<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, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _______________
Commission File No.: 0-27942
COMMONWEALTH BANCORP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
PENNSYLVANIA 23-2828883
<S> <C>
(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) 313-1600
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 10, 1998, the aggregate value of the 15,416,612 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
846,166 shares held by all directors and officers of the Registrant as a group,
was approximately $308.3 million. This figure is based on the closing sales
price of $20 per share of the Registrant's Common Stock on March 10, 1998 as
reported by the Nasdaq Stock Market.
Number of shares of Common Stock outstanding as of March 10, 1998: 16,262,778
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, 1997 are incorporated into Part II, Items 6 through 8 of this Form 10-K.
(2) Portions of the definitive proxy statement for the Annual Meeting of
Stockholders to be filed within 120 days of December 31, 1997 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").
The Bank is a federally chartered stock savings bank, primarily regulated by the
Office of Thrift Supervision ("OTS"). The Bank conducts business from its
executive offices in Norristown, Pennsylvania and, as of December 31, 1997, 56
full-service offices located in southeast Pennsylvania.
ComNet Mortgage Services ("ComNet"), a division of the Bank, also
located in Norristown, conducts business through ten 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. In January 1997, Commonwealth acquired selected assets of
Homestead Mortgage, Inc. ("Homestead Mortgage"), a mortgage company
headquartered in Millersville, Maryland. Among the assets acquired by
Commonwealth were production branches located in Millersville, Bethesda,
Whitemarsh, and Woodlawn, Maryland, and Media, Pennsylvania. The Millersville,
Bethesda, and Whitemarsh branches continue to operate under the trade name of
Homestead Mortgage. The Woodlawn, Maryland and Media, Pennsylvania locations
were closed subsequent to the acquisition as a result of the consolidation of
their operations with other ComNet and Homestead Mortgage branches.
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, which owned approximately 55% of the outstanding common stock
of the Bank. On June 14, 1996, the Company completed an offering of common stock
in connection with the second-step conversion and reorganization from the mutual
holding company form of ownership to the stock holding company form.
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.
-1-
<PAGE> 3
MARKET AREA
The Bank's 56 full-service branch offices, which include 17 supermarket
branch offices, are located throughout Berks, Bucks, Chester, Delaware, Lebanon,
Lehigh, Montgomery, and Philadelphia Counties, Pennsylvania. The Bank's branch
locations are concentrated in the Reading area of Berks County; central and
southern Montgomery County; and the northeast Philadelphia community within
Philadelphia County. Management believes that the Bank's meaningful presence in
these markets, coupled with its emphasis on providing superior customer service,
will enable the Bank to compete effectively with larger regional and national
banks.
The Bank focuses on relationship banking by cross-selling services to
new and 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, 1997, loans held for investment totaled $1.3
billion, which represented 56% 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 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 Commonwealth originates loans in a number of states, the
Company's mortgage loans held for investment are primarily secured by properties
located in Pennsylvania and New Jersey. At December 31, 1997, approximately 47%
of the Company's total mortgage loans held for investment were secured by
properties located in these states.
