,308 $ 106,906 $ 295,506
agricultural 2,312 56 247 2,615
Real estate-construction ----------- ---------- ----------- ----------
$ 101,604 $ 89,364 $ 107,153 $ 298,121
=========== ========== =========== ==========
Interest Sensitivity
--------------------
Variable Fixed Total
-------- ----- -----
Due in one year or less $ 75,120 $ 26,484 $ 101,604
Due after one year 124,896 71,621 196,517
----------- ---------- -----------
$ 200,016 $ 98,105 $ 298,121
=========== ========== ===========
12
APPENDIX A
- ----------
Continued
RISK ELEMENTS (a)
(dollars in thousands)
as of December 31
-----------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Loans on which accrual of interest has
been discontinued:
Commercial, financial and agricultural $ 757 $ 3,783 $ 2,042 $ 2,231 $ 3,037
Mortgages 8,250 6,952 3,445 3,203 2,419
Other 386 355 356 222 282
--------- -------- -------- -------- --------
9,393 11,090 5,843 5,656 5,738
--------- -------- -------- -------- --------
Loans renegotiated with borrowers --- --- 205 254 248
--------- -------- -------- -------- --------
Total non-accrual loans 9,393 11,090 6,048 5,910 5,986
Other real estate owned 1,183 631 416 615 853
--------- -------- -------- -------- --------
Total non-performing assets 10,576 11,721 6,464 6,525 6,839
Loans past due 90 days or more:
Commercial, financial and agricultural --- 1,002 8 146 47
Mortgages 913 405 495 147 353
Personal installment 26 239 98 73 36
Other 22 13 11 12 7
--------- -------- -------- -------- --------
961 1,659 612 378 443
--------- -------- -------- -------- --------
Total $ 11,537 $ 13,380 $ 7,076 $ 6,903 $ 7,282
========= ======== ======== ======== ========
(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.
The approximate amount that would have been accrued on those loans for
which interest was discontinued in 2002 was $250,000. Interest income from these
loans would have approximated $605,000 in 2001.
The change in non-performing loans is primarily a result of the impact of
economic conditions upon the loan portfolio. The economic outlook remains
uncertain. If the economy in the Corporation's trading area improves this could
have a positive impact on delinquency trends and collectibility of loans.
However, the commercial real estate market in the Corporation's trading area
remains stagnant. The ability of borrowers to liquidate collateral is dependent
upon the demand for commercial real estate projects and a buyer's ability to
finance commercial real estate projects.
13
APPENDIX A
- ----------
Continued
LOAN LOSS EXPERIENCE
(dollars in thousands)
For the years ended December 31, 2002, 2001, 2000, 1999, and 1998
-----------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Loans at year-end, net of unearned income $904,568 $857,278 $814,874 $708,016 $619,750
======== ======== ======== ======== ========
Average loans balance (a) $886,808 $838,178 $768,204 $665,422 $579,926
======== ======== ======== ======== ========
Balance, allowance for loan losses,
January 1 $ 12,132 $ 10,328 $ 8,976 $ 8,608 $ 8,535
Net charge-offs (b) (3,139) (3,276) (1,511) (1,220) (1,981)
Provision for loan losses, 3,350 5,080 2,863 1,588 2,054
-------- -------- -------- -------- --------
Balance, allowance for loan losses,
December 31 $ 12,343 $ 12,132 $ 10,328 $ 8,976 $ 8,608
======== ======== ======== ======== ========
Net charge-offs to loans at year end .35% .38% .19% .17% .32%
Net charge-offs to average loans (a) .35% .39% .20% .18% .34%
Balance of allowance for loan losses
to loans at year end 1.36% 1.42% 1.27% 1.27% 1.39%
(a) Averages are a combination of monthly and daily averages.
(b) For detail, see Schedule of Loans Charged Off and Recovered.
