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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
---------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2003
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
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES X NO
----- -----
Number of shares outstanding as of March 31, 2003
CAPITAL STOCK-COMMON 9,590,000
- -------------------- ---------------------
(Title of Class) (Outstanding Shares)
COMMUNITY BANKS, INC. and SUBSIDIARIES
INDEX 10-Q
PART I - Financial Information
Item 1. Financial Statements
Consolidated Interim Balance Sheets.................................. 3
Consolidated Interim Statements of Income............................ 4
Consolidated Interim Statements of Changes in Stockholders' Equity... 5
Consolidated Interim Statements of Cash Flows........................ 6
Notes to Consolidated Interim Financial Statements................... 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation.............................11-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 17
Item 4. Controls and Procedures ....................................... 17
PART II - Other Information
Item 1. Legal Proceedings.............................................. 18
Item 2. Changes in Securities and Use of Proceeds...................... 18
Item 3. Defaults Upon Senior Securities................................ 18
Item 4. Submission of Matters to a Vote of Security Holders............ 18
Item 5. Other Information.............................................. 18
Item 6. Exhibits and Reports on Form 8-K...............................18-20
SIGNATURES.................................................................21-23
2
COMMUNITY BANKS, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
Consolidated Interim Balance Sheets
(Unaudited)
(Dollars in thousands except per share data)
March 31, December 31,
2003 2002
-------------- -------------
ASSETS
Cash and due from banks..................................... $ 41,740 $ 36,137
Interest-bearing time deposits in other banks............... 1,106 951
Investment securities, available for sale................... 716,696 667,801
Loans....................................................... 940,730 904,568
Less: Allowance for loan losses......................... (12,653) (12,343)
-------------- ------------
Net loans..................................... 928,077 892,225
Premises and equipment, net................................. 24,012 24,209
Goodwill.................................................... 1,031 1,031
Identifiable intangible assets.............................. 710 729
Other real estate owned..................................... 729 1,183
Loans held for sale......................................... 8,292 11,483
Accrued interest receivable and other assets................ 45,551 44,149
-------------- -------------
Total assets........................................... $ 1,767,944 $ 1,679,898
============== =============
LIABILITIES
Deposits:
Demand (non-interest bearing)............................ $ 166,028 $ 168,277
Savings.................................................. 371,859 345,598
Time..................................................... 501,018 506,991
Time in denominations of $100,000 or more................ 107,238 112,047
-------------- -------------
Total deposits.......................................... 1,146,143 1,132,913
Short-term borrowings....................................... 141,892 69,125
Long-term debt.............................................. 319,823 320,533
Subordinated debentures..................................... 15,000 15,000
Accrued interest payable and other liabilities.............. 14,248 13,165
-------------- -------------
Total liabilities........................................ 1,637,106 1,550,736
-------------- -------------
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; 9,880,000 and 9,881,000 shares
issued in 2003 and 2002, respectively.................... 49,338 47,053
Surplus..................................................... 57,209 46,418
Retained earnings........................................... 25,204 35,344
Accumulated other comprehensive income, net of
tax of $3,216 and $3,520, respectively................... 5,972 6,538
Less: Treasury stock of 290,000 and 271,000
shares at cost, respectively............................. (6,885) (6,191)
-------------- -------------
Total stockholders' equity................................ 130,838 129,162
-------------- -------------
Total liabilities and stockholders' equity................ $ 1,767,944 $ 1,679,898
============== =============
Issued and treasury shares have been restated to reflect the stock dividend
payable April 30, 2003. The accompanying notes are an integral part of the
consolidated interim financial statements.
3
COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Interim Statements of Income
(Unaudited)
(Dollars in thousands except per share data)
Three Months Ended
March 31,
--------------------------
2003 2002
--------------------------
INTEREST INCOME:
Interest and fees on loans..................................... $ 16,066 $ 16,608
Interest and dividends on investment securities:
Taxable..................................................... 5,111 4,955
Exempt from federal income tax.............................. 2,592 2,507
Federal funds interest......................................... --- 26
Other interest income.......................................... 2 11
---------- ----------
Total interest income....................................... 23,771 24,107
---------- ----------
INTEREST EXPENSE:
Interest on deposits:
Savings..................................................... 755 1,124
Time........................................................ 4,378 5,199
Time in denominations of $100,000 or more................... 885 967
Interest on short-term borrowings and long-term debt........... 4,441 4,180
Interest on subordinated debentures............................ 179 ---
Federal funds purchased and repo interest...................... 60 168
---------- ----------
Total interest expense...................................... 10,698 11,638
---------- ----------
Net interest income......................................... 13,073 12,469
Provision for loan losses......................................... 400 1,600
---------- ----------
Net interest income after provision for loan losses......... 12,673 10,869
---------- ----------
NON-INTEREST INCOME:
Investment management and trust services....................... 317 201
Service charges on deposit accounts............................ 1,041 760
Other service charges, commissions and fees.................... 754 651
Investment security gains ..................................... 1,047 518
Insurance premium income and commissions....................... 410 530
Gains on loan sales............................................ 426 385
Other income................................................... 394 637
---------- ----------
Total non-interest income................................... 4,389 3,682
---------- ----------
NON-INTEREST EXPENSES:
Salaries and employee benefits................................. 5,900 5,152
Net occupancy expense.......................................... 1,766 1,196
Other operating expense........................................ 3,123 3,075
---------- ----------
Total non-interest expenses................................. 10,789 9,423
---------- ----------
Income before income taxes.................................. 6,273 5,128
Income taxes ..................................................... 1,172 677
---------- ----------
Net income.................................................. $ 5,101 $ 4,451
========== ==========
Consolidated per share data:
Basic earnings per share....................................... $ .53 $ .46
Diluted earnings per share..................................... $ .52 $ .45
Dividends declared............................................. $ .19 $ .15
Per share data has been restated to reflect the stock dividend payable April 30,
2003. The accompanying notes are an integral part of the consolidated interim
financial statements.