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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,
-------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- ----------------------- -----------------------
Percent of Percent Percent of
Amount Total Amount of Total Amount Total
------ ------- ------ ---------- ------ -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
1-4 family residential (1) $ 958,542 75.51% $ 857,053 76.37% $655,152 81.08%
Consumer loans:
Equity lines of credit 41,592 3.28 49,136 4.38 44,432 5.50
Second mortgage 98,934 7.79 77,304 6.89 48,653 6.03
Other 54,267 4.28 42,867 3.82 18,009 2.23
--------- ------ --------- ------ ------- ------
Total consumer loans 194,793 15.35 169,307 15.09 111,094 13.76
Commercial loans:
SBA (2) 20,016 1.58 25,104 2.24 29,472 3.65
Commercial real estate (3) 71,508 5.63 35,452 3.15 9,386 1.16
Business loans (3) 24,456 1.93 35,380 3.15 2,801 0.35
--------- ------ --------- ------ ------- ------
Total commercial loans 115,980 9.14 95,936 8.54 41,659 5.16
--------- ------ --------- ------ ------- ------
Total loans receivable 1,269,315 100.00% 1,122,296 100.00% 807,905 100.00%
--------- ====== --------- ====== ------- ======
Less:
(Premium)/Discount on
loans purchased (2,314) (3,655) 1,004
Allowance for loan losses 9,024 9,971 7,485
Deferred loan fees 3,009 2,866 2,681
Allowance for imputed interest - - -
--------- --------- -------
Loans receivable, net $1,259,596 $1,113,114 $796,735
========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1994 1993
------------------------ ---------------------------
Percent of Percent of
Amount Total Amount Total
------ ------- ------ ------
<S> <C> <C> <C> <C>
Mortgage loans:
1-4 family residential (1) $450,959 75.55% $369,456 72.02%
Consumer loans:
Equity lines of credit 49,246 8.26 56,862 11.08
Second mortgage 42,883 7.18 31,449 6.13
Other 12,013 2.01 9,701 1.89
------- ------ ------- ------
Total consumer loans 104,142 17.45 98,012 19.10
Commercial loans:
SBA (2) 35,482 5.94 40,973 7.99
Commercial real estate (3) 4,679 0.78 4,543 0.89
Business loans (3) 1,671 0.28 - -
------- ------ ------- ------
Total commercial loans 41,832 7.00 45,516 8.88
------- ------ ------- ------
Total loans receivable 596,933 100.00% 512,984 100.00%
------- ====== ------- ======
Less:
(Premium)/Discount on
loans purchased 2,864 4,007
Allowance for loan losses 7,307 7,309
Deferred loan fees 3,555 2,595
Allowance for imputed interest 63 99
------- -------
Loans receivable, net $583,144 $498,974
======== ========
</TABLE>
(1) At December 31, 1997, $613.6 million, or 64%, of the Company's 1-4
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) Approximately $11.5 million of business loans were reclassified to
commercial real estate loans in December 1997. Previously reported amounts were
not restated.
-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, 1997, 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, 2001- 2003- 2009- There-
1997 1998 1999 2000 2002 2008 2014 after
----------- --------- -------- --------- --------- ---------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
1-4 family residential $ 958,542 $25,404 $22,775 $23,711 $ 50,986 $166,321 $184,966 $484,379
Consumer 194,793 35,114 22,199 20,515 31,630 52,101 18,837 14,397
Commercial real estate 71,508 5,121 5,361 5,699 14,411 31,058 9,846 12
Business loans 24,456 1,943 2,129 2,332 4,236 8,216 5,600 -
SBA 20,016 1,574 1,186 1,153 2,414 7,157 4,169 2,363
---------- ------- ------- ------- -------- -------- --------- ---------
Total (1) $1,269,315 $69,156 $53,650 $53,410 $103,677 $264,853 $223,418 $501,151
========= ====== ====== ====== ======= ======= ======= =======
</TABLE>
(1) Of the $1.2 billion of loan principal repayments contractually due
after December 31, 1998, $496.3 million have fixed rates of interest and $703.8
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 sets forth
the activity in the Company's loans held for investment during the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1997 1996 1995
----------- ------------ ----------
(in thousands)
<S> <C> <C> <C>
Gross loans held for investment at
beginning of period $ 1,122,296 $ 807,905 $ 596,933
Originations of loans held for
investment:
1-4 family residential 107,628 52,304 35,319
Consumer 88,809 58,411 48,432
Commercial real estate 32,905 16,848 5,291
Business loans 14,424 16,955 4,766
----------- ----------- ---------
Total originations 243,766 144,518 93,808
Purchases of loans held for investment:
1-4 family residential (1) 152,480 257,575 234,963
Consumer -- 45,579 --
Commercial real estate -- 26,110 --
Business loans -- 18,269 --
SBA -- -- --
----------- ----------- ---------
Total purchases 152,480 347,533 234,963
Total originations and purchases 396,246 492,051 328,771
Repayments (249,227) (177,660) (117,799)
----------- ----------- ---------
Net activity in loans held for
investment 147,019 314,391 210,972
----------- ----------- ---------
Gross loans held for investment at end
of period $ 1,269,315 $ 1,122,296 $ 807,905
=========== =========== =========
</TABLE>
(1) The $152.5 million of 1-4 family residential loans purchased during
1997 consisted of $21.3 million of adjustable rate loans purchased by the
Company from third parties and $131.2 million of loans generated through
Commonwealth's wholesale correspondent network. The $257.6 million of 1-4 family
residential loans purchased during 1996 consisted of $79.9 million of adjustable
rate loans purchased by the Company from third parties, $148.3 million of loans
generated through Commonwealth's wholesale correspondent network, and $29.4
million purchased in the June 1996 acquisition of 12 former Meridian Bank
branches (the "Berks Acquisition"). For additional information, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Acquisitions" in Item 7 hereto.
