<PAGE> 1
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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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No.: 0-27942
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COMMONWEALTH BANCORP, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
PENNSYLVANIA 23-2828883
- --------------------------------- -----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
COMMONWEALTH BANK PLAZA
2 WEST LAFAYETTE STREET
NORRISTOWN, PENNSYLVANIA 19401
--------------------------- ---------------------
(Address) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (610) 251-1600
Securities registered pursuant to Section 12(b) of the Act:
NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act
COMMON STOCK (PAR VALUE $.10 PER SHARE)
--------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required 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 the 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.
---
As of March 13, 1997, the aggregate value of the 16,354,590 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
816,680 shares held by all directors and officers of the Registrant as a group,
was approximately $256.6 million. This figure is based on the closing sales
price of $15.6875 per share of the Registrant's Common Stock on March 13, 1997
as reported by the Nasdaq Stock Market.
Number of shares of Common Stock outstanding as of March 13, 1997: 17,171,270
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the
Part of the Form 10-K into which the document is incorporated.
(1) Portions of the Annual Report to Stockholders for the year ended December
31, 1996 are incorporated into Part II, Items 6 through 8 of this Form 10-K.
(2) Portions of the definitive proxy statement for the 1997 Annual Meeting of
Stockholders to be filed within 120 days of December 31, 1996 are incorporated
into Part III, Items 10 through 13 of this Form 10-K.
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<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
Commonwealth Bancorp, Inc. ("Commonwealth" or the "Company"), a
Pennsylvania corporation, is the holding company for Commonwealth Bank
("Bank"). On June 14, 1996, the Company completed an offering of common stock
in connection with the Conversion and Reorganization of Commonwealth Mutual
Holding Company, the former parent company of the Bank, from the mutual holding
company form of ownership to the stock holding company form. In the offering,
9.9 million shares of common stock of the Company were sold in a subscription
and community offering at $10.00 per share. In addition, 8.1 million shares of
common stock of the Company were issued in exchange for shares of stock of the
Bank previously held by public stockholders at an exchange ratio of 2.0775
shares for each share of Bank common stock, resulting in 18.0 million shares of
common stock of the Company outstanding at the Conversion and Reorganization.
The Bank is a Federally chartered stock savings bank which conducts
business from its executive offices in Norristown, Pennsylvania and, as of
December 31, 1996, 53 full-service offices, including 14 supermarket branch
offices, located in southeast Pennsylvania. The Bank's executive offices were
moved to Norristown from Malvern, Pennsylvania in January 1997 to accommodate
growth and better control operating expenses. ComNet Mortgage Services
("ComNet"), a division of the Bank, also currently located in Norristown,
conducted business at December 31, 1996 through seven loan origination offices
located in Pennsylvania, Connecticut, New Jersey, and Rhode Island. ComNet
also conducts business through its wholesale network, which includes
correspondents in 29 states. During January 1997, Commonwealth Bank, through
ComNet, acquired selected assets of Homestead Mortgage, Inc., a mortgage
company headquartered in Millersville, Maryland. Among the assets acquired by
ComNet were production branches located in Millersville, Bethesda, Whitemarsh,
and Woodlawn, Maryland, and Media, Pennsylvania.
The Bank first issued stock on January 21, 1994, as a result of the
conversion of Commonwealth Federal Savings Bank from a Federally chartered
mutual savings bank to a Federally chartered stock savings bank. The Bank was
a subsidiary of Commonwealth Mutual Holding Company, a Federally chartered
mutual holding company (the "Mutual Holding Company"), which owned
approximately 55% of the outstanding common stock of the Bank. In June 1994,
the Bank converted from a Federally chartered stock savings bank to a
Pennsylvania chartered stock savings bank known as Commonwealth Savings Bank.
In December 1995, the Bank converted back to a Federally chartered stock
savings bank. In February 1996, the Bank commenced a stock offering in
connection with the conversion of the Mutual Holding Company and reorganization
of the Bank to its current stock holding company form of ownership.
-1-
<PAGE> 3
The Bank is subject to examination and comprehensive regulation by the
Office of Thrift Supervision (the "OTS"), which is the Bank's chartering
authority and primary regulator, and by the Federal Deposit Insurance
Corporation ("FDIC"), which, as administrator of the Savings Association
Insurance Fund ("SAIF") and the Bank Insurance Fund ("BIF"), insures the Bank's
deposits up to applicable limits. The Bank also is subject to certain reserve
requirements established by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board"), and is a member of the Federal Home Loan Bank
("FHLB") of Pittsburgh, which is one of the 12 regional banks comprising the
FHLB System.
MARKET AREA
The Bank's 53 full-service branch offices, which include 14 supermarket
branch offices, are located throughout Berks, Bucks, Chester, Delaware,
Lebanon, Lehigh, Montgomery and Philadelphia Counties, Pennsylvania. The
Bank's primary market is suburban Berks, Chester, and Montgomery Counties, with
34 of the Bank's 53 branches located in these counties. The Bank's branch
locations are concentrated in the Reading area of Berks County; southeastern
Chester County; central and southern Montgomery County; and the northeast
Philadelphia community within Philadelphia County. In terms of share of
deposits and branch office representation, management of the Company believes
that the Bank is well positioned in Berks, Chester, and Montgomery Counties,
with a substantial presence that enables it to compete effectively with the
Bank's competitors. Management believes that its emphasis on providing
customers with quality service also helps the Bank compete effectively.
The Bank focuses on relationship banking by cross-selling services to
established customers. These include a variety of loan and deposit products
for individuals and businesses. The Bank also makes available other financial
instruments, such as annuity products and mutual funds, through arrangements
with third parties.
LENDING ACTIVITIES
GENERAL. At December 31, 1996, the Company's loans totaled $1.1 billion,
which represented 53% of total assets. The Company's loans consist principally
of conventional loans which are secured by first liens on single-family
residences. Conventional residential real estate loans are loans which are
neither insured by the Federal Housing Administration ("FHA") nor partially
guaranteed by the Veterans Administration ("VA"). The other principal
categories of loans in the Company's loans held for investment portfolio are
consumer loans and commercial loans, including commercial real estate loans and
loans which are guaranteed by the Small Business Administration ("SBA"). In
addition, the Company's loan portfolio includes a small amount of loans which
are secured by multi-family residential (five or more units) properties.
Although ComNet originates loans in a number of states, the majority of
the Company's mortgage loans held for investment are secured by properties
located in Pennsylvania and New Jersey. At December 31, 1996, $411.2 million,
or 48%, of the Company's $857.1 million of total mortgage loans held for
investment were secured by properties located in Pennsylvania and New Jersey.
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<PAGE> 4
LOAN PORTFOLIO COMPOSITION. The following table sets forth the
composition of the Company's loans held for investment at the dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------
1996 1995 1994
-------------------------- ---------------------- -----------------------
Percent of Percent Percent of
Amount Total Amount of Total Amount Total
------ ---------- ------ ---------- ------ ---------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Mortgage loans:
Single-family residential (1) $ 857,053 76.37% $655,152 81.08% $450,959 75.55%
Consumer loans:
Equity lines of credit 49,136 4.38 44,432 5.50 49,246 8.26
Second mortgage 77,304 6.89 48,653 6.03 42,883 7.18
Other 42,867 3.82 18,009 2.23 12,013 2.01
---------- ------ --------- ------- -------- ------
Total consumer loans 169,307 15.09 111,094 13.76 104,142 17.45
Commercial loans:
SBA (2) 25,104 2.24 29,472 3.65 35,482 5.94
Commercial real estate 35,452 3.15 9,386 1.16 4,679 0.78
Business loans 35,380 3.15 2,801 0.35 1,671 0.28
---------- ------ --------- ------- -------- ------
Total commercial loans 95,936 8.54 41,659 5.16 41,832 7.00
---------- ------ --------- ------- -------- ------
Total loans receivable 1,122,296 100.00% 807,905 100.00% 596,933 100.00%
---------- ====== --------- ======= -------- ======
Less:
(Premium)/Discount on loans
purchased (3,655) 1,004 2,864
Allowance for loan losses 9,971 7,485 7,307
Deferred loan fees 2,866 2,681 3,555
Allowance for imputed interest - - 63
---------- -------- --------
Loans receivable, net $1,113,114 $796,735 $583,144
========== ======== ========
<CAPTION>
December 31,
-------------------------------------------------
1993 1992
----------------------- ----------------------
Percent of Percentof
Amount Total Amount Total
------ --------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
Single-family residential (1) $369,456 72.02% $436,537 74.26%
Consumer loans:
Equity lines of credit 56,862 11.08 63,385 10.78
Second mortgage 31,449 6.13 22,941 3.90
Other 9,701 1.89 8,361 1.42
-------- ------ -------- ------
Total consumer loans 98,012 19.10 94,687 16.10
Commercial loans:
SBA (2) 40,973 7.99 47,015 8.00
Commercial real estate 4,543 0.89 9,655 1.64
Business loans - - - -
-------- ------ -------- ------
Total commercial loans 45,516 8.88 56,670 9.64
-------- ------ -------- ------
Total loans receivable 512,984 100.00% 587,894 100.00%
-------- ====== -------- ======
Less:
(Premium)/Discount on loans
purchased 4,007 6,538
Allowance for loan losses 7,309 6,935
Deferred loan fees 2,595 3,234
Allowance for imputed interest 99 140
-------- --------
Loans receivable, net $498,974 $571,047
======== ========
</TABLE>
- ----------------------
(1) At December 31, 1996, $533.9 million, or 62%, of the Company's
single-family residential loans had adjustable interest rates.
(2) Consists entirely of loans (or securities backed by loans) which are
guaranteed by the SBA, with the majority adjusting monthly or quarterly.
All such loans or securities were purchased by the Company.
-3-
<PAGE> 5
CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following table
sets forth the scheduled contractual amortization of the Company's loans held
for investment at December 31, 1996, as well as the dollar amount of such loans
which are scheduled to mature after one year which have fixed or adjustable
interest rates. Demand loans, loans having no schedule of repayments and no
stated maturity, and overdraft loans are reported as due in one year or less.
<TABLE>
<CAPTION>
Principal Repayments Contractually Due
in Year(s) Ended December 31,
-----------------------------------------------------------------------------
Total at
December 31, 2000- 2002- 2008- There-
1996 1997 1998 1999 2001 2007 2013 after
--------------- ---------- ----------- --------- ---------- -------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family
residential $ 857,053 $ 22,148 $20,554 $21,500 $45,723 $149,620 $165,313 $432,195
Consumer 169,307 24,149 23,288 19,256 25,800 46,581 27,964 2,269
Commercial real
estate 35,452 6,404 3,920 3,148 10,559 6,343 3,747 1,331
Business loans 35,380 15,421 3,140 2,970 6,819 5,143 1,132 755
SBA 25,104 1,688 1,550 1,499 2,916 8,748 6,752 1,951
------- ------- ------ ------ ------ ------- ------- -------
Total (1) $1,122,296 $ 69,810 $52,452 $48,373 $91,817 $216,435 $204,908 $438,501
========= ======= ====== ====== ====== ======= ======= =======
</TABLE>
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(1) Of the $1.1 billion of loan principal repayments contractually due after
December 31, 1997, $440.2 million have fixed rates of interest and $612.3
million have adjustable rates of interest.
Scheduled contractual amortization of loans does not reflect the expected
term of the Company's loan portfolio. The expected average life of the loan
portfolio is substantially less than its contractual term because of
prepayments and due-on-sale clauses, which give the Company the right to
declare a conventional loan immediately due and payable in the event, among
other things, that the borrower sells the real property subject to the mortgage
and the loan is not repaid. The average life of mortgage loans tends to
increase when current mortgage loan rates are higher than rates on existing
mortgage loans and, conversely, decrease when rates on current mortgage loans
are lower than existing mortgage loan rates (due to refinancing of
adjustable-rate and fixed-rate loans at lower rates). Under the latter
circumstance, the weighted average yield on loans decreases as higher-yielding
loans are repaid or refinanced at lower rates.
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<PAGE> 6
ACTIVITY IN LOANS HELD FOR INVESTMENT. The following table shows the
activity in the Company's loans held for investment during the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1996 1995 1994
--------------- ------------------ -----------------
(In Thousands)
<S> <C> <C> <C>
Gross loans held for investment at
beginning of period $ 807,905 $596,933 $512,984
Originations of loans held for
investment:
Single-family residential (1) 52,304 35,319 117,841
Consumer 58,411 48,432 43,781
Commercial real estate 16,848 5,291 725
Business loans 16,955 4,766 1,802
------- ------- --------
Total originations 144,518 93,808 164,149
Purchases of loans held for investment:
Single-family residential (2) 257,575 234,963 33,613
Consumer 45,579 - -
Commercial real estate 26,110 - -
Business loans 18,269 - -
SBA - - 1,585
------- ------- --------
Total purchases 347,533 234,963 35,198
Total originations and purchases 492,051 328,771 199,347
Repayments (177,660) (117,799) (115,398)
--------- --------- ---------
Net activity in loans held for
investment 314,391 210,972 83,949
-------- -------- --------
Gross loans held for investment at end
of period $1,122,296 $807,905 $596,933
========= ======= =======
</TABLE>
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(1) Originated by ComNet.
(2) The $257.6 million of single-family residential loans consist of $79.9
million of adjustable rate loans purchased by the Company from third parties,
$148.3 million of loans generated through ComNet's wholesale correspondent
network, and $29.4 million purchased in the June 1996 acquisition of 12 former
Meridian Bank branches (the "Branch Acquisition"). For additional information,
see "Management Discussion and Analysis of Financial Condition and Results of
Operations - Branch Acquisitions" in Item 7 hereto.
RESIDENTIAL LOAN ORIGINATION AND SALES ACTIVITIES. The primary
lending activities of the Company are the origination and sale, without
recourse, of conventional and insured/guaranteed real estate loans secured by
first liens on single-family residences. Residential loan origination
activities are conducted through ComNet.
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<PAGE> 7
Retail loans are originated by ComNet's own sales force of approximately 37
commissioned or salaried loan originators through referrals from the Company,
real estate brokers, builders of new homes and others, as well as through
direct contact with borrowers. In connection with the origination of each
loan, ComNet prepares mortgage documentation, conducts credit checks, has the
subject property appraised by independent appraisers, and closes the loan.
The ComNet retail loan production office originating a loan is responsible
for taking the loan application and coordinating information flow between the
applicant and ComNet's processing center, which relocated f along with the
Company's headquarters in January 1997 from Malvern, Pennsylvania to
Norristown, Pennsylvania. Retail loan applications must be approved by
ComNet's underwriting department or compliance with underwriting criteria,
including the ratio of the loan amount to the value of the security property
("loan-to-value ratio"), borrower income qualifications and necessary
insurance. Upon approval, ComNet issues a formal commitment letter to the
prospective borrower specifying the amount of the loan, the prevailing interest
rate or means for determining the same, the fees to be paid to ComNet, and the
date on which the commitment expires.
Wholesale loans are purchased from correspondents/brokers, or funded by
ComNet on behalf of correspondents and brokers. ComNet currently employs three
regional account executives to work with over 194 correspondents and brokers.
The correspondent or broker is responsible for the processing of the loan
application. When a wholesale loan enters the underwriting stage, for the
majority of correspondents and brokers, the underwriting is performed by ComNet
similar to retail loan originations above. In certain instances, ComNet
delegates the underwriting function to correspondents and brokers. Such
delegated underwriting meets ComNet's criteria of underwriting standards. Once
the underwriting approval is complete, the purchase or funding is initiated.
ComNet originates conventional loans and, to a lesser extent, FHA-insured
and VA-guaranteed loans. The vast majority of the conventional loans
originated by ComNet are originated under terms and documentation which conform
to the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC") guidelines, and, as such, are eligible for sale
in the secondary market.
The results of operations of ComNet are significantly dependent upon its
ability to originate loans. This ability, in turn, is substantially dependent
upon prevailing interest rate levels, which affect the degree to which
consumers obtain new loans and refinance existing loans. Economic conditions
in ComNet's service areas also have a significant effect on the residential
housing market and, thus, could have a similar effect on ComNet's loan
origination activity.
ComNet's originations totaled $462.1 million and $494.8 million during 1996
and 1995, respectively, which included $233.8 million and $318.0 million,
respectively, of loans originated through the wholesale correspondent lending
network.
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<PAGE> 8
ComNet sells substantially all of the fixed-rate loans it originates which
conform to FNMA/FHLMC requirements to investors in the secondary market. The
Company retains substantially all of the adjustable-rate loans originated by
ComNet, as well as the loans originated by it which do not conform to the
requirements for sale to the FNMA and the FHLMC (primarily because the
principal amount exceeds the limit, which is currently $214,600 for loans
secured by a single-family, owner-occupied residence) and loans by ComNet to
employees of the Company. The Company also has been retaining fully amortizing
fixed-rate loans originated by ComNet, with maturities of ten years.
ComNet's mortgage loans sold to others generally are sold in groups through
mortgage-backed securities issued by the FNMA or the FHLMC, or on a
loan-by-loan basis to these agencies or other investors. In the case of the
loans sold through mortgage-backed securities, the loans are grouped in pools
of $1.0 million or more and certain documents are delivered to the FNMA or the
FHLMC, which issues a mortgage-backed security representing an undivided
interest in the loan pool. For issuing the security, the FNMA or the FHLMC
receives an annual guarantor fee of approximately 0.18% to 0.29% of the
declining principal amount of the loan pool. ComNet, through investment
bankers, arranges to sell mortgage-backed securities to investors.
ComNet generally retains the rights to service the conventional loans it
sells, while selling the FHA-insured and VA-guaranteed loans originated by it
on a servicing-released basis. As a result, the loans serviced by ComNet for
others do not include any FHA-insured or VA-guaranteed loans.
A period of 30 to 90 days generally lapses between the closing of a loan by
ComNet and its sale to an investor. During this period, ComNet employs various
hedging techniques, such as forward commitments and put options, to protect the
value of its mortgage production. Mortgage loans generally will decrease in
value during periods of increasing interest rates and increase in value during
periods of decreasing interest rates. The cost of the various hedging
techniques employed by ComNet are deducted from the net gain (loss) on the
sales of mortgage loans. Accordingly, fluctuations in prevailing interest
rates may result in a gain or loss to ComNet as a result of adjustments to the
carrying value of loans held for sale, or on sales of loans to the extent that
ComNet has not obtained prior commitments by investors to purchase such loans
or otherwise hedged the value of the loans against changes in interest rates.
Moreover, the amount of unhedged loans can increase as a result of increases in
interest rates, which can result in greater than anticipated closings of loans
in process.
The principal means by which ComNet hedges its mortgage production are
through the use of mandatory forward and option contracts, which are legal
agreements between two parties to purchase and sell a specific quantity of a
financial instrument, at a specified price, with delivery and settlement at a
specified future date. ComNet adjusts the amount of its unhedged loans in
process based on management's assessment of market conditions and loan closing
rates.
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<PAGE> 9
The following table sets forth certain information relating to the volume
and type of loans originated and sold by ComNet during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------
1996 1995 1994
--------------------------- ---------------------- --------------------------
Number Number Number
Principal of Principal of Principal of
Amount Loans Amount Loans Amount Loans
------ ------ ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Originations for the Company (1):
Conventional $200,558 979 $208,865 1,086 $151,454 1,216
FHA/VA - - - - - -
------- ------ ------- ----- ------- -----
Total Company 200,558 979 208,865 1,086 151,454 1,216
------- ------ ------- ----- ------- -----
Originations for others (1):
Conventional 232,622 2,176 260,300 2,362 148,640 1,448
FHA/VA 28,893 322 25,594 281 38,534 430
------- ------ ------- ----- ------- -----
Total Other 261,515 2,498 285,894 2,643 187,174 1,878
------- ------ ------- ----- ------- -----
Total Company and others $462,073 3,477 $494,759 3,729 $338,628 3,094
======= ===== ======= ===== ======= =====
Retained by the Company (1)(2):
Conventional $200,558 979 $208,865 1,086 $151,454 1,216
FHA/VA - - - - - -
------- ------ ------- ----- ------- -----
Total Company 200,558 979 208,865 1,086 151,454 1,216
------- ------ ------- ----- ------- -----
Sales to Others (1)(3):
Conventional 236,190 2,275 264,538 2,332 175,048 1,894
FHA/VA 29,781 331 14,738 161 73,197 682
------- ------ ------ ------ -------- ------
Total Other 265,971 2,606 279,276 2,493 248,245 2,576
------- ----- ------- ----- ------- -----
Total Company and Other $466,529 3,585 $488,141 3,579 $399,699 3,792
======= ===== ======= ===== ======= =====
Other adjustments to
loans held for sale (4) $ (4,210) $ 850 $ (235)
======== ======= ========
(Decrease)Increase in
loans held for sale $ (8,666) $ 7,468 $(61,306)
======== ======= ========
</TABLE>
- --------------------
(1) Consists entirely of single-family residential loans.
(2) Consists primarily of single-family residential loans which have
adjustable-rates, are non-conforming due to the size of the loan or are
made to an employee of the Company.
(3) Includes loans converted into mortgage-backed securities.
(4) Consists of repayments of loans held for sale, net gain on sales of loans,
and deferred loan fees.
-8-
<PAGE> 10
The following table sets forth certain information relating to the
geographic distribution of loans originated by ComNet through its retail and
wholesale networks during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------
1996 1995 1994
----------------------- ----------------------- ------------------------
Number Number Number
Principal of Principal of Principal of
Amount Loans Amount Loans Amount Loans
----------- --------- ---------- --------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
RETAIL :
Pennsylvania $166,770 1,542 $116,455 1,078 $189,081 1,853
New Jersey 28,863 220 17,081 146 48,416 414
Rhode Island 20,328 222 21,950 227 19,898 224
Connecticut 10,433 90 9,489 79 18,167 156
Florida 1,894 21 11,805 124 263 3
Virginia 0 0 0 0 7,427 84
-------- ------ -------- ------ -------- ------
Total Retail 228,288 2,095 176,780 1,654 283,252 2,734
-------- ------ -------- ------ -------- ------
WHOLESALE (1) :
Maryland 50,049 268 82,023 486 16,383 102
Pennsylvania 44,328 336 33,671 255 1,058 14
Virginia 42,326 207 72,794 410 33,555 177
New Jersey 17,250 106 17,163 134 236 3
Delaware 16,682 133 24,764 201 2,450 19
Georgia 13,551 60 18,159 85 891 4
Florida 9,156 54 12,023 93 231 2
North Carolina 7,570 54 22,533 187 3,092 25
Illinois 6,214 32 749 4 0 0
Alabama 6,053 24 3,941 14 0 0
Texas 3,768 22 2,924 17 751 5
Arizona 3,633 17 0 0 0 0
Ohio 2,831 14 9,925 81 0 0
Indiana 1,670 13 149 1 0 0
Kansas 1,543 8 1,222 9 0 0
Massachusetts 1,276 4 0 0 0 0
Colorado 1,269 5 0 0 0 0
Tennessee 1,225 8 0 0 0 0
South Carolina 1,151 6 1,388 13 405 2
Louisiana 769 2 0 0 0 0
Washington, DC 460 2 0 0 0 0
Kentucky 264 2 865 10 0 0
Connecticut 234 1 1,934 17 0 0
Wisconsin 203 1 10,236 49 1,356 7
West Virginia 171 2 203 1 0 0
Missouri 139 1 0 0 0 0
New York 0 0 274 2 0 0
California 0 0 1,039 6 0 0
-------- ------ -------- ------ -------- ------
Total Wholesale 233,785 1,382 317,979 2,075 60,408 360
-------- ------ -------- ------ -------- ------
Total Retail and Wholesale (2) $462,073 3,477 $494,759 3,729 $343,660 3,094
======== ====== ======== ====== ======== ======
</TABLE>
- ------------------
(1) Wholesale originations commenced during 1994.
(2) Consists entirely of single-family residential loans.
-9-
<PAGE> 11
CONSUMER LENDING ACTIVITIES. The Company offers consumer loans to its
customers, which are obtained primarily through existing and walk-in customers
and direct advertising. At December 31, 1996, $169.3 million, or 15%, of the
Company's total loan portfolio was comprised of consumer loans.
A significant portion of the Company's consumer loan portfolio is
comprised of second mortgage loans, which are generally secured by the
underlying equity in a borrower's home or second residence. These loans are
for a fixed amount, have fixed interest rates, terms of one to 15 years,
loan-to-value ratios of 100% or less, with the majority being at 80% or less,
and are generally for amounts less than $100,000. At December 31, 1996, second
mortgage loans totaled $77.3 million, or 7%, of the Company's total loan
portfolio.
The Company's consumer loan portfolio is also comprised of a significant
amount of home equity lines of credit, which are a form of revolving credit and
are generally secured by the underlying equity in the borrower's home or second
residence. These loans have floating interest rates, loan-to-value ratios of
100% or less, with the majority being at 75% or less, and are generally for
amounts less than $100,000. At December 31, 1996, home equity lines of credit
amounted to $49.1 million, or 4%, of the Company's total loan portfolio. The
Company had $109.3 million of total commitments pursuant to such equity lines
of credit outstanding at year-end 1996.
The remaining $42.9 million of the Company's consumer loan portfolio at
December 31, 1996 was comprised primarily of loans secured by new and used
automobiles, recreational vehicles, and personal loans and lines of credit.
The Company generates loans secured by automobiles and recreational vehicles
through, among other things, relationships pursuant to which it acquires such
loans indirectly through dealers.
The Company also commenced marketing credit cards to its deposit customers
in 1996. Such credit cards may be secured by the borrower's principal
residence or unsecured, and are serviced for the Company by a third-party
servicer.
Consumer loans generally have shorter terms and higher interest rates than
mortgage loans, but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. These risks are not as prevalent in the case of the
Company's consumer loan portfolio, however, because of the high percentage of
home equity lines of credit and second mortgages, which are secured by real
estate and underwritten in a manner such that they result in a lending risk
which is substantially similar to single-family residential loans.
COMMERCIAL LENDING ACTIVITIES. Commencing in late 1993, the Company
expanded its commercial lending activities by developing the capacity to make
commercial business loans directly to small businesses located in its primary
market areas in Pennsylvania, as well as loans secured by owner-occupied
commercial real estate in such areas. The Company provides loans for
commercial purposes to borrowers only under circumstances where the borrower
also has, or establishes, a
-10-
<PAGE> 12
deposit relationship with the Company. The Company targets local businesses
with annual revenues of under $10.0 million for commercial business loans under
$5.0 million, with many of the loans ranging between $0.25 million and $1.0
million. Commercial real estate loans are made in the same amounts and may be
secured by office buildings, warehouses, and other special purpose properties.
Applications for commercial loans are obtained primarily through loan officer
solicitation, branch referrals, and direct inquiry. As of December 31, 1996,
commercial loans (other than loans generated by the Small Business
Administration) totaled $70.8 million, or 6%, of the Company's total loan
portfolio primarily, $44.4 million of which were acquired in conjunction with
the Branch Acquisition. For additional information, see "Management Discussion
and Analysis of Financial Condition and Results of Operations - Branch
Acquisitions" in Item 7 hereto. At December 31, 1996, commercial loans (other
than SBA loans) were comprised of $35.5 million of commercial real estate loans
and $35.4 million of business loans.
Commercial real estate loans originated by the Company generally have
terms of five to fifteen years and fixed interest rates. Commercial business
loans originated by the Company generally have terms of one to five years and
interest rates which are fixed or float in accordance with the Company's prime
lending rate. Such loans are generally secured and backed by the personal
guarantees of the principals of the borrower. Although commercial loans
involve greater credit risk than other types of loans, management believes that
the greater income potential and positive effects on interest rate risk offset
this increased credit risk. Also, income opportunities are enhanced through
the generation of commercial loan origination fees and business deposit account
fee income. The Company intends to continue to expand its commercial lending
program.
From time to time the Company purchases from other entities participation
interests in loans and securities backed by loans to commercial businesses
which are fully guaranteed by the SBA. At December 31, 1996, the Company had
$25.1 million of such loans or securities, which represented 2% of the
Company's total loan portfolio.
LOAN ORIGINATION FEES. In addition to interest earned on loans, the
Company receives loan origination fees or "points" for originating loans. Loan
points are a percentage of the principal amount of the loan and are charged to
the borrower in connection with the origination of the loan.
In accordance with SFAS No. 91, which addresses the accounting for
non-refundable fees and costs associated with originating or acquiring loans,
the Company's loan origination fees and certain related direct loan origination
costs have been offset, and the resulting net amount has been deferred and
amortized as interest income over the contractual life of the related loans as
an adjustment to the yield of such loans. At December 31, 1996, the Company
had $2.9 million of loan fees related to loans receivable which had been
deferred and are being recognized as income over the estimated maturities of
the related loans using the level- yield method.
-11-
<PAGE> 13
LOAN SERVICING ACTIVITIES
ComNet, a qualified seller servicer for the FNMA and the FHLMC, services
residential real estate loans for others as well as the Company. Servicing
includes collecting and remitting loan payments, accounting for principal and
interest, holding escrow funds for the payment of real estate taxes and
insurance premiums, contacting delinquent borrowers, supervising foreclosures
in the event of unremedied defaults, and generally administering the loans.
When ComNet receives the gross loan payment from the individual mortgagees
of serviced loans, it remits to the owner of the loan a predetermined net
amount based on the yield on that loan. The difference between the coupon on
the underlying loan and the predetermined net amount paid to the owner of the
loan is the gross servicing fee. As the owner of servicing rights, ComNet
retains a net servicing fee which currently ranges from 0.25% to 0.375% of the
declining principal amount of the loans, plus any late charges.
At December 31, 1996, ComNet was servicing $1.3 billion of loans for
others, as well as $747.8 million of loans held by the Company for investment
and sale. The portfolio of loans serviced by ComNet at December 31, 1996
consisted of approximately 24,800 loans with an average loan balance of
approximately $84,200, a weighted-average service fee of approximately 0.34%
per annum (inclusive of excess servicing associated with loans serviced by
ComNet for others) and a weighted average remaining contractual term of
approximately 23.3 years.
The following table sets forth the loan servicing fees of the Company as a
percentage of net interest income for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1996 1995 1994
----------------- ---------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C>
Servicing fees $ 5,155 $ 5,531 $ 5,789
Net interest income 60,954 47,462 43,514
Servicing fees as a percentage of
net interest income 8.5% 11.7% 13.3%
</TABLE>
In recent years, ComNet has sought to expand its mortgage servicing
portfolio through the acquisition of Purchased Mortgage Servicing Rights
("PMSRs"). In 1990 and 1991, ComNet paid $19.1 million to acquire the
servicing rights related to $1.1 billion of loans. During 1994, ComNet began
purchasing whole loans through a wholesale lending network. In connection with
the purchase of these loans, a premium may be paid to the correspondent or
broker for the right to service such loans, which is recorded in PMSRs.
ComNet also has sought to expand its mortgage servicing portfolio by
increasing the amount of loans originated and sold by it on a
servicing-retained basis. ComNet generally retains the rights
-12-
<PAGE> 14
to service the conventional loans sold by it, and sells all FHA-insured and
VA-guaranteed loans on a servicing-released basis.
During the years ended December 31, 1996, 1995 and 1994, ComNet sold
$226.9 million, $86.1 million and, $175.0 million of loans originated on a
servicing-retained basis, respectively, and $39.1 million, $193.2 million, and
$73.2 million on a servicing-released basis, respectively. During 1996 and
1995, the percentage of loans sold on a servicing-released basis decreased as a
result of a decrease in loan originations of these products which ComNet
generally sells servicing-released.
On January 1, 1996, the Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights." The Company, through ComNet, acquires mortgage
servicing rights through the purchase and origination of mortgage loans which
are sold or securitized, generally with servicing retained. SFAS No. 122
requires the Company to allocate the total cost of the mortgage loans to the
mortgage servicing rights and to the loans (exclusive of the mortgage servicing
rights) based on their relative fair values. The Company is required to
periodically assess its capitalized mortgage servicing rights for impairment,
based upon the discounted cash flow of the rights disaggregated within their
predominant risk characteristics. Any impairment would be recognized through a
valuation allowance. Application of this pronouncement was required for
mortgage servicing rights acquired on loans sold or securitized commencing
January 1, 1996, without retroactive capitalization of mortgage servicing
rights retained in such transactions before adoption of the pronouncement. For
the year ended December 31, 1996, the Company recorded originated mortgage
servicing rights ("OMSRs") of $1.9 million, net of a $0.9 million valuation
allowance.
PMSRs, OMSRs, and capitalized excess servicing fees generally are
adversely affected by current and anticipated prepayments resulting from
decreasing interest rates.
As part of its responsibilities as a servicer of mortgage-backed
securities, ComNet is required to remit to investors the monthly principal
collected and scheduled interest payments on most loans, including those for
which no interest payments have been received due to delinquency. At December
31, 1996, the principal amount of loans serviced by ComNet for others that were
subject to this condition aggregated $1.1 billion, of which $25.9 million, or
2%, were more than 30 days delinquent. Substantially all of these loans were
sold without recourse and are guaranteed by the FNMA or the FHLMC.
Although the Company currently intends to continue to expand ComNet's loan
servicing portfolio primarily through the sale of conventional loans on a
servicing-retained basis, the Company may, depending on current mortgage
origination volumes and other factors, elect to sell a portion of
newly-originated loans on a servicing-released basis. Management also may
evaluate the acquisition of PMSRs.
-13-
<PAGE> 15
The following table presents information regarding the loans serviced by
ComNet for the Company and others at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1996 1995 1994
------------- -------------- --------------
(In Thousands)
<S> <C> <C> <C>
Mortgage loans underlying mortgage-
backed securities:
FNMA $ 714,472 $ 708,138 $ 684,456
FHLMC 340,928 346,765 364,242
Other investors 615 20,694 21,036
--------- --------- ---------
1,056,015 1,075,597 1,069,734
Mortgage loans serviced for others:
FNMA 102,387 103,184 107,535
Other investors 181,488 85,195 76,694
--------- --------- ---------
283,875 188,379 184,229
--------- --------- ---------
Total loans serviced for others 1,339,890 1,263,976 1,253,963
--------- --------- ---------
Mortgage loans serviced for the
Company:
Loans held for investment 724,207 560,404 431,384
Loans held for sale by ComNet 23,610 26,385 18,816
--------- --------- ---------
747,817 586,789 450,200
--------- --------- ---------
Total loans serviced (1) $2,087,707 $1,850,765 $1,704,163
========= ========= =========
</TABLE>
- --------------------
(1) PMSRs accounted for $205.9 million, $291.3 million, and $266.0 million of
total loans serviced at December 31, 1996, 1995, and 1994, respectively.
-14-
<PAGE> 16
The following table sets forth the coupon distribution of the loans
relating to ComNet's servicing rights at December 31, 1996.
<TABLE>
<CAPTION>
Coupon Principal Balance of Serviced Loans Relating to or for
- ----------------------- -----------------------------------------------------------------------------------
Capitalized Excess Servicing
PMSRs Fees, OMSRs and Other (1) The Company (2) Total
------------ --------------------------- -------------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
5.00% or less $ - $ 35 $ 25,771 $ 25,806
5.01 - 6.00% - 16,181 39,423 55,604
6.01 - 7.00% 3,887 244,934 114,435 363,256
7.01 - 8.00% 25,557 490,453 316,204 832,214
8.01 - 9.00% 33,756 286,219 222,598 542,573
9.01 - 10.00% 55,824 67,701 21,263 144,788
10.01 - 11.00% 68,700 23,059 4,747 96,506
11.01 - 12.00% 16,384 3,222 1,281 20,887
12.01 - 13.00% 825 767 952 2,544
13.01 or greater 972 1,414 1,143 3,529
------- --------- ------- ---------
$205,905 $1,133,985 $747,817 $2,087,707
======= ========= ======= =========
</TABLE>
- -------------------------------
(1) Includes approximately $297.3 million of loans serviced by ComNet for
others which relate neither to PMSRs, OMSRs, nor capitalized excess servicing
fees.
(2) Includes loans held for investment by the Company and loans held for sale
by ComNet.
-15-
<PAGE> 17
The following table sets forth the geographic locations of property
securing ComNet's portfolio of loans serviced for others and the Company at
December 31, 1996.
<TABLE>
<CAPTION>
Percentage of Total Principal
State Principal Balance Balance
- ----------------------- ---------------------------- ---------------------------------
(Dollars in Thousands)
<S> <C> <C>
Pennsylvania $1,113,341 53.33%
New Jersey 293,244 14.05
Virginia 129.741 6.21
Maryland 128.221 6.14
Connecticut 108,782 5.21
New York 58,857 2.82
Florida 51,860 2.48
Rhode Island 42,594 2.04
Delaware 29,701 1.42
Georgia 27,483 1.32
North Carolina 17,130 0.82
Alabama 10,255 0.49
Ohio 7,249 0.35
Illinois 7,026 0.34
District of Columbia 6,896 0.33
California 4,569 0.22
South Carolina 4,560 0.22
Other 46,198 2.21
--------- ------
$2,087,707 100.00%
========= ======
</TABLE>
-16-
<PAGE> 18
ASSET QUALITY
Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on non-accrual
status, previously accrued but unpaid interest is deducted from interest
income. As a matter of policy, the Company does not accrue interest on loans
past due 90 days or more.
Real estate acquired by the Company as a result of foreclosure or by
deed-in-lieu of foreclosure under generally accepted accounting principles
("GAAP") is classified as real estate owned until sold. Pursuant to a
statement of position ("SOP 92-3"), such assets are carried at the lower of
fair value less estimated costs to sell the property, or cost (generally the
balance of the loan on the property at the date of acquisition). After the
date of acquisition, all costs incurred in maintaining the property are
expensed and costs incurred for the improvement or development of such property
are capitalized to the extent of their net realizable value. The Company's
accounting for its real estate owned complies with the guidance set forth in
SOP 92-3.
DELINQUENT LOANS. The following table sets forth information relating to
the Company's delinquent loans held for investment and the relation to the
Company's total loans held for investment at the dates indicated.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1996 1995 1994
------------------- ----------------------- --------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
30 to 59 days $12,854 1.15% $ 5,013 0.62% $ 4,688 0.78%
60 to 89 days 7,980 0.71 2,132 0.26 1,432 0.24
90 days and over 8,058 0.72 6,193 0.77 4,352 0.73
------ ---- ------ ---- ------ ----
Total (1) $28,892 2.58% $13,338 1.65% $10,472 1.75%
====== ==== ====== ==== ====== ====
</TABLE>
- --------------------------
(1) Does not include delinquent commercial loans which are fully guaranteed as
to principal and interest by the SBA, which amounted to $0.3 million, $1.4
million, and $1.2 million at December 31, 1996, 1995, and 1994, respectively.
-17-
<PAGE> 19
NON-PERFORMING ASSETS. The following table sets forth information
relating to the Company's non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------ ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Single-family residential mortgage loans $5,240 $5,605 $4,137 $ 5,775 $ 7,092
Consumer loans 1,335 221 215 203 364
Commercial real estate loans 1,399 367 - - -
Business loans (1) 84 - - - -
------ ------ ------ -------- -------
Total non-performing loans 8,058 6,193 4,352 5,978 7,456
Real estate owned, net 1,090 752 1,927 4,424 5,412
Investment securities - 420(2) - 4,420(3) 4,420(3)
------ ------ ------ -------- ------
Total non-performing assets (1) $9,148 $7,365 $6,279 $ 14,822 $17,288
====== ====== ====== ======== =======
Non-performing loans to total loans held
for investment (1) 0.72% 0.77% 0.73% 1.17% 1.27%
====== ====== ====== ======== =======
Total non-performing assets to total
assets (1) 0.43% 0.51% 0.52% 1.26% 1.42%
====== ====== ====== ======== =======
</TABLE>
- ---------------------------
(1) Does not include non-performing commercial loans which are fully
guaranteed as to principal and interest by the SBA, which amounted to $1.1
million, $0, and $0 at December 31, 1996, 1995, and 1994, respectively.
(2) Consisted of a deposit (net of a $130,000 reserve) with a bankers' bank
which was in bankruptcy liquidation. The deposit was received by the Company
in 1996.
(3) Consisted of a $4.4 million non-performing investment in commercial paper
which was sold in 1994.
-18-
<PAGE> 20
At December 31, 1996, the Company's $5.2 million of non-performing
single-family residential loans consisted of 103 loans having an average
balance of $51,000.
Forgone interest income on nonaccruing loans was $0.6 million for each of
the years ended December 31, 1996, 1995 and 1994. The actual amount of
interest recorded as income on such loans during such periods amounted to $0.3
million, $0.3 million, and $0.4 million, respectively.
At December 31, 1996, the Company's real estate owned totaled $1.1
million, consisting of 23 single-family residential properties acquired through
foreclosure or by deed-in-lieu of foreclosure. At year-end 1995, real estate
owned totaled $0.8 million, consisting of ten single-family residential
properties acquired through foreclosure or by deed-in-lieu of foreclosure. At
December 31, 1994, real estate owned totaled $1.9 million, consisting of 29
single-family residential properties acquired through foreclosure or by
deed-in-lieu of foreclosure, and a 102 lot subdivision located in Bucks County,
Pennsylvania.
During 1996, the Company sold 11 single-family residential properties
which were held as real estate owned for a net loss of $0.1 million, and
acquired an additional 24 single-family residential properties through
foreclosure or deed-in-lieu thereof. During 1995, the Company sold 17
single-family residential properties which were held as real estate owned for a
net gain of $0.1 million, and acquired an additional eight single-family
residential properties through foreclosure or deed-in-lieu thereof. During
1994, the Company sold 18 single-family residential properties which were held
as real estate owned for a net loss of $0.1 million and acquired an additional
12 single-family residential properties through foreclosure or deed-in-lieu of
foreclosure.
CLASSIFIED ASSETS. Federal regulations require that each insured savings
association classify its assets on a regular basis. Furthermore, in connection
with examinations of insured institutions, federal examiners have authority to
identify problem assets and, if appropriate, classify them. There are three
classifications for problem assets: "substandard," "doubtful" and "loss."
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full questionable on the basis of currently
existing facts, conditions and values, and there is a high possibility of loss.
An asset classified loss is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted. Classifies
assets of the Company were essentially comprised of its nonperforming assets,
as discussed above.
A fourth category designated "special mention" also must be established
and maintained for assets which do not currently expose an insured institution
to a sufficient degree of risk to warrant classification as substandard,
doubtful or loss, but which represent potential future problem assets. At
December 31, 1996, the Company had $5.7 million of assets classified special
mention.
-19-
<PAGE> 21
ALLOWANCE FOR LOAN LOSSES. It is management's policy to maintain an
allowance for estimated losses on loans based upon an assessment of prior loss
experience, the volume and type of lending conducted by the Company, industry
standards, past due loans, general economic conditions and other factors
related to the collectibility of the loan portfolio. In management's opinion,
the allowance for loan losses is sufficient to absorb estimated losses in the
loan portfolio.
