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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, 2003
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
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(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) Number)
125 NORTH STATE STREET, CLARKS SUMMIT, PA 18411
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(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
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(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 check mark 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: $49,024,422 AT JUNE 30, 2003.
Indicate the number of shares outstanding of the registrant's common stock, as
of the latest practicable date: 1,907,377 AT MARCH 17, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Stockholders for the year ended
December 31, 2003, are incorporated by reference in Part II of this Annual
Report. Portions of the registrant's 2004 Proxy Statement are incorporated by
reference in Part III of this Annual Report.
Page 1 of 208
Exhibit Index on Page 59
COMM BANCORP, INC.
FORM 10-K INDEX
Page
----
Special Note Regarding Forward-Looking Statements .............................. 1
PART I
Item 1. Business .............................................................. 4
Item 2. Properties ............................................................ 34
Item 3. Legal Proceedings ..................................................... 35
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 ............................................................... 35
Item 6. Selected Financial Data ............................................... 36
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations ......................................................... 36
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ............ 36
Item 8. Financial Statements and Supplementary Data ........................... 36
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .................................................. *
Item 9A. Controls and Procedures ............................................... 36
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons of the
Registrant ............................................................ 39
Item 11. Executive Compensation ................................................ 47
Item 12. Security Ownership of Certain Beneficial Owners and Management ........ 53
Item 13. Certain Relationships and Related Transactions ........................ 54
Item 14. Principal Accountant Fees and Services ................................ 55
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ...... 55
Signatures ..................................................................... 57
Exhibit Index .................................................................. 59
* Not Applicable
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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 ("Exchange Act"), 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 and the war
on international terrorism 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 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
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, but not limited to, the continued
growth of the markets in which we operate consistent with recent
historical experience, 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.
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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, 2003, we
had approximately:
- $509.4 million in total assets;
- $357.9 million in loans;
- $459.5 million in deposits; and
- $ 46.5 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, 2003, Community
Bank had 17 branch banking offices located in the Pennsylvania counties of
Lackawanna, Monroe, 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.
In 2002, Community Bank organized and became a 40.0 percent member in an
abstract company, Community Abstract Services, LLC, referred to as Community
Abstract, a Pennsylvania limited liability company, to offer title insurance and
abstract services. Community Bank accounts for Community Abstract using the
equity method of accounting.
We have combined financial information about Comm Realty, Community Leasing and
Comm Financial Services with our financial information as none of these
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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:
- 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, 2003.
As of December 31, 2003, we had 203 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, 2003,
approximately $4.6 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
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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.
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
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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).
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 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
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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.
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
investment securities, and operating activities, primarily net income.
We offer a variety of deposit accounts with a range of interest rates and terms,
including 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, 2003, our
deposits totaled $459.5 million. Of the total deposit balance, $180.9 million,
or 39.4 percent, represented time deposits less than $100.0 thousand and $129.6
million or 28.2 percent represented savings accounts.
When we determine the levels of our deposit rates, consideration is given to
local competition, yields on 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 93.7 percent of total deposits at
December 31, 2003, and 94.4 percent of total deposits at December 31, 2002.
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
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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 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, 2003,
we met both requirements, with Tier I and Total Capital equal to 11.3 percent
and 12.2 percent of total risk-weighted assets. Community Bank also met both
requirements at December 31, 2003, with Tier I and Total Capital equal to 11.0
percent and 11.9 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. Under these market
risk requirements, capital is 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, 2003, our
Leverage ratio was 8.7 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
9
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 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 into 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, 2003, 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
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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.
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, 2003, 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, 2003, approximately
$7.8 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 into 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.
Community Bank is classified in the lowest risk category.
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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 and to pay for the cost of Financing Corporation
("FICO") funding. The FICO assessments are adjusted periodically to reflect
changes in the assessment bases of the FDIC insurance funds. In 2003, Community
Bank paid FICO assessments of $70,012.
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.
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 Exchange Act, like
ourselves, would, under the circumstances set forth in the presumption,
constitute acquisition of control of the bank holding company.
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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 subsidiaries 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 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
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- 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
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.
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- 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
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;
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- 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 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
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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 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.
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- 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.
- 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.
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- 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.
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
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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, 2003. 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 10, 2003. "Outstanding" is the
highest CRA rating that a depository institution can receive.
CONCENTRATION
We are not dependent on 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 on November 12, 1999, 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 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;
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- 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
prior to 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
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.
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Other activities may also 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.
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 nonaffiliated 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.
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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
- 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:
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- 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 is therefore, not a customer, if:
- The person only obtains a financial product or service in an
isolated transaction, such as withdrawing cash from one of
Community Bank's Automated Teller Machines 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 Community
Bank provides its consumers and customers 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.
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- 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
- 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.
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- 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
- 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.