RESIDENTIAL LOAN ORIGINATIONS AND SALES. 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 1-4 family
residences.
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<PAGE> 7
Retail loans are originated by Commonwealth's own sales force of
approximately 52 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, Commonwealth prepares mortgage documentation, conducts credit checks,
has the subject property appraised by independent appraisers, and closes the
loan.
The retail loan production office originating a loan is responsible for
taking the loan application and coordinating information flow between the
applicant and Commonwealth's processing center, which relocated along with the
Company's headquarters in January 1997 from Malvern, Pennsylvania to Norristown,
Pennsylvania. Retail loan applications must be approved by Commonwealth's
underwriting department for 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,
Commonwealth 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 Commonwealth, and the date on which
the commitment expires.
Wholesale loans are purchased from correspondents/brokers, or funded by
Commonwealth on behalf of correspondents and brokers. Commonwealth currently
employs three regional account executives to work with over 195 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
Commonwealth similar to retail loan originations above. In certain instances,
Commonwealth delegates the underwriting function to correspondents and brokers.
Such delegated underwriting meets Commonwealth's criteria of underwriting
standards. Once the underwriting approval is complete, the purchase or funding
is initiated.
Commonwealth originates conventional loans and, to a lesser extent,
FHA-insured and VA-guaranteed loans. The vast majority of conventional loans 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 the Company's mortgage banking operations 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 the Company's service areas also have a
significant effect on the residential housing market and, thus, could have a
similar effect on Commonwealth's loan origination activity.
Mortgage loan originations totaled $585.1 million and $462.1 million
during 1997 and 1996, respectively, which included $192.4 million and $233.8
million, respectively, of loans originated through the wholesale correspondent
lending network.
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<PAGE> 8
Commonwealth 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 essentially all of the adjustable rate
loans, 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 $227,150 for loans secured by a
single-family, owner-occupied residence) and loans to employees of the Company.
The Company also has been retaining fully amortizing fixed-rate loans with
maturities of ten years.
The Company'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 0.17% to 0.29% of the
declining principal amount of the loan pool. Commonwealth, through investment
bankers, arranges to sell mortgage-backed securities to investors.
The Company 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
Commonwealth for others do not include any FHA-insured or VA-guaranteed loans.
A period of 30 to 90 days generally lapses between Commonwealth's
commitment to make a mortgage loan and the ultimate sale of the loan to an
investor. During this period, Commonwealth 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 the Company are deducted from the net gain or loss on the sale of mortgage
loans. Accordingly, fluctuations in prevailing interest rates may result in a
gain or loss to Commonwealth as a result of adjustments to the carrying value of
loans held for sale, or on the sale of loans to the extent that Commonwealth 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 Commonwealth 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. Commonwealth 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 Commonwealth during the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ---------------------
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 $238,799 1,286 $200,558 979 $208,865 1,086
FHA/VA -- -- -- -- -- --
-------- ----- -------- ----- -------- -----
Total Company 238,799 1,286 200,558 979 208,865 1,086
-------- ----- -------- ----- -------- -----
Originations for others (1):
Conventional 249,741 2,081 232,622 2,176 260,300 2,362
FHA/VA 96,606 1,014 28,893 322 25,594 281
-------- ----- -------- ----- -------- -----
Total Other 346,347 3,095 261,515 2,498 285,894 2,643
-------- ----- -------- ----- -------- -----
Total Company and others $585,146 4,381 $462,073 3,477 $494,759 3,729
======== ===== ======== ===== ======== =====
Retained by the Company (1)(2):
Conventional $238,799 1,286 $200,558 979 $208,865 1,086
FHA/VA -- -- -- -- -- --
-------- ----- -------- ----- -------- -----
Total Company 238,799 1,286 200,558 979 208,865 1,086
-------- ----- -------- ----- -------- -----
Sales to Others (1)(3):
Conventional 233,299 2,116 236,190 2,275 264,538 2,332
FHA/VA 94,654 979 29,781 331 14,738 161
-------- ----- -------- ----- -------- -----
Total Other 327,953 3,095 265,971 2,606 279,276 2,493
-------- ----- -------- ----- -------- -----
Total Company and Other $566,752 4,381 $466,529 3,585 $488,141 3,579
======== ===== ======== ===== ======== =====
Other adjustments to
loans held for sale (4) $ 1,845 $ (4,210) $ 850
======== ======== ========
Increase/(decrease) in
mortgage loans held for sale $ 20,239 $ (8,666) $ 7,468
======== ======== ========
</TABLE>
(1) Consists entirely of 1-4 family residential loans.