The following table sets forth the activity in the Company's allowance for
loan losses during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ------ ------ ------ ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of year $7,485 $7,307 $7,309 $ 6,935 $2,796
----- ----- ------ ------ -----
Provision:
Mortgage 119 449 118 590 3,234
Consumer 457 114 (200) 120 1,260
Commercial 25 15 250 - -
----- ----- ------ ------ -----
Total provision 601 578 168 710 4,494
Charge-offs:
Mortgage ( 189) ( 362) (103) (226) (63)
Consumer ( 478) ( 125) (191) (215) (438)
Commercial - - - - -
----- ----- ------ ------ -----
Total charge-offs ( 667) ( 487) (294) (441) (501)
Recoveries:
Mortgage 133 68 39 19 51
Consumer 29 19 85 86 95
Commercial 18 - - - -
----- ----- ------ ------ -----
Total recoveries 180 87 124 105 146
Allowance Acquired in Meridian
Branch Acquisition 2,372 - - - -
----- ----- ------ ------ -----
Allowance at end of year $9,971 $7,485 $7,307 $ 7,309 $6,935
===== ===== ===== ====== =====
Allowance for loan losses to
total non-performing loans
at end of year 123.74% 120.86% 167.90% 122.26% 93.01%
====== ======= ====== ====== =====
Allowance for loan losses to
total loans held for
investment at end
of year 0.89% 0.93% 1.22% 1.42% 1.18%
==== ==== ==== ===== =====
</TABLE>
-20-
<PAGE> 22
The following table shows the Company's total allowance for loan losses
and the allocation to the various categories of loans held for investment at
the dates indicated.
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------------------------------------
1996 1995 1994 1993
------------------------- -------------------- --------------------- ----------------------
Percent of Percent of Percent of Percent of
Loans by Loans by Loans by Loans by
Amount Category(1) Amount Category(1) Amount Category(1) Amount Category(1)
------ -------- ------ ----------- ------ ------------ ------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Breakdown of allowance:
Mortgage loans $5,339 0.63% $5,228 0.80% $5,074 1.27% $5,020 1.36%
Consumer loans 2,505 1.48 1,992 1.79 1,983 1.90 2,289 2.33
Commercial loans 2,127 3.00 265 2.18 250 3.94 - -
SBA loans - - - - - - - -
----- ---- ----- ---- ----- ---- ----- ----
Total allowance for
loan losses $9,971 5.11% $7,485 4.77% $7,307 7.11% $7,309 3.69%
====== ===== ====== ===== ====== ==== ====== ====
<CAPTION>
December 31
---------------------
1992
---------------------
Percentof
Loans by
Amount Category (1)
------ -----------
(Dollars in Thousands)
<S> <C> <C>
Breakdown of allowance:
Mortgage loans $4,638 1.06%
Consumer loans 2,297 2.43
Commercial loans - -
SBA loans - -
------ ----
Total allowance for
loan losses $6,935 3.49%
= ===== ====
</TABLE>
- -------------------
(1) Total loans exclude loans held for sale.
-21-
<PAGE> 23
INVESTMENT ACTIVITIES
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities (which are also
known as mortgage participation certificates or pass-through certificates)
represent a participation interest in a pool of single-family or multi-family
mortgages, the principal and interest payments on which are passed from the
mortgage originators, through intermediaries (generally U.S. Government
agencies and U.S. Government sponsored enterprises) that pool and repackage the
participation interests in the form of securities, to investors such as the
Company. Such U.S. Government agencies and U.S. Government sponsored
enterprises, which guarantee the payment of principal and interest to
investors, primarily include the Government National Mortgage Association
("GNMA"), the FHLMC, and the FNMA.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," as
of January 1, 1994. In accordance with this Statement, the Company segregated
its mortgage-backed and investment securities into two categories, those held
to maturity and those available for sale. Held-to-maturity securities are
recorded at amortized cost. Available-for sale securities are recorded at fair
value, with unrealized gains and losses, net of related tax effects, excluded
from earnings and reported as a separate component of shareholders' equity.
The effect of the adoption was to increase shareholders' equity by $7.3 million
at January 1, 1994.
At December 31, 1996, the Company's $752.7 million of mortgage-backed
securities, representing 36% of the Company's $2.1 billion of total assets,
were comprised of $237.7 million and $515.0 million of held-to-maturity and
available-for-sale mortgage-backed securities, respectively. Included in the
Company's $752.7 million of mortgage-backed securities at December 31, 1996
were $458.0 million of mortgage-backed securities, which were issued and
guaranteed by the FHLMC, the FNMA or the GNMA, and $288.3 million of CMOs.
With respect to the CMOs, $53.8 million were guaranteed by the FNMA and FHLMC,
and $234.5 million were rated AAA by national rating agencies. At December 31,
1996, $619.7 million, or 82%, of the Company's mortgage-backed securities
portfolio had fixed rates of interest, and $133.0 million, or 18%, had
adjustable rates of interest.
Mortgage-backed securities generally increase the quality of the Company's
assets by virtue of the related insurance or guarantees, are more liquid than
individual mortgage loans and may be used to collateralize borrowings or other
obligations of the Company. At December 31, 1996, $206.1 million, or 27%, of
the Company's mortgage-backed securities were pledged to secure various
obligations of the Company.
-22-
<PAGE> 24
The following table sets forth the activity in the Company's aggregate
mortgage-backed securities portfolio during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1996 1995 1994
----------- ------ -----
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities at beginning of year $463,353 $430,119 $386,747
Purchases 412,676 85,472 189,751
Sales - - (14,598)
Repayments and prepayments (122,895) (64,887) (122,690)
Unrealized (losses) or gains on available-for-sale
mortgage-backed securities (427) 12,649 (9,091)
-------- ------- --------
Mortgage-backed securities at end of year (1) $752,707 $463,353 $430,119
======= ======= =======
</TABLE>
- -----------------------------
(1) At December 31, 1996, the amortized cost and market value of the Company's
total mortgage-backed securities (including held-to-maturity and
available-for-sale mortgage-backed securities) amounted to $749.6 million and
$754.4 million, respectively.
At December 31, 1996, the contractual maturity of substantially all of the
Company's mortgage-backed securities was in excess of ten years. The actual
maturity of a mortgage-backed security is less than its stated maturity due to
prepayments of the underlying mortgages. Prepayments also affect the yield to
maturity. The yield on the security is based upon the interest income and the
amortization of any premium or discount related to the mortgage-backed
security. In accordance with generally accepted accounting principles,
premiums and discounts are amortized over the estimated lives of the loans,
which decrease and increase interest income, respectively. The prepayment
assumptions used to determine the amortization period for premiums and
discounts can significantly affect the yield of the mortgage-backed security,
and these assumptions are reviewed periodically to reflect actual prepayments.
Although prepayments of underlying mortgages depend on many factors, including
the type of mortgages, the coupon rate, the age of mortgages, the geographical
location of the underlying real estate collateralizing the mortgages, and
general levels of market interest rates, the difference between the interest
rates on the underlying mortgages and the prevailing mortgage interest rates,
generally, is the most significant determinant of the rate of prepayments.
During periods of falling mortgage interest rates, if the coupon rate of the
underlying mortgages exceeds the prevailing market interest rates offered for
mortgage loans, refinancing generally increases and accelerates the prepayment
of the underlying mortgages and the related security. Under such
circumstances, the Company may be subject to reinvestment risk because to the
extent that the Company's mortgage-backed securities amortize or prepay faster
than anticipated, the Company may not be able to reinvest the proceeds of such
repayments and prepayments at a comparable rate.
-23-
<PAGE> 25
INVESTMENT SECURITIES. The Company has the authority to invest in various
types of liquid assets, including United States Treasury obligations,
securities of various federal agencies and state and municipal governments,
certificates of deposit at federally-insured banks and savings and loan
associations, certain bankers' acceptances and federal funds. Subject to
various restrictions, federally-chartered savings institutions may also invest
a portion of their assets in commercial paper, corporate debt securities and
mutual funds, the assets of which conform to the investments that
federally-chartered savings institutions are otherwise authorized to make
directly.
The following table sets forth information regarding the carrying and
market value of the Company's investment securities at the dates indicated.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------
1996 1995 1994
------------------------ --------------------- -------------------
Carry Market Carry Market Carry Market
Value Value Value Value Value Value
----- ----- ----- ----- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Held to maturity:
U.S. Government and
federal agency
obligations $ - $ - $ - $ - $15,000 $14,484
------- ------- ------- ------- ------- -------
Total Held to
Maturity (1) - - - - 15,000 14,484
------- ------- ------- ------- ------- -------
Available for sale (at
market):
U.S. Government and
federal agency
obligations 47,963 48,089 38,789 39,263 58,858 58,152
Corporate and bank
notes receivable - - 5,498 5,483 5,492 5,260
Mortgage Security
Mutual Fund 2,215 2,209 2,077 2,150 - -
Equity Servicing
Partnerships 2,880 2,880 - - - -
Other Equity Investment 757 757 - - - -
------- ------- ------- ------- ------- -------
Total Available for Sale 53,815 53,935 46,364 46,896 64,350 63,412
------- ------- ------ ------- ------- -------
Total $53,815 $53,935 $46,364 $46,896 $79,350 $77,896
======= ======= ======= ======= ======= =======
</TABLE>
- ----------
(1) During 1995, a $15.0 million principal amount investment security was
called by the issuer.
-24-
<PAGE> 26
The following table sets forth certain information regarding the
maturities of the Company's investment securities (all of which were classified
as available for sale) at December 31, 1996.
<TABLE>
<CAPTION>
Contractually Maturing
----------------------------------------------------------------------------------------------
Weighted Weighted Weighted Over Weighted
Under 1 Average 1-5 Average 6-10 Average 10 Average
Year Yield Years Yield Years Yield Years Yield
---- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
federal agency
obligations $28,046 6.07% $10,020 5.98% $10,024 7.13% $ - - %
Mortgage Security
Mutual Fund - - 2,209 6.52 - - - -
Equity Servicing
Partnerships - - 2,880 N/A - - - -
Other Equity
Investment - - 756 N/A - - - -
------- ------- ------- -------
$28,046 6.07% $15,865 6.08% $10,024 7.13% $ - - %
======= ======= ======= =======
</TABLE>
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Company's funds for
lending and other investment purposes. In addition to deposits, the Company
derives funds from loan principal repayments and prepayments, advances from the
FHLB of Pittsburgh, and securities sold under agreements to repurchase. Loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows are influenced by general interest rates and money market conditions.
Borrowings may be used on a short-term basis to compensate for reductions in
the availability of funds from other sources. They may also be used on a
longer term basis for general business purposes.
DEPOSITS. The Company's deposit products include a broad selection of
deposit instruments, including NOW accounts, money market accounts,
non-interest-bearing checking accounts, passbook savings accounts, and term
certificate accounts. Deposit account terms vary, with the principal
differences being the minimum balance required, the length of time the funds
must remain on deposit and the interest rate.
The Company's deposits are obtained primarily from residents and businesses
located in southeast Pennsylvania. Management of the Company estimates that a
deminimus portion of the Company's deposits are obtained from outside southeast
Pennsylvania. The Company does not pay fees to brokers to solicit funds for
deposit with the Company, nor does it actively solicit negotiable-rate
certificates of deposit with balances of $100,000 or more.
The Company attracts deposits through a network of convenient branch office
locations by offering a wide variety of accounts and services, competitive
interest rates, and extended customer hours. At December 31, 1996, the branch
offices of the Company consisted of 39 traditional full-service offices and 14
full-service offices located in supermarkets. The Company opened its first
supermarket branch in 1994, nine supermarket branches in 1995, and four in
1996. Currently, the
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<PAGE> 27
Company intends to open up to an additional five branch offices in supermarkets
in its market area in 1997.
In addition to the Company's extensive branch network, the Company
currently maintains 48 automated teller machine ("ATM") locations, and plans to
install approximately 10 additional ATMs by the end of 1997. The Company also
maintains a 24 hour telephone banking service known as COM-LINE.
Deposit account terms offered by the Company vary according to the minimum
balance required, the length of time the funds must remain on deposit, and the
interest rate, among other factors. In determining the characteristics of its
deposit accounts, consideration is given to the impact on the profitability of
the Company, matching terms of the deposits with loan products, the
attractiveness to customers, and the rates offered by the Company's
competitors.
The Company's focus on customer service and convenience has facilitated its
acquisition of lower-cost demand deposits and passbook savings accounts, which
generally have rates which are substantially less than certificates of deposit.
At December 31, 1996, total demand deposits and passbook savings deposits
amounted to 34% and 17% of the Company's total deposits, respectively. During
1996, the weighted average rate paid on the Company's demand deposits and
passbook savings deposits amounted to 2.58% and 2.11%, respectively, as
compared to a weighted average rate paid of 5.27% on the Company's certificates
of deposit during this same period.
The following table sets forth certain information relating to the
Company's deposits at the dates indicated.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- -----------------------
Percent Percent Percent
of Total of Total of Total
Amount Deposits Amount Deposits Amount Deposits
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW accounts $171,567 11.50% $109,756 10.20% $99,766 11.68%
Money market accounts 278,527 18.68 264,239 24.54 257,079 30.12
Non-interest-bearing
deposit accounts 60,957(1) 4.09 44,651 4.15 38,204 4.48
----------- ------ ---------- ------ -------- ------
Total demand deposits 511,051 34.27 418,646 38.89 395,049 46.28
---------- ------ ---------- ------ -------- ------
Passbook savings
deposits 260,089 17.44 144,163 13.39 132,372 15.51
Certificate of deposit
accounts:
6 months or less 304,674 20.43 237,460 22.05 150,281 17.61
7-12 months 175,425 11.76 82,637 7.68 44,974 5.27
13-36 months 199,292 13.36 141,589 13.15 83,780 9.82
More than 36 months 40,919 2.74 52,054 4.84 47,063 5.51
---------- ------ ---------- ------ -------- ------
Total certificates 720,310 48.29 513,740 47.72 326,098 38.21
---------- ------ ---------- ------ -------- ------
Total deposits $1,491,450 100.00% $1,076,549 100.00% $853,519 100.00%
========== ====== ========== ====== ======== ======
</TABLE>
- ---------------------
(1) Includes $30.4 million of business checking accounts.
-26-
<PAGE> 28
The following table sets forth the activity in the Company's deposits during
the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1996 1995 1994
-------------- ----------------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C>
Beginning balance $1,076,549 $ 853,519 $882,222
Net increase (decrease)
before interest 371,952(2) 191,808(1) (50,233)
Interest credited 42,949 31,222 21,530
--------- --------- --------
Net increase (decrease)
in deposits 414,901 223,030 (28,703)
--------- --------- --------
Ending balance $1,491,450 $1,076,549 $853,519
========= ========= =======
</TABLE>
- ---------------------
(1) Includes $197.4 million of deposits assumed in connection with the
acquisition of four branch offices of Fidelity Federal in July 1995.
(2) Includes $379.7 million of deposits assumed in connection with the
acquisition of twelve branch offices of Meridian Bank in June 1996.
The following table sets forth by various interest rate categories the
certificates of deposit with the Bank at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1996 1995 1994
---------------- -------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C>
0.00% to 2.99% $ 3,132 $ 796 $ 57,780
3.00% to 3.99% 79,101 69,108 96,077
4.00% to 4.99% 165,704 96,900 57,211
5.00% to 6.99% 465,258 336,762 100,539
7.00% to 8.99% 6,833 10,059 13,190
9.00% to 10.99% 282 115 980
11.00% and over - - 321
------- ------- -------
Total $720,310 $513,740 $326,098
======= ======= =======
</TABLE>
-27-
<PAGE> 29
The following table sets forth the amount and remaining maturities of the
Company's certificates of deposit at December 31, 1996.
<TABLE>
<CAPTION>
Over Six Months Over One Over Two Years
Six Months Through One Year Through Through Three Over Three
and Less Year Two Years Years Years
-------------- --------------- ------------- --------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
0.00% to 1.99% $ 3,095 $ - $ - $ - $ -
2.00% to 2.99% 37 - - - -
3.00% to 3.99% 74,068 4,861 157 15 -
4.00% to 4.99% 90,904 43,472 16,433 9,689 5,206
5.00% to 6.99% 136,145 124,117 141,588 29,651 33,757
7.00% to 8.99% 211 2,975 584 1,170 1,893
9.00% to 10.99% 214 - - 5 63
11.00% & over - - - - -
------- ------- ------- ------ ------
Total $304,674 $175,425 $158,762 $40,530 $40,919
======= ======= ======= ====== ======
</TABLE>
At December 31, 1996, the Company had $68.3 million of certificates of
deposit in amounts equal to or greater than $100,000, of which $40.1 million
was scheduled to mature within six months, $13.2 million was scheduled to
mature in over six months through 12 months, and $15.0 million was scheduled to
mature in a time period greater than 12 months.
BORROWINGS. The Company may obtain advances from the FHLB of Pittsburgh by
pledging the common stock it owns in the FHLB and by pledging certain of its
residential mortgage loans, provided certain standards related to
creditworthiness have been met. Such advances are made pursuant to several
credit programs, each of which has its own interest rate and range of
maturities. Such advances are generally available to meet seasonal and other
withdrawals of deposit accounts and to permit increased lending. At December
31, 1996, the Company had $175.0 million of advances from the FHLB of
Pittsburgh.
From time to time the Company enters into agreements to sell securities
under terms which require it to repurchase the same securities by a specified
date. Repurchase agreements are considered borrowings which are secured by the
sold securities. At December 31, 1996, the Company had $176.7 million of
repurchase agreements outstanding.
-28-
<PAGE> 30
The following table sets forth the amount and weighted average rate of the
Company's borrowings at the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1996 1995 1994
-------------------- ----------------------- ------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
FHLB advances $175,000 5.48% $120,614 6.05% $ 61,214 5.92%
Repurchase
agreements(1) 176,674 5.47 81,112 6.65 145,398 6.09
Other borrowings - - 1,554 8.75 2,072 8.50
-------- -------- --------
Total Borrowings $351,674 5.48% $203,280 6.31% $208,684 6.06%
======== ======== ========
- -------------
</TABLE>
(1) Does not include interest expense associated with interest rate swaps
and interest rate caps.
The following table sets forth certain information relating to the Company's
borrowings at the dates and for the periods indicated.
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
---------------------------------------------------------------
1996 1995 1994
------------------- ------------------ ------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
FHLB advances:
Maximum balance $202,500 $121,114 $ 84,914
Average balance $138,917 $ 77,249 $ 76,094
Weighted average rate:
at end of period 5.48% 6.05% 5.92%
during the period 5.62% 6.05% 5.86%
Repurchase agreements:
Maximum balance $176,674 $210,324 $167,147
Average balance $154,523 $143,313 $119,528
Weighted average rate (1):
at end of period 5.47% 6.65% 6.09%
during the period 5.91% 6.35% 4.52%
</TABLE>
- -----------------------------
(1) Does not include interest expense associated with interest rate swaps
and interest rate caps.
-29-
<PAGE> 31
EMPLOYEES
The Company had 524 full-time employees and 312 part-time employees at
December 31, 1996. None of these employees are represented by a collective
bargaining agent.
SUBSIDIARIES
A brief description of the activities of the Company's active subsidiaries
is set forth below.
COMMONWEALTH BANK. The Bank is a Federally chartered stock savings bank
which conducts business from its executive offices in Norristown, Pennsylvania
and, as of December 31, 1996, 53 full-service offices, including 14 supermarket
branch offices, located in southeast Pennsylvania. Prior to February, 1997,
the Bank's executive offices were located in Malvern, Pennsylvania. ComNet
Mortgage Services ("ComNet"), a division of the Bank, also currently located in
Norristown, conducted business at December 31, 1996 through seven loan
origination offices located in Pennsylvania, Connecticut, New Jersey, and Rhode
Island. ComNet also conducts business through its wholesale network, which
includes correspondents in 29 states. During January 1997, Commonwealth Bank,
through ComNet, acquired selected assets of Homestead Mortgage Inc., a mortgage
company headquartered in Millersville, Maryland. Among the assets acquired by
ComNet were five loan origination offices located in Millersville, Bethesda,
Whitemarsh, and Woodlawn, Maryland, and Media, Pennsylvania.
COMMONWEALTH INVESTMENT CORPORATION. At December 31, 1996, $27.0 million,
or 4%, of the Company's mortgage-backed securities were held by Commonwealth
Investment Corporation, a wholly-owned subsidiary of the Company which was
incorporated under the laws of Delaware in 1996.
CFSL INVESTMENT CORPORATION. At December 31, 1996, $82.9 million, or 11%,
of the Company's mortgage-backed securities were held by CFSL Investment
Corporation, a wholly-owned subsidiary of the Bank which was incorporated under
the laws of Delaware in 1987.
QME, INC. The activities of QME, Inc. ("QME") consisted of the ownership
and development of a 102 lot subdivision located in Bucks County, Pennsylvania,
which was acquired by the Bank in connection with the acquisition of another
savings association. The property was developed through the construction of
single-family units. The development was scheduled to occur in three phases,
the first two of which were financed by QME. QME entered into agreements with
a builder of the project which covered the sale of the 102 units to be built
and three model units built by a prior builder. As of December 31, 1996, all
of the units had been sold and closed. The third phase is currently not being
developed.
FIRSTCOR, LTD. The activities of Firstcor, Ltd. ("Firstcor") consist
primarily of investing in limited partnerships which have been formed for the
purpose of investing in real estate for low income families, elderly housing
projects, and/or the preservation or restoration of historically or
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<PAGE> 32
architecturally significant buildings or structures. At December 31, 1996,
Firstcor had four investments in such partnerships which had an aggregate
carrying value of $0.8 million. The investments held by these partnerships are
all located in southeast Pennsylvania. In addition, Firstcor, through an
independent brokerage, makes available investments in annuities and mutual
funds to customers of the Company.
COMPETITION
The Company faces strong competition in attracting deposits and making
loans. Its most direct competition for deposits has historically come from
other savings associations, credit unions and commercial banks located in
eastern Pennsylvania, including many large financial institutions which have
greater financial and marketing resources available to them. In addition, the
Company faces additional significant competition for investors' funds from
short-term money market securities, mutual funds and other corporate and
government securities. The ability of the Company to attract and retain
savings deposits depends on its ability to generally provide a rate of return,
liquidity, and risk comparable to that offered by competing investment
opportunities.
The Company experiences strong competition for loans principally from other
savings associations, commercial banks and mortgage banking companies. The
Company competes for loans principally through the interest rates and loan fees
it charges, and through the efficiency and quality of services it provides
borrowers. Competition may increase as a result of the continuing reduction of
restrictions on the interstate operations of financial institutions.
-31-
<PAGE> 33
TAXATION
FEDERAL. The Company is subject to federal income taxation in the same
general manner as other corporations. The following discussion of federal
taxation is intended only to summarize certain pertinent federal income tax
matters and is not a comprehensive description of the tax rules applicable to
the Company. The Company's federal income tax returns have been audited or
closed without audit by the Internal Revenue Service through 1992.
METHOD OF ACCOUNTING. For federal income tax purposes, the Company
currently reports its income and expenses on the accrual method of accounting
and uses a tax year ending December 31 for filing its federal income tax
returns.
DISTRIBUTIONS. If the Bank distributes cash or property to its
shareholders, and the distribution is treated as being from its accumulated bad
debt reserves, the distribution will cause the Company to have additional
taxable income. A distribution to shareholders is deemed to have been made
from accumulated bad debt reserves to the extent that the distribution is a
"non-dividend distribution." A distribution in respect of stock is a
non-dividend distribution to the extent that, for federal income tax purposes,
(i) it is in redemption of shares, (ii) it is pursuant to a liquidation of the
institution, or (iii) in the case of a current distribution, together with all
other such distributions during the taxable year, it exceeds the Company's
current and post-1951 accumulated earnings and profits. The amount of
additional taxable income created by a non-dividend distribution is an amount
that when reduced by the tax attributable to it is equal to the amount of the
distribution.
MINIMUM TAX. The Code imposes an alternative minimum tax at a rate of 20%
of regular taxable income plus certain tax preferences ("alternative minimum
taxable income" or "AMTI"). The alternative minimum tax is payable to the
extent such AMTI is in excess of an exemption amount. Items of tax preference
that constitute AMTI include (a) tax exempt interest on newly-issued
(generally, issued on or after August 8, 1986) private activity bonds other
than certain qualified bonds and (b) for taxable years beginning after 1989,
75% of the excess (if any) of (i) adjusted current earnings as defined in the
Code, over (ii) AMTI (determined without regard to this preference and prior to
reduction by net operating losses). Net operating losses ("NOLs") can offset no
more than 90% of AMTI. Certain payments of alternative minimum tax may be used
as credits against regular tax liabilities in future years. The Company has
not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.
Legislation adopted in August 1996 (i) repealed the provision of the Code
which authorizes use of the percentage method by qualifying savings
institutions to determine deductions for bad debts, effective for taxable years
beginning after 1995, and (ii) required that a savings institution recapture
for tax purposes (i.e. take into income) over a six-year period its applicable
excess reserves, which for a thrift institution such as the Bank generally is
the excess of the balance of its bad debt reserves as of the close of its last
taxable year beginning before January 1,1996 over the balance of such reserves
as of the close of its last taxable year beginning before January 1, 1988,
which recapture would be suspended for any tax year that begins after December
31, 1995
-32-
<PAGE> 34
and before January 1, 1998 (thus a maximum of two years) in which a savings
institution originates an amount of residential loans which is not less than
the average of the principal amount of such loans made by a savings institution
during its six most recent taxable years beginning before January 1, 1996.
These provisions did not have a material adverse effect on the Company's
financial condition or operations.
NET OPERATING LOSS CARRYOVERS. A financial institution may carry back net
operating losses to the preceding three taxable years and forward to the
succeeding 15 taxable years. This provision applies to losses incurred in
taxable years beginning after 1986. At December 31, 1996, the Company had no
net operating loss carryforwards for federal income tax purposes.
CAPITAL GAINS AND CORPORATE DIVIDENDS-RECEIVED DEDUCTION. The capital gains
income tax, which was previously imposed at a rate of 28% of net long-term
capital gains, was repealed effective December 31, 1986. From that time until
January 1, 1993, corporate net capital gains were taxed at a maximum rate of
34%. The Omnibus Budget Reconciliation Act of 1993 increased the maximum
corporate capital gains rate to 35% effective January 1, 1993. The corporate
dividends-received deduction is 80% in the case of dividends received from
corporations with which a corporate recipient does not file a consolidated tax
return. Corporations which own less than 20% of the stock of a corporation
distributing a dividend may deduct only 70% of dividends received or accrued on
their behalf. However, a corporation may deduct 100% of dividends from a
member of the same affiliated group of corporations.
STATE. The Company is subject to the Pennsylvania corporate net income tax,
which imposes a tax at the rate of 9.99% based on federal taxable income. The
Company is also subject to the Pennsylvania capital stock tax based on the
deemed value of its capital at the rate of 0.01275%.
The Bank is subject to tax under the Pennsylvania Mutual Thrift Institutions
Tax Act, which imposes a tax at the rate of 11.5% of the Bank's net earnings,
determined in accordance with GAAP. For fiscal years beginning in 1983, and
thereafter, NOLs may be carried forward and allowed as a deduction for three
succeeding years. This Act exempts the Bank from all other corporate taxes
imposed by Pennsylvania for state tax purposes, and from all local taxes
imposed by political subdivisions thereof, except taxes on real estate and real
estate transfers. At December 31, 1996, the Company had net loss carryforwards
for state tax purposes totaling $10.8 million, which expire beginning in 1997.
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<PAGE> 35
REGULATION
Set forth below is a brief description of those laws and regulations which
are deemed material to an understanding of the extent to which the Company and
the Bank are regulated. The description of the laws and regulations hereunder
does not purport to be complete and is qualified in its entirety by reference
to applicable laws and regulations.
THE COMPANY
GENERAL. The Company is a registered savings and loan holding company under
the Home Owners' Loan Act ("HOLA") and is subject to OTS regulations,
examinations, supervision, and reporting requirements. As a subsidiary of a
savings and loan holding company, the Bank is subject to certain restrictions
in its dealings with the Company and affiliates thereof.
ACTIVITIES RESTRICTIONS. There are generally no restrictions on the
activities of a savings and loan holding company which holds only one
subsidiary savings institution. However, if the Director of the OTS determines
that there is reasonable cause to believe that the continuation by a savings
and loan holding company of an activity constitutes a serious risk to the
financial safety, soundness or stability of its subsidiary savings institution,
the Director may impose such restrictions as deemed necessary to address such
risk, including limiting (i) payment of dividends by the savings institution;
(ii) transactions between the savings institution and its affiliates; and (iii)
any activities of the savings institution that might create a serious risk that
the liabilities of the holding company and its affiliates may be imposed on the
savings institution. Notwithstanding the above rules as to permissible
business activities of unitary savings and loan holding companies, if the
savings institution subsidiary of such a holding company fails to meet a
qualified thrift lender ("QTL") test, then such unitary holding company also
shall become subject to the activities restrictions applicable to multiple
savings and loan holding companies and, unless the savings institution
requalifies as a QTL within one year thereafter, shall register as, and become
subject to the restrictions applicable to, a bank holding company.
If the Company were to acquire control of another savings institution, other
than through merger or other business combination with the Bank, the Company
would thereupon become a multiple savings and loan holding company. Except
where such acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings institution meets the QTL test,
as set forth below, the activities of the Company and any of its subsidiaries
(other than the Bank or other subsidiary savings institutions) would thereafter
be subject to further restrictions. Among other things, no multiple savings
and loan holding company or subsidiary thereof which is not a savings
institution shall commence or continue for a limited period of time after
becoming a multiple savings and loan holding company or subsidiary thereof any
business activity, upon prior notice to, and no objection by the OTS, other
than: (i) furnishing or performing management services for a subsidiary savings
institution; (ii) conducting an insurance agency or escrow business; (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings institution; (iv) holding or managing properties used or occupied by a
-34-
<PAGE> 36
subsidiary savings institution; (v) acting as trustee under deeds of trust;
(vi) those activities authorized by regulation as of March 5, 1987 to be
engaged in by multiple savings and loan holding companies; or (vii) unless the
Director of the OTS by regulation prohibits or limits such activities for
savings and loan holding companies, those activities authorized by the Federal
Reserve Board as permissible for bank holding companies. Those activities
described in (vii) above also must be approved by the Director of the OTS prior
to being engaged in by a multiple savings and loan holding company.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings institution is any company or
entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company
of a savings institution (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B,
no savings institution may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for
affiliates which are subsidiaries of the savings institution.
In addition, Sections 22(h) and (g) of the Federal Reserve Act places
restrictions on loans to executive officers, directors, and principal
stockholders. Under Section 22(h), loans to a director, an executive officer
and to a greater than 10% stockholder of a savings institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the institution's
loans to one borrower limit (generally equal to 15% of the institution's
unimpaired capital and surplus). Section 22(h) also requires that loans to
directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons
and also requires prior board approval for certain loans. In addition, the
aggregate amount of extensions of credit by a savings institution to all
insiders cannot exceed the institution's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers. At December 31, 1996, the Bank was in compliance with the above
restrictions.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior
approval of the Director of the OTS, (i) control of any other savings
institution or savings and loan holding company or
-35-
<PAGE> 37
substantially all the assets thereof or (ii) more than 5% of the voting shares
of a savings institution or holding company thereof which is not a subsidiary.
Except with the prior approval of the Director of the OTS, no director or
officer of a savings and loan holding company or person owning or controlling
by proxy or otherwise more than 25% of such company's stock, may acquire
control of any savings institution, other than a subsidiary savings
institution, or of any other savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home
or branch office located in the state of the institution to be acquired as of
March 5, 1987; (ii) the acquiror is authorized to acquire control of the
savings institution pursuant to the emergency acquisition provisions of the
Federal Deposit Insurance Act ("FDIA"); or (iii) the statutes of the state in
which the institution to be acquired is located specifically permit
institutions to be acquired by the state-chartered institutions or savings and
loan holding companies located in the state where the acquiring entity is
located (or by a holding company that controls such state-chartered savings
institutions).
FIRREA amended provisions of the Bank Holding Company Act of 1956 to
specifically authorize the Federal Reserve Board to approve an application by a
bank holding company to acquire control of a savings institution. FIRREA also
authorized a bank holding company that controls a savings institution to merge
or consolidate the assets and liabilities of the savings institution with, or
transfer assets and liabilities to, any subsidiary bank which is a member of
the BIF with the approval of the appropriate federal banking agency and the
Federal Reserve Board. As a result of these provisions, there have been a
number of acquisitions of savings institutions by bank holding companies in
recent years.
FEDERAL SECURITIES LAWS. The Company's common stock is registered with the
SEC under Section 12(g) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Company is subject to the information, proxy
solicitation, insider trading restrictions, and other requirements under the
Exchange Act.
THE BANK
GENERAL. The OTS has extensive authority over the operations of Federally
chartered savings institutions. As part of this authority, savings
institutions are required to file periodic reports with the OTS and are subject
to periodic examinations by the OTS and the Federal Deposit Insurance
Corporation ("FDIC"). The investment and lending authority of savings
institutions are prescribed by federal laws and regulations, and such
institutions are prohibited from engaging in any activities not permitted by
such laws and regulations. Those laws and regulations generally are applicable
to all Federally chartered savings institutions and may also apply to
state-chartered savings institutions. Such regulation and supervision is
primarily intended for the protection of depositors.
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The OTS' enforcement authority over all savings institutions was
substantially enhanced by FIRREA. This enforcement authority includes, among
other things, the ability to assess civil money penalties, to issue cease and
desist or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated for violations of laws and regulations and
unsafe or unsound practices. Other actions or inactions may provide the basis
for enforcement action, including misleading or untimely reports filed with the
OTS. FIRREA significantly increased the amount of, and grounds for, civil
money penalties.
On December 19, 1991, the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") was enacted into law. The FDICIA provides for, among
other things, the recapitalization of the BIF; the authorization of the FDIC to
make emergency special assessments under certain circumstances against Bank
Insurance Fund ("BIF") and Savings Association Insurance Fund ("SAIF") members;
the establishment of risk-based deposit insurance premiums; and improved
examinations and reporting requirements. The FDICIA also provides for enhanced
federal supervision of depository institutions based on, among other things, an
institution's capital level. See " Prompt Corrective Action."
INSURANCE OF ACCOUNTS. The deposits of the Bank are insured to the maximum
extent permitted by either the SAIF or the BIF, both of which are administered
by the FDIC, and are backed by the full faith and credit of the U.S.
Government. As insurer, the FDIC is authorized to conduct examinations of, and
to require reporting by, FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious threat to the FDIC. The FDIC also has
the authority to initiate enforcement actions against savings institutions,
after giving the OTS an opportunity to take such action.
The SAIF and BIF are required by law to attain and maintain a reserve ratio
of 1.25% of insured deposits. As a result of the BIF achieving fully funded
status, the FDIC promulgated a regulation in November 1995, which reduced
deposit premiums paid by BIF-insured banks in the lowest risk category from 27
basis points to zero (subject to an annual minimum of $2,000).
On September 30, 1996, legislation was enacted into law to recapitalize the
SAIF through a one-time special assessment on SAIF-insured deposits as of March
31, 1995. The special assessment amounted to approximately $0.65 for every
$100 of assessable deposits. The Bank's assessment amounted to $6.8 million
($4.5 million, net of income tax benefit). As a result of the special
assessment, the Bank's deposit insurance premiums decreased from the previous
rate of $0.23 per $100 of deposits to approximately $0.08 per $100 of deposits.
Under current FDIC regulations, institutions are assigned to one of three
capital groups based solely on the level of an institution's capital--"well
capitalized," "adequately capitalized," and "undercapitalized." The three
groups are defined in the same manner as per the regulations establishing the
prompt corrective action system under Section 38 of the FDIA, as discussed
below. These three groups are then divided into three subgroups which reflect
varying levels of supervisory concern, from those which are considered to be
healthy to those which are considered to be of
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substantial supervisory concern. The matrix so created results in nine
assessment risk classifications, with deposit insurance rates ranging from 0%
for well capitalized, healthy institutions to 0.27% for undercapitalized
institutions with substantial supervisory concerns.
Beginning January 1, 1997, Financing Corporation ("FICO") assessments of 6.5
and 1.3 basis points were added to the regular assessment for the
SAIF-assessable and the BIF-assessable base, respectively. The FICO rate is
not tied to the FDIC risk classification, referred to above, and was the
result of the Deposit Insurance Act of 1996.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. There are no pending proceedings to terminate the deposit
insurance of the Bank.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings institutions are
required to maintain minimum levels of regulatory capital. Pursuant to FIRREA,
the OTS has established capital standards applicable to all savings
institutions. These standards generally must be as stringent as the comparable
capital requirements imposed on national banks. The OTS also is authorized to
impose capital requirements in excess of these standards on individual
institutions on a case-by-case basis.
Current OTS capital standards require savings institutions to satisfy three
different capital requirements. Under these standards, savings institutions
must maintain "tangible" capital equal to at least 1.5% of adjusted total
assets, "core" capital equal to at least 3.0% of adjusted total assets and
"total" capital (a combination of core and "supplementary" capital) equal to at
least 8.0% of "risk-weighted" assets. For purposes of the regulation, core
capital generally consists of common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus,
minority interests in the equity accounts of fully consolidated subsidiaries,
certain nonwithdrawable accounts and pledged deposits, and is reduced by
intangible assets, with a limited exception for purchased mortgage servicing
rights and originated mortgage servicing rights. Tangible capital is given the
same definition as core capital but does not include qualifying intangible
assets. The Bank had $51.2 million of goodwill and other intangible assets at
December 31, 1996. Both core and tangible capital are further reduced by an
amount equal to a savings institution's debt and equity investments in
subsidiaries engaged in activities not permissible to national banks (other
than subsidiaries engaged in activities undertaken as agent for customers or in
mortgage banking activities and subsidiary depository institutions or their
holding companies). These adjustments do not affect the Bank's regulatory
capital. Supplementary capital generally consists of hybrid capital
instruments; perpetual preferred stock which is not eligible to be included as
core capital; subordinated debt and
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intermediate-term preferred stock; and general allowances for loan losses up to
a maximum of 1.25% of risk-weighted assets.
In determining compliance with the risk-based capital requirement, a savings
institution is allowed to include both core capital and supplementary capital
in its total capital, provided that the amount of supplementary capital
included does not exceed the savings institution's core capital. In
determining the required amount of risk-based capital, total assets, including
certain off-balance sheet items, are multiplied by a risk weight based on the
risks inherent in the type of assets. The risk weights assigned by the OTS for
principal categories of assets are (i) 0% for cash and securities issued by the
U.S. Government or unconditionally backed by the full faith and credit of the
U.S. Government; (ii) 20% for securities (other than equity securities) issued
by U.S. Government-sponsored agencies and mortgage-backed securities issued by,
or fully guaranteed as to principal and interest by, the FNMA or the FHLMC,
except for those classes with residual characteristics or stripped
mortgage-related securities; (iii) 50% for prudently underwritten permanent
one- to four-family first lien mortgage loans not more than 90 days delinquent
and having a loan-to-value ratio of not more than 80% at origination unless
insured to such ratio by an insurer approved by the FNMA or the FHLMC,
qualifying residential bridge loans made directly for the construction of one-
to four-family residences and qualifying multi-family residential loans; and
(iv) 100% for all other loans and investments, including consumer loans,
commercial loans, and single-family residential real estate loans more than 90
days delinquent, and for repossessed assets.
At December 31, 1996, the Bank exceeded all of its regulatory capital
requirements, with tangible, core and risk-based capital ratios of 6.6%, 6.6%
and 14.2%, respectively. For additional information, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Regulatory Capital Requirements" in Item 7 hereto.
A savings institution which is not in capital compliance or which is
otherwise deemed to require more than normal supervision is subject to
restrictions on its ability to grow pursuant to Regulatory Bulletin 3a-1. In
addition, a provision of HOLA generally provides that the Director of OTS must
restrict the asset growth of savings institutions not in regulatory capital
compliance, subject to a limited exception for growth not exceeding interest
credited.
A savings institution which is not in capital compliance is also
automatically subject to the following: (i) new directors and senior executive
officers and employment contracts for senior executive officers must be
approved by the OTS in advance; (ii) the savings institution may not accept or
renew any brokered deposits; (iii) the savings institution is subject to higher
OTS assessments as a capital-deficient institution; and (iv) the savings
institution may not make any capital distributions without prior written
approval.
Any savings institution that fails any of the capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such actions
could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on the institution's operations,
termination of federal deposit insurance and the appointment of a conservator
or receiver. The OTS'
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capital regulation provides that such actions, through enforcement proceedings
or otherwise, could require one or more of a variety of corrective actions.
In August 1993, the OTS adopted a final rule incorporating an interest-rate
risk component into the risk-based capital regulation. Under the rule, an
institution with a greater than "normal" level of interest rate risk is subject
to a deduction of its interest rate risk component from total capital for
purposes of calculating its risk-based capital. As a result, such an
institution is required to maintain additional capital in order to comply with
the risk-based capital requirement. An institution with a greater than
"normal" interest rate risk is defined as an institution that would suffer a
loss of net portfolio value exceeding 2.0% of the estimated economic value of
its assets in the event of a 200 basis point increase or decrease (with certain
minor exceptions) in interest rates. The interest rate risk component is
calculated, on a quarterly basis, as one-half of the difference between an
institution's measured interest rate risk and 2.0%, multiplied by the economic
value of its assets. The rule also authorizes the Director of the OTS, or his
designee, to waive or defer an institution's interest rate risk component on a
case-by-case basis. The final rule was originally to be effective as of
January 1, 1994, subject however to a three quarter "lag" time between the
reporting date of the data used to calculate an institution's interest rate
risk and the effective date of each quarter's interest rate risk component.
However, in October 1994, the Director of the OTS indicated that it would waive
the capital deduction for institutions with greater than "normal" interest rate
risk until the OTS publishes an appeals process. In August 1995, the OTS
issued Thrift Bulletin No. 67 which allows eligible institutions to request
adjustment to their interest rate risk component as calculated by the OTS, or
to request to use their own models to calculate their interest rate component.
The OTS also indicated that it will delay invoking its interest rate risk rule
requiring institutions with above normal interest rate risk exposure to adjust
their regulatory capital requirement until new procedures are implemented and
evaluated. The OTS has not yet established an effective date for the capital
deduction. In any event, management of the Bank does not believe that the OTS'
adoption of an interest rate risk component to the risk-based capital
requirement will adversely affect the Bank's regulatory capital position.
PROMPT CORRECTIVE ACTION. Under Section 38 of the FDIA, as amended by the
FDICIA, each federal banking agency was required to implement a system of
prompt corrective action for institutions which it regulates. The federal
banking agencies, including the OTS, adopted substantially similar regulations
to implement Section 38 of the FDIA, effective as of December 19, 1992. Under
the regulations, an institution is deemed to be (i) "well capitalized" if it
has total risk-based capital of 10.0% or more, has a Tier 1 risk-based capital
ratio of 6.0% or more, has a Tier 1 leverage capital ratio of 5.0% or more, and
is not subject to any order or final capital directive to meet and maintain a
specific capital level for any capital measure, (ii) "adequately capitalized"
if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based
capital ratio of 4.0% or more, and a Tier 1 leverage capital ratio of 4.0% or
more (3.0% under certain circumstances), and does not meet the definition of
"well capitalized," (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is
less than 4.0%, or a Tier 1 leverage capital ratio that is less than 4.0% (3.0%
under certain circumstances), (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based
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capital ratio that is less than 3.0%, or a Tier 1 leverage capital ratio that
is less than 3.0%, and (v) "critically undercapitalized" if it has a ratio of
tangible equity to total assets that is equal to or less than 2.0%. Section 38
of the FDIA and the regulations promulgated thereunder also specify
circumstances under which a federal banking agency may reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category (except that the
FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized).
An institution generally must file a written capital restoration plan which
meets specified requirements with an appropriate federal banking agency within
45 days of the date that the institution receives notice or is deemed to have
notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. A federal banking agency must provide the
institution with written notice of approval or disapproval within 60 days after
receiving a capital restoration plan, subject to extensions by the agency.
