Back to GetFilings.com
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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________________ to __________________________
Commission file number 0-17455
COMM BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2242292
- ----------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
125 NORTH STATE STREET, CLARKS SUMMIT, PA 18411
- ----------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (570) 586-0377
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
NONE registered
- ----------------------------------------- ------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.33 PER SHARE
- --------------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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:$58,125,083 at June 30, 2004.
Indicate the number of shares outstanding of the registrant's common stock, as
of the latest practicable date: 1,865,848 at March 16, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Stockholders for the year ended
December 31, 2004, are incorporated by reference in Part II of this Annual
Report. Portions of the registrant's 2005 Proxy Statement are incorporated by
reference in Part III of this Annual Report.
Page 1 of 193
Exhibit Index on Page 56
COMM BANCORP, INC.
FORM 10-K INDEX
Page
----
Special Note Regarding Forward-Looking Statements.................... 3
PART I
Item 1. Business.................................................... 4
Item 2. Properties.................................................. 32
Item 3. Legal Proceedings........................................... 33
Item 4. Submission of Matters to a Vote of Security Holders......... *
PART II
Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities.................................................. 33
Item 6. Selected Financial Data..................................... 34
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 34
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.. 34
Item 8. Financial Statements and Supplementary Data................. 35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... *
Item 9A. Controls and Procedures..................................... 35
Item 9B. Other Information........................................... 35
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 35
Item 11. Executive Compensation...................................... 44
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 50
Item 13. Certain Relationships and Related Transactions.............. 51
Item 14. Principal Accountant Fees and Services...................... 52
PART IV
Item 15. Exhibits and Financial Statement Schedules.................. 52
Signatures........................................................... 54
Exhibit Index........................................................ 56
* Not Applicable
2
COMM BANCORP, INC.
FORM 10-K
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K, other periodic reports filed by us under the
Securities Exchange Act of 1934 ("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.
3
PART I
ITEM 1. BUSINESS
GENERAL
We are a registered bank holding company incorporated in 1983 as a Pennsylvania
business corporation and are headquartered in Clarks Summit, Pennsylvania. We
have two wholly-owned subsidiaries, Community Bank and Trust Company, referred
to as Community Bank, and Comm Realty Corporation, referred to as Comm Realty.
Our business consists primarily of the management and supervision of Community
Bank. Comm Realty, a Pennsylvania business corporation, holds, manages and sells
foreclosed or distressed assets on behalf of Community Bank. Our principal
source of income is dividends paid by Community Bank. At December 31, 2004, we
had approximately:
- $528.3 million in total assets;
- $381.7 million in loans;
- $478.5 million in deposits; and
- $ 47.3 million in stockholders' equity.
Community Bank is a Pennsylvania commercial bank and a member of the Federal
Reserve System whose deposits are insured by the Bank Insurance Fund ("BIF") of
the Federal Deposit Insurance Corporation ("FDIC"). Community Bank is a
full-service commercial bank providing a wide 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, 2004, 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.
Community Bank is a 40.0 percent member in Community Abstract Services, LLC,
referred to as Community Abstract, a Pennsylvania limited liability company,
which offers title insurance and abstract services to residential and commercial
mortgage loan customers. 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
subsidiaries meet the quantitative thresholds for reportable operating segments.
Moreover, we consider Community Bank's branch banking offices to
4
be a single operating segment because these branches have similar economic
characteristics and share a majority of the following aggregation criteria for
reportable operating segments:
- 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, 2004.
As of December 31, 2004, Community Bank had 205 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, 2004,
approximately $4.7 million was available for loans to us from Community Bank.
Section 23A also generally requires that Community Bank's loans to its nonbank
affiliates, including financial subsidiaries, be secured, and Section 23B
generally requires that Community Bank's transactions with its nonbank
affiliates, including financial subsidiaries, be at arm's-length terms. Also, we
and Community Bank and any financial subsidiary are prohibited from engaging in
certain "tie-in" arrangements in connection with extensions of credit or
provision of property or services.