(2) Consists entirely of 1-4 family residential loans which have adjustable
rates, are nonconforming 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 sale of
loans, and deferred loan fees.
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<PAGE> 10
The following table sets forth certain information relating to the
geographic distribution of loans originated by Commonwealth through its retail
and wholesale networks during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
============================================================================
1997 1996 1995
====================== ====================== =====================
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 $186,086 1,682 $166,770 1,542 $116,455 1,078
Maryland 147,713 1,069 0 0 0 0
New Jersey 32,236 222 28,863 220 17,081 146
Rhode Island 19,776 207 20,328 222 21,950 227
Connecticut 6,930 58 10,433 90 9,489 79
Florida 0 0 1,894 21 11,805 124
-------- ----- -------- ----- -------- -----
Total Retail 392,741 3,238 228,288 2,095 176,780 1,654
-------- ----- -------- ----- -------- -----
Wholesale:
Pennsylvania 37,551 276 44,328 336 33,671 255
Maryland 35,080 164 50,049 268 82,023 486
Virginia 29,624 139 42,326 207 72,794 410
New Jersey 19,757 147 17,250 106 17,163 134
North Carolina 12,276 66 7,570 54 22,533 187
Delaware 11,904 95 16,682 133 24,764 201
Arizona 8,393 30 3,633 17 0 0
Texas 5,407 27 3,768 22 2,924 17
Massachusetts 4,960 25 1,276 4 0 0
Georgia 4,901 25 13,551 60 18,159 85
Illinois 3,011 15 6,214 32 749 4
Ohio 2,948 18 2,831 14 9,925 81
Colorado 2,464 13 1,269 5 0 0
Connecticut 2,241 18 234 1 1,934 17
Michigan 2,045 13 0 0 0 0
South Carolina 1,756 13 1,151 6 1,388 13
Indiana 1,644 13 1,670 13 149 1
Florida 1,559 13 9,156 54 12,023 93
Wisconsin 1,150 9 203 1 10,236 49
Louisiana 1,065 8 769 2 0 0
Washington, D.C 633 2 460 2 0 0
Kentucky 590 3 264 2 865 10
New York 390 4 0 0 274 2
Kansas 339 2 1,543 8 1,222 9
Tennessee 230 1 1,225 8 0 0
Alabama 214 1 6,053 24 3,941 14
West Virginia 100 1 171 2 203 1
Rhode Island 90 1 0 0 0 0
Missouri 83 1 139 1 0 0
California 0 0 0 0 1,039 6
-------- ----- -------- ----- -------- -----
Total Wholesale 192,405 1,143 233,785 1,382 317,979 2,075
-------- ----- -------- ----- -------- -----
Total Retail and Wholesale (1) $585,146 4,381 $462,073 3,477 $494,759 3,729
======== ===== ======== ===== ======== =====
</TABLE>
- -----------------------------------
(1) Consists entirely of 1-4 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, 1997, $194.8 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, 1997, second
mortgage loans totaled $98.9 million, or 8%, 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, 1997, home equity
lines of credit amounted to $41.6 million, or 3%, of the Company's total loan
portfolio. The Company had $102.7 million of total commitments pursuant to such
equity lines of credit outstanding at year-end 1997.
