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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 2002
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to _______________________
Commission file number 0-17455
COMM BANCORP, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2242292
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
125 NORTH STATE STREET, CLARKS SUMMIT, PA 18411
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (570) 586-0377
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE _________________________________________
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.33 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by checkmark whether the registrant is an accelerated filer as defined
in Rule 12b-2 of the Securities Exchange Act of 1934. | |
The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing sale price: $47,271,138 AT MARCH 19, 2003.
Indicate the number of shares outstanding of the registrant's common stock, as
of the latest practicable date: 1,945,977 AT MARCH 19, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Stockholders for the year ended
December 31, 2002, are incorporated by reference in Part II of this Annual
Report. Portions of the registrant's 2003 Proxy Statement are incorporated by
reference in Part III of this Annual Report.
Page 1 of 183
Exhibit Index on Page 54
COMM BANCORP, INC.
FORM 10-K INDEX
Page
----
Special Note Regarding Forward-Looking Statements................... 3
PART I
Item 1. Business................................................... 4
Item 2. Properties................................................. 33
Item 3. Legal Proceedings.......................................... 34
Item 4. Submission of Matters to a Vote of Security Holders........ *
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters........................................ 34
Item 6. Selected Financial Data.................................... 35
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 35
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk....................................................... 35
Item 8. Financial Statements and Supplementary Data................ 35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ *
PART III
Item 10. Directors, Executive Officers, Promoters and Control
Persons of the Registrant.................................. 35
Item 11. Executive Compensation..................................... 38
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 44
Item 13. Certain Relationships and Related Transactions............. 45
Item 14. Controls and Procedures.................................... 45
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................... 47
Signatures.......................................................... 48
Certifications...................................................... 50
Exhibit Index....................................................... 54
*Not Applicable
2
COMM BANCORP, INC.
FORM 10-K
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K, other periodic reports filed by us under the
Securities Exchange Act of 1934, as amended, and any other written or oral
statements made by or on behalf of us may include "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 which
reflect our current views with respect to future events and financial
performance. Such forward-looking statements are based on general assumptions
and are subject to various risks, uncertainties, and other factors that may
cause actual results to differ materially from the views, beliefs and
projections expressed in such statements. These risks, uncertainties and other
factors include, but are not limited to:
- Possible changes in economic and business conditions that may affect
the prevailing interest rates, the prevailing rates of inflation, or
the amount of growth, stagnation, or recession in the global, United
States, and Northeastern Pennsylvania economies, the value of
investments, collectibility of loans and the profitability of
business entities;
- Possible changes in monetary and fiscal policies, laws and
regulations, and other activities of governments, agencies and
similar organizations;
- The effects of easing of restrictions on participants in the
financial services industry, such as banks, securities brokers and
dealers, investment companies and finance companies, and changes
evolving from the enactment of the Gramm-Leach-Bliley ("GLB") Act
which became effective in 2000, and attendant changes in patterns
and effects of competition in the financial services industry;
- The cost and other effects of legal proceedings, claims, settlements
and judgments; and
- Our ability to achieve the expected operating results depends on a
variety of factors, including the continued growth of the markets in
which we operate consistent with recent historical experience, and
our ability to expand into new markets and to maintain profit
margins in the face of pricing pressures.
The words "believe," "expect," "anticipate," "project" and similar expressions
signify forward-looking statements. Readers are cautioned not to place undue
reliance on any forward-looking statements made by or on behalf of us. Any such
statements speak only as of the date the statement was made. We undertake no
obligation to update or revise any forward-looking statements.
3
PART I
ITEM 1. BUSINESS
GENERAL
We are a registered bank holding company incorporated in 1983 as a Pennsylvania
business corporation and are headquartered in Clarks Summit, Pennsylvania. We
have two wholly-owned subsidiaries, Community Bank and Trust Company, referred
to as Community Bank, and Comm Realty Corporation, referred to as Comm Realty.
Our business consists primarily of the management and supervision of Community
Bank. Comm Realty, a Pennsylvania business corporation, holds, manages and sells
foreclosed or distressed assets on behalf of Community Bank. Our principal
source of income is dividends paid by Community Bank. At December 31, 2002, we
had approximately:
- $486.4 million in total assets;
- $323.6 million in loans;
- $437.2 million in deposits; and
- $ 45.3 million in stockholders' equity.
Community Bank is a Pennsylvania commercial bank and a member of the Federal
Reserve System whose deposits are insured by the Bank Insurance Fund ("BIF") of
the Federal Deposit Insurance Corporation ("FDIC"). Community Bank is a
full-service commercial bank providing a range of products and services,
including time and demand deposit accounts, consumer, commercial and mortgage
loans, and commercial leases to individuals and small- to medium-sized
businesses in its Northeastern Pennsylvania market area. At December 31, 2002,
Community Bank had sixteen branch banking offices located in the Pennsylvania
counties of Lackawanna, Susquehanna, Wayne and Wyoming.
Community Bank has two wholly-owned subsidiaries, Community Leasing Corporation,
referred to as Community Leasing, and Comm Financial Services Corporation,
referred to as Comm Financial Services. Community Leasing, a Pennsylvania
business corporation, engages in commercial leasing. Comm Financial Services, a
Pennsylvania business corporation, engages in selling insurance products and
services and in providing asset management services.
We have combined financial information about Comm Realty, Community Leasing and
Comm Financial Services with our financial information as none of these
subsidiaries meet the quantitative thresholds for reportable operating segments
and all of these subsidiaries share a majority of the aggregation criteria for
reportable operating segments. Moreover, we consider Community Bank's branch
banking offices to be a single operating segment because these branches have
similar:
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- Economic characteristics;
- Products and services;
- Operating processes;
- Delivery systems;
- Customer bases; and
- Regulatory oversight.
We have not operated any other reportable operating segments in the three-year
period ended December 31, 2002.
As of December 31, 2002, we had 196 full-time equivalent employees. We and
Community Bank are not parties to any collective bargaining agreement and
employee relations are considered to be good.
SUPERVISION AND REGULATION
The following discussion sets forth the material elements of the regulatory
framework applicable to us and Community Bank and provides certain specific
information. This regulatory framework is primarily intended for the protection
of investors in our common stock, depositors of Community Bank and the BIF that
insures bank deposits. To the extent that the following information describes
statutory and regulatory provisions, it is qualified by reference to those
provisions. A change in the statutes, regulations or regulatory policies
applicable to us or Community Bank may have a material effect on our business.
INTERCOMPANY TRANSACTIONS
Various governmental requirements, including Sections 23A and 23B of the Federal
Reserve Act and Regulation W of the Board of Governors of the Federal Reserve
System ("Federal Reserve Board"), limit borrowings by us from Community Bank and
also limit various other transactions between us and Community Bank. For
example, Section 23A limits to no more than 10.0 percent of its total capital
the aggregate outstanding amount of Community Bank's loans and other "covered
transactions" with any particular nonbank affiliate including financial
subsidiaries, and limits to no more than 20.0 percent of its total capital the
aggregate outstanding amount of Community Bank's covered transactions with all
of its affiliates including financial subsidiaries. At December 31, 2002,
approximately $4.4 million was available for loans to us from Community Bank.
Section 23A also generally requires that Community Bank's loans to its nonbank
affiliates, including financial subsidiaries, be secured, and Section 23B
generally requires that Community Bank's transactions with its nonbank
affiliates, including financial subsidiaries, be at arm's-length terms. Also, we
and Community Bank and any financial subsidiary are prohibited from engaging in
certain "tie-in" arrangements in connection with extensions of credit or
provision of property or services.
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SUPERVISORY AGENCIES
As a Pennsylvania commercial bank and member of the Federal Reserve System,
Community Bank is subject to primary supervision, regulation, and examination by
the Pennsylvania Department of Banking and the Federal Reserve Board. Community
Bank is subject to extensive Pennsylvania and federal statutes and regulations
that significantly affect its business and activities. Community Bank must file
reports with its regulators concerning its activities and financial condition
and obtain regulatory approval to enter into certain transactions. Community
Bank is also subject to periodic examinations by its primary and secondary
regulators to ascertain compliance with various regulatory requirements. Other
applicable statutes and regulations relate to: (i) insurance of deposits; (ii)
allowable investments; (iii) loans; (iv) leases; (v) acceptance of deposits;
(vi) trust activities; (vii) mergers; (viii) consolidations; (ix) payment of
dividends; (x) capital requirements; (xi) reserves against deposits; (xii)
establishment of branches and certain other facilities; (xiii) limitations on
loans to one borrower and loans to affiliated persons; (xiv) activities of
subsidiaries; and (xv) other aspects of the business of banks. Recent federal
legislation has instructed federal agencies to adopt standards or guidelines
governing banks' internal controls, information systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, compensation and
benefits, asset quality, earnings and stock valuation and other matters. Federal
law gives the federal banking agencies greater flexibility in implementing
standards on asset quality, earnings and stock valuation. Regulatory authorities
have broad flexibility to initiate proceedings designed to prohibit banks from
engaging in unsafe and unsound banking practices.
We, Community Bank and our subsidiaries are also affected by various other
governmental requirements and regulations, general economic conditions and the
fiscal and monetary policies of the federal government and the Federal Reserve
Board. The monetary policies of the Federal Reserve Board influence to a
significant extent the overall growth of loans, leases, investments, deposits,
interest rates charged on loans and interest rates paid on deposits. The nature
and impact of future changes in monetary policies are often unpredictable.
We are subject to the jurisdiction of the United States Securities and Exchange
Commission ("SEC") for matters relating to the offering and sale of our
securities. We are also subject to the SEC's rules and regulations relating to
periodic reporting, insider trading reports and proxy solicitation materials.
Our common stock is listed for quotation of prices on The NASDAQ Stock Market(R)
and, therefore, we are subject to the listing rules and regulations imposed by
The NASDAQ Stock Market(R).
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SUPPORT OF COMMUNITY BANK
Under current Federal Reserve Board policy, we are expected to act as a source
of financial and managerial strength to Community Bank by standing ready to use
available resources to provide adequate capital funds to Community Bank during
periods of financial adversity and by maintaining the financial flexibility and
capital-raising capacity to obtain additional resources for assisting Community
Bank. The support expected by the Federal Reserve Board may be required at times
when we may not have the resources or inclination to provide it.
If a default occurred with respect to Community Bank, any capital loans to
Community Bank from us would be subordinate in right of payment to payment of
Community Bank depositors and certain of its other obligations.
LIABILITY OF COMMONLY CONTROLLED BANKS
Community Bank can be held liable for any loss incurred, or reasonably expected
to be incurred, by the FDIC in connection with the default of a commonly
controlled FDIC-insured depository institution, or any assistance provided by
the FDIC to a commonly controlled FDIC-insured depository institution in danger
of default.