5
SUPERVISORY AGENCIES
As a Pennsylvania commercial bank and member of the Federal Reserve System,
Community Bank is subject to primary supervision, regulation and examination by
the Pennsylvania Department of Banking and the Federal Reserve Board. Community
Bank is subject to extensive Pennsylvania and federal statutes and regulations
that significantly affect its business and activities. Community Bank must file
reports with its regulators concerning its activities and financial condition
and obtain regulatory approval to enter into certain transactions. Community
Bank is also subject to periodic examinations by its primary and secondary
regulators to ascertain compliance with various regulatory requirements. Other
applicable statutes and regulations relate to: (i) insurance of deposits; (ii)
allowable investments; (iii) loans; (iv) leases; (v) acceptance of deposits;
(vi) trust activities; (vii) mergers; (viii) consolidations; (ix) payment of
dividends; (x) capital requirements; (xi) reserves against deposits; (xii)
establishment of branches and certain other facilities; (xiii) limitations on
loans to one borrower and loans to affiliated persons; (xiv) activities of
subsidiaries; and (xv) other aspects of the business of banks. Recent federal
legislation has instructed federal agencies to adopt standards or guidelines
governing banks' internal controls, information systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, compensation and
benefits, asset quality, earnings and stock valuation and other matters. Federal
law gives the federal banking agencies greater flexibility in implementing
standards on asset quality, earnings and stock valuation. Regulatory authorities
have broad flexibility to initiate proceedings designed to prohibit banks from
engaging in unsafe and unsound banking practices.
We, Community Bank and our subsidiaries, are also affected by various other
governmental requirements and regulations, general economic conditions and the
fiscal and monetary policies of the federal government and the Federal Reserve
Board. The monetary policies of the Federal Reserve Board influence, to a
significant extent, the overall growth of loans, leases, investments, deposits,
interest rates charged on loans and interest rates paid on deposits. The nature
and impact of future changes in monetary policies are often unpredictable.
We are subject to the jurisdiction of the United States Securities and Exchange
Commission ("SEC") for matters relating to the offering and sale of our
securities. We are also subject to the SEC's rules and regulations relating to
periodic reporting, insider trading reports and proxy solicitation materials.
Our common stock is listed for quotation of prices on The NASDAQ Stock Market(R)
and, therefore, we are subject to the listing rules and regulations imposed by
The NASDAQ Stock Market(R).
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
6
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 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.
7
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, 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, 2004, our deposits totaled $478.5
million. Of the total deposit balance, $176.4 million, or 36.9 percent,
represented time deposits less than $100.0 thousand and $127.2 million or 26.6
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 92.8 percent of total deposits at
December 31, 2004, and 93.7 percent of total deposits at December 31, 2003.
A further discussion of our deposits is filed at Exhibit 13 to this report and
is incorporated in its entirety by reference under this Item 1.
CAPITAL REQUIREMENTS
We are subject to risk-based capital requirements and guidelines imposed by the
Federal Reserve Board, which are substantially similar to the capital
requirements and guidelines imposed by the Federal Reserve Board on Community
Bank. For this purpose, a bank's or bank holding company's assets and certain
specified off-balance sheet commitments are assigned to four risk categories,
each weighted differently based on the level of credit risk that is ascribed to
those assets or commitments. In addition, risk-weighted assets are adjusted for
low-level recourse and market-risk 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
8
- 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, 2004,
we met both requirements, with Tier I and Total Capital equal to 11.4 percent
and 12.3 percent of total risk-weighted assets. Community Bank also met both
requirements at December 31, 2004, with Tier I and Total Capital equal to 10.9
percent and 11.8 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, 2004, our
Leverage ratio was 8.8 percent and Community Bank's Leverage ratio was 8.4
percent.
The Federal Reserve Board may set capital requirements higher than the minimums
noted above for bank holding companies whose circumstances warrant it. For
example, bank holding companies experiencing or anticipating significant growth
may be expected to maintain strong capital positions substantially above the
minimum supervisory levels without significant reliance on intangible assets.
Furthermore, the Federal Reserve Board has 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
9
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, 2004, Community Bank was well capitalized,
based on the prompt corrective action ratios and guidelines described above. It
should be noted, however, that a bank's capital category is determined solely
for the purpose of applying the Federal Reserve Board's prompt corrective action
regulations, and that the capital category may not constitute an accurate
representation of the bank's overall financial condition or prospects.
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, 2004, 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
10
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, 2004,
approximately $5.2 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.
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 2004, Community
Bank paid FICO assessments of $67,992.
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;
11
- 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.
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 section 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
12
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
- 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 5.0 percent or less of any
company. Acquiring 5.0 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.
13
- 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.
- 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.
14
- 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;
- 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:
15
- 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
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
16
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.
- 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
17
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.
- 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.