The allowance for loan losses is based upon management's continuing
evaluation of the loan portfolio. A review as to loan quality, current
macro-economic conditions and delinquency status is performed at least on a
quarterly basis. The provision for loan losses is adjusted quarterly based upon
current review. The table on page 16 presents an allocation by loan categories
of the allowance for loan losses at December 31 for the last five years. In
retrospect, the specific allocation in any particular category may prove
excessive or inadequate and consequently may be reallocated in the future to
reflect the then current condition. Accordingly, the entire allowance is
available to absorb losses in any category.
14
APPENDIX A
- ----------
Continued
The amount of the allowance assigned to each component of the loan
portfolio is derived from a combination of factors. Estimation methods and
assumptions used in the process are reviewed periodically by both management and
a committee of the board of directors. The methodology used by the Corporation
in estimating the allowance has not changed during 2002.
The Corporation's allowance for loan losses is based upon management's
quarterly review of the loan portfolio. The purpose of the review is to assess
loan quality, identify impaired loans, analyze delinquencies, ascertain loan
growth, evaluate potential charge-offs and recoveries, and assess general
economic conditions in the markets its affiliates serve.
Commercial and real estate loans are internally risk rated by the
Corporation's loan officers and periodically reviewed by loan quality personnel.
Consumer and residential real estate loans are generally analyzed in the
aggregate as they are of relative small dollar size and homogeneous in nature.
In addition to economic conditions, consideration of loan portfolio
diversification, delinquency and historic loss experience, consideration is also
given to examinations performed by the regulatory authorities.
To determine the allowance and corresponding loan loss provision, the
amount required for specific loans is first determined. For certain commercial
and construction loans, this amount is based upon specific borrower data
determined by reviewing individual non-performing, delinquent, or potentially
troubled credits. The remaining commercial as well as consumer, and residential
real estate loans are evaluated as part of various pools. These pool reserves,
generally are based upon historic charge-offs and delinquency history, other
known trends and expected losses over the remaining lives of these loans, as
well as the condition of local, regional and national economies and other
qualitative factors.
To ensure adequacy to a higher degree of confidence, a portion of the
allowance for loan losses is considered unallocated. The unallocated portion of
the allowance is intended to provide for probable losses that are not otherwise
identifiable. The inherent unallocated allowance includes management's
subjective determination of amounts necessary for such things as economic
uncertainties and the possible use of imprecise estimates in determining the
allocated portion of the allowance. The unallocated portion of the allowance,
when added to these allocated amounts, brings the total to the amount deemed
prudent and reasonable by management at that time. This unallocated portion is
available to absorb losses sustained anywhere within the loan portfolios.
Management believes that the allowance for loan losses at December 31, 2002 was
adequate to absorb probable credit losses in the portfolio as of that date.
The provision for loan losses totaled $3,350,000 for the year ended
December 31, 2002, compared to $5,080,000, $2,863,000, $1,588,000, and
$2,054,000 for the years ended December 31, 2001, 2000, 1999, and 1998,
respectively. The relationship of the allowance for loan losses to loans at
year-end approximated 1.36% compared to ratios ranging from 1.27% to 1.42% for
the previous four years. In reviewing the adequacy of the allowance for loan
losses, management considered the relationship of non-accrual loans and accruing
loans contractually past due 90 days or more to total assets. This relationship
approximated .62%, .84%, .51%, .55%, and .63% at year-end 2002, 2001, 2000,
1999, and 1998, respectively.