An institution which is required to submit a capital restoration plan must
concurrently submit a performance guaranty by each company that controls the
institution. Such guaranty shall be limited to the lesser of (i) an amount
equal to 5.0% of the institution's total assets at the time the institution was
notified or deemed to have notice that it was undercapitalized or (ii) the
amount necessary to restore the relevant capital measures of the institution to
the levels required for the institution to be classified as adequately
capitalized. Such a guarantee shall expire after the federal banking agency
notifies the institution that it has remained adequately capitalized for each
of four consecutive calendar quarters. An institution which fails to submit a
written capital restoration plan within the requisite period, including any
required performance guarantee(s), or fails in any material respect to
implement a capital restoration plan, shall be subject to the restrictions in
Section 38 of the FDIA which are applicable to significantly undercapitalized
institutions.
Immediately upon becoming undercapitalized, an institution shall become
subject to the provisions of Section 38 of the FDIA (i) restricting payment of
capital distributions and management fees, (ii) requiring that the appropriate
federal banking agency monitor the condition of the institution and its efforts
to restore its capital, (iii) requiring submission of a capital restoration
plan, (iv) restricting the growth of the institution's assets and (v) requiring
prior approval of certain expansion proposals. The appropriate federal banking
agency for an undercapitalized institution also may take any number of
discretionary supervisory actions if the agency determines that any of these
actions is necessary to resolve the problems of the institution at the least
possible long-term cost to the deposit insurance fund, subject in certain cases
to specified procedures. These discretionary supervisory actions include
requiring the institution to raise additional capital; restricting transactions
with affiliates; restricting interest rates paid by the institution on
deposits; requiring replacement of senior executive officers and directors;
restricting the activities of the institution and its affiliates; requiring
divestiture of the institution or the sale of the institution to a willing
purchaser; and any other supervisory action that the agency deems appropriate.
These and additional mandatory and permissive supervisory actions may be taken
with respect to significantly undercapitalized and critically undercapitalized
institutions.
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At December 31, 1996, the Bank was deemed a "well capitalized" institution
for purposes of the above regulations and as such was not subject to the above
mentioned restrictions.
SAFETY AND SOUNDNESS. FDICIA requires each federal banking regulatory
agency to prescribe, by regulation or guideline, standards for all insured
depository institutions and depository institution holding companies relating
to (i) internal controls, information systems and audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v)
asset growth; (vi) compensation, fees and benefits; and (vii) such other
operational and managerial standards as the agency determines to be
appropriate. The compensation standards would prohibit employment contracts or
other compensatory arrangements that provide excess compensation, fees or
benefits or could lead to material financial loss. In addition, each federal
banking regulatory agency must prescribe, by regulation or guideline, standards
relating to asset quality, earnings and stock valuation as the agency
determines to be appropriate. On July 10, 1995, the federal banking agencies,
including the OTS, adopted final rules and proposed guidelines concerning
standards for safety and soundness required to be prescribed by regulation
pursuant to Section 39 of the FDIA. In general, the standards relate to (1)
operational and managerial matters; (2) asset quality and earnings; and (3)
compensation. The operational and managerial standards cover (a) internal
controls and information systems, (b) internal audit systems, (c) loan
documentation, (d) credit underwriting, (e) interest rate exposure, (f) asset
growth, and (g) compensation, fees and benefits. Under the proposed asset
quality and earnings standards, the Bank would be required to establish and
maintain systems to (i) identify problem assets and prevent deterioration in
those assets, and (ii) evaluate and monitor earnings and ensure that earnings
are sufficient to maintain adequate capital reserves. Finally, the proposed
compensation standard states that compensation will be considered excessive if
it is unreasonable or disproportionate to the services actually performed by
the individual being compensated. If a savings institution fails to meet any
of the standards promulgated by regulation, then such institution will be
required to submit a plan within 30 days to the OTS specifying the steps it
will take to correct the deficiency. In the event that a savings institution
fails to submit or fails in any material respect to implement a compliance plan
within the time allowed by the federal banking agency, Section 39 of the FDIA
provides that the OTS must order the institution to correct the deficiency and
may (1) restrict asset growth; (2) require the savings institution to increase
its ratio of tangible equity to assets; (3) restrict the rates of interest that
the savings institution may pay; or (4) take any other action that would better
carry out the purpose of prompt corrective action. The Bank believes that it
has been and will continue to be in compliance with each of the standards as
they have been adopted by the OTS.
LIQUIDITY REQUIREMENTS. All savings institutions are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary
from time to time (between 4% and 10%) depending upon economic conditions and
savings flows of all savings institutions. At the present time, the required
minimum liquid asset ratio is 5%. At December 31, 1996, the Company's liquid
asset ratio was 16.0%.
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CAPITAL DISTRIBUTIONS. OTS regulations govern capital distributions by
savings institutions, which include cash dividends, stock redemptions or
repurchases, cash-out mergers, interest payments on certain convertible debt
and other transactions charged to the capital account of a savings institution
to make capital distributions. Generally, the regulation creates a safe harbor
for specified levels of capital distributions from institutions meeting at
least their minimum capital requirements, so long as such institutions notify
the OTS and receive no objection to the distribution from the OTS. Savings
institutions and distributions that do not qualify for the safe harbor are
required to obtain prior OTS approval before making any capital distributions.
Generally, a savings institution that before and after the proposed
distribution meets or exceeds its fully phased-in capital requirements (Tier 1
institutions) may make capital distributions during any calendar year equal to
the higher of (i) 100% of net income for the calendar year-to-date plus 50% of
its "surplus capital ratio" at the beginning of the calendar year or (ii) 75%
of net income over the most recent four-quarter period. The "surplus capital
ratio" is defined to mean the percentage by which the institution's ratio of
total capital to assets exceeds the ratio of its fully phased-in capital
requirement to assets. "Fully phased-in capital requirement" is defined to
mean an institution's capital requirement under the statutory and regulatory
standards to be applicable on December 31, 1994, as modified to reflect any
applicable individual minimum capital requirement imposed upon the institution.
Failure to meet fully phased-in or minimum capital requirements will result in
further restrictions on capital distributions, including possible prohibition
without explicit OTS approval.
Tier 2 institutions, which are institutions that before and after the
proposed distribution meet or exceed their minimum capital requirements, may
make capital distributions up to 75% of their net income over the most recent
four quarter period.
In order to make distributions under these safe harbors, Tier 1 and Tier 2
institutions must submit 30 days written notice to the OTS prior to making the
distribution. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. In addition, a Tier 1 institution
deemed to be in need of more than normal supervision by the OTS may be
downgraded to a Tier 2 or Tier 3 institution as a result of such a
determination.
Tier 3 institutions, which are institutions that do not meet current minimum
capital requirements, or that have capital in excess of either their fully
phased-in capital requirement or minimum capital requirement but which have
been notified by the OTS that it will be treated as a Tier 3 institution
because they are in need of more than normal supervision, cannot make any
capital distribution without obtaining OTS approval prior to making such
distributions.
At December 31, 1996, the Bank was a Tier 1 institution for purposes of this
regulation.
On December 5, 1994, the OTS published a notice of proposed rulemaking to
amend its capital distribution regulation. Under the proposal, savings
institutions would be permitted to only make capital distributions that would
not result in their capital being reduced below the level required
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to remain "adequately capitalized." A savings institution is adequately
capitalized if it has a total risk-based capital ratio of 8.0% or more, a Tier
1 risk-based capital ratio of 4.0% or more and a Tier 1 leverage capital ratio
of 4.0% or more and does not meet the definition of "well capitalized."
Because the Bank is a subsidiary of the Company, the proposal would require the
Bank to provide notice to the OTS of its intent to make a capital distribution.
The Bank does not believe that the proposal will adversely affect its ability
to make capital distributions if it is adopted substantially as proposed.
LOANS TO ONE BORROWER. FIRREA imposed limitations on the aggregate amount
of loans that a savings institution could make to any one borrower, including
related entities. Under FIRREA, the permissible amount of loans-to-one
borrower now follows the national bank standard for all loans made by savings
institutions, as compared to the pre-FIRREA rule that applied that standard
only to commercial loans made by federally chartered savings institutions. The
regulations promulgated pursuant to FIRREA generally do not permit loans-to-one
borrower to exceed the greater of $0.5 million, or 15% of unimpaired capital
and surplus. Loans in an amount equal to an additional 10% of unimpaired
capital and surplus also may be made to a borrower if the loans are fully
secured by readily marketable securities.
BRANCHING BY FEDERAL SAVINGS INSTITUTIONS. Effective May 11, 1992, the OTS
amended its Policy Statement on Branching by Federal Savings Institutions to
permit interstate branching to the full extent permitted by statute (which is
essentially unlimited). Prior policy permitted interstate branching for
federal savings institutions only to the extent allowed for state-chartered
institutions in the states where the institution's home office is located and
where the branch is sought. Prior policy also permitted healthy out-of-state
federal institutions to branch into another state, regardless of the law in
that state, provided the branch office was the result of a purchase of an
institution that was in danger of default.
Generally, federal law prohibits federal savings institutions from
establishing, retaining or operating a branch outside the state in which the
federal institution has its home office unless the institution meets the IRS's
domestic building and loan test (generally, 60% of a thrift's assets must be
housing-related) ("IRS Test"). The IRS Test requirement does not apply if: (i)
the branch(es) result(s) from an emergency acquisition of a troubled savings
institution (however, if the troubled savings institution is acquired by a bank
holding company, does not have its home office in the state of the bank holding
company bank subsidiary and does not qualify under the IRS Test, its branching
is limited to the branching laws for state-chartered banks in the state where
the savings institution is located); (ii) the law of the state where the
branch would be located would permit the branch to be established if the
federal savings institution were chartered by the state in which its home
office is located; or (iii) the branch was operated lawfully as a branch under
state law prior to the savings institution's conversion to a federal charter.
Furthermore, the OTS will evaluate a branching applicant's record of
compliance with the Community Reinvestment Act of 1977 ("CRA"). An
unsatisfactory CRA record may be the basis for denial of a branching
application.
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QUALIFIED THRIFT LENDER TEST. All savings institutions are required to meet
a QTL test set forth in Section 10(m) of the HOLA and regulations of the OTS
thereunder to avoid certain restrictions on their operations. A savings
institution that does not meet the QTL test set forth in the HOLA and
implementing regulations must either convert to a bank charter or comply with
the following restrictions on its operations: (i) the institution may not
engage in any new activity or make any new investment, directly or indirectly,
unless such activity or investment is permissible for a national bank; (ii) the
branching powers of the institution shall be restricted to those of a national
bank; (iii) the institution shall not be eligible to obtain any advances from
its FHLB; and (iv) payment of dividends by the institution shall be subject to
the rules regarding payment of dividends by a national bank. Upon the
expiration of three years from the date the savings institution ceases to be a
QTL, it must cease any activity and not retain any investment not permissible
for a national bank and immediately repay any outstanding FHLB advances
(subject to safety and soundness considerations).
Under recent legislation and applicable regulations, any savings institution
is a QTL if (i) it qualifies as a domestic building and loan association under
Section 7701(a)(19) of the Internal Revenue Code (which generally requires that
at least 60% of the institution's assets constitute housing-related and other
qualifying assets) or (ii) at least 65% of the institution's "portfolio assets"
(as defined) consist of certain housing and consumer-related assets on a
monthly average basis in at least nine out of every 12 months. At December 31,
1996, the qualified thrift investments of the Bank were approximately 114% of
its portfolio assets.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of
Pittsburgh, which is one of 12 regional FHLBs that administers the home
financing credit function of savings institutions. Each FHLB serves as a
reserve or central bank for its members within its assigned region. It is
funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. It makes loans to members (i.e., advances) in
accordance with policies and procedures established by the Board of Directors
of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the FHLB
of Pittsburgh in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At December 31, 1996, the Bank had $11.2 million
in FHLB stock, which was in compliance with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community
investment and low- and moderate-income housing projects. These contributions
have adversely affected the level of FHLB dividends paid and could continue to
do so in the future. These contributions also could have an adverse effect on
the value of FHLB stock in the future. For the year ended December 31, 1996,
dividends paid by the FHLB of Pittsburgh to the Bank amounted to $0.7 million,
compared to $0.5 million for the year ended December 31, 1995.
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FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all depository
institutions to maintain reserves against their transaction accounts (primarily
NOW and Super NOW checking accounts). As of December 31, 1996, no reserves
were required to be maintained on the first $4.4 million of transaction
accounts, reserves of 3% were required to be maintained against the next $44.9
million of net transaction accounts (with such dollar amounts subject to
adjustment by the Federal Reserve Board), and a reserve of 10% (which is
subject to adjustment by the Federal Reserve Board to a level between 8% and
14%) against all remaining net transaction accounts. Because required reserves
must be maintained in the form of vault cash or a noninterest-bearing account
at a Federal Reserve Bank, the effect of this reserve requirement is to reduce
an institution's earning assets.
-46-
<PAGE> 48
ITEM 2. PROPERTIES.
OFFICES AND PROPERTIES
At December 31, 1996, the Bank conducted its business from its executive
offices in Valley Forge, Pennsylvania and 53 full-service offices, including 14
supermarket branches, located in southeast Pennsylvania.
The following table sets forth certain information relating to the Bank's
offices at December 31, 1996.
<TABLE>
<CAPTION>
Net Book Value of
Property &
Leasehold
Lease Improvements at
Owned or Expiration December 31, Deposits at
Location(1) Leased Date 1996(2) December 31, 1996
------------------------------ ---------- ------------- ------------------- ---------------------
(In Thousands)
<S> <C> <C> <C> <C>
EXECUTIVE OFFICES:
------------------
VALLEY FORGE: Owned -- $8,772 $28,859
Post Office Box 2100
Valley Forge, PA 19482
TRADITIONAL FULL-SERVICE OFFICES:
---------------------------------
NORRISTOWN: Owned -- 200 30,020
104 West Main Street
Norristown, PA 19401
TRAPPE: Leased 10/10 265 31,239
Trappe Shopping Center
130 West Main Street
Trappe, PA 19426
KING OF PRUSSIA: Leased 09/03 212 36,786
DeKalb Plaza Shopping Center
338 West DeKalb Pike
King of Prussia, PA 19406
PARK RIDGE: Leased 01/98 19 51,959
Park Ridge Shopping Center
2701 West Main Street
Norristown, PA 19403
SWEDE SQUARE: Leased 10/01 113 70,264
Swede Square Shopping Center
2947 Swede Road
Norristown, PA 19401
</TABLE>
-47-
<PAGE> 49
<TABLE>
<CAPTION>
Net Book Value of
Property &
Leasehold
Lease Improvements at
Owned or Expiration December 31, Deposits at
Location(1) Leased Date 1996(2) December 31, 1996
------------------------------ ---------- ------------- ------------------- ---------------------
(In Thousands)
<S> <C> <C> <C> <C>
AUDUBON: Leased 08/98 $114 $35,228
Audubon Village Shopping Center
Audubon, PA 19403
NEWTOWN SQUARE: Owned -- 350 39,548
3531 West Chester Pike
Newtown Square, PA 19073
FRANKFORD AVENUE: Owned -- 389 59,699
7149 Frankford Avenue
Philadelphia, PA 19135
CASTOR AVENUE: Owned - 160 53,383
6537 Castor Avenue
Philadelphia, PA 19149
PENNDEL: Owned -- 108 24,088
U.S. #1 & Durham Road
Penndel, PA 19047
WELSH ROAD: Owned -- 180 55,252
2501 Welsh Road
Philadelphia, PA 19114
GLENSIDE: Owned -- 348 59,742
139 South Easton Road
Glenside, PA 19038
WESTTOWN: Leased 11/99 23 34,813
Marketplace Shopping Center
1502 West Chester Pike
West Chester, PA 19382
KENNETT SQUARE: Leased 12/03 219 22,410
New Garden Center
345 Scarlett Road
Kennett Square, PA 19348
WEST GROVE: Owned -- 36 17,636
106 West Evergreen Street
West Grove, PA 19390
WAYNE: Leased 08/01 -- 18,785
Chester
brook Village Center
500 Chesterbrook Boulevard
Wayne, PA 19087
</TABLE>
-48-
<PAGE> 50
<TABLE>
<CAPTION>
Net Book Value of
Property &
Leasehold
Lease Improvements at
Owned or Expiration December 31, Deposits at
Location(1) Leased Date 1996(2) December 31, 1996
------------------------------ ---------- ------------- ------------------- ---------------------
(In Thousands)
<S> <C> <C> <C> <C>
LANSDALE: Leased 06/99 $37 $46,177
521 West Main Street
Lansdale, PA 19446
HILLCREST: Leased 07/97 1 29,304
Hillcrest Shopping Center
638 East Main Street
Lansdale, PA 19446
SUMNEY FORGE: Leased 08/99 -- 39,025
Sumney Forge Square
Lansdale, PA 19446
SOUDERTON: Owned -- 218 17,516
705 Route 113
Souderton, PA 18964
CONSHOHOCKEN: Leased 10/09 291 76,734
Plymouth Square Shopping Center
200 West Ridge Pike, Suite 108
Conshohocken, PA 19428
PHOENIXVILLE: Leased 03/12 490 15,485
Maple Lawn Village Center
1007 Route 113
Phoenixville, PA 19460
ROYERSFORD: Leased 01/16 345 2,133
Limerick Square
70 Buckwalter Road, Suite 650
Royersford, PA 19465
TACONY: Owned -- 820 65,343
6958 Torresdale Avenue
Philadelphia, PA 19135
HOLMESBURG: Leased 08/00 28 44,693
8729 Frankford Avenue
Philadelphia, PA 19136
ACADEMY: Leased 02/99 1 34,380
3292 Red Lion Road
Philadelphia, PA 19114
MAYFAIR: Owned -- 341 37,085
7425 Frankford Avenue
Philadelphia, PA 19136
</TABLE>
-49-
<PAGE> 51
<TABLE>
<CAPTION>
Net Book Value of
Property &
Leasehold
Lease Improvements at
Owned or Expiration December 31, Deposits at
Location(1) Leased Date 1996(2) December 31, 1996
------------------------------ ---------- ------------- ------------------- ---------------------
(In Thousands)
<S> <C> <C> <C> <C>
5TH & PENN STREETS: Owned -- $1,029 $51,148
445 Penn Street
Reading, PA 19601
9TH & SPRING STREETS: Owned -- 432 32,451
956 North Ninth Street
Reading, PA 19604
LANCASTER AVENUE: Leased 12/99 77 41,973
830 Lancaster Avenue
Reading, PA 19607
MOHNTON: Owned -- 422 23,134
14 West Wyomissing Avenue
Mohnton, PA 19540
TEMPLE: Owned -- 342 41,510
4950 Kutztown Road
Temple, PA 19560
RIVERSIDE: Owned -- 351 33,714
2040 Centre Avenue
Reading, PA 19605
HEIDELBERG: Leased 06/07 92 25,438
4641 Penn Avenue
Sinking Spring, PA 19608
KUTZTOWN: Owned -- 289 20,659
601 East Main Street
Kutztown, PA 19530
EXETER: Leased 03/00 75 37,150
4215 Perkiomen Avenue
Reading, PA 19606
BIRDSBORO: Leased 09/01 28 14,663
350 West Main Street
Birdsboro, PA 19508
LEBANON VALLEY: Owned -- 286 26,463
2203 West Cumberland Street
Lebanon, PA 17042
</TABLE>
-50-
<PAGE> 52
<TABLE>
<CAPTION>
Net Book Value of
Property &
Leasehold
Lease Improvements at
Owned or Expiration December 31, Deposits at
Location(1) Leased Date 1996(2) December 31, 1996
------------------------------ ---------- ------------- ------------------- ---------------------
(In Thousands)
<S> <C> <C> <C> <C>
LEBANON: Owned -- $101 $ 457
152 North Eighth Street
Lebanon, PA 17046
SUPERMARKET BRANCHES:
---------------------
GIANT-WHITEHALL: Leased 11/99 113 9,503
MacArthur Towne Centre
2540 MacArthur Road, Suite 200
Whitehall, PA 18052
REDNER'S COLLEGEVILLE: Leased 08/99 157 5,467
Redner's Warehouse Market
Marketplace at Collegeville
201 Second Avenue, Suite 100
Collegeville, PA 19426
GIANT-FAIRLESS HILLS: Leased 01/00 112 7,404
Fairless Hills Shopping Center
473 Oxford Road
Fairless Hills, PA 19030
GIANT-SINKING SPRING: Leased 06/00 127 9,682
Spring Towne Center
2643 Shillington Road
Sinking Spring, PA 19608
GIANT-ALDEN: Leased 11/01 192 137
Providence Village
543 North Oak Avenue
Alden, PA 19018
GIANT-BLUE BELL: Leased 06/00 122 6,287
The Shoppes at Blue Bell
1760 DeKalb Pike
Blue Bell, PA 19422
GIANT-TREXLERTOWN: Leased 02/01 153 1,696
Trexler Mall
6900 Hamilton Boulevard
Trexlertown, PA 18087
GIANT-TROOPER: Leased 02/01 154 3,771
Audubon Square Shopping Center
2668 Egypt Road
Norristown, PA 19403
</TABLE>
-51-
<PAGE> 53
<TABLE>
<CAPTION>
Net Book Value of
Property &
Leasehold
Lease Improvements at
Owned or Expiration December 31, Deposits at
Location(1) Leased Date 1996(2) December 31, 1996
------------------------------ ---------- ------------- ------------------- ---------------------
(In Thousands)
<S> <C> <C> <C> <C>
REDNER'S-DOYLESTOWN: Leased 08/00 $131 $4,083
Doylestown Pointe
1661 Easton Road
Warrington, PA 18976
GUINTA'S THRIFTWAY: Leased 02/00 129 5,785
Bradford Plaza
700 Downingtown Pike, Suite 130
West Chester, PA 19380
CLEMENS-EXTON: Leased 06/00 122 2,761
Lionville Shopping Center
170 Eagleview Boulevard
Exton, PA 19341
WEIS-POTTSTOWN: Leased 07/00 129 3,855
The Pottstown Center
223 Shoemaker Road
Pottstown, PA 19464
THRIFTWAY-PORT RICHMOND Leased 08/00 145 3,595
Port Richmond Village
2497 Aramingo Avenue
Philadelphia, PA 19125
SHOPRITE-FAR NORTHEAST: Leased 09/11 190 1,078
Boulevard Plaza
11000 Roosevelt Boulevard
Philadelphia, PA 19116
</TABLE>
- -------------------
(1) The Bank opened a branch office in Southampton, Pennsylvania, which
commenced operations in February 1997.
(2) Does not include furniture, fixtures and equipment.
-52-
<PAGE> 54
The following table sets forth certain information relating to ComNet's
offices at December 31, 1996.
<TABLE>
<CAPTION>
Location Year Opened Owned or Leased Lease Expiration Date
---------------------------------- ----------------- --------------------- --------------------------
<S> <C> <C> <C>
WARWICK, RHODE ISLAND: 1988 Leased 06/97
875 Centerville Road
Warwick, RI 02886
HORSHAM, PENNSYLVANIA: 1988 Leased 11/97
Building # 4, Suite 150
Horsham Business Center
300 Welsh Road
Horsham, PA 19044
GREAT VALLEY, PENNSYLVANIA: 1988 Owned --
70 Valley Stream Parkway
P.O. Box 2104
Valley Forge, PA 19482-2104
MOUNT LAUREL, NEW JERSEY: 1988 Leased 03/99
533 Fellowship Road
Mount Laurel, NJ 08054
STRATFORD, CONNECTICUT: 1988 Leased 03/97
3241 Main Street, Suite A
Stratford, CT 06497
LANCASTER, PENNSYLVANIA: 1991 Leased 08/97
1681 Crown Avenue
Lancaster, PA 17601
ALLENTOWN, PENNSYLVANIA 1996 Leased 03/99
221 North Cedar Crest Boulevard
Allentown, PA 18104
</TABLE>
- -------------------------
-53-
<PAGE> 55
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in routine legal proceedings occurring in the
ordinary course of business, which in the opinion of management, in the
aggregate, will not have a material adverse effect on the consolidated
financial condition and results of operations of the Company.
On October 31, 1996, Commonwealth Bank ("Commonwealth") filed a complaint
against CoreStates Financial Corp. in the Court of Common Pleas for Chester
County, Pennsylvania for damages related to Commonwealth's acquisition on June
28, 1996 of twelve branch offices from CoreStates, which were divested by
CoreStates in connection with the merger of CoreStates Bank and Meridian Bank.
The complaint alleges, among other things, that Commonwealth's relationships
with its new customers were damaged as a result of negligence and errors
committed by CoreStates and its affiliates in connection with the conversion of
the former Meridian Bank customers to Commonwealth's banking system and the
reissuance of bank cards for use at Commonwealth's automated teller machines.
The complaint alleges damages incurred by Commonwealth of approximately $5.2
million from the additional run-off of deposits from former Meridian customers
and other losses and expenses as a result of CoreStates negligence and its
breach of the branch sale agreement between the parties.
-54-
<PAGE> 56
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
(a) A special meeting of stockholders of the Company was held on December
17, 1996 ("Special Meeting").
(b) Not applicable.
(c) There were 17,950,936 shares of Common Stock of the Company eligible
to be voted at the Special Meeting and 13,702,741 shares were represented at
the meeting by the holders thereof, which constituted a quorum. The items
voted upon at the Special Meeting and the vote for each proposal were as
follows:
1. Proposal to adopt the 1996 Stock Option Plan.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C>
11,804,237 1,707,942 190,562
</TABLE>
2. Proposal to adopt the 1996 Recognition and Retention Plan.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C>
11,004,382 2,475,289 223,069
</TABLE>
The proposals were adopted by the stockholders of the Company.
(d) Not applicable.
.
-55-
<PAGE> 57
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is traded on the National Association of Securities Dealers
Automated Quotation National Market System under the symbol "CMSB." At
December 31, 1996, the 17,953,613 shares of common stock were held by 6,671
holders of record, which does not reflect the number of beneficial owners of
the common stock.
The following table sets forth the reported high and low sale prices of a
share of the Company's common stock as reported by NASDAQ (the common stock
commenced trading on the NASDAQ National Market System on January 24, 1994) and
cash dividends paid per share of common stock during the periods indicated.
<TABLE>
<CAPTION>
Dividends Declared
Quarter Ended High(1) Low(1) Per Share(1)
--------------- ------- ------- -------------
<S> <C> <C> <C>
1995
March 31 $6.619 $5.836 $0.06
June 30 7.581 6.438 0.06
September 30 11.131 7.341 0.06
December 31 11.974 10.830 0.06
1996
March 31 11.673 10.770 0.06
June 30 11.188 9.500 0.06
September 30 11.875 9.750 0.06
December 31 15.125 11.500 0.06
</TABLE>
- --------------------
(1) Adjusted to reflect the June 1996 conversion of 2.0775 shares of Company
common stock for each share of Bank common stock.
The closing price of a share of Company common stock was $15.6875 on
March 13, 1997, the most recent day on which trading of the Company common stock
occurred preceding the issuance of the 10-K.
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from page 13 of
the Company's 1996 Annual Report to Stockholders ("1996 Annual Report").
-56-
<PAGE> 58
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OF OPERATIONS.
The information required herein is incorporated by reference from pages 14
to 28 of the 1996 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from pages 32
to 58 of the 1996 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required herein is incorporated by reference from the
definitive proxy statement of the Company for the 1997 Annual Meeting of
Stockholders to be filed with the Commission ("Definitive Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from the
Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required herein is incorporated by reference from the
Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from the
Definitive Proxy Statement.
-57-
<PAGE> 59
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS PART OF THIS REPORT.
(1) The following financial statements are incorporated by reference from
Item 8 hereof (see Exhibit 13):
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Income for the years ended December 31, 1996,
1995 and 1994
Consolidated Statements of Shareholders' Equity for the years ended December
31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994
Notes to Consolidated Financial Statements
(2) All schedules for which provision is made in the applicable accounting
regulation of the Commission are omitted because of the absence of conditions
under which they are required or because the required information is included
in the financial statements and related notes thereto.
(3) The following exhibits are filed as part of this Form 10-K and this list
includes the Exhibit Index.
<TABLE>
<CAPTION>
Exhibit Index
- -------------
Page
----
<S> <C> <C>
3.1 Articles of Incorporation of Commonwealth Bancorp, Inc. *
3.2 Bylaws of Commonwealth Bancorp, Inc. *
4.1 Form of Stock Certificate of Commonwealth Bancorp, Inc. *
10.1 1993 Stock Incentive Plan*** *
10.2 1993 Directors' Stock Option Plan*** *
10.3 1993 Management Recognition Plan for Officers*** *
10.4 1993 Management Recognition Plan for Directors*** *
10.5 1996 Stock Option Plan*** **
10.6 1996 Recognition and Retention Plan*** **
10.7 Employee Stock Ownership Plan and Trust*** *
10.8 Employment Agreement between Commonwealth Bank and *
Charles H. Meacham*** E-1
</TABLE>
-58-
<PAGE> 60
<TABLE>
<S> <C> <C>
10.9 Form of Employment Agreement between Commonwealth Bank
and Patrick J. Ward, Charles M. Johnston, William J. Monnich,
Peter Kehoe and David K. Griest*** E-12
13.0 1996 Annual Report to Stockholders E-23
22.0 Subsidiaries of the Registrant - Reference is made to
"Item 1. Business - Subsidiaries" for the required information
</TABLE>
- -------------------------------
* Incorporated herein by reference from the Company's Registration Statement
on Form S-1 filed with the Commission on December 18, 1995, as amended.
** Incorporated herein by reference from the Company's definitive proxy
statement for its special meeting of stockholders on December 17, 1996 filed
with the Commission on November 8, 1996.
*** Management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K.
On December 18, 1996, the Company filed a Current Report on Form 8-K to
report under Item 5 that its 1996 Stock Option Plan and its 1996 Recognition
and Retention Plan were approved by stockholders and that in order to fund the
Recognition Plan the related trust intended to purchase shares of common stock
in the open market.
-59-
<PAGE> 61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
COMMONWEALTH BANCORP, INC.
By: /s/ Charles H. Meacham
-----------------------
Charles H. Meacham
Chairman of the Board,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ Charles H. Meacham March 18, 1997
- -----------------------
Charles H. Meacham
Chairman of the Board,
Chief Executive Officer
(principal executive officer)
/s/ Patrick J. Ward March 18, 1997
- --------------------
Patrick J. Ward
President, Chief
Operating Officer
/s/ Charles M. Johnston March 18, 1997
- -----------------------
Charles M. Johnston
Senior Vice President, Chief
Financial Officer
(principal financial and
accounting officer)
</TABLE>
-60-
<PAGE> 62
<TABLE>
<S> <C>
/s/ George C. Beyer, Jr. March 18, 1997
- -------------------------
George C. Beyer, Jr.
Director
/s/ Joseph E. Colen, Jr. March 18, 1997
- -------------------------
Joseph E. Colen, Jr.
Director
/s/ William B. Haines, Jr. March 18, 1997
- ---------------------------
William B. Haines, Jr.
Director
/s/ Harry P. Mirabile March 18, 1997
- ----------------------
Harry P. Mirabile
Director
/s/ Nicholas Sclufer March 18 , 1997
- ---------------------
Nicholas Sclufer
Director
/s/ Matthew T. Welde March 18, 1997
- ---------------------
Matthew T. Welde
Director
</TABLE>
-61-
<PAGE> 1
EXHIBIT 10.8
AGREEMENT
AGREEMENT, dated this 1st day of January 1997, between Commonwealth
Bank (the "Bank"), a federally-chartered savings bank, and Charles H. Meacham
(the "Executive").
W I T N E S S E T H:
WHEREAS, the Executive is presently Chairman of the Board and Chief
Executive Officer of the Bank; and
WHEREAS, the Bank desires to be ensured of the Executive's continued
active participation in the business of the Bank; and
WHEREAS, in order to induce the Executive to remain in the employ of
the Bank and in consideration of the Executive's agreeing to remain in the
employ of the Bank, the parties desire to specify the terms of such employment;
NOW THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the parties hereby agree as follows:
1. DEFINITIONS. The following words and terms shall have the
meanings set forth below for the purposes of this Agreement:
(a) AVERAGE ANNUAL COMPENSATION. The Executive's "Average
Annual Compensation" for purposes of this Agreement shall be deemed to mean the
average level of compensation paid to the Executive by the Bank or any
subsidiary thereof during the most recent five taxable years preceding the Date
of Termination, including Base Salary, as defined in Section 1.(b) hereof, and
bonuses under any employee benefit plans of the Bank.
(b) BASE SALARY. "Base Salary" shall mean the Executive's
annual salary exclusive of any pension or other retirement benefit plan, profit
sharing, stock option, employee stock ownership, or other plans, benefits and
privileges given to employees and executives of the Bank.
(c) CAUSE. Termination by the Bank of the Executive's
employment for "Cause" shall mean termination because of personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful violation of any
law, rule or regulation (other than traffic violations or similar offenses) or
final cease-and-desist order or material breach of any provision of this
Agreement or for any act or failure to act on the Executive's part done, or
omitted to be done, by the Executive not in good faith and without reasonable
belief that the Executive's action or omission was in the best interest of the
Bank.
(d) CHANGE IN CONTROL OF THE BANK. "Change in Control of
the Bank" shall mean a change in control of a nature that would be required to
be reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934,
<PAGE> 2
as amended ("Exchange Act") or any successor thereto, whether or not the Bank
is registered under Exchange Act; provided that, without limitation, such a
change in control shall be deemed to have occurred if (i) any "person" (as such
term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Bank representing 25% or more of the
combined voting power of the Bank's then outstanding securities; or (ii) during
any period of two consecutive years, individuals who at the beginning of such
period constitute the Board of Directors of the Bank cease for any reason to
constitute at least a majority thereof unless the election, or the nomination
for election by stockholders, of each new director was approved by a vote of at
least two-thirds of the directors then still in office who were directors at
the beginning of the period; provided, however, that a "Change in Control" of
the Bank shall not be deemed to have occurred if Commonwealth Mutual Holding
Company ceases to own at least 51% of all outstanding shares of stock of the
Bank in connection with its conversion from mutual to stock form.
(e) CODE. "Code" shall mean the Internal Revenue Code of
1986, as amended.
(f) DATE OF TERMINATION. "Date of Termination" shall mean
the date the Executive's employment is terminated for any reason as specified
in the Notice of Termination.
(g) DISABILITY. Termination by the Bank of the Executive's
employment based on "Disability" shall mean termination because of any physical
or mental impairment which qualifies the Executive for disability benefits
under the applicable long-term disability plan maintained by the Bank or any
subsidiary or, if no such plan applies, which would qualify the Executive for
disability benefits under the Federal Social Security System.
(h) GOOD REASON. Termination by the Executive of the
Executive's employment for "Good Reason" shall mean termination by the
Executive within one year following a Change in Control of the Bank based on:
(i) Without the Executive's express written
consent, the failure to elect or to re-elect
or to appoint or to re-appoint the Executive
to the offices of Chairman, President and
Chief Executive Officer of the Bank or a
material adverse change made by the Bank in
the Executive's functions, duties or
responsibilities as Chairman, President and
Chief Executive Officer of the Bank as they
existed immediately prior to a Change in
Control of the Bank;
(ii) Without the Executive's express written
consent, a reduction by the Bank in the
Executive's Base Salary as the same may be
increased from time to time or, except to the
extent permitted by Section 3(b) hereof, a
reduction in the package of fringe benefits
provided to the Executive, taken as a whole;
2
<PAGE> 3
(iii) The principal executive office of the Bank is
relocated more than 25 miles from the current
principal executive office or, without the
Executive's express written consent, the Bank
requires the Executive to be based anywhere
other than an area in which the Bank's
principal executive office is located, except
for required travel on business of the Bank
to an extent substantially consistent with
the Executive's present business travel
obligations;
(iv) Any purported termination of the Executive's
employment for Cause, Disability or
Retirement which is not effected pursuant to
a Notice of Termination satisfying the
requirements of paragraph (j) below; or
(v) The failure by the Bank to obtain the
assumption of and agreement to perform this
Agreement by any successor as contemplated in
Section 9 hereof.
(i) IRS. IRS shall mean the Internal Revenue Service.
(j) NOTICE OF TERMINATION. Any purported termination of
the Executive's employment by the Bank for any reason, including without
limitation for Cause, Disability or Retirement, or by the Executive for any
reason, including without limitation for Good Reason, shall be communicated by
written "Notice of Termination" to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a dated notice which (i)
indicates the specific termination provision in this Agreement relied upon,
(ii) sets forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision
so indicated, (iii) specifies a Date of Termination, which shall be not less
than thirty (30) nor more than ninety (90) days after such Notice of
Termination is given, except in the case of the Bank's termination of
Executive's employment for Cause; and (iv) is given in the manner specified in
Section 11 hereof.
(k) RETIREMENT. Termination by the Bank of the
Executive's employment based on "Retirement" shall mean voluntary termination
by the Employee in accordance with the Bank's retirement policies, including
early retirement, generally applicable to their salaried employees.
(l) GENDER NEUTRAL PRONOUN USAGE. The use of the
masculine pronoun shall be deemed to include the feminine pronoun throughout
this Agreement.
2. TERM OF EMPLOYMENT.
(a) The Bank hereby employs the Executive as Chairman of
the Board and Chief Executive Officer and Executive hereby accepts said
employment and agrees to render such services to the Bank on the terms and
conditions set forth in this Agreement. The term of employment under this
Agreement shall be for three years, commencing on the date of this Agreement.
Prior to the first annual anniversary of the date of this Agreement and each
annual
3
<PAGE> 4
anniversary thereafter, the Board of Directors of the Bank shall consider and
review (with appropriate corporate documentation thereof, and after taking into
account all relevant factors, including the Executive's performance hereunder)
extension of the term under this Agreement. If the Board of Directors does not
approve such extension it shall provide written notice to the Executive of such
event or the Executive may give written notice to the Bank of the Executive's
election not to extend the term. In each case such written notice shall be
given not less than thirty (30) days prior to any such anniversary date. If
the Board of Directors of the Bank elects to extend this Agreement after any
anniversary date of this Agreement, it may, in its discretion, relate back to
the anniversary date and extend this Agreement for up to three years from such
anniversary date. References herein to the term of this Agreement shall refer
both to the initial term and successive terms.
(b) During the term of this Agreement, the Executive shall
perform such executive services for the Bank as may be consistent with his
titles and from time to time assigned to him by the Bank's Board of Directors.
3. COMPENSATION AND BENEFITS.
(a) The Bank shall compensate and pay Executive for his
services during the term of this Agreement at a minimum base salary of Three
Hundred Thirty Seven Thousand Eight Hundred Eighteen Dollars ($337,818.00) per
year, which may be increased from time to time in such amounts as may be
determined by the Board of Directors of the Bank and may not be decreased
without the Executive's express written consent ("Base Salary"). In addition
to his Base Salary, the Executive shall be entitled to receive during the term
of this Agreement such bonus payments as may be determined by the Board of
Directors of the Bank.
(b) During the term of the Agreement, Executive shall be
entitled to participate in and receive the benefits of any pension or other
retirement benefit plan, profit sharing, stock option, employee stock
ownership, or other plans, benefits and privileges given to employees and
executives of the Bank, to the extent commensurate with his then duties and
responsibilities, as fixed by the Board of Directors of the Bank. The Bank
shall not make any changes in such plans, benefits or privileges which would
adversely affect Executive's rights or benefits thereunder, unless such change
occurs pursuant to a program applicable to all executive officers of the Bank
and does not result in a proportionately greater adverse change in the rights
of or benefits to Executive as compared with any other executive officer of the
Bank. Nothing paid to Executive under any plan or arrangement presently in
effect or made available in the future shall be deemed to be in lieu of the
salary payable to Executive pursuant to Section 3(a) hereof.
(c) During the term of this Agreement, Executive shall be
entitled to paid annual vacation in accordance with the policies as established
from time to time by the Board of Directors of the Bank, which shall in no
event be less than four weeks per annum. Executive shall not be entitled to
receive any additional compensation from the Bank for failure to take a
vacation, nor shall Executive be able to accumulate unused vacation time from
one year to the next, except to the extent authorized by the Board of Directors
of the Bank.
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<PAGE> 5
(d) During the term of this Agreement, Bank agrees to
provide Executive with the use of a Bank-owned automobile appropriate to his
positions with the Bank and to pay all costs associated with such automobile,
including registration, licensing, insurance and costs of operation.
4. EXPENSES. The Bank shall reimburse Executive or otherwise
provide for or pay for all reasonable expenses incurred by Executive in
furtherance or in connection with the business of the Bank, including, but not
by way of limitation, automobile and traveling expenses, and all reasonable
entertainment expenses (whether incurred at the Executive's residence, while
traveling or otherwise), subject to such reasonable documentation and other
limitations as may be established by the Board of Directors of the Bank. If
such expenses are paid in the first instance by Executive, the Bank shall
reimburse the Executive therefor.
5. TERMINATION.
(a) The Bank shall have the right, at any time upon prior
Notice of Termination, to terminate the Executive's employment hereunder for
any reason, including without limitation termination for Cause, Disability or
Retirement, and Executive shall have the right, upon prior Notice of
Termination, to terminate his employment hereunder for any reason.
(b) The Executive's employment, and his status as an
officer of the Bank shall terminate (i) immediately upon being given a Notice
of Termination for Cause, or (ii) on the Date of Termination for any other
reason. A Notice of Termination for other than Cause shall not affect the
Executive's right to compensation to the Date of Termination or for such other
period of time after the Date of Termination as specified in Section 5(c)(i)
and (ii) hereof, if applicable.
(c)(i) In the event that Executive's employment is
terminated by the Bank for other than Cause, Disability, Retirement or the
Executive's death, or such employment is terminated by the Executive due to a
material breach of this Agreement by the Bank which has not been cured within
fifteen (15) days after a written notice of non-compliance has been given by
the Executive to the Bank, and as of the Executive's Date of Termination no
Change in Control of the Bank has occurred, no written agreement which
contemplates a Change in Control of the Bank and which still is in effect has
been entered into by Commonwealth Mutual Holding Company and/or the Bank and no
discussions and/or negotiations are being conducted by either of such entities
which relate to same, then the Bank shall, subject to the provisions of Section
6 hereof, if applicable:
(A) pay to the Executive, in twenty-four (24)
equal monthly installments beginning with the
first business day of the month following the
Date of Termination, a cash severance amount
equal to two (2) times the Executive's Base
Salary as of his Date of Termination, and
(B) maintain and provide for a period ending at
the earlier of (i) the expiration of
twenty-four (24) months from the Executive's
Date of
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<PAGE> 6
Termination or (ii) the date of the
Executive's full-time employment by another
employer (provided that the Executive is
entitled under the terms of such employment
to benefits substantially similar to those
described in this subparagraph (B)), at no
cost to the Executive, the Executive's
continued participation in all group
insurance (other than disability insurance
unless the Executive was disabled and was
receiving disability insurance benefits prior
to the Date of Termination), life insurance,
health and accident, and other employee
benefit plans, programs and arrangements in
which the Executive was entitled to
participate immediately prior to the Date of
Termination (other than stock option and
restricted stock plans of the Bank).