18
- 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 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, 2004. 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.
19
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 are now
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 can 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;
- 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,
20
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.
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.
21
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 United States
generally accepted accounting principles ("GAAP"), 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.
The term consumer is different from the term customer. A consumer refers to 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.
22
- 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:
- 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;
23
- 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.
- 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;
24
- 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.
- 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;
25
- 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.
TERRORIST ACTIVITIES
The Office of Foreign Assets Control ("OFAC") of the Department of the Treasury
has, and will, send us and 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;
26
- 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 identity 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;
- 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
27
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
- 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 2004, was $499,
according to the Federal Reserve Board.
These loans are called "covered loans" under this law. If HOEPA's rate or point
triggers are changed, then the definition of a covered loan under this law
changes automatically. Loans with an original principal amount of $100.0
thousand or more are not subject to this law, but may be subject to HOEPA.
Certain loan terms are prohibited or conditionally restricted in connection with
a covered loan, such as balloon payments, call provisions, negative
amortization, increased interest rate upon default and prepayment fees or
penalties.
Certain acts or practices are prohibited, conditionally restricted or required
in connection with a covered loan, including the following:
- A cautionary notice, in writing, is required to be provided by
Community Bank to the borrower at least three business days prior to
consummation of the mortgage transaction;
- It is impermissible to engage in a pattern or practice of making
covered loans without due regard to the consumer's ability to repay
the loan;(1)
- There are restrictions on Community Bank refinancing an existing
covered loan held by it with a new covered loan such that no points
may be charged to the extent the proceeds are used to refinance the
existing covered loan if the most recent financing was within one
year;(1)
(1) Under this law, the consumer's ability to repay applies only to persons
whose income is 120.0 percent or less of the median family income under the
metropolitan statistical area or nonmetropolitan family income statistics. There
is a statutory presumption that a consumer can repay the covered loan if the
monthly payment does not exceed 50.0 percent of the consumer's monthly gross
income. There is no statutory presumption that a consumer cannot make the
payments even if the 50.0 percent monthly gross income level is exceeded by the
required monthly loan payments.
28
- Community Bank may not refinance a zero interest rate or low-rate
loan made by a governmental or nonprofit lender with a covered loan
unless the loan is at least ten years old or the current holder of
the loan consents to the refinancing;
- Community Bank may not pay proceeds from a covered loan directly to
a home improvement contractor, but instead must disburse the loan
proceeds through an instrument payable to the borrower, statutorily
defined as the person obligated to repay a covered loan,
individually or jointly with the contractor or, at the borrower's
election, through a third party escrow agent in accordance with the
terms of a written agreement signed by the borrower, Community Bank
and 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.
29
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 will approximate $300,000 in 2005.
COMMUNITY BANK
Community Bank's legal headquarters is located at 125 North State Street, Clarks
Summit, Lackawanna County, Pennsylvania 18411. Community Bank is a commercial
bank that seeks to provide personal attention and professional financial
assistance to its customers. Community Bank is a locally managed and oriented
financial institution established to serve the needs of individuals and small-
and medium-sized businesses. Community Bank's business philosophy includes
offering direct access to its President and
30
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 21 commercial banks, four thrift institutions and
19 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 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 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
31
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.
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.
32
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, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
We had 1,158 stockholders of record, including individual participants in
security position listings, and 1,865,848 shares of common stock, par value of
$0.33 per share, the only authorized class of common stock outstanding as of
March 16, 2005. 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 2004 and 2003 are summarized
in the following table:
DIVIDENDS
2004: HIGH LOW DECLARED
- -------------- ------ ------ ---------
First quarter $40.87 $38.06 $ 0.22
Second quarter 41.45 38.78 0.22
Third quarter 41.00 39.20 0.22
Fourth quarter $41.78 $39.20 $ 0.22
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
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.