4
COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Interim Statements of Changes in Stockholders' Equity
(Unaudited)
(Dollars in thousands except per share data)
Three Month Periods Ended March 31
Accumulated
Other
Common Retained Comprehensive Treasury Total
Stock Surplus Earnings Income Stock Equity
------------------------------------------------------------------------------------
Balance, January 1, 2002................. $44,839 $35,906 $36,923 $ (4,024) $ (2,395) $111,249
Comprehensive income:
Net income......................... 4,451 4,451
Change in unrealized gain (loss)
on securities, net of tax of $(1,035)
and reclassification adjustment
of $518 ........................ (1,923) (1,923)
--------
Total comprehensive income.......... 2,528
Cash dividends ($.15 per share).......... (1,498) (1,498)
5% stock dividend (448,000 shares)....... 2,241 10,177 (12,418)
Purchases of treasury stock
(70,000 shares)....................... (1,763) (1,763)
Issuance of additional shares
(32,000 net shares of treasury
stock reissued)...................... (2) (231) 668 435
------- ------- ------- -------- -------- --------
Balance, March 31, 2002.................. $47,078 $46,083 $27,227 $ (5,947) $ (3,490) $110,951
======= ======= ======= ======== ======== ========
Balance, January 1, 2003................. $47,053 $46,418 $35,344 $ 6,538 $ (6,191) $129,162
Comprehensive income:
Net income.......................... 5,101 5,101
Change in unrealized gain (loss)
on securities, net of tax of $(305)
and reclassification adjustment
of $1,047.......................... (566) (566)
--------
Total comprehensive income.......... 4,535
Cash dividends ($.19 per share).......... (1,830) (1,830)
5% stock dividend (470,000 shares)....... 2,290 10,668 (12,958)
Purchases of treasury stock
....(69,000 shares)....................... (1,939) (1,939)
Issuance of additional shares
(51,000 net shares of treasury
....stock reissued and 1,000 shares
of common stock canceled)............ (5) 123 (453) 1,245 910
------- ------- ------- -------- -------- --------
Balance, March 31, 2003.................. $49,338 $57,209 $25,204 $ 5,972 $ (6,885) $130,838
======= ======= ======= ======== ======== ========
Per share data has been restated to reflect the stock dividend payable April 30,
2003. The accompanying notes are an integral part of the consolidated interim
financial statements.
5
COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Interim Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Three Months Ended
March 31,
--------------------------------------
2003 2002
--------------------------------------
Operating Activities:
Net income..................................................... $ 5,101 $ 4,451
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses.................................... 400 1,600
Depreciation and amortization................................ 1,416 593
Investment security gains.................................... (1,047) (518)
Loans originated for sale.................................... (20,197) (17,077)
Proceeds from sales of loans................................. 23,814 21,759
Gains on loan sales.......................................... (426) (385)
Change in other assets, net.................................. (658) (3,566)
Change in accrued interest payable and
other liabilities, net...................................... 1,083 (157)
----------- -----------
Net cash provided by operating activities.................... 9,486 6,700
----------- -----------
Investing Activities:
Net (increase) in interest-bearing time
deposits in other banks....................................... (155) (900)
Proceeds from sales of investment securities................... 59,688 45,404
Proceeds from maturities of investment securities.............. 36,661 3,020
Purchases of investment securities............................. (145,734) (84,693)
Net increase in total loans.................................... (36,259) (24,908)
Net increase in premises and equipment......................... (512) (786)
----------- -----------
Net cash used by investing activities.......................... (86,311) (62,863)
----------- -----------
Financing Activities:
Net increase in total deposits................................. 13,230 92,782
Net increase (decrease) in short-term borrowings............... 72,767 (17,422)
Proceeds from issuance of long-term debt....................... --- ---
Repayment of long-term debt.................................... (710) (21,373)
Cash dividends................................................. (1,830) (1,498)
Purchases of treasury stock.................................... (1,939) (1,763)
Proceeds from issuance of common stock......................... 910 435
----------- -----------
Net cash provided by financing activities................... 82,428 51,161
----------- -----------
Increase (decrease) in cash and cash equivalents............. 5,603 (5,002)
Cash and cash equivalents at beginning of period............... 36,137 44,764
----------- -----------
Cash and cash equivalents at end of period..................... $ 41,740 $ 39,762
=========== ===========
The accompanying notes are an integral part of the consolidated interim
financial statements.