The remaining $54.3 million of the Company's consumer loan portfolio at
December 31, 1997 was comprised primarily of loans secured by new and used
automobiles, recreational vehicles, and personal loans and lines of credit. 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 generally provides loans for
commercial purposes to borrowers only under circumstances where the borrower
also has, or establishes, a deposit relationship with the Company. The loans
typically range in size from $0.25 million to $1.0 million. Commercial real
estate loans are generally 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, 1997, commercial loans
(other than loans generated by the Small
-10-
<PAGE> 12
Business Administration) totaled $96.0 million, or 8%, of the Company's total
loan portfolio. Of that amount, $44.4 million were acquired in conjunction with
the Berks Acquisition. For additional information, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Acquisitions" in
Item 7 hereto. At December 31, 1997, commercial loans (other than SBA loans)
were comprised of $71.5 million of commercial real estate loans and $24.5
million of business loans. During December 1997, Commonwealth reclassified
approximately $11.5 million of business loans to commercial real estate loans.
However, previously reported amounts were not restated.
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, 1997, the
Company had $20.0 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 Statement of Financial Accounting Standards ("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, 1997, the Company had $3.0 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.
LOAN SERVICING ACTIVITIES
Commonwealth, a qualified seller servicer for the FNMA and the FHLMC,
services residential real estate loans for others as well as loans held by
Commonwealth for investment and sale. Servicing includes collecting and
remitting loan payments, accounting for principal and interest, holding escrow
-11-
<PAGE> 13
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 Commonwealth 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, Commonwealth
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, 1997, Commonwealth was servicing $1.3 billion of loans
for others, as well as $0.9 billion of loans held by Commonwealth for investment
and sale. The portfolio of loans serviced by Commonwealth at December 31, 1997
consisted of approximately 24,200 loans with an average loan balance of
approximately $90,870, a weighted average service fee of approximately 0.35% per
annum (inclusive of excess servicing associated with loans serviced by
Commonwealth for others) and a weighted average remaining contractual term of
approximately 23.3 years. The Company's loan servicing fees totaled $5.2 million
in 1997, $5.2 million in 1996, and $5.5 million in 1995.
From time to time, the Company evaluates purchased mortgage servicing
rights ("PMSRs") as a means of enhancing noninterest income. In 1990 and 1991,
Commonwealth paid $19.1 million to acquire the servicing rights related to $1.1
billion of loans. In addition, during 1994, the Company 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.
Commonwealth also has sought to expand its mortgage servicing portfolio
by increasing the amount of loans originated and sold on a servicing-retained
basis. Commonwealth generally retains the rights to service the conventional
loans sold, and sells all FHA-insured and VA-guaranteed loans on a
servicing-released basis.
During the years ended December 31, 1997, 1996 and 1995, Commonwealth
sold $191.4 million, $226.9 million and, $86.1 million of loans originated on a
servicing-retained basis, respectively, and $136.6 million, $39.1 million, and
$193.2 million on a servicing-released basis, respectively. During 1997, the
percentage of loans sold on a servicing-released basis increased, relating
primarily to servicing-released loan sales by Homestead Mortgage. During 1996,
the percentage of loans sold on a servicing-released basis decreased as a result
of a decrease in loan originations of products which Commonwealth generally
sells servicing-released.
On January 1, 1996, the Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights." The Company 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
-12-
<PAGE> 14
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, 1997, the Company recorded originated mortgage servicing rights ("OMSRs") of
$3.3 million, net of a $1.6 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, Commonwealth 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, 1997, the principal amount of loans serviced by Commonwealth for others that
were subject to this condition aggregated $1.1 billion, of which $26.0 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 its 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 loans serviced by
Commonwealth at the dates indicated.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1997 1996 1995
---------- ---------- -----------
(in thousands)
<S> <C> <C> <C>
Mortgage loans underlying mortgage-backed securities:
FNMA $ 748,727 $ 714,472 $ 708,138
FHLMC 350,216 340,928 346,765
Other investors 462 615 20,694
---------- ---------- ----------
1,099,405 1,056,015 1,075,597
Mortgage loans serviced for others:
FNMA 93,364 102,387 103,184
Other investors 110,747 181,488 85,195
---------- ---------- ----------
204,111 283,875 188,379
---------- ---------- ----------
Total loans serviced for others 1,303,516 1,339,890 1,263,976
---------- ---------- ----------
Mortgage loans serviced for the Company:
Loans held for investment 836,955 724,207 560,404
Loans held for sale by Commonwealth 58,594 23,610 26,385
---------- ---------- ----------
895,549 747,817 586,789
---------- ---------- ----------
Total loans serviced (1) $2,199,065 $2,087,707 $1,850,765
========== ========== ==========
</TABLE>
(1) PMSRs accounted for $173.7 million, $205.9 million, and $291.3 million
of total loans serviced at December 31, 1997, 1996, and 1995, respectively.