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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
- 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 established an anti-money laundering
program which includes a program for proper customer identification. The USA
PATRIOT Act sets forth minimum standards for this program, including:
- The development of internal policies, procedures and controls;
- The designation of a compliance officer;
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- An ongoing employee training program; and
- An independent audit function in order to test this program.
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 institution complying with these rules will not be deemed to have
violated the privacy provisions of the GLB Act, as discussed above.
SUBPRIME AND PREDATORY LENDING
Our federal banking regulatory agencies jointly issued expanded examination and
supervision guidance relating to subprime and predatory 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 and
predatory 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.
Community Bank must also comply with a Pennsylvania 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
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- 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, and for the year 2003, was
$488, 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)
- 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;
(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.
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- 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 the 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 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.
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SALES OF INSURANCE
Our federal banking regulatory agencies have issued consumer protection rules
with respect to the retail sale of insurance products by us, Community Bank, or
a subsidiary or joint venture of us 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, us 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.
CORPORATE GOVERNANCE
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002
("SOX"). SOX has substantially changed the manner in which public companies
govern themselves and how the accounting profession performs its statutorily
required audit function. SOX makes structural changes in the way public
companies make disclosures and strengthens the independence of auditors and
audit committees. SOX requires direct responsibility of senior corporate
management, namely the Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO"), for establishing and maintaining an adequate internal control
structure and procedures for financial reporting and disclosure by public
companies.
Under SOX, audit committees will be primarily responsible for the appointment,
compensation and oversight of the work of their auditors. The independence of
the members of the audit committee is assured by barring members who accept
consulting fees from the company or are affiliated with the company other than
in their capacity as members of the board of directors.
SOX prohibits insider trades during pension fund blackout periods and requires
prompt disclosure of insider transactions in company stock, which must be
reported by the second business day following an insider transaction.
Furthermore, SOX established a new federal crime of securities fraud with
substantial penalties.
The costs to enhance our corporate governance regime and financial reporting
controls and procedures approximates $100,000.
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
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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, Luzerne, Monroe,
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 16 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 23 commercial banks, five thrift institutions and
21 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 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.
AVAILABLE INFORMATION
We file reports, proxy and information statements and other information
electronically with the SEC through the Electronic Data Gathering Analysis and
Retrieval ("EDGAR") filing system. You may read and copy any materials that we
file with the SEC at the SEC's Public Reference Room located at 450 5th Street,
N.W., Washington, DC 20549. You can obtain information on the
32
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC maintains an Internet site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC. The SEC's website address is http://www.sec.gov. Our website address is
http://www.combk.com. Copies of our Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act, as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC may be obtained without charge by
writing to Comm Bancorp, Inc., 125 North State Street, Clarks Summit, PA 18411,
Attn: Investor Relations or through our Internet website.
33
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 offices and loan operations center 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
Route 611, Tannersville, PA Owned 3,600
1212 South Abington Road, Clarks Summit, PA(1) Leased 7,295
(1) Loan operations center.
We consider our banking offices to be suitable and adequate for our current and
immediate future purposes.
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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 1,142 stockholders of record, including individual participants in
security position listings, and 1,907,377 shares of common stock, par value of
$0.33 per share, the only authorized class of common stock outstanding as of
March 17, 2004. 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 2003 and 2002 are summarized
in the following table:
DIVIDENDS
2003: HIGH LOW DECLARED
- -----------------------------------------------------------
First quarter $35.48 $33.50 $0.22
Second quarter 37.40 34.23 0.22
Third quarter 36.67 34.25 0.22
Fourth quarter $38.85 $35.97 $0.22
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
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.
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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.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF OUR DISCLOSURE CONTROLS AND INTERNAL CONTROLS
Within the 90-day period prior to the date of this report on Form 10-K, we
evaluated the effectiveness of the design and operation of our "disclosure
controls and procedures" ("Disclosure Controls"), and our "internal controls and
procedures for financial reporting" ("Internal Controls"). This evaluation (the
"Controls Evaluation") was done under the supervision and with the participation
of management, including our CEO and CFO. Rules adopted by the SEC require that,
in this section of the report, we present the conclusions of the CEO and CFO
about the effectiveness of our Disclosure Controls and Internal Controls based
on, and as of, the date of the Controls Evaluation.
CEO AND CFO CERTIFICATIONS
The two separate forms of Certifications required under SOX for both the CEO and
CFO are filed at Exhibit 31(i), 31(ii), 32(i) and 32(ii) to this report and are
incorporated in their entirety by reference under this Item 9A. The type of
Certification at Exhibits 31(i) and 31(ii) is required in accordance with
Section 302 of SOX ("Section 302 Certification"). The section of this report
which you are currently reading is the information
36
concerning the Controls Evaluation referred to in the Section 302 Certification
and this information should be read in conjunction with the Section 302
Certification for a more complete understanding of the topics presented.