"Default" is generally defined as the appointment of a conservator or receiver,
and "in danger of default" is generally defined as the existence of certain
conditions indicating that a default is likely to occur in the absence of
regulatory assistance.
DEPOSITOR PREFERENCE STATUTE
In the "liquidation or other resolution" of Community Bank by any receiver,
federal law provides that deposits and certain claims for administrative
expenses and employee compensation against Community Bank are afforded a
priority over the general unsecured claims against Community Bank, including
federal funds and letters of credit.
ALLOWANCE FOR LOAN LOSSES
There are certain risks inherent in making all loans. These risks include
interest rate changes over the time period in which loans may be repaid, risks
resulting from changes in our Northeastern Pennsylvania economy, risks inherent
in dealing with individual borrowers, and, in the case of loans backed by
collateral, the risks resulting from uncertainties about the future value of the
collateral. As a result, we maintain an allowance for loan losses at a level
believed adequate to absorb probable losses resulting from these risks related
to specifically identified loans as well as probable incurred losses inherent in
the remainder of the loan portfolio as of the balance sheet date.
7
The information explaining our systematic analysis and procedural discipline
utilized for determining our allowance for loan losses and its elements is filed
at Exhibit 13 to this report and is incorporated in its entirety by reference
under this Item 1.
SOURCES OF FUNDS
Our primary source of funds is the cash flow provided by our financing
activities, mainly deposit gathering. Our other sources of funds are provided by
investing activities, including principal and interest payments on loans and
mortgage-backed and other securities, and operating activities, primarily net
income.
We offer a variety of deposit accounts with a range of interest rates and terms.
We currently offer NOW accounts, money market accounts, passbook and statement
savings accounts, certificates of deposit and demand deposit accounts. The flow
of deposits is influenced significantly by general economic conditions, changes
in prevailing interest rates, pricing of deposits and competition. Our deposits
are primarily obtained from areas surrounding our banking offices. We rely
primarily on marketing, new products, service and long-standing relationships
with customers to attract and retain these deposits. At December 31, 2002, our
deposits totaled $437.2 million. Of the total deposit balance, $184.0 million,
or 42.1 percent, represented time deposits less than $100.0 thousand and $122.4
million or 28.0 percent represented savings accounts.
When we determine the levels of our deposit rates, consideration is given to
local competition, yields of U.S. Treasury securities and the rates charged for
other sources of funds. We have maintained a high level of core deposits, which
has contributed to our low cost of funds. Core deposits include NOW, money
market, savings, time deposits less than $100.0 thousand and demand deposit
accounts, which, in the aggregate, represented 94.4 percent of total deposits at
December 31, 2002, and 92.4 percent of total deposits at December 31, 2001.
A further discussion of our deposits is filed at Exhibit 13 to this report and
is incorporated in its entirety by reference under this Item 1.
CAPITAL REQUIREMENTS
We are subject to risk-based capital requirements and guidelines imposed by the
Federal Reserve Board, which are substantially similar to the capital
requirements and guidelines imposed by the Federal Reserve Board on Community
Bank. For this purpose, a bank's or bank holding company's assets and certain
specified off-balance sheet commitments are assigned to four risk categories,
each weighted differently based on the level of credit risk that is ascribed to
those assets or commitments. In addition, risk- weighted assets are adjusted for
low-level recourse and market-risk
8
equivalent assets. A bank's or bank holding company's capital, in turn, includes
the following tiers:
- Core Tier I capital, which includes common equity, non-cumulative
perpetual preferred stock, a limited amount of cumulative perpetual
preferred stock, and minority interests in equity accounts of
consolidated subsidiaries, less goodwill, certain identifiable
intangible assets, and certain other assets; and
- Supplementary Tier II capital, which includes, among other items,
perpetual preferred stock not meeting the Tier I definition,
mandatory convertible securities, subordinated debt and allowances
for loan and lease losses, subject to certain limitations, less
certain required deductions.
We and Community Bank, like other bank holding companies and banks, are required
to maintain Tier I and Total Capital, the sum of Tier I and Tier II capital,
less certain deductions, equal to at least 4.0 percent and 8.0 percent of their
total risk-weighted assets, including certain off-balance sheet items, such as
unused lending commitments and standby letters of credit. At December 31, 2002,
we met both requirements, with Tier I and Total Capital equal to 12.1 percent
and 13.2 percent of total risk-weighted assets. Community Bank also met both
requirements at December 31, 2002, with Tier I and Total Capital equal to 11.6
percent and 12.7 percent of total risk-weighted assets.
The Federal Reserve Board has adopted rules to incorporate market and interest
rate risk components into their risk-based capital standards. Amendments to the
risk-based capital requirements, incorporating market risk, became effective
January 1, 1998. Under the new market-risk requirements, capital will be
allocated to support the amount of market risk related to a financial
institution's ongoing trading activities.
The Federal Reserve Board also requires bank holding companies and banks to
maintain a minimum Leverage ratio, Tier I capital to total average assets less
intangible assets, of 3.0 percent if the bank holding company has the highest
regulatory rating and meets certain other requirements, or of 3.0 percent plus
an additional cushion of at least 1.0 to 2.0 percentage points if the bank
holding company does not meet these requirements. At December 31, 2002, our
Leverage ratio was 8.8 percent and Community Bank's Leverage ratio was 8.4
percent.
The Federal Reserve Board may set capital requirements higher than the minimums
noted above for bank holding companies whose circumstances warrant it. For
example, bank holding companies experiencing or anticipating significant growth
may be expected to maintain strong capital positions substantially above the
minimum supervisory levels without significant reliance on intangible assets.
Furthermore, the Federal Reserve Board has
9
indicated that it will consider a Tangible Tier I Leverage ratio, and other
indicia of capital strength in evaluating proposals for expansion or new
activities, or when a bank holding company faces unusual or abnormal risk.
Failure to meet capital requirements could subject us and Community Bank to a
variety of enforcement remedies, including the termination of deposit insurance
by the FDIC, and to certain restrictions on its business. The Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), among other things,
identifies five capital categories for insured banks: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized, and requires federal bank regulatory agencies to
implement systems for prompt corrective action for insured banks that do not
meet minimum capital requirements based on these categories. FDICIA imposes
progressively more restrictive constraints on operations, management and capital
distributions depending on the category in which an institution is classified.
Unless a bank is well capitalized, it is subject to restrictions on its ability
to offer brokered deposits, on "pass-through" insurance coverage for certain of
its accounts and on certain other aspects of its operations. FDICIA generally
prohibits a bank from paying any dividend or making any capital distribution or
paying any management fee to its holding company if the bank would thereafter be
undercapitalized. An undercapitalized bank is subject to regulatory monitoring
and may be required to divest itself of or liquidate subsidiaries. Holding
companies of the institutions may be required to divest themselves of the
institutions or divest themselves of or liquidate other affiliates. An
undercapitalized bank must develop a capital restoration plan, and its parent
bank holding company must guarantee the bank's compliance with the plan up to
the lesser of 5.0 percent of the bank's assets at the time it became
undercapitalized or the amount needed to comply with the plan. Critically
undercapitalized institutions are prohibited from making payments of principal
and interest on subordinated debt and are generally subject to the mandatory
appointment of a conservator or receiver.
Rules adopted by the Federal Reserve Board under FDICIA provide that a state
member bank is deemed to be well capitalized if the bank has a total risk-based
capital ratio of 10.0 percent or greater, a Tier I risk-based capital ratio of
6.0 percent or greater, and a Leverage ratio of 5.0 percent or greater and the
institution is not subject to a written agreement, order, capital directive, or
prompt corrective action directive to meet and maintain a specific level of any
capital measure. As of December 31, 2002, Community Bank was well capitalized,
based on the prompt corrective action ratios and guidelines described above. It
should be noted, however, that a bank's capital category is determined solely
for the purpose of applying the Federal Reserve Board's prompt corrective action
regulations, and that the capital category may not constitute an accurate
representation of the bank's overall financial condition or prospects.
10
BROKERED DEPOSITS
Under FDIC regulations, no FDIC-insured bank can accept brokered deposits unless
it is well capitalized, or adequately capitalized and receives a waiver from the
FDIC. In addition, these regulations prohibit any bank that is not well
capitalized from paying an interest rate on brokered deposits in excess of
three-quarters of one percentage point over certain prevailing market rates. As
of December 31, 2002, Community Bank held no brokered deposits.
DIVIDEND RESTRICTIONS
We are a legal entity separate and distinct from Community Bank. In general,
under Pennsylvania law, we cannot pay a cash dividend if the payment would
render us insolvent. Our revenues primarily consist of dividends paid by
Community Bank. Various federal and state statutory provisions limit the amount
of dividends Community Bank can pay to us without regulatory approval. Under
Pennsylvania law, Community Bank may declare and pay dividends to us only out of
accumulated net earnings and as long as the surplus of Community Bank would not
be reduced below its stated paid-in capital. At December 31, 2002, approximately
$6.4 million was available for payment of dividends to us.
In addition, federal bank regulatory agencies have authority to prohibit
Community Bank from engaging in an unsafe or unsound practice in conducting its
business. Depending upon the financial condition of the bank in question, the
payment of dividends could be deemed to constitute an unsafe or unsound
practice. The ability of Community Bank to pay dividends in the future is
currently influenced, and could be further influenced, by bank regulatory
policies and capital guidelines.
DEPOSIT INSURANCE ASSESSMENTS
The deposits of Community Bank are insured up to regulatory limits by the FDIC
and accordingly, are subject to deposit insurance assessments to maintain the
BIF administered by the FDIC. The FDIC has adopted regulations establishing a
permanent risk-related deposit insurance assessment system. Under this system,
the FDIC places each insured bank in one of nine risk categories based on the
bank's capitalization and supervisory evaluations provided to the FDIC by the
institution's primary federal regulator. An insured bank's insurance assessment
rate is then determined by the risk category into which it is classified.
The annual insurance premiums on bank deposits insured by the BIF vary between
$0.00 per $100 of deposits for banks classified in the highest capital and
supervisory evaluation categories to $0.27 per $100 of deposits for banks
classified in the lowest capital and supervisory evaluation categories. BIF
assessment rates are subject to semi-annual adjustment by
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the FDIC within a range of up to five basis points without public comment. The
FDIC also possesses authority to impose special assessments from time to time.
Community Bank paid no BIF insurance premium in 2002.