(ii) In the event that Executive's employment is
terminated by the Bank for other than Cause, Disability, Retirement or the
Executive's death, or such employment is terminated by the Executive due to a
material breach of this Agreement by the Bank which has not been cured within
fifteen (15) days after a written notice of non-compliance has been given by
the Executive to the Bank or for Good Reason, and prior to the Executive's Date
of Termination there has been a Change in Control of the Bank or a written
agreement which contemplates a Change in Control of the Bank and which still is
in effect has been entered into by Commonwealth Mutual Holding Company and/or
the Bank or discussions and/or negotiations are being conducted by either of
such entities which relate to the same, then the Bank shall, subject to the
provisions of Section 6 hereof, if applicable:
(A) pay to the Executive, within thirty (30) days
following the Date of Termination, a lump sum
cash severance amount equal to three (3)
times the Executive's Average Annual
Compensation as set forth on the W-2 forms
issued by the Bank to the Executive and as
determined in Section 1.(a) hereof, and
(B) maintain and provide for a period ending at
the earlier of (i) the expiration of thirty
six (36) months from the Executive's Date of
Termination or (ii) the date of the
Executive's full-time employment by another
employer (provided that the Executive is
entitled under the terms of such employment
to benefits substantially similar to those
described in this subparagraph (B)), at no
cost to the Executive, the Executive's
continued participation in all group
insurance (other than disability insurance
unless the Executive was disabled and was
receiving disability insurance benefits prior
to the Date of Termination), life insurance,
health and accident, and other employee
benefit plans, programs and arrangements in
which the Executive was entitled to
participate immediately prior to the Date of
Termination (other than stock option and
restricted stock plans of the Bank).
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<PAGE> 7
6. ARBITRATION The Executive agrees to submit to final and
binding arbitration, pursuant to the rules of the American Arbitration
Association, any and all claims arising from the termination, for any reason,
of the Executive's employment by the Bank including, but not limited to:
(a) any and all claims for wages and benefits
(including without limitation salary, stock,
commissions, royalties, license fees, health
and welfare benefits, Severance pay, vacation
pay, and bonuses):
(b) any and all claims for wrongful discharge and
breach of contract (whether express or
implied), and implied covenants of good faith
and fair dealing;
(c) any and all claims for alleged employment
discrimination on the basis of age, race,
color, religion, sex, national origin,
veteran status, disability and/or handicap,
in violation of any federal, state or local
statute, ordinance, judicial precedent or
executive order, including but not limited to
claims for discrimination under the following
statutes: Title VII of the Civil Rights Act
of 1964, 42 U.S.C. Section 2000 et seq., the
Civil Rights Act of 1866, 42 U.S.C. Section
1981, the Age Discrimination in Employment
Act, as amended, 29 U.S.C. Section 621 et.
seq., the Older Workers Benefit Protection
Act, the Rehabilitation Act of 1972, as
amended, 29 U.S.C. Section 701 et seq., the
Americans with Disabilities Act, 42
U.S.C.Section 12101 et. seq., and the
Pennsylvania Human Relations Act, 43 P.S.
Section 951 et seq.
(d) any and all claims under any federal or state
statute relating to employee benefits or
pensions;
(e) any and all claims in tort (including but not
limited to any claims for misrepresentation,
defamation, interference with contract or
prospective economic advantage, intentional
infliction of emotional distress and
negligence; and
(f) any and all claims for attorney's fees and
costs.
7. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the
payments and benefits pursuant to Section 5 hereof, either alone or together
with other payments and benefits which Executive has the right to receive from
the Bank, would constitute a "parachute payment" under Section 280G of the
Code, the payments and benefits pursuant to Section 5 hereof shall be reduced,
in the manner determined by the Executive, by the amount, if any, which is the
minimum necessary to result in no portion of the payments and benefits under
Section 5 being non-deductible to either of the Bank pursuant to Section 280G
of the Code and subject to the excise tax imposed under Section 4999 of the
Code. The determination of any reduction in the payments and benefits to be
made pursuant to Section 5 shall be based upon the opinion of independent tax
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<PAGE> 8
counsel selected by the Bank's independent public accountants and paid by the
Bank. Such counsel shall be reasonably acceptable to the Bank and the
Executive; shall promptly prepare the foregoing opinion, but in no event later
than thirty (30) days from the Date of Termination; and may use such actuaries
as such counsel deems necessary or advisable for the purpose. In the event
that the Bank and/or the Executive do not agree with the opinion of such
counsel, (i) the Bank shall pay to the Executive the maximum amount of payments
and benefits pursuant to Section 5, as selected by the Executive, which such
opinion indicates that there is a high probability do not result in any of such
payments and benefits being non-deductible to the Bank and subject to the
imposition of the excise tax imposed under Section 4999 of the Code and (ii)
the Bank may request, and Executive shall have the right to demand that the
Bank request, a ruling from the IRS as to whether the disputed payments and
benefits pursuant to Section 5 hereof have such consequences. Any such request
for a ruling from the IRS shall be promptly prepared and filed by the Bank, but
in no event later than thirty (30) days from the date of the opinion of counsel
referred to above, and shall be subject to Executive's approval prior to
filing, which shall not be unreasonably withheld. The Bank and Executive agree
to be bound by any ruling received from the IRS and to make appropriate
payments to each other to reflect any such rulings, together with interest at
the applicable federal rate provided for in Section 7872(f)(2) of the Code.
Nothing contained herein shall result in a reduction of any payments or
benefits to which the Executive may be entitled upon termination of employment
under any circumstances other than as specified in this Section 6, or a
reduction in the payments and benefits specified in Section 5 below zero. The
payments and benefits specified in Section 5 hereof may in no event exceed the
Executive's Average Base Salary and benefits over the most recent three years
prior to termination.
8. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) The Executive, unless terminated for Retirement,
Change in Control of the Bank, or Disability, shall be required to mitigate
the amount of any payments and benefits hereunder by seeking other employment
or otherwise. In the event that the Executive obtains other employment during
the period that the Executive is receiving payments pursuant to Section
5(c)(i)(A) hereof, the cash amounts to be paid to the Executive pursuant
thereto shall be reduced by any compensation received by the Executive as a
result of employment by another employer after the Date of Termination.
(b) The specific arrangements referred to herein are not
intended to exclude any other benefits which may be available to the Executive
upon a termination of employment with the Bank pursuant to employee benefit
plans of the Bank or otherwise, provided, however, that any payments or
benefits the Executive receives from sources other than the Bank shall serve to
reduce the cash amount paid to the Executive pursuant to Section 5(c)(i)(A)
hereof.
9. CONFIDENTIALITY. The Executive acknowledges that by virtue
of his employment hereunder, he will maintain an intimate knowledge of the
activities and affairs of the Bank, including confidential matters. As a
result, the Executive agrees to maintain the confidentiality of all
confidential information relating to the Bank during the term of employment
hereunder and any period that the Executive may be receiving payments pursuant
to Section 5 hereof, provided that
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<PAGE> 9
nothing in this Section 8 shall be deemed to prevent the Executive from being
employed by any other corporation, firm or entity upon termination of
Executive's employment by the Bank as long as Executive does not violate the
foregoing proscription.
10. WITHHOLDING. All payments required to be made by the Bank
hereunder to the Executive shall be subject to the withholding of such amounts,
if any, relating to tax and other payroll deductions as the Bank may reasonably
determine should be withheld pursuant to any applicable law or regulation.
11. ASSIGNABILITY. The Bank may assign this Agreement and its
rights and obligations hereunder in whole, but not in part, to any corporation,
bank or other entity with or into which the Bank may hereafter merge or
consolidate or to which the Bank may transfer all or substantially all of its
assets, if in any such case said corporation, bank or other entity shall by
operation of law or expressly in writing assume all obligations of the Bank
hereunder as fully as if it had been originally made a party hereto, but may
not otherwise assign this Agreement or its rights and obligations hereunder.
The Executive may not assign or transfer this Agreement or any rights or
obligations hereunder.
12. NOTICE. For the purposes of this Agreement, notices and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by certified
or registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below:
To the Bank: Commonwealth Bank
70 Valley Stream Parkway
Valley Forge, Pennsylvania 19482-2104
To the Executive:
13. AMENDMENT; WAIVER. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing signed by the Executive and such officer or officers as
may be specifically designated by the Board of Directors of the Bank to sign on
its behalf. No waiver by any party hereto at any time of any breach by any
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
14. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United
States where applicable and otherwise by the substantive laws of the
Commonwealth of Pennsylvania.
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<PAGE> 10
15. NATURE OF OBLIGATIONS. Nothing contained herein shall create
or require the Bank to create a trust of any kind to fund any benefits which
may be payable hereunder, and to the extent that the Executive acquires a right
to receive benefits from the Bank hereunder, such right shall be no greater
than the right of any unsecured general creditor of the Bank.
16. HEADINGS. The section headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
17. VALIDITY. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
18. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
19. REGULATORY ACTIONS. The following provisions shall be
applicable to the parties to the extent that they are required to be included
in employment agreements between a savings association and its employees
pursuant to Section 563.39(b) of the Regulations Applicable to all Savings
Associations, 12 C.F.R. Section 563.39(b), or any successor thereto, and shall
be controlling in the event of a conflict with any other provision of this
Agreement, including without limitation Section 5 hereof
(a) If Executive is suspended from office and/or
temporarily prohibited from participating in the conduct of the Bank's affairs
pursuant to notice served under Section 8(e)(3) or Section 8(g)(1) of the
Federal Deposit Insurance Act ("FDIA")(12 U.S.C. Sections 1818(e)(3) and
1818(g)(1)), the Bank's obligations under this Agreement shall be suspended as
of the date of service, unless stayed by appropriate proceedings. If the
charges in the notice are dismissed, the Bank may, in its discretion: (i) pay
Executive all or part of the compensation withheld while its obligations under
this Agreement were suspended, and (ii)reinstate (in whole or in part) any of
its obligations which were suspended.
(b) If Executive is removed from office and/or permanently
prohibited from participating in the conduct of the Bank's affairs by an order
issued under Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C. Sections
1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement shall
terminate as of the effective date of the order, but vested rights of the
Executive and the Bank as of the date of termination shall not be affected.
(c) If the Bank is in default, as defined in Section
3(x)(1) of the FDIA (12 U.S.C. Section 1813(x)(1)), all obligations under this
Agreement shall terminate as of the date of default, but vested rights of the
Executive and the Bank as of the date of termination shall not be affected.
(d) All obligations under this Agreement shall be
terminated pursuant to 12 C.F.R. Section 563.39(b)(5) (except to the extent
that it is determined that continuation of the Agreement for the continued
operation of the Bank is necessary): (i) by the Director of the Office
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<PAGE> 11
of Thrift Supervision ("OTS"), or his/her designee, at the time the Federal
Deposit Insurance Corporation ("FDIC") or Resolution Trust Corporation enters
into an agreement to provide assistance to or on behalf of the Bank under the
authority contained in Section 13(c) of the FDIA (12 U.S.C. Section 1823(c));
or (ii) by the Director of the OTS, or his/her designee, at the time the
Director or his/her designee approves a supervisory merger to resolve problems
related to operation of the Bank or when the Bank is determined by the Director
of the OTS to be in an unsafe or unsound condition, but vested rights of the
Executive and the Bank as of the date of termination shall not be affected.
20. REGULATORY PROHIBITION. Notwithstanding any other provision
of this Agreement to the contrary, any payments made to the Executive pursuant
to this Agreement, or otherwise, are subject to and conditioned upon their
compliance with Section 18(k) of the FDIA (12 U.S.C. Section 1828(k)) and any
regulations promulgated thereunder.
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
Attest: COMMONWEALTH BANK
/s/ LEROY TODD, JR. By: /s/ PATRICK J. WARD
- ----------------------------- ------------------------------------------
PATRICK J. WARD
Witness:
/s/ LEROY TODD, JR. /s/ CHARLES H. MEACHAM
- ----------------------------- --------------------------------------------
CHARLES H. MEACHAM
11
<PAGE> 1
EXHIBIT 10.9
AGREEMENT
AGREEMENT, dated this 1st day of January 1997, between Commonwealth
Bank (the "Bank"), a federally-chartered savings bank, and Patrick J. Ward
(the "Executive").
W I T N E S S E T H:
WHEREAS, the Executive is presently President and Chief Operating
Officer of the Bank; and
WHEREAS, the Bank desires to be ensured of the Executive's continued
active participation in the business of the Bank; and
WHEREAS, in order to induce the Executive to remain in the employ of
the Bank and in consideration of the Executive's agreeing to remain in the
employ of the Bank, the parties desire to specify the terms of such employment;
NOW THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the parties hereby agree as follows:
1. DEFINITIONS. The following words and terms shall have the
meanings set forth below for the purposes of this Agreement:
(a) AVERAGE ANNUAL COMPENSATION. The Executive's "Average
Annual Compensation" for purposes of this Agreement shall be deemed to mean the
average level of compensation paid to the Executive by the Bank or any
subsidiary thereof during the most recent five taxable years preceding the Date
of Termination, including Base Salary, as defined in Section 1.(b) hereof, and
bonuses under any employee benefit plans of the Bank.
(b) BASE SALARY. "Base Salary" shall mean the Executive's
annual salary exclusive of any pension or other retirement benefit plan, profit
sharing, stock option, employee stock ownership, or other plans, benefits and
privileges given to employees and executives of the Bank.
(c) CAUSE. Termination by the Bank of the Executive's
employment for "Cause" shall mean termination because of personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful violation of any
law, rule or regulation (other than traffic violations or similar offenses) or
final cease-and-desist order or material breach of any provision of this
Agreement or for any act or failure to act on the Executive's part done, or
omitted to be done, by the Executive not in good faith and without reasonable
belief that the Executive's action or omission was in the best interest of the
Bank.
(d) CHANGE IN CONTROL OF THE BANK. "Change in Control of
the Bank" shall mean a change in control of a nature that would be required to
be reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934,
<PAGE> 2
as amended ("Exchange Act") or any successor thereto, whether or not the Bank
is registered under Exchange Act; provided that, without limitation, such a
change in control shall be deemed to have occurred if (i) any "person" (as such
term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Bank representing 25% or more of the
combined voting power of the Bank's then outstanding securities; or (ii) during
any period of two consecutive years, individuals who at the beginning of such
period constitute the Board of Directors of the Bank cease for any reason to
constitute at least a majority thereof unless the election, or the nomination
for election by stockholders, of each new director was approved by a vote of at
least two-thirds of the directors then still in office who were directors at
the beginning of the period; provided, however, that a "Change in Control" of
the Bank shall not be deemed to have occurred if Commonwealth Mutual Holding
Company ceases to own at least 51% of all outstanding shares of stock of the
Bank in connection with its conversion from mutual to stock form.
(e) CODE. "Code" shall mean the Internal Revenue Code of
1986, as amended.
(f) DATE OF TERMINATION. "Date of Termination" shall mean
the date the Executive's employment is terminated for any reason as specified
in the Notice of Termination.
(g) DISABILITY. Termination by the Bank of the Executive's
employment based on "Disability" shall mean termination because of any physical
or mental impairment which qualifies the Executive for disability benefits
under the applicable long-term disability plan maintained by the Bank or any
subsidiary or, if no such plan applies, which would qualify the Executive for
disability benefits under the Federal Social Security System.
(h) GOOD REASON. Termination by the Executive of the
Executive's employment for "Good Reason" shall mean termination by the
Executive within one year following a Change in Control of the Bank based on:
(i) Without the Executive's express written
consent, the failure to elect or to re-elect
or to appoint or to re-appoint the Executive
to the offices of Chairman, President and
Chief Executive Officer of the Bank or a
material adverse change made by the Bank in
the Executive's functions, duties or
responsibilities as Chairman, President and
Chief Executive Officer of the Bank as they
existed immediately prior to a Change in
Control of the Bank;
(ii) Without the Executive's express written
consent, a reduction by the Bank in the
Executive's Base Salary as the same may be
increased from time to time or, except to the
extent permitted by Section 3(b) hereof, a
reduction in the package of fringe benefits
provided to the Executive, taken as a whole;
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<PAGE> 3
(iii) The principal executive office of the Bank is
relocated more than 25 miles from the current
principal executive office or, without the
Executive's express written consent, the Bank
requires the Executive to be based anywhere
other than an area in which the Bank's
principal executive office is located, except
for required travel on business of the Bank
to an extent substantially consistent with
the Executive's present business travel
obligations;
(iv) Any purported termination of the Executive's
employment for Cause, Disability or
Retirement which is not effected pursuant to
a Notice of Termination satisfying the
requirements of paragraph (j) below; or
(v) The failure by the Bank to obtain the
assumption of and agreement to perform this
Agreement by any successor as contemplated in
Section 9 hereof.
(i) IRS. IRS shall mean the Internal Revenue Service.
(j) NOTICE OF TERMINATION. Any purported termination of
the Executive's employment by the Bank for any reason, including without
limitation for Cause, Disability or Retirement, or by the Executive for any
reason, including without limitation for Good Reason, shall be communicated by
written "Notice of Termination" to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a dated notice which (i)
indicates the specific termination provision in this Agreement relied upon,
(ii) sets forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision
so indicated, (iii) specifies a Date of Termination, which shall be not less
than thirty (30) nor more than ninety (90) days after such Notice of
Termination is given, except in the case of the Bank's termination of
Executive's employment for Cause; and (iv) is given in the manner specified in
Section 11 hereof.
(k) RETIREMENT. Termination by the Bank of the
Executive's employment based on "Retirement" shall mean voluntary termination
by the Employee in accordance with the Bank's retirement policies, including
early retirement, generally applicable to their salaried employees.
(l) GENDER NEUTRAL PRONOUN USAGE. The use of the
masculine pronoun shall be deemed to include the feminine pronoun throughout
this Agreement.
2. TERM OF EMPLOYMENT.
(a) The Bank hereby employs the Executive as President and
Chief Operating Officer and Executive hereby accepts said employment and agrees
to render such services to the Bank on the terms and conditions set forth in
this Agreement. The term of employment under this Agreement shall be for three
years, commencing on the date of this Agreement. Prior to the first annual
anniversary of the date of this Agreement and each annual anniversary
thereafter, the
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<PAGE> 4
Board of Directors of the Bank shall consider and review (with appropriate
corporate documentation thereof, and after taking into account all relevant
factors, including the Executive's performance hereunder) extension of the term
under this Agreement. If the Board of Directors does not approve such
extension it shall provide written notice to the Executive of such event or the
Executive may give written notice to the Bank of the Executive's election not
to extend the term. In each case such written notice shall be given not less
than thirty (30) days prior to any such anniversary date. If the Board of
Directors of the Bank elects to extend this Agreement after any anniversary
date of this Agreement, it may, in its discretion, relate back to the
anniversary date and extend this Agreement for up to three years from such
anniversary date. References herein to the term of this Agreement shall refer
both to the initial term and successive terms.
(b) During the term of this Agreement, the Executive shall
perform such executive services for the Bank as may be consistent with his
titles and from time to time assigned to him by the Bank's Board of Directors.
3. COMPENSATION AND BENEFITS.
(a) The Bank shall compensate and pay Executive for his
services during the term of this Agreement at a minimum base salary of One
Hundred Ninety Five Thousand Dollars ($195,000) per year, which may be
increased from time to time in such amounts as may be determined by the Board
of Directors of the Bank and may not be decreased without the Executive's
express written consent ("Base Salary"). In addition to his Base Salary, the
Executive shall be entitled to receive during the term of this Agreement such
bonus payments as may be determined by the Board of Directors of the Bank.
(b) During the term of the Agreement, Executive shall be
entitled to participate in and receive the benefits of any pension or other
retirement benefit plan, profit sharing, stock option, employee stock
ownership, or other plans, benefits and privileges given to employees and
executives of the Bank, to the extent commensurate with his then duties and
responsibilities, as fixed by the Board of Directors of the Bank. The Bank
shall not make any changes in such plans, benefits or privileges which would
adversely affect Executive's rights or benefits thereunder, unless such change
occurs pursuant to a program applicable to all executive officers of the Bank
and does not result in a proportionately greater adverse change in the rights
of or benefits to Executive as compared with any other executive officer of the
Bank. Nothing paid to Executive under any plan or arrangement presently in
effect or made available in the future shall be deemed to be in lieu of the
salary payable to Executive pursuant to Section 3(a) hereof.
(c) During the term of this Agreement, Executive shall be
entitled to paid annual vacation in accordance with the policies as established
from time to time by the Board of Directors of the Bank, which shall in no
event be less than four weeks per annum. Executive shall not be entitled to
receive any additional compensation from the Bank for failure to take a
vacation, nor shall Executive be able to accumulate unused vacation time from
one year to the next, except to the extent authorized by the Board of Directors
of the Bank.
4
<PAGE> 5
(d) During the term of this Agreement, Bank agrees to
provide Executive with the use of a Bank-owned automobile appropriate to his
positions with the Bank and to pay all costs associated with such automobile,
including registration, licensing, insurance and costs of operation.
4. EXPENSES. The Bank shall reimburse Executive or otherwise
provide for or pay for all reasonable expenses incurred by Executive in
furtherance or in connection with the business of the Bank, including, but not
by way of limitation, automobile and traveling expenses, and all reasonable
entertainment expenses (whether incurred at the Executive's residence, while
traveling or otherwise), subject to such reasonable documentation and other
limitations as may be established by the Board of Directors of the Bank. If
such expenses are paid in the first instance by Executive, the Bank shall
reimburse the Executive therefor.
5. TERMINATION.
(a) The Bank shall have the right, at any time upon prior
Notice of Termination, to terminate the Executive's employment hereunder for
any reason, including without limitation termination for Cause, Disability or
Retirement, and Executive shall have the right, upon prior Notice of
Termination, to terminate his employment hereunder for any reason.
(b) The Executive's employment, and his status as an
officer of the Bank shall terminate (i) immediately upon being given a Notice
of Termination for Cause, or (ii) on the Date of Termination for any other
reason. A Notice of Termination for other than Cause shall not affect the
Executive's right to compensation to the Date of Termination or for such other
period of time after the Date of Termination as specified in Section 5(c)(i)
and (ii) hereof, if applicable.
(c)(i) In the event that Executive's employment is
terminated by the Bank for other than Cause, Disability, Retirement or the
Executive's death, or such employment is terminated by the Executive due to a
material breach of this Agreement by the Bank which has not been cured within
fifteen (15) days after a written notice of non-compliance has been given by
the Executive to the Bank, and as of the Executive's Date of Termination no
Change in Control of the Bank has occurred, no written agreement which
contemplates a Change in Control of the Bank and which still is in effect has
been entered into by Commonwealth Mutual Holding Company and/or the Bank and no
discussions and/or negotiations are being conducted by either of such entities
which relate to same, then the Bank shall, subject to the provisions of Section
6 hereof, if applicable:
(A) pay to the Executive, in twelve (12) equal
monthly installments beginning with the first
business day of the month following the Date
of Termination, a cash severance amount equal
to two (2) times the Executive's Base Salary
as of his Date of Termination, and
(B) maintain and provide for a period ending at
the earlier of (i) the expiration of twelve
(12) months from the Executive's Date of
5
<PAGE> 6
Termination or (ii) the date of the
Executive's full-time employment by another
employer (provided that the Executive is
entitled under the terms of such employment
to benefits substantially similar to those
described in this subparagraph (B)), at no
cost to the Executive, the Executive's
continued participation in all group
insurance (other than disability insurance
unless the Executive was disabled and was
receiving disability insurance benefits prior
to the Date of Termination), life insurance,
health and accident, and other employee
benefit plans, programs and arrangements in
which the Executive was entitled to
participate immediately prior to the Date of
Termination (other than stock option and
restricted stock plans of the Bank).
(ii) In the event that Executive's employment is
terminated by the Bank for other than Cause, Disability, Retirement or the
Executive's death, or such employment is terminated by the Executive due to a
material breach of this Agreement by the Bank which has not been cured within
fifteen (15) days after a written notice of non-compliance has been given by
the Executive to the Bank or for Good Reason, and prior to the Executive's Date
of Termination there has been a Change in Control of the Bank or a written
agreement which contemplates a Change in Control of the Bank and which still is
in effect has been entered into by Commonwealth Mutual Holding Company and/or
the Bank or discussions and/or negotiations are being conducted by either of
such entities which relate to the same, then the Bank shall, subject to the
provisions of Section 6 hereof, if applicable:
(A) pay to the Executive, within thirty (30) days
following the Date of Termination, a lump sum
cash severance amount equal to three (3)
times the Executive's Average Annual
Compensation as set forth on the W-2 forms
issued by the Bank to the Executive and as
determined in Section 1.(a) hereof, and
(B) maintain and provide for a period ending at
the earlier of (i) the expiration of twenty
four (24) months from the Executive's Date of
Termination or (ii) the date of the
Executive's full-time employment by another
employer (provided that the Executive is
entitled under the terms of such employment
to benefits substantially similar to those
described in this subparagraph (B)), at no
cost to the Executive, the Executive's
continued participation in all group
insurance (other than disability insurance
unless the Executive was disabled and was
receiving disability insurance benefits prior
to the Date of Termination), life insurance,
health and accident, and other employee
benefit plans, programs and arrangements in
which the Executive was entitled to
participate immediately prior to the Date of
Termination (other than stock option and
restricted stock plans of the Bank).
6
<PAGE> 7
6. ARBITRATION The Executive agrees to submit to final and
binding arbitration, pursuant to the rules of the American Arbitration
Association, any and all claims arising from the termination, for any reason,
of the Executive's employment by the Bank including, but not limited to:
(a) any and all claims for wages and benefits
(including without limitation salary, stock,
commissions, royalties, license fees, health
and welfare benefits, Severance pay, vacation
pay, and bonuses):
(b) any and all claims for wrongful discharge and
breach of contract (whether express or
implied), and implied covenants of good faith
and fair dealing;
(c) any and all claims for alleged employment
discrimination on the basis of age, race,
color, religion, sex, national origin,
veteran status, disability and/or handicap,
in violation of any federal, state or local
statute, ordinance, judicial precedent or
executive order, including but not limited to
claims for discrimination under the following
statutes: Title VII of the Civil Rights Act
of 1964, 42 U.S.C. Section 2000 et seq., the
Civil Rights Act of 1866, 42 U.S.C. Section
1981, the Age Discrimination in Employment
Act, as amended, 29 U.S.C. Section 621 et.
seq., the Older Workers Benefit Protection
Act, the Rehabilitation Act of 1972, as
amended, 29 U.S.C. Section 701 et seq., the
Americans with Disabilities Act, 42
U.S.C.Section 12101 et. seq., and the
Pennsylvania Human Relations Act, 43 P.S.
Section 951 et seq.
(d) any and all claims under any federal or state
statute relating to employee benefits or
pensions;
(e) any and all claims in tort (including but not
limited to any claims for misrepresentation,
defamation, interference with contract or
prospective economic advantage, intentional
infliction of emotional distress and
negligence; and
(f) any and all claims for attorney's fees and
costs.
7. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the
payments and benefits pursuant to Section 5 hereof, either alone or together
with other payments and benefits which Executive has the right to receive from
the Bank, would constitute a "parachute payment" under Section 280G of the
Code, the payments and benefits pursuant to Section 5 hereof shall be reduced,
in the manner determined by the Executive, by the amount, if any, which is the
minimum necessary to result in no portion of the payments and benefits under
Section 5 being non-deductible to either of the Bank pursuant to Section 280G
of the Code and subject to the excise tax imposed under Section 4999 of the
Code. The determination of any reduction in the payments and benefits to be
made pursuant to Section 5 shall be based upon the opinion of independent tax
7
<PAGE> 8
counsel selected by the Bank's independent public accountants and paid by the
Bank. Such counsel shall be reasonably acceptable to the Bank and the
Executive; shall promptly prepare the foregoing opinion, but in no event later
than thirty (30) days from the Date of Termination; and may use such actuaries
as such counsel deems necessary or advisable for the purpose. In the event
that the Bank and/or the Executive do not agree with the opinion of such
counsel, (i) the Bank shall pay to the Executive the maximum amount of payments
and benefits pursuant to Section 5, as selected by the Executive, which such
opinion indicates that there is a high probability do not result in any of such
payments and benefits being non-deductible to the Bank and subject to the
imposition of the excise tax imposed under Section 4999 of the Code and (ii)
the Bank may request, and Executive shall have the right to demand that the
Bank request, a ruling from the IRS as to whether the disputed payments and
benefits pursuant to Section 5 hereof have such consequences. Any such request
for a ruling from the IRS shall be promptly prepared and filed by the Bank, but
in no event later than thirty (30) days from the date of the opinion of counsel
referred to above, and shall be subject to Executive's approval prior to
filing, which shall not be unreasonably withheld. The Bank and Executive agree
to be bound by any ruling received from the IRS and to make appropriate
payments to each other to reflect any such rulings, together with interest at
the applicable federal rate provided for in Section 7872(f)(2) of the Code.
Nothing contained herein shall result in a reduction of any payments or
benefits to which the Executive may be entitled upon termination of employment
under any circumstances other than as specified in this Section 6, or a
reduction in the payments and benefits specified in Section 5 below zero. The
payments and benefits specified in Section 5 hereof may in no event exceed the
Executive's Average Base Salary and benefits over the most recent three years
prior to termination.
8. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) The Executive, unless terminated for Retirement,
Change in Control of the Bank, or Disability, shall be required to mitigate
the amount of any payments and benefits hereunder by seeking other employment
or otherwise. In the event that the Executive obtains other employment during
the period that the Executive is receiving payments pursuant to Section
5(c)(i)(A) hereof, the cash amounts to be paid to the Executive pursuant
thereto shall be reduced by any compensation received by the Executive as a
result of employment by another employer after the Date of Termination.
(b) The specific arrangements referred to herein are not
intended to exclude any other benefits which may be available to the Executive
upon a termination of employment with the Bank pursuant to employee benefit
plans of the Bank or otherwise, provided, however, that any payments or
benefits the Executive receives from sources other than the Bank shall serve to
reduce the cash amount paid to the Executive pursuant to Section 5(c)(i)(A)
hereof.
9. CONFIDENTIALITY. The Executive acknowledges that by virtue
of his employment hereunder, he will maintain an intimate knowledge of the
activities and affairs of the Bank, including confidential matters. As a
result, the Executive agrees to maintain the confidentiality of all
confidential information relating to the Bank during the term of employment
hereunder and any period that the Executive may be receiving payments pursuant
to Section 5 hereof, provided that
8
<PAGE> 9
nothing in this Section 8 shall be deemed to prevent the Executive from being
employed by any other corporation, firm or entity upon termination of
Executive's employment by the Bank as long as Executive does not violate the
foregoing proscription.
10. WITHHOLDING. All payments required to be made by the Bank
hereunder to the Executive shall be subject to the withholding of such amounts,
if any, relating to tax and other payroll deductions as the Bank may reasonably
determine should be withheld pursuant to any applicable law or regulation.
11. ASSIGNABILITY. The Bank may assign this Agreement and its
rights and obligations hereunder in whole, but not in part, to any corporation,
bank or other entity with or into which the Bank may hereafter merge or
consolidate or to which the Bank may transfer all or substantially all of its
assets, if in any such case said corporation, bank or other entity shall by
operation of law or expressly in writing assume all obligations of the Bank
hereunder as fully as if it had been originally made a party hereto, but may
not otherwise assign this Agreement or its rights and obligations hereunder.
The Executive may not assign or transfer this Agreement or any rights or
obligations hereunder.
12. NOTICE. For the purposes of this Agreement, notices and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by certified
or registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below:
To the Bank: Commonwealth Bank
70 Valley Stream Parkway
Valley Forge, Pennsylvania 19482-2104
To the Executive:
13. AMENDMENT; WAIVER. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing signed by the Executive and such officer or officers as
may be specifically designated by the Board of Directors of the Bank to sign on
its behalf. No waiver by any party hereto at any time of any breach by any
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
14. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United
States where applicable and otherwise by the substantive laws of the
Commonwealth of Pennsylvania.
9
<PAGE> 10
15. NATURE OF OBLIGATIONS. Nothing contained herein shall create
or require the Bank to create a trust of any kind to fund any benefits which
may be payable hereunder, and to the extent that the Executive acquires a right
to receive benefits from the Bank hereunder, such right shall be no greater
than the right of any unsecured general creditor of the Bank.
16. HEADINGS. The section headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
17. VALIDITY. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
18. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
19. REGULATORY ACTIONS. The following provisions shall be
applicable to the parties to the extent that they are required to be included
in employment agreements between a savings association and its employees
pursuant to Section 563.39(b) of the Regulations Applicable to all Savings
Associations, 12 C.F.R. Section 563.39(b), or any successor thereto, and shall
be controlling in the event of a conflict with any other provision of this
Agreement, including without limitation Section 5 hereof
(a) If Executive is suspended from office and/or
temporarily prohibited from participating in the conduct of the Bank's affairs
pursuant to notice served under Section 8(e)(3) or Section 8(g)(1) of the
Federal Deposit Insurance Act ("FDIA")(12 U.S.C. Sections 1818(e)(3) and
1818(g)(1)), the Bank's obligations under this Agreement shall be suspended as
of the date of service, unless stayed by appropriate proceedings. If the
charges in the notice are dismissed, the Bank may, in its discretion: (i) pay
Executive all or part of the compensation withheld while its obligations under
this Agreement were suspended, and (ii)reinstate (in whole or in part) any of
its obligations which were suspended.
(b) If Executive is removed from office and/or permanently
prohibited from participating in the conduct of the Bank's affairs by an order
issued under Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C. Sections
1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement shall
terminate as of the effective date of the order, but vested rights of the
Executive and the Bank as of the date of termination shall not be affected.
(c) If the Bank is in default, as defined in Section
3(x)(1) of the FDIA (12 U.S.C. Section 1813(x)(1)), all obligations under this
Agreement shall terminate as of the date of default, but vested rights of the
Executive and the Bank as of the date of termination shall not be affected.
(d) All obligations under this Agreement shall be
terminated pursuant to 12 C.F.R. Section 563.39(b)(5) (except to the extent
that it is determined that continuation of the Agreement for the continued
operation of the Bank is necessary): (i) by the Director of the Office
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<PAGE> 11
of Thrift Supervision ("OTS"), or his/her designee, at the time the Federal
Deposit Insurance Corporation ("FDIC") or Resolution Trust Corporation enters
into an agreement to provide assistance to or on behalf of the Bank under the
authority contained in Section 13(c) of the FDIA (12 U.S.C. Section 1823(c));
or (ii) by the Director of the OTS, or his/her designee, at the time the
Director or his/her designee approves a supervisory merger to resolve problems
related to operation of the Bank or when the Bank is determined by the Director
of the OTS to be in an unsafe or unsound condition, but vested rights of the
Executive and the Bank as of the date of termination shall not be affected.
20. REGULATORY PROHIBITION. Notwithstanding any other provision
of this Agreement to the contrary, any payments made to the Executive pursuant
to this Agreement, or otherwise, are subject to and conditioned upon their
compliance with Section 18(k) of the FDIA (12 U.S.C. Section 1828(k)) and any
regulations promulgated thereunder.
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
Attest: COMMONWEALTH BANK
By:
- ------------------------------ --------------------------------------
Witness:
- ------------------------------ ---------------------------------------
PATRICK J. WARD
11
<PAGE> 1
EXHIBIT 13
COMMONWEALTH
BANCORP
[PHOTO]
1996 ANNUAL REPORT
<PAGE> 2
[PHOTO]
TABLE OF CONTENTS
<TABLE>
<S> <C>
Selected Financial Highlights . . . . . . . . . . . . . Page 1
Letter to Shareholders . . . . . . . . . . . . . . . . Page 2
Detailed Financial Highlights . . . . . . . . . . . . . Page 13
Management's Discussion and Analysis . . . . . . . . . Page 14
Report of Management . . . . . . . . . . . . . . . . . Page 29
Independent Accountants' Internal Control Report . . . Page 30
Independent Accountants' Opinion Report . . . . . . . . Page 31
Consolidated Financial Statements . . . . . . . . . . . Page 32
Directors and Officers . . . . . . . . . . . . . . . . Page 59
Corporate Information . . . . . . . . . . . . . . . . . Page 59
Locations . . . . . . . . . . . . . . . . . . . . . . . Page 60
Bank Locations Map . . . . . . . . . . . . . . . . . . Page 61
</TABLE>
Commonwealth Bancorp, Inc., with consolidated assets in excess of $2.1 billion,
is the holding company for Commonwealth Bank, which has branches throughout
southeast Pennsylvania. ComNet Mortgage Services, a division of Commonwealth
Bank, has offices in Pennsylvania, Connecticut, Maryland, New Jersey, and Rhode
Island.
GRANITE INSCRIPTION (FRONT COVER) ON COMMONWEALTH'S NEWLY ACQUIRED BRANCH
OFFICE AT FIFTH AND PENN STREETS IN READING, PENNSYLVANIA IS REFLECTIVE OF
COMMONWEALTH'S PHILOSOPHIES. TELLER AREA OF FIFTH AND PENN OFFICE IS PICTURED
ABOVE.
<PAGE> 3
SELECTED FINANCIAL HIGHLIGHTS (unaudited)
(Dollars in thousands, except per share and ratio data)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
AT YEAR END 1996 1995 1994
<S> <C> <C> <C>
Total assets $2,119,961 $1,455,700 $1,213,960
Mortgage-backed securities 752,707 463,353 430,119
Loans receivable, net 1,113,114 796,735 583,144
Deposit accounts 1,491,450 1,076,549 853,519
Shareholders' equity 231,924(2) 137,036 116,905(1)
- ----------------------------------------------------------------------------------------------------------------------
FOR THE YEAR
Net interest income $ 60,954 $ 47,462 $ 43,514
Net income 9,338 11,255 9,245
Earnings per share 0.72 N/A(3) N/A(3)
Dividends per share(4) 0.24 0.24 0.18
Book value per share 12.92 N/A(3) N/A(3)
- ----------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS(5)
Total risk-based capital to risk-weighted assets 14.17% 18.96% 24.67%
Return on assets 0.51 0.85 0.77
Return on equity 4.97 8.95 8.02
Interest rate spread 3.30 3.55 3.55
Net interest margin 3.54 3.80 3.83
Non-performing assets to total assets at end of period 0.43 0.51 0.52
Allowance for loan losses to non-performing loans at end of period 123.74 120.86 167.90
</TABLE>
(1) Reflects the receipt of $32.0 million of net proceeds from the Bank's
initial public offering of common stock in January 1994.
(2) Reflects the receipt of $88.8 million of net proceeds from the Company's
second offering of common stock in June 1996.
(3) Not applicable, as the Company completed its Conversion and Reorganization
on June 14, 1996.
(4) All periods have been adjusted to reflect the conversion of 2.0775 shares
of Company common stock for each share of Bank common stock.
(5) With the exception of end of period ratios, all ratios are based on average
daily balances during the respective periods and are annualized where
appropriate.
1
<PAGE> 4
LETTER TO SHAREHOLDERS Commonwealth Bancorp, Inc. and Subsidiaries
DEAR SHAREHOLDERS,
CUSTOMERS AND FRIENDS:
[PHOTO]
CHARLES H. MEACHAM,
CHAIRMAN OF THE BOARD
CHIEF EXECUTIVE OFFICER
The past year was one of outstanding progress for Commonwealth Bancorp, Inc.
The Company continued to experience significant growth and, exclusive of a
one-time charge from the Federal Deposit Insurance Corporation to recapitalize
the Savings Association Insurance Fund, achieved record earnings in its third
year of public ownership.
Net income in 1996 was $9.3 million, or $0.72 per common share. Excluding the
one-time charge to recapitalize the Savings Association Insurance Fund, net
income would have been $13.9 million, or 23% above the $11.3 million achieved
in 1995. Importantly, 1996 earnings reflected $3.2 million in non-cash
expenses (after tax) relating to the amortization of goodwill and core deposit
intangibles acquired in various acquisitions and accounted for under the
purchase method of accounting. This compared to $1.4 million of such expenses
in 1995. We highlight this to emphasize that Commonwealth's "cash" earnings
are meaningfully higher than its "reported" earnings.
The investment community's assessment of Commonwealth's 1996 performance and
future earnings potential was reflected in the increase in the value of the
Company's common stock during 1996. As adjusted for the June 1996 exchange of
common shares relating to the Company's second step conversion, our common
stock increased in price by 39% in 1996 to $15.00 per share at year-end.
The year was marked by a number of key accomplishments, all of which were
directed toward furthering Commonwealth's strategic plan to expand its retail,
mortgage and business banking franchise in southeast Pennsylvania through
acquisition and supermarket branching. Reflecting this strategy, during 1996,
total assets increased by 46% to $2.1 billion; deposits increased by 39% to
$1.5 billion; and net loans increased by 40% to $1.1 billion. Additionally,
the Company's mortgage servicing portfolio grew by 13% in 1996 to $2.1 billion
at year-end.
A critical component of Commonwealth's strategy has been the conversion and
reorganization of the Company from a mutual savings bank to its current public
stock holding company form. The first step in that process was completed in
1994 with the initial public offering of approximately 45% of the shares of the
Bank's common stock. We took another important step forward in 1996 with the
public offering of shares representing the remaining portion of Commonwealth's
common stock. This second offering was completed on June 14, 1996, and
generated net proceeds of $88.8 million. Similar to the capital raised in
1994,
2
<PAGE> 5
the capital raised in 1996 is expected to be used primarily to expand the
Company's retail, business, and mortgage banking activities.
A portion of the capital raised in the second offering was allocated toward the
June 28, 1996 purchase of twelve former branch offices of Meridian Bank located
in Berks and Lebanon Counties, Pennsylvania. This acquisition provided
Commonwealth with an excellent distribution network, deposit market share of
approximately 8% in Berks County, solid retail and commercial customer
relationships, and talented branch staff in counties contiguous to our
historical markets in southeast Pennsylvania.
During the year, the Bank continued to implement its supermarket banking
strategy, increasing the number of supermarket branches from 10 to 14. These
full-service branches are open seven days and six nights per week, offering
extraordinary convenience to customers who wish to combine their banking with
their grocery shopping. Additionally, the Bank opened one traditional branch,
bringing the total number of branches to 53 in Commonwealth's eight county
region in southeast Pennsylvania.
The Bank significantly increased its focus on consumer lending activities in
1996. Reflective of this effort and, in part, due to the acquisition of the
Meridian branches, consumer loans increased by more than 50% in 1996 to $169.3
million at year-end.
In the business banking arena, Commonwealth made tremendous progress in 1996.
We expanded our offering of asset and liability products directed toward
commercial customers and significantly increased the number of business banking
relationship officers. At the end of 1996, loans to businesses, exclusive of
those guaranteed by the Small Business Administration, totaled $70.8 million,
nearly a five-fold increase from year-end 1995.
Mortgage banking has been a key component of Commonwealth's business strategy
for most of its history. In 1996, we sharpened the geographic focus of ComNet
Mortgage Services, the Bank's mortgage banking division, to those markets where
the Bank's presence gives it a competitive advantage. For example, we opened a
new ComNet branch in Allentown, Pennsylvania in 1996, which
[CHART]
COMMONWEALTH SHARES HAVE OUTPACED THE NASDAQ STOCK AND FINANCIAL INDICES,
APPRECIATING, ON AN ADJUSTED BASIS, FROM $4.81 PER SHARE TO $15.00 PER SHARE
FROM THE ORIGINAL OFFERING IN JANUARY 1994 THROUGH DECEMBER 31, 1996. STOCK
PRICES HAVE BEEN ADJUSTED TO REFLECT THE JUNE 1996 CONVERSION OF 2.0775 SHARES
OF COMPANY COMMON STOCK FOR EACH SHARE OF BANK STOCK. THE NASDAQ FINANCIAL
INDEX IS A CAPITALIZATION-WEIGHTED INDEX DESIGNED TO MEASURE THE PERFORMANCE OF
ALL NASDAQ STOCKS IN THE FINANCE SECTOR, EXCLUDING BANKS. THE COMPANIES
INCLUDED ARE SAVINGS AND LOAN ASSOCIATIONS, SECURITY AND COMMODITY BROKERS, AND
INVESTMENT COMPANIES. THE INDICES REFLECT A BASE VALUE OF 100 AS OF DECEMBER
31, 1993.