6
COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Interim Financial Statements
(Unaudited)
1. Summary of Significant Accounting Policies
------------------------------------------
Basis of Presentation - The accompanying unaudited consolidated financial
statements of Community Banks , Inc. and Subsidiaries ("Community") have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 2003, are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2003.
For further information, refer to the audited consolidated financial
statements, and footnotes thereto, included in the Annual Report on Form 10K,
for the year ended December 31, 2002.
Community Banks, Inc. (Community) is a financial holding company whose
wholly-owned subsidiaries include Community Banks, Community Bank Investments,
Inc. (CBII), Community Banks Life Insurance Co. (CBLIC) and CMTY Capital Trust
I. 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 and Carroll County in Maryland.
Statement of Cash Flows - Cash and cash equivalents include cash and due
from banks and federal funds sold. The company made cash payments of $10,000 and
$50,000 and $10,624,000 and $11,668,000 for income taxes and interest,
respectively, for each of the three month periods ended March 31, 2003 and 2002.
Excluded from the consolidated statements of cash flows for the periods ended
March 31, 2003 and 2002 was the effect of certain non-cash activities. The
company acquired real estate through foreclosure totaling $7,000 and $2,218,000,
respectively.
Stock-based Compensation - Community has a stock-based compensation plan
and accounts for this plan under the recognition and measurement principle of
APB No. 25, "Accounting for Stock Issued to Employees", and related
Interpretations. No stock-based compensation cost is reflected in net income, as
all options granted under this plan had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if Community had
applied the fair value recognition provisions of FASB No. 123, "Accounting for
Stock-Based Compensation", to stock-based compensation.
Three Months Ended March 31,
(In Thousands, Except Per Share Data)
-------------------------------------
2003 2002
----------------------------
Net income, as reported $5,101 $4,451
Deduct: Total stock-based
compensation expense determined under fair
value based method for all awards, net of
related tax effects (127) (99)
------ ------
Pro forma net income $4,974 $4,352
====== ======
Earnings per share:
Basic-as reported $.53 $.46
==== ====
Basic-pro forma $.52 $.45
==== ====
Diluted-as reported $.52 $.45
==== ====
Diluted-pro forma $.51 $.44
==== ====
7
COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Interim Financial Statements, Continued
(Unaudited)
Recent Accounting Developments - SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities," was issued in April 2003.
SFAS 149 amends and clarifies financial accounting and reporting for derivatives
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS 149 is effective for contracts entered into or modified after June 30,
2003. The adoption of this standard is not expected to have a material impact on
results of operations, financial position, or liquidity.
2. Investment Securities
---------------------
The amortized cost and fair values of investment securities at March 31,
2003 and December 31, 2002 were as follows:
March 31, 2003
--------------
Amortized Fair
Cost Value
----------- -----------
U.S. Treasury and federal agencies ...................................... $ 143,230 $ 146,083
Mortgage-backed U.S. government agencies................................. 214,923 218,199
Obligations of states and political subdivisions......................... 185,359 190,220
Corporate securities..................................................... 97,139 95,268
Equity securities........................................................ 64,534 66,926
----------- -----------
Total............................................................... $ 705,185 $ 716,696
=========== ===========
December 31, 2002
-----------------
Amortized Fair
Cost Value
----------- -----------
U.S. Treasury and federal agencies ...................................... $ 130,947 $ 134,334
Mortgage-backed U.S. government agencies................................. 206,450 210,825
Obligations of states and political subdivisions......................... 172,391 177,135
Corporate securities..................................................... 95,022 93,094
Equity securities........................................................ 50,610 52,413
----------- -----------
Total............................................................... $ 655,420 $ 667,801
=========== ===========
8
COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Interim Financial Statements, Continued
(Unaudited)
3. Allowance for loan losses
-------------------------
Changes in the allowance for loan losses are as follows:
Three Months Ended Year Ended Three Months Ended
March 31, December 31, March 31,
2003 2002 2002
------------------ ----------- ------------------
Balance, January 1................................... $ 12,343 $ 12,132 $ 12,132
Provision for loan losses............................ 400 3,350 1,600
Loan charge-offs..................................... (292) (4,180) (1,462)
Recoveries........................................... 202 1,041 192
--------- --------- ---------
Balance, March 31, 2003, December 31,
2002, and March 31, 2002............................ $ 12,653 $ 12,343 $ 12,462
========= ========= =========
RISK ELEMENTS (a)
March 31, December 31, March 31,
2003 2002 2002
--------- --------- ---------
Loans on which accrual of interest has been
discontinued:
