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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
No. 0-15786
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(Commission File Number)
COMMUNITY BANKS, INC.
---------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2251762
-------------- ----------------------------------------
(State of incorporation) (I.R.S. Employer Identification Number)
750 East Park Dr., Harrisburg, PA 17111
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(717) 920-1698
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(Registrant's telephone number, including area code)
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 April 30, 2004
CAPITAL STOCK-COMMON 12,274,000
- -------------------- --------------------
(Title of Class) (Outstanding Shares)
COMMUNITY BANKS, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I - Financial Information Page
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 7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21-22
Item 4. Controls and Procedures 23
PART II - Other Information
Item 1. Legal Proceedings 24
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases 24
of Equity Securities
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24-25
SIGNATURES 26
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
Community Banks, Inc. and Subsidiaries
CONSOLIDATED INTERIM BALANCE SHEETS
(Unaudited)
(Dollars in thousands except per share data)
March 31, December 31,
2004 2003
-------------- ---------------
ASSETS
Cash and due from banks $ 39,744 $ 42,790
Federal funds sold --- 17,097
-------------- ---------------
Cash and cash equivalents 39,744 59,887
Interest-bearing time deposits in other banks 2,537 3,301
Investment securities, available for sale 715,055 646,961
Loans held for sale 4,957 6,067
Loans 1,112,557 1,078,611
Less: Allowance for loan losses (13,862) (13,178)
--------------- ---------------
Net loans 1,098,695 1,065,433
Premises and equipment, net 24,979 24,153
Goodwill and identifiable intangible assets 4,759 4,773
Accrued interest receivable and other assets 53,829 50,488
-------------- ---------------
Total assets $ 1,944,555 $ 1,861,063
============== ===============
LIABILITIES
Deposits:
Non-interest bearing $ 174,159 $ 165,174
Interest bearing 1,108,251 1,065,511
-------------- ---------------
Total deposits 1,282,410 1,230,685
Short-term borrowings 65,007 27,764
Long-term debt 399,750 411,422
Subordinated debt 30,928 30,928
Accrued interest payable and other liabilities 15,956 16,858
-------------- ---------------
Total liabilities 1,794,051 1,717,657
-------------- ---------------
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; 12,424,000 and 11,851,000
shares issued in 2004 and 2003 62,121 59,256
Surplus 72,839 57,563
Retained earnings 7,973 24,297
Accumulated other comprehensive income,
net of tax 10,604 6,596
Treasury stock; 154,000 and 203,000
shares in 2004 and 2003, at cost (3,033) (4,306)
-------------- ---------------
Total stockholders' equity 150,504 143,406
-------------- ---------------
Total liabilities and stockholders' equity $ 1,944,555 $ 1,861,063
============== ===============
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,
----------------------------
2004 2003
----------------------------
INTEREST INCOME:
Loans, including fees $ 16,658 $ 16,066
Investment securities:
Taxable 4,562 4,977
Tax exempt 2,195 2,280
Dividends 552 446
Other 13 2
------------ ------------
Total interest income 23,980 23,771
------------ ------------
INTEREST EXPENSE:
Deposits 5,458 6,018
Short-term borrowings 124 334
Long-term debt 4,581 4,167
Subordinated debt 378 184
------------ ------------
Total interest expense 10,541 10,703
------------ ------------
Net interest income 13,439 13,068
Provision for loan losses 850 400
------------ ------------
Net interest income after provision for loan losses 12,589 12,668
------------ ------------
NON-INTEREST INCOME:
Investment management and trust services 267 317
Service charges on deposit accounts 1,405 1,041
Other service charges, commissions and fees 902 754
Investment security gains 1,332 1,047
Insurance premium income and commissions 654 410
Mortgage banking activities 627 426
Earnings on investment in life insurance 365 329
Other 71 70
------------ ------------
Total non-interest income 5,623 4,394
------------ ------------
NON-INTEREST EXPENSES:
Salaries and employee benefits 6,835 5,900
Net occupancy 2,033 1,766
Marketing expense 420 514
Telecommunications expense 317 200
Other 2,278 2,409
------------ ------------
Total non-interest expenses 11,883 10,789
------------ ------------
Income before income taxes 6,329 6,273
Income taxes 1,154 1,172
------------ ------------
Net income $ 5,175 $ 5,101
============ ============
CONSOLIDATED PER SHARE DATA:
Basic earnings per share $ .42 $ .42
Diluted earnings per share $ .41 $ .41
Dividends declared $ .16 $ .15
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 (Loss) Stock Equity
------------------------------------------------------------------------------------
Balance, January 1, 2003 $47,053 $46,418 $35,344 $ 6,538 $ (6,191) $129,162
Comprehensive income:
Net income 5,101 5,101
Unrealized (loss) on securities,
net of reclassification adjustment
and tax effect (566) (566)
--------
Total comprehensive income 4,535
Cash dividends (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
======= ======= ======= ========== ======== ========
Balance, January 1, 2004 $59,256 $57,563 $24,297 $ 6,596 $ (4,306) $143,406
Comprehensive income:
Net income 5,175 5,175
Unrealized gain on securities,
net of reclassification adjustment
and tax effect 4,008 4,008
--------
Total comprehensive income 9,183
Cash dividends (1,989) (1,989)
5% stock dividend (592,000 shares) 2,958 15,127 (18,085) ---
Stock split paid in the form
of a 20% stock dividend
(fractional shares) (4) (25) (29)
Purchases of treasury stock