DISCLOSURE CONTROLS AND INTERNAL CONTROLS
Disclosure Controls are procedures that are designed with the objective of
ensuring that information required to be disclosed in our reports filed under
the Exchange Act, such as this report, is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules. Disclosure
Controls are also designed with the objective of ensuring that such information
is accumulated and communicated to our management, including the CEO and CFO, as
appropriate, to allow timely decisions regarding required disclosure. We design
Internal Controls procedures with the objective of providing reasonable
assurance that: (i) our transactions are properly authorized; (ii) our assets
are safeguarded against unauthorized or improper use; and (iii) our transactions
are properly recorded and reported, all to permit the preparation of our
financial statements in conformity with generally accepted accounting
principles.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
Our management, including the CEO and CFO, does not expect that our Disclosure
Controls or our Internal Controls will prevent all errors or all fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control systems
are met. Furthermore, the design of a control system must reflect the fact that
there are resource constraints, and that the benefits or controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within our Company and
Community Bank have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty and that breakdowns
can occur because of simple errors or mistakes. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people or by management override of the control. The design of any system of
controls is also based, in part, upon certain assumptions about the likelihood
of future events. Therefore, no assurance can be given that any design will
succeed in achieving its stated goals under all potential future conditions.
Over time, control may become inadequate because of changes in conditions or the
degree of compliance with the policies and procedures may deteriorate. Because
of the inherent limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.
37
SCOPE OF THE CONTROLS EVALUATION
The CEO and CFO evaluation of our Disclosure Controls and Internal Controls
included a review of the objectives and design of the controls, the
implementation of the controls by us and Community Bank and the effect of the
controls on the information generated for use in this report. In the course of
the Controls Evaluation, we sought to identify data errors, controls problems or
acts of fraud and to confirm that appropriate corrective action, including
process improvements, were being undertaken. This type of evaluation will be
done on a quarterly basis so that the conclusions concerning controls
effectiveness can be reported in our Quarterly Reports on Form 10-Q and Annual
Report on Form 10-K. Our Internal Controls are also evaluated on an ongoing
basis by our Outside Internal Auditor firm, our Internal Auditor, the Joint
Audit Committee and by other personnel in Community Bank. In addition, the
public accounting firm, registered with the Public Accounting Company Oversight
Board ("registered public accounting firm"), conducting the audit of our
financial statements examines our assertion that we maintain effective internal
controls. The overall goals of these various activities are to monitor our
Disclosure Controls and Internal Controls and to make modifications as
necessary. Our intent in this regard is that the Disclosure Controls and
Internal Controls will be maintained as dynamic systems that change, with
improvements and corrections, as conditions warrant.
Among other matters, we sought in our evaluation to determine whether there were
any "significant deficiencies" or "material weaknesses" in our and Community
Bank's Internal Controls, and whether we had identified any acts of fraud
involving personnel who have a significant role in our and Community Bank's
Internal Controls. This information was important both for the Controls
Evaluation generally and because item no. 5 in the Section 302 Certifications
require that the CEO and CFO disclose that information to our Joint Audit
Committee, the registered public accounting firm and in this section of our
Annual Report. In the professional auditing literature, "significant
deficiencies" are referred to as "reportable conditions," control issues that
could have a significant adverse effect on the ability to record, process,
summarize and report financial data in the financial statements. According to
auditing guidance, a "material weakness" is defined as a particularly serious
reportable condition where the internal control does not reduce to a relatively
low level the risk that misstatements caused by error or fraud may occur in
amounts that would be material in relation to the financial statements and not
be detected within a timely period by employees in the normal course of
performing their assigned functions. In addition, we sought to deal with other
control matters in the Controls Evaluation, and in each case, if a problem was
identified, we considered what revision, improvement and/or correction to make
regarding our on-going procedures.
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In accordance with SEC requirements, the CEO and CFO note that, since the date
of the Controls Evaluation ("Evaluation Date") to the date of this Annual
Report, there have been no significant changes in Internal Controls or in other
factors that could significantly affect Internal Controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
CONCLUSIONS
Based upon the Controls Evaluation, our CEO and CFO have concluded that, subject
to the limitations noted above, our Disclosure Controls under Rule 13a-15(e) and
Rule 15d-15(e) of the Exchange Act are effective to ensure that material
information relating to us and our consolidated subsidiaries is made known to
management, including the CEO and CFO, particularly during the period when our
periodic Exchange Act reports are being prepared, and that our Internal Controls
are effective to provide reasonable assurance that our financial statements are
fairly presented in conformity with generally accepted accounting principles.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT
DIRECTORS
At December 31, 2003, we had 13 directors. Our directors are elected at each
annual meeting of stockholders for a one-year term and until their successors
are duly elected and qualified. A majority of the directors have been determined
by the Board of Directors to satisfy the independence requirements mandated by
the SEC, The NASDAQ Stock Market(R) and any related banking laws.
39
The following information is presented for each of our current directors, all of
whom have been nominated to become a director at our 2004 Annual Stockholders
Meeting.