Commercial................................................ $ 2,784 $ 757 $ 5,892
Residential and commercial mortgages...................... 6,832 8,250 2,737
Other..................................................... 647 386 510
--------- --------- ---------
10,263 9,393 9,139
--------- --------- ---------
Other real estate.............................................. 729 1,183 2,085
--------- --------- ---------
Total non-performing assets............................. 10,992 10,576 11,224
Loans past due 90 days or more and still accruing interest:
Commercial................................................ 45 817 605
Residential and commercial mortgages...................... 38 49 475
Consumer.................................................. 22 95 87
--------- --------- ---------
105 961 1,167
--------- --------- ---------
Total risk elements..................................... $ 11,097 $ 11,537 $ 12,391
========= ========= =========
(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 March 31, 2003 and December 31, 2002, the recorded investment in loans
for which impairment has been recognized totaled $7,391,000 and $6,994,000,
respectively. The valuation allowance for impaired loans totaled $381,000 and
$326,000 at March 31, 2003 and December 31, 2002, respectively. For the three
months ended March 31, 2003, and 2002 the average recorded investment in
impaired loans approximated $7,192,000 and $7,563,000, respectively. Interest
recognized on impaired loans on the cash basis for the three month periods
ending March 31, 2003 and 2002 was not significant.
9
COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Interim Financial Statements, Continued
(Unaudited)
4. Earnings Per Share:
-------------------
The following table sets forth the calculations of Basic and Diluted
Earnings Per Share for the periods indicated:
Three Months Ended March 31,
----------------------------------------------------------------
2003 2002
----------------------------------------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
----------------------------------------------------------------
(In thousands except per share data) Basic EPS:
Income available to common stockholders....................... $5,101 9,597 $ .53 $4,451 9,733 $ .46
====== ===== ====== =====
Effect of Dilutive Securities: ...............................
Incentive stock options outstanding........................... 225 211
----- -----
Diluted EPS:
Income available to common stockholders &
assumed conversion......................................... $5,101 9,822 $ .52 $4,451 9,944 $ .45
====== ===== ====== =====
Per share and share data has been adjusted to reflect stock dividends.
5. Letters of Credit
------------------
Outstanding letters of credit written are conditional commitments issued by
the bank subsidiary to guarantee the performance of a customer to a third party.
Community's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for standby letters of credit is represented
by the contractual amount of those instruments. Community had $22.2 million of
standby letters of credit as of March 31, 2003. The subsidiary bank uses the
same credit policies in making conditional obligations as it does for on-balance
sheet instruments.
The majority of these standby letters of credit expire within the next
twelve months. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending other loan commitments. The
subsidiary bank requires collateral and personal guarantees supporting these
letters of credit as deemed necessary. Management believes that the proceeds
obtained through a liquidation of such collateral and the enforcement of
personal guarantees would be sufficient to cover the maximum potential amount of
future payments required under the corresponding guarantees. The current amount
of the liability as of March 31, 2003 for guarantees under standby letters of
credit issued after December 31, 2002 is not material.
10
COMMUNITY BANKS, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Overview
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 three months of
2003 compared to the same period of 2002 unless otherwise indicated.
Forward-Looking Statements
Periodically, Community has made and will continue to make statements that
may include forward-looking information. Community 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 Community
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, Community 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.
11
Management's Discussion, Continued
- ----------------------------------
Summary of Financial Results
Community, the parent company of Community Banks, continued a trend of
improved earnings performance in the first quarter of 2003, and reported an
increase in earnings per share to $0.52, a 16% improvement over the $0.45
recorded in the year earlier period. Earnings per share amounts have been
restated to reflect the impact of the previously announced 5% stock dividend
that was paid April 30, 2003 to shareholders of record on April 16, 2003.
Similarly, net income reflected a 15% increase as first quarter 2003 results
reached $5.1 million versus $4.5 million in the same quarter of 2002.
Performance in the first quarter included increased levels of gains from
investment transactions, continued improvement in the core revenue stream,
resilient asset quality measurements and the offsetting impact of higher
marketing expenses and the costs associated with new office openings. Return on
average assets and return on average equity, two common measures of financial
institution performance, reached 1.21% and 15.82%, respectively, for the three
months ended March 31, 2003.