33
The following table presents information with respect to purchases made by or on
behalf of us or any "affiliated purchaser," as defined in the Exchange Act Rule
10b-18(a)(3), of our common stock during each of the 12 months ended December
31, 2004:
TOTAL NUMBER OF MAXIMUM NUMBER
TOTAL NUMBER AVERAGE SHARES PURCHASED OF SHARES THAT MAY
OF SHARES PRICE PAID AS PART OF PUBLICLY YET BE PURCHASED
MONTH ENDING PURCHASED PER SHARE ANNOUNCED PROGRAMS(1) UNDER THE PROGRAMS(1)
- ---------------------------------------------- ------------ ---------- --------------------- ---------------------
January 31, 2004.............................. 850 $39.54 850 2,171
February 29, 2004............................. 2,171
March 31, 2004................................ 59,392
April 30, 2004................................ 5,000 40.08 5,000 54,392
May 31, 2004.................................. 1,800 39.66 1,800 52,592
June 30, 2004................................. 14,000 40.54 14,000 38,592
July 31, 2004................................. 38,592
August 31,2004................................ 500 40.16 500 38,092
September 30,2004............................. 12,115 40.42 12,115 25,977
October 31, 2004.............................. 1,000 39.84 1,000 24,977
November 30, 2004............................. 13,100 40.75 13,100 67,808
December 31, 2004............................. 67,808
------ ------ ------
Total....................................... 48,365 $40.45 48,365
====== ====== ======
(1)On March 20, 2002, the Board of Directors approved the 2002 Stock Repurchase
Program, which authorized us to repurchase up to 57,018 shares of our common
stock from time to time in unsolicited open market purchases through a licensed
broker-dealer and in accordance with terms, conditions and restrictions
contained in Rule 10b-18 under the Exchange Act. As of December 31, 2003, there
were 3,021 shares available for repurchase under the 2002 Stock Repurchase
Program. There was no expiration date for the 2002 Stock Repurchase Program,
however all of the shares authorized under this program were purchased as of
April 29, 2004.
On March 17, 2004, the Board of Directors approved the 2004 Stock Repurchase
Program authorizing the repurchase of up to 57,221 shares, which was amended on
November 17, 2004, to allow for the repurchase of up to an additional 55,931
shares. As of December 31, 2004, there were 67,808 shares available for
repurchase under this Program. The 2004 Stock Repurchase Program has no
expiration date.
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.
34
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
As of December 31, 2004, the end of the period covered by this Annual Report on
Form 10-K, our CEO and CFO evaluated the effectiveness of our disclosure
controls and procedures as defined in Rule 13a-15(e) under the Exchange Act.
Based upon that evaluation, the CEO and CFO concluded that as of the period
covered by this Annual Report on Form 10-K, we maintained effective disclosure
controls and procedures.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting as
defined in Rule 13a-15(f) under the Exchange Act during the fourth quarter of
our fiscal year ended December 31, 2004, that materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
At December 31, 2004, 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.
35
The following information is presented for each of our current directors, all of
whom have been nominated to become a director at our 2005 Annual Stockholders
Meeting.
AGE AS OF DIRECTOR
NAME MARCH 16, 2005 PRINCIPAL OCCUPATION FOR PAST FIVE YEARS SINCE
- ---------------------- -------------- ------------------------------------------------ --------
David L. Baker 59 Senior Vice President of Community Bank. 1988
President and Chief Executive Officer of
Comm Bancorp, Inc. and Community Bank in 2000.
Thomas M. Chesnick 70 Retired. 2000
William F. Farber, Sr. 68 President and Chief Executive Officer of 1983
Comm Bancorp, Inc. and Community Bank
since 2001. Retired in 2000.
Judd B. Fitze 53 Partner in Farr, Davis & Fitze, a law 1995
firm.
Dean L. Hesser 38 President of Tom Hesser Chevrolet, Inc., 2003
Tom Hesser Ford, LLC and Tom Hesser
Nissan, LLC, automobile dealerships.
John P. Kameen 63 Publisher of The Forest City News. 1983
William A. Kerl 68 President of Carbondale Concrete Company, 2000
Inc. and Kerl Coal, Oil & Trucking
Company, Inc.
Erwin T. Kost 61 President of Kost Tire Distributors, Inc. 1997
Susan F. Mancuso 53 Partner in Mancuso & Mancuso, Accounting 2003
& Tax Service.
Robert A. Mazzoni 56 Judge of the Court of Common Pleas of 2000
Lackawanna County since July 25, 2001.
Partner in Mazzoni & Karam, a law firm,
from 2000 to July 24, 2001.
J. Robert McDonnell 69 Owner of McDonnell's Restaurant. 1983
Joseph P. Moore, III(1) 53 President of J.J. Motors, Inc., an 2000
automobile dealership.
Eric G. Stephens 53 Auto Dealer, H.L. Stephens & Son, 1988
an automobile dealership.
(1) A son of Joseph P. Moore, Jr., who owns beneficially more than 5.0 percent
of our common stock.