(25,000 shares) (747) (747)
Issuance of additional shares
(81,000 net shares of treasury
stock reissued and 18,000 shares
of common stock canceled) (89) 149 (1,400) --- 2,020 680
------- ------- ------- ---------- -------- --------
Balance, March 31, 2004 $62,121 $72,839 $ 7,973 $ 10,604 $ (3,033) $150,504
======= ======= ======= ========== ======== ========
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,
--------------------------------------
2004 2003
--------------------------------------
Operating Activities:
Net income $ 5,175 $ 5,101
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 850 400
Depreciation and amortization 815 750
Amortization of security premiums and discounts, net 296 666
Investment security gains (1,332) (1,047)
Loans originated for sale (5,492) (20,197)
Proceeds from sales of loans 6,812 23,814
Gains on loan sales (209) (426)
Earnings on investment in life insurance (365) (329)
Change in other assets, net (206) (329)
Change in accrued interest payable and
other liabilities, net (1,146) 1,083
----------- -----------
Net cash provided by operating activities 5,198 9,486
----------- -----------
Investing Activities:
Net (increase) decrease in interest-bearing time
deposits in other banks 764 (155)
Proceeds from sales of investment securities 11,915 59,688
Proceeds from maturities of investment securities 64,844 36,661
Purchases of investment securities (137,404) (145,734)
Net increase in total loans (34,143) (36,259)
Investment in life insurance (5,000) ---
Net additions to premises and equipment (1,528) (512)
----------- -----------
Net cash used by investing activities (100,552) (86,311)
----------- -----------
Financing Activities:
Net increase in deposits 51,725 13,230
Net increase in short-term borrowings 37,243 72,767
Repayment of long-term debt (11,672) (710)
Cash dividends and cash paid in lieu of fractional shares (2,018) (1,830)
Purchases of treasury stock (747) (1,939)
Proceeds from issuance of common stock 680 910
----------- -----------
Net cash provided by financing activities 75,211 82,428
----------- -----------
Increase (decrease) in cash and cash equivalents (20,143) 5,603
Cash and cash equivalents at beginning of period 59,887 36,137
----------- -----------
Cash and cash equivalents at end of period $ 39,744 $ 41,740
=========== ===========
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, 2004, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004.
For further information, refer to the audited consolidated financial statements,
and footnotes thereto, included in the Annual Report on Form 10-K, for the year
ended December 31, 2003.
Community is a financial holding company whose wholly-owned subsidiaries include
Community Banks, Community Bank Investments, Inc. (CBII), and Community Banks
Life Insurance Co. (CBLIC). Community Banks provides a wide range of services
through its network of offices in Adams, Cumberland, Dauphin, Luzerne,
Northumberland, Schuylkill, Snyder, and York Counties in Pennsylvania and
Carroll and Montgomery Counties in Maryland.
Statement of Cash Flows - Cash and cash equivalents include cash and due from
banks and federal funds sold
Stock-Based Compensation - Community has a stock-based compensation plan and
accounts for this plan under the recognition and measurement principles 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.
(Dollars in thousands, except per share data) Three Months Ended
March 31,
2004 2003
-----------------------------
Net income, as reported $ 5,175 $ 5,101
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax effect (322) (187)
---------- ----------
Pro forma net income $ 4,853 $ 4,914
========== ==========
Earnings per share:
Basic - as reported $ .42 $ .42
Basic - pro forma $ .40 $ .41
Diluted - as reported $ .41 $ .41
Diluted - pro forma $ .38 $ .40
7
Community Banks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS, (continued)
(Unaudited)
Comprehensive Income:
The components of other comprehensive income (loss) and related tax effects for
the three months ended March 31 are as follows (in thousands):
----------------------------
2004 2003
----------------------------
Unrealized holding gains (losses)
on available-for-sale securities $ 7,498 $ 176
Reclassification adjustments for
(gains) included in net income (1,332) (1,047)
----------- -----------
Net unrealized gains (losses) 6,166 (871)
Tax effect (2,158) 305
----------- -----------
$ 4,008 $ (566)
=========== ===========
The components of accumulated other comprehensive income (loss), included in
stockholders' equity, are as follows at March 31, 2004 (in thousands):
Net unrealized gain (loss) on
available-for-sale securities $ 19,512
Tax effect (6,829)
-----------
Net-of-tax amount 12,683
-----------
Unfunded pension liability (3,199)
Tax effect 1,120
-----------
Net-of-tax amount (2,079)
-----------
Accumulated other comprehensive income $ 10,604
===========
8
Community Banks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS, (continued)
(Unaudited)
2. Allowance for loan losses:
--------------------------
Changes in the allowance for loan losses are as follows (in thousands):
Three Months Ended Year Ended Three Months Ended
March 31, December 31, March 31,
2004 2003 2003
------------------ ------------- ------------------
Balance, January 1 $ 13,178 $12,343 $12,343
Provision for loan losses 850 2,500 400
Loan charge-offs (450) (2,839) (292)
Recoveries 284 1,174 202
--------- ------- -------
Balance, March 31, 2004, December 31,
2003, and March 31, 2003 $ 13,862 $13,178 $12,653
========= ======= =======
The following table summarizes period-end risk elements (in thousands):
March 31, December 31, March 31,
2004 2003 2003
--------- ------------ -------
Loans on which accrual of interest has been
discontinued:
Commercial $ 2,893 $ 3,066 $ 2,784
Residential and commercial mortgages 3,606 4,054 6,832