3
<PAGE> 6
[PHOTO]
PATRICK J. WARD, PRESIDENT AND CHIEF OPERATING
OFFICER, PICTURED TO THE RIGHT OF MR. MEACHAM.
contributed to the 29% increase in retail mortgage originations to $228.3
million during the year. The strategy to narrow ComNet's geographic focus,
coupled with a disciplined approach to pricing, resulted in a decrease in
wholesale mortgage originations to $233.8 million in 1996, from $318.0 million
in 1995. Nevertheless, despite the decrease in wholesale mortgage
originations, ComNet recorded the most profitable year in its history.
Key to the future performance of any organization is the strength and vision of
its management team. In this regard, we took a number of important steps in
1996 to bolster Commonwealth's management team to better enable the Company to
meet the challenges of the future. Most important among these was the
promotion of Patrick J. Ward to President and Chief Operating Officer in
December 1996. Mr. Ward joined the organization in 1992 as Chief Financial
Officer and was instrumental in managing our conversion and reorganization to
the public stock holding company form. The Board of Directors and employees of
Commonwealth have great confidence in him, as he brings to the office of
President a thorough understanding of the Company's businesses and markets. We
look forward to Mr. Ward's continued success with Commonwealth.
4
<PAGE> 7
David K. Griest was promoted to Senior Vice President and Chief Information
Officer in December 1996. Mr. Griest has been with Commonwealth since 1989,
having joined the Company from a large savings institution. He played a key
role in the integration of the Meridian branch acquisition and offers a wealth
of information processing expertise to the position.
Also in December 1996, Charles M. Johnston joined Commonwealth as Senior Vice
President and Chief Financial Officer. Mr. Johnston came to Commonwealth after
several years as the Chief Financial Officer of a consumer finance company and
a number of years managing the corporate finance and investor relations
activities of a major bank holding company. He brings to Commonwealth
significant banking and capital markets experience.
In early 1996, Peter A. Kehoe joined Commonwealth as President of ComNet
Mortgage Services. Mr. Kehoe brings with him the leadership and vision gained
from over 20 years experience in the mortgage banking industry, including
executive positions with two large national mortgage companies.
On a personal note, we would be remiss if we did not also take this opportunity
to recognize the important and long-standing contributions of two individuals
who have retired from the organization. Richard J. Conner retired from the
Board of Directors in 1996, after serving admirably in that capacity for 40
years. While we will miss his advice and counsel as a member of the Board, he
has agreed to serve in the future in the role of Director Emeritus of our
subsidiary, Commonwealth Bank. Also, LeRoy D. Todd, Jr., Senior Vice President
- - Compliance and Planning, retired in January 1997 after 48 years with
Commonwealth and its predecessor companies. Roy has been a trusted friend and
associate. He will be deeply missed by the organization.
Looking forward, 1997 promises to be as exciting as 1996. We are enthusiastic
about the future and our continuing evolution from a traditional savings bank
to a larger, more profitable community bank. Recognizing this evolution and
reflecting our optimism about the future, we changed the name of the Bank from
"Commonwealth Savings Bank" to "Commonwealth Bank" in 1996. Additionally, to
accommodate growth and to better control operating expenses, we moved our
corporate headquarters from Malvern, Pennsylvania to Norristown, Pennsylvania
in early 1997.
Although our organization has and will continue to experience great change, our
fundamental business philosophies remain constant. These philosophies include
a commitment to strong credit quality, prudent risk management, and a continued
focus on community and mortgage banking. Our commitment to customer service is
reflected in the corporate slogan prominently displayed in each of our
branches. "Putting the Customer First" has been the foundation of our past
achievements and will be the hallmark of Commonwealth's future success.
The Board of Directors and management are proud of Commonwealth's
accomplishments in 1996, and look enthusiastically toward the future. However,
we recognize that the Company's past accomplishments would not have been
possible, and its future prospects not as bright, without the loyal support of
our customers, shareholders and friends, nor without the hard work and
dedication of all Commonwealth employees. We are grateful to each of you.
Sincerely,
/s/ CHARLES H. MEACHAM
Charles H. Meacham
Chairman of the Board and Chief Executive Officer
5
<PAGE> 8
[PHOTO]
SUPERMARKET BANK
BRANCHES OFFER
EXTRAORDINARY
CONVENIENCE TO
CUSTOMERS AND
SIGNIFICANT MARKETING
OPPORTUNITIES AND COST
SAVINGS TO THE BANK.
RETAIL BANKING
Much of Commonwealth's past, and anticipated future, success has been founded
on the expansion and strengthening of its retail banking franchise in southeast
Pennsylvania. In this regard, the Company's strategy has been directed toward
building a full-service community bank, with localized service and decision
making, capable of thriving in competition with much larger regional and
national banks.
A key aspect of the retail strategy has involved increasing the Company's
presence in markets in which it chooses to compete. At year-end 1996,
Commonwealth had a total of 53 retail branch offices in its eight county region
of Berks, Bucks, Chester, Delaware, Lehigh, Lebanon, Montgomery, and
Philadelphia Counties, Pennsylvania. This compared to 36 locations in seven
counties at year-end 1995. The growth in the retail branch network in 1996 was
attributable to the acquisition of twelve former Meridian branches, as well as
to the opening of four new supermarket branches and one traditional branch.
On June 28, 1996, Commonwealth completed the acquisition of twelve former
branch offices of Meridian Bank located in Berks and Lebanon Counties. In
connection with this transaction, the Company assumed approximately $379.7
million of deposits and acquired approximately $122.4 million of single-family
residential, commercial and consumer loans. This acquisition provided
Commonwealth with an excellent distribution network, deposit market share of
approximately 8% in Berks County, solid retail and business customer
relationships, and talented branch staff in counties contiguous to our
historical markets in southeast Pennsylvania.
During the year, the Bank also continued to implement its supermarket banking
strategy, increasing the number of supermarket branches from 10 to 14. These
branches provide a number of advantages over traditional branches, offering
extraordinary convenience to customers and significant marketing opportunities
and cost advantages to the Bank.
6
<PAGE> 9
Customers benefit from supermarket branches because, from the standpoint of
convenience, supermarket branches are open seven-days-per-week (12 hours per
day Monday through Saturday, and 4 hours on Sunday) and the majority are
located in newer, larger supermarkets where weekly customer counts average in
excess of 12,000. Studies have shown that customers visit the grocery store an
average of 2.2 times per week. Recognizing this, Commonwealth's supermarket
banking strategy is directed toward enabling customers to do their banking when
and where it is convenient for them.
Commonwealth also benefits from supermarket branches, as they provide increased
opportunity to market the Bank's financial products and services by putting
Commonwealth "in the walking path" of thousands of potential customers every
day. Additionally, supermarket banking enables the Bank to improve market
penetration more quickly and at significantly lower cost than would be possible
through traditional branches.
Another important aspect of Commonwealth's retail banking strategy has involved
the broadening of the Company's product offering and delivery capabilities.
For example, in 1996, the Bank increased its automated teller machine ("ATM")
network to 48 ATMs, strategically located in or near our existing traditional
and supermarket branches. Also, in 1996, the Bank expanded its customer
service phone center and introduced the Commonwealth VISA(R) credit card and
Commonwealth CheckCard. The Commonwealth CheckCard is a debit card through
which customers can make purchases, from any merchant accepting VISA(R) or
MAC(R), and have the amount of the purchase deducted directly from their
checking account.
Through an agreement with Independent Financial Marketing Group, Inc., a third
party marketing firm, the Bank offers a full line of investment services to its
customers, including asset allocation products and retirement planning
services. Sales of mutual funds and annuities through this program totaled
$27.3 million in 1996, or 24% above the $22.1 million sold in 1995. Fee income
related to these products improved to $0.5 million in 1996, up from $0.3
million in 1995.
Commonwealth expects to continue to expand and strengthen its retail banking
franchise in the future. Five supermarket branches are scheduled to open
during 1997, and the Bank expects to add approximately 10 ATMs. Commonwealth
will also continue to explore ways to expand its product line to increase
customer convenience and Bank profitability.
NUMBER OF BANK BRANCH
LOCATIONS
Dec. 31, 1994 26
Dec. 31, 1995 36
Dec. 31, 1996 53
DEPOSIT BALANCES
Dec. 31, 1995 $0.9 BILLION
Dec. 31, 1994 $1.1 BILLION
Dec. 31, 1996 $1.5 BILLION
THE BANK HAS ACHIEVED SIGNIFICANT GROWTH IN BRANCH OFFICES AND
DEPOSITS SINCE YEAR-END 1994.
7
<PAGE> 10
[PHOTO]
JOHN DAVIS, TREASURER, AND FRANK CARSON, PRESIDENT, CARSON SERVICES, INC.
REVIEW PLANS WITH COMMONWEALTH BANKING OFFICER, CHRISTOPHER MCDERMOTT. THE 30
YEAR-OLD COMPANY RECENTLY TRANSFERRED ITS BANKING RELATIONSHIP TO COMMONWEALTH.
BUSINESS BANKING
One of the key elements of Commonwealth's transition from a traditional savings
bank to a full-service community bank has been the development of a business
banking program to meet the needs of businesses located in markets served by
our retail branch network. Commencing in late 1993, Commonwealth expanded its
commercial lending activities by developing the capacity to make loans to local
businesses, including loans secured by owner-occupied commercial real estate,
in its primary market area in southeast Pennsylvania.
8
<PAGE> 11
Similar to the Company's retail banking strategy, Commonwealth's business
banking strategy has focused on building a full-service institution, with
localized service and decision making, capable of competing effectively with
larger regional and national banks, which are not as consistently focused on
the small business market. In 1996, the Bank made significant investments in
products, staffing and support systems to meet the needs of local businesses.
In particular, the Bank expanded its product offering in the cash management
area, which now includes sweep, zero balance and controlled disbursement
account capabilities, as well as on-line access to up-to-date account
information through Commonwealth's PC Treasury Station. Commonwealth now has a
staff of 11 commercial lenders and expects to add 3 more during 1997.
Commonwealth's target market is comprised of businesses in its eight county
region having annual revenues of under $10.0 million. While the Bank has the
legal lending capacity to extend credit in much larger amounts, most credits
are under $1.0 million, reflecting prudent risk management and the relatively
modest credit needs, in absolute terms, of this borrowing segment.
For credit exposures of up to $2.5 million, credit risk is managed through the
Credit Policy and Loan Administration Department, under the supervision of the
Chief Credit Officer. Approval authority for exposures above $2.5 million
rests with the Commercial Loan Credit Committee which, in addition to the Chief
Credit Officer, is comprised of other senior officers of the Bank.
The Company is beginning to experience tangible benefits from its efforts to
prudently manage growth in business banking. For example, during 1996, business
deposits increased to $49.6 million, compared to $24.1 million at year-end
1995. Additionally, commercial loans, exclusive of loans guaranteed by the
Small Business Administration, increased nearly five-fold from $12.2 million at
December 31, 1995, to $70.8 million at the end of 1996. Importantly, the
Company's growth in business banking has been achieved without incurring undue
credit risk. Nonperforming commercial loans totaled only $1.5 million, or 2%,
of the Bank's commercial loan portfolio at year end 1996.
THE BANK HAS
ACHIEVED SIGNIFICANT
GROWTH IN BUSINESS
LOANS AND DEPOSITS
SINCE YEAR-END 1994.
BUSINESS LOAN GROWTH
Dec. 31, 1994 $6.4 MILLION
Dec. 31, 1995 $12.2 MILLION
Dec. 31, 1996 $70.8 MILLION
BUSINESS DEPOSIT
GROWTH
Dec. 31, 1994 $17.7 MILLION
Dec. 31, 1995 $24.1 MILLION
Dec. 31, 1996 $49.6 MILLION
9
<PAGE> 12
[PHOTO]
COMMONWEALTH IS
PROUD OF ITS HERITAGE
AS A MORTGAGE LENDER. THE BANK HAS BEEN
HELPING PEOPLE BUY HOMES FOR OVER 50 YEARS.
MORTGAGE BANKING
Commonwealth is proud of its long heritage as a mortgage lender. Through
ComNet Mortgage Services, a division of the Bank, Commonwealth is involved in
retail and wholesale mortgage originations, securitization and sale of mortgage
loans, and mortgage servicing. ComNet focuses its business in the I-95
corridor between Rhode Island and Virginia.
With respect to the origination of mortgage loans, ComNet's strategy has been
to focus on retail originations in those markets where the Company's local
presence gives it a competitive advantage. In 1996, retail mortgage loan
originations totaled $228.3 million, an increase of 29% compared to $176.8
million in 1995. The growth in retail mortgage originations was particularly
strong in those Pennsylvania counties in which the Bank has branches, and was
supported, in part, by the opening of a new ComNet branch in Allentown,
Pennsylvania. In markets where Commonwealth has a banking presence, additional
bank products are offered to mortgage customers.
The origination of mortgages on a retail basis will continue to be a strategic
focus for ComNet in the future. Commonwealth's commitment to this business was
highlighted in early 1997 with the acquisition of selected assets and offices
of Homestead Mortgage, Inc., a mortgage banking company headquartered in
Millersville, Maryland. Among the offices acquired from Homestead were
production branches located in Millersville, Bethesda, Whitemarsh, and
Woodlawn, Maryland, and Media, Pennsylvania. In 1996, these branches
originated approximately $160.0 million in mortgages in Virginia, Maryland,
Delaware, Pennsylvania, and the District of Columbia. This acquisition gives
Commonwealth an excellent opportunity to expand an already profitable core
business in important Mid-Atlantic markets much faster than would be possible
through de novo branch expansion. Under the terms of the transaction, the
acquired offices will continue to operate under the Homestead Mortgage name in
Maryland, Virginia, and the District of Columbia.
10
<PAGE> 13
Wholesale mortgage originations totaled $233.8 million in 1996, compared to
$318.0 million in 1995. The decrease in this portion of ComNet's business was
attributable to ComNet's strategy of focusing on mortgage originations in those
markets in which it has a local presence. Also contributing to the decrease in
wholesale originations was ComNet's disciplined approach to wholesale pricing,
which is driven primarily by economic, rather than volume, considerations.
From the standpoint of loan sales, ComNet's strategy is to sell, to investors
in the secondary market, substantially all of the fixed rate loans which
conform to Federal National Mortgage Association ("FNMA") or Federal Home Loan
Mortgage Corporation ("FHLMC") guidelines. Substantially all of the jumbo
fixed rate loans and adjustable rate loans are retained by the Bank. ComNet's
net gain on the sale of mortgage loans more than doubled in 1996 to $2.1
million, from $0.9 million in 1995.
ComNet generally retains the rights to service the conventional loans it sells,
with the exception of those loans insured by the Federal Housing Administration
or guaranteed by the Veterans Administration. To further leverage
Commonwealth's investment in the mortgage servicing business, ComNet is also a
subservicer for other mortgage lenders who desire access to ComNet's systems
and servicing expertise. At December 31, 1996, ComNet's mortgage servicing
portfolio totaled $2.1 billion, an increase of 13% from $1.9 billion at
year-end 1995. Reflecting the run-off of more favorably priced historical
mortgage servicing rights, and the sale of out-of-market servicing rights,
mortgage servicing fees decreased to $5.2 million in 1996, compared to $5.5
million in 1995.
MORTGAGE LOAN SERVICING PORTFOLIO
Dec. 31, 1994 $1.7 BILLION
Dec. 31, 1995 $1.9 BILLION
Dec. 31, 1996 $2.1 BILLION
COMNET GENERALLY RETAINS THE RIGHT TO SERVICE THE CONVENTIONAL LOANS IT SELLS.
COMNET IS ALSO A SUBSERVICER FOR OTHER MORTGAGE LENDERS WHO DESIRE ACCESS TO
COMNET'S SYSTEMS AND SERVICING EXPERTISE. AS A RESULT, COMNET'S SERVICING
PORTFOLIO HAS STEADILY INCREASED SINCE 1994.
11
<PAGE> 14
[PHOTO]
VICE PRESIDENT ROBERT GEHRING AND BANKING OFFICER MICHAEL KRAYNYAK REVIEW
CONSTRUCTION PROGRESS AT FRANKLIN AND NOBLE MANOR, A COMMONWEALTH BANK FINANCED
18 UNIT AFFORDABLE HOUSING PROJECT FOR SENIOR CITIZENS LOCATED IN
SHOEMAKERSVILLE, PENNSYLVANIA. THE BUILDING WAS FORMERLY AN ABANDONED TEXTILE
MILL.
COMMUNITY ACTIVITIES
As a community bank, Commonwealth reflects the strength of the communities it
serves. An important aspect of maintaining strong and healthy communities
involves having a sufficient quantity of affordable housing. The Bank is
committed to facilitating the financing of affordable housing in southeast
Pennsylvania. The Company's Community Reinvestment Act ("CRA") rating of "1"
or "Outstanding" is evidence of that commitment. This top rating reflects
Commonwealth's achievement in fair lending and outreach programs relating to
lower income and minority households.
Commonwealth's involvement in community sponsored events is further evidence of
its commitment to serve lower income and minority households. For example,
Commonwealth contributed its time, efforts and financial support to the ACORN &
Friends Bank Fair '96. The goal of this community event, sponsored by the
Association of Community Organizations for Reform Now ("ACORN"), is to bring
together local bankers, lower income persons, and small business entrepreneurs
from urban Philadelphia, to assist the latter groups with their banking needs.
Commonwealth's community involvement also includes the support, financial and
otherwise, of a number of different organizations, each having a similar goal
of making our community a better place to live and work. Additionally, as
individuals, our employees serve the community through a number of volunteer
efforts. While the list of donations and involvements is extensive, among the
most meaningful of these activities over the past several years has been the
sponsorship of an annual community golf outing for the benefit of Children's
Hospital of Philadelphia. This event represents a wonderful opportunity to
help a truly worthy cause, while spending an enjoyable day with friends and
customers within the community.
12
<PAGE> 15
DETAILED FINANCIAL HIGHLIGHTS Commonwealth Bancorp, Inc. and Subsidiaries
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected consolidated financial and other data of the Company
does not purport to be complete and is qualified in its entirety by reference
to the more detailed financial information contained elsewhere herein including
without limitation the Consolidated Financial Statements. (Dollars in
thousands, except per share and ratio data)
<TABLE>
<CAPTION>
=========================================================================================================================
DECEMBER 31,
---------------------------------------------------------------------------------
SELECTED FINANCIAL CONDITION DATA: 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $2,119,961 $1,455,700 $1,213,960 $1,175,797 $1,219,463
Cash, interest-bearing deposits and
short-term investments 60,102 50,177 45,913 112,992 137,078
Investment securities 53,935 46,896 78,412 37,585 21,509
Mortgage-backed securities 752,707 463,353 430,119 386,747 333,967
Loans held for sale 17,335 26,001 18,533 79,839 83,143
Loans receivable, net 1,113,114 796,735 583,144 498,974 571,047
Intangible assets 51,220 17,279 1,737 2,812 4,637
Mortgage servicing rights 7,677 6,855 6,941 7,091 11,725
Deposit accounts 1,491,450 1,076,549 853,519 882,222 860,981
FHLB advances 175,000 120,614 61,214 84,914 119,014
Other borrowings 176,674 82,666 147,470 87,359 122,956
Shareholders' equity 231,924 137,036 116,905 82,425 72,902
Tangible shareholders' equity (1) 180,704 119,757 115,168 79,613 68,265
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
SELECTED OPERATING DATA: 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $127,306 $ 97,153 $ 80,374 $ 85,056 $ 93,386
Interest expense 66,352 49,691 36,860 39,467 49,124
- -------------------------------------------------------------------------------------------------------------------------
Net interest income 60,954 47,462 43,514 45,589 44,262
Provision for loan losses 601 578 168 710 4,494
- -------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 60,353 46,884 43,346 44,879 39,768
Net gain on sales of mortgage loans 2,056 939 318 5,420 2,361
Other noninterest income 13,617 11,820 12,617 9,174 12,487
Amortization of intangible assets 4,542 1,598 1,076 1,825 2,111
Noninterest expenses, exclusive of
amortization of intangible assets 57,365 40,666 41,445 42,913 51,661
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes 14,119 17,379 13,760 14,735 844
Income taxes 4,781 6,124 4,515 5,212 745
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 9,338 $ 11,255 $ 9,245 $ 9,523 $ 99
=========================================================================================================================
Earnings per common share $ 0.72(3) N/A(2) N/A(2) N/A(2) N/A(2)
=========================================================================================================================
Dividends per share $ 0.24(3) $ 0.24(3) $ 0.18(3) N/A(2) N/A(2)
=========================================================================================================================
OTHER DATA:
Number of full-service customer facilities (4) 53 36 26 26 27
Number of loan origination offices (5) 7 7 9 10 9
Loans serviced for others (in millions) $ 1,340 $ 1,264 $ 1,254 $ 1,271 $ 1,414
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
KEY OPERATING RATIOS: ----------------------------------------------------------------------------
PERFORMANCE RATIOS: (6) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on assets 0.51% 0.85% 0.77% 0.81% 0.01%
Return on equity 4.97% 8.95% 8.02% 12.55% 0.13%
Interest-earning assets to
interest-bearing liabilities 106.41% 106.20% 108.51% 104.60% 102.80%
Interest rate spread (7) 3.30% 3.55% 3.55% 3.94% 3.87%
Net interest margin (7) 3.54% 3.80% 3.83% 4.10% 3.99%
Noninterest expenses, exclusive of
amortization of intangible assets, to assets 3.11% 3.06% 3.46% 3.64% 4.32%
ASSET QUALITY RATIOS:
Non-performing assets to total assets at end
of period (8) 0.43% 0.51% 0.52% 1.26% 1.42%
Allowance for loan losses to non-performing
loans at end of period 123.74% 120.86% 167.90% 122.26% 93.01%
Allowance for loan losses to total loans held
for investment at end of period 0.89% 0.93% 1.22% 1.42% 1.18%
CAPITAL AND OTHER RATIOS:
Equity to assets 10.17% 9.46% 9.62% 6.45% 6.25%
Tangible equity to assets at end of period 8.52% 8.23% 9.49% 6.77% 5.60%
Dividend payout ratio (9) 33.50% 17.14% 15.69% N/A(2) N/A(2)
</TABLE>
(1) Shareholders' equity less intangible assets.
(2) Not applicable, as the Company completed its Conversion and Reorganization
on June 14, 1996.
(3) All periods have been adjusted to reflect the conversion of 2.0775 shares
of Company common stock for each share of Bank common stock.
(4) Includes ten supermarket branch offices at December 31, 1995 and 14
supermarket branch offices at December 31, 1996.
(5) Consists of offices of ComNet Mortgage Services ("ComNet"), a division of
the Bank.
(6) With the exception of end of period ratios, all ratios are based on average
daily balances during the respective periods and are annualized where
appropriate.
(7) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities, and net interest margin represents net interest
income as a percentage of average interest-earning assets.
(8) Non-performing assets consist of non-accrual loans, real estate acquired
through foreclosure or by deed-in-lieu thereof and non-performing investment
securities.
(9) Aggregate dividends divided by net income.
13
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and
Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
GENERAL
Commonwealth Bancorp, Inc. ("Commonwealth" or the "Company"), a Pennsylvania
corporation, is the holding company for Commonwealth Bank ("Bank"). On June
14, 1996, the Company completed an offering of common stock in connection with
the second step Conversion and Reorganization of Commonwealth Mutual Holding
Company, the former parent company of the Bank, from the mutual holding company
form of ownership to the stock holding company form (the "Conversion and
Reorganization"). In the offering, 9.9 million shares of common stock of the
Company were sold in a subscription and community offering at $10.00 per share.
In addition, 8.1 million shares of common stock of the Company were issued in
exchange for shares of stock of the Bank previously held by public stockholders
at an exchange ratio of 2.0775 shares for each share of Bank common stock,
resulting in 18.0 million shares of common stock of the Company outstanding at
the Conversion and Reorganization.
The Company's results of operations depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets (principally loans, mortgage-backed securities and investment
securities), and interest expense on interest-bearing liabilities (principally
deposits and borrowings). Net interest income is determined by the interest
rate spread (the difference between the yield earned on interest-earning assets
and the rate paid on interest-bearing liabilities) and the relative amount of
interest-earning assets and interest-bearing liabilities.
The Company's results of operations also are affected by the provision for
loan losses, resulting from management's assessment of the adequacy of the
allowance for loan losses; the level of noninterest income, including deposit
fees and related income, servicing fees, and gains and losses relating to the
sale of loans and real estate owned; the level of non-interest expense,
including compensation and employee benefits, occupancy and office expense, and
deposit insurance premiums; and income tax expense.
The Bank is a community-oriented full-service bank which emphasizes customer
service and convenience. As part of this strategy, the Bank has developed a
wide variety of products and services which meet the needs of its retail and
business customer base. The Bank generally has sought to achieve long-term
financial strength by increasing the amount and stability of its net interest
income and noninterest income, and by maintaining a high level of asset
quality. In pursuit of these goals, the Bank has adopted a number of
complementary business strategies, including emphasis on the following:
controlled growth of the Bank's retail branch network through de novo
supermarket branching and through acquisitions of traditional branches;
increased focus on consumer and business lending, in addition to the lending
and deposit products and services traditionally offered by savings
associations; controlled growth of the mortgage banking business; maintenance
of excellent asset quality and strong capital levels; and prudent management of
interest rate risk.
The Bank is a Federally chartered stock savings bank, regulated by the Office
of Thrift Supervision ("OTS"). The Bank conducts business from its executive
offices in Norristown, Pennsylvania and, as of December 31, 1996, 53
full-service offices located in southeast Pennsylvania. Prior to February
1997, the Bank's executive offices were located in Malvern, Pennsylvania.
ComNet Mortgage Services ("ComNet"), a division of the Bank, also currently
located in Norristown, conducted business at December 31, 1996 through seven
loan origination offices located in Pennsylvania, Connecticut, New Jersey, and
Rhode Island. ComNet also conducts business through its wholesale network,
which includes correspondents in 29 states. During January 1997, Commonwealth
Bank, through ComNet, acquired selected assets of Homestead Mortgage, Inc., a
mortgage company headquartered in Millersville, Maryland. Among the assets
acquired by ComNet were production branches located in Millersville, Bethesda,
Whitemarsh, and Woodlawn, Maryland, and Media, Pennsylvania.
BRANCH ACQUISITIONS
On June 28, 1996, the Company completed the acquisition of twelve former
branch offices of Meridian Bank located in Berks County (ten offices) and
Lebanon County (two offices), Pennsylvania from CoreStates Bank (the "Branch
Acquisition"). In connection with this transaction, the Company assumed
approximately $379.7 million of deposits and acquired approximately $122.4
million of single-family residential, commercial and consumer loans. In
addition, Commonwealth received approximately $3.1 million of real property and
approximately $215.8 million of cash, net of a deposit premium of approximately
$38.4 million.
14
<PAGE> 17
The Company assigned $14.7 million of the cost of the Branch Acquisition to
the value of the core deposit intangible asset, which is being amortized on an
accelerated basis over approximately 10 years. The excess of the cost over the
identifiable assets acquired, less liabilities assumed, was recorded as
goodwill. This amount, which totaled $23.7 million, is being amortized on a
straight-line basis over approximately 13 years.
The Company acquired four branches and the related deposits from Fidelity
Federal Savings and Loan Association ("Fidelity Federal") on July 29, 1995.
The branches had deposits totaling $197.4 million at the time of closing. The
acquisition premium was comprised of $3.3 million of core deposit intangible
and $13.8 million of goodwill, and is being amortized on a straight-line basis
over 10 and 13 years, respectively.
Management of the Company believes that the Meridian and Fidelity Federal
acquisitions were strategically important, as the Company's market presence and
core deposit base in southeast Pennsylvania were significantly improved through
the transactions.
CHANGES IN FINANCIAL CONDITION
GENERAL. Total assets increased by $664.3 million, or 46%, from $1.5 billion
at December 31, 1995, to $2.1 billion at December 31, 1996. The major
component of this increase was directly related to the cash proceeds obtained
through the Branch Acquisition. The cash proceeds were reinvested during the
period into other interest-earning assets. Also, in 1996, Commonwealth
completed its Conversion and Reorganization from the mutual holding company
form of ownership to its current public stock holding company form. The first
step in that process was completed in 1994 with the initial public offering of
approximately 45% of the shares of common stock of the Bank. The second step
occurred in June 1996 with the completion of a public offering of shares
representing the remaining portion of the Company's common stock. This second
offering generated net proceeds of $88.8 million and resulted in a total of
18.0 million shares of common stock outstanding at that time. The Conversion
and Reorganization, the Branch Acquisition and the related reinvestment of
proceeds led to increases in loans receivable, mortgage-backed securities, and
intangible assets.
CASH, INTEREST-BEARING DEPOSITS AND SHORT-TERM INVESTMENTS (COLLECTIVELY
"CASH AND CASH EQUIVALENTS"). Cash and cash equivalents increased by $9.9
million, or 20%, from $50.2 million at December 31, 1995, to $60.1 million at
December 31, 1996. The Company invested the high level of liquidity resulting
from its 1996 common stock offering and the Branch Acquisition primarily in
loans receivable, mortgage-backed securities, and investment securities. As a
matter of policy, the Company generally emphasizes investments in loans
receivable, and mortgage-backed securities in order to enhance the weighted
average yield on its interest-earning assets.
MORTGAGE LOANS HELD FOR SALE. Mortgage loans held for sale decreased by $8.7
million, or 33%, from $26.0 million at December 31, 1995, to $17.3 million at
December 31, 1996. The decrease was attributable to a decline in loan
production during the fourth quarter of 1996, as compared to the same period in
1995, as a result of ComNet's strategy of focusing on mortgage originations in
those markets in which it has a local presence. Also contributing to the
decrease in originations was ComNet's disciplined approach to wholesale pricing
which is driven primarily by economic, rather than volume, considerations.
INVESTMENT SECURITIES. Investment securities increased by $7.0 million, or
15%, from $46.9 million at December 31, 1995, to $53.9 million at December 31,
1996. The increase was primarily the result of purchases of U.S.Treasury and
U.S. Government agency securities. Investment securities classified as held to
maturity are carried at amortized cost and are adjusted for amortization of
premiums and accretion of discounts over the life of the related security
pursuant to the level-yield method. Investment securities classified as
available for sale are reported at fair value, with unrealized gains and
losses, net of tax, excluded from earnings and reported as a separate component
of shareholders' equity. There were no investment securities classified as
held to maturity at December 31, 1996 and December 31, 1995. Investment
securities classified as available for sale totaled $53.9 million at December
31, 1996, compared to $46.9 million at December 31, 1995. The net unrealized
gain on available for sale investment securities was $0.1 million at December
31, 1996, compared to $0.5 million at December 31,1995.
The Company invests primarily in U.S. Treasury and U.S. Government agency
securities with maturities of less than five years. As part of its investment
policy, the Company also has the ability to invest in non-federally insured
debt and equity securities. These investments generally yield a higher rate of
return and involve a higher risk of loss than comparable U.S. Treasury and U.S.
Government agency securities and serve to diversify the Company's investment
portfolio.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities increased by $289.4
million, or 62%, from $463.4 million at December 31, 1995, to $752.7 million at
December 31, 1996. Mortgage-backed securities classified as held to maturity
totaled $237.7 million at year-end 1996, compared to $251.3 million at year-end
1995. Mortgage-backed securities classified as available for sale totaled
$515.0 million at December 31, 1996, compared to $212.0 million at December 31,
1995. The net unrealized gain on available for sale mortgage-
15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and
Subsidiaries
backed securities was $3.1 million at year-end 1996, compared to $3.6 million
at year-end 1995. The Company increased its holdings of mortgage-backed
securities during 1996 through the investment of excess cash generated by its
secondary stock offering and the Branch Acquisition.
Mortgage-backed securities generally increase the quality of the Company's
assets by virtue of the insurance or guarantees related to the securities, are
more liquid than individual mortgage loans, and may be used to collateralize
borrowings or other obligations of the Company. At December 31, 1996 and 1995,
$511.8 million, or 68%, and $409.7 million, or 88%, respectively, of the
Company's mortgage-backed securities were issued or guaranteed by the
Government National Mortgage Association ("GNMA"), the Federal Home Loan
Mortgage Corporation ("FHLMC") or the Federal National Mortgage Association
("FNMA"). As part of its investment policy, the Company also has the ability
to invest in private and other mortgage-backed securities. These non-federally
insured mortgage-backed securities, which are generally rated AA or better,
yield a higher rate of return and involve a higher risk of loss than comparable
mortgage-backed securities issued by the GNMA, the FHLMC, or the FNMA, and
serve to further diversify the Company's mortgage-backed securities portfolio.
At December 31, 1996, private and other mortgage-backed securities totaled
$240.9 million, or 32%, of the Company's $752.7 million mortgage-backed
securities portfolio.
LOANS RECEIVABLE. Loans receivable increased by $316.4 million, or 40%,
from $796.7 million at December 31, 1995, to $1.1 billion at December 31, 1996.
The increase was primarily due to the $122.4 million loan portfolio acquired in
the Branch Acquisition, the Company's continued emphasis on building its
adjustable rate mortgage portfolio, as well as its consumer and commercial loan
portfolios, and the closing of $79.9 million of bulk loan purchases during
1996.
Total loans originated and purchased by ComNet for the year ended December
31, 1996, decreased by $32.7 million, or 7%, from $494.8 million for the year
ended December 31, 1995, to $462.1 million for the year ended December 31,
1996. The $32.7 million decrease in ComNet's production was primarily
attributable to a decrease in originations generated through ComNet's Wholesale
Lending Department. This Department originates loans through a network of
correspondent brokers in 29 states. All loans are underwritten under the same
criteria as those used for retail originations. Registered applications and
closed loans relating to ComNet's wholesale network totaled $390.5 million and
$233.8 million, respectively, during the year ended December 31, 1996, compared
to $545.6 million and $318.0 million, respectively, during the year ended
December 31, 1995.
During 1994, the Company expanded its lending capacity to include the
origination of commercial loans in order to diversify its loan portfolio.
Experienced commercial lenders have been hired to facilitate this expansion.
In addition, on June 28, 1996, the Company acquired $44.4 million of commercial
loans in conjunction with the Branch Acquisition. As of December 31, 1996,
commercial loans, [other than loans guaranteed by the Small Business
Administration ("SBA")] totaled $70.8 million, or 6%, of the Company's total
loan portfolio, as compared to $12.2 million, or 2%, at December 31, 1995. At
December 31, 1996, commercial loans (other than SBA loans) were comprised of
$35.5 million of commercial real estate loans and $35.4 million of business
loans. At December 31, 1995, commercial loans (other than SBA loans) were
comprised of $9.4 million of commercial real estate loans and $2.8 million of
business loans. Commercial loans are generally considered to have a greater
risk than single-family residential mortgage loans because the risk of borrower
default is greater, and the collateral is more likely to decline in value and
may be more difficult to liquidate than single-family residences.
NON-PERFORMING ASSETS. The Company's non-performing assets, which primarily
consist of non-accrual loans and real estate acquired through foreclosure,
increased by $1.8 million, or 24%, from $7.4 million at December 31, 1995 to
$9.1 million at December 31, 1996. At December 31, 1996, the Company's $9.1
million of non-performing assets amounted to 0.43% of total assets and
consisted of $8.1 million of non-accrual loans, $5.2 million of which were
single-family residential loans, and $1.1 million of real estate owned.
ALLOWANCE FOR LOAN LOSSES. The Company's allowance for loan losses amounted
to $10.0 million at December 31, 1996, as compared to $7.5 million at December
31, 1995. The increase in the allowance for loan losses in 1996 was primarily
due to $2.4 million in allowance established in connection with the Branch
Acquisition. It is management's policy to maintain an allowance for estimated
losses on loans based upon an assessment of prior loss experience, the volume
and type of lending conducted by the Company, industry standards, past due
loans, general economic conditions, and other factors related to the
collectibility of the loan portfolio. At December 31, 1996, the Company's
allowance for loan losses amounted to 124% of total non-performing loans and
0.89% of total loans held for investment, as compared to 121% of total
non-performing loans and 0.93% of total loans held for investment at December
31, 1995. The Company utilizes these percentages as only one of the factors in
assessing the adequacy of the allowance for loan losses at various points in
time. The provision for loan losses totaled $0.6 million for the full years
1996 and 1995. For the full year 1996, net loan losses totaled $0.5 million,
or .05% of average loans, compared to $0.4 million, or .06%, in 1995.
16
<PAGE> 19
INTANGIBLE ASSETS. The Company's intangible assets consist of goodwill and
core deposit intangibles ("CDI") recorded in connection with the acquisitions
of the Meridian branches in 1996 and the Fidelity Federal branches in 1995.
Goodwill was also recorded relating to the acquisition of First Family Federal
Savings and Loan Association ("First Family") in 1982. The Meridian CDI are
being amortized on an accelerated basis over approximately 10 years. The
Meridian goodwill and Fidelity Federal goodwill and CDI are being amortized on
a straight-line basis over the period to be benefited, ranging between 10 and
13 years. The goodwill relating to the acquisition of First Family was fully
amortized using the level-yield method over the actual lives of the long-term
interest-earning assets of the acquired institution.
The following is a summary of intangible assets as of December 31, 1996 and
1995 (in thousands):
<TABLE>
<CAPTION>
=========================================================
DECEMBER 31,
----------------------
1996 1995
- ---------------------------------------------------------
<S> <C> <C>
Goodwill (Meridian) $22,791 $ --
CDI (Meridian) 13,199 --
Goodwill (Fidelity Federal) 12,398 13,456
CDI (Fidelity Federal) 2,832 3,162
Goodwill (First Family) -- 661
- ---------------------------------------------------------
Total $51,220 $17,279
=========================================================
</TABLE>
MORTGAGE SERVICING RIGHTS. In recent years, the Company, acting through
ComNet, has emphasized the servicing of residential mortgage loans as a source
of fee income. At December 31, 1996, ComNet's total servicing portfolio was
$2.1 billion, compared to $1.9 billion at December 31, 1995. During the year
ended December 31, 1996, ComNet's servicing portfolio increased by $236.9
million, or 13%. At December 31, 1996 and December 31, 1995, ComNet was
servicing $1.3 billion and $1.3 billion, respectively, of third party loans, as
well as $747.8 million and $586.8 million, respectively, of loans held by the
Company for investment and sale. At December 31, 1996 and December 31, 1995,
purchased mortgage servicing rights ("PMSRs") totaled $2.2 million and $3.0
million, respectively. At the same dates, capitalized excess servicing fees
totaled $3.6 million and $3.8 million, respectively.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights." The
Company, through ComNet, acquires mortgage servicing rights through the
purchase and origination of mortgage loans which are sold or securitized,
generally with servicing retained. SFAS No. 122 requires the Company to
allocate the total cost of the mortgage loans to the mortgage servicing rights
and the loans (exclusive of mortgage servicing rights) based on their relative
fair values. The Company is required to periodically assess its capitalized
mortgage servicing rights for impairment, based upon the discounted cash flow
of the rights disaggregated within their predominant risk characteristics. Any
impairment would be recognized through a valuation allowance. Application of
this pronouncement was required for mortgage servicing rights acquired relating
to loans sold or securitized commencing January 1, 1996, without retroactive
capitalization of mortgage servicing rights retained in such transactions
before adoption of the pronouncement. For the year ended December 31, 1996,
the Company recorded originated mortgage servicing rights ("OMSRs") of $1.9
million, net of a $0.9 million valuation allowance.
From time to time, ComNet evaluates PMSRs as a means of enhancing noninterest
income. In 1990 and 1991, ComNet paid $19.1 million to acquire the servicing
rights related to $1.1 billion of loans. In addition, during 1994, ComNet
began purchasing whole loans through a wholesale lending network. In
connection with the purchase of these loans, a premium is paid to the
correspondent or broker for the right to service such loans, which is recorded
as PMSRs.
The amounts paid to purchase PMSRs have been capitalized. In addition, on a
loan by loan basis, the premiums paid to correspondents or brokers for the
right to service whole loans are capitalized when such purchases meet the
current accounting requirements for capitalization. These amounts are
amortized over the estimated servicing lives of the loans to which they relate,
using a level-yield method over the contractual life of the underlying mortgage
loans, and an estimated prepayment assumption. The prepayment assumption is
reviewed quarterly and the amortization is adjusted based on actual
prepayments, if necessary. Amortization of PMSRs, which is a component of the
Company's other noninterest expense, amounted to $0.5 million, $0.5 million,
and $0.2 million during 1996, 1995, and 1994, respectively. PMSRs amounted to
$2.2 million at December 31, 1996, as compared to $3.0 million at December 31,
1995, and $2.8 million at December 31, 1994.
17
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and
Subsidiaries
================================================================================
The following table sets forth an analysis of the activity in the Company's
PMSRs during the periods indicated.
<TABLE>
<CAPTION>
Unpaid Principal Balance of
Carrying Value of PMSRs Serviced Loans Relating to PMSRs
Year Ended December 31, Year Ended December 31,
---------------------------------------- ---------------------------------------
1996 1995 1994 1996 1995 1994
(In Thousands)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of period $3,026 $2,809 $2,948 $291,274 $265,973 $356,000
Acquisitions 103 679 56 10,114 67,637 5,600
Amortization/Paydown (511) (462) (195) (60,587) (42,336) (95,627)
Sales (375) -- -- (34,896) -- --
- ---------------------------------------------------------------------------------------------------------------------
Balance, end of period $2,243 $3,026 $2,809 $205,905 $291,274 $265,973
=====================================================================================================================
</TABLE>
ComNet also has sought to expand its mortgage servicing portfolio by
increasing the amount of loans originated and sold by it on a
servicing-retained basis. When loans are sold on a servicing-retained basis
and the stated servicing fee rate differs from the normal contracted servicing
fee rate, the mortgage servicing value associated with the rate differential is
used to calculate a gain or loss on sale. These excess mortgage servicing fees
are capitalized and amortized using a level-yield method over the estimated
life of the loans sold. The prepayment assumption utilized in this estimate is
reviewed quarterly and the amortization is adjusted based on actual
prepayments, if necessary. Capitalized excess mortgage servicing fees amounted
to $3.6 million at December 31, 1996, $3.8 million at December 31, 1995, and
$4.1 million at December 31, 1994.
Amortization of capitalized excess mortgage servicing fees, which is a
component of the Company's servicing fee income, amounted to $0.4 million,
$0.8 million, and $0.3 million, during 1996, 1995, and 1994, respectively. The
decrease in amortization recorded during 1996, as compared to 1995, was
primarily the result of a decrease in prepayments and refinancing of mortgage
loans during 1996. The significant increase in amortization of capitalized
mortgage servicing fees recorded during 1995, as compared to 1994, was due to
declining mortgage interest rates, which triggered higher prepayment activity.
================================================================================
The following table sets forth the activity in the Company's capitalized
excess servicing fees during the periods indicated.
<TABLE>
<CAPTION>
Unpaid Principal Balance of
Carrying Value of Capitalized Serviced Loans Relating to
Excess Servicing Fees Capitalized Excess Servicing Fees
Year Ended December 31, Year Ended December 31,
-------------------------------------- ---------------------------------------
1996 1995 1994 1996 1995 1994
(In Thousands)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of period $3,829 $4,132 $4,143 $697,000 $690,000 $733,000
Amortization/Paydown (412) (780) (261) (162,799) (121,000) (120,000)
Acquisitions 156 477 250 102,801 128,000 77,000
- ---------------------------------------------------------------------------------------------------------------------
Balance, end of period $3,573 $3,829 $4,132 $637,002 $697,000 $690,000
=====================================================================================================================
</TABLE>
18
<PAGE> 21
OMSRs, recorded for the first time in 1996 relating to the January 1, 1996
implementation of SFAS No. 122, amounted to $1.9 million at December 31, 1996,
net of a valuation allowance.