AGE AS OF DIRECTOR
NAME MARCH 17, 2004 PRINCIPAL OCCUPATION FOR PAST FIVE YEARS SINCE
- ------------------------------------------------------------------------------------------------------
David L. Baker 58 Senior Vice President of Community Bank, President 1988
and Chief Executive Officer of Comm Bancorp, Inc.
and Community Bank from 1999 to 2000.
Thomas M. Chesnick 69 Retired. Vice President of Community Bank in 1999. 2000
William F. Farber, Sr. 66 President and Chief Executive Officer of Comm 1983
Bancorp, Inc. and Community Bank since 2001.
Retired from 1999 to 2000.
Judd B. Fitze 52 Partner in Farr, Davis & Fitze, a law firm. 1995
Dean L. Hesser 37 President of Tom Hesser Chevrolet, Inc., Tom 2003
Hesser Ford, LLC and Tom Hesser Nissan, LLC,
automobile dealerships.
John P. Kameen 62 Publisher of The Forest City News. 1983
William A. Kerl 67 President of Carbondale Concrete Company, Inc. and 2000
Kerl Coal, Oil & Trucking Company, Inc.
Erwin T. Kost 60 President of Kost Tire Distributors, Inc. 1997
Susan F. Mancuso 52 Partner in Mancuso & Mancuso, Accounting & Tax 2003
Service.
Robert A. Mazzoni 55 Judge of the Court of Common Pleas of Lackawanna 2000
County since July 25, 2001. Partner in Mazzoni &
Karam, a law firm, from 1999 to July 24, 2001.
J. Robert McDonnell 68 Owner of McDonnell's Restaurant. 1983
Joseph P. Moore, III(1) 52 President of J.J. Motors, Inc., an automobile 2000
dealership.
Eric G. Stephens 52 Auto Dealer, H.L. Stephens & Son, 1988
an automobile dealership.
(1) A son of Joseph P. Moore, Jr., who owns beneficially more than five percent
of our common stock.
40
COMMITTEES
Our Board of Directors has two standing committees, namely the Nominating and
Corporate Governance Committee and the Joint Audit Committee, which also serves
as the audit committee for Community Bank. Each member of these committees
satisfies the independence requirements applicable to the SEC, The NASDAQ Stock
Market(R) and any related banking laws.
The Nominating and Corporate Governance Committee assists the Board of Directors
in fulfilling their corporate oversight responsibilities. The primary duties of
this committee are to:
- Develop and recommend corporate governance policies and guidelines
for us and monitor our compliance with these policies and
guidelines; and
- Identify and recommend to the Board, director nominees and
committee member candidates.
The following directors are members of the Nominating and Corporate Governance
Committee: Robert A. Mazzoni, Chairman; Dean L. Hesser; Joseph P. Moore, III and
Eric G. Stephens. The Nominating and Corporate Governance Committee operates
pursuant to a Charter approved and adopted by our Board of Directors on March
17, 2004. The Charter of the Nominating and Corporate Governance Committee is
filed at Exhibit 99(ii) to this report and is incorporated in its entirety by
reference under this Item 10. Copies of this Charter will be provided, without
charge, upon written request to Comm Bancorp, Inc., 125 North State Street,
Clarks Summit, PA 18411, Attn: Investor Relations.
The Joint Audit Committee is responsible for assisting the Boards of Directors'
oversight of:
- The integrity of our financial statements;
- The audit by the public accounting firm registered with the Public
Company Accounting Oversight Board (the "registered public
accounting firm") of our financial statements;
- Our report on internal controls;
- The registered public accounting firm and internal auditing firms'
qualifications and independence; and
- The performance of our internal audit function.
41
The following directors are members of the Joint Audit Committee: Erwin T. Kost,
Chairman; Robert A. Mazzoni; Susan F. Mancuso and Eric G. Stephens. The Joint
Audit Committee operates pursuant to a Charter approved and adopted by our Board
of Directors on March 17, 2004. The Charter of the Joint Audit Committee is
filed at Exhibit 99(i) to this report and is incorporated in its entirety by
reference under this item 10. The text of this Charter is posted on our website
at http://www.combk.com. Copies of this Charter will be provided, without
charge, upon written request to Comm Bancorp, Inc., 125 North State Street,
Clarks Summit, PA 18411, Attn: Investor Relations.
Our Board of Directors has identified Mrs. Mancuso as the Joint Audit
Committee's financial expert. Mrs. Mancuso is a licensed Pennsylvania public
accountant. Mrs. Mancuso received degrees of a Bachelor of Science in Accounting
and a Master of Business Administration. From 1976 to the present, she has
practiced in the area of taxation, specializing in taxation and financial
advisement. During the years 1980 through 1986, she was engaged to perform
governmental and school audits. She is a licensed Accredited Tax Preparer and
Tax Advisor and member of the National Society of Public Accountants and the
Pennsylvania Society of Public Accountants.