Other 1,042 1,031 647
--------- ------- -------
7,541 8,151 10,263
--------- ------- -------
Foreclosed real estate 2,057 4,865 729
--------- ------- -------
Total non-performing assets 9,598 13,016 10,992
Loans past due 90 days or more and still accruing interest:
Commercial 40 4 45
Residential and commercial mortgages 42 40 38
Consumer 16 46 22
--------- ------- -------
98 90 105
--------- ------- -------
Total risk elements $ 9,696 $13,106 $11,097
========= ======= =======
9
Community Banks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS, (continued)
(Unaudited)
3. 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,
2004 2003
----------------------------------------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
----------------------------------------------------------------
(In thousands except per share data)
Basic EPS:
Income available to common stockholders $ 5,175 12,271 $ .42 $5,101 12,093 $.42
======= ===== ====== ====
Effect of Dilutive Securities:
Incentive stock options outstanding 382 282
------ ------
Diluted EPS:
Income available to common stockholders &
assumed conversion $ 5,175 12,653 $ .41 $5,101 12,375 $.41
======= ===== ====== ====
Per share and number of share amounts reflect stock splits and dividends with a
record date prior to issuance of the financial statements, including the 5%
stock dividend paid April 30, 2004 to stockholders of record on April 16, 2004.
4. Guarantees:
-----------
Community does not issue any guarantees that would require liability recognition
or disclosure, other than its standby letters of credit. Standby letters of
credit written are conditional commitments issued by Community to guarantee the
performance of a customer to a third party. Generally, all letters of credit,
when issued have expiration dates within one year. The credit risk involved in
issuing letters of credit is essentially the same as those that are involved in
extending loan facilities to customers. Community generally holds collateral
and/or personal guarantees supporting these commitments. Community had issued
$36.5 million of standby letters of credit as of March 31, 2004. Management
believes that the proceeds obtained through a liquidation of collateral and the
enforcement of guarantees would be sufficient to cover the potential amount of
future payment required under the corresponding guarantees. The current amount
of the liability as of March 31, 2004, for guarantees under standby letters of
credit issued is not material.
10
Community Banks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS, (continued)
(Unaudited)
5. Subordinated Debt to Unconsolidated Subsidiary Trusts
-----------------------------------------------------
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51" which was revised in December 2003. This
Interpretation provides guidance for the consolidation of variable interest
entities (VIEs). CMTY Capital Trust I and CMTY Capital Statutory Trust II (the
trusts) qualify as VIEs under FIN 46. The trusts issued mandatorily redeemable
preferred securities (Trust Preferred Securities) to third- party investors and
loaned the proceeds to Community. The debentures held by each trust are the sole
assets of that trust.
In the first quarter of 2004, as a result of applying the provisions of FIN 46,
which represents new accounting guidance governing when an equity interest
should be consolidated, Community was required to deconsolidate the trusts from
its consolidated financial statements. Prior periods have been restated. The
deconsolidation of the net assets and results of operations of the trusts had
virtually no impact on Community's financial statements or liquidity position
since Community continues to be obligated to repay the debentures held by the
trusts and guarantees repayment of the capital securities issued by the trusts.
Community's total debt obligation related to the trusts did increase, however,
from $30 million to $30.9 million upon deconsolidation, with the difference
representing Community's common ownership interest in the trusts, which is now
reported in "Other assets."
For regulatory reporting purposes, the Federal Reserve Board has indicated that
the Trust Preferred Securities will continue to qualify as Tier 1 Capital
subject to previously specified limitations, until further notice. If regulators
make a determination that the Trust Preferred Securities can no longer be
considered in regulatory capital, it is anticipated that Community will continue
to meet its minimum capital requirements.
11
COMMUNITY BANKS, INC. AND SUBSIDIARIES
Part 1 - 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 2004 compared to
the same period of 2003 unless otherwise indicated. Per share and number of
share amounts reflect stock splits and dividends with a record date prior to
issuance of the financial statements, including the 5% stock dividend paid April
30, 2004 to stockholders of record on April 16, 2004.
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 to the allowance
for loan losses, and subsequent recoveries, if any, are credited to the
allowance for loan losses.
12
COMMUNITY BANKS, INC. AND SUBSIDIARIES
Part 1 - Item 2. Management's Discussion and Analysis of Financial Condition and
- --------------------------------------------------------------------------------
Results of Operations (continued)
- ---------------------------------
Summary of Financial Results
Earnings for the first quarter of 2004 resulted in net income of $5.2 million
and diluted earnings per share of $0.41. Reported net income for 2004 was only
slightly higher than the amount recorded for the first quarter of 2003, which
reflected net income of $5.1 million and earnings per share of $0.41. Results in
2004 produced a return on average assets of 1.10% and return on average equity
of 14.13%, compared to 1.21% and 15.82%, respectively, for the first quarter of
2003.