================================================================================
The following table sets forth the activity in the Company's capitalized
OMSRs during the periods indicated.
<TABLE>
<CAPTION>
Unpaid Principal Balance of
Carrying Value of OMSRs Serviced Loans Relating to OMSRs
Year Ended December 31, Year Ended December 31,
--------------------------------------- ----------------------------------------
1996 1995 1994 1996 1995 1994
(In Thousands)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of period $ -- $ -- $ -- $ -- $ -- $ --
Amortization/Paydown (136) -- -- (20,897) -- --
Acquisitions 1,997 -- -- 220,604 -- --
- ---------------------------------------------------------------------------------------------------------------------
Balance, end of period $1,861 $ -- $ -- $ 199,707 $ -- $ --
=====================================================================================================================
</TABLE>
During 1996, the Company recorded as a component of its servicing fee income,
$0.1 million in amortization of OMSRs.
At December 31, 1996, the weighted average coupons on loans relating to the
Company's PMSRs, capitalized excess servicing fees, and OMSRs were 9.9%, 7.8%,
and 7.4%, respectively.
DEPOSITS. Deposits increased by $414.9 million, or 39%, to $1.5 billion at
December 31, 1996, from $1.1 billion at December 31, 1995. This increase was
primarily attributable to the assumption of $379.7 million of deposits relating
to the Branch Acquisition in June 1996.
BORROWINGS. The Company's borrowings are primarily comprised of advances
from the Federal Home Loan Bank of Pittsburgh ("FHLB") and securities sold
under agreements to repurchase. FHLB advances increased by $54.4 million, or
45%, to $175.0 million at December 31, 1996, from $120.6 million at December
31, 1995. Repurchase agreements increased by $95.6 million, or 118%, to
$176.7 million at December 31, 1996, from $81.1 million at December 31, 1995.
The Company's borrowings are used to fund lending and investment activities,
withdrawals from deposit accounts, and other disbursements which occur in the
normal course of business. Dependent upon the funding requirements and
interest rate risk considerations, these borrowings are hedged with
off-balance-sheet financial instruments. See "Asset and Liability Management."
SHAREHOLDERS' EQUITY. At December 31, 1996, shareholders' equity equaled
$231.9 million, compared to $137.0 million at December 31, 1995. This increase
of $94.9 million, or 69%, was primarily the result of $88.8 million of net
proceeds relating to the Company's offering of common stock and net income of
$9.3 million for the year ended December 31, 1996.
At December 31, 1996, the Bank's tangible and core capital represented 6.6%
of adjusted total assets, which was in excess of the 1.5% and 3.0% minimum
regulatory requirements. The Bank's tangible and core capital represented 8.2%
of adjusted total assets at December 31, 1995. The decrease in the tangible
and core capital ratios in 1996 was primarily attributable to the increase in
intangibles related to the Branch Acquisition. At December 31, 1996, the
Bank's risk-based capital totaled 14.2% of total risk-weighted assets, which
exceeded the minimum 8.0% requirement.
In 1996, the Board of Directors authorized the purchase of 0.4 million shares
to fund the 1996 Management Recognition Plan. Of that amount, 0.1 million
shares were purchased in December 1996 and 0.3 million shares were purchased in
January 1997. In addition, in 1997, the Company initiated the repurchase of up
to 0.9 million shares to be used for general corporate purposes.
19
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and
Subsidiaries
================================================================================
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following table sets forth, for the periods indicated, information
regarding (i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rate; (iii) net interest income; (iv) interest rate spread; and (v) net
interest margin. Information is based on average daily balances during the
indicated periods.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
---------------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate (5) Balance Interest Rate (5) Balance Interest Rate (5)
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1):
Mortgage loans:
Single-family residential $ 724,844 $ 54,849 7.57% $ 507,809 $41,222 8.12% $ 384,372 $30,193 7.86%
Consumer loans 140,806 12,698 9.02 105,316 10,291 9.77 97,815 8,846 9.04
Commercial real estate loans 26,566 2,035 7.66 6,865 618 9.00 4,577 407 8.89
Business loans 39,984 3,093 7.74 34,205 2,665 7.79 38,616 2,309 5.98
---------- -------- ---------- ------- ---------- -------
Total loans receivable 932,200 72,675 7.80 654,195 54,796 8.38 525,380 41,755 7.95
---------- -------- ---------- ------- ---------- -------
Loans held for sale 39,639 2,927 7.38 41,978 3,208 7.64 44,229 2,799 6.33
Mortgage-backed securities 654,586 45,471 6.95 472,651 33,587 7.11 427,532 28,920 6.76
Investment securities 63,018 3,386 5.37 59,885 3,754 6.27 82,603 4,247 5.14
Other earning assets(2) 31,192 2,847 9.13 20,462 1,808 8.84 56,447 2,653 4.70
---------- -------- ---------- ------- ---------- -------
Total interest-earning assets 1,720,635 127,306 7.40 1,249,171 97,153 7.78 1,136,191 80,374 7.07
-------- ------- -------
Non-interest-earning assets 126,810 80,598 63,334
---------- ---------- ----------
Total assets $1,847,445 $1,329,769 $1,199,525
========== ========== ==========
Interest-bearing liabilities:
Deposits:
Demand deposits(3) $ 472,755 12,182 2.58 $ 402,753 11,172 2.77 $ 389,148 8,940 2.30
Passbook savings deposits 240,579 5,072 2.11 136,678 2,841 2.08 142,549 2,934 2.06
Certificates of deposit 609,510 32,104 5.27 414,360 21,740 5.25 317,300 12,950 4.08
---------- -------- ---------- ------- ---------- -------
Total deposits 1,322,844 49,358 3.73 953,791 35,753 3.75 848,997 24,824 2.92
---------- -------- ---------- ------- ---------- -------
Total Borrowings 294,098 16,994 5.78 222,437 13,938 6.27 198,045 12,036 6.08
---------- -------- ---------- ------- ---------- -------
Total interest-bearing
liabilities(4) 1,616,942 66,352 4.10 1,176,228 49,691 4.23 1,047,042 36,860 3.52
Non-interest bearing liabilities 42,665 -------- 27,793 ------- 37,147 ------
---------- ---------- ----------
Total liabilities 1,659,607 1,204,021 1,084,189
---------- ---------- ----------
Shareholders' equity 187,838 125,748 115,336
---------- ---------- ----------
Total liabilities and equity $1,847,445 $1,329,769 $1,199,525
========== ========== ==========
Net interest-earning assets $ 103,693 $ 72,943 $ 89,149
========== ========== ==========
Net interest income/interest
rate spread $ 60,954 3.30% $47,462 3.55% $43,514 3.55%
======== ======== ======= ======= ======= =======
Net interest margin 3.54% 3.80% 3.83%
======== ======= =======
Ratio of average interest-earning
assets to average
interest-bearing liabilities 106.41% 106.20% 108.51%
======== ======= =======
</TABLE>
(1) The average balance of loans receivable includes non-performing loans,
interest on which is recognized on a cash basis.
(2) Includes FHLB stock, money market accounts, FHLB deposits and interest
earning bank deposits.
(3) Includes checking and money market accounts.
(4) Includes interest expense associated with interest rate swaps and interest
rate caps.
(5) Annualized.
20
<PAGE> 23
RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on
net interest income of the Company. Information is provided with respect to
(i) effects on interest income attributable to changes in volume (changes in
volume multiplied by prior rate); (ii) effects on interest income attributable
to changes in rate (changes in rate multiplied by prior volume); and (iii)
changes in rate/volume (changes in rate multiplied by changes in volume).
<TABLE>
<CAPTION>
1996 compared to 1995 1995 compared to 1994
Increase (decrease) due to Increase (decrease) due to
--------------------------------------------------------------------------------------------
Total Net Total Net
Rate/ Increase Rate/ Increase
Rate Volume Volume (Decrease) Rate Volume Volume (Decrease)
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Mortgage loans:
Single-family residential $(2,796) $17,618 $(1,195) $13,627 $1,009 $9,696 $ 324 $11,029
Consumer loans (794) 3,468 (267) 2,407 712 678 55 1,445
Commercial real estate loans (92) 1,774 (265) 1,417 5 203 3 211
Business loans (19) 450 (3) 428 700 (264) (80) 356
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans receivable (3,701) 23,310 (1,730) 17,879 2,426 10,313 302 13,041
Loans held for sale (108) (179) 6 (281) 581 (142) (30) 409
Mortgage-backed securities (754) 12,928 (290) 11,884 1,461 3,052 154 4,667
Investment securities (536) 196 (28) (368) 931 (1,168) (256) (493)
Other earning assets 60 948 31 1,039 2,335 (1,691) (1,489) (845)
- ------------------------------------------------------------------------------------------------------------------------------------
Total net change in income on interest-
earning assets (5,039) 37,203 (2,011) 30,153 7,734 10,364 (1,319) 16,779
Interest-bearing liabilities:
Deposits:
Demand deposits (794) 1,942 (138) 1,010 1,855 313 64 2,232
Passbook savings deposits 41 2,160 30 2,231 29 (121) (1) (93)
Certificates of deposit 85 10,239 40 10,364 3,698 3,961 1,131 8,790
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits (668) 14,341 (68) 13,605 5,582 4,153 1,194 10,929
Borrowings (968) 4,333 (309) 3,056 374 1,482 46 1,902
- ------------------------------------------------------------------------------------------------------------------------------------
Total net change in expense on interest-
bearing liabilities (1,636) 18,674 (377) 16,661 5,956 5,635 1,240 12,831
- ------------------------------------------------------------------------------------------------------------------------------------
Net change in net interest income $(3,403) $18,529 $(1,634) $13,492 $1,778 $4,729 $(2,559) $ 3,948
====================================================================================================================================
</TABLE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
1995
GENERAL. Net income was $9.3 million, or $0.72 per common share, for the
year ended December 31, 1996, as compared to $11.3 million during 1995.
Earnings per share for years prior to 1996 are not comparable as a result of
the Company's Conversion and Reorganization in 1996. The decrease in net
income in 1996, compared to 1995, was primarily due to a $4.5 million after-tax
charge relating to the recapitalization of the Savings Association Insurance
Fund ("SAIF") in the third quarter of 1996. Exclusive of this one-time charge,
net income would have been $13.9 million, or $1.06 per common share, in 1996.
NET INTEREST INCOME. Net interest income increased by $13.5 million, or 28%,
to $61.0 million for the year ended December 31, 1996, as compared to $47.5
million in 1995. The increase was primarily attributable to sharply higher
interest-earning asset levels, which increased from $1.2 billion in 1995, to
$1.7 billion in 1996. The increase in average interest-earning assets was
primarily attributable to the
21
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and
Subsidiaries
Meridian and Fidelity Federal branch acquisitions and to the leveraging of the
capital raised in the June 1996 Conversion and Reorganization. Funds received
in these transactions in excess of loans purchased were primarily invested in
mortgage-backed securities. Also contributing to the increase in average
interest-earning assets in 1996 was an increase in the Company's supermarket
banking activities.
Total interest income was $127.3 million in 1996, or 31% above the $97.2
million in 1995. The increase in interest income during the year ended
December 31, 1996 was primarily attributable to the $471.5 million increase in
average interest-earning assets compared to 1995, offset, in part, by a 38
basis point decrease in the average yield on interest-earning assets.
Total interest expense was $66.4 million in 1996, or 34% above the $49.7
million in 1995. The increase in interest expense during 1996, compared to
1995, was caused by higher balances of average interest-bearing liabilities,
primarily related to the Meridian and Fidelity Federal branch acquisitions and
deposit growth related to the expansion of the Company's supermarket branch
network. Partially offsetting this increase in interest expense was a 13 basis
point decrease in the weighted average rates paid on interest-bearing
liabilities during 1996, compared to 1995.
For the full year 1996, the net interest margin was 3.54%, compared to 3.80%
in 1995. The decrease was attributable to a 25 basis point decrease in the net
interest spread and a 1 basis point decrease in the favorable effect relating
to interest free funds. The decrease in the full year net interest spread was
primarily attributable to a lower average spread on the Company's residential
mortgage loan portfolio, which, in part, was due to a less favorable interest
rate environment in 1996.
PROVISION FOR LOAN LOSSES. Provision for loan losses amounted to $0.6
million during the years ended December 31, 1996 and 1995. As of December 31,
1996, the allowance for loan losses amounted to $10.0 million, or 0.89% of
loans and 124% of non-performing loans. At December 31, 1996, non-performing
loans represented 0.72% of total loans, and non-performing assets represented
0.43% of total assets. The Company maintains the allowance for loan losses at
a level which it believes is sufficient to absorb estimated future credit
losses relating to the loan portfolio.
NONINTEREST INCOME. Total noninterest income was $15.7 million in 1996, or
23% above the $12.8 million in 1995. The increase was attributable, in part,
to a $1.5 million increase in deposit fees. The increase in full year deposit
fees was attributable to the Branch Acquisition, growth in supermarket
branches, and expansion of Commonwealth's business banking activities. The net
gain on sales of mortgage loans increased by $1.1 million, primarily as a
result of the capitalization of mortgage servicing rights relating to the
January 1, 1996 implementation of SFAS No. 122, "Accounting for Mortgage
Servicing Rights." Other income for the year ended December 31, 1996 increased
by $1.7 million, as compared to 1995, primarily due to a favorable litigation
settlement, the sale of a branch property, and the reversal of a contingent
liability. The foregoing increases in noninterest income more than offset a
$1.1 million decrease in gain on sales of foreclosed real estate, and the $0.5
million gain relating to the sale of two branch properties during 1995. Net
gain on sales of foreclosed real estate decreased by $1.1 million, to a loss of
$0.2 million during the year ended December 31, 1996, from a gain of $0.9
million during 1995.
NONINTEREST EXPENSE. Total noninterest expense was $61.9 million in 1996, or
46% above the $42.3 million in 1995. The increase was due, in part, to a $7.1
million increase in FDIC premiums, $6.8 million of which represented a one-time
charge to recapitalize the SAIF. Higher expenses relating to the Branch
Acquisition, growth in supermarket branches, and expansion of business banking
activities also contributed to the increase in noninterest expense in 1996.
During 1996, Commonwealth also recorded approximately $0.8 million in one-time
expenses associated with the Branch Acquisition, and $0.3 million in one-time
charges relating to a management reorganization.
Amortization of intangible assets was $4.5 million in 1996, compared to $1.6
million in 1995. This increase was primarily due to increased amortization
related to the Branch Acquisition. In that transaction, the Company recorded
$38.4 million of combined goodwill and core deposit intangibles, which are
being amortized over 13 and 10 years, respectively.
INCOME TAXES. Income tax expense amounted to $4.8 million and $6.1 million
during 1996 and 1995, respectively, reflecting an effective tax rate of 34% in
1996 and 35% in 1995. As of December 31, 1996, the Company had a deferred tax
asset of $1.1 million, which was net of a valuation allowance of $1.6 million.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND
1994
GENERAL. Net income was $11.3 million for the year ended December 31, 1995,
as compared to $9.2 million during 1994. The increase in net income was
primarily attributable to growth in Commonwealth's businesses in 1995, relative
to 1994.
NET INTEREST INCOME. Net interest income was $47.5 million in 1995, or 9%
above the $43.5 million in 1994. The increase was primarily attributable to a
10% increase in interest-earning assets from $1.1 billion in 1994, to $1.2
billion in 1995. The increase in interest-earning assets was primarily
22
<PAGE> 25
the result of the Fidelity Federal branch acquisition and the associated
deployment of funds received in that transaction.
Total interest income was $97.2 million in 1995, or 21% above the $80.4
million in 1994. The increase in interest income during the twelve month
period ended December 31, 1995 resulted from the increase in average
interest-earning assets, as well as an increase in the average yield on those
assets of 71 basis points.
Total interest expense was $49.7 million in 1995, or 35% above the $36.9
million in 1994. The increase was primarily due to the combined effect of an
increase in average interest-bearing liabilities during 1995, as compared to
1994, and to an increase in the average rate paid on those liabilities.
Average interest-bearing liabilities increased by $129.2 million during the
year ended December 31, 1995, as compared to 1994, primarily due to the
increase in deposits from the Fidelity Federal transaction. The average rate
paid on interest-bearing liabilities increased to 4.23% for the year ended
December 31, 1995, from 3.52% in 1994.
For the full year 1995, the net interest margin was 3.80%, compared to 3.83%
in 1994. The decrease was attributable to a decline in the favorable effect
relating to interest free funds.
PROVISION FOR LOAN LOSSES. Provision for loan losses amounted to $0.6
million during the year ended December 31, 1995, as compared to $0.2 million
during 1994. The increase related to an increase in delinquent mortgage loans
in the New England area. As of December 31, 1995, Commonwealth's allowance for
loan losses amounted to $7.5 million, or 0.93% of loans and 121% of
non-performing loans. At December 31, 1995, non-performing loans represented
0.77% of total loans, and non-performing assets represented 0.51% of total
assets. The Company maintains the allowance for loan losses at a level which
it believes is sufficient to absorb estimated future credit losses relating to
the loan portfolio.
NONINTEREST INCOME. Total noninterest income was $12.8 million in 1995, or
1% below the $12.9 million in 1994. The decrease in noninterest income for the
year ended December 31, 1995, as compared to 1994, was primarily attributable
to the non-recurring gain recorded on the sale of a non-performing commercial
paper investment during 1994, and a decrease in servicing fee income in 1995,
offset, in part, by an increase in the net gain on sales of mortgage loans and
foreclosed real estate in 1995.
Servicing fee income was $5.5 million in 1995, or 4% below the $5.8 million
in 1994. The decrease was primarily attributable to a $0.4 million write-down
of capitalized excess servicing fees during the fourth quarter of 1995 to
reflect higher prepayment estimates caused by declining mortgage interest
rates.
The net gain on sales of mortgage loans was $0.9 million in 1995, compared to
$0.3 million in 1994. These gains were attributable to ComNet's secondary
market activities. The improvement in the net gain on sales of mortgage loans
was influenced by increased servicing released sales of loans during the third
and fourth quarters of 1995, which partially offset increased loan origination
and hedging costs associated with increased loan production from ComNet's
wholesale correspondent network.
The net gain on sales of foreclosed real estate was $0.9 million in 1995,
compared to $0.2 million in 1994. The increase was primarily attributable to
the sale of certain residential properties located in Bucks County,
Pennsylvania.
NONINTEREST EXPENSE. Total noninterest expense was $42.3 million in 1995, or
1% below the $42.5 million in 1994. This decrease was primarily due to a
reduction in compensation and employee benefits expense, which was partially
offset by increases in the amortization of intangible assets and other
noninterest expense.
Compensation and employee benefits expense was $20.5 million in 1995, or 9%
below the $22.5 million in 1994. The decrease was primarily the result of
non-recurring operational restructuring charges in 1994 associated with the
Company's Performance Enhancement Program, as well as lower commissions paid to
loan originators and lower health insurance and pension costs during 1995.
Amortization of intangible assets was $1.6 million in 1995, or 49% above the
$1.1 million in 1994. This increase was primarily due to increased
amortization relating to the Fidelity Federal acquisition, in which the Company
recorded $17.1 million of combined goodwill and core deposit intangibles, which
are being amortized over 13 and 10 years, respectively.
Other noninterest expense was $9.1 million in 1995, or 15% above the $7.9
million in 1994. This increase was primarily attributable to increased costs
associated with the Fidelity Federal acquisition, and increased expenses
associated with the addition of nine new supermarket branch offices during
1995.
INCOME TAXES. Income tax expense amounted to $6.1 million and $4.5 million
during 1995 and 1994, respectively, representing an effective tax rate of 35%
in 1995 and 33% in 1994. As of December 31, 1995, the Company had a deferred
tax asset of $1.6 million, which was net of a valuation allowance of $1.7
million.
23
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and
Subsidiaries
ASSET AND LIABILITY MANAGEMENT
The ability to maximize net interest income is largely dependent upon the
achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap," provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates. A gap is considered positive when
interest-rate sensitive assets exceed interest-rate sensitive liabilities, and
is considered negative when interest-rate sensitive liabilities exceed
interest-rate sensitive assets. Generally, during a period of rising interest
rates, a negative gap within shorter maturities would adversely affect net
interest income, while a positive gap within shorter maturities would result in
an increase in net interest income. During a period of falling interest rates,
a negative gap within shorter maturities generally would result in an increase
in net interest income, while a positive gap within shorter maturities
generally would have the opposite effect.
The Company's asset and liability management policy is established by the
Asset/Liability Committee of the Company and reviewed by the Company's Board of
Directors at least annually. Such policy is implemented by the Investment
Committee, which is comprised of members of senior management and meets
bi-weekly. Currently, the Company manages the imbalance between its
interest-earning assets and interest-bearing liabilities within shorter
maturities to ensure that such relationships are within acceptable ranges,
given the Company's business strategies and objectives and its analysis of
market and economic conditions.
The Company's analysis of the gap between its interest-earning assets and
interest-bearing liabilities within specified periods includes the effects of
certain hedging techniques which are used by the Company to manage interest
rate risk. The techniques which are used by the Company for this purpose
include interest-rate swap agreements, interest-rate cap agreements, and
interest-rate collar agreements. Interest-rate swaps are contractual
agreements pursuant to which the parties exchange interest payments on a
specified principal amount (referred to as the "notional amount") for a
specified period, without the exchange of the underlying principal amount. The
Company agrees to make fixed interest payments on a specified notional amount
and the counter party makes variable rate payments to the Company on the same
amount at the London Interbank Offer Rate ("LIBOR") or the prime rate less 2%.
An interest-rate cap agreement is an agreement pursuant to which the seller of
the cap agrees to pay the buyer the difference between the actual interest rate
and the strike rate set forth in the contract if the actual interest rate is
higher than the strike rate. The Company receives intermittent interest
payments based on the spread between the variable month LIBOR rate and the
strike rate of the caps if the variable month LIBOR is higher than the strike
rate. An interest rate collar combines an interest rate cap and an interest
rate floor (one held and one written). An interest rate floor is a contract in
which the floor writer, in return for a premium, agrees to limit the risk
associated with a decline in interest rates based on a notional amount. If
rates fall below an agreed upon strike rate, the floor holder will receive cash
payment from the floor writer equal to the difference between the market rate
and an agreed upon strike rate multiplied by the notional principal amount.
The Company generally uses interest rate swaps, caps, and collars to
effectively fix the cost of short-term funding sources which are used to
purchase interest-earning assets with longer effective maturities, such as
mortgage-backed securities and fixed-rate residential mortgage loans which do
not meet the criteria for sale to the FNMA or the FHLMC in the secondary
market. Such agreements reduce the impact of increases in interest rates by
preventing the Company from having to replace funding sources at a higher cost
prior to the time that the interest-earning assets, which were acquired with
such sources, mature or reprice.
The net effect of the Company's interest rate swaps, caps, and collars was to
increase the Company's interest expense by $0.5 million, $39,000, and $1.6
million during the years ended December 31, 1996, 1995, and 1994, respectively.
Although the impact of the interest rate swaps, caps, and collars has been to
reduce the Company's net interest income in recent periods, they have served to
decrease the imbalance between the Company's interest-earning assets and
interest-bearing liabilities within shorter maturities, thereby reducing the
Company's exposure to increases in interest rates that may occur in the future.
24
<PAGE> 27
The following tables set forth the interest-rate swap agreements,
interest-rate cap agreements, and interest-rate collar agreements which the
Company had entered into as of December 31, 1996.
<TABLE>
<CAPTION>
==========================================================
Interest-rate December 31, 1996
swap agreements: Interest Rates
-------------------------
Floating
Notional Fixed Rate
Maturity Principal Amount Rate Paid Received
- ----------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
02/18/97 $ 10,000 5.05% 5.50%
05/09/97 10,000 7.11 6.25
11/08/97 10,000 7.14 6.25
11/10/97 10,000 7.04 6.25
11/20/97 25,000 5.68 5.50
01/17/98 30,000 5.31 5.62
11/20/98 25,000 5.78 5.50
12/23/98 12,500 6.06 5.59
01/17/99 20,000 5.45 5.62
12/23/99 12,500 6.20 5.59
---------
Total $165,000 5.89(1) 5.69(1)
=========
</TABLE>
(1) Reflects weighted average rates at December 31, 1996.
<TABLE>
<CAPTION>
==========================================================
Interest-rate December 31, 1996
cap agreements: Interest Rates
--------------------------
Notional Index
Maturity Principal Amount Strike Rate Rate
- ----------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
09/21/97 $ 5,000 5.54% 5.59%
02/18/98 15,000 5.25 5.50
--------
Total $20,000 5.32(1) 5.52(1)
========
</TABLE>
(1) Reflects weighted average rates at December 31, 1996.
<TABLE>
<CAPTION>
==========================================================
Interest-rate December 31, 1996
collar agreements: Interest Rates
--------------------------
Notional Floor Cap
Maturity Principal Amount Strike Rate Rate
- ----------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
06/09/97 $10,000 5.25% 6.10%
==========================================================
</TABLE>
In evaluating its interest rate risk position, the Company also has the
ability to utilize the foregoing hedging techniques to mitigate the overall
balance sheet interest rate risk exposure. During 1996, $35.0 million of
interest-rate swaps matured, and were replaced with $75.0 million of
interest-rate swap agreements having maturities of two to three years, in order
to reduce the Company's negative gap position.
The Company's investment in servicing rights also provides some protection
against increases in interest rates. In addition to providing servicing fees,
management believes that servicing rights provide the Company with a long-term
hedge against increasing interest rates which counteracts the effects of such
rates on the market value of certain of its interest-earning assets, such as
fixed-rate loans and securities. Generally, in an increasing interest rate
environment, servicing rights increase in value and produce higher income as a
result of slower prepayments of the underlying mortgages. Such an increase in
value and income can offset the loss of value and income on fixed-rate loans
and securities. Conversely, the loss of value and income on servicing rights
in a generally declining interest rate environment can be offset by the
increase in value and income on loans and securities under such circumstances.
In addition to the foregoing, the Company's strategies to manage interest
rate risk include (i) increasing the interest sensitivity of its single-family
residential loan portfolio through one, three, and five-year adjustable-rate
loan programs, (ii) diversifying into other types of lending, which consist
primarily of short-term and adjustable rate consumer and commercial loans,
(iii) maintaining a high level of investments with maturities of five years or
less, (iv) promoting stable demand and other transaction accounts and, (v)
maintaining a strong capital position.
25
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and
Subsidiaries
================================================================================
The following table summarizes the anticipated maturities or repricing of the
Company's interest-earning assets and interest-bearing liabilities as of
December 31, 1996, based on the information and assumptions set forth in the
notes below.
<TABLE>
<CAPTION>
Four to More Than More Than
Within Three Twelve One Year to Three Years Over Five
Months Months Three Years to Five Years Years Total
(Dollars in Thousands)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets (1):
Loans receivable (2):
Single-family residential loans:
Fixed $ 13,009 $ 37,356 $ 75,344 $ 54,437 $ 141,731 $ 321,877
Adjustable 92,497 187,211 41,330 131,512 77,632 530,182
Consumer loans 62,603 19,246 36,775 23,483 25,865 167,972
Commercial Real Estate 7,882 3,165 6,384 4,613 12,009 35,053
Commercial loans 15,559 1,097 5,498 16,938 21,308 60,400
Loans held for sale 17,089 -- -- -- -- 17,089
Mortgage-backed securities(3) 145,540 85,843 137,675 97,613 286,036 752,707
Investment securities 9,618 27,953 9,988 2,077 10,022 59,658
Other interest-earning assets(4) 15,111 -- -- -- 11,159 26,270
- ---------------------------------------------------------------------------------------------------------------------
Total $378,908 $ 361,871 $ 312,994 $ 330,673 $ 585,762 $1,970,208
=====================================================================================================================
Interest-bearing liabilities:
Deposits(5):
NOW accounts (6) $ 4,295 $ 12,868 $ 29,338 $ 23,764 $ 101,302 $ 171,567
Passbook savings accounts (6) 15,999 47,998 83,995 47,247 64,850 260,089
Money market deposit accounts 113,079 114,542 47,726 2,983 197 278,527
Certificates of deposit 231,207 248,892 199,292 23,378 17,541 720,310
FHLB advances 166,000 1,000 6,000 2,000 -- 175,000
Repurchase agreements 77,424 29,250 65,000 5,000 -- 176,674
- ---------------------------------------------------------------------------------------------------------------------
Total 608,004 454,550 431,351 104,372 183,890 1,782,167
- ---------------------------------------------------------------------------------------------------------------------
Hedge impact (175,000) 60,000 115,000 -- -- --
- ---------------------------------------------------------------------------------------------------------------------
$433,004 $ 514,550 $ 546,351 $ 104,372 $ 183,890 $1,782,167
Excess (deficiency) of interest-earning
assets over interest-bearing
liabilities $(54,096) $(152,679) $(233,357) $ 226,301 $ 401,872 $ 188,041
=====================================================================================================================
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities $(54,096) $(206,775) $(440,132) $(213,831) $ 188,041 --
=====================================================================================================================
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities as a percent of
total assets (2.55)% (9.75)% (20.76)% (10.09)% 8.87% --
=====================================================================================================================
</TABLE>
(1) Adjustable-rate loans are included in the period in which interest rates
are next scheduled to adjust rather than in the period in which they are due,
and fixed-rate loans are included in the periods in which they are scheduled to
be repaid, based on scheduled amortization, in each case as adjusted to take
into account estimated prepayments based on assumptions used by the FDIC in
assessing the interest rate sensitivity of savings associations in the Company's
region.
(2) Balances have been reduced for non-performing loans, which amounted to
$8.1 million at December 31, 1996.
(3) Reflects estimated prepayments in the current interest rate environment.
(4) Includes $11.2 million of stock in the FHLB of Pittsburgh.
(5) Does not include non-interest-bearing deposit accounts.
(6) Although the Company's negotiable order of withdrawal ("NOW") accounts
and passbook savings accounts are subject to immediate withdrawal, management
considers a substantial amount of such accounts to be core deposits having
significantly longer effective maturities based on the Company's retention of
such deposits in changing interest rate environments. The above table assumes
that funds will be withdrawn from the Company at the annual rate of 10% for NOW
accounts and 25% for passbook savings accounts. If all of the Company's NOW
accounts and passbook savings accounts had been assumed to be subject to
repricing within one year, interest-bearing liabilities which were estimated to
mature or reprice within one year would have exceeded interest-earning assets
with comparable characteristics by $557.3 million or 26% of total assets.
26
<PAGE> 29
Although "gap" analysis is a useful measurement device available to
management in determining the existence of interest rate exposure, its static
focus as of a particular date makes it necessary to utilize other techniques in
measuring exposure to changes in interest rates. As a result, the Company,
through simulation models, also analyzes on a quarterly basis the estimated
effects on net interest income under multiple interest rate scenarios,
including increases and decreases in interest rates amounting to 300, 200, and
100 basis points. Each scenario is modeled for a change in net interest income
for two one-year periods. Similar simulation models are prepared to analyze
the Company's net asset value, which is the present value of the cash flows
generated by the Company's assets minus the present value of the cash flows
generated by the Company's liabilities, plus or minus the net cash flows
produced by off-balance sheet contracts. As of December 31, 1996, these
analyses indicated that anticipated changes in the level of net interest
income and net asset value over the various scenarios, were within limits
approved by the Company's Board of Directors.
The adverse effects of rising interest rates are likely to be offset, in
part, by reduced amortization and increased market values of mortgage servicing
rights, which are primarily attributable to decreased current and long-term
prepayment rates used to value this asset. Similarly, the amortization of
mortgage servicing rights will increase and the fair value will decrease during
periods of declining interest rates.
Management believes that the assumptions utilized to evaluate the
vulnerability of the Company's operations to changes in interest rates
approximate actual experience and considers them reasonable. However, the
interest rate sensitivity of the Company's assets and liabilities in the above
table could vary substantially if different assumptions were used or actual
experience differs from the historical experience on which they are based.
REGULATORY CAPITAL REQUIREMENTS
As a Federally chartered savings bank, the Bank is required to maintain
regulatory capital sufficient to meet tangible, core, and risk-based capital
ratios of 1.5%, 3.0%, and 8.0%, respectively.
================================================================================
The following table sets forth the Bank's compliance with applicable
regulatory capital requirements at December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
To Be Well
Minimum Capitalized
For Capital For Prompt
Adequacy Corrective Action
Actual Purposes Provisions
------------------------ --------------------- ----------------------
Ratio Amount Ratio Amount Ratio Amount
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shareholders' equity,
and ratio to OTS total assets 9.0% $ 189,265
------
Intangible assets (51,220)
-----------
Unrealized gains on available-for-sale
securities, net of tax (2,092)
-----------
Tangible capital, and ratio to
OTS adjusted total assets 6.6% $ 135,953 1.5% $30,692
------ =========== ----- =======
Core capital, and ratio to OTS
adjusted total assets 6.6% $ 135,953 3.0% $61,385 5.0% $102,308
------ =========== ----- ======= ------ ========
Core capital, and ratio to OTS
risk-weighted assets 13.2% $ 135,953 6.0% $ 61,800
------ ----------- ------ ========
Allowance for loan and lease losses 9,971
-----------
Supplementary capital 9,971
-----------
Total risk-based capital, and ratio to
OTS risk-weighted assets (1) 14.2% $ 145,924 8.0% $82,400 10.0% $103,000
------ =========== ----- ======= ----- ========
OTS Total assets $2,099,463
===========
OTS Adjusted total assets $2,046,151
===========
OTS Risk-weighted assets $1,030,000
===========
</TABLE>
(1) Does not reflect the interest rate risk component to the risk-based
capital requirement, the effective date of which has been postponed.
27
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and
Subsidiaries
LIQUIDITY AND COMMITMENTS
The Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S. Treasury,
U.S. Government agency, and other investments having maturities of five years
or less. Current OTS regulations require that a savings association maintain
average liquid assets of not less than 5% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less.
Additionally, OTS regulations require a minimum level of liquid assets, at any
given time, equal to 1% or more of net withdrawable deposit accounts and
borrowings payable in one year or less. Monetary penalties may be imposed for
failure to meet applicable liquidity requirements. The Bank's liquidity, as
measured for regulatory purposes, averaged 17.05% and 13.95% during the years
ended December 31, 1996 and 1995, respectively, and amounted to 16.00% and
11.39% at December 31, 1996 and 1995, respectively. The Asset/Liability
Committee of the Bank meets quarterly to review the Bank's liquidity position.
At December 31, 1996, the Company had commitments to originate $11.9 million
of loans, consisting of $9.6 million and $2.3 million of fixed-rate loans and
adjustable-rate loans, respectively. At the same date, scheduled maturities of
certificates of deposit during the succeeding 12 months amounted to $480.1
million, including $304.7 million within six months. Scheduled maturities of
FHLB advances during the same 12-month period amounted to $167.0 million.
Management of the Company believes that the Company has adequate resources to
fund all of its commitments to the extent required, and that it can adjust the
rates on certificates of deposit to retain deposits in changing interest rate
environments.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in relative
purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the Company's assets and
liabilities are monetary in nature. As a result, interest rates generally have
a more significant impact on a financial institution's performance than does
the effect of inflation.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1994, the Accounting Standards Division of the AICPA approved
SOP 94-6, "Disclosure of Certain Significant Risks and Uncertainties." SOP
94-6 requires disclosures in the financial statements beyond those previously
required or generally made in the financial statements about the risk and
uncertainties existing as of the date of those financial statements in the
following areas: nature of operations, use of estimates in the preparation of
financial statements, certain significant estimates, and current vulnerability
due to certain concentrations. The standard was effective for financial
statements issued for fiscal years ending after December 15, 1995.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights," which required the Company to change its accounting for
mortgage servicing rights effective January 1, 1996. The Company, through
ComNet, acquires mortgage servicing rights through the purchase and origination
of mortgage loans which are sold or securitized, generally with servicing
retained. According to SFAS No. 122, the Company must allocate the total cost
of the mortgage loans to the mortgage servicing rights and the loans (exclusive
of mortgage servicing rights) based on their relative fair values. The Company
is required to periodically assess its capitalized mortgage servicing rights
for impairment, based upon the discounted cash flow of the rights disaggregated
within their predominant risk characteristics. Any impairment would be
recognized through a valuation allowance. Application of this pronouncement
was required for mortgage servicing rights acquired relating to loans sold or
securitized commencing January 1, 1996, without retroactive capitalization of
mortgage servicing rights retained in such transactions before adoption of the
pronouncement. For the year ended December 31, 1996, the Company recorded
originated mortgage servicing rights of $1.9 million, net of a $0.9 million
valuation allowance.
On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which establishes financial accounting and reporting
standards for stock-based employee compensation plans. The statement
encourages all entities to adopt a new method of accounting to measure the
compensation cost of all employee stock compensation plans based on the
estimated fair value of the award at the date it is granted. Companies are,
however, permitted to continue to measure compensation cost for those plans
using the intrinsic value based method of accounting. Disclosure is required
for the effects on reported results of the fair value of options granted as if
they had been used to measure compensation cost. Management of the Company has
adopted the pro forma method of disclosure as described above.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" was issued in 1996 and is effective for 1997.
SFAS No. 125 establishes standards for transfers and servicing of financial
assets and extinguishments of liabilities. SFAS No. 127 was also issued in
1996 and amended SFAS No. 125 by deferring for one year the effective date for
certain provisions of SFAS No. 125. The Company intends to adopt SFAS No. 125,
as amended, on January 1, 1997 and SFAS No. 127 on January 1, 1998, and does
not anticipate the impact on the financial statements to be material.
28
<PAGE> 31
REPORT OF MANAGEMENT
The management of Commonwealth Bancorp, Inc. (the "Company") is responsible for
the preparation, integrity, and fair presentation of the Company's annual
financial statements. The December 31, 1996 financial statements have been
prepared in accordance with generally accepted accounting principles and, as
such, include amounts based on judgements and estimates made by management.
Management has also prepared other information included in this annual report
and is responsible for its consistency with the financial statements.
The annual financial statements referred to above have been audited by Arthur
Andersen LLP, who have been given unrestricted access to all financial records
and related data including minutes of all meetings of shareholders, the board
of directors, and committees of the board. Management believes that all
representations made to Arthur Andersen LLPduring the audit were valid and
appropriate.
Management is also responsible for establishing and maintaining the internal
control structure over financial reporting and for the safeguarding and
management of the Company's assets. The objective of the internal control
structure is to provide reasonable assurance to management and the board of
directors.
- that the preparation of the institution's financial statements
is in accordance with generally accepted accounting
principles.
- that adequate procedures are in effect to safeguard assets
against unauthorized loss or disposition.
- that adequate procedures are in effect over the management of
assets including loan underwriting and documentation.
There are inherent limitations in the effectiveness of any internal control
structure including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control
structure can provide only reasonable assurance with respect to reliability of
financial statements and safeguarding and management of assets. Furthermore,
any internal control structure will be affected by changes in circumstance.
Management has made its own assessment of the effectiveness of the Company's
internal control structure over financial reporting as of December 31, 1996 in
relation to the criteria described in the Internal Control - Integrated
Framework, issued by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO"), and the safeguarding and management of assets in relation
to regulatory and COSO guidelines and prudent risk evaluation. Based on this
assessment, management believes that, as of December 31, 1996, the Company's
internal control structure was effective in achieving the objectives stated
above.
/s/ CHARLES M. JOHNSTON /s/ CHARLES H. MEACHAM
- -------------------------------- -----------------------------
Charles M. Johnston Charles H. Meacham
Senior Vice President and Chairman of the Board and
Chief Financial Officer Chief Executive Officer
29
<PAGE> 32
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Commonwealth Bancorp, Inc.
We have examined management's assertion that Commonwealth Bancorp, Inc.
maintained an effective internal control structure over financial reporting as
of December 31, 1996, included in the accompanying management report.
Our examination was made in accordance with standards established by the
American Institute of Certified Public Accountants and, accordingly, included
obtaining an understanding of the internal control structure over financial
reporting, testing and evaluating the design and operating effectiveness of the
internal structure and such other procedures as we considered necessary in the
circumstances. We believe that our examination provides a reasonable basis for
our opinion.