The Deposit Insurance Funds Act provides for assessments to be imposed on
insured depository institutions with respect to deposits insured by the BIF, in
addition to assessments currently imposed on depository institutions with
respect to BIF-insured deposits, to pay for the cost of Financing Corporation
("FICO") funding. The FDIC established the FICO assessment rates effective for
the fourth quarter 2002 and first quarter 2003 at approximately $0.0170 and
$0.0168, respectively, per $100 annually for BIF-assessable deposits. The FICO
assessments are adjusted quarterly to reflect changes in the assessment bases of
the FDIC insurance funds and do not vary depending upon a depository
institution's capitalization or supervisory evaluations. In 2002, Community Bank
paid FICO assessments of $71,595.
INTERSTATE BANKING AND BRANCHING
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
("Riegle-Neal"), we are subject to certain concentration limits and other
requirements:
- Bank holding companies, like ourselves, are permitted to acquire
banks and bank holding companies located in any state;
- Any bank that is a subsidiary of a bank holding company is permitted
to receive deposits, renew time deposits, close loans, service
loans, and receive loan payments as an agent for any other
depository institution subsidiary of that bank holding company; and
- Banks are permitted to acquire branch offices outside their home
state by merging with out-of-state banks, purchasing branches in
other states, and establishing de-novo branch offices in other
states.
The ability of banks to acquire branch offices through purchases or openings of
other branches is contingent, however, on the host state having adopted
legislation "opting in" to those provisions of Riegle-Neal. In addition, the
ability of a bank to merge with a bank located in another state is contingent on
the host state not having adopted legislation "opting out" of that provision of
Riegle-Neal. Pennsylvania has opted in to all of these provisions upon the
condition that another host state has similar or reciprocal requirements.
As of the date of this report, we are not contemplating any interstate
acquisitions of a bank or a branch office.
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CONTROL ACQUISITIONS
The Change in Bank Control Act prohibits a person or group of persons from
acquiring "control" of a bank holding company, unless the Federal Reserve Board
has been notified and has not objected to the transaction. Under a rebuttable
presumption established by the Federal Reserve Board, the acquisition of 10.0
percent or more of a class of voting stock of a bank holding company with a
class of securities registered under Section 12 of the Securities Exchange Act
of 1934, like ourselves, would, under the circumstances set forth in the
presumption, constitute acquisition of control of the bank holding company.
In addition, a company is required to obtain the approval of the Federal Reserve
Board under the Bank Holding Company Act before acquiring 25.0 percent, 5.0
percent in the case of an acquirer that is a bank holding company, or more of
any class of outstanding common stock of a bank holding company, like ourselves,
or otherwise obtaining control or a controlling influence over that bank holding
company.
PERMITTED NONBANKING ACTIVITIES
The Federal Reserve Board permits us or our subsidiary to engage in nonbanking
activities that are so closely related to banking or managing or controlling
banks as to be a proper incident thereto. For a discussion of other activities
that are financial in nature in which we can engage, see the caption that
follows entitled "Financial Services Modernization."
The Federal Reserve Board requires us to serve as a source of financial and
managerial strength to Community Bank and not to conduct our operations in an
unsafe or unsound manner. Whenever the Federal Reserve Board believes an
activity that we perform or our control of a nonbank subsidiary, other than a
nonbank subsidiary of Community Bank, constitutes a serious risk to the
financial safety, soundness, or stability of Community Bank and is inconsistent
with sound banking principles or the purposes of the federal banking laws, the
Federal Reserve Board may require us to terminate that activity or to terminate
control of that subsidiary. While the types of permissible activities are
subject to change by the Federal Reserve Board, the principal nonbanking
activities that presently may be conducted by a bank holding company or its
subsidiary without prior approval of the Federal Reserve Board are:
- Servicing activities. Furnishing services for, establishing or
acquiring a company that engages solely in servicing activities for:
- Us or Community Bank in connection with activities authorized
by law, such as commitments entered into by any subsidiary
with third parties as long as we or our servicing company
comply with
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published guidelines and do not act as a principal in dealing
with third parties.
- The internal operations of Community Bank, such as:
- Accounting, auditing and appraising;
- Advertising and public relations;
- Data processing and transmission services, databases or
facilities;
- Personnel services;
- Courier services;
- Holding or operating property used by our subsidiaries
or for their future use;
- Liquidating property acquired from Community Bank; and
- Selling, purchasing or underwriting insurance, such as
blanket bond insurance, group insurance for employees
and property and casualty insurance.
- Safe deposit business. Conduct a safe deposit business or acquire
voting securities of a company that conducts such business.
- Securities or property representing five percent or less of any
company. Acquiring five percent or less of the outstanding voting
securities of any company regardless of that company's activities.
- Extending credit and servicing loans. Making, acquiring, brokering,
or servicing loans or other extensions of credit, including
factoring, issuing letters of credit and accepting drafts, for the
company's account or for the account of others.
- Activities related to extending credit. Any activity usual in
connection with making, acquiring, brokering or servicing loans or
other extensions of credit, as determined by the Federal Reserve
Board. The Federal Reserve Board has determined that the following
activities are usual in connection with making, acquiring, brokering
or servicing loans or other extensions of credit:
- Real estate and personal property appraising. Performing
appraisals of real estate and tangible and intangible personal
property, including securities.
- Arranging commercial real estate equity financing. Acting as
intermediary for the financing of commercial or industrial
income-producing real estate by arranging for the transfer of
the title, control, and risk of such a real estate project to
one or more investors, if the bank holding company and its
affiliates do not have an interest in, or participate in
managing or developing, a real estate project for which it
14
arranges equity financing, and do not promote or sponsor the
development of the property.
- Check-guaranty services. Authorizing a subscribing merchant to
accept personal checks tendered by the merchant's customers in
payment for goods and services, and purchasing from the
merchant validly authorized checks that are subsequently
dishonored.
- Collection agency services. Collecting overdue accounts
receivable, either retail or commercial.
- Credit bureau services. Maintaining information related to the
credit history of consumers and providing the information to a
credit grantor who is considering a borrower's application for
credit or who has extended credit to the borrower.
- Asset management, servicing, and collection activities.
Engaging under contract with a third party in asset
management, servicing, and collection of assets of a type that
an insured depository institution may originate and own, if
the company does not engage in real property management or
real estate brokerage services as part of these services.
- Acquiring debt in default. Acquiring debt that is in default
at the time of acquisition under certain conditions.
- Real estate settlement servicing. Providing real estate
settlement services.
- Leasing personal or real property. Leasing personal or real property
or acting as agent, broker, or advisor in leasing such property
under certain conditions.
- Operating nonbank depository institutions:
- Industrial banking. Owning, controlling, or operating an
industrial bank, Morris Plan bank, or industrial loan company,
so long as the institution is not a bank; or
- Operating a savings association. Owning, controlling or
operating a savings association, if the savings association
engages only in deposit-taking activities, lending, and other
activities that are permissible for bank holding companies.
- Trust company functions. Performing functions or activities that may
be performed by a trust company, including activities of a
fiduciary, agency or custodial nature, in the manner authorized by
15
federal or state law, so long as the company is not a bank for
purposes of the Bank Holding Company Act.
- Financial and investment advisory activities. Acting as investment
or financial advisor to any person, including, without, in any way,
limiting the foregoing:
- Serving as investment adviser, as defined in Section 2(a)(20)
of the Investment Company Act of 1940, Title 15 United States
Code ("U.S.C.") 80a-2(a)(20), to an investment company
registered under that act, including sponsoring, organizing,
and managing a closed-end investment company;
- Furnishing general economic information and advice, general
economic statistical forecasting services, and industry
studies;
- Providing advice in connection with mergers, acquisitions,
divestitures, investments, joint ventures, leveraged buyouts,
recapitalizations, capital structurings, financing
transactions and similar transactions, and conducting
financial feasibility studies;
- Providing information, statistical forecasting, and advice
with respect to any transaction in foreign exchange, swaps,
and similar transactions, commodities, and any forward
contract, option, future, option on a future, and similar
instruments;
- Providing educational courses, and instructional materials to
consumers on individual financial management matters; and
- Providing tax-planning and tax-preparation services to any
person.
- Agency transactional services for customer investments:
- Securities brokerage. Providing securities brokerage services,
including securities clearing and/or securities execution
services on an exchange, whether alone or in combination with
investment advisory services, and incidental activities,
including related securities credit activities and custodial
services, if the securities brokerage services are restricted
to buying and selling securities solely as agent for the
account of customers and does not include securities
underwriting or dealing.
- Riskless principal transactions. Buying and selling in the
secondary market all types of securities on the order of
customers as a "riskless principal" to the extent of engaging
in
16
a transaction in which the company, after receiving an order
to buy or sell a security from a customer, purchases or sells
the security for its own account to offset a contemporaneous
sale to or purchase from the customer. This does not include:
(i) selling bank-ineligible securities at the order of a
customer that is the issuer of the securities, or selling
bank-ineligible securities in any transaction where the
company has a contractual agreement to place the securities as
agent of the issuer; or (ii) acting as a riskless principal in
any transaction involving a bank-ineligible security for which
the company or any of its affiliates acts as underwriter,
during the period of the underwriting or for 30 days
thereafter, or dealer.
- Private placement services. Acting as an agent for the private
placement of securities in accordance with the requirements of
the Securities Act of 1933 and the rules of the SEC, if the
company engaged in the activity does not purchase or
repurchase for its own account the securities being placed, or
hold in inventory unsold portions of issues of these
securities.
- Futures commission merchant. Acting as a futures commission
merchant for unaffiliated persons in the execution, clearance,
or execution and clearance of any futures contract and option
on a futures contract traded on an exchange in the United
States or abroad under certain conditions.
- Other transactional services. Providing to customers as agent
transactional services with respect to swaps and similar
transactions.
- Investment transactions as principal:
- Underwriting and dealing in government obligations and money
market instruments. Underwriting and dealing in obligations of
the United States, general obligations of states and their
political subdivisions, and other obligations that state
member banks of the Federal Reserve System may be authorized
to underwrite and deal in under 12 U.S.C. 24 and 335,
including bankers' acceptances and certificates of deposit,
under the same limitations as would be applicable if the
activity were performed by the bank holding company's
subsidiary member banks or its subsidiary nonmember banks as
if they were member banks.
- Investing and trading activities. Engaging as principal in:
(i) foreign exchange; (ii) forward contracts, options,
futures, options on futures, swaps, and similar contracts,
whether traded on exchanges or not, based on any rate, price,
financial asset, including gold, silver, platinum, palladium,
copper, or any
17
other metal approved by the Federal Reserve Board,
nonfinancial asset, or group of assets, other than a
bank-ineligible security under certain conditions; and (iii)
forward contracts, options, futures, options on futures,
swaps, and similar contracts, whether traded on exchanges or
not, based on an index of a rate, a price, or the value of any
financial asset, nonfinancial asset, or group of assets, if
the contract requires such settlement.