Despite the rather "soft" economy and the disquieting impact of world
events, Community was able to report improvements in a number of important
performance areas. The gains from sales of investments included in the first
quarter results were attributed to discrete opportunities to realize gains from
both the sales of callable portfolio investments and specific bank equity
securities. Such gains served to lift net income and earnings per share during
the quarter by almost $700,000, or $0.07 per share, respectively. On the other
hand, results were adversely affected by higher than normal marketing expenses
that were part of a plan to broaden customer awareness of Community Banks and
the services it provides. The timing of these expenditures corresponded with
market expansion opportunities within several of the markets currently
experiencing disruption from merger activity in the financial services industry.
Community intends to continue to selectively expand marketing expenditures to
promote brand awareness during 2003. These marketing expenditures, and the
expenses associated with new office openings, reflect Community's commitment to
continue to build market share in existing markets, and to invest in
opportunities to enter vital new markets.
Other areas of performance improvement included growth in core lending and
deposit-taking activities. Loan balances at the end of the first quarter of 2003
reached $928 million and grew 7.1% from the year earlier period. At the same
time, deposits reached $1.15 billion, an increase of 4.6% from the end of the
first quarter of 2002. While balance sheet growth rates were less robust than
those experienced in the early half of 2002, the increases served to fuel a 5%
increase in net interest income, the single largest source of revenue for banks,
from the first quarter of 2002. This improvement occurred despite compression in
net interest margin to 3.68%, substantially below the year earlier margin of
3.96%. Falling interest rates continued to exert pressure on margin during the
quarter. Management recognizes that further declines in interest rates could
serve to constrain 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.
Revenue expansion also occurred in non-interest sources of income, net of
investment security gains, which grew in excess of 5% and included continuing
expansion from fees on deposit services, gains from the sale of mortgage loans,
and higher fees from asset management services.
In the first quarter of 2003, Community continued to report outstanding
credit quality metrics. For example, net charge-offs for the quarter aggregated
only $90,000, or 0.04% of loans on an annualized basis. This compares very
favorably with the ratio of 0.36% for all of 2002. As a result, the Company was
able to reduce its provision for loan losses to $400,000, well below the $1.6
million charge taken in the first quarter of 2002. At the same time, the
allowance for loan losses, which is used to offset credit risk in the loan
portfolio, rose to $12.7 million or 1.35% of loans. Community also experienced a
decline in the level of problem assets, an additional indicator of favorable
loan quality trends.
After the end of the quarter, Community completed its acquisition of
Abstracting Company of York, a title insurance and abstracting agency. Before
the end of the second quarter, Community expects to complete the previously
announced mergers of Shultz Insurance Agency in Hanover, Pennsylvania, and the
Erie Financial Group, Inc., a York, Pennsylvania-based mortgage banking company.
12
Management's Discussion, Continued
- ----------------------------------
Average Statement of Condition
The average balance sheets for the three months ended March 31, 2003 and 2002
were as follows (in thousands):
Change
2003 2002 Volume %
- -------------------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 32,430 $ 34,470 $ (2,040) (6)%
Federal funds sold and other 1,159 8,138 (6,979) (86)%
Investments 686,204 557,794 128,410 23%
Loans 915,652 859,175 56,477 7%
Allowance for loan losses 12,641 12,399 242 2%
- -------------------------------------------------------------------------------------------------------------------------
Net loans 903,011 846,776 56,235 7%
Goodwill and identifiable intangibles 1,753 956 797 83%
Loans held for resale 8,890 7,098 1,792 25%
Other assets 69,437 64,528 4,909 8%
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,702,884 $ 1,519,760 $ 183,124 12%
- -------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits $ 158,128 $ 157,220 $ 908 1%
Interest-bearing deposits 969,999 880,916 89,083 10%
Short-term borrowings 96,119 56,594 39,525 70%
Long-term debt 320,263 297,500 22,763 8%
Subordinated debentures 15,000 --- 15,000 n/a
Other liabilities 12,575 9,571 3,004 31%
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,572,084 1,401,801 170,283 12%
- -------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY 130,800 117,959 12,841 11%
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,702,884 $ 1,519,760 $ 183,124 12%
- -------------------------------------------------------------------------------------------------------------------------
Loan growth trends have been fairly steady throughout 2002 and into 2003
and continue to be influenced by external factors present in 2002 within both
the commercial and consumer sectors. Commercial loan growth continues to be more
concentrated in the commercial real estate market. Residential real estate
lending, composed primarily of loans to single-family creditors, has experienced
a steady decline as a result of refinancing activity and the accessibility of
secondary market liquidity, with most new credits being sold in the secondary
market. This strategy reduces the interest rate risk associated with consumer
preferences for long term, fixed rate lending, and provides valuable liquidity
for other forms of relationship lending. Consumer demand for credit facilities
continues to be a significant contributing factor to sustaining lending during a
period when commercial borrowing has declined from more robust earlier trends.