In fulfilling its oversight responsibilities, the Joint Audit Committee reviewed
with us the audited financial statements and the footnotes to those statements
for our fiscal year 2003 Annual Report to Stockholders and discussed with us the
quality, not just the acceptability, of the accounting principles, the
reasonableness of significant judgments and the clarity of disclosures in the
financial statements.
The Joint Audit Committee reviewed and discussed with the registered public
accounting firm their judgments as to the quality, not just the acceptability,
of our accounting principles and such other matters required to be discussed by
the Joint Audit Committee with the registered public accounting firm under
auditing standards generally accepted in the United States of America. Our
registered public accounting firm has expressed the opinion that our audited
financial statements present fairly, in all material respects, our financial
position, the results of operations and cash flows for the fiscal year 2003, in
conformity with accounting principles generally accepted in the United States of
America.
The Joint Audit Committee discussed with the registered public accounting firm
the registered public accounting firm's independence from us and our management,
and received the written disclosures and the letter from the registered public
accounting firm required by the Independence Standards Board Standard No. 1,
"Independence Discussions with Audit Committees."
Prior to the issuance of this report, the Joint Audit Committee discussed with
the registered public accounting firm matters required to be discussed by
Statement on Auditing Standards No. 61, "Communication with Audit Committees,"
including the overall scope and plans for their respective
42
audits. In addition, the Joint Audit Committee met with the internal auditing
firm, the internal auditor and the registered public accounting firm to discuss
the results of their examinations, their evaluations of our internal controls
and the overall quality of our financial reporting.
In reliance on the reviews and discussions referred to above, the Joint Audit
Committee recommended to the Board of Directors that the audited financial
statements be included in this report. The Joint Audit Committee also
recommended to the Board of Directors the selection of Kronick Kalada Berdy &
Co., Certified Public Accountants, to serve as our registered public accounting
firm.
DIRECTOR QUALIFICATIONS AND NOMINATING PROCESS
The Nominating and Corporate Governance Committee is responsible to search for
qualified candidates for director for us and Community Bank. The Committee
performs its nominating function in accordance with the Charter of the
Nominating and Corporate Governance Committee and our Bylaws. The text of the
Charter of the Nominating and Corporate Governance Committee and our Bylaws are
posted on our website at http://www.combk.com. In making recommendations for
nomination as a director, the committee reviews and considers the
qualifications, strengths and abilities of the potential candidates, including
new candidates that may be identified from time to time through our internal
search and review procedures or as a result of stockholder recommendations. For
new candidates, the review process becomes more involved as it becomes
increasingly likely that a particular candidate may be recommended for
nomination. In deciding whether to recommend the re-nomination of an incumbent
director or the nomination of a director who previously served as an officer or
director, the committee considers their prior performance as a director or
officer. The committee also makes specific recommendations to the Board
regarding the directors who it believes should be appointed to particular
committees of the Board, based upon its review and assessment of the
qualifications and abilities of the individual directors and the differing
functions and membership requirements of the committees.
The committee works with the Board, on an ongoing basis, to identify the
particular qualities and abilities that we generally seek in our directors, and
the mix of experience, expertise and attributes that are sought or required for
the Board as a whole. These qualities and attributes include, but are not
limited to, integrity, business acumen, financial literacy and community
involvement. Target attributes for our Board as a whole include independence,
diversity of background and experience, and a range of expertise across all
areas vital to corporate governance, including financial expertise and knowledge
of the banking business. All candidates for nomination are evaluated against
these target qualities and attributes, as well as our particular needs at the
time, both on the Board and on
43
committees of the Board. The committee will determine, in its sole discretion,
whether a nominee meets the quality and attribute standards.
The committee oversees the internal procedures, adopted from time to time, to
assist in the identification of suitable candidates to serve as directors. The
committee also has the authority to retain professional consultants to assist in
the task of identifying possible candidates, although it did not do so in 2003.
The Board gives substantial weight to the recommendations of the Nominating and
Corporate Governance Committee in selecting nominees for election or appointment
as directors. Under normal circumstances, the Board will not select nominees,
including incumbent directors, who have not been recommended by a majority of
the Nominating and Corporate Governance Committee members.
Under Section 10.1 of our Amended and Restated Bylaws, a stockholder may also
nominate a person for director to be elected at our annual meeting. A
stockholder must submit a nomination for director to the Secretary of the Board
of Directors, in writing, no later than the close of business on the 60th day
preceding the date for the annual meeting. This notification must contain the
following information:
- The nominee's name and address;
- The nominee's principal occupation;
- The number of shares of the Company's common stock held by the
notifying stockholder and the nominee; and
- A certification, under oath before a notary public, that a nominee
meets the eligibility requirements under Section 10.3 of the
Company's Amended and Restated Bylaws.