- Buying and selling bullion, and related activities. Buying,
selling and storing bars, rounds, bullion, and coins of gold,
silver, platinum, palladium, copper, or any other metal
approved by the Federal Reserve Board, for the Company's own
account or the account of others, and providing incidental
services such as arranging for storage, safe custody,
assaying, and shipment.
- Management consulting and counseling activities:
- Management consulting. Providing management consulting advice
under certain conditions.
- Employee benefits consulting services. Providing consulting
services to employee benefit, compensation and insurance
plans, including designing plans, assisting in the
implementation of plans, providing administrative services to
plans, and developing employee communication programs for
plans.
- Career counseling services. Providing career counseling
services to: (i) a financial organization and individuals
currently employed by, or recently displaced from, a financial
organization; (ii) individuals who are seeking employment at a
financial organization; and (iii) individuals who are
currently employed in or who seek positions in the finance,
accounting, and audit departments of any company.
- Support services:
- Courier services. Providing courier services for: (i) checks,
commercial papers, documents, and written instruments,
excluding currency or bearer-type negotiable instruments, that
are exchanged among banks and financial institutions; and (ii)
audit and accounting media of a banking or financial nature
and other business records and documents used in processing
such media.
- Printing and selling Magnetic Ink Character Recognition
("MICR")-encoded items. Printing and selling checks and
related documents, including corporate image checks, cash
tickets, voucher checks, deposit slips, savings withdrawal
packages, and other forms that require MICR-encoding.
18
- Insurance agency and underwriting:
- Credit insurance. Acting as principal, agent, or broker for
insurance, including home mortgage redemption insurance, that
is: (i) directly related to an extension of credit by the bank
holding company or any of its subsidiaries; and (ii) limited
to ensuring the repayment of the outstanding balance due on
the extension of credit in the event of the death, disability
or involuntary unemployment of the debtor.
- Finance company subsidiary. Acting as agent or broker for
insurance directly related to an extension of credit by a
finance company that is a subsidiary of a bank holding company
under certain conditions.
- Engaging in any general insurance agency activities.
- Supervision of retail insurance agents:
- Supervising on behalf of insurance underwriters the activities
of retail insurance agents who sell fidelity, property and
casualty and group insurances of the bank holding company or
its subsidiaries.
- Community development activities:
- Financing and investment activities. Making equity and debt
investments in corporations or projects primarily designed to
promote community welfare, such as the economic rehabilitation
and development of low-income areas by providing housing,
services, or jobs for residents.
- Advisory activities. Providing advisory and related services
for programs primarily designed to promote community welfare.
- Money orders, savings bonds, and travelers' checks. The issuance and
sale at retail of money orders and similar consumer-type payment
instruments, the sale of United States savings bonds, and the
issuance and sale of travelers' checks.
- Data processing. Providing data processing and data transmission
services, facilities, including data processing and data
transmission hardware, software, documentation, or operating
personnel, databases, advice, and access to such services,
facilities, or databases by any technological means under certain
conditions.
19
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act of 1977, as amended ("CRA"), and the regulations
promulgated to implement the CRA are designed to create a system for bank
regulatory agencies to evaluate a depository institution's record in meeting the
credit needs of its community. CRA regulations establish tests for evaluating
both small and large depository institutions' investment in their community. A
small bank is defined as a bank having total assets of less than $250 million
and is independent or is an affiliate of a holding company with less than $1
billion in assets. A large retail institution is one which does not meet the
small bank definition. A large retail institution can be evaluated under one of
two tests: (i) a three-part test evaluating the institution's lending, service
and investment performance; or (ii) a strategic plan designed by the institution
with community involvement and approved by the appropriate federal bank
regulator. A large institution must choose one of these options under which to
be examined. In addition, the CRA regulations include separate rules regarding
the manner in which wholesale banks and limited purpose banks will be evaluated
for compliance.
For the purposes of the CRA regulations, Community Bank is deemed to be a large
bank, based upon financial information as of December 31, 2002. Community Bank
will be examined under the three-part test relating to lending, service and
investment performance. Community Bank received an "outstanding" rating in its
last CRA examination which was held on February 12, 2001. "Outstanding" is the
highest CRA rating that a depository institution can receive.
CONCENTRATION
We are not dependent for deposits or exposed by loan concentrations to a single
customer or to a small group of customers, the loss of any one or more of whom
would have a materially adverse effect on our financial condition.
FINANCIAL SERVICES MODERNIZATION
The GLB Act was signed into law and became effective on March 11, 2000. The GLB
Act contains some of the most far-reaching changes governing the operations of
companies doing business in the financial services industry. The GLB Act
eliminates the restrictions placed on the activities of banks and bank holding
companies and creates two new structures, financial holding companies and
financial subsidiaries. We and Community Bank will be allowed to provide a wider
array of financial services and products that were reserved only for insurance
companies and securities firms. In addition, we can now affiliate with an
insurance company and a securities firm. We would qualify to elect to become a
financial holding company. This election is made to the Federal Reserve Board. A
financial holding
20
company has authority to engage in activities referred to as "financial
activities" that are not permitted to bank holding companies. A financial
holding company may also affiliate with companies that are engaged in financial
activities. A "financial activity" is an activity that does not pose a safety
and soundness risk and is financial in nature, incidental to an activity that is
financial in nature, or complimentary to a financial activity.
The GLB Act lists certain activities as financial in nature:
- Lending, investing or safeguarding money or securities;
- Underwriting insurance or annuities, or acting as an insurance or
annuity principal, agent or broker;
- Providing financial or investment advice;
- Issuing or selling interests in pools of assets that a bank could
hold;
- Underwriting, dealing in or making markets in securities;
- Engaging in any activity that the Federal Reserve Board found before
the GLB Act to be closely related to banking, see the section in
this report entitled "Permitted Nonbanking Activities;"
- Engaging within the United States in any activity that a bank
holding company could engage in outside of the country, if the
Federal Reserve Board determined before the GLB Act that the
activity was usual in connection with banking or other financial
operations internationally;
- Merchant banking, acquiring or controlling ownership interests in an
entity engaged in impermissible activities, if: (i) the interests
are not held by a depository institution; (ii) the interests are
held by a securities affiliate or an investment advisory affiliate
of an insurance company as part of underwriting, merchant or
investment banking activity; (iii) the interests are held long
enough to enable their sale in a manner consistent with the
financial viability of such an activity; and (iv) we do not control
the entity except to the extent necessary to obtain a reasonable
return on the investment; or
- Insurance portfolio investing, acquiring or controlling ownership
interests in an entity engaged in impermissible activities, if: (i)
the interests are not held by a depository institution; (ii) the
interests are held by an insurance or annuity company; (iii) the
interests represent investments made in the ordinary course of
21
business in accordance with state law; and (iv) we do not control
the entity except to the extent necessary to obtain a reasonable
return on the investment.
The GLB Act instructs the Federal Reserve Board to adopt a regulation or order
defining certain additional activities as financial in nature, to the extent
they are consistent with the purposes of the GLB Act. These are:
- Lending, exchanging, transferring, investing for others or
safeguarding financial assets other than money or securities;
- Providing any method of transferring financial assets; and
- Arranging, effecting or facilitating financial transactions for
third parties.
Other activities also may be decided by the Federal Reserve Board to be
financial in nature or incidental to a financial activity if they meet specified
criteria. The Federal Reserve Board is instructed to consider: (i) the purposes
of the GLB Act and the Bank Holding Company Act; (ii) changes in the market in
which financial holding companies compete; (iii) changes in the technology used
to deliver financial services; and (iv) whether the proposed activity is
necessary or appropriate to allow a financial holding company and its affiliates
to compete effectively, deliver services efficiently and offer services through
the most advanced technological means available.
The GLB Act gives national banks authority to use "financial subsidiaries" to
engage in financial activities. This authority has some limitations. Community
Bank is a Pennsylvania commercial bank. Under Pennsylvania Law, there is
currently parity with the permitted activities for national banks. Therefore,
Community Bank is permitted to own a financial subsidiary to engage in financial
activities. However, a financial subsidiary of Community Bank may not, as a
principal:
- Underwrite insurance or annuities;
- Engage in real estate development or investment;
- Engage in merchant banking; or
- Engage in insurance portfolio investment activities.
A bank's investment in a financial subsidiary will affect the way it calculates
its capital. The bank must deduct from its assets and stockholders' equity the
total of its investments in financial subsidiaries. Moreover, a bank must
present its financial information in two ways: in accordance with generally
accepted accounting principles, and separately, in a manner that reflects the
segregation of the bank's investments in financial subsidiaries.
22
PRIVACY
Title V of the GLB Act creates a minimum federal standard of privacy by limiting
the instances which we and Community Bank may disclose nonpublic personal
information about a consumer of our products or services to nonaffilitated third
parties. A state, such as Pennsylvania, can impose a greater or more restrictive
standard of privacy than the GLB Act. The GLB Act distinguishes "consumers" from
"customers" for purposes of the notice requirements imposed by this Act. We are
required to give a "consumer" a privacy notice only if we intend to disclose
nonpublic personal information about the consumer to a nonaffiliated third
party. However, by contrast, we are required to give a "customer" a notice of
our privacy policy at the time of the establishment of a customer relationship
and then annually, thereafter during the continuation of the customer
relationship.
The term consumer is different from the term customer. A consumer means an
individual who obtains or has obtained a financial product or service from
Community Bank that is to be primarily used for personal, family or household
purposes or that of the individual's representative. A customer is an individual
with a continuous relationship with Community Bank. The Federal Reserve Board
has regulations, which give several examples of a consumer and customer
relationship:
- An individual who applies to Community Bank for credit for personal,
family or household purposes is a consumer of a financial service,
regardless of whether the credit is extended.
- An individual who provides nonpublic personal information to
Community Bank in order to obtain a determination about whether he
or she may qualify for a loan to be primarily used for personal,
family, or household purposes is a consumer of a financial service,
regardless of whether the loan is extended by Community Bank or
another financial institution.
- An individual who provides nonpublic personal information to
Community Bank in connection with obtaining or seeking to obtain
financial, investment or economic advisory services is a consumer
regardless of whether Community Bank establishes an ongoing advisory
relationship.
- An individual who negotiates a workout with Community Bank for a
loan that Community Bank owns is a consumer regardless of whether
Community Bank originally extended the loan to the individual.