In the latter part of the first quarter of 2003, Community began offering a
longer-term equity loan with bi-weekly payments as an alternative to consumers
seeking low cost financing.
Deposit balances remain the primary source of funding for financial
institutions and Community recognized growth of 11% in this important
core-funding source. Throughout 2002, deposit growth occurred evenly between
core accounts and time deposits. In the first quarter of 2003, deposit products
such as Community's higher interest PowerNOW Plus accounts contributed to more
growth within the interest bearing deposit accounts than in demand deposits or
time deposits.
Community has made strategic use of relatively inexpensive funding sources
to augment its funding needs. Throughout the first quarter of 2003, advances
from the Federal Home Loan Bank were increased. In December of 2002, management
executed a pooled trust preferred issuance of $15 million in order to increase
the amount of regulatory capital. The use of these alternative funding vehicles
continues to provide the excess liquidity necessary to fund earning asset
growth.
13
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 three months
ended March 31, 2003 and 2002 (in thousands):
2003 2002 Increase (Decrease)
Amount Yield/rate Amount Yield/rate Amount Yield/rate
- -------------------------------------------------------------------------------------------------------------------------
Interest income $ 25,289 6.38% $ 25,584 7.26% $ (295) (.88)
Interest expense 10,698 3.10% 11,638 3.82% (940) (.72)
- -------------------------------------------------------------------------------------------------------------------------
Net interest income $ 14,591 $ 13,946 $ 645
Interest spread 3.28% 3.44% (.16)
Impact of non-interest funds .40% .52% (.12)
- -------------------------------------------------------------------------------------------------------------------------
Net interest margin 3.68% 3.96% (.28)
- -------------------------------------------------------------------------------------------------------------------------
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. Net interest margin is a relative
measure of a financial institution's ability to efficiently deliver net interest
income from a given level of earnings assets. Both net interest income and net
interest margin are influenced by the frequency and velocity of interest rate
changes and by the composition and absolute volumes of earning assets and
funding sources.
Net interest income increased $645,000 or 4.6% in 2003 compared to 2002.
Both earning asset and interest-bearing liability levels increased and a decline
in asset yields outpaced the decline in funding costs. As such, the net interest
spread decreased 16 basis points.
Interest income decreased $295,000 or 1% during the first quarter of 2003.
An increase in earning assets of approximately $178 million was offset by a
decrease in the yield on loans and investments, which decreased in line with a
general decline in overall rates. Interest expense declined more substantially,
by $940,000 or 8.1%. Although interest bearing liabilities increased
approximately $166 million, the benefit of a lower interest rate environment
resulted in a decrease in the total rate paid on funding sources of 72 basis
points. Given the reduction in interest rates since last year, the contribution
from non-interest funding sources declined from 52 basis points to 40 basis
points and added to the decrease in net interest margin.
Though Community has experienced significant compression in net interest
margin since the first quarter of 2002, the first quarter margin for 2003
exhibited modest improvement from the most recent quarter ended December 31,
2002.
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 2003
and 2004.
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 2003 was
$400,000 compared to $1.6 million in 2002. Net loan charge-offs in 2003 were
$90,000, or .01% of average net loans, compared to $1.3 million, or .15% of
average net loans, in the first quarter of 2002. Although non-accrual loans
increased to $10.3 million at March 31, 2003, from $9.1 million a year earlier,
Community continues to note improvement in the metrics commonly used to assess
the overall credit quality of the loan portfolio. Total non-performing assets
decreased to $11.0 million at March 31, 2003 from $11.2 million at March 31,
2002, while loans 90 days past due but still accruing interest showed a dramatic
decline to $105,000 at March 31, 2003, from $1.2 million a year earlier. Total
risk elements decreased from $12.4 million at March 31, 2002, to $11.1 million
at March 31, 2003.
14
Management's Discussion, Continued
- ----------------------------------
Non-Interest Income
Non-interest income continued to improve on a year-over-year basis,
reflecting Community's continuing emphasis on the expansion of products and
services. Non-interest income, exclusive of security gains, increased $178,000
or 5.6% in the first quarter of 2003 compared to the first quarter of 2002.
Service charges on deposit accounts increased $281,000, or 37%, in the
first quarter of 2003 compared to 2002. Service charges include the impact of
fees associated with insufficient funds, deposit service fees, and other similar
products of fee-based income.
Insurance premium income and commissions decreased $120,000, or 23%, in
2003 from 2002 and reflect an increase in title insurance activity offset by a
decrease in fees earned through Community's captive insurance business. During
the latter part of 2002, changes in federal regulations required that all banks
convert from a single premium to a monthly premium on credit insurance, which
will require income recognition over the life of the related loan. Previously,
such fees could be recognized upon remittance of the single premium. Over time,
this change in income recognition is not expected to adversely affect fees from
this service.