Under Section 10.3, a person is not qualified to serve as a director if he or
she:
- Is under indictment for, or has ever been convicted of, a criminal
offense involving dishonesty or breach of trust and the penalty
for such offense could be imprisonment for more than one year;
- Is a person against whom a federal or state bank regulatory agency
has, within the past ten years, issued a cease and desist order
for conduct involving dishonesty or breach of trust and that order
is final and not subject to appeal;
44
- Has been found either by any federal or state regulatory agency
whose decision is final and not subject to appeal or by a court to
have (i) breached a fiduciary duty involving personal profit or
(ii) committed a willful violation of any law, rule or regulation
governing banking, securities, commodities or insurance, or any
final cease and desist order issued by a banking, securities,
commodities or insurance regulatory agency; or
- Has been nominated by a person who would be disqualified from
serving as a director of this Company under the above eligibility
requirements.
If a stockholder's nomination is not timely and in proper form or in accordance
with the above requirements, the nominee will not be recommended by the
Nominating and Corporate Governance Committee for consideration for nomination
by the full Board of Directors. Furthermore, nominations, not timely and in
proper form, shall be disregarded by the presiding officer of the annual
meeting, and upon his or her instruction, the vote tellers may disregard all
votes cast for such nominee.
COMMUNICATIONS WITH DIRECTORS
Security holders and other interested parties who wish to communicate with our
directors may do so by writing to Comm Bancorp, Inc., 125 North State Street,
Clarks Summit, PA 18411, Attn: Investor Relations-Corporate Secretary. The
Office of the Corporate Secretary will forward such written correspondence to
the applicable director or to the Nominating and Corporate Governance Committee
if such correspondence is not addressed to a specific director. Periodically,
the Nominating and Corporate Governance Committee will summarize all stockholder
communications it has received and will make all such communications available
for the directors' review. In order to efficiently process all stockholder
communications, the Nominating and Corporate Governance Committee, with the
Board's approval, may seek the assistance of counsel or advisors in reviewing
and evaluating particular communications. In all cases, the complete text of
communications will be made available to the directors in an appropriate and
timely manner.
45
EXECUTIVE OFFICERS
Our executive 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 executive officers:
AGE AS OF
NAME AND POSITION HELD SINCE EMPLOYEE SINCE MARCH 17, 2004
- --------------------------------------------------------------------------------------------------
William R. Boyle 2001 2001(1) 44
Senior Vice President and Chief Credit Officer
William F. Farber, Sr. 2001 2001(2) 66
President and Chief Executive Officer
John P. Kameen 1996 (3) 62
Secretary
J. Robert McDonnell 1983 (3) 68
Vice Chairman
Scott A. Seasock 1989 1989 46
Executive Vice President and Chief Financial Officer
(1) Senior Vice President and Chief Credit Officer since 2001. Vice President of
Community Bank from 1999 to 2000.
(2) President and Chief Executive Officer since 2001. Retired from 1999 to 2000.
(3) Not our employee or an employee of Community Bank.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
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 2003.
CODE OF ETHICS
We adopted a Code of Ethics (the "Code") for Senior Financial Officers that
applies to the CEO (Principal Executive Officer), CFO (Principal Financial
Officer) and Vice President of Finance (Principal Accounting Officer). The Code
has been filed as Exhibit 14 to this report and is incorporated in its entirety
by reference under this Item 10. The text of the Code is posted on our website
at http://www.combk.com. Copies of our Code will be provided
46
without charge upon written request to Comm Bancorp, Inc., 125 North State
Street, Clarks Summit, PA 18411, Attn: Investor Relations. Any amendment to, or
waiver from, the provisions of the Code that require disclosure under applicable
rules of the SEC or The NASDAQ Stock Market(R) will be disclosed along with the
reasons for the amendment or waiver in Item 10 of a current report on Form 8-K
and posted on our website.
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
$100,000. It also contains the performance graph comparing our performance
relative to a peer group and the report of our executive compensation committee
explaining the compensation philosophy for our most highly paid officers.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------------------- -------------------- --------
OTHER ANNUAL RESTRICTED LTIP ALL OTHER
SALARY BONUS COMPENSATION OPTIONS STOCK PAYOUTS COMPENSATION
NAME AND POSITION YEAR ($) ($) ($)(3) (#) (#) ($) ($)(4)
- --------------------------- ---- ---------- --------- ------------ ------- ---------- ------- ------------
William F. Farber, Sr. 2003 188,872(1) 11,500(2) -0- -0- -0- -0- 6,446
President and 2002 180,463(1) 11,500(2) -0- -0- -0- -0- -0-
Chief Executive Officer 2001 95,000(1) 11,500(2) -0- -0- -0- -0- -0-
Scott A. Seasock 2003 115,319 12,000 -0- -0- -0- -0- 5,966
Executive Vice President 2002 104,046 12,000 -0- -0- -0- -0- 6,525
and Chief Financial Officer 2001 100,517 12,000 -0- -0- -0- -0- 2,344
William R. Boyle 2003 109,494 5,000 -0- -0- -0- -0- 5,427
Senior Vice President 2002 95,084 10,425 -0- -0- -0- -0- 5,929
and Chief Credit Officer 2001 68,447 10,000 -0- -0- -0- -0- 1,449
(1) Includes director fees of $60,000 in 2003, 2002 and 2001.