36
COMMITTEES
Our Board of Directors has two standing committees, namely the Nominating and
Corporate Governance Committee and the Joint Audit Committee, which also
servesas the audit committee for Community Bank. Each member of these committees
stisfies 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, Chairperson; 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. A copy of
our written Charter of the Nominating and Corporate Governance Committee is
filed at Exhibit 99(ii) to our Annual Report on Form 10-K for the year ended
December 31, 2003, Commission File Number: 0-17455, and is incorporated in its
entirety by reference into this report. 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. 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 independent registered public accounting firm of
our financial statements;
- Our report on internal controls;
- The independent registered public accounting firm and internal
auditing firms' qualifications and independence; and
- The performance of our internal audit function.
37
The following directors are members of the Joint Audit Committee: Susan F.
Mancuso, Chairperson; Thomas M. Chesnick; Robert A. Mazzoni; and Joseph P.
Moore, III. The Joint Audit Committee operates pursuant to a Charter approved
and adopted by our Board of Directors. A copy of our written Charter of the
Joint Audit Committee is filed at Exhibit 99(i) to our Annual Report on Form
10-K for the year ended December 31, 2003, Commission File Number: 0-17455, and
is incorporated in its entirety by reference into this report. 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 2004 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 independent 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 independent registered public
accounting firm under the auditing standards of the Public Company Accounting
Oversight Board (United States). Our independent 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 2004, in conformity with United
States GAAP.
The Joint Audit Committee discussed with the independent registered public
accounting firm their independence from us and our management, and received from
them the written disclosures and the letter 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 independent 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
38
respective audits. In addition, the Joint Audit Committee met with the internal
auditing firm, the internal auditor and the independent 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 independent 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. 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 committees of the Board. The committee will
determine, in its sole discretion, whether a nominee meets the quality and
attribute standards.
39
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 2004.
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;
- 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
40
- 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
Stockholders 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.
41
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:
HELD EMPLOYEE AGE AS OF
NAME AND POSITION SINCE SINCE MARCH 16, 2005
- ----------------------------------------------- ----- -------- --------------
William R. Boyle 2001 2001(1) 45
Senior Vice President and Chief Credit Officer
William F. Farber, Sr. 2001 2001(2) 68
President and Chief Executive Officer,
Chairman of the Board
John P. Kameen 1996 (3) 63
Secretary
J. Robert McDonnell 1983 (3) 69
Vice Chairman
Scott A. Seasock 1989 1989 47
Executive Vice President and Chief Financial
Officer
(1) Senior Vice President and Chief Credit Officer since 2001. Vice President
of Community Bank in 2000.
(2) President and Chief Executive Officer since 2001. Retired in 2000.
(3) Not our employee or an employee of Community Bank. These persons do not
receive any additional fees for serving as Board Officers.
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 2004 with the exception of the following: on April
15, 2004, Dean L. Hesser, a director of the Company, purchased 200 shares of our
common stock at a price of $40.00 per share or $8,000 in the aggregate. A Form 4
was required to filed on or before April 17, 2004. Mr. Hesser failed to do so.
Mr. Hesser filed his Form 4 with the SEC for this purchase on April 28, 2004.
42
CODES OF ETHICS AND BUSINESS CONDUCT
The Boards of Directors of us and Community Bank have adopted a Code of Ethics
that applies to the CEO and Principal Executive Officer, CFO and Principal
Financial Officer, and the Vice President of Finance and Principal Accounting
Officer (collectively referred to as the "Senior Financial Officers"). This Code
of Ethics for Senior Financial Officers is designed to deter wrongdoing and to
promote the following, among other responsibilities:
- Honest and ethical conduct, including the ethical handling of actual
or apparent conflicts of interest between personal and professional
relationships;
- Full, fair, accurate, timely, and understandable disclosure in
reports and documents that we file with, or submit to, the SEC and
in other public communications made by us;
- Compliance with applicable governmental laws, rules and regulations;
- Prompt internal reporting of Code of Ethics violations to an
appropriate person or persons identified in the Code of Ethics; and
- Accountability of adherence to the Code of Ethics.
In addition, all of our employees, including our Senior Financial Officers, are
required to abide by our Code of Business Conduct to ensure that our business is
conducted in a consistently legal and ethical manner. This Code of Business
Conduct forms the foundation of a comprehensive process that includes compliance
with all corporate policies and procedures, an open relationship among
colleagues that contributes to good business conduct, and an abiding belief in
the integrity of our employees. Our policies and procedures cover all areas of
professional conduct, including employment policies, conflicts of interest,
intellectual property and the protection of confidential information, as well as
strict adherence to all laws and regulations applicable to the conduct of our
business.