Community derives revenue from the origination and sale of mortgage loans
into the secondary market. Gains on loan sales increased $41,000 or 10.6% in
2003 as a result of continued demand for fixed-rate real estate loans.
Investment security gains of $1,047,000 million were recognized in the
first quarter of 2003 compared to $518,000 in 2002. Such gains were realized
pursuant to management's ongoing effort to review investment holdings and
portfolio strategy. During the quarter, Community recognized gains arising from
discrete sales of certain callable investments, which were likely to be called
in the near term. Other gains resulted from the sale of equity securities of
other financial institutions that had been recently acquired.
Non-Interest Expenses
The increase in salaries and employee benefits of $748,000 or 14.5% for
2003 compared to 2002 was affected by a number of factors including the annual
merit increase and employees added through the expansion of both Community's
distribution network and its fee-based activities
The increase in occupancy expense of $570,000, or 47%, includes the effect
of branch expansion and the opening of the Southern Operations Center in 2002,
as well as increased costs of facilities maintenance associated with the harsh
winter weather experienced throughout Community's geographic region in 2003.
Other operating expense increased $48,000 or 1.6% in the first quarter of
2003. Marketing costs increased approximately $200,000 in the first quarter of
2003 and will continue to increase throughout 2003 as part of a plan to broaden
customer awareness of Community Banks and the services it provides. In addition
to increased marketing exposure through radio, billboard, and direct mail
advertising, Community has developed two television commercials to promote its
name and services. The timing of these expenditures is intended to correspond
with market expansion opportunities within several of the markets currently
experiencing disruption from merger activity.
Income Taxes
Income tax expense for the first quarter of 2003 was $1.2 million,
resulting in an effective tax rate of 18.7%. The relative level of tax-exempt
income influences effective income tax rates and was largely responsible for the
difference between the effective tax rate and the statutory federal tax rate for
corporations.
15
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 most fundamental source of capital is earnings and earnings retention.
This cornerstone of capital adequacy can be augmented by a number of capital
management strategies, many of which were used in 2002 and which will continue
in 2003. As it has for a number of years, the Board approved the issuance of a
5% dividend in the first quarter of 2003. Community's strong earnings supported
an increase in the return of capital to existing shareholders in the form of an
increase in the traditional cash dividend. Community also continues to make
strategic use of share repurchase as another efficient means of returning
capital to shareholders. These strategies and techniques allow management to
maintain capital at levels that represent an efficient use of this valuable
resource.
Regulators have established standards for the monitoring and maintenance of
appropriate levels of capital for financial institutions. All regulatory capital
guidelines are now based upon a risk-based supervisory approach that has been
designed to ensure effective management of capital levels and associated
business risk. The following table provides Community's risk-based capital
position at March 31, 2003, along with a comparison to the various regulatory
capital requirements.
March 31, "Well Regulatory
2003 Capitalized" Minimums
---- ------------ --------
Leverage ratio 8.0% 5% 4%
Tier 1 capital ratio 10.8% 6% 4%
Total risk-based capital ratio 11.9% 10% 8%
At March 31, 2003, total stockholders' equity reflected accumulated other
comprehensive income of $6.0 million compared to the accumulated other
comprehensive income of $6.5 million reflected in total stockholder's equity at
year-end 2002. This decrease can be attributed to the change in the net
unrealized gain (loss) on investment securities available for sale, net of
taxes. Community reissued approximately 51,000 shares and purchased
approximately 69,000 shares of treasury stock during the first three months of
2003. Community currently has board approval to purchase an additional 199,000
shares through it share repurchase plan.
16
COMMUNITY BANKS, INC. AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------------------
Community Banks, Inc. has virtually no involvement with derivative
financial instruments and does not use them for trading purposes. Any
derivatives are embedded in their host contract and are not required to be
bifurcated. The business of Community 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 Community 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, Community's interest-earning assets,
interest-bearing liabilities, and off-balance sheet financial instruments.
Community's exposure to interest rate sensitivity is managed primarily through
Community'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 Community'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 Community's exposure to interest rate
sensitivity.
The rates, terms and interest rate indices of Community'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
Community 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.
At March 31, 2003, there have been no material changes to information
regarding Quantitative and Qualitative Disclosures about Market Risk as
presented in the 2002 Annual Report on Form 10K.
Item 4. 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.
17
COMMUNITY BANKS, INC. and SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
There are no material pending legal actions, other than litigation
incidental to the business of Community, to which Community is a party.
Item 2 - Changes in Securities and Use of Proceeds
Not applicable.
Item 3 - Defaults Upon Senior Securities
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5 - Other Information
Not applicable.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
3(i) Amended Articles of Incorporation (Incorporated by reference
to Exhibit 3.1, attached to Registrant's registration on
Form 8-A, filed on May 13, 2002)
3(ii) Amended By-Laws
4 Instruments defining the rights of the holders of trust
capital securities and sold by Community in December 2002
are not attached, as the amount of such securities is less
than 10% of the consolidated assets of Community and its
subsidiaries, and the securities have not been registered.