Robust growth in both loan and deposit balances yielded increases of 18% and
12%, respectively, since the end of the first quarter of 2003. Despite this
growth, improvement in revenue derived from these activities was constrained by
steadily declining interest rates. This low rate environment has limited the
financial services industry's capacity to improve the spread between interest
earned on earning assets and the interest paid on funding sources. Despite these
challenges, Community has continued to achieve growth in both loans and deposit
volumes, while simultaneously expanding revenues from service and fee-related
activities. Community has also achieved steady improvement in the measures used
to assess overall loan quality, a vital component of future financial success.
Loans grew to $1.1 billion at March 31, 2004, an 18% increase from the balance
at the end of the first quarter of 2003, while deposits increased to $1.3
billion, reflecting nearly a 12% increase over the same period. Total assets of
Community Banks, Inc., now stand at almost $2.0 billion.
During the quarter, the ratio of nonperforming assets to period end loans
dropped from 1.21% at the end of the year to 0.86%. The ratio of the allowance
for loan losses to loans now stands at 1.25% and provides 184% coverage of loans
that are on nonaccrual status. Net charge-offs for the period declined to 0.06%
of average loans on an annualized basis, well below the annualized charge-off
rate of 0.17% for all of 2003. These asset quality metrics provide tangible
evidence of the underlying quality of Community's loan portfolio. Operating
expenses, on the other hand, grew between the first quarter of 2003 and 2004, as
a result of several factors, including increased costs of acquired businesses;
expansion of the delivery network; and continuing investment in the growth of
Community.
13
COMMUNITY BANKS, INC. AND SUBSIDIARIES
Part 1 - Item 2. Management's Discussion and Analysis of Financial Condition and
- --------------------------------------------------------------------------------
Results of Operations (continued)
- ---------------------------------
Average Statement of Condition
The average balance sheets for the three months ended March 31, 2004 and 2003
were as follows (dollars in thousands):
March 31, Change
----------------------------------
2004 2003 Volume %
- -----------------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 36,065 $ 32,430 $ 3,635 11.2
Federal funds sold and other 6,399 1,159 5,240 452.1
Investments 671,746 686,204 (14,458) (2.1)
Loans held for resale 5,786 8,890 (3,104) (34.9)
Loans 1,100,432 915,652 184,780 20.2
Allowance for loan losses 13,484 12,641 843 6.7
- -----------------------------------------------------------------------------------------------------------------------
Net loans 1,086,948 903,011 183,937 20.4
Goodwill and identifiable intangibles 4,756 1,753 3,003 171.3
Other assets 85,081 69,906 15,175 21.7
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ 1,896,781 $ 1,703,353 $ 193,428 11.4
- -----------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits $ 164,295 $ 158,128 $ 6,167 3.9
Interest-bearing deposits 1,078,299 969,999 108,300 11.2
Short-term borrowings 52,020 96,119 (44,099) (45.9)
Long-term debt 410,148 320,263 89,885 28.1
Subordinated debt 30,928 15,464 15,464 100.0
Other liabilities 13,783 12,580 1,203 9.6
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 1,749,473 1,572,553 176,920 11.3
- -----------------------------------------------------------------------------------------------------------------------
Stockholders' equity 147,308 130,800 16,508 12.6
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 1,896,781 $ 1,703,353 $ 193,428 11.4
- -----------------------------------------------------------------------------------------------------------------------
Average loans reached $1.1 billion at March 31, 2004, a 20% increase over the
$916 million of average loans recorded at March 31, 2003. The following
presentation of average loans at March 31 is an indication of the relative mix
of loans included in the portfolio (dollars in thousands):
Change
2004 2003 Amount %
---- ---- ------ -
Commercial $ 393,786 $ 305,640 $ 88,146 29 %
Commercial real estate 283,302 251,271 32,031 13 %
Residential real estate 97,784 108,403 (10,619) (10)%
Consumer 325,560 250,338 75,222 30 %
---------------------------------------------------------
Total $ 1,100,432 $ 915,652 $ 184,780 20 %
=========================================================
14
COMMUNITY BANKS, INC. AND SUBSIDIARIES
Part 1 - Item 2. Management's Discussion and Analysis of Financial Condition and
- --------------------------------------------------------------------------------
Results of Operations (continued)
- ---------------------------------
Commercial borrowing began to increase during the second quarter of 2003,
leveled off in the fourth quarter, then resurged in the first quarter of 2004.
After the end of the first quarter of 2003, declines in interest rate trends
caused many borrowers to reevaluate their existing credit arrangements in search
of improved funding terms and more responsive credit relationships. Community
has consistently made efforts to position itself in the marketplace to ensure
its ability to compete with large and small competitors alike. As a result,
Community was able to increase both its commercial and commercial real estate
portfolios by nearly $120 million on an aggregate basis. Much of the growth in
the commercial sector was attributed to Community's ability to acquire existing
market share since business lending has been constrained on both a national
level and in certain segments of Community's market. A portion of this growth
also can be attributed to the addition of certain key lending personnel made
available as a result of mergers of local financial institutions by
out-of-market acquirers.