15
APPENDIX A
- ----------
Continued
LOANS CHARGED OFF AND RECOVERED
(dollars in thousands)
For the years ended December 31, 2002, 2001, 2000, 1999, and 1998
-----------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Loans charged off:
Commercial, financial and agricultural $ 1,355 $ 2,275 $ 303 $ 489 $ 1,304
Real estate-mortgage 1,997 484 521 190 248
Personal installment 86 108 215 903 833
Other 742 909 886 81 77
-------- -------- -------- -------- --------
Total 4,180 3,776 1,925 1,663 2,462
-------- -------- -------- -------- --------
Loans recovered:
Commercial, financial and agricultural 507 120 23 140 53
Real estate-mortgage 153 108 83 43 104
Personal installment 363 254 298 243 299
Other 18 18 10 17 25
-------- -------- -------- -------- --------
Total 1,041 500 414 443 481
-------- -------- -------- -------- --------
Net charge-offs $ 3,139 $ 3,276 $ 1,511 $ 1,220 $ 1,981
======== ======== ======== ======== ========
ALLOCATION OF
ALLOWANCE FOR LOAN LOSSES*
(dollars in thousands)
as of December 31
-----------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Loans:
Commercial, financial and agricultural $ 6,305 $ 9,285 $ 5,268 $ 3,030 $ 3,008
Real estate-construction --- 10 14 9 7
Real estate-mortgage 1,936 965 1,593 1,509 1,726
Installment 1,767 1,030 1,748 1,575 1,566
Unallocated 2,335 842 1,705 2,853 2,301
-------- -------- -------- -------- --------
Balance $ 12,343 $ 12,132 $ 10,328 $ 8,976 $ 8,608
======== ======== ======== ======== ========
*See Schedule "Loan Account Composition" for the percent of loan classification
to total loans.
16
APPENDIX A
- ----------
Continued
MATURITY DISTRIBUTION OF TIME
DEPOSITS OF $100,000 OR MORE
(dollars in thousands)
as of December 31, 2002
-----------------------
Remaining to Maturity:
Less than three months $ 20,776
Three months to six months 13,636
Six months to twelve months 32,339
More than twelve months 45,296
---------
$ 112,047
=========
MATURITY DISTRIBUTION OF ALL
TIME DEPOSITS
(dollars in thousands)
as of December 31, 2002
-----------------------
Remaining Maturity:
One year or less $ 312,177
After one year through two years 160,595
After two years through three years 63,556
After three years through four years 17,451
After four years through five years 60,055
After five years 5,204
---------
$ 619,038
=========
17
APPENDIX A
- ----------
Continued
INTEREST RATE SENSITIVITY
The excess of interest-earning assets over interest-bearing liabilities,
which are expected to mature or reprice within a given period is commonly
referred to as the "GAP" for that period. For an institution with a positive
GAP, the amount of income earned on its assets fluctuates more than the cost of
its liabilities in response to changes in the prevailing rates of interest
during the period. Accordingly, in a period of decreasing interest rates,
institutions with a positive GAP will experience a greater decrease in the yield
on their assets than in the cost of their liabilities. Conversely, in a period
of rising interest rates, institutions with a positive GAP face a greater
increase in the yield on their assets than in the cost of their liabilities. An
increasing interest rate environment is favorable to institutions with a
positive GAP because more of their assets than their liabilities adjust during
the period and, accordingly, the increase in the yield of their assets is
greater than the increase in the cost of their liabilities.
The negative GAP between the Corporation's interest-earning assets and
interest-bearing liabilities maturing or repricing within one year approximated
5% of total assets at December 31, 2002.
Significant maturity/repricing assumptions (based on internal analysis)
include the presentation of all savings, Money Market, and NOW accounts as being
100% interest rate sensitive. Equity securities are reflected in the longest
time interval. Assumed pay downs on mortgage-backed securities and loans have
also been included in all time intervals.
The following table sets forth the scheduled repricing or maturity of the
Corporation's interest-earning assets and interest-bearing liabilities at
December 31, 2002.