Employees are required to report any conduct they believe in good faith to be an
actual or apparent violation of the standards contained in our Code of Business
Conduct or any other unusual or suspicious business arrangement or behavior. SOX
requires audit committees to have procedures to receive, retain and treat
complaints received regarding accounting, internal accounting controls or
auditing matters and to allow for the confidential and anonymous submission by
employees of concerns regarding questionable accounting or auditing matters. We
currently have such procedures in place.
In addition, the members of our Board of Directors are required to comply with
the Code of Business Conduct, which is intended to focus the Board and the
individual directors on areas of ethical risk, help directors recognize and deal
with ethical issues, provide mechanisms to report unethical
43
conduct, and foster a culture of honesty and accountability. The Code of
Business Conduct covers all areas of professional conduct relating to service on
the Board, including conflicts of interest, unfair or unethical use of corporate
opportunities, strict maintenance of confidential information, compliance with
all applicable laws and regulations and oversight of ethics and compliance by
employees of the Company.
A copy of our written Code of Ethics for Senior Financial Officers has been
filed as Exhibit 14 to our Annual Report on Form 10-K for the year ended
December 31, 2003, Commission File Number: 0-17455, and is incorporated in its
entirety by reference into the report. The text of the Codes of Ethics for
Senior Financial Officers and Business Conduct are posted on our website at
http://www.combk.com. Copies of our Codes of Ethics for Senior Financial
Officers and Business Conduct will be provided, 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 of Ethics for Senior Financial Officers 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. 2004 202,805(1) 11,500(2) -0- -0- -0- -0- 6,621
President and 2003 188,872(1) 11,500(2) -0- -0- -0- -0- 6,446
Chief Executive Officer 2002 180,463(1) 11,500(2) -0- -0- -0- -0- -0-
Scott A. Seasock 2004 135,407 12,000 -0- -0- -0- -0- 6,441
Executive Vice President 2003 115,319 12,000 -0- -0- -0- -0- 5,966
and Chief Financial Officer 2002 104,046 12,000 -0- -0- -0- -0- 6,525
William R. Boyle 2004 135,386 6,500 -0- -0- -0- -0- 6,242
Senior Vice President 2003 109,494 5,000 -0- -0- -0- -0- 5,427
and Chief Credit Officer 2002 95,084 10,425 -0- -0- -0- -0- 5,929
(1) Includes director fees of $60,000 in 2004, 2003 and 2002.
(2) Includes director bonus of $1,500 in 2004, 2003 and 2002.
(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.
44
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
We do not have an Executive Compensation Committee and no compensation was paid
to Mr. Farber, President and CEO; Mr. Seasock, Executive Vice President and CFO;
or Mr. Boyle, Senior Vice President and CCO (collectively, the "Executive
Officers") by us in 2004. All compensation was paid by Community Bank.
COMPOSITION OF COMMITTEE
Community Bank has an Executive Compensation Committee comprised of five of our
directors who also serve as directors of Community Bank. All of these members of
the Executive Compensation Committee meet the independence standards contained
in Rule 4200(a)(15) of the listing rules for The NASDAQ Stock Market(R). The
Executive Compensation Committee is solely responsible for the compensation
decisions involving the Executive Officers. None of the Executive Officers
participate in discussions and decisions concerning their compensation.
OBJECTIVES OF EXECUTIVE COMPENSATION
Our executive compensation policy aims to:
- Link the executive's goals with the interests of the stockholders;
- Support our strategic business plan and long-term development;
- Tie a portion of the executive's compensation to our overall
performance; and
- Attract and retain talented management.
TYPE OF COMPENSATION
We utilize annual compensation which includes salary, bonus and contributions to
Community Bank's defined contribution plan on behalf of the Executive Officers.
We do not have any long-term compensation program including those that are based
upon the award of stock options and restricted stock or other long-term
incentive awards.