- An individual who has a loan from Community Bank is Community Bank's
consumer even if Community Bank:
- Hires an agent to collect on the loan;
- Sells the rights to service the loan; or
23
- Bought the loan from the financial institution that originated
the loan.
- An individual is not Community Bank's consumer solely because
Community Bank processes information about the individual on behalf
of a financial institution that extended the loan to the individual.
On the other hand, the following are several examples of a customer
relationship:
- A customer has a continuing relationship with Community Bank if the
customer:
- Has a deposit, credit, trust or investment account with
Community Bank;
- Purchases an insurance product from Community Bank;
- Holds an investment product through Community Bank;
- Enters into an agreement or understanding with Community Bank
whereby Community Bank undertakes to arrange or broker a home
mortgage loan for the consumer or customer;
- Has a loan that Community Bank services where Community Bank
owns the servicing rights;
- Enters into a lease of personal property with Community Bank;
or
- Obtains financial, investment, or economic advisory services
from Community Bank for a fee.
- A person does not, however, have a continuing relationship with
Community Bank and therefore is not a customer, if:
- The person only obtains a financial product or service in an
isolated transaction, such as withdrawing cash from Community
Bank's ATM or purchasing a cashier's check or money order;
- Community Bank sells the person's loan and does not retain the
rights to service the loan; or
- Community Bank sells the person airline tickets, travel
insurance or travelers' checks in an isolated transaction.
In general, Community Bank cannot disclose to a nonaffiliated third party any
nonpublic personal information of its consumers and customers unless
24
Community Bank provides its consumer and customer with a notice that includes:
- Community Bank's policies and practices with regard to:
- Disclosing nonpublic personal information to nonaffiliated
third parties;
- The categories of persons to whom the information is or may be
disclosed; and
- The policy for disclosure to former customers.
- Categories of nonpublic information that are collected by Community
Bank;
- Community Bank's policies to protect the confidentiality and
security of nonpublic personal information;
- The disclosure, if required, under the Fair Credit Reporting Act;
and
- In addition, Community Bank must provide an opt out notice to each
of its consumers and customers that explains accurately the right to
opt out of any disclosure by Community Bank of the consumer's or
customer's nonpublic personal information and the means by which the
consumer or customer may exercise the right to opt out.
The GLB Act sets forth a new requirement that this notice to a consumer or
customer must be in clear and conspicuous or "plain English" language and
presentation. The proposed regulations give several examples of the rules to
follow in drafting these notices:
- Community Bank makes its notice reasonably understandable if,
Community Bank:
- Presents the information contained in the notice in clear,
concise sentences, paragraphs and sections;
- Uses short explanatory sentences and bullet lists, whenever
possible;
- Uses definite, concrete, everyday words and active voice,
whenever possible;
- Avoids multiple negatives;
- Avoids legal and highly technical business terminology; and
25
- Avoids boilerplate explanations that are imprecise and readily
subject to different interpretations.
- Community Bank designs its notice to call attention to the nature
and significance of the information contained in the notice if, to
the extent applicable, Community Bank:
- Uses a plain-language heading to call attention to the notice;
- Uses a typeface and type size that are easy to read; and
- Provides wide margins and ample line spacing.
- If Community Bank provides a notice on the same form as another
notice or other documents, Community Bank designs its notice to call
attention to the nature and significance of the information
contained in the notice if Community Bank uses:
- Larger type size(s), boldface or italics in the text;
- Wider margins and line spacing in the notice; or
- Shading or sidebars to highlight the notice, whenever
possible.
The GLB Act creates certain exceptions to the prohibition on disclosure of
nonpublic personal information of customers. Some of these exceptions are:
- With the consent of the consumer or customer;
- To effect, administer or enforce a transaction requested or
authorized by the consumer or customer;
- The servicing or processing of a financial product or service
requested or authorized by the consumer or customer;
- The maintaining or servicing of the consumer's or customer's account
with Community Bank or with another entity as part of a private
label credit card program;
- Disclosure to persons holding a legal or beneficial interest
relating to the consumer or customer or to persons acting in a
fiduciary or representative capacity on behalf of the consumer or
customer;
- Providing information to insurance rate advisory organizations,
guaranty funds or agencies, rating agencies, persons assessing
Community Bank's compliance with industry standards and Community
Bank's attorneys, accountants and auditors; and
26
- Disclosure permitted under other laws, such as the Right to
Financial Privacy Act, to law enforcement agencies or under local
and state laws.
Community Bank cannot disclose an account number or similar form of access code
for a credit card account, deposit account or transaction account of a customer
to any nonaffiliated third party for use in telemarketing, direct mail marketing
or other marketing through electronic mail to the customer.
TERRORIST ACTIVITIES
The Office of Foreign Assets Control ("OFAC") of the Department of the Treasury
has, and will, send our banking regulatory agencies lists of names of persons
and organizations suspected of aiding, harboring or engaging in terrorist acts.
If Community Bank finds a name on any transaction, account or wire transfer that
is on an OFAC list, Community Bank must freeze such account, file a suspicious
activity report and notify the Federal Bureau of Investigation. Community Bank
has appointed an OFAC compliance officer to oversee the inspection of its
accounts and the filing of any notifications.
THE USA PATRIOT ACT
In the wake of the tragic events of September 11, 2001, the President signed the
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism ("USA PATRIOT") Act of 2001. Under the USA
PATRIOT Act, financial institutions are subject to prohibitions against
specified financial transactions and account relationships as well as enhanced
due diligence and "know your customer" standards in their dealings with foreign
financial institutions and foreign customers. For example, the enhanced due
diligence policies, procedures, and controls generally require financial
institutions to take reasonable steps:
- To conduct enhanced scrutiny of account relationships, to guard
against money laundering and to report any suspicious transactions;
- To ascertain the identity of the nominal and beneficial owners of,
and the source of funds deposited into, each account as needed to
guard against money laundering and report any suspicious
transactions;
- To ascertain for any foreign bank, the shares of which are not
publicly traded, the identity of the owners of the foreign bank, and
the nature and extent of the ownership interest of each such owner;
and
27
- To ascertain whether any foreign bank provides correspondent
accounts to other foreign banks and, if so, the identify of those
foreign banks and related due diligence information.
Under the USA PATRIOT Act, Community Bank had until April 25, 2002, to establish
anti-money laundering programs. The USA PATRIOT Act sets forth minimum standards
for these programs, including:
- The development of internal policies, procedures, and controls;
- The designation of a compliance officer;
- An ongoing employee training program; and
- An independent audit function, in order to test these programs.
In addition, the USA PATRIOT Act authorized the Secretary of the Treasury to
adopt rules increasing the cooperation and information sharing between financial
institutions, regulators, and law enforcement authorities regarding individuals,
entities and organizations engaged in, or reasonably suspected based on credible
evidence of engaging in, terrorist acts or money laundering activities. Any
financial institutions complying with these rules will not be deemed to have
violated the privacy provisions of the GLB Act, as discussed above.
SUBPRIME LENDING
Our federal banking regulatory agencies jointly issued expanded examination and
supervision guidance relating to subprime lending activities. In the guidance,
"subprime" lending generally refers to programs that target borrowers with
weakened credit histories or lower repayment capacity. The guidance principally
applies to institutions with subprime lending programs with an aggregate credit
exposure equal to or greater than 25.0 percent of an institution's Tier I
capital. Such institutions would be subject to more stringent risk management
standards and, in many cases, additional capital requirements. As a starting
point, the guidance generally expects that such an institution would hold
capital against subprime portfolios in an amount that is one and one-half to
three times greater than the amount appropriate for similar types of
non-subprime assets. Community Bank does not engage in any subprime lending
programs.
The Federal Reserve Board has issued regulations which would implement the Home
Ownership and Equity Protection Act ("HOEPA"). This Act imposes additional
disclosure requirements and certain substantive limitations on certain mortgage
loans with rates or fees above specified levels. The regulations lower the rate
levels that trigger the application of HOEPA and include additional fees in the
calculation of the fee amount that triggers HOEPA. The loans that Community Bank
currently makes are generally below the rate and fee levels that trigger HOEPA.
28
On June 23, 2001, the Governor of the Commonwealth of Pennsylvania signed into
law Act 55 of 2001, the Mortgage Bankers and Brokers and Consumer Equity
Protection Act. This Act addresses what is known as "predatory lending," among
other things, and is applicable to Community Bank's closed-end home equity
mortgage loans, involving property located in Pennsylvania, in an amount less
than $100.0 thousand made at a "high cost," which is generally the rate and
point triggers in the HOEPA. Those HOEPA triggers are:
- An annual percentage rate exceeding 10.0 percentage points above
comparable term U.S. Treasury securities; and/or
- Total points and fees payable by the consumer at or before closing
that exceed the greater of 8.0 percent of the total loan amount or
$400. The $400 is adjusted annually by the annual percentage change
in the Consumer Price Index ("CPI"), and for the years 2002 and
2003, were $480 and $488, respectively, according to the Federal
Reserve Board.
These loans are called "covered loans" under this law. If HOEPA's rate or point
triggers are changed, then the definition of a covered loan under this law
changes automatically. Loans with an original principal amount of $100.0
thousand or more are not subject to this law, but may be subject to HOEPA.
Certain loan terms are prohibited or conditionally restricted in connection with
a covered loan, such as: balloon payments, call provisions, negative
amortization, increased interest rate upon default, and prepayment fees or
penalties.
Certain acts or practices are prohibited, conditionally restricted, or required
in connection with a covered loan, including the following:
- A cautionary notice, in writing, is required to be provided by
Community Bank to the borrower at least three business days prior to
consummation of the mortgage transaction;
- It is impermissible to engage in a pattern or practice of making
covered loans without due regard to the consumer's ability to repay
the loan;(1)
- There are restrictions on Community Bank refinancing an existing
covered loan held by it with a new covered loan such that no points
may be charged to the extent the proceeds are used to refinance the
existing covered loan if the most recent financing was within one
year;(1)
(1) Under this law, the consumer's ability to repay applies only to persons
whose income is 120.0 percent or less of the median family income under the
metropolitan statistical area or nonmetropolitan family income statistics. There
is a statutory presumption that a consumer can repay the covered loan if the
monthly payment does not exceed 50.0 percent of the consumer's monthly gross
income. There is no statutory presumption that a consumer cannot make the
payments even if the 50.0 percent monthly gross income level is exceeded by the
required monthly loan payments.