18
APPENDIX A
- ----------
Continued
Interest Rate Sensitivity
- ------------------------------------------------------------------------------------------------------------------------------
At December 31, 2002 1-90 90-180 180-365 1 year
Dollars in thousands days days days or more Total
- ------------------------------------------------------------------------------------------------------------------------------
Assets
Interest-bearing deposits in
other banks $ 951 --- --- --- $ 951
Investment securities 110,487 $ 40,220 $ 67,684 $ 449,410 667,801
Loans, net of unearned income* 299,987 70,423 87,846 446,312 904,568
Loans held for sale 96 96 192 2,565 2,949
- ------------------------------------------------------------------------------------------------------------------------------
Total $ 411,521 $ 110,739 $ 155,722 $ 898,287 $1,576,269
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities
Savings $ 345,598 $ --- $ --- $ --- $ 345,598
Time 81,818 60,044 107,129 258,000 506,991
Time in denominations of
$100,000 or more 20,776 13,636 32,339 45,296 112,047
Short-term borrowings 69,125 --- --- --- 69,125
Long-term debt 840 840 6,680 312,173 320,533
Subordinated debentures 15,000 --- --- --- 15,000
- ------------------------------------------------------------------------------------------------------------------------------
Total $ 533,157 $ 74,520 $ 146,148 $ 615,469 $1,369,294
- ------------------------------------------------------------------------------------------------------------------------------
Interest Sensitivity Gap
Periodic $(121,636) $ 36,219 $ 9,574 $ 282,818
Cumulative (85,417) (75,843) 206,975
Cumulative gap as a percentage
of earning assets (8)% (5)% (5)% 13%
*Does not include non-accrual loans.
Forward-Looking Statements:
- --------------------------
Incorporated by reference is the information appearing under the heading
"Forward-Looking Statements" on page 40 of the Annual Report to Stockholders for
the year ended December 31, 2002 (hereafter referred to as the "Annual Report").
19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters:
- ------- ----------------------------------------------------------------------
Incorporated by reference is the information appearing under the heading
"Market for the Corporation's Common Stock and Related Securities Holders
Matters" on page 41 of the Annual Report.
On December 19, 2002, the Corporation, through its subsidiary CMTY Capital
Trust I, issued and sold to TPref Funding III, Ltd., 15,000 trust preferred
securities for an aggregate offering price of $15 million. The trust securities
were exempt from registration under the private offering exemption in Section
4(2) of the Securities Act of 1933. The proceeds of the sale were used by CMTY
for general corporate purposes.
Equity Compensation Plan Information
Plan Category Number of securities Weighted average Number of securities
to be issued upon exercise price of remaining available
exercise of outstanding options, for future issuance
outstanding options, warrants and rights under equity
warrants and rights compensation plans
(excluding securities
reflected in column
(a))
(a) (b) (c)
Equity compensation
plans approved by
security holders 786,397 $19.74 882,669
Equity compensation
plans not approved
by security holders -0- -0- -0-
Total 786,397 $19.74 882,669
Item 6. Selected Financial Data:
- ------- ------------------------
Incorporated by reference is the information appearing under the heading
"Financial Highlights" on page 28 of the Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operation:
-------------
Incorporated by reference is the information appearing under the headings
"Rate/Volume Analysis"; "Average Balances, Effective Interest Differential and
Interest Yields"; and "Management's Discussion of Financial Condition and
Results of Operations' on pages 29 through 41 of the Annual Report.
20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------- ----------------------------------------------------------
Community Banks, Inc. has only virtually no involvement with derivative
financial instruments and does not use them for trading purposes. These
derivatives are embedded in their host contract and are not required to be
bifurcated. The business of the Corporation and the composition of its balance
sheet consists of investments in interest-earning assets (primarily loans,
mortgage-backed securities and investment securities), which are primarily
funded by interest-bearing liabilities (deposits and borrowings). Such financial
instruments have varying levels of sensitivity to changes in market interest
rates resulting in market risk. Other than loans, which are originated and held
for sale, all of the financial instruments of the Corporation are for other than
trading purposes.