Significant growth also occurred in consumer lending, which grew by $75 million
between March 31, 2003, and March 31, 2004, particularly in home equity lending.
As part of Community's effort to increase its visibility in core markets, a
concerted effort was made to become a more effective consumer lender, including
substantial increases in marketing and advertising efforts. Consumer demand for
credit was aided by the high levels of consumer confidence and improved credit
affordability experienced in the current interest rate environment. These
efforts were also aided by the growth achieved as a result of the expansion of
the office network and sales efforts over the last several years.
Residential real estate lending, which is composed primarily of loans to
single-family creditors, has experienced a steady decline as a result of the
increasing accessibility of secondary market liquidity through mortgage banking
activities. Community-based banks continue to provide a convenient avenue for
consumers to access funding for residential lending, but most fixed-rate credits
continue to be sold in the secondary market. This strategy has reduced the
interest rate risk associated with consumer preferences for long-term, fixed
rate lending, and continues to provide valuable liquidity for other forms of
relationship lending.
Deposit balances remain the primary source of funding. Growth of nearly 10% was
recognized, as indicated by the following summary of average balances at March
31(dollars in thousands):
Change
2004 2003 Amount %
---- ---- ------ -
Demand $ 164,295 $ 158,128 $ 6,167 4%
Savings & NOW accounts 457,269 356,668 100,601 28%
Time 501,571 503,995 (2,424) --%
Time $100,000 or more 119,459 109,336 10,123 9%
--------------------------------------------------------------
$ 1,242,594 $ 1,128,127 $ 114,467 10%
==============================================================
Deposit growth occurred almost exclusively in savings and NOW deposits; more
specifically Community's Power Checking account. This account, with
characteristics of both a money market and checking account, grew steadily
throughout 2003. At the same time, longer term time deposit growth was
relatively flat. Consumer preferences were clearly weighted in favor of
maintaining adequate liquidity in anticipation of a gradual rise in rates.
Downward pressure on rates, combined with lack of confidence in other more risky
investment vehicles, increased consumer preference for the flexibility,
liquidity and guaranteed return provided by these accounts.
15
COMMUNITY BANKS, INC. AND SUBSIDIARIES
Part 1 - Item 2. Management's Discussion and Analysis of Financial Condition and
- --------------------------------------------------------------------------------
Results of Operations (continued)
- ---------------------------------
Community has made strategic use of short and long-term funding sources at
historic low rates to augment its ability to generate funding through increased
deposits. In early 2003, Community used increases in low-cost federal funds
borrowings to fund earning asset growth. In the latter part of 2003, Community
began to extend the maturities of overnight borrowings through the Federal Home
Loan Bank to take advantage of lower long-term rates on longer borrowings.
In December, 2003, Community issued $15 million of trust preferred securities in
order to increase the amount of qualifying regulatory capital through this
relatively inexpensive funding source. Community previously had executed a $15
million issuance at the end of 2002, bringing the subordinated debt total to $30
million at December 31, 2003 and March 31, 2004. In the first quarter of 2004,
the trusts that had been used for the trust preferred issuances were
deconsolidated in accordance with FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" which was revised
in December 2003. See Note 5 in the Notes to Consolidated Interim Financial
Statements for a further description of the deconsolidation.
Net Interest Income
The following table compares net interest income and net interest margin
components between the first quarters of 2004 and 2003 (dollars in thousands):
- -------------------------------------------------------------------------------------------------------------------------
2004 2003 Increase (Decrease)
Amount Yield/rate Amount Yield/rate Amount Yield/rate
- -------------------------------------------------------------------------------------------------------------------------
Interest income $ 25,603 5.77% $ 25,289 6.38% $ 314 (.61)
Interest expense 10,541 2.70% 10,703 3.10% (162) (.40)
- -------------------------------------------------------------------------------------------------------------------------
Net interest income $ 15,062 $ 14,586 $ 476
Interest spread 3.07% 3.28% (.21)
Impact of non-interest funds .33% 0.40% (.07)
- -------------------------------------------------------------------------------------------------------------------------
Net interest margin 3.40% 3.68% (.28)
- -------------------------------------------------------------------------------------------------------------------------
Interest Income /Earning Assets
Interest income totaled $25.6 million in 2004, slightly ahead of the $25.3
million recorded in 2003, despite an earning asset yield decline from 6.38% to
5.77%. Earning assets increased from $1.61 billion to $1.78 billion and helped
to offset the effect of lower earning asset yields. From 2003 to 2004, earning
assets grew $177 million, with an increase of $186 million in loans and a
decrease of $14 million in portfolio investment securities. Growth in loans was
funded by both runoff in the investment portfolio and by an increase in
deposits.
Interest Expense / Funding Sources
Interest expense on deposits declined, thus contributing to the increase in net
interest income. The rate environment that generated only modest improvement in
interest income also enabled Community to marginally reduce its overall funding
costs from $10.7 million in 2003 to $10.5 million in 2004 while interest-bearing
deposits grew by nearly $108 million. The majority of this increase occurred in
savings, Power Checking and other accounts that were responsive to customer
preferences for liquidity.