29
- Community Bank may not refinance a zero interest rate or low-rate
loan made by a governmental or nonprofit lender with a covered loan
unless the loan is at least ten years old or the current holder of
the loan consents to the refinancing;
- Community Bank may not pay proceeds from a covered loan directly to
a home improvement contractor, but instead must disburse the loan
proceeds through an instrument payable to the borrower, statutorily
defined as the person obligated to repay a covered loan,
individually or jointly with the contractor or, at the borrower's
election, through a third party escrow agent in accordance with the
terms of a written agreement signed by the borrower, Community Bank,
and home improvement contractor prior to disbursement of funds to
the contractor;
- Community Bank may not sell single premium credit insurance in
connection with a covered loan unless Community Bank offers the
borrower the option of purchasing all such credit insurance on a
monthly basis, compliance with this provision is required within 18
months to two years after June 25, 2002;
- A credit insurance notice, in writing, must be provided to the
borrower stating that his or her purchase of credit insurance is not
a required condition of obtaining the covered loan, and that the
borrower may cancel the credit insurance within 30 days of the date
of the covered loan in order to receive a full refund, meaning a
credit to the loan balance or cash, at Community Bank's or the
insurance company's discretion;
- Community Bank shall maintain records related to covered loans that
will facilitate the Pennsylvania Department of Banking determining
compliance;
- Community Bank or its servicer shall file quarterly reports of
favorable and unfavorable credit history of the borrower with a
nationally recognized consumer credit reporting agency, but this
requirement shall not prevent Community Bank or servicer from
agreeing with the borrower not to report payment history information
related to resolved or unresolved disputes with a borrower, and this
provision shall not apply to covered loans held or serviced by
Community Bank for less than 90 days; and
- Community Bank shall verify that each mortgage broker with whom it
does business in connection with covered loans holds the required
license to engage in business in Pennsylvania.
A borrower or group of borrowers can institute a civil action to recover damages
from Community Bank if it engages in the above practices with
30
respect to a covered loan. Moreover, the Pennsylvania Department of Banking can
impose monetary penalties, revoke a license, issue a cease and desist order,
and/or remove persons from their employment in the mortgage finance industry or
in any other capacity related to these prohibited activities.
SALES OF INSURANCE
Our federal banking regulatory agencies have issued consumer protection rules
with respect to the retail sale of insurance products by the Company, Community
Bank, or a subsidiary or joint venture of the Company or Community Bank. These
rules generally cover practices, solicitations, advertising or offers of any
insurance product by a depository institution or any person that performs such
activities at an office of, or on behalf of, the Company or Community Bank.
Moreover, these rules include specific provisions relating to sales practices,
disclosures and advertising, the physical separation of banking and nonbanking
activities, and domestic violence discrimination.
COMMUNITY BANK
Community Bank's legal headquarters is located at 125 North State Street, Clarks
Summit, Lackawanna County, Pennsylvania 18411. Community Bank is a commercial
bank that seeks to provide personal attention and professional financial
assistance to its customers. Community Bank is a locally managed and oriented
financial institution established to serve the needs of individuals and small-
and medium-sized businesses. Community Bank's business philosophy includes
offering direct access to its President and other officers and providing
friendly, informed and courteous service, local and timely decision-making,
flexible and reasonable operating procedures and consistently-applied credit
policies.
MARKET AREA
Community Bank's primary market area comprises Lackawanna, Susquehanna, Wayne
and Wyoming counties located in the Northeast corner of the Commonwealth of
Pennsylvania. The largest municipality in this market area is the City of
Scranton with a population of approximately 76.4 thousand based upon 2000 census
data. Community Bank has one branch located within the City of Scranton. All of
the fifteen remaining branches are located outside of Scranton in rural or
small-town settings. See Item 2 in this report for a description of the location
of each branch office.
Community Bank competes with 20 commercial banks, three thrift institutions and
16 credit unions, many of which are substantially larger in terms of assets and
liabilities. In addition, Community Bank experiences competition for deposits
from mutual funds and security brokers, while consumer discount, mortgage and
insurance companies compete for various types of loans. Principal methods of
competing for banking, permitted nonbanking
31
services and financial activities include price, nature of product, quality of
service and convenience of location.
FUTURE LEGISLATION
Various legislation, including proposals to substantially change the financial
institution regulatory system and to expand or contract the powers of banking
institutions and bank holding companies, is from time to time introduced in
Congress. This legislation may change banking statutes and our operating
environment in substantial and unpredictable ways. If enacted, such legislation
could increase or decrease the cost of doing business, limit or expand
permissible activities or affect the competitive balance among banks, savings
associations, credit unions, and other financial institutions. We cannot
accurately predict whether any of this potential legislation will ultimately be
enacted, and if enacted, the ultimate effect that it, or implementing
regulations, would have upon our financial condition or results of operations.
32
ITEM 2. PROPERTIES
Our corporate headquarters is located at 125 North State Street, Clarks Summit,
Lackawanna County, Pennsylvania. We own this facility which has approximately
24,000 square feet.
Our remaining banking centers and limited purpose banking office are described
as follows:
APPROXIMATE
LOCATION TYPE OF OWNERSHIP SQUARE FOOTAGE
61 Church Street, Montrose, PA Owned 3,500
60 Main Street, Clifford, PA Owned 2,640
Route 6 West, Tunkhannock, PA Owned 3,500
Route 29, Eaton Township, PA Leased 2,175
Route 307, Lake Winola, PA Leased 1,250
Route 6, Eynon, PA Leased 1,850
97 College Avenue, Factoryville, PA Owned 1,850
125 North State Street, Clarks Summit, PA Owned 3,860
57 Main Street, Nicholson, PA Owned 6,000
1601 Main Street, Dickson City, PA Owned 5,330
521 Main Street, Forest City, PA Owned 7,100
347 Main Street, Simpson, PA Owned 5,500
37 Dundaff Street, Carbondale, PA Owned 4,300
Lake Como Road, Lakewood, PA Leased 900
601 West Lackawanna Avenue, Scranton, PA Owned 3,200
92 Brooklyn Street, Carbondale, PA Leased 640
601 Baltimore Drive, Wilkes-Barre, PA(1) Leased 476
(1) Limited purpose banking office.
We consider our banking centers to be suitable and adequate for our current and
immediate future purposes.
33
ITEM 3. LEGAL PROCEEDINGS
We, Community Bank and our subsidiaries are not parties to any legal proceedings
that could have any significant effect upon our financial condition or operating
results. In addition, we, Community Bank and our subsidiaries are not parties to
any legal proceedings under federal and state environmental laws.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
We had 1,131 stockholders of record, including individual participants in
security position listings, and 1,945,977 shares of common stock, par value of
$0.33 per share, the only authorized class of common stock outstanding as of
March 19, 2003. Our common stock trades on The NASDAQ Stock Market(R) as CommBcp
under the symbol "CCBP." The high and low closing sale prices and dividends per
share of our common stock for the four quarters of 2002 and 2001 are summarized
in the following table:
DIVIDENDS
2002: HIGH LOW DECLARED
- ----- ---- --- ---------
First quarter ...................... $32.00 $29.00 $0.20
Second quarter ..................... 38.00 31.50 0.20
Third quarter ...................... 35.97 32.01 0.21
Fourth quarter ..................... $35.50 $32.76 $0.21
DIVIDENDS
2001: HIGH LOW DECLARED
- ----- ---- --- ---------
First quarter ...................... $32.00 $25.00 $0.18
Second quarter ..................... 30.85 26.00 0.18
Third quarter ...................... 31.00 26.00 0.19
Fourth quarter ..................... $32.00 $26.50 $0.19
We have paid cash dividends since 1983. It is our present intention to continue
the dividend payment policy, although the payment of future dividends must
necessarily depend upon earnings, financial position, appropriate restrictions
under applicable law and other factors relevant at the time the Board of
Directors considers any declaration of dividends. For information on dividend
restrictions on us and Community Bank, refer to our consolidated financial
statements and notes to these statements filed at Exhibit 13 to this report and
incorporated in their entirety by reference under this Item 5.
34
ITEM 6. SELECTED FINANCIAL DATA
The information called for by this item is filed at Exhibit 13 to this report
and is incorporated in its entirety by reference under this Item 6.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information called for by this item is filed at Exhibit 13 to this report
and is incorporated in its entirety by reference under this Item 7.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is filed at Exhibit 13 to this report
and is incorporated in its entirety by reference under this Item 7A.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and notes to these statements are filed at
Exhibit 13 to this report and are incorporated in their entirety by reference
under this Item 8.
The supplementary data is filed at Exhibit 13 to this report and is incorporated
in its entirety by reference under this Item 8.
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT
DIRECTORS
At December 31, 2002, we had thirteen directors. Our directors are elected at
each annual meeting of stockholders for a one-year term and until their
successors are elected and qualified.
35
The following information is presented for each of our current directors and all
those persons who have been nominated to become a director at our 2003 Annual
Stockholders Meeting. All of our current directors are also nominees for
director, with the exception of William B. Lopatofsky and Theodore W. Porosky.
AGE AS OF DIRECTOR
NAME MARCH 19, 2003 PRINCIPAL OCCUPATION FOR PAST FIVE YEARS SINCE
---- -------------- ---------------------------------------- --------
David L. Baker 57 Senior Vice President of Community Bank, 1988
President and Chief Executive Officer of
Comm Bancorp, Inc. and Community Bank from
1998 to 2000.
Thomas M. Chesnick 68 Retired. Vice President of Community Bank 2000
from 1998 to 1999.
William F. Farber, Sr. 65 President and Chief Executive Officer of 1983
Comm Bancorp, Inc. and Community Bank since
2001. Retired from 1999 to 2000. President
of Farber's Restaurants in 1998.
Judd B. Fitze 51 Partner in Farr, Davis & Fitze, a law firm. 1995
Dean L. Hesser(1) 36 President of Tom Hesser Chevrolet, Inc., --
Tom Hesser Ford, LLC and Tom Hesser Nissan,
LLC, automobile dealerships
John P. Kameen 61 Publisher of The Forest City News. 1983
William A. Kerl 66 President of Carbondale Concrete Company, 2000
Inc. and Kerl Coal, Oil & Trucking Company,
Inc.
Erwin T. Kost 59 President of Kost Tire Distributors, Inc. 1997
William B. Lopatofsky 71 Retired. 1983
Susan F. Mancuso(1) 51 Partner in Mancuso & Mancuso, a public --
accounting firm.
Robert A. Mazzoni 54 Judge of the Court of Common Pleas of 2000
Lackawanna County since July 25, 2001.
Partner in Mazzoni & Karam, a law firm,
from 1998 to July 24, 2001.
J. Robert McDonnell 67 Owner of McDonnell's Restaurant. 1983
Joseph P. Moore, III(2) 51 President of J.J. Motors, Inc., an 2000
automobile dealership.