Interest rate sensitivity results when the maturity or repricing intervals
of interest-earning assets, interest-bearing liabilities, and off-balance sheet
financial instruments are different, creating a risk that changes in the level
of market interest rates will result in disproportionate changes in the value
of, and the net earnings generated from, the Corporation's interest-earning
assets, interest-bearing liabilities, and off-balance sheet financial
instruments. The Corporation's exposure to interest rate sensitivity is managed
primarily through the Corporation's strategy of selecting the types and terms of
interest-earning assets and interest-bearing liabilities which generate
favorable earnings, while limiting the potential negative effects of changes in
market interest rates. Since the Corporation's primary source of
interest-bearing liabilities is customer deposits, its ability to manage the
types and terms of such deposits may be somewhat limited by customer preferences
in the market areas in which it operates. Borrowings, which include Federal Home
Loan Bank (FHLB) advances and short-term loans, subordinated notes, and other
short-term and long-term borrowings are generally structured with specific terms
which in management's judgement, when aggregated with the terms for outstanding
deposits and matched with interest-earning assets, mitigate the Corporation's
exposure to interest rate sensitivity.
The rates, terms and interest rate indices of the Corporation's
interest-earning assets result primarily from its strategy of investing in loans
and securities (a substantial portion of which have adjustable-rate terms) which
permit the Corporation to limit its exposure to interest rate sensitivity,
together with credit risk, while at the same time achieving a positive interest
rate spread compared to the cost of interest-bearing liabilities.
Significant Assumptions Utilized in Managing Interest Rate Sensitivity
- ----------------------------------------------------------------------
Managing the Corporation's exposure to interest rate sensitivity involves
significant assumptions about the exercise of embedded options and the
relationship of various interest rate indices of certain financial instruments.
Embedded Options
- ----------------
A substantial portion of the Corporation's loans and mortgage-backed
securities and residential mortgage loans contain significant embedded options,
which permit the borrower to prepay the principal balance of the loan prior to
maturity ("prepayments") without penalty. A loan's propensity for prepayment is
dependent upon a number of factors, including the current interest rate and
interest rate index (if any) of the loan, the financial ability of the borrower
to refinance, the economic benefit to be obtained from refinancing, availability
of refinancing at attractive terms, as well as economic and other factors in
specific geographic areas which affect the sales and price levels of residential
property. In a changing interest rate environment, prepayments may increase or
decrease on fixed and adjustable-rate loans pursuant to the current relative
levels and expectations of future short and long-term interest rates.
21
Investment securities, other than mortgage-backed securities and those with
early call provisions, generally do not have significant embedded options and
repay pursuant to specific terms until maturity. While savings and checking
deposits generally may be withdrawn upon the customer's request without prior
notice, a continuing relationship with such customers is generally predictable
resulting in a dependable and uninterrupted source of funds. Time deposits
generally have early withdrawal penalties, while term FHLB borrowings and
subordinated notes have prepayment penalties, which discourage customer
withdrawal of time deposits and prepayment by the Corporation of FHLB borrowings
and subordinated notes prior to maturity.
Interest Rate Indices
- ---------------------
The Corporation's loans and mortgage-backed securities are primarily
indexed to the national interest indices. When such loans and mortgage-backed
securities are funded by interest-bearing liabilities which are determined by
other indices, usually deposits and FHLB borrowings, a changing interest rate
environment may result in different levels of changes in the indices leading to
disproportionate changes in the value of, and net earnings generated from, the
Corporation's financial instruments. Each index is unique and is influenced by
different external factors, therefore, the historical relationships in various
indices may not be indicative of the actual change which may result in a
changing interest rate environment.