(2) Includes director bonus of $1,500 in 2003, 2002 and 2001.
(3) Aggregate perquisites and other personal benefits were less than 10.0
percent of the salary and bonus reported, and therefore, need not be
presented.
(4) Represents contributions Community Bank made on behalf of Mr. Farber,
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
47
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 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 CEO 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 2003 compensation for the
President and CEO of $200,372, the Executive Vice President and CFO of $127,319
and the Senior Vice President and Chief Credit Officer ("CCO") of $114,494 were
appropriate in light of our 2003 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 2003 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;
48
(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 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
49
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 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 2003, annual discretionary contributions of $82,714 were allocated among
participants' accounts under the defined contribution plan. Matching
contributions under the 401(k) feature of the plan totaled $127,323 in 2003.
Community Bank contributed $6,446 for Mr. Farber, $5,966 for Mr. Seasock and
$5,427 for Mr. Boyle to the plan in 2003. Mr. Farber has three (3) years, Mr.
Seasock has seventeen (17) years and Mr. Boyle has nineteen (19) years of
credited service under the plan.
EXECUTIVE EMPLOYMENT AGREEMENTS
We have entered into written ongoing employment agreements with Scott A.
Seasock, Executive Vice President and CFO, and William R. Boyle, Senior Vice
President and CCO. The employment agreement with Mr. Boyle filed as exhibit
10.02 in our quarterly report on Form 10-Q for the period ended September 30,
2001, was amended on November 19, 2003. The amendment is filed as Exhibit 10 to
this report and is incorporated in its entirety by reference under this Item 11.
The employment agreements contain severance payments based on non-renewal of the
agreements or a change in control of us or Community Bank. In the event that 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 us 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.
50
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 Boards of Directors; or
- At any time during any 24 consecutive months commencing with the
date of the agreements, a majority of the directors of us or
Community Bank are persons who were not members of the respective
boards at the beginning of such period, unless changes in the
boards' 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.
51
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, 2003. The stockholder return
shown on the graph and table below is not necessarily indicative of future
performance.
[GRAPH]
1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ----
_________ Comm Bancorp, Inc.................................... 100.0 141.5 111.4 106.0 134.4 147.4
- -- - - -- The NASDAQ Stock Market(R) (US Companies)............ 100.0 186.0 113.2 89.7 61.7 92.9
- --------- Mid-Atlantic Bank Stocks............................. 100.0 127.1 155.7 146.7 112.9 160.5
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 12/31/98.
52
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This section describes how much stock our directors 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 AND EXECUTIVE OFFICERS
This table indicates the number of shares of our common stock owned by the
directors and executive officers as of March 17, 2004. The aggregate percentage
of shares owned by all directors and executive officers is 16.87 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 14,161.464 ---
William R. Boyle(2) 1,883.190 ---
Thomas M. Chesnick 26,611.283 1.40%
William F. Farber, Sr. 164,570.000 8.63%
Judd B. Fitze 14,966.595 ---
Dean L. Hesser 100.000 ---
John P. Kameen 20,572.000 1.08%
William A. Kerl 15,322.257 ---
Erwin T. Kost 10,193.946 ---
Susan F. Mancuso 2,717.683 ---
Robert A. Mazzoni 100.000 ---
J. Robert McDonnell 35,139.000 1.84%
Joseph P. Moore, III 100.000 ---
Scott A. Seasock(2) 6,112.510 ---
Eric G. Stephens 9,202.209 ---
All Directors and Executive Officers as a group (13 321,752.137 16.87%
Directors 5 Executive Officers, 15 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.
53
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 17, 2004.
NAME AND ADDRESS NUMBER OF SHARES(1) PERCENT OF CLASS
- --------------------- ------------------- ----------------
Joseph P. Moore, Jr. 181,935.000 9.54%
400 Williamson Road
Gladwyne, PA 19035
William F. Farber, Sr. 164,570.000 8.63%
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, 2003, 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 $5.6
million or 12.0 percent of our total consolidated capital accounts. The largest
aggregate balance for these loans in 2003 was $9.9 million or 21.3 percent of
our total consolidated capital accounts. During 2003, advances and repayments on
these loans were $13.0 million and $13.5 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 billed $8,779 in 2003
for his legal services on our behalf.