At various times during 2003, Community increased its long-term borrowings,
which are composed principally of term funding available through the Federal
Home Loan Bank program. Community experienced a 31% increase in long-term
funding, which included the $15 million in trust preferred instruments issued at
the end of 2003.
16
COMMUNITY BANKS, INC. AND SUBSIDIARIES
Part 1 - Item 2. Management's Discussion and Analysis of Financial Condition and
- --------------------------------------------------------------------------------
Results of Operations (continued)
- ---------------------------------
Interest Spread and Net Interest Margin
As a result of rate trends and other dynamics specific to its balance sheet,
Community reported a quarter-to-quarter decline in net interest spread from
3.28% in 2003 to 3.07% in 2004, and a decline in net interest margin from 3.68%
to 3.40% over the same period. The decline in margin was also linked to the
impact of reduced contribution from non-interest funding sources, which declined
from 0.40% to 0.33%. During periods of declining interest rates, the
contribution from non-interest funds to net interest margin is reduced since
funds are invested at progressively lower rates. During periods of rising rates,
these funds can be expected to contribute to improvements in net interest
margin.
Provision for Loan Losses
Community reported a modest increase in the provision for loan losses, which
reflected continued steady improvement in the overall asset quality metrics of
its loan portfolio. The provision increased from $400 thousand in 2003 to $850
thousand in 2004, while the relationship of the allowance for loan losses to
loans declined from 1.35% at March 31, 2003 to 1.25% at March 31, 2004. The
provision, and the level of the allowance, were responsive to the changing
credit quality conditions of both seasoned loans and the incremental risk
inherent in a growing loan portfolio. Net charge-offs during the first quarter
of 2004 were only $166 thousand, or, when annualized, 0.06% of average loans.
Non-Interest Income
Non-interest income grew during the first quarter of 2004 as the result of
important steps undertaken in 2003 to solidify and expand Community's integrated
businesses and complementary banking services. Excluding the impact from sales
of investment securities, non-interest revenue grew 28%, from $3.3 million in
2003 to $4.3 million in 2004.
Though overall fees grew, fees derived from the sale of various retail
investment products (annuities, brokerage services, mutual funds, etc) and other
fees related to Community's limited trust department activities decreased $50
thousand, or 16%, in 2004 compared to 2003. While traditional trust fees showed
a modest increase in 2004 over 2003, income from the sale of additional
investment products started slowly early in the quarter, but rebounded nicely
later in the quarter.
A substantial increase in fees occurred in the area of service charges on
deposits. In the first quarter of 2003, Community initiated a new service known
as "Overdraft Honor." Under this carefully designed program, customers who so
choose now have access to a service that facilitates payment of periodic
overdraft items while simultaneously avoiding adverse credit history events.
Fees from these services, which were not provided prior to 2003, were
responsible for virtually all of the increase in this category.
Other service charges included interchange fees from Community's ATM network and
debit card transactions and increased $148 thousand, or 20%, in 2004 from 2003.
Nearly all of the increases in these sources of fee income resulted from
increased usage and growing consumer acceptance of electronic mediums as a
substitute for cash or check-based transactions.
Insurance premiums and commissions include agency-based commissions from
commercial and personal lines, fees from credit reinsurance activities related
to consumer lending, and the revenue from title insurance and settlement
activities conducted through Community's title insurance subsidiary. Fees rose
by a total of $244 thousand, or 60%, from 2003 to 2004. The increase was related
to an overall increase in mortgage loan originations, the addition of the ABCO
franchise at the beginning of the second quarter of 2003 and to the acquisitions
of insurance agencies later in 2003.
17
COMMUNITY BANKS, INC. AND SUBSIDIARIES
Part 1 - Item 2. Management's Discussion and Analysis of Financial Condition and
- --------------------------------------------------------------------------------
Results of Operations (continued)
- ---------------------------------
Income from mortgage banking activities increased $201 thousand, or 50%, and is
attributable to activity generated from the acquisition of Erie Financial Group,
Ltd., a mortgage broker service, in July, 2003. Community has more than doubled
its capacity to originate mortgages with the acquisition of Erie and has become
a more significant and efficient competitor in its core and extended Maryland
markets.
Security gains increased by nearly $300 thousand from 2003. The total gains of
$1.3 million recorded in 2004 were principally gains related to sales of bank
equity holdings.
Non-Interest Expenses
Total non-interest expenses reached $11.9 million in 2004 and reflected a 10%
increase, or $1.1 million, from the $10.8 million recorded in 2003. Comparisons
to the first quarter of 2003 were influenced by the acquisitions of integrated
businesses acquired later in 2003, for which a full three months of expenses was
included in 2004. Comparisons to the most recent prior quarter yielded only
modest increases.
Salaries and employee benefits, representing 57% of operating costs in 2004,
increased $935 thousand, or 16%, for 2004 compared to 2003. The increase was
affected by a number of factors including the annual merit increase and
employees added through the expansion of Community's office network and its
fee-based activities, and the acquisitions of Abstracting Company of York County
in April 2003, Erie Financial Group, Ltd., in July 2003, and Your Insurance
Partnership in September 2003.
The increase in occupancy expense of $267 thousand, or 15%, similarly includes
the effect of branch expansion and corporate acquisitions.