Interest Rate Sensitivity Measurement
- -------------------------------------
In addition to periodic GAP reports comparing the sensitivity of
interest-earning assets and interest-bearing liabilities to changes in interest
rates, management also utilizes a report which measures the exposure of the
Corporation's economic value of equity to interest rate risk. The model
calculates the present value of assets, liabilities and equity at current
interest rates, and at hypothetically higher and lower interest rates at one
percent intervals. The present value of each major category of financial
instruments is calculated by the model using estimated cash flows based on
prepayments, early withdrawals, weighted average contractual rates and terms,
and discount rates for similar financial instruments. The resulting present
value of longer term fixed-rate financial instruments are more sensitive to
change in a higher or lower interest rate scenario, while adjustable-rate
financial instruments largely reflect only a change in present value
representing the difference between the contractual and discounted rates until
the next interest rate repricing date. The information provided by these
analyses provides some indication of the potential for interest rate adjustment,
but does not necessarily mean that the rate adjustment will occur or that it
will occur in accordance with the assumptions. Despite these inherent
limitations, Community believes that the tools used to manage its level of
interest rate risk provide an appropriate measure of market risk exposure.
The following table reflects the estimated present value of assets,
liabilities and equity using the model for Community Banks, Inc. as of December
31, 2002 at current interest rates and hypothetically, higher and lower interest
rates of one and two percent.
22
Base
-2% -1% Present Value +1% +2%
------------------------------------------------------------------------------
Assets (dollars in thousands)
Cash, interest-bearing time deposits,
and federal funds sold....................... $ 37,088 $ 37,088 $ 37,088 $ 37,088 $ 37,088
Investment securities............................ 678,878 661,164 643,451 625,737 608,023
Loans, net of unearned income.................... 934,143 923,134 911,547 900,261 888,475
Loans held for sale.............................. 11,325 11,228 11,134 11,046 10,961
Other assets..................................... 71,301 71,301 71,301 71,301 71,301
---------- ---------- ---------- ---------- ----------
Total assets................................ $1,732,735 $1,703,915 $1,674,521 $1,645,433 $1,615,848
========== ========== ========== ========== ==========
Liabilities
Deposits......................................... $1,161,271 $1,153,431 $1,144,891 $1,136,570 $1,128,461
Short-term borrowings............................ 67,234 67,234 67,234 67,234 67,234
Long-term debt................................... 404,473 371,429 344,236 321,562 302,401
Subordinated debentures 15,000 15,000 15,000 15,000 15,000
Other liabilities................................ 15,056 15,056 15,056 15,056 15,056
---------- ---------- ---------- ---------- ----------
Total liabilities........................... 1,663,034 1,622,150 1,586,417 1,555,422 1,528,152
---------- ---------- ---------- ---------- ----------
Total stockholders' equity.................. 69,701 81,765 88,104 90,011 87,696
---------- ---------- ---------- ---------- ----------
Total liabilities and stockholders'
equity................................... $1,732,735 $1,703,915 $1,674,521 $1,645,433 $1,615,848
========== ========== ========== ========== ==========
Item 8. Financial Statements and Supplementary Data:
- ------- --------------------------------------------
Critical Accounting Policies
The Corporation has established various accounting policies that govern the
application of accounting principles generally accepted in the United States of
America in the preparation of its financial statements. The significant
accounting policies of the Corporation are described in the footnotes to the
consolidated financial statements. Certain accounting policies involve
significant judgments and assumptions by management that have a material impact
on the carrying value of certain assets and liabilities; management considers
such accounting policies to be critical accounting policies. The judgments and
assumptions used by management are based on historical experiences and other
factors, which are believed to be reasonable under the circumstances. Because of
the nature of the judgments and assumptions made by management, actual results
could differ from these judgments and estimates, which could have a material
impact on the carrying values of assets and liabilities and the results of
operations of the Corporation. The Corporation believes that the allowance for
loan losses, which is discussed in the section titled "Determination of the
Allowance for Loan Losses" (incorporated by reference on page 37 of the Annual
Report) requires the most significant judgments and estimates used in the
preparation of its consolidated financial statements. See "Footnote 2 - Summary
of Significant Accounting Policies" (incorporated by reference on pages 10 and
11 of the Annual Report) for a detailed description of the Corporation's
estimation process and methodology related to the allowance for loan losses.