FACTORS CONSIDERED IN DETERMINING COMPENSATION
The Executive Compensation Committee bases their decision on an Executive
Officer's annual salary and bonus based on the following criteria, with the
exception of Mr. Seasock's bonus which is based on a formula for us achieving a
certain return on average assets and percentage increase in net income ranges:
45
- A report prepared by an independent consulting firm, which compares
base salaries and bonuses of other commercial banking institutions
of similar size on a regional basis for similar positions and
responsibilities;
- An inflation index based on the latest Northeastern Pennsylvania
Consumer Price Index;
- The overall annual improvement in our consolidated balance sheet and
consolidated statements of income and comprehensive income; and
- The Executive Compensation Committee's judgment on the extent of
support the Executive Officer provided us in meeting our strategic
business plan and long-term development.
Under the bonus formula for Mr. Seasock, the achievement ranges for return on
average assets and percentage increase in net income are given equal weightings.
The minimum achievement ranges were 1.00 to 1.05 percent for return on average
assets and 5.0 to 5.9 percent for the percentage increase in net income for
2004. The Executive Compensation Committee has the discretion to award bonuses
in excess of the amounts calculated pursuant to this bonus formula.
Discretionary annual contributions to Community Bank's defined contribution plan
on behalf of the Executive Officers are proportional to the Executive Officers'
salaries as a percentage of the total amount of annual salaries paid to all
employees. In addition, we make contributions, on behalf of the Executive
Officers, to the defined contribution plan in accordance with an amendment to
the plan under section 401(k) of the Internal Revenue Code ("401(k)").
CONCLUSION ON ANNUAL COMPENSATION
Annual compensation for our Executive Officers includes salary, bonus and
contributions to Community Bank's defined contribution plan. This is similar to
the compensation programs for most of our peer group banking companies. The
Executive Compensation Committee has determined that the 2004 compensation for
the President and CEO of $220,926, the Executive Vice President and CFO of
$153,848 and the Senior Vice President and CCO of $148,128 were appropriate in
light of our performance accomplishments. The base salaries and bonuses of our
Executive Officers was in the 52.0 percentile compared to similar sized
commercial banking institutions based on the report of the independent
consulting firm. We intend to pay salaries at the median range of the peer group
banking companies that are represented in this report.
46
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 a 401(k) feature. This feature of the plan
permits employees to make voluntary, pre-tax contributions up to 25.0 percent of
their compensation. Company contributions to the 401(k) are based on 100.0
percent matching of voluntary contributions up to 3.0 percent of the employee's
eligible compensation. If a participant separates from service prior to
retirement, the participant will be entitled to 100.0 percent (100%) of their
contributions made under the 401(k) and also a portion of Community Bank's
matching 401(k) contributions and annual 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 2004, annual discretionary contributions of $76,545 were allocated among
participants' accounts under the defined contribution plan. Discretionary
matching contributions under the 401(k) feature of the plan totaled $145,114 in
2004. Community Bank contributed $6,621 for Mr. Farber, $6,441 for Mr. Seasock
and $6,242 for Mr. Boyle to the plan in 2004. Mr.
47
Farber has four (4) years, Mr. Seasock has eighteen (18) years and Mr. Boyle has
twenty (20) 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 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.
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.
48
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) Composite 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, 2004. The stockholder return
shown on the graph and table below is not necessarily indicative of future
performance.
[PERFORMANCE GRAPH]
1999 2000 2001 2002 2003 2004
----- ----- ----- ----- ----- -----
Comm Bancorp, Inc......................... 100.0 78.7 74.9 95.0 104.2 117.8
The NASDAQ Stock Market(R) Composite...... 100.0 60.8 48.2 33.1 49.9 54.5
Mid-Atlantic Bank Stocks.................. 100.0 122.6 115.5 88.8 126.3 133.8
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 12/31/99.
49
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 16, 2005. The aggregate percentage
of shares owned by all directors and executive officers is 16.68 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 13,758.691 -
William R. Boyle(2) 2,152.291 -
Thomas M. Chesnick 26,681.943 1.43%
William F. Farber, Sr. 152,460.000 8.17%
Judd B. Fitze 15,092.821 -
Dean L. Hesser 600.000 -
John P. Kameen 20,572.000 1.10%
William A. Kerl 15,859.868 -
Erwin T. Kost 10,297.390 -
Susan F. Mancuso 3,018.595 -
Robert A. Mazzoni 100.000 -
J. Robert McDonnell 35,139.000 1.88%
Joseph P. Moore, III 100.000 -
Scott A. Seasock(2) 6,557.594 -
Eric G. Stephens 8,753.478 -
All Directors and Executive Officers as a group (13
Directors, 5 Executive Officers, 15 persons in total) 311,143.671 16.68%
(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.