Community agrees to provide copies of such instruments to
the SEC upon request.
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 (Incorporated by reference to Exhibit 10.1
to Community's Annual Report on Form 10-K for the year ended
December 31, 2002, filed with the Commission on March 28,
2003)
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(Incorporated by reference to Exhibit 10.2 to
Community's Annual Report on Form 10-K for the year ended
December 31, 2002, filed with the Commission on March 28,
2003)
18
10.3 Form of Stock Option Agreement - Directors Stock Option Plan
(Incorporated by reference to Exhibit 10.3 to Community's
Annual Report on Form 10-K for the year ended December 31,
2002, filed with the Commission on March 28, 2003)
10.4 Form of Stock Option Agreement - Long-Term Incentive Plan
(Incorporated by reference to Exhibit 10.4 to Community's
Annual Report on Form 10-K for the year ended December 31,
2002, filed with the Commission on March 28, 2003)
10.5 Employment Agreement of Eddie L. Dunklebarger (Incorporated
by reference to Exhibit 10.5 to Community's Annual Report on
Form 10-K for the year ended December 31, 2002, filed with
the Commission on March 28, 2003)
10.6 Employment Agreement of Donald F. Holt (Incorporated by
reference to Exhibit 10.6 to Community's Annual Report on
Form 10-K for the year ended December 31, 2002, filed with
the Commission on March 28, 2003)
10.7 Employment Agreement, and amendment thereto, of Robert W.
Lawley (Incorporated by reference to Exhibit 10.7 to
Community's Annual Report on Form 10-K for the year ended
December 31, 2002, filed with the Commission on March 28,
2003)
10.8 Employment Agreement, and amendment thereto, of Anthony N.
Leo (Incorporated by reference to Exhibit 10.8 to
Community's Annual Report on Form 10-K for the year ended
December 31, 2002, filed with the Commission on March 28,
2003)
10.9 Employment Agreement, and amendment thereto, of Jeffrey M.
Seibert (Incorporated by reference to Exhibit 10.9 to
Community's Annual Report on Form 10-K for the year ended
December 31, 2002, filed with the Commission on March 28,
2003)
10.10 Salary Continuation Agreement, and amendment thereto, of
Eddie L. Dunklebarger (Incorporated by reference to Exhibit
10.10 to Community's Annual Report on Form 10-K for the year
ended December 31, 2002, filed with the Commission on March
28, 2003)
10.11 Salary Continuation Agreement, and amendment thereto, of
Robert W. Lawley (Incorporated by reference to Exhibit 10.11
to Community's Annual Report on Form 10-K for the year ended
December 31, 2002, filed with the Commission on March 28,
2003)
10.12 Salary Continuation Agreement, and amendment thereto, of
Anthony N. Leo (Incorporated by reference to Exhibit 10.12
to Community's Annual Report on Form 10-K for the year ended
December 31, 2002, filed with the Commission on March 28,
2003)
10.13 Salary Continuation Agreement, and amendment thereto, of
Jeffrey M. Seibert (Incorporated by reference to Exhibit
10.13 to Community's Annual Report on Form 10-K for the year
ended December 31, 2002, filed with the Commission on March
28, 2003)
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 (Incorporated by reference
to Exhibit 10.15 to Community's Annual Report on Form 10-K
for the year ended December 31, 2002, filed with the
Commission on March 28, 2003)
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.
(b) Reports on Form 8-K
Registrant filed the following reports on Form 8-K during the quarter
ending March 31, 2003:
19
Report Dated January 14, 2003
-----------------------------
Registrant announced the appointment of Scott J. Newkam to the Board of
Directors.
Report Dated January 21, 2003
-----------------------------
Registrant announced its earnings for the period ended December 31, 2002.
Report Dated February 13, 2003
------------------------------
Registrant announced the declaration of a first quarter dividend and a 5%
stock dividend.
20
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 May 15, 2003 /s/ Eddie L. Dunklebarger
-------------------------------- -------------------------
Eddie L. Dunklebarger
Chairman and President
(Chief Executive Officer)
Date May 15, 2003 /s/ Donald F. Holt
-------------------------------- -------------------------
Donald F. Holt
Executive Vice President
(Chief Financial Officer)
21
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 May 15, 2003 /s/ Eddie L. Dunklebarger
--------------------------------- -------------------------
Eddie L. Dunklebarger
Chairman and President
(Chief Executive Officer)
22
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 May 15, 2003 /s/ Donald F. Holt
-------------------------------- -------------------------
Donald F. Holt
Executive Vice President
(Chief Financial Officer)
23