Because of inherent limitations in any internal control structure, errors or
irregularities may occur and not be detected. Also, projections of any
evaluation of the internal control structure over financial reporting to future
periods are subject to the risk that the internal control structure may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assertion that Commonwealth Bancorp, Inc.
maintained an effective internal control structure over financial reporting as
of December 31, 1996, is fairly stated, in all material respects, based on
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
Philadelphia, Pa., /s/ ARTHUR ANDERSEN LLP
January 31, 1997
30
<PAGE> 33
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Commonwealth Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Commonwealth
Bancorp, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Commonwealth Bancorp, Inc. and
Subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Philadelphia, Pa., /s/ ARTHUR ANDERSEN LLP
January 31, 1997
31
<PAGE> 34
CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS (in thousands)
<TABLE>
<CAPTION>
======================================================================================================================
DECEMBER 31,
-----------------------------------------
ASSETS 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 39,268 $ 31,994
Interest-bearing deposits 15,111 7,637
Short-term investments available for sale 5,723 10,546
Mortgage loans held for sale 17,335 26,001
Investment securities (Note 2):
Securities available for sale (cost of $53,815 and
$46,364, respectively), at market value 53,935 46,896
Mortgage-backed securities (Note 3):
Securities held to maturity (market value of $239,447
and $254,352, respectively), at cost 237,743 251,330
Securities available for sale (cost of $511,833 and
$208,464, respectively), at market value 514,964 212,023
Loans receivable, net (Note 4) 1,113,114 796,735
Accrued interest receivable, net (Note 5) 13,339 9,060
FHLB stock, at cost 11,159 8,912
Premises and equipment, net (Note 6) 25,369 20,687
Intangible assets (Note 1) 51,220 17,279
Mortgage servicing rights 7,677 6,855
Other assets, including net deferred taxes of $1,144
and $1,579, respectively 14,004 9,745
- ----------------------------------------------------------------------------------------------------------------------
Total assets $2,119,961 $1,455,700
======================================================================================================================
</TABLE>
(Continued)
32
<PAGE> 35
CONSOLIDATED BALANCE SHEETS Continued (in thousands)
<TABLE>
<CAPTION>
======================================================================================================================
DECEMBER 31,
----------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities:
Deposits (Note 7) $1,491,450 $1,076,549
Notes payable and other borrowings (Note 8):
Secured notes due to Federal Home Loan Bank
of Pittsburgh 175,000 120,614
Securities sold under agreements to repurchase 176,674 81,112
Other borrowings -- 1,554
Advances from borrowers for taxes and insurance 23,883 25,797
Accrued interest payable, accrued expenses and
other liabilities 21,030 13,038
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 1,888,037 1,318,664
- ----------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 11 and 13)
Shareholders' Equity:
Preferred stock, $0.10 par value; 5,000,000 shares
authorized; none issued -- --
Common stock, $0.10 par value; 30,000,000 and
20,000,000 shares authorized; 17,953,613 and 8,628,884
issued, at December 31, 1996 and December 31, 1995,
respectively 1,795 863
Additional paid-in capital 132,931 36,686
Retained earnings 105,577 99,165
Unearned stock benefit plan compensation (10,510) (2,337)
Unrealized gain on marketable securities, net 2,131 2,659
- ----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 231,924 137,036
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $2,119,961 $1,455,700
======================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
33
<PAGE> 36
CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (in thousands, except share amounts)
<TABLE>
<CAPTION>
======================================================================================================================
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest on loans $ 75,602 $58,004 $44,554
Interest on investment securities 3,386 3,754 4,247
Interest and dividends on deposits and money
market investments 2,847 1,808 2,653
Interest on mortgage-backed securities 45,471 33,587 28,920
- ----------------------------------------------------------------------------------------------------------------------
Total interest income 127,306 97,153 80,374
- ----------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits (Note 7) 49,358 35,753 24,824
Interest on notes payable and other borrowings 16,994 13,938 12,036
- ----------------------------------------------------------------------------------------------------------------------
Total interest expense 66,352 49,691 36,860
- ----------------------------------------------------------------------------------------------------------------------
Net interest income 60,954 47,462 43,514
Provision for loan losses (Note 4) 601 578 168
- ----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 60,353 46,884 43,346
- ----------------------------------------------------------------------------------------------------------------------
Noninterest income:
Deposit fees and related income 5,414 3,877 3,670
Servicing fees 5,155 5,531 5,789
Net gain on sales of mortgage loans 2,056 939 318
Net gain on sales of securities -- -- 860
Net (loss) gain on sales of foreclosed real estate (245) 862 183
Other 3,293 1,550 2,115
- ----------------------------------------------------------------------------------------------------------------------
Total noninterest income 15,673 12,759 12,935
- ----------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Compensation and employee benefits 25,584 20,484 22,472
Occupancy and office operations 8,891 7,474 7,749
FDIC premium 9,239 2,174 1,996
Amortization of intangible assets 4,542 1,598 1,076
Advertising and promotion 1,816 1,423 1,313
Other 11,835 9,111 7,915
- ----------------------------------------------------------------------------------------------------------------------
Total noninterest expense 61,907 42,264 42,521
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes 14,119 17,379 13,760
Income tax provision (Note 9) 4,781 6,124 4,515
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 9,338 $11,255 $ 9,245
======================================================================================================================
Weighted average number of shares outstanding 13,033,566 N/A N/A
======================================================================================================================
Earnings per share $ 0.72 N/A N/A
======================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
34
<PAGE> 37
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands)
<TABLE>
<CAPTION>
===================================================================================================================================
Unrealized
Unearned Gain (Loss)
Common Additional Stock on Marketable
Shares Common Paid-in Retained Benefit Plan Securities,
Outstanding Stock Capital Earnings Compensation net Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Adjusted shareholders' equity at January 1, 1994 -- $ -- $ -- $ 82,425 $ -- $ 7,312 $ 89,737
Net income -- -- -- 9,245 -- -- 9,245
Dividends -- -- -- (1,358) -- -- (1,358)
Release of 55,651 ESOP shares -- -- 203 -- 585 -- 788
Amortization of unearned compensation -- -- -- -- 296 -- 296
Decrease in unrealized gain on marketable
securities, net of tax -- -- -- -- -- (13,831) (13,831)
Mutual Holding Company conversion 4,750 475 -- (575) -- -- (100)
Issuance of common stock 3,850 385 35,813 -- (3,685) -- 32,513
ESOP shares purchased at market -- -- -- -- (385) -- (385)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 8,600 860 36,016 89,737 (3,189) (6,519) 116,905
Net income -- -- -- 11,255 -- -- 11,255
Dividends -- -- -- (1,827) -- -- (1,827)
Release of 53,224 ESOP shares -- -- 385 -- 556 -- 941
Amortization of unearned compensation -- -- -- -- 296 -- 296
Exercise of stock options 29 3 285 -- -- -- 288
Decrease in unrealized loss on marketable
securities, net of tax -- -- -- -- -- 9,178 9,178
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 8,629 863 36,686 99,165 (2,337) 2,659 137,036
Net income -- -- -- 9,338 -- -- 9,338
Dividends -- -- -- (3,026) -- -- (3,026)
Release of ESOP shares (c) -- -- 341 -- 826 -- 1,167
Amortization of unearned compensation -- -- -- -- 288 -- 288
Exercise of stock options 14 1 135 -- -- -- 136
Decrease in unrealized gain on marketable
securities, net of tax -- -- -- -- -- (528) (528)
Issuance and exchange of common stock as a
result of the conversion/reorganization(a)(b) 9,311 931 95,769 -- (7,898) -- 88,802
Assets consolidated from Commonwealth
Mutual Holding Company -- -- -- 100 -- -- 100
Common stock acquired by stock benefit plans -- -- -- -- (1,389) -- (1,389)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 17,954 $ 1,795 $132,931 $105,577 ($10,510) $ 2,131 $231,924
===================================================================================================================================
</TABLE>
(a) Includes 3,889,598 shares of Commonwealth Bank outstanding at June 14,
1996, converted into 8,080,538 shares of Commonwealth Bancorp, Inc. based on
the 2.0775 exchange ratio; 9,872,155 shares of Commonwealth Bancorp, Inc.
sold in the subscription and community offering; and the cancellation of
4,752,000 shares of Commonwealth Bank previously held by Commonwealth
Mutual Holding Company.
(b) Of the 9,872,155 conversion shares, 8% were purchased by the ESOP.
(c) Pre-conversion shares totaling 11,344 were released during the quarter
ended March 31, 1996; Post-conversion shares totaling 78,702 were released
during the nine months ended December 31, 1996.
The accompanying notes are an integral part of the consolidated financial
statements.
35
<PAGE> 38
CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
<TABLE>
<CAPTION>
=======================================================================================================================
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 9,338 $ 11,255 $ 9,245
Adjustments to reconcile net income to net cash
provided by (used in) operating activities -
Proceeds from loans sold to others 265,971 279,276 248,245
Loans originated for sale (175,984) (141,461) (160,080)
Purchases of loans held for sale (85,531) (144,433) (27,094)
Principal collection on mortgage loans held
for sale 427 334 1,331
Net gain on sales of mortgage loans (2,056) (939) (318)
Increase (decrease) in net deferred loan fees 339 (782) (84)
Provision for loan losses and foreclosed
real estate 1,041 1,107 510
Net loss (gain) on sales of assets 3 (1,406) (1,507)
Depreciation and amortization 3,161 2,187 3,090
Net amortization of other assets and liabilities 7,173 4,092 2,319
Interest reinvested on repurchase agreements (6,792) (7,782) (5,192)
Changes in assets and liabilities -
(Increase) decrease in-
Accrued interest receivable, net (3,523) (1,610) (810)
Deferred income taxes 747 1,201 (69)
Other assets (2,843) (6,206) (2,412)
(Decrease) increase in -
Advances from borrowers for taxes
and insurance (1,914) 3,023 (4,109)
Accrued interest payable, accrued expenses
and other liabilities 5,215 867 84
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 14,772 (1,277) 63,149
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
36
<PAGE> 39
CONSOLIDATED STATEMENTS OF CASH FLOWS Continued (in thousands)
<TABLE>
<CAPTION>
=======================================================================================================================
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investing activities:
Proceeds from maturities of investment securities $ 29,249 $ 45,000 $117,366
Purchases of investment securities (36,530) (12,029) (162,091)
Purchases of mortgage-backed securities (412,676) (85,472) (189,751)
Principal collected on mortgage-backed securities 122,895 64,887 137,368
Principal collected on loans 177,660 117,799 115,398
Loans originated (144,518) (93,487) (164,149)
Loans purchased (228,190) (234,963) (35,198)
Sales of real estate acquired through foreclosure 809 3,270 4,628
Purchase of FHLB stock (5,343) (1,035) (20)
Sale of FHLB stock 3,096 0 0
Purchases of premises and equipment (4,918) (4,254) (1,880)
Acquisition of branches 215,904 178,610 0
Other 107 615 4,238
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (282,455) (21,059) (174,091)
- -----------------------------------------------------------------------------------------------------------------------
Financing activities:
Net increase (decrease) in deposits 37,276 25,668 (28,703)
Proceeds from notes payable and other borrowings 429,475 320,294 293,186
Repayment of notes payable and other borrowings (274,289) (317,916) (251,583)
Net issuance of common stock 87,549 288 32,029
Cash dividends paid (2,403) (1,734) (1,066)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 277,608 26,600 43,863
- -----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 9,925 4,264 (67,079)
Cash and cash equivalents at beginning of year 50,177 45,913 112,992
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 60,102 $ 50,177 $ 45,913
=======================================================================================================================
Supplemental disclosures of cash flow information
Cash paid during the year for -
Interest $ 65,133 $ 47,936 $ 36,563
=======================================================================================================================
Income taxes $ 4,266 $ 5,532 $ 4,577
=======================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
37
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1996, 1995 and 1994
1. ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES:
Commonwealth Bancorp, Inc. ("Commonwealth" or the "Company"), a Pennsylvania
corporation, is the holding company for Commonwealth Bank ("Bank"). On June 14,
1996, the Company completed an offering of common stock in connection with the
Conversion and Reorganization of Commonwealth Mutual Holding Company, the
former parent company of the Bank, from the mutual holding company form of
ownership to the stock holding company form ("the Conversion and
Reorganization"). In the offering, 9.9 million shares of common stock of the
Company were sold in a subscription and community offering at $10.00 per share.
In addition, 8.1 million shares of common stock of the Company were issued in
exchange for shares of stock of the Bank previously held by public stockholders
at an exchange ratio of 2.0775 shares for each share of Bank common stock,
resulting in 18.0 million shares of common stock of the Company outstanding at
the Conversion and Reorganization.
The Company prepares its consolidated financial statements in accordance with
generally accepted accounting principles. The financial data for periods prior
to June 14, 1996 is for Commonwealth Bank. The following is a description of
the more significant accounting policies:
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries:
- Commonwealth Bank-Federally chartered savings bank
- CFSL Investment Corporation-Delaware investment subsidiary
- CS Corporation-Inactive Pennsylvania investment subsidiary
- Firstcor, Ltd.-Pennsylvania investment subsidiary
- QME, Inc.-Pennsylvania investment subsidiary
- Commonwealth Investment Corporation-Delaware investment subsidiary
All material intercompany accounts and transactions have been eliminated in
consolidation.
NATURE OF OPERATIONS
The Bank conducts business through 53 full-service offices located in Berks,
Bucks, Chester, Delaware, Lebanon, Lehigh, Montgomery, and Philadelphia
counties, Pennsylvania, as well as through ComNet Mortgage Services ("ComNet"),
a division of the Bank. ComNet conducts business through seven loan
origination offices located in Pennsylvania, Connecticut, New Jersey, and Rhode
Island. ComNet also originates loans through a network of correspondents,
primarily in the eastern United States.
The Bank is a community-oriented savings bank that emphasizes customer
service and convenience. As part of this strategy, the Bank has sought to
develop a variety of products and services that meet the needs of its customer
base. Accordingly, the Bank has adopted a number of complementary business
strategies that emphasize lending and deposit products and services oriented
toward individuals and businesses.
USE OF ESTIMATES IN THE PREPARATION
OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain items in the 1994 and 1995 financial statements have been
reclassified in order to conform with the 1996 financial statement
presentation.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" was issued in 1996 and is effective for 1997. SFAS No. 125
establishes standards for transfers and servicing of financial assets and
extinguishments of liabilities. SFAS No. 127 was also issued in 1996, and
amended SFAS No. 125 by deferring
38
<PAGE> 41
for one year the effective date for certain provisions of SFAS No. 125. The
Company intends to adopt SFAS No. 125, as amended, on January 1, 1997 and SFAS
No. 127 on January 1, 1998, and does not anticipate the impact on the
consolidated financial statements to be material.
SECURITIES
The Company classifies all of its debt and equity securities as either held
to maturity or available for sale.
Securities classified as held to maturity are those securities which the
Company has the intent and ability to hold to maturity, subject to the
continued creditworthiness of the issuers. Accordingly, these securities are
stated at cost, adjusted for amortization of premiums and accretion of
discounts over the expected term of the securities using the level-yield
method.
Securities classified as available for sale are intended to be held for
indefinite periods of time and include those securities that management may
employ as part of its asset/liability management strategy and that may be sold
in response to changes in interest rates, resultant prepayment risk, and other
factors related to interest rate and resultant prepayment risk changes.
Realized gains or losses on the sales of securities are computed by comparing
the sales proceeds with the cost of the securities, as calculated by the
specific identification method.
Federal Home Loan Bank ("FHLB") stock, owned due to regulatory requirements,
is carried at cost.
LOANS
Loans held for investment are stated at the amount of the unpaid principal
balance. Mortgage loans held for sale are carried at the lower of aggregate
cost or market as determined by outstanding commitments from investors or
current investor yield requirements. Discounts and premiums on loans acquired
are accreted and amortized over the estimated life of the portfolio using the
level-yield method and estimated prepayment assumptions. The prepayment
assumptions are reviewed periodically and the accretion or amortization is
adjusted based on actual prepayments, if necessary.
Interest on loans is credited to income as it is earned. The Company provides
an allowance for accrued interest deemed to be uncollectible when a loan is 90
days delinquent. Loans on which the accrual of interest has been discontinued
are designated as nonaccrual loans. Accrual of interest on loans is
discontinued when reasonable doubt exists as to the full, timely collection of
principal or interest. When loans are placed on nonaccrual, interest previously
accrued but not collected is reversed against interest income in the current
period. Interest payments received thereafter are recognized as interest income
only to the extent that cash is received and where the future collection of
principal is probable. Accruals are resumed on loans only when they are brought
fully current with respect to principal and interest and when, in the judgment
of management, the loan is estimated to be fully collectible as to both
principal and interest.
ALLOWANCE FOR LOAN LOSSES
An allowance for loan losses is maintained at a level that management
considers adequate to provide for estimated future credit losses based upon an
evaluation of known and inherent risks attendant with the Company's loan
portfolio. Management's evaluation is based on a regular review of the loan
portfolio and considers such factors as payment history, adverse situations
that may affect a borrower's ability to repay, collateral adequacy, and current
economic conditions. Actual losses may vary from current estimates. These
estimates are reviewed periodically, and if additions to the original estimates
of the allowance for loan losses are deemed necessary, they are recorded in the
period in which they become reasonably estimable.
The Financial Accounting Standards Board ("FASB") issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," in May 1993, and SFAS No.
118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures," in October 1994. These statements require creditors to measure
certain impaired loans based on the present value of expected future cash flows
discounted at the loan's effective interest rate, or as a practical expedient,
at the loan's observable market price, or the fair value of the collateral if
the loan is collateral dependent. Loans excluded from these statements include
large groups of smaller-balance homogenous loans that are collectively
evaluated for impairment, loans that are measured at fair value or at the lower
of cost or fair value, leases and debt securities. The in-substance foreclosure
rules also changed in that "in-substance foreclosures" are classified as loans
and stated at the lower of cost or fair value, as defined.
LOAN ORIGINATION FEES AND SERVICING FEES
The net amount of nonrefundable loan origination fees and certain direct loan
origination costs relating to completed loans are deferred and recognized over
the contractual life of the loans using the level-yield method. Deferred loan
fees, net of loan origination costs, were $3.3 million and $2.9 million at
December 31, 1996 and 1995, respectively, of which $0.4 million and $0.3
million,
39
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and
Subsidiaries
respectively, were related to mortgage loans held for sale.
The Company sells whole interests in loans and mortgage-backed securities. In
transactions that involve sales of loans or mortgage-backed securities that are
backed by loans originated by the Company, the Company generally continues to
service such loans. Fees earned for servicing mortgage loans for others are
calculated on the outstanding principal balances of the loans serviced and are
recorded as income when earned, provided the related mortgagor payment has been
collected.
In conjunction with the administration of its servicing portfolio, ComNet is
required to advance taxes and insurance payments on those loans relating to
which the escrow has been depleted. Advances that reach a predetermined level
are controlled by reimbursement requests to the mortgagor. If reimbursement is
not received, the advance is built into the mortgagor's future payment
schedule. At December 31, 1996 and 1995, advances for taxes and insurance
totaled $1.4 million and $1.1 million, respectively.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
the estimated useful lives of the related assets, which range from 3 to 42
years.
Maintenance and repairs are charged to expense as incurred, and betterments
are capitalized. Gains and losses are reflected in earnings upon disposition.
INTANGIBLE ASSETS
Goodwill and Core Deposit Intangibles ("CDI") were recorded in connection
with the acquisitions of Meridian branches in 1996 and Fidelity Federal Savings
and Loan Association ("Fidelity Federal") branches in 1995 (see Note 16).
Goodwill was also recorded relating to the acquisition of First Family Federal
Savings and Loan Association ("First Family") in 1982. The Meridian CDI are
being amortized on an accelerated basis over approximately 10 years. The
Meridian goodwill and Fidelity Federal goodwill and CDI are being amortized on
a straight-line basis over the period to be benefited, ranging between 10 and
13 years. The goodwill relating to the acquisition of First Family was
amortized using the level-yield method over the actual lives of the long-term
interest-bearing assets of the acquired institution.
The following is a summary of intangible assets as of December 31, 1996 and
1995 (in thousands):
<TABLE>
<CAPTION>
========================================================
DECEMBER 31,
---------------------
1996 1995
- --------------------------------------------------------
<S> <C> <C>
Goodwill (Meridian) $22,791 $ --
CDI (Meridian) 13,199 --
Goodwill (Fidelity Federal) 12,398 13,456
CDI (Fidelity Federal) 2,832 3,162
Goodwill (First Family) -- 661
- --------------------------------------------------------
Total $51,220 $17,279
========================================================
</TABLE>
MORTGAGE SERVICING RIGHTS
On January 1, 1996, the Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights." The Company, through ComNet, acquires mortgage
servicing rights through the purchase and origination of mortgage loans which
are sold or securitized, generally with servicing retained. SFAS No. 122
requires the Company to allocate the total cost of the mortgage loans to the
mortgage servicing rights and the loans (exclusive of mortgage servicing
rights) based on their relative fair values. The Company is required to
periodically assess its capitalized mortgage servicing rights for impairment,
based upon the discounted cash flow of the rights disaggregated within their
predominant risk characteristics. Any impairment would be recognized through a
valuation allowance. Application of this pronouncement was required for
mortgage servicing rights acquired relating to loans sold or securitized
commencing January 1, 1996, without retroactive capitalization of mortgage
servicing rights retained in such transactions before adoption of the
pronouncement. For the year ended December 31, 1996, the Company recorded
originated mortgage servicing rights of $1.9 million, net of a $0.9 million
valuation allowance.
The allocated cost of mortgage servicing rights is amortized in proportion
to, and over the period of, estimated net servicing revenues. Impairment of
mortgage servicing rights is assessed based on the fair value of those rights.
Fair values are estimated using discounted cash flows based on a current market
interest rate. For purposes of measuring impairment, the rights are stratified
based on the predominant risk characteristics of the underlying loans. ComNet
primarily stratifies mortgage servicing rights by product (30, 15, and 7 years)
and by interest rate. The amount of impairment recognized is the amount by
which the capitalized mortgage servicing rights for a stratum exceed their fair
value.
When mortgage loans are sold with servicing retained and the stated servicing
fee rate differs from the normal contracted servicing fee rate, the excess
servicing value
40
<PAGE> 43
associated with the rate differential is used to calculate a gain or loss on
sale. These excess servicing fees are capitalized and amortized to servicing
income monthly, using the level-yield method over the contractual life of the
mortgage loans sold, and estimated prepayment assumptions. The prepayment
assumptions are reviewed periodically and the amortization is adjusted based on
actual prepayments, if necessary.
REAL ESTATE OWNED
Real estate acquired through foreclosure or deed in lieu of foreclosure is
presumed to be held for sale, and is carried at the lower of cost or fair value
less estimated costs to sell, on an individual asset basis. Decreases in the
fair value of the assets less estimated costs to sell are recorded against the
individual asset carrying amount. Actual losses may vary from current
estimates. These estimates are reviewed periodically and, as adjustments become
necessary, are recorded in the period in which they become reasonably
estimable. At December 31, 1996 and 1995, real estate owned totaled $1.1
million and $0.8 million, respectively, and is included in other assets in the
accompanying consolidated balance sheets.
INCOME TAXES
The Company records deferred taxes based on the estimated future tax effects
of temporary differences between the financial statement and income tax bases
of assets and liabilities using the enacted marginal tax rate. Deferred income
tax expense or credits are based on the changes in the asset or liability from
period to period.
POSTEMPLOYMENT BENEFITS
The Company has postemployment benefits relating to a salary continuation
package for certain eligible employees. The benefits are based, in part, on the
number of years of service provided by the employee.
ACCOUNTING FOR STOCK-BASED COMPENSATION
On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which establishes financial accounting and reporting
standards for stock-based employee compensation plans. The statement encourages
all entities to adopt a new method of accounting to measure the compensation
cost of all employee stock compensation plans based on the estimated fair value
of the award at the date it is granted. Companies are, however, permitted to
continue to measure compensation cost for such plans using the intrinsic value
based method of accounting. Disclosure is required for the effects on reported
results of the fair value of options granted as if they had been used to
measure compensation cost. Management of the Company has adopted the pro forma
method of disclosure as described above.
EARNINGS PER SHARE
Earnings per share is computed by dividing net income by the weighted average
number of shares of common stock outstanding during the year, adjusted for
Employee Stock Ownership Plan ("ESOP") shares that have not been committed to
be released, and the effects of shares held by the Recognition Plans. Stock
options are considered common stock equivalents and are included in the
computation of the number of outstanding shares using the treasury stock
method, unless such options are antidilutive. Net income per common share for
the years ended December 31, 1995 and 1994, are not applicable, as the Company
completed its Conversion and Reorganization on June 14, 1996.
In 1996, the Company recognized a $4.5 million after-tax, or $0.35 per share,
one-time charge to earnings relating to the federal deposit insurance
assessment to recapitalize the Savings Association Insurance Fund ("SAIF").
OFF-BALANCE-SHEET ITEMS
INTEREST RATE EXCHANGE, CAP, AND COLLAR AGREEMENTS
The company enters into interest rate swaps, caps, and collars as a means
of hedging interest rate risk on floating rate liabilities. The costs of cap
transactions are deferred and amortized over the contract period. The amortized
costs of cap transactions and interest income and interest expense on swap,
cap, and collar transactions are included in interest on notes payable and
other borrowings.
FUTURES AND OPTIONS
Financial futures and options are used in asset/liability management. Gains
and losses on futures and options contracts used as hedges are deferred and
recognized in interest income or interest expense over the term of the hedge.
FORWARD COMMITMENTS
The Company uses mandatory forward sales commitments of mortgage-backed
securities, with the intent to deliver or pair-off for cash, and put options to
assist in hedging interest rate risks attendant with the mortgage loan
portfolio held for sale. The costs of the put options are deferred and either
amortized over the contract period or expensed if and when the options are
exercised. Gains and losses, net of unamortized options costs, are recognized
in income at the time of sale.
41
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and
Subsidiaries
INTEREST RATE RISK MANAGEMENT
The ability to maximize net interest income is largely dependent upon the
achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap," provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates. A gap is considered positive when the
amount of interest-rate sensitive assets exceed the amount of interest-rate
sensitive liabilities, and is considered negative when the amount of
interest-rate sensitive liabilities exceed the amount of interest-rate
sensitive assets. Generally, during a period of rising interest rates, a
negative gap within shorter maturities would adversely affect net interest
income, while a positive gap within shorter maturities would result in an
increase in net interest income. Conversely, during a period of falling
interest rates, a negative gap within shorter maturities generally would result
in an increase in net interest income, while a positive gap within shorter
maturities generally would have the opposite effect.
As of December 31, 1996, the Company had a negative gap relating to assets
and liabilities maturing or repricing within one year, indicating that within
shorter maturities, the duration of the Company's interest-rate-sensitive
liabilities was shorter than its interest-rate-sensitive assets. This increases
interest rate risk because, in a rising rate environment, liabilities would
reprice faster at higher interest rates, thereby reducing net interest income.
The Company's asset and liability management policy is established by the
Asset/Liability Committee of the Company and reviewed by the Company's Board of
Directors at least annually. Such policy is implemented by the Investment
Committee, which is comprised of members of senior management and meets
bi-weekly. Currently, the Company manages the imbalance between its
interest-earning assets and interest-bearing liabilities within shorter
maturities to ensure that such relationships are within acceptable ranges,
given the Company's business strategies and objectives, and its analysis of
market and economic conditions.
CASH FLOW INFORMATION
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks, interest-bearing deposits, and short-term investments
available for sale which consist of federal funds sold and money market
investments with original maturities of three months or less. Generally,
federal funds are sold for one-day periods. The Consolidated Statements of Cash
Flows reflect the net amounts of cash receipts and cash payments associated
with deposit transactions. During the years ended December 31, 1996, 1995, and
1994, reclassifications of mortgage loans to real estate owned were $1.5
million, $1.2 million, and $0.5 million, respectively.
OTHER INFORMATION
The deposits of the Bank are insured by either the Savings Association
Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF"), both of which are
administered by the Federal Deposit Insurance Corporation ("FDIC"). The SAIF
and BIF are required by law to attain and maintain a reserve ratio of 1.25% of
insured deposits. As a result of the BIF achieving fully funded status, the
FDIC promulgated a regulation in November 1995, which reduced deposit premiums
paid by BIF-insured banks in the lowest risk category from 27 basis points to
zero (subject to an annual minimum of $2,000).
On September 30, 1996, legislation was enacted into law to recapitalize the
SAIF through a one-time special assessment on SAIF-insured deposits as of March
31, 1995. The special assessment amounted to approximately $0.65 for every $100
of assessable deposits. The Bank's assessment amounted to $6.8 million ($4.5
million, net of income tax benefit). As a result of the special assessment, the
Bank's deposit insurance premiums decreased from the previous rate of $0.23 per
$100 of deposits to approximately $0.08 per $100 of deposits.
42
<PAGE> 45
2. INVESTMENT SECURITIES:
Investments in debt and equity securities at December 31, 1996 and 1995, were
as follows (in thousands):
<TABLE>
<CAPTION>
==============================================================================================================================
December 31, 1996 December 31, 1995
Available for Sale Available for Sale
-------------------------------------------------------------------------------
Unrealized Unrealized
Amortized Market Amortized Market
Cost Gains Losses Value Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and U.S. Government agency
securities maturing:
Within one year $27,953 $ 93 $ -- $28,046 $20,521 $ 222 $ -- $ 20,743
After one year but within five years 9,988 31 -- 10,019 8,241 85 -- 8,326
After five years but within ten years 10,022 2 -- 10,024 10,027 167 -- 10,194
- ------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury and U.S.
Government agency securities 47,963 126 -- 48,089 38,789 474 -- 39,263
- ------------------------------------------------------------------------------------------------------------------------------
Corporate bonds maturing:
Within one year -- -- -- -- -- -- -- --
After one year but within five years -- -- -- -- 5,498 7 22 5,483
After five years but within ten years -- -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total corporate bonds -- -- -- -- 5,498 7 22 5,483
- ------------------------------------------------------------------------------------------------------------------------------
Mortgage Security Mutual Fund 2,215 -- 6 2,209 2,077 73 -- 2,150
Equity
Servicing Partnership 2,880 -- -- 2,880 -- -- -- --
Other Equity Investment 757 -- -- 757 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total $53,815 $ 126 $ 6 $53,935 $46,364 $ 554 $ 22 $46,896
==============================================================================================================================
</TABLE>
During the year ended December 31, 1996 and 1995, there were no sales of
investment securities.
43
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and
Subsidiaries
3. MORTGAGE-BACKED SECURITIES:
Mortgage-backed securities at December 31, 1996 and 1995, were as follows (in
thousands):
<TABLE>
<CAPTION>
=======================================================================================================================
DECEMBER 31, 1996
----------------------------------------------------------------------
AMORTIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity:
GNMA $ 89,715 $1,900 $ 254 $ 91,361
FHLMC 54,162 514 34 54,642
FNMA 87,484 392 814 87,062
Private 6,221 -- -- 6,221
Other 161 -- -- 161
- -----------------------------------------------------------------------------------------------------------------------
Total $ 237,743 $2,806 $ 1,102 $239,447
=======================================================================================================================
Available for sale:
GNMA $ 20,343 $1,656 $ 312 $ 21,687
FHLMC 116,884 3,038 217 119,705
CMO and REMIC 289,718 858 2,244 288,332
FNMA 84,888 732 380 85,240
- -----------------------------------------------------------------------------------------------------------------------
Total $ 511,833 $6,284 $ 3,153 $514,964
=======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------------------------------------
AMORTIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity:
GNMA $ 92,651 $3,092 $ 266 $ 95,477
FHLMC 72,141 521 219 72,443
FNMA 79,055 381 487 78,949
Private 7,236 -- -- 7,236
Other 247 -- -- 247
- -----------------------------------------------------------------------------------------------------------------------
Total $ 251,330 $3,994 $ 972 $254,352
=======================================================================================================================
Available for sale:
GNMA $ 25,144 $2,085 $ 354 $26,875
FHLMC 62,782 2,940 43 65,679
CMO and REMIC 75,362 38 1,468 73,932
FNMA 45,176 562 201 45,537
- -----------------------------------------------------------------------------------------------------------------------
Total $ 208,464 $5,625 $2,066 $212,023
=======================================================================================================================
</TABLE>
Expected and actual maturities of mortgage-backed securities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations, with or without call or prepayment penalties. During 1996 and
1995, there were no sales of mortgage-backed securities.
At December 31, 1996 and 1995, Federal Home Loan Mortgage Corporation
("FHLMC") mortgage-backed securities with a carrying value of $64.8 million and
$17.8 million, respectively (market value of $64.7 million and $18.5 million,
respectively); Government National Mortgage Association ("GNMA")
mortgage-backed securities with a carrying value of $46.7 million and $43.7
million, respectively (market value of $47.9 million and $45.2 million,
respectively); and Federal National Mortgage Association ("FNMA")
mortgage-backed securities with a carrying value of $77.1 million and $23.1
million, respectively (market value of $76.3 million and $23.1 million,
respectively), collateralized certain securities sold under agreements to
repurchase (see Note 8). Mortgage-backed securities with a carrying value at
December 31, 1996 and 1995, of $10.4 million and $3.9 million, respectively
(market value of $10.5 million and $4.0 million, respectively), were pledged as
collateral for depositors. Mortgage-backed securities with a carrying value at
December 31, 1996 and 1995, of $1.6 million and $5.0 million, respectively
(market value of $1.6 million and $5.1 million, respectively), were pledged as
collateral for interest rate swap agreements.
44
<PAGE> 47
4. LOANS RECEIVABLE, NET:
A summary of mortgage and other loans at December 31, 1996 and 1995, follows
(in thousands):
<TABLE>
<CAPTION>
==============================================================
DECEMBER 31,
------------------------
1996 1995
- --------------------------------------------------------------
<S> <C> <C>
Mortgage loans:
1-4 family residential,
principally conventional $ 857,053 $655,152
Commercial loans:
Small Business Administration 25,104 29,472
Commercial real estate 35,452 9,386
Business loans 35,380 2,801
- --------------------------------------------------------------
Total commercial loans 95,936 41,659
Consumer loans:
Equity lines of credit 49,136 44,432
Second mortgages 77,304 48,653
Other 42,867 18,009
- --------------------------------------------------------------
Total consumer loans 169,307 111,094
- --------------------------------------------------------------
Total loans receivable 1,122,296 807,905
- --------------------------------------------------------------
Less:
(Premium)/Discount on
loans purchased (3,655) 1,004
Allowance for loan losses 9,971 7,485
Deferred loan fees 2,866 2,681
- --------------------------------------------------------------
9,182 11,170
- --------------------------------------------------------------
Loans receivable, net $1,113,114 $796,735
==============================================================
</TABLE>
At December 31, 1996 and 1995, approximately 48% and 55%, respectively, of
the mortgage loan receivable balances related to loans made in Pennsylvania and
New Jersey. Due to the nature of the receivable, the Company is able to
decrease its credit exposure by an amount equal to the appraised value and
private mortgage insurance coverage of the real estate securing the loan.
Nonaccruing loans at December 31, 1996 and 1995, were $8.1 million and $6.2
million, respectively. Forgone interest income on nonaccruing loans was $0.6
million, for each of the years ended December 31, 1996, 1995 and 1994.
A summary of activity relating to loans in excess of $60,000 outstanding to
directors and executive officers follows (in thousands):
<TABLE>
<CAPTION>
==========================================================
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
1996 1995 1994
- ----------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 937 $1,319 $1,311
New loans 207 27 191
Loan repayments (226) (409) (183)
- ----------------------------------------------------------
Balance, end of year $918 $ 937 $1,319
==========================================================
</TABLE>
The above loans were made at substantially the same terms as loans to
unrelated third parties.
A summary of activity relating to the allowance for loan losses follows (in
thousands):
<TABLE>
<CAPTION>
==========================================================
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
1996 1995 1994
- ----------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $7,485 $7,307 $7,309
Loans charged off (667) (487) (294)
Recoveries of loans 180 87 124
- ----------------------------------------------------------
Net loans charged off (487) (400) (170)
Provision for loan losses 601 578 168
Allowance acquired in
Meridian Branch
Acquisition 2,372 -- --
- ----------------------------------------------------------
Balance, end of year $9,971 $7,485 $7,307
==========================================================
</TABLE>
45
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and
Subsidiaries
5. ACCRUED INTEREST RECEIVABLE:
Accrued interest receivable was related to the following at December 31, 1996
and 1995 (in thousands):
<TABLE>
<CAPTION>
==========================================================
DECEMBER 31,
-------------------------
1996 1995
- ----------------------------------------------------------
<S> <C> <C>
Investment securities $ 1,027 $ 887
Mortgage-backed securities 4,733 3,233
Loans receivable, net 7,579 4,940
- ----------------------------------------------------------
Total $13,339 $9,060
==========================================================
</TABLE>
6. PREMISES AND EQUIPMENT:
A summary of premises and equipment, less accumulated depreciation and
amortization, at December 31, 1996 and 1995, follows (in thousands):
<TABLE>
<CAPTION>
==========================================================
DECEMBER 31,
-------------------------
1996 1995
- ----------------------------------------------------------
<S> <C> <C>
Land $ 3,947 $ 3,645
Office buildings 16,738 14,229
Furniture, fixtures and equipment 18,525 15,567
Leasehold improvements 6,972 5,527
- ----------------------------------------------------------
Premises and equipment 46,182 38,968
Less-accumulated depreciation
and amortization (20,813) (18,281)
- ----------------------------------------------------------
Premises and equipment, net $25,369 $20,687
==========================================================
</TABLE>
7. DEPOSITS:
A summary of interest expense, average balances, and interest rates on
deposits follows (in thousands):
<TABLE>
<CAPTION>
=========================================================================================================================
MONEY
CHECKING MARKET SAVINGS CERTIFICATES
DEPOSITS DEPOSITS DEPOSITS OF DEPOSIT
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For the year ended December 31, 1996:
Balance at year-end $232,524 $278,527 $260,089 $720,310
Average balance 191,057 281,698 240,579 609,510
Interest expense 1,885 10,297 5,072 32,104
Average rate paid 0.99% 3.66% 2.11% 5.27%
For the year ended December 31, 1995:
Balance at year-end $154,407 $264,239 $144,163 $513,740
Average balance 137,638 265,115 136,678 414,360
Interest expense 1,277 9,895 2,841 21,740
Average rate paid 0.93% 3.73% 2.08% 5.25%
</TABLE>
Certificates of deposit of $100,000 or more, totaled $68.3 million and $39.0
million at December 31, 1996 and 1995, respectively. Deposits in excess of
$100,000 are not federally insured by the FDIC.
The scheduled maturities of certificate accounts at December 31, 1996 and 1995,
were as follows (in thousands):
<TABLE>
<CAPTION>
=========================================================================================================================
DECEMBER 31,
---------------------------------------------------------------
1996 1995
AMOUNT PERCENT AMOUNT PERCENT
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Under 12 months $480,099 67% $320,097 62%
12 to 36 months 199,292 28 141,589 28
Over 36 months 40,919 5 52,054 10
- -------------------------------------------------------------------------------------------------------------------------
$720,310 100% $513,740 100%
=========================================================================================================================
</TABLE>
46
<PAGE> 49
8. NOTES PAYABLE AND OTHER BORROWINGS:
Notes payable and other borrowings at December 31, 1996 and 1995, were as
follows (in thousands):
<TABLE>
<CAPTION>
=========================================================================================================================
DECEMBER 31,
------------------------------------------------------------------------------------
1996 1995
----------------------------- -----------------------------
Due Date Rate Amount Rate Amount
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Secured notes due to
FHLB of Pittsburgh:
Maturing in 1996 $ -- $110,614
1997 167,000 2,000
1998 5,000 5,000
1999 1,000 1,000
2000 1,000 1,000
2001 1,000 1,000
-------- --------
Total 5.24%-7.27% $175,000 4.49%-7.27% $120,614
======== ========
Securities sold under
agreement to repurchase:
Maturing in 1996 $ -- $ 71,112
1997 106,674 10,000
1998 40,000 --
1999 25,000 --
2000 5,000 --
-------- --------
Total 4.98%-6.71% $176,674 5.75%-6.00% $ 81,112
======== ========
ESOP loan (see Note 15):
Maturing in 1996 $ -- $ 519
1997 -- 518
1998 -- 517
-------- --------
Total $ -- Prime $ 1,554
======== ========
</TABLE>
The ESOP loan from an unaffiliated lender was repaid during 1996.
All stock in the FHLB of Pittsburgh at December 31, 1996, was pledged as
collateral for the notes due to the FHLB. The Company had a $94.3 million
Flexline commitment with the FHLB at December 31, 1996. At December 31, 1996,
there was no outstanding balance against the line of credit.
The Company enters into sales of securities under agreements to repurchase.
These transactions are reflected as a liability on the accompanying
Consolidated Balance Sheets. The dollar amount of securities underlying the
agreements remains in the asset account, although the securities underlying the
agreements are delivered to primary dealers who manage the transactions. At
December 31, 1996 and 1995, all of the agreements were to repurchase identical
securities.
Securities underlying these reverse repurchase agreements consisted of
mortgage-backed securities and U.S. Treasury and U.S. Government agency
securities with carrying values of $188.7 million and $84.5 million,
respectively (market value of $188.9 million and $86.8 million, respectively),
at December 31, 1996 and 1995 (see Notes 2 and 3).
The maximum amounts of outstanding reverse repurchase agreements during the
years ended December 31, 1996 and 1995, were $176.7 million and $210.3 million,
respectively. Average agreements outstanding for the years ended December 31,
1996 and 1995, were $154.5 million and $143.3 million, respectively. The
weighted average interest rates relating to the agreements for the years ended
December 31, 1996 and 1995, were 5.91% and 6.35%, respectively.
47
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and
Subsidiaries
9. INCOME TAXES:
A summary of the provision (benefit) for income taxes for the years ended
December 31, 1996, 1995, and 1994, follows (in thousands):
<TABLE>
<CAPTION>
==========================================================
CURRENT DEFERRED TOTAL
- ----------------------------------------------------------
<S> <C> <C> <C>
December 31, 1996:
Federal $4,051 $ 728 $4,779
State 2 -- 2
- ----------------------------------------------------------
Total $4,053 $ 728 $4,781
==========================================================
December 31, 1995:
Federal $4,959 $ 1,079 $6,038
State (36) 122 86
- ----------------------------------------------------------
Total $4,923 $ 1,201 $6,124
==========================================================
December 31, 1994:
Federal $4,560 $ 17 $4,577
State 24 (86) (62)
- ----------------------------------------------------------
Total $4,584 $ (69) $4,515
==========================================================
</TABLE>
Income tax expense has been provided at the effective rates of 34%, 35%, and
33% for the years ended December 31, 1996, 1995, and 1994, respectively. These
rates differ from the statutory rate of 35%, as follows (in thousands):
<TABLE>
<CAPTION>
==========================================================
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------
1996 1995 1994
- ----------------------------------------------------------
<S> <C> <C> <C>
Income before income
taxes $14,119 $17,379 $13,760
==========================================================
Income tax expense at
federal statutory rate $ 4,942 $ 6,083 $ 4,816
Goodwill 244 377 377
ESOP 111 138 71
Low-income housing
credits (132) (132) (144)
Change in valuation
allowance (104) -- (140)
Other (280) (342) (465)
- ----------------------------------------------------------
Income tax expense at
effective rate $ 4,781 $ 6,124 $ 4,515
==========================================================
</TABLE>
Deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities, given the provisions of the enacted tax laws. The net deferred tax
asset was comprised of the following at December 31, 1996 and 1995,
respectively (in thousands):
<TABLE>
<CAPTION>
==========================================================
December 31,
------------------------
1996 1995
- ----------------------------------------------------------
<S> <C> <C>
Deferred loan fees $ (125) $ 127
Depreciation 643 591
Loan loss reserves 2,773 2,620
Mortgage servicing rights 692 529
Unrealized gain on securities (1,120) (1,432)
Post retirement and post
employment benefits 412 307
Accrued expenses not
currently deductible 145 595
Tax deductible goodwill 539 9
Other 643 663
- ----------------------------------------------------------
Total gross assets 4,602 4,009
Less valuation allowance (1,586) (1,690)
- ----------------------------------------------------------
Gross assets net of
valuation allowance 3,016 2,319
- ----------------------------------------------------------
Capitalized mortgage
servicing fees (1,224) (315)
Other (648) (425)
- ----------------------------------------------------------
Total gross liabilities (1,872) (740)
- ----------------------------------------------------------
Net deferred tax asset $ 1,144 $1,579
==========================================================
</TABLE>
The net deferred tax asset recognized by the Company is based on the
combination of future reversals of existing taxable temporary differences,
carry back availability and future taxable income.
At December 31, 1996, the Company had net loss carryforwards for state tax
purposes totaling $10.8 million, which expire beginning in 1997.
48
<PAGE> 51
10. MORTGAGE BANKING ACTIVITIES:
During the years ended December 31, 1996 and 1995, ComNet sold mortgage loans
and mortgage-backed securities collateralized by loans originated by ComNet
totaling $266.0 million and $279.3 million, respectively, generally with
servicing retained.
A summary of the principal balances of loans serviced for others follows (in
thousands):
<TABLE>
<CAPTION>
====================================================================
DECEMBER 31,
-----------------------------------------
1996 1995 1994
- --------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage loans underlying
pass-through securities:
FNMA $ 714,472 $ 708,138 $ 684,456
FHLMC 340,928 346,765 364,242
Other investors 615 20,694 21,036
- --------------------------------------------------------------------
Total 1,056,015 1,075,597 1,069,734
Mortgage loan portfolios
serviced for:
FNMA 102,387 103,184 107,535
Other investors 181,488 85,195 76,694
- --------------------------------------------------------------------
Total $1,339,890 $1,263,976 $1,253,963
====================================================================
</TABLE>
ComNet is required to remit to mortgage-backed security investors the monthly
principal collected and scheduled interest payments on most mortgages,
including those for which no interest payments have been received due to
delinquency. As of December 31, 1996, the principal amount of mortgages
outstanding that are subject to this condition aggregated approximately $1.1
billion, of which approximately $25.9 million were delinquent. Substantially
all of these loans were sold without recourse and are guaranteed by FHLMC or
FNMA.
11. COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS
A summary of future minimum rental payments, excluding real estate taxes,
insurance and maintenance, required under noncancelable operating leases that
have initial or remaining noncancelable lease terms in excess of one year as of
December 31, 1996, follows (in thousands):
<TABLE>
<CAPTION>
=================================================
Year Ending December 31, Amount
- -------------------------------------------------
<S> <C>
1997 $ 3,879
1998 4,035
1999 3,850
2000 2,593
2001 1,892
2002 and thereafter 16,707
- -------------------------------------------------
Total $32,956
=================================================
</TABLE>
Rent expense under operating leases was $1.7 million, $1.3 million, and $1.2
million for the years ended December 31, 1996, 1995 and 1994, respectively.