Marketing expenses decreased $106 thousand, or 18%, for 2004 compared to 2003.
During the first half of 2003, increased marketing and promotional efforts had
been undertaken to increase Community's market share in new markets and to
preserve and extend share in its legacy communities. Community continues to
execute a targeted strategic marketing campaign that includes radio, billboard,
direct mail, and television mediums.
Telecommunications expenses increased $117 thousand, or 58%, from 2003 to 2004,
for costs associated with upgrades of existing systems and increased costs for
the growing office network.
Other non-interest expenses decreased modestly.
Income Taxes
The effective income tax rate for both 2004 and 2003 was approximately 18.5%.
The relative mix of tax exempt income influences the effective income tax rate
and remains the primary reason for the difference between the effective tax rate
and the statutory federal tax rate for corporations.
18
COMMUNITY BANKS, INC. AND SUBSIDIARIES
Part 1 - Item 2. Management's Discussion and Analysis of Financial Condition and
- --------------------------------------------------------------------------------
Results of Operations (continued)
- ---------------------------------
Stockholders' Equity
Capital strength is 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 sources of capital are earnings and earnings retention.
This cornerstone of capital adequacy can be augmented by a number of capital
management strategies, many of which are used by Community. As it has for a
number of years, the Board approved the issuance of a 5% stock dividend in the
first quarter of 2003 and in the first quarter of 2004. A 20% stock split in the
form of a stock dividend was declared in November, 2003, and distributed in
January, 2004. In addition to these stock dividends, 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 repurchases 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. Such regulatory guidelines are continually under review and are
expected to undergo some change as a result of the Basel II capital accords
which are currently under review by U.S. banking regulators. The following table
provides the risk-based capital positions of Community and its banking
subsidiary, Community Banks, at March 31, 2004, along with a comparison to the
various current regulatory capital requirements:
March 31, Regulatory "Well
2004 Minimum Capitalized"
---- ------- ------------
Leverage ratio
Community Banks, Inc. 8.62% 4% n/a
Community Banks 7.66% 4% 5%
Tier 1 capital ratio
Community Banks, Inc. 11.44% 4% n/a
Community Banks 10.08% 4% 6%
Total risk-based capital ratio
Community Banks, Inc. 12.47% 8% n/a
Community Banks 11.08% 8% 10%
At March 31, 2004, total stockholders' equity reflected accumulated other
comprehensive income of $10.6 million compared to the accumulated other
comprehensive income of $6.6 million reflected in total stockholders' equity at
December 31, 2003. This increase can be attributed to the change in the net
unrealized gain on investment securities available for sale, net of taxes, due
to the influence of lower interest rates.
19
COMMUNITY BANKS, INC. AND SUBSIDIARIES
Part 1 - Item 2. Management's Discussion and Analysis of Financial Condition and
- --------------------------------------------------------------------------------
Results of Operations (continued)
- ---------------------------------
Off-Balance-Sheet Commitments
In the normal course of business, Community is a party to financial instruments
with off-balance-sheet risk to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to originate loans and standby letters of
credit, which involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the Consolidated Balance Sheets.
Financial instruments with off-balance-sheet risk at March 31, 2004, are as
follows (in thousands):
Contract
Amount
------
Commitments to fund loans $ 54,566
Unused lines of credit $ 302,212
Standby letters of credit $ 34,974
Unadvanced portions of construction loans $ 33,789
Substantially all of Community's unused commitments to originate loans and
unused lines of credit are at variable rates or will be provided at the
prevailing fixed rate when the loans are originated or the lines are used.
20
COMMUNITY BANKS, INC. AND SUBSIDIARIES
PART I - Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------------------
Market risk is defined as the exposure to economic loss that arises from changes
in the values of certain financial instruments pursuant to factors arising out
of the various categories of market risk. Market risk can include a number of
categories, including interest rate risk, foreign currency risk, exchange rate
risk, commodity price risk, etc. For domestic, community-based banks, the vast
majority of market risk is related to interest rate risk.
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 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
judgment, 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.
The following table provides a measure of interest rate sensitivity for each
category of interest earning assets and interest bearing liabilities at March
31, 2004.
Interest Rate Sensitivity
- ------------------------------------------------------------------------------------------------------------------------------
1-90 90-180 180-365 1 year
Dollars in thousands days days days or more Total
- ------------------------------------------------------------------------------------------------------------------------------
Assets
Interest-bearing deposits in
other banks $ 2,537 $ --- $ --- $ --- $ 2,537
Loans held for sale(1) 96 96 195 4,425 4,812
Investment securities 121,903 49,844 81,287 462,021 715,055
Loans(2) 405,348 57,141 106,942 543,126 1,112,557
- ------------------------------------------------------------------------------------------------------------------------------
Earning assets 529,884 107,081 188,424 1,009,572 1,834,961
Non-earning assets 146 --- --- 109,448 109,594
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 530,030 $ 107,081 $ 188,424 $ 1,119,020 $ 1,944,555
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities
Savings $ 318,287 $ --- $ --- $ 154,393 $ 472,680
Time 66,594 99,002 111,870 236,731 514,197
Time in denominations of
$100,000 or more 35,028 23,401 21,493 41,452 121,374
Short-term borrowings 55,608 9,399 --- --- 65,007
Long-term debt 27,487 1,791 3,582 366,890 399,750
Trust preferred securities 23,196 --- --- 7,732 30,928
- ------------------------------------------------------------------------------------------------------------------------------
Interest bearing liabilities 526,200 133,593 136,945 807,198 1,603,936
Other liabilities and equity --- --- --- 340,619 340,619
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 526,200 $ 133,593 $ 136,945 $ 1,147,817 $ 1,944,555
- ------------------------------------------------------------------------------------------------------------------------------
(1) Only education loans held for sale are included in earning assets.