23
The consolidated financial statements, together with the report thereon of
PricewaterhouseCoopers LLP dated January 24, 2003, are incorporated by reference
to pages 6 through 27 of the Annual Report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
- ------- ----------------------------------------------------------------
Financial Disclosure:
----------------------
None.
24
PART III
Item 10. Directors and Executive Officers of the Registrant:
- --------- ---------------------------------------------------
Incorporated by reference to the Corporation's definitive Proxy Statement
for its 2003 Annual Meeting of Shareholders, which will be filed on or before
April 30, 2003.
Item 11. Executive Compensation:
- ------- ----------------------
Incorporated by reference to the Corporation's definitive Proxy Statement
for its 2003 Annual Meeting of Shareholders, which will be filed on or before
April 30, 2003.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
- -------- -------------------------------------------------------------------
Related Stockholder Matters:
----------------------------
Incorporated by reference to the Corporation's definitive Proxy Statement
for its 2003 Annual Meeting of Shareholders, which will be filed on or before
April 30, 2003.
Item 13. Certain Relationships and Related Transactions:
- -------- -----------------------------------------------
Incorporated by reference to the Corporation's definitive Proxy Statement
for its 2003 Annual Meeting of Shareholders, which will be filed on or before
April 30, 2003.
Item 14. 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 annual 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
annual 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.
25
PART IV
Item 15. Exhibits, Financial Statements Schedules and Reports on Form 8-K:
- -------- -----------------------------------------------------------------
Reference (page)
----------------
(a) (1) Consolidated Financial Statements Form Annual Report to
10-K Shareholders
---- ------------
Report of Independent Accountants --- 27
Balance Sheets as of December 31, 2002
and 2001 --- 6
Statements of Income for each of the three years
ended December 31, 2002 --- 7
Statements of Changes in Stockholders' Equity for each of the
three years ended December 31, 2002. --- 8
Statements of Cash Flows for each of the three years ended
December 31, 2002 --- 9
Notes to Financial Statements --- 10-26
(a) (2) All other schedules are omitted since the required information
is not applicable or is not present in amounts sufficient to
require submission on the schedule.
(a) (3) Exhibits
(13) Portions of the Annual Report to Security Holders
incorporated by reference within this document is filed as
part of this report.
(21) Subsidiaries of the Registrant (See Item 1, page 4.)
(b) The registrant filed the following reports on Form 8-K during the
fourth calendar quarter of the year ending December 31, 2002:
Report Dated October 18, 2002
-----------------------------
Registrant announced its earnings for the period ended
September 30, 2002.
Report Dated October 30, 2002
-----------------------------
Registrant released information pursuant to Regulation FD with respect
to presentation materials, which were made available to the investment
community by Community Banks, Inc.
Report Dated November 5, 2002
-----------------------------
Registrant announced a stock repurchase agreement.
26
Report Dated December 17, 2002
------------------------------
Registrant announced an Agreement and Plan of Reorganization between
Community Banks, Inc. and the Abstracting Company of York County.
(c) Exhibits
(3)(i) Articles of Incorporation - Incorporated by reference to
Exhibit 3.1, attached to Community's registration on Form 8-A,
filed on May 13, 2002
(3)(ii)By-Laws
(4) Instruments defining the rights of the holders of trust
capital securities and sold by the Corporation are not
attached, as the amount of such securities is less than 10%
of the consolidated assets of the Corporation and its
subsidiaries, and the securities have not been registered.
The Corporation agrees to provide copies of such instruments
to the SEC upon request.