50
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 16, 2005.
NAME AND ADDRESS NUMBER OF SHARES(1) PERCENT OF CLASS
---------------- ------------------- ----------------
Joseph P. Moore, Jr. 162,935.000 8.73%
400 Williamson Road
Gladwyne, PA 19035
William F. Farber, Sr. 152,460.000 8.17%
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, 2004, 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 $5.4
million or 11.5 percent of our total consolidated capital accounts. The largest
aggregate balance for these loans in 2004 was $5.7 million or 12.1 percent of
our total consolidated capital accounts. During 2004, advances and repayments on
these loans were $11.4 million and $11.6 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 $8,847 in 2004
for his legal services on our behalf.
51
]
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The fees billed for professional services rendered by our independent registered
public accounting firm, for each of the two years ended December 31, 2004 and
2003 are summarized as follows:
YEAR ENDED DECEMBER 31, 2004 2003
- ------------------------------------------------------------ -------- --------
Audit fees(1)............................................... $ 53,801 $ 51,425
Audit-related fees(2)....................................... 4,555 3,940
Tax fees(3)................................................. 8,156 16,280
Other fees(4)............................................... 7,975 5,540
-------- --------
Total..................................................... $ 74,487 $ 77,185
======== ========
(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.
(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 independent registered public accounting firm are
set forth in the Charter of the Joint Audit Committee of us and Community Bank.
For the two years ended December 31, 2004 and 2003, 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 AND FINANCIAL STATEMENT SCHEDULES
(a) 1. The consolidated financial statements and notes to these statements
as well as the applicable report of the independent 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(b) to this report.
52
(b) Exhibits required by Item 601 of Regulation S-K:
Exhibit Number Referred to
Item 601 of Regulation S-K Description of Exhibit
- -------------------------- -------------------------------
2 None.
3(i) None.
3(ii) None.
4 None.
9 None.
10 None.
11 None.
12 None.
13 Portions of the Annual Report
to Stockholders for Fiscal Year
Ended December 31, 2004.
14 None.
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 None.
53
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. Date
(Registrant)
BY:/s/ William F. Farber, Sr. March 16, 2005
-----------------------------------
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 16, 2005
- -------------------------------------
David L. Baker, Director
/s/ Thomas M. Chesnick March 16, 2005
- -------------------------------------
Thomas M. Chesnick, Director
/s/ William F. Farber, Sr. March 16, 2005
- -------------------------------------
William F. Farber, Sr.,
President and Chief Executive Officer
Chairman of the Board/Director
(Principal Executive Officer)
/s/ Judd B. Fitze March 16, 2005
- -------------------------------------
Judd B. Fitze, Director
/s/ Stephanie A. Ganz March 16, 2005
- -------------------------------------
Stephanie A. Ganz,
Vice President of Finance
(Principal Accounting Officer)
/s/ Dean L. Hesser March 16, 2005
- -------------------------------------
Dean L. Hesser, Director
54
/s/ John P. Kameen March 16, 2005
- -------------------------------------
John P. Kameen, Secretary/Director
/s/ William A. Kerl March 16, 2005
- -------------------------------------
William A. Kerl, Director
/s/ Erwin T. Kost March 16, 2005
- -------------------------------------
Erwin T. Kost, Director
/s/ Susan F. Mancuso March 16, 2005
- -------------------------------------
Susan F. Mancuso, Director
/s/ Robert A. Mazzoni March 16, 2005
- -------------------------------------
Robert A. Mazzoni, Director
/s/ J. Robert McDonnell March 16, 2005
- -------------------------------------
J. Robert McDonnell,
Vice Chairman/Director
/s/ Joseph P. Moore, III March 16, 2005
- -------------------------------------
Joseph P. Moore, III, Director
/s/ Scott A. Seasock March 16, 2005
- -------------------------------------
Scott A. Seasock, Executive Vice
President and Chief Financial Officer
(Principal Financial Officer)
/s/ Eric G. Stephens March 16, 2005
- -------------------------------------
Eric G. Stephens, Director
55
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ------------------------------------------------------------------------------------- ----
13 Portions of the Annual Report to Stockholders for Fiscal Year Ended December 31, 2004 57
21 List of Subsidiaries of the Company 187
31(i) CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 188
31(ii) CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 190
32(i) CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 192
32(ii) CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 193
56