Theodore W. Porosky 55 Owner of Porosky Lumber Company. 1997
Eric G. Stephens 51 Auto Dealer, H.L. Stephens & Son, 1988
an automobile dealership.
(1) A nominee for director, not a current director.
(2) A son of Joseph P. Moore, Jr., who owns beneficially more than five
percent of our common stock.
36
PRINCIPAL OFFICERS
Our principal officers are appointed by the Board of Directors and serve at the
will of the Board of Directors, subject to certain change in control agreements
discussed later in this report.
The following information is presented for our principal officers:
AGE AS OF
NAME AND POSITION HELD SINCE EMPLOYEE SINCE MARCH 19, 2003
----------------- ---------- -------------- --------------
William R. Boyle 2001 2001(1) 43
Senior Vice President and Chief Credit Officer
William F. Farber, Sr. 1983 2001 65
Chairman, President and Chief Executive Officer(2)
John P. Kameen 1996 (3) 61
Secretary
J. Robert McDonnell 1983 (3) 67
Vice Chairman
Scott A. Seasock 1989 1989 45
Executive Vice President and Chief Financial Officer
(1) An employee of Community Bank since 1984 as Vice President.
(2) Chairman since 1983, President and Chief Executive Officer since 2001.
(3) Not our employee or an employee of Community Bank.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Executive officers, directors and "beneficial owners" of more than 10.0 percent
of our common stock must file initial reports of ownership and reports of
changes in ownership with the SEC and The NASDAQ Stock Market(R) pursuant to
Section 16(a).
We have reviewed the reports and written representations from the executive
officers and directors. Based on this review, we believe that all filing
requirements were met during 2002.
37
ITEM 11. EXECUTIVE COMPENSATION
This section of the report contains a chart that shows the amount of
compensation earned by our executive officers whose salary and bonus exceeded
$100,000. It also contains the performance graph comparing our performance
relative to a peer group and the report of our executive compensation committee
explaining the compensation philosophy for our most highly paid officers.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------------------- ------------------------------
OTHER ANNUAL RESTRICTED LTIP ALL OTHER
SALARY BONUS COMPENSATION OPTIONS STOCK PAYOUTS COMPENSATION
NAME AND POSITION YEAR ($) ($) ($)(4) (#) (#) ($) ($)
- -----------------------------------------------------------------------------------------------------------------------------------
William F. Farber, Sr. 2002 180,463(2) 11,500(3) -0- -0- -0- -0- -0-
President and 2001 95,000(2) 11,500(3) -0- -0- -0- -0- -0-
Chief Executive Officer (1) 2000 60,000(2) 1,500(3) -0- -0- -0- -0- -0-
Scott A. Seasock 2002 104,046 12,000 6,525(5) -0- -0- -0- -0-
Executive Vice President 2001 100,517 12,000 2,344(5) -0- -0- -0- -0-
and Chief Financial Officer 2000 97,496 11,400 2,589(5) -0- -0- -0- -0-
William R. Boyle 2002 95,084 10,425 5,929(5) -0- -0- -0- -0-
Senior Vice President 2001 68,447 10,000 1,449(5) -0- -0- -0- -0-
and Chief Credit Officer 2000 54,322 4,500 1,415(5) -0- -0- -0- -0-
(1) Mr. Farber was appointed President and Chief Executive Officer of Comm
Bancorp, Inc. and Community Bank effective January 1, 2001.
(2) Includes director fees of $60,000 in 2002, 2001 and 2000.
(3) Includes director bonus of $1,500 in 2002, 2001 and 2000.
(4) Aggregate perquisites and other personal benefits were less than 10.0
percent of the salary and bonus reported, and therefore, need not be
presented.
(5) Represents contributions Community Bank made on behalf of Mr. Seasock and
Mr. Boyle pursuant to the defined contribution plan.
Executive officer compensation is determined by the Executive Compensation
Committee of Community Bank's Board of Directors. Salaries and bonuses for the
executive officers are reviewed annually. All executive compensation is paid by
Community Bank to the applicable executive.
EXECUTIVE COMPENSATION COMMITTEE REPORT
The Board of Directors is responsible for the governance of us, Community Bank
and our subsidiaries. In fulfilling its fiduciary duties, the Board of Directors
acts in the best interests of our stockholders, customers and communities. To
accomplish our strategic goals and objectives, the Board of Directors engages
competent persons who undertake to accomplish these objectives with integrity
and in a cost-effective manner. The compensation of these individuals is part of
the Board of Directors' fulfillment of its
38
duties to accomplish our strategic mission. Community Bank provides compensation
to our employees and those of Community Bank and our subsidiaries.
The fundamental philosophy of the compensation program is to offer competitive
compensation opportunities for all employees based on the individual's
contribution and personal performance. The objective of the Executive
Compensation Committee is to establish a fair compensation policy to govern
executive officers' base salaries and incentive plans to attract and motivate
competent, dedicated and ambitious managers whose efforts will enhance our
products and services, the results of which will be improved profitability,
increased dividends to our stockholders and subsequent appreciation in the
market value of our stock.
The compensation of top executives is reviewed and approved annually by the
Board of Directors. The top executives whose compensation is determined by this
committee include the Chief Executive Officer and all other executive
management. As a guideline for review in determining base salaries, this
committee uses information comprised from a Pennsylvania bank peer group. This
bank peer group is different from the peer group utilized for the performance
chart. The Pennsylvania bank peer group has been utilized because of common
industry issues and competition for the same executive talent group.
EXECUTIVE COMPENSATION
The Board of Directors has determined that the 2002 compensation for the
President and Chief Executive Officer of $191,963, the Executive Vice President
and Chief Financial Officer of $116,046 and the Senior Vice President and Chief
Credit Officer of $105,509 were appropriate in light of our 2002 performance
accomplishments. There is no direct correlation, however, between such
compensation and our performance, nor is there any weight given by the Executive
Compensation Committee to any specific individual criteria. Such 2002
compensation was based on the Executive Compensation Committee's subjective
determination after review of all information that it deemed relevant.
EXECUTIVE OFFICERS
Compensation for executive officers is determined by the Executive Compensation
Committee based on its subjective analysis of the individual's contribution to
our strategic goals and objectives. In determining whether strategic goals have
been achieved, the Board of Directors considers our performance as measured by,
among numerous other factors, the following: (i) earnings; (ii) revenues; (iii)
return on assets; (iv) return on equity; (v) market share; (vi) total assets;
and (vii) nonperforming loans. Although the performance and increases in
compensation are measured in light of these factors, there is no direct
correlation between any specific
39
criterion and the employee's compensation, nor is there any specific weight
provided to any such criteria in this committee's analysis. The determination by
this committee is subjective after review of all information, including the
above, it deems relevant.
Total compensation opportunities available to employees are influenced by
general labor market conditions, the specific responsibilities of the individual
and the individual's contributions to our success. Individuals are reviewed
annually on a calendar year basis. We strive to offer compensation that is
competitive with that offered by employers of comparable size in the banking
industry. Through these compensation policies, we strive to meet our strategic
goals and objectives to our constituencies and provide compensation that is fair
and meaningful to our employees.
Submitted by the Executive Compensation Committee
Judd B. Fitze
John P. Kameen
Erwin T. Kost
J. Robert McDonnell
Eric G. Stephens
ESTIMATED RETIREMENT BENEFITS
Community Bank has a defined contribution plan, which covers all employees who
have completed 1,000 hours of service, attained twenty-one (21) years of age and
have been employed by Community Bank for at least one year. Normal retirement
age is sixty-five (65). The normal retirement benefit is the accumulated account
balance of contributions, investment income and forfeitures. The annual
contribution is determined by the Board of Directors and is based on a
prescribed percentage of annual net income allocated to each participant on a
pro-rata share of compensation covered under the plan. Investment income is
allocated to each participant based on a pro-rata share of the account balances
accumulated at the beginning of the year. Forfeitures are allocated to each
participant based on a pro-rata share of compensation covered under the plan.
Effective January 1, 2002, the Board of Directors ratified the amendment of the
defined contribution plan to include the provisions under section 401(k) of the
Internal Revenue Code ("401(k)"). The 401(k) feature of the plan permits
employees to make voluntary, pre-tax contributions up to 25.0 percent of their
compensation. Company contributions to the 401(k) are based on 100.0 percent
matching of voluntary contributions up to 3.0 percent of the employee's eligible
compensation. If a participant separates from service prior to retirement, the
participant will be entitled to 100.0 percent (100%) of their contributions made
under the 401(k) and also a portion of Community Bank's matching 401(k)
contributions and annual
40
discretionary contributions based on years of service according to the following
schedule:
Years of Service Vested Interest
---------------- ---------------
Less than 1 0%
1 20%
2 40%
3 60%
4 80%
5 100%
A participant is always 100.0 percent (100%) vested in pension plan transferred
balances.
During 2002, annual discretionary contributions of $114,363 were allocated among
participants' accounts under the defined contribution plan. Matching
contributions under the 401(k) feature of the plan totaled $111,048 in 2002.
Community Bank contributed $6,525 for Mr. Seasock and $5,929 for Mr. Boyle to
the plan in 2002. There was no amount contributed to the plan in 2002 for Mr.
Farber. Mr. Seasock has sixteen (16) years and Mr. Boyle has eighteen (18) years
of credited service under the plan.
EXECUTIVE EMPLOYMENT AGREEMENTS
During 2001, we entered into written employment agreements with Scott A.
Seasock, Executive Vice President and Chief Financial Officer, and William R.
Boyle, Senior Vice President and Chief Credit Officer. Mr. Seasock's initial
annual salary was $97,985. Mr. Boyle's initial annual salary was $72,020. These
agreements contain severance payments based upon non-renewal of these agreements
or the change in control of Comm Bancorp, Inc. or Community Bank.
With respect to salary and benefits, both of these agreements contain the
following same provisions:
- Salary will be reviewed annually and increased based on performance,
but such increase shall be no less than the North-Eastern
Pennsylvania Domestic CPI percentage rate;
- Each officer shall participate in the Executive Bonus Plan; and
- Each officer shall receive the usual and customary benefits for an
officer of his rank and status in the banking industry, such as the
use of an automobile, participation in a retirement plan, health,
disability and life insurances, vacation and reimbursement for
business related expenses.
41
In the event that each of these officers serves at least one full year under his
respective employment agreement and we give notice of our intent not to renew
the employment agreement, then the affected officer may, at his sole discretion,
terminate his employment and receive a severance payment equal to 24 months of
his then current salary plus any vested employee benefits.
If a change in control of Comm Bancorp, Inc. or Community Bank has occurred and
the officer is terminated by reason of such change in control or for any other
good reason, then we or our successor is obligated to pay the terminated officer
his then current salary and maintain his long-term disability and medical
benefits for a period of 24 months. All other benefits of the officer shall
cease upon termination under one of these conditions.