COMMITMENTS TO ORIGINATE LOANS
The Company had outstanding commitments to originate fixed and adjustable
rate residential mortgage loans of $9.6 million (interest rates ranged between
5.25% and 9.13%) and $2.3 million (interest rates ranged between 4.55% to
7.31%), respectively, at December 31, 1996. These commitments, generally, had
an original term of 60 days.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with certain key officers, including
the Chief Executive Officer, the Chief Operating Officer, and all four Senior
Vice Presidents. The agreements have terms of up to three years, with one-year
renewal options at the discretion of the Board of Directors annually. The
agreements also include provisions for certain severance payments. At December
31, 1996, the aggregate commitment for payments to the executives upon
termination, without a change in control, was $2.1 million.
LITIGATION
There are no material legal proceedings, other than as described below, to
which the Company or any of its subsidiaries is a party, or to which any of
their property is subject, other than proceedings routine to the business of
the Company and its subsidiaries.
In August 1995, the Bank commenced litigation against the United States in
the U.S. Court of Federal Claims (the "Claims Court") seeking to recover the
value of its supervisory goodwill. The suit alleges that the treatment of such
goodwill mandated by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") constitutes a breach of contract between the
Bank and the
49
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and
Subsidiaries
United States and an unlawful taking of property by the United States without
just compensation or due process in violation of the U.S. Constitution. The
suit emanates from the Bank's acquisition of First Family Federal Savings and
Loan Association of Lansdale, Pennsylvania in 1982, pursuant to which the
government agreed to the use of the purchase method of accounting under
generally accepted accounting principles and the recording of approximately $61
million of goodwill as an asset resulting from the voluntary supervisory
merger. (There was no financial assistance from the Federal Savings and Loan
Insurance Corporation.) Since the enactment of FIRREA, numerous suits have been
filed on behalf of thrift institutions and their holding companies alleging
similar theories for breach of contract. The goodwill balance associated with
the First Family acquisition at the point of FIRREA enactment in 1989 was $48.4
million.
In the past several years, the Claims Court, the United States Court of
Appeals for the Federal Circuit, and the United States Supreme Court have
handed down decisions relating to the liability portion of the breach of
contract claims brought by three other thrift institutions. On July 1, 1996,
the United States Supreme Court ruled in the consolidated cases (United States
v. Winstar Corporation) and determined that when Congress adopted the
accounting changes to supervisory goodwill specified in FIRREA, the government
became responsible for any breaches to its original agreements with the
institutions regarding the accounting rules. The Supreme Court's decision in
the Winstar case was based upon the specific facts of each of the three
consolidated cases and, accordingly, the Claims Court may determine that the
Bank's claims involve sufficiently different facts and/or legal issues as to
render the Winstar case inapplicable to the litigation and thereby result in a
different conclusion from that of the Winstar case. Moreover, the damages
portion of the claims presented by the Winstar plaintiff thrift institutions
remains to be litigated and could take several years to resolve. There can be
no assurance that the Bank will prevail in its action, and if it does prevail,
that the Claims Court will find that the Bank is entitled to any substantial
amount of damages.
On October 31, 1996, the Bank filed a complaint against CoreStates Financial
Corporation in the Court of Common Pleas for Chester County, Pennsylvania for
damages related to Commonwealth's acquisition on June 28, 1996, of twelve
former Meridian Bank branch offices from CoreStates. The complaint alleges,
among other things, that CoreStates breached the branch sales agreement and
that Commonwealth's relationships with its new customers were damaged as a
result of negligence and errors committed by CoreStates and its affiliates in
connection with the conversion of the former Meridian Bank customers to
Commonwealth's banking system and the reissuance of bank cards for use at
Commonwealth's automated teller machines. The complaint alleges damages
incurred by Commonwealth of approximately $5.2 million from the additional
run-off of deposits relating to former Meridian customers, and other losses and
expenses.
12. REGULATORY CAPITAL REQUIREMENTS:
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
could result in certain mandatory and discretionary actions by regulators that,
if undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of tangible and Tier I capital (as defined in the regulations) to
adjusted total assets, and of risk-based capital to risk-weighted assets.
Management believes that, as of December 31, 1996, the Bank met all capital
adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Office of
Thrift Supervision categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, core risk-based,
and core ratios as set forth in the table. There have been no conditions or
events since that notification which, in management's opinion, would have
changed the institution's well capitalized status. Commonwealth Bancorp, the
holding company of the Bank, is not regulated by the OTS and therefore its
capital ratios are not included herein.
50
<PAGE> 53
A summary of the Bank's capital amounts and ratios as of December 31, 1996
follows (in thousands):
<TABLE>
<CAPTION>
==========================================================================================================================
To Be Well
Minimum Capitalized
For Capital For Prompt
Adequacy Corrective Action
Actual Purposes Provisions
----------------------- ------------------- --------------------
Ratio Amount Ratio Amount Ratio Amount
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shareholders' equity,
and ratio to OTS total assets 9.0% $ 189,265
-------
Intangible assets (51,220)
Unrealized gains on available-for-sale
securities, net of tax (2,092)
------------
Tangible capital, and ratio to
OTS adjusted total assets 6.6% $ 135,953 1.5% $30,692
------- =========== ------ =======
Core capital, and ratio to OTS
adjusted total assets 6.6% $ 135,953 3.0% $61,385 5.0% $102,308
------- =========== ------ ======= ------ ========
Core capital, and ratio to OTS
risk-weighted assets 13.2% $ 135,953 6.0% $ 61,800
------- =========== ------ ========
Allowance for loan and lease losses 9,971
-----------
Supplementary capital 9,971
-----------
Total risk-based capital, and ratio to
OTS risk-weighted assets (1) 14.2% $ 145,924 8.0% $82,400 10.0% $103,000
------- =========== ------ ======= ------ ========
OTS Total assets $2,099,463
===========
OTS Adjusted total assets $2,046,151
===========
OTS Risk-weighted assets $1,030,000
===========
</TABLE>
(1) Does not reflect the interest rate risk component to the risk-based capital
requirement, the effective date of which has been postponed.
A summary of the Bank's capital amounts and ratios as of December 31, 1995,
follows (in thousands):
<TABLE>
<CAPTION>
==========================================================================================================================
To Be Well
Minimum Capitalized
For Capital For Prompt
Adequacy Corrective Action
Actual Purposes Provisions
----------------------- ------------------- --------------------
Ratio Amount Ratio Amount Ratio Amount
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shareholders' equity,
and ratio to OTS total assets 9.4% $ 137,036
-------
Intangible assets (17,279)
Unrealized gains on available-for-sale
securities, net of tax (2,659)
-----------
Tangible capital, and ratio to
OTS adjusted total assets 8.2% $ 117,098 1.5% $21,547
------- =========== ------ =======
Core capital, and ratio to OTS
adjusted total assets 8.2% $ 117,098 3.0% $43,095 5.0% $ 71,825
------- =========== ------ ======= ------ ========
Core capital, and ratio to OTS
risk-weighted assets 17.8% $ 117,098 6.0% $ 39,432
------- ----------- ------ ========
Allowance for loan
and lease losses 7,485
-----------
Supplementary capital 7,485
-----------
Total risk-based capital, and ratio to
OTS risk-weighted assets (1) 19.0% $ 124,583 8.0% $52,576 10.0% $ 65,720
------- =========== ------ ======= ------ ========
OTS Total assets $ 1,456,428
===========
OTS Adjusted total assets $ 1,436,490
===========
OTS Risk-weighted assets $ 657,204
===========
</TABLE>
(1) Does not reflect the interest rate risk component to the risk-based capital
requirement, the effective date of which has been postponed.
51
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and
Subsidiaries
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991, adequately capitalized institutions are required to maintain a core
capital ratio (as defined) of 4.0% or greater. The Bank's capital exceeded this
requirement by $54.1 million. In April 1991, the OTS issued a proposal to
increase the core capital requirement for most savings institutions. Under the
proposal, only institutions with the highest rating under the OTS MACRO rating
system would be permitted to operate at or near the current 3.0% core capital
requirement. For all other savings institutions, the minimum required ratio
would be 3.0% plus at least an additional 100 to 200 basis points, as
determined by the OTS on a case-by-case basis.
For regulatory purposes and under OTS guidelines, unrealized gains on
securities held available for sale of $2.1 million were deducted from core and
tangible capital as of December 31, 1996. These unrealized gains, however, are
added back to shareholders' equity under generally accepted accounting
principles. Risk-based capital, for regulatory requirements, includes the $10.0
million allowance for loan losses at December 31, 1996.
The Federal Financial Institution Examination Council ("FFIEC") ruled on the
question of deferred tax assets under SFAS No. 109 and the related capital
impact. The FFIEC has indicated that to the extent that the realization of
deferred tax assets is dependent on an institution's future taxable income
(exclusive of reversing temporary differences and carry forwards) or its
tax-planning strategies, such deferred tax assets would be limited for
regulatory capital purposes to the amount that can be realized within one year
or 10% of core capital, whichever is less. The Bank has included the net
deferred tax asset of $1.2 million at December 31, 1996, in the regulatory
amounts due to the realizability of these tax benefits through carry back
availability against prior year taxable income.
In 1993, the OTS adopted an amendment to its risk-based capital requirements
that will require institutions with more than a "normal" level of interest rate
risk to maintain additional risk-based capital. As of December 31, 1996, the
OTS has continued to delay implementation of this regulation. Under the
regulation, a savings bank will be considered to have a "normal" level of
interest rate risk if the decline in its net portfolio value after an immediate
and sustained 200-basis-point increase or decrease in market interest rates
(whichever leads to the greater decline) is less than 2.0% of the current
estimated value of its assets. An institution with more than "normal" interest
rate risk will be required to deduct from capital, for purposes of calculating
its risk-based capital ratio, an "interest rate risk component" in an amount
equal to one-half of the difference between its measured interest rate risk and
2.0% multiplied by the estimated economic value of its total assets. This
deduction of an interest rate risk component from capital would effectively
increase the amount of capital otherwise required to satisfy the risk-based
capital requirement. Under OTS criteria as of December 31, 1996, the Bank was
exempt from this requirement. However, events beyond the control of the Bank,
such as changing interest rates or a downturn in the economy in areas where the
Bank has most of its loans, could adversely affect future earnings and,
consequently, the ability of the Bank to meet its future minimum capital
requirements.
At periodic intervals, both the OTS and the FDIC routinely examine the Bank's
financial statements as part of their legally prescribed oversight of the
savings and loan industry. Based on these examinations, the regulators could
direct that the Bank's financial statements be adjusted in accordance with
their findings.
A future examination by the OTS or the FDIC could include a review of certain
transactions or other amounts reported in the Bank's 1996 financial statements.
The regulators have not proposed any adjustments to the Bank's year-end
financial statements in prior years. However, in view of the Financial
Institution Reform, Recovery, and Enforcement Act of 1989, and the increasingly
uncertain regulatory environment in which the Bank now operates, the extent, if
any, to which a forthcoming regulatory examination may ultimately result in
adjustments to the 1996 financial statements cannot presently be determined.
13. FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK:
OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to reduce its exposure to fluctuations in
interest rates (hedging). These off-balance-sheet financial instruments include
interest rate swaps, interest rate caps, interest rate collars, and mandatory
and optional forward commitments. These instruments involve, to varying
degrees, elements of credit, interest rate, or liquidity risk in excess of the
amount recognized in the accompanying consolidated balance sheets. The contract
or notional amounts of these instruments represent the extent of involvement
the Company has in particular classes of financial instruments.
52
<PAGE> 55
OFF-BALANCE-SHEET CREDIT RISK
For interest rate swap transactions, forward and futures contracts, and
options contracts, the contract or notional amounts do not represent exposure
to credit loss. The Company controls credit risk by conducting transactions
only with "primary" U.S. Government dealers as established by the Federal
Reserve Bank, money center banks, recognized GNMA dealers, and major investment
firms, and by setting policies for transaction volume limitations and periodic
monitoring. Each broker, dealer or bank is carefully evaluated on the basis of
its financial strength, reputation and expertise. Unless noted otherwise, the
Company does not require collateral or other securities to support financial
instruments with credit risk.
SUMMARY OF FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK (in thousands)
<TABLE>
<CAPTION>
============================================================
CONTRACT OR NOTIONAL AMOUNT
DECEMBER 31,
-----------------------------
1996 1995
- -----------------------------------------------------------
<S> <C> <C>
Interest rate swap agreements $165,000 $125,000
Interest rate caps 20,000 20,000
Interest rate collars 10,000 10,000
Mandatory forward contracts 26,750 36,000
Option Contracts:
Puts 6,000 8,500
</TABLE>
INTEREST RATE SWAPS
Interest rate swaps are contractual agreements between two parties to
exchange interest payments on a specified principal amount (referred to as the
"notional" amount) for a specified period, without the exchange of the
underlying principal amount. In most instances, the swap involves the exchange
of variable interest payments and fixed interest payments. The Company uses
swaps to reduce the impact of interest rate changes on short-term funding
sources that are, in turn, used to finance fixed rate mortgage-backed
securities.
At December 31, 1996 and 1995, the Company had notional balances of interest
rate exchange agreements totaling $165.0 million and $125.0 million,
respectively, with interest payable at fixed rates. The weighted average rates
to be paid by the Company at December 31, 1996 and 1995, were 5.89% and 6.33%,
respectively. In return, the Company was to receive variable interest payments
at the London Interbank Offer Rate (LIBOR) payable every three or six months,
or the prime rate less 2.0%. At December 31, 1996 and 1995, the weighted
average variable yields were 5.69% and 5.98%, respectively. The amounts
receivable or payable are credited or charged to interest expense on notes
payable and other borrowings. Included in other assets were swap receivables of
$2.1 million and $1.2 million at December 31, 1996 and 1995, respectively.
These agreements have expiration dates between February 1997 and December 1999.
FHLMC and GNMA mortgage-backed securities, with a combined carrying value of
$1.6 million and $5.0 million (market value of $1.6 million and $5.1 million),
were pledged by the Company as collateral for the interest rate swaps
outstanding as of December 31, 1996 and 1995, respectively.
In the event of nonperformance by the other parties to the interest rate swap
agreements, credit risk to the Company totaled $0.4 million, representing the
fair value of the benefit (cost) of these agreements at December 31, 1996.
INTEREST RATE CAP AGREEMENTS
Interest rate cap agreements are instruments used by the Company in hedging
certain short-term liabilities. An interest rate cap is an agreement whereby
the seller of the cap contractually agrees to pay the buyer the difference
between the actual interest rate and strike rate per the cap contract, if the
actual rate is higher than the strike rate. At December 31, 1996 and 1995, the
Company had notional balances of interest rate cap agreements totaling $20.0
million. The Company receives variable interest payments based on the spread
between the variable-month LIBOR rate and the strike price of the caps if the
variable-month LIBOR rate is higher than the strike rate. The weighted average
strike price of the agreements held by the Company at December 31, 1996 and
1995, was 5.32%. Unamortized fees at December 31, 1996 and 1995, were $0.1
million and $0.3 million, respectively, and were included in other assets.
These agreements have expiration dates between September 1997 and February
1998. Credit risk to the Company for interest rate cap agreements of $0.2
million at December 31, 1996 represented the unamortized fees of $0.1 million,
plus the cost of contract replacement of $0.1 million if the other party does
not perform.
INTEREST RATE COLLARS
Interest rate collars are instruments used by the Company in managing its
interest rate sensitivity position. Based on its interest rate sensitivity
analysis, the Company enters into interest rate collars to more effectively
manage the impact of fluctuating interest rates on its net interest income. An
interest rate collar combines an interest rate cap and a floor (one held and
one written). An interest rate floor is a contract in which the floor writer,
in return for a premium, agrees to limit the risk associated with a decline in
interest rates based
53
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and
Subsidiaries
on a notional amount. If rates fall below an agreed upon strike rate, the floor
holder will receive cash payments from the floor writer equal to the difference
between the market rate and the strike rate multiplied by the notional
principal amount. At December 31, 1996 and 1995, the Company's interest rate
collar had a notional principal balance of $10.0 million. The Company pays
variable interest payments quarterly based on the spread between the LIBOR rate
(5.5% at December 31, 1996) and the strike rate of the floor (5.25%) if LIBOR
is less than the strike rate. The Company receives variable rate interest
payments based on the spread between the LIBOR rate and the strike rate of the
cap (6.10%) if LIBOR is higher than the strike rate. This agreement was
executed without exchange of premiums between counter parties and expires in
June 1997. Any obligations which may arise under this contract are recorded to
interest expense on an accrual basis. Credit risk to the Company for the
interest rate collar agreement, if the other party does not perform, was ($119)
at December 31, 1996, representing the fair value of the (cost) benefit of the
agreement.
MANDATORY AND OPTIONAL FORWARD CONTRACTS
A forward contract is a legal agreement between two parties to purchase or
sell a specific quantity of a financial instrument, at a specified price, with
delivery and settlement at a specified future date. Because forward contracts
lack the liquidity and protection provided by regulated exchanges, there is a
heightened risk of default by the counterparties. The Company had open
mandatory forward commitments for future delivery of FNMA and FHLMC guaranteed
pass-through certificates of $26.8 million and $36.0 million, respectively, as
of December 31, 1996 and 1995.
At December 31, 1996 and 1995, the Company's exposure to credit loss in the
event of nonperformance by other parties to the mandatory forward commitments
approximated $0.1 million and $0.4 million, respectively, which represented the
difference between the contractual amount and the fair value of these
agreements. However, the Company does not anticipate any credit losses related
to these agreements.
The Company purchases put and call options on U.S. Treasury note and bond
futures as an alternative to mandatory forward contracts. The Company had
outstanding put options of $6.0 million and $8.5 million at December 31, 1996
and 1995, respectively. The Company had no call options outstanding at December
31, 1996 and 1995. The Company's only exposure to loss on these options
represents unamortized premiums of $26,000 at December 31, 1996.
14. DISCLOSURES ABOUT FAIR VALUE OF
FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments,"
requires the disclosure of estimated fair values for financial instruments.
Quoted market prices, if available, are utilized as an estimate of the fair
value of financial instruments. Because no quoted market prices exist for a
significant part of the Company's financial instruments, the fair value of such
instruments has been derived based on management's assumptions with respect to
future economic conditions, the amount and timing of future cash flows, and
estimated discount rates. Different assumptions could significantly affect
these estimates. Accordingly, the actual fair value if the asset or liability
were to be sold or settled at the current date could be materially different
from the estimates presented below. In addition, the estimates are only
indicative of individual financial instruments' values and should not be
considered an indication of the fair value of the combined Company taken as a
whole.
The following methods and assumptions were used by the Company in estimating
the fair value of its financial instruments:
Cash and cash equivalents-The carrying amounts reported in the balance sheet
approximate the fair value for those assets.
Securities-Fair values for securities are based on quoted market prices,
where available. If quoted market prices are not available, then fair values
are based on quoted market prices of comparable instruments.
Mortgage loans held for sale and loans receivable-The fair values for
certain mortgage loans are based on quoted prices of similar loans, adjusted
for differences in loan characteristics. The fair values for other loans are
estimated through discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms and credit quality. The
carrying amount of accrued interest approximates its fair value.
Mortgage Servicing Rights-The fair value of capitalized excess servicing
fees, originated mortgage servicing rights, and purchased mortgage servicing
rights are estimated by discounting the future cash flows at a rate that
management believes to be reasonable. The future cash flows used to estimate
the fair value of these financial instruments are adjusted for prepayments.
54
<PAGE> 57
Deposit liabilities-The fair values disclosed for demand deposits, savings
accounts and certain money market accounts are, by definition, equal to the
amount payable on demand at the reporting date, i.e., their carrying
amounts. Fair values for certificates of deposit are estimated using a
discounted cash flow calculation that applies current interest rates to a
schedule of aggregated expected maturities.
Notes payable and other borrowings-The fair values of secured notes due to
FHLB of Pittsburgh and borrowings under repurchase agreements are estimated
using the rates currently offered for liabilities of similar remaining
maturities. The fair values of other borrowings are based on quoted prices.
Off-balance-sheet instruments-Fair values for the Company's
off-balance-sheet instruments (swaps, caps, collars, forwards, options and
lending commitments) are based on quoted prices, current settlement values,
pricing models or other formulas.
At December 31, 1996 and 1995, the estimated fair values of the Company's
financial instruments were as follows (in thousands):
<TABLE>
<CAPTION>
======================================================================================================================
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 60,102 $ 60,102 $ 50,177 $ 50,177
Mortgage loan held for sale 17,335 17,335 26,001 26,001
Investment Securities 53,935 53,935 46,896 46,896
Mortgage-backed securities 752,707 754,411 463,353 466,375
Loans receivable, net 1,113,114 1,120,662 796,735 809,539
FHLB stock 11,159 11,159 8,912 8,912
Mortgage Servicing Rights 7,677 7,677 6,855 6,855
Financial liabilities:
Deposits 1,491,450 1,511,024 1,076,549 1,100,584
Secured notes due to FHLB of Pittsburgh 175,000 175,032 120,614 121,023
Securities sold under agreements to repurchase 176,674 175,844 81,112 81,112
Other borrowings 0 0 1,554 1,554
</TABLE>
<TABLE>
<CAPTION>
======================================================================================================================
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------------------------------------------
COST FAIR COST FAIR
AMOUNT VALUE AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unrecognized Financial Instruments:
Commitments to originate loans $ -- $ -- $ -- $ --
Interest rate swaps in a net receivable,
(payable) position, respectively 42 (439) (682) (1,794)
Interest rate caps 134 99 266 163
Interest rate collar -- -- -- (39)
Mandatory forward commitments -- (129) -- (368)
Put options 26 26 15 15
</TABLE>
55
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and
Subsidiaries
15. EMPLOYEE BENEFIT PLANS:
The Company has a noncontributory defined benefit pension plan that covers
substantially all employees. Benefits are based on years of service and the
employees' compensation during the last five years of employment. Investments
of the plan primarily include mutual funds, Company stock, U.S. Government
securities, and cash. Company stock totaled $0.7 million, representing 12% of
plan assets at December 31, 1996.
The following table sets forth the pension plan's accumulated plan benefits
and funded status, as determined by consulting actuaries, at December 31, 1996
and 1995 (in thousands):
<TABLE>
<CAPTION>
===================================================================================================================
DECEMBER 31,
-------------------------------------
1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of accumulated benefit obligations,
including vested benefits of $3,438 and $3,486, respectively $3,515 $3,598
- -------------------------------------------------------------------------------------------------------------------
Projected benefit obligations for services rendered to date $4,778 $5,486
Plan assets at fair value 5,571 4,730
- -------------------------------------------------------------------------------------------------------------------
Projected benefit obligation less than (greater than) plan assets 793 (756)
Unrecognized net (gain) loss from past experience, different
from that assumed (766) 843
Unrecognized net asset being amortized over 18 years (490) (551)
- -------------------------------------------------------------------------------------------------------------------
Accrued pension liability $ (463) $ (464)
===================================================================================================================
</TABLE>
A summary of net pension costs for the years ended December 31, 1996 and 1995
follows in (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Service cost $ 411 $ 380
Interest cost on projected benefit obligation 340 339
Return on plan assets (686) (951)
Net amortization and deferral 235 590
- -------------------------------------------------------------------------------------------------------------------
Net pension cost $ 300 $ 358
===================================================================================================================
</TABLE>
At December 31, 1996 and 1995, the projected annual salary growth rates used
in determining the projected benefit obligations were 5.00% and 5.50%,
respectively, while the weighted average discount rates used in determining the
projected benefit obligations were 8.00% and 7.25%, respectively. The expected
long-term rate of return on plan assets was 8.00% for the years ended December
31, 1996 and 1995.
The Company has a cafeteria-type health and welfare plan for the benefit of
all employees and their dependents. Participation in the plan is voluntary.
Contributions made by the Company are based on actuarially determined amounts.
Participants contribute monthly through payroll deductions. The Company's
contributions totaled $0.8 million and $0.5 million for the years ended
December 31, 1996 and 1995, respectively.
The Company also has an employee savings plan (401[k]) for the benefit of all
employees having the requisite service period. Contributions are made at the
discretion of the employee. Investments of the plan include mutual funds,
Company stock, certificates of deposit and cash. Company stock totaled $6.4
million, or 40% of the plan's assets at December 31, 1996.
The Company provides an Employee Stock Ownership Plan ("ESOP") to employees
age 21 or older who have at least one year of credited service with the
Company. In June 1996, the ESOP borrowed $9.3 million from the Company to
purchase 0.8 million shares of the Company's common stock in the Conversion and
Reorganization, and to repay the balance of a loan from an unaffiliated lender
relating to the purchase of shares of common stock of the Bank in the Bank's
initial public offering in January 1994. The Company makes scheduled
discretionary cash contributions to the ESOP sufficient to amortize the
principal and interest on the loan, which has a maturity of ten years.
Unallocated shares are released annually and allocated to
56
<PAGE> 59
individual accounts. Dividends on unallocated shares are not considered
dividends for financial reporting purposes and are used to pay debt service.
The Company recognized compensation expense of $1.1 million relating to the
ESOP in the year ended December 31, 1996. As of December 31, 1996, the ESOP
held 1.3 million shares, of which 0.3 million had been allocated. The fair
value of unearned ESOP shares at December 31, 1996, approximated $14.6 million.
In addition to the ESOP, the Company has established a management recognition
plan for directors and a management recognition plan for officers
(collectively, the Recognition Plans). The objective of the Recognition Plans
is to enable the Company to provide directors, officers and employees with a
proprietary interest in the Company as an incentive to contribute to its
success. The Bank contributed funds to the Recognition Plans to enable the
Recognition Plans to acquire 4% of the common stock in the Bank's initial
public offering in January 1994. The purchase of an additional 4% of the common
stock sold in the 1996 Conversion and Reorganization was authorized by
shareholders at the December 17, 1996 Special Meeting of Shareholders, of which
0.1 million shares were purchased in December 1996. The remaining 0.3 million
shares were purchased in January 1997. Such amounts have been charged to
equity, representing the cost of shares acquired for the Recognition Plans.
Unless the administrators specify otherwise, shares of common stock granted
pursuant to the Recognition Plans generally will be in the form of restricted
stock payable over a five-year period at the rate of 20% per year, commencing
on the date of grant of the award. Compensation expense in the amount of the
fair market value of the common stock at the date of the grant to the recipient
will be recognized pro rata over the five years during which the shares are
payable. A recipient will be entitled to all voting and other shareholder
rights, except that the shares, while restricted, may not be sold, pledged or
otherwise disposed of, and are required to be held in trusts. The Company
recognized expense related to the Recognition Plans of $0.3 million for the
year ended December 31, 1996, which is reflected as an adjustment to
shareholders' equity.
In connection with the 1994 Reorganization and Stock Offering, the Company
adopted the 1993 Directors' Stock Option Plan. Authorized shares of common
stock equal to 1.5% of the common stock in the Stock Offering (or 0.1 million
shares adjusted for the 2.0775 exchange ratio) were reserved for issuance
pursuant to the Directors' Stock Option Plan. The 1996 Stock Option Plan
provides the Directors the option to purchase, as a group, 2.1% of the common
stock in the 1996 Stock Offering, or 0.2 million shares of common stock. The
Stock Option Plans provide that each current director who is not an officer or
employee of the Company be granted compensatory options to purchase shares of
common stock. The per-share exercise price of a compensatory stock option shall
at least equal the fair market value of a share of common stock on the date the
option is granted. Options granted under the 1996 Stock Option Plan vest and
are exercisable 20% per year over a five-year period, commencing on the first
anniversary of the date of grant. An option granted under the Stock Option
Plan will be exercisable until the earlier of ten years after its date of grant
or three years after the date on which the optionee ceases to be a nonemployee
director.
Additionally, the Company adopted the 1993 and 1996 Stock Incentive Plans
("Stock Option Plans") in connection with the 1994 and 1996 Reorganization and
Stock Offerings, respectively. The Stock Option Plans authorize the grant of
stock options and stock appreciation rights equal to 8.5% and 7.9% of the
common stock in the 1994 and 1996 Stock Offerings, respectively. Under the
Stock Option Plans, certain officers and key employees may be granted options,
which may be incentive or compensatory. The per-share exercise price of an
incentive stock option shall at least equal the fair market value of a share of
common stock on the date the option is granted. The per-share exercise price of
a compensatory stock option shall at least equal the greater of par value, or
85% of the fair market value of a share of common stock on the date the option
is granted. In connection with the Stock Offerings, 0.7 million (adjusted for
the 2.0775 exchange ratio) and 0.8 million options were reserved for issuance
in the 1993 and 1996 plans, respectively.
The Company accounts for Stock Option Plans under Accounting Principles Board
Opinion No. 25, and accordingly, no compensation expense has been recognized in
the financial statements of the Company. Had compensation expense for these
plans been determined consistent with the provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", the Company's net income and
earnings per share would not have been materially different, as a significant
portion of outstanding stock options were granted on December 17, 1996, and
will vest over a five year period.
Because the SFAS No. 123 method has not been applied to options granted prior
to January 1, 1995, the resulting pro-forma compensation cost may not be
representative of that to be expected in future years. The fair value of each
option grant was estimated on the date of grant using the Black-Scholes option
pricing model. Weighted average assumptions used for grants in 1996 and 1995
included a risk-free interest rate of 6.21%, expected volatility of 20%, an
expected dividend yield of 2.0% and an expected option life of 7 years.
The Stock Option Plans provide for the granting of stock options to key
officers and directors to purchase
57
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and
Subsidiaries
common stock at prices equal to the market price of the stock at the date of
the grant. In connection with the Conversion and Reorganization completed on
June 14, 1996, the Company adopted the 1993 Stock Incentive Plan and the 1993
Directors' Stock Option Plan of the Bank. The Bank common stock and the
original option price were adjusted for the exchange ratio of 2.0775.
A summary of activity under the various stock option plans for the years
ended December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
===============================================================
Weighted-
Average
Exercise
Option Price $4.81-$15.00 Prices
===============================================================
<S> <C> <C>
Options outstanding December 31, 1994 715,362 $ 4.81
Granted 44,238 6.41
Exercised (60,006) 4.81
Forfeited (74,137) 4.81
- ---------------------------------------------------------------
Options outstanding December 31, 1995 625,457 $ 4.92
===============================================================
Granted 979,435 14.40
Exercised (27,333) 4.90
Forfeited (7,019) 4.81
- ---------------------------------------------------------------
Options outstanding December 31, 1996 1,570,540 $ 10.84
===============================================================
Options exercisable December 31, 1996 586,119 $ 4.87
===============================================================
</TABLE>
16. ACQUISITIONS:
On June 28, 1996, the Company completed the acquisition of twelve former
branch offices of Meridian Bank located in Berks County (ten offices) and
Lebanon County (two offices), Pennsylvania from CoreStates Bank, (the "Branch
Acquisition"). In connection with this transaction, the Company assumed
approximately $379.7 million of deposits and acquired approximately $122.4
million of single-family residential, commercial and consumer loans. In
addition, Commonwealth received approximately $3.1 million of real property and
approximately $215.8 million of cash, net of a deposit premium of approximately
$38.4 million. The Company assigned $14.7 million of the cost of the
acquisition to the value of the core deposit intangible asset. The excess of
the cost over the identifiable assets acquired less liabilities assumed of
$23.7 million was recorded as goodwill.
On July 29, 1995, the Company purchased four Philadelphia-area branch offices
and the related deposits from Fidelity Federal. This transaction was accounted
for as a purchase, and accordingly, all assets acquired and liabilities assumed
were recorded at estimated fair value. In purchasing these branches, the
Company acquired premises and equipment of $1.3 million, loans of $0.1 million,
deposits of $197.4 million, and received $178.9 million in cash. The core
deposit intangible assigned through the allocation of the purchase price
amounted to approximately $3.3 million, while the remaining goodwill totaled
approximately $13.8 million.
17. CONVERSION AND REORGANIZATION:
On June 14, 1996, the Company completed its stock offering in connection with
the Conversion and Reorganization of Commonwealth Mutual Holding Company, the
former parent company of the Bank from the mutual holding company form of
ownership to the stock holding company form. In the offering, 9.9 million
shares of common stock of the Company were sold in a subscription and community
offering at $10.00 per share. In addition, 8.1 million shares of common stock
of the Company were issued in exchange for shares of stock of the Bank
previously held by public stockholders at an exchange ratio of 2.0775 shares
for each share of Bank common stock, resulting in 18.0 million shares of common
stock of the Company outstanding at the time of the offering.
18. SUBSEQUENT EVENTS:
On February 18, 1997, the Company completed the sale of its headquarters
building, resulting in an after-tax gain of approximately $1.0 million. The
Bank has relocated its headquarters from the Great Valley Corporate Center in
Chester County, Pennsylvania to Norristown, Pennsylvania, which is the county
seat of Montgomery County. The move is anticipated to result in annual cost
savings to the Company (exclusive of certain costs associated with the
relocation, which will be expensed in the first quarter of 1997) and provide
increased business opportunities by centering its operations in the county seat
of an economically strong and diverse county.
On January 31, 1997, ComNet Mortgage Services acquired selected assets of
Homestead Mortgage, Inc. ("Homestead"), a mortgage company headquartered in
Millersville, Maryland. Among the assets acquired from Homestead were
production branches located in Millers-ville, Bethesda, Whitemarsh, and
Woodlawn, Maryland and Media, Pennsylvania. In 1996, these branches originated
approximately $160.0 million of mortgages in Virginia, Maryland, Delaware,
Pennsylvania, and the District of Columbia. Under the terms of the transaction,
the group will continue to operate under the Homestead Mortgage name in
Maryland, Virginia, and the District of Columbia.
58
<PAGE> 61
SHAREHOLDER INFORMATION Commonwealth Bancorp, Inc. and Subsidiaries
BOARD OF DIRECTORS
<TABLE>
<S> <C>
GEORGE C. BEYER, JR. Chief Executive Officer
Valley Forge Financial Group, Inc.
JOSEPH E. COLEN, JR. Chairman, President & CEO
of Machined Metals Co., Inc.
President of Jennings International Co.
President of Oak-Corson Realty Co.
RICHARD J. CONNER* Retired, Previously President
of Connor's Firestone Service
WILLIAM B. HAINES, JR. Retired, Previously President
of McFarland & Haines Insurance Agency
CHARLES H. MEACHAM Chairman and Chief Executive Officer
Commonwealth Bancorp, Inc.
HARRY P. MIRABILE Retired, Previously Secretary and Treasurer
of Mirabile Beverage Company
NICHOLAS SCLUFER Senior Partner of Penton Company
MATTHEW T. WELDE Retired, Previously Chairman,
President & CEO of Commonwealth Bank
* Director Emeritus
ADVISORY COMMITTEE
George W. Snear, Sr. Funeral Director,
George W. Snear Funeral Home
COMMONWEALTH BANK OFFICERS
Charles H. Meacham Chairman of the Board, Chief Executive Officer
Patrick J. Ward President, Chief Operating Officer
David K. Griest Senior Vice President, Chief Information Officer
Charles M. Johnston Senior Vice President, Chief Financial Officer
William J. Monnich Senior Vice President, Community Banking
Ellen L. Benson Vice President, Human Resources
Patricia A. Collins Vice President, Marketing
Paul Donovan Vice President, Consumer Lending
Robert P. Gehring Vice President, Chief Credit Officer
Cynthia Graham Vice President, Traditional Banking
Michael W. Harrington Vice President, Treasurer
James L. Jillson Vice President, Consumer Credit
Kathleen J. Lippincott Vice President, Operations Support Services
W. David McHugh Vice President, Computer Systems and Services
William P. Mulholland Vice President, General Auditor
Margaret Petrakis Vice President, Service Quality
Rose Marie J. Smith Vice President, Administrative Services
James T. Thomas Vice President, Controller
COMNET MORTGAGE SERVICES
A DIVISION OF COMMONWEALTH BANK
OFFICERS
Peter A. Kehoe President
Ronald J. Altieri Senior Vice President, Production
Katherine M. Solomon Senior Vice President, Loan Administration
Theodore T. Aicher Vice President, Secondary Marketing
Tracy L. Gift Vice President, Residential Operations
</TABLE>
CORPORATE INFORMATION
ANNUAL MEETING:
April 24, 1997
10:00 am
The People's Light & Theatre Company
39 Conestoga Road
Malvern, PA 19355
STOCK LISTING:
Commonwealth Bancorp, Inc.'s common stock is traded on the NASDAQ National
Stock Market under the symbol "CMSB".
TRANSFER AGENT AND REGISTRAR:
Address changes and all shareholder inquiries should be directed to:
Registrar & Transfer Company
10 Commerce Drive
Cranford, NJ 07016
1-800-368-5948
INVESTOR INFORMATION:
Analysts, investors and others requesting additional financial information may
contact:
Charles M. Johnston
Chief Financial Officer
Commonwealth Bancorp, Inc.
2 West Lafayette Street
Norristown, Pennsylvania 19401-4758
610-313-2189
COMMONWEALTH NEWS RELEASES:
As a service to our shareholders and prospective investors, copies of the
Company's recent news releases, including quarterly earnings releases, can
be transmitted at no charge via fax by calling "Company News On Call" at
1-800-758-5804 ext. 110634. This electronic, menu-driven system, a service
of PR Newswire, allows callers to receive specific Commonwealth news
releases within minutes of the request.
AUDITORS:
Arthur Andersen LLP
1601 Market Street
Philadelphia, Pennsylvania 19103
LEGAL COUNSEL:
Pepper, Hamilton & Scheetz
2 Logan Square
Philadelphia, Pennsylvania 19141
SPECIAL COUNSEL:
Elias, Matz, Tiernan & Herrick L.L.P.
734 15th Street NW
Washington, DC 20005
COMMONWEALTH WEBSITE:
http://www.commonwealthbank.com
COMNET WEBSITE:
http://www.commortgage.com
[RECYCLED LOGO] Printed on recycled paper.
[COMMONWEALTH BANCORP, INC. LOGO]
59
<PAGE> 62
BRANCH INFORMATION Commonwealth Bancorp, Inc. and Subsidiaries
LOCATIONS OF
COMMONWEALTH BANK
- - EXECUTIVE OFFICE
Commonwealth Bank Plaza
2 West Lafayette Street
Norristown, PA 19401-4758
BERKS COUNTY
- - BIRDSBORO
350 West Main Street
- - EXETER
4215 Perkiomen Avenue
- - HEIDELBERG
4641 Penn Avenue
- - KUTZTOWN
601 East Main Street
- - MOHNTON
14 West Wyomissing Avenue
- - READING (4)
- 830 Lancaster Avenue
- 2040 Centre Avenue
- 445 Penn Street
- 956 North Ninth Street
- - SINKING SPRING
Giant Food Stores
Spring Towne Center
- - TEMPLE
4950 Kutztown Road
BUCKS COUNTY
- - WARRINGTON
Redner's Warehouse Market
Doylestown Pointe
- - FAIRLESS HILLS
Giant Food Stores
Fairless Hills Shopping Center
- - PENNDEL
U.S. #1 & Durham Road
- - SOUDERTON
705 Route 113
- - SOUTHAMPTON
Giant Food Stores
Southampton Shopping Center
CHESTER COUNTY
- - EXTON
Clemens Markets
Lionville Shopping Center
- - KENNETT SQUARE
New Garden Shopping Center
- - PHOENIXVILLE
Maple Lawn Center
- - WAYNE
Chesterbrook Village Center
- - WEST CHESTER (2)
- Marketplace Shopping Center
- Giunta's Thriftway
- Bradford Plaza
- - WEST GROVE
106 West Evergreen Street
DELAWARE COUNTY
- - ALDAN
Giant Food Stores
Providence Village
- - NEWTOWN SQUARE
3531 West Chester Pike
LEBANON COUNTY
- - LEBANON (2)
- 2203 West Cumberland Street
- 152 North Eighth Street
LEHIGH COUNTY
- - TREXLERTOWN
Giant Food Stores - Trexler Mall
- - WHITEHALL
Giant Food Stores
MacArthur Towne Centre
MONTGOMERY COUNTY
- - AUDUBON
Audubon Village Shopping Center
- - BLUE BELL
Giant Food Stores
The Shoppes at Blue Bell
- - COLLEGEVILLE
Redner's Warehouse Markets
The Marketplace at Collegeville
- - CONSHOHOCKEN
Plymouth Square Shopping Center
- - GLENSIDE
139 South Easton Road
- - KING OF PRUSSIA
DeKalb Plaza Shopping Center
- - LANSDALE (3)
- Hillcrest Shopping Center
- Sumney Forge Square
- 521 West Main Street
- - NORRISTOWN (2)
- Swede Square Shopping Center
- 104 West Main Street
- - POTTSTOWN
Weis Markets
The Pottstown Center
- - ROYERSFORD
Limerick Square
- - TRAPPE
Trappe Shopping Center
- - TROOPER (2)
- Park Ridge Shopping Center
- Giant Food Stores
Audubon Square Shopping Center
Office Listings as of March 7, 1997
60
<PAGE> 63
o 39 Traditional Branches
15 Supermarket Branches
H Corporate Headquarters
[MAP]
PHILADELPHIA COUNTY
- - PHILADELPHIA (9)
- 3292 Red Lion Road
- 8729 Frankford Ave.
- 7149 Frankford Ave.
- 7425 Frankford Ave.
- 2501 Welsh Road
- 6537 Castor Ave.
- 6958 Torresdale Ave.
- Gross' Thriftway
- Port Richmond Village
- ShopRite Food Stores
Boulevard Plaza
LOCATIONS OF COMNET MORTGAGE SERVICES
- Allentown, PA
- Horsham, PA
- Lancaster, PA
- Mt. Laurel, NJ
- Norristown, PA
- Pittsburgh, PA
- Stratford, CT
- Warwick, RI
LOCATIONS OF
HOMESTEAD MORTGAGE
- Baltimore, MD (2)
- Bethesda, MD
- Media, PA
- Millersville, MD
COMLINE(R)
24 Hour Automated Service Line
1-800-327-9885
61
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 39,268
<INT-BEARING-DEPOSITS> 15,111
<FED-FUNDS-SOLD> 5,723
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 586,234
<INVESTMENTS-CARRYING> 237,743
<INVESTMENTS-MARKET> 239,447
<LOANS> 1,123,085
<ALLOWANCE> 9,971
<TOTAL-ASSETS> 2,119,961
<DEPOSITS> 1,515,333
<SHORT-TERM> 0
<LIABILITIES-OTHER> 21,030
<LONG-TERM> 351,674
0
0
<COMMON> 124,216
<OTHER-SE> 107,708
<TOTAL-LIABILITIES-AND-EQUITY> 2,119,961
<INTEREST-LOAN> 75,602
<INTEREST-INVEST> 6,233
<INTEREST-OTHER> 45,471
<INTEREST-TOTAL> 127,306
<INTEREST-DEPOSIT> 49,358
<INTEREST-EXPENSE> 66,352
<INTEREST-INCOME-NET> 60,954
<LOAN-LOSSES> 601
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 61,907
<INCOME-PRETAX> 14,119
<INCOME-PRE-EXTRAORDINARY> 14,119
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,338
<EPS-PRIMARY> 0.72
<EPS-DILUTED> 0.72
<YIELD-ACTUAL> 7.40
<LOANS-NON> 8,058
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,255
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,485
<CHARGE-OFFS> 667
<RECOVERIES> 180
<ALLOWANCE-CLOSE> 9,971
<ALLOWANCE-DOMESTIC> 9,971
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