54
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The fees billed for professional services rendered by our registered public
accounting firm, for each of the two years ended December 31, 2003 and 2002 are
summarized as follows:
2003 2002
-------- --------
Audit fees(1) .......................... $ 51,425 $ 49,941
Audit-related fees(2) .................. 3,940 7,450
Other fees(3) .......................... 16,280 5,319
Other fees(4) .......................... 5,540 6,437
-------- --------
Total ................................ $ 77,185 $ 69,147
======== ========
(1) Audit fees consist of fees billed for services rendered for the audit
of our annual financial statements on Form 10-K and review of financial
statements included in our Form 10-Q, or services that are normally
provided in connection with statutory and regulatory filings.
(2) Audit-related fees consist of fees billed for services rendered for
assurance and related services on our employee benefit plan and our
electronic data processing control procedures.
(3) Tax fees consist of fees billed for services rendered for the
preparation of federal and state tax returns, tax compliance, tax
advice and tax planning.
(4) Other fees consist of fees billed for services rendered for performing
agreed upon procedures with regard to our Trust Division and those
required by the Federal National Mortgage Corporation.
The Audit Committee's pre-approval policies and procedures related to products
and services provided by its registered public accounting firm are set forth in
the Charter of the Joint Audit Committee of us and Community Bank. This Audit
Charter is filed as Exhibit 99(i) to this report and is incorporated in its
entirety by reference under this Item 14. For the two years ended December 31,
2003 and 2002, all of the Audit Fees, Audit-Related Fees, Tax Fees and Other
Fees were pre-approved by the Audit Committee.
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 report of the registered
public accounting firm 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.
55
(b) Reports on Form 8-K:
On October 21, 2003, we filed a current report on Form 8-K to disclose our
results of operations for the three months ended September 30, 2003, under Item
12.
(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 Amendment No. 1 to the Executive Employment
Agreement Dated October 1, 2001, Among Comm
Bancorp, Inc., Community Bank and Trust
Company and William R. Boyle.
11 None.
12 None.
13 Portions of the Annual Report to
Stockholders for Fiscal Year Ended December
31, 2003.
14 Code of Ethics For Senior Financial Officers.
16 None.
18 None.
21 List of Subsidiaries of the Company.
22 None.
23 None.
24 None.
31(i) CEO certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31(ii) CFO certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32(i) CEO certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32(ii) CFO certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99(i) Charter of the Joint Audit Committee.
99(ii) Charter of the Nominating and Corporate Governance Committee.
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, 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 17, 2004
---------------------------------------
William F. Farber, Sr.,
President and Chief Executive Officer
Chairman of the Board
(Principal Executive Officer)
Pursuant to the requirements of the Exchange Act, 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 17, 2004
- ------------------------------------
David L. Baker, Director
/s/ Thomas M. Chesnick March 17, 2004
- ------------------------------------
Thomas M. Chesnick, Director
/s/ William F. Farber, Sr. March 17, 2004
- ------------------------------------
William F. Farber, Sr.,
President and Chief Executive Officer
Chairman of the Board/Director
(Principal Executive Officer)
/s/ Judd B. Fitze March 17, 2004
- ------------------------------------
Judd B. Fitze, Director
/s/ Stephanie A. Ganz March 17, 2004
- ------------------------------------
Stephanie A. Ganz,
Vice President of Finance
(Principal Accounting Officer)
/s/ Dean L. Hesser March 17, 2004
- ------------------------------------
Dean L. Hesser, Director
57
/s/ John P. Kameen March 17, 2004
- ------------------------------------
John P. Kameen, Secretary/Director
/s/ William A. Kerl March 17, 2004
- ------------------------------------
William A. Kerl, Director
/s/ Erwin T. Kost March 17, 2004
- ------------------------------------
Erwin T. Kost, Director
/s/ Susan F. Mancuso March 17, 2004
- ------------------------------------
Susan F. Mancuso, Director
/s/ Robert A. Mazzoni March 17, 2004
- ------------------------------------
Robert A. Mazzoni, Director
/s/ J. Robert McDonnell March 17, 2004
- ------------------------------------
J. Robert McDonnell,
Vice Chairman/Director
/s/ Joseph P. Moore, III March 17, 2004
- ------------------------------------
Joseph P. Moore, III, Director
/s/ Scott A. Seasock March 17, 2004
- ------------------------------------
Scott A. Seasock, Executive Vice
President and Chief Financial Officer
(Principal Financial Officer)
/s/ Eric G. Stephens March 17, 2004
- ------------------------------------
Eric G. Stephens, Director
58
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10 Amendment No. 1 to the Executive Employment Agreement dated October 1, 2001, Among Comm
Bancorp, Inc., Community Bank and Trust Company and William R. Boyle
13 Portions of the Annual Report to Stockholders for Fiscal Year Ended December 31, 2003
14 Code of Ethics for Senior Financial Officers
21 List of Subsidiaries of the Company
31(i) CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31(ii) CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32(i) CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32(ii) CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99(i) Charter of the Joint Audit Committee
99(ii) Charter of the Nominating and Corporate Governance Committee
59