(2) Includes non-accrual loans.
21
COMMUNITY BANKS, INC. AND SUBSIDIARIES
PART I - Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ---------------------------------------------------------------------------
(continued)
- -----------
Interest Sensitivity GAP
- ------------------------------------------------------------------------------------------------------------
1-90 90-180 180-365 1 year
Dollars in thousands days days days or more
- ------------------------------------------------------------------------------------------------------------
Periodic $ 3,830 $ (26,512) $ 51,479 $ (28,797)
Cumulative (22,682) 28,797
Cumulative GAP as a percentage
of total assets .20% (1.17)% 1.48% 0.00%
The positive GAP between interest-earning assets and interest-bearing
liabilities maturing or repricing within one year approximated 1.50% at March
31, 2004 and has remained relatively constant since December 31, 2003.
Interest rate sensitivity, and the measurement thereof, are also influenced by
the optionality of certain earning assets and interest bearing liabilities. For
example, a substantial portion of Community'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.
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 Community of FHLB borrowings and
subordinated notes prior to maturity.
22
COMMUNITY BANKS, INC. AND SUBSIDIARIES
PART I - Item 4. Controls and Procedures
- -----------------------------------------
Under the supervision and with the participation of Community's management,
including its Chief Executive Officer and Chief Financial Officer, Community has
evaluated the effectiveness of its disclosure controls and procedures as of
March 31, 2004. Based upon this evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that Community's disclosure controls and
procedures are adequate and effective to ensure that material information
relating to Community 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 have not been any changes in Community's
internal control over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, Community's internal control over financial reporting.
23
COMMUNITY BANKS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
- --------------------------
The nature of the Community's business generates a certain amount of
litigation involving matters arising out of the ordinary course of business. In
the opinion of management, there are no legal proceedings that might have a
material effect on the results of operations, liquidity, or the financial
position of Community at this time.
Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
- --------------------------------------------------------------------------------
Securities
- ---------
The following shares were purchased during the quarter as part of
Community's Share Repurchase Program:
Avg Price Shares Purchased Capacity to
Shares Paid as part of Purchase
Date Purchased Per Share Repurchase Program More Shares
--------------------------------------------------------------------------------------------------------------
01/1/04-01/31/04 --- --- --- 231,834
02/1/04-02/29/04 --- --- --- 231,834
03/1/04-03/31/04 24,500 $30.49 24,500 207,334
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
---------------------
3.1 Amended Articles of Incorporation (Incorporated by reference to Exhibit
3.1, attached to Community's registration on Form 8-A, filed on May 13,
2002)
3.2 Amended By-Laws (Incorporated by reference to Exhibit 3.2, attached to
Community's Quarterly Report on Form 10-Q for the quarter ended March 31,
2003, filed with the Commission on May 15, 2003)
4 Instruments defining the rights of the holders of trust capital securities
sold by Community in December 2002 and in December 2003 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 Amended and Restated Salary Continuation Agreement of Eddie L. Dunklebarger
10.2 Salary Continuation Agreement of Donald F. Holt
10.3 Amended and Restated Salary Continuation Agreement of Robert W. Lawley
10.4 Amended and Restated Salary Continuation Agreement of Anthony N. Leo
10.5 Amended and Restated Salary Continuation Agreement of Jeffrey M. Seibert
24
COMMUNITY BANKS, INC. AND SUBSIDIARIES
PART II - Item 6 - Exhibits and Reports on Form 8-K (continued)
- ---------------------------------------------------------------
(a) Exhibits (continued)
- ---------------------------------
10.6 Survivor Income Agreement, with Split Dollar Addendum thereto, of Donald F.
Holt
31.1 Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer)
31.2 Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer)
32.1 Section 1350 Certification (Chief Executive Officer)
32.2 Section 1350 Certification (Chief Financial Officer)
(b) Reports on Form 8-K
- -------------------------
Registrant filed the following reports on Form 8-K during the quarter ended
March 31, 2004:
Report Dated January 21, 2004
-----------------------------
Registrant announced its earnings for the period ended December 31, 2003.
Report Dated February 11, 2004
------------------------------
Registrant announced the declaration of a first quarter cash dividend
payable April 1, 2004 and a 5% stock dividend payable April 30, 2004.
25
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 10, 2004 /s/ Eddie L. Dunklebarger
----------------------- -----------------------------
Eddie L. Dunklebarger
Chairman and President
(Chief Executive Officer)
Date May 10, 2004 /s/ Donald F. Holt
----------------------- -----------------------------
Donald F. Holt
Executive Vice President
(Chief Financial Officer)
26