A change in control under these agreements is defined as:
- A substantial sale or disposition of our or Community Bank's assets
or operations;
- A person holding beneficial ownership of enough shares of our stock
to gain majority control of the Board of Directors; or
- At any time during any 24 consecutive months commencing July 1,
2001, a majority of the directors of us or Community Bank are
persons who were not members of the respective board at the
beginning of such period, unless changes in the board's membership
were the result of death, voluntary resignation or retirement.
A termination for good reason under these agreements is defined as:
- Without the officer's consent, any assignment of duties other than
duties described in the agreement;
- Any removal of the officer from, or failure to re-elect the officer
to, his position for cause;
- Any failure to pay the officer his benefits as described in his
agreement;
- Any material breach of the agreement by us or Community Bank; or
- A change in control.
42
FIVE-YEAR PERFORMANCE GRAPH
The following line graph compares the cumulative total stockholder return on our
common stock, based on the market price change and assumes reinvestment of
dividends, with the cumulative total return of the index for The NASDAQ Stock
Market(R) (US Companies) and the index for Mid-Atlantic Bank Stocks (Delaware,
Maryland, New Jersey, New York, Pennsylvania and Washington, D.C. Companies)
during the five-year period ended December 31, 2002. The stockholder return
shown on the graph and table below is not necessarily indicative of future
performance.
[LINE CHART OMITTED]
1997 1998 1999 2000 2001 2002
----- ----- ----- ----- ----- -----
Comm Bancorp, Inc. .......................... 100.0 80.8 114.4 90.0 85.7 108.7
The NASDAQ Stock Market(R)(US Companies) .... 100.0 141.0 261.5 157.4 124.9 86.3
Mid-Atlantic Bank Stocks .................... 100.0 110.9 140.9 172.6 162.7 125.1
NOTES:
A. The lines represent monthly index levels derived from compounded daily
returns that include all dividends.
B. The indices are reweighed daily, using the market capitalization on the
previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a trading
day, the preceding trading day is used.
D. The index level for all series was set to $100.0 on 12/31/97.
43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This section describes how much stock our directors, nominees for director and
executive officers own. It also describes the persons or entities that own more
than 5.0 percent of our voting stock.
STOCK OWNED BY DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS
This table indicates the number of shares of our common stock owned by the
directors, nominees for director and executive officers as of March 19, 2003.
The aggregate percentage of shares owned by all directors, nominees for director
and executive officers is 19.00 percent. Unless otherwise noted, each individual
has sole voting and investment power for the shares indicated below.
AMOUNT AND NATURE OF
NAME OF INDIVIDUAL OR IDENTITY OF GROUP BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
--------------------------------------- ----------------------- ----------------
David L. Baker 14,076.330 --
William R. Boyle(2) 1,713.447 --
Thomas M. Chesnick 26,535.204 1.36%
William F. Farber, Sr. 184,020.000 9.46%
Judd B. Fitze 14,613.538 --
Dean L. Hesser(3) 100.000 --
John P. Kameen 20,572.000 1.06%
William A. Kerl 14,653.314 --
Erwin T. Kost 10,079.000 --
William B. Lopatofsky 26,835.273 1.38%
Susan F. Mancuso(3) 1,675.763 --
Robert A. Mazzoni 100.000 --
J. Robert McDonnell 35,139.000 1.81%
Joseph P. Moore, III 100.000 --
Theodore W. Porosky 5,177.150 --
Scott A. Seasock(2) 5,679.176 --
Eric G. Stephens 8,645.230 --
All Directors, Nominees and Executive Officers as a group 369,714.425 19.00%
(13 Directors, 13 Nominees, 5 Executive Officers,
17 persons in total)
(1) Includes shares held (i) directly; (ii) jointly with spouse; (iii) by
spouse; (iv) jointly with various relatives; (v) by the transfer agent in
our dividend reinvestment account; (vi) individually in employee benefit
plans; and (vii) in various trusts.
(2) Executive Officer, not a director or nominee.
(3) A nominee for director, not a current director.
44
VOTING STOCK OWNED BY "BENEFICIAL OWNERS"
The following are the persons or entities known by us to own beneficially more
than 5.0 percent of our common stock as of March 19, 2003.
NAME AND ADDRESS NUMBER OF SHARES(1) PERCENT OF CLASS
---------------- ------------------- ----------------
Joseph P. Moore, Jr. 185,935.000 9.55%
400 Williamson Road
Gladwyne, PA 19035
William F. Farber, Sr. 184,020.000 9.46%
Crystal Lake Road
R.R.1, Box 1281
Carbondale, PA 18407
(1) Includes shares held (i) directly; and (ii) in various trusts.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We encourage our directors and executive officers to have banking and financial
transactions with Community Bank. All of these transactions are made on
comparable terms and with similar interest rates as those prevailing for other
customers.
The total consolidated loans made by Community Bank at December 31, 2002, to our
directors and officers as a group, members of their immediate families and
companies in which they have a 10.0 percent or more ownership interest was $6.1
million or 13.5 percent of our total consolidated capital accounts. The largest
balance for all of these loans in 2002 was $6.3 million or 13.8 percent of our
total consolidated capital accounts. During 2002, advances and repayments on
these loans were $4.7 million and $1.2 million. These loans did not involve more
than the normal risk of collectibility nor did they present any other
unfavorable features.
From time to time, we engage Judd B. Fitze to represent us as our attorney. Mr.
Fitze is a director of us and Community Bank. Mr. Fitze received $7,000 in 2002
for his legal services on our behalf.
ITEM 14. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures, as such term is defined
in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as
amended, as of a date within 90 days prior to the filing date of this annual
report, the ("Evaluation Date"). Based on such evaluation, such officers have
concluded that, as of the Evaluation Date, our disclosure controls and
procedures are effective in alerting them on a
45
timely basis to material information relating to the Company, including our
consolidated subsidiaries, required to be included in our periodic filings under
the Securities Exchange Act of 1934.
CHANGES IN INTERNAL CONTROLS
Since the Evaluation Date, there have not been any significant changes in our
internal controls or in other factors that could significantly affect such
controls.
46
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The consolidated financial statements and notes to these statements
as well as the applicable reports of the independent certified
public accountants are filed at Exhibit 13 to this report and are
incorporated in their entirety by reference under this Item 15(a)1.
2. All schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
to these statements.
3. The exhibits required by Item 601 of Regulation S-K are included
under Item 15(c) to this report.
(b) Reports on Form 8-K:
We filed no current reports on Form 8-K during the quarter ended December 31,
2002.
(c) Exhibits required by Item 601 of Regulation S-K:
Exhibit Number Referred to
Item 601 of Regulation S-K Description of Exhibit
- -------------------------- ----------------------
2 None.
3(i) None.
3(ii) None.
4 None.
9 None.
10 None.
11 None.
12 None.
13 Portions of the Annual Report
to Stockholders for Fiscal Year
Ended December 31, 2002.
16 None.
18 None.
21 List of Subsidiaries.
22 None.
23 None.
24 None.
99(i) CEO certification pursuant to
18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99(ii) CFO certification pursuant to
18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto, duly authorized.
COMM BANCORP, INC.
(Registrant)
BY: /s/ William F. Farber, Sr. March 19, 2003
-----------------------------------
William F. Farber, Sr.,
President and Chief Executive Officer
Chairman of the Board
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature and Capacity Date
/s/ David L. Baker March 19, 2003
- --------------------------------------
David L. Baker, Director
/s/ Thomas M. Chesnick March 19, 2003
- --------------------------------------
Thomas M. Chesnick, Director
/s/ William F. Farber, Sr. March 19, 2003
- --------------------------------------
William F. Farber, Sr.,
President and Chief Executive Officer
Chairman of the Board/Director
(Principal Executive Officer)
/s/ Judd B. Fitze March 19, 2003
- --------------------------------------
Judd B. Fitze, Director
/s/ Stephanie A. Ganz March 19, 2003
- --------------------------------------
Stephanie A. Ganz,
Vice President of Finance
(Principal Accounting Officer)
48
/s/ John P. Kameen March 19, 2003
- --------------------------------------
John P. Kameen, Secretary/Director
/s/ William A. Kerl March 19, 2003
- --------------------------------------
William A. Kerl, Director
/s/ Erwin T. Kost March 19, 2003
- --------------------------------------
Erwin T. Kost, Director
/s/ William B. Lopatofsky March 19, 2003
- --------------------------------------
William B. Lopatofsky, Director
/s/ Robert A. Mazzoni March 19, 2003
- --------------------------------------
Robert A. Mazzoni, Director
/s/ J. Robert McDonnell March 19, 2003
- --------------------------------------
J. Robert McDonnell,
Vice Chairman/Director
/s/ Joseph P. Moore, III March 19, 2003
- --------------------------------------
Joseph P. Moore, III, Director
/s/ Theodore W. Porosky March 19, 2003
- --------------------------------------
Theodore W. Porosky, Director
/s/ Scott A. Seasock March 19, 2003
- --------------------------------------
Scott A. Seasock, Executive Vice
President and Chief Financial Officer
(Principal Financial Officer)
/s/ Eric G. Stephens March 19, 2003
- --------------------------------------
Eric G. Stephens, Director
49
CERTIFICATIONS
I, William F. Farber, Sr., certify that:
1. I have reviewed this annual report on Form 10-K of Comm Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures, as
defined in Exchange Act Rules 13a-14 and 15d-14, for the registrant and
have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the Evaluation Date;
and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors or persons performing the
equivalent functions:
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for
registrant's auditors any material weaknesses in internal controls; and
50
(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 officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 19, 2003 /s/ William F. Farber, Sr.
--------------------------
William F. Farber, Sr.
President and Chief Executive Officer
Chairman of the Board/Director
(Principal Executive Officer)
51
I, Scott A. Seasock, certify that:
1. I have reviewed this annual report on Form 10-K of Comm Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures, as
defined in Exchange Act Rules 13a-14 and 15d-14, for the registrant and
have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the Evaluation Date;
and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors or persons performing the
equivalent functions:
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for
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
52
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 19, 2003 /s/ Scott A. Seasock
--------------------------------
Scott A. Seasock,
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
53
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE
- -------------- ----------- ----
13 Portions of the Annual Report to 55
Stockholders for Fiscal Year Ended
December 31, 2002
21 List of Subsidiaries 181
99(i) CEO certification pursuant to 18 U.S.C. 182
Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
99(ii) CFO certification pursuant to 18 U.S.C. 183
Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
54