(10) Material Contracts
10.1 2000 Directors' Stock Option Plan, incorporated by reference to
Exhibit 4 to Community's registration on Form S-8, filed on May
17, 2000
10.2 1998 Long-Term Incentive Plan, incorporated by reference to
Exhibit 4 to Community's registration on Form S-8, filed on June
18, 1998
10.3 Form of Stock Option Agreement - Directors Stock Option Plan
10.4 Form of Stock Option Agreement - Long-Term Incentive Plan
10.5 Employment Agreement of Eddie L. Dunklebarger
10.6 Employment Agreement of Donald F. Holt
10.7 Employment Agreement, and amendment thereto, of Robert W. Lawley
10.8 Employment Agreement, and amendment thereto, of Anthony N. Leo
10.9 Employment Agreement, and amendment thereto, of Jeffrey M.
Seibert
10.10 Salary Continuation Agreement, and amendment thereto, of Eddie
L. Dunklebarger
10.11 Salary Continuation Agreement, and amendment thereto, of Robert
W. Lawley
10.12 Salary Continuation Agreement, and amendment thereto, of Anthony
N. Leo
10.13 Salary Continuation Agreement, and amendment thereto, of Jeffrey
M. Seibert
10.14 Rights Agreement between Community Banks, Inc. and Community
Banks, dated February 28, 2002, incorporated by reference to
Exhibit 1 to Community's registration on Form 8-A, filed on
February 27, 2002
10.15 Community Banks, Inc. 401(k) Plan
23.1 Consent of Independent Accountants - PricewaterhouseCoopers LLP
23.2 Consent of Independent Accountants - Beard Miller Company LLP
99.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.3 Independent Auditor's Report - Beard Miller Company LLP
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Community Banks, Inc.
By: /S/ (Eddie L. Dunklebarger)
-----------------------------
(Eddie L. Dunklebarger)
Chairman of the Board, President and Director
Date: 3/28/03
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/S/ (Donald F. Holt) Ex. Vice President and 3/28/03
- ---------------------------------- Chief Financial Officer
(Donald F. Holt)
/S/ (Ronald E. Boyer) Director 2/11/03
- ----------------------------------
(Ronald E. Boyer)
/S/ (Samuel E. Cooper) Director 2/11/03
- ----------------------------------
(Samuel E. Cooper)
/S/ (Kenneth L. Deibler) Director 2/11/03
- ----------------------------------
(Kenneth L. Deibler)
Director
- ----------------------------------
(Peter DeSoto)
/S/ (Thomas W. Long) Director 2/11/03
- ----------------------------------
(Thomas W. Long)
/S/ (Donald L. Miller) Director 2/11/03
- ----------------------------------
(Donald L. Miller)
28
/S/ (Thomas L. Miller) Director 2/11/03
- ----------------------------------
(Thomas L. Miller)
/S/ (Earl L. Mummert) Director 2/11/03
- ----------------------------------
(Earl L. Mummert)
Director
- ----------------------------------
(Wayne H. Mummert)
/S/ (Scott J. Newkam) Director 2/11/03
- ----------------------------------
(Scott J. Newkam)
/S/ (Robert W. Rissinger) Director 2/11/03
- ----------------------------------
(Robert W. Rissinger)
/S/ (Allen Shaffer) Director 2/11/03
- ----------------------------------
(Allen Shaffer)
/S/ (John W. Taylor, Jr.) Director 2/11/03
- ----------------------------------
(John W. Taylor, Jr.)
/S/ (James A. Ulsh) Director 2/11/03
- ----------------------------------
(James A. Ulsh)
29
CERTIFICATION
I, Eddie L. Dunklebarger, certify that:
1. I have reviewed this annual report on Form 10-K of Community Banks, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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
annual report (the "Evaluation Date"); and
c) presented in this annual 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
functions):
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
annual report whether 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 3/28/03 /s/ Eddie L. Dunklebarger
---------------------------- ---------------------------
Eddie L. Dunklebarger
Chairman and President
(Chief Executive Officer)
30
CERTIFICATION
I, Donald F. Holt, certify that:
1. I have reviewed this annual report on Form 10-K of Community Banks, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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
annual report (the "Evaluation Date"); and
c) presented in this annual 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
functions):
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
annual report whether 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 3/28/03 /s/ Donald F. Holt
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Donald F. Holt
Executive Vice President
(Chief Financial Officer)
31