-14-
<PAGE> 16
The following table sets forth the coupon distribution of loans
serviced by Commonwealth at December 31, 1997.
<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 $ 390 $ 831 $ 14,613 $ 15,834
5.01 - 6.00% - 14,141 59,741 73,882
6.01 - 7.00% 3,606 245,353 173,367 422,326
7.01 - 8.00% 23,418 537,351 404,426 965,195
8.01 - 9.00% 29,368 258,248 220,558 508,174
9.01 - 10.00% 45,741 53,063 17,867 116,671
10.01 - 11.00% 55,780 17,798 3,429 77,007
11.01 - 12.00% 13,968 1,532 584 16,084
12.01 - 13.00% 661 1,055 584 2,300
13.01 or greater 806 406 380 1,592
---------- ------------- - --------- ------------
$ 173,738 $ 1,129,778 $ 895,549 $ 2,199,065
========== ============= ========= ============
</TABLE>
(1) Includes approximately $128.2 million of loans serviced by Commonwealth
for others which relate neither to capitalized excess servicing fees nor OMSRs.
(2) Includes loans held for investment and loans held for sale by the
Company.
-15-
<PAGE> 17
The following table sets forth the geographic distribution of
properties securing the loans serviced by Commonwealth at December 31, 1997.
<TABLE>
<CAPTION>
Percentage of Total Principal
State Principal Balance Balance
- ------------------ ----------------- ------------------------------
(dollars in thousands)
<S> <C> <C>
Pennsylvania $1,128,281 51.31%
New Jersey 302,844 13.77
Maryland 189,720 8.63
Virginia 140,312 6.38
Connecticut 103,233 4.69
New York 49,546 2.25
Rhode Island 45,108 2.05
Florida 43,643 1.99
Delaware 39,105 1.78
Georgia 28,005 1.27
North Carolina 25,842 1.18
Washington, D.C. 13,063 0.59
Arizona 11,535 0.53
Texas 10,821 0.49
Alabama 9,483 0.43
Illinois 8,543 0.39
Massachusetts 8,264 0.38
Ohio 7,798 0.35
South Carolina 5,971 0.27
Colorado 5,075 0.23
California 3,083 0.14
Other 19,790 0.90
---------- --------
Total $2,199,065 100.00%
========== ======
</TABLE>
-16-
<PAGE> 18
ASSET QUALITY
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 and
interest. When loans are placed on nonaccrual, interest previously accrued but
not collected is reversed against interest income in the current period. As a
matter of policy, the Company provides an allowance for accrued interest deemed
to be uncollectable when a loan is 90 days delinquent.
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,
----------------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ---------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
30 to 59 days $13,083 1.03% $12,854 1.15% $ 5,013 0.62%
60 to 89 days 2,503 0.20 7,980 0.71 2,132 0.26
90 days and over 8,938 0.70 8,058 0.72 6,193 0.77
------- ---- ------- ---- ------- ----
Total (1) $24,524 1.93% $28,892 2.58% $13,338 1.65%
======= ==== ======= ==== ======= ====
</TABLE>
(1) Does not include delinquent commercial loans which are fully guaranteed
as to principal and interest by the SBA, which amounted to $1.1 million, $1.4
million, and $1.4 million at December 31, 1997, 1996, and 1995, respectively.
-17-
<PAGE> 19
NONPERFORMING ASSETS. The following table sets forth information
relating to the Company's nonperforming assets at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
1-4 family residential mortgage loans $5,269 $5,240 $5,605 $4,137 $ 5,775
Consumer loans 1,324 1,335 221 215 203
Commercial real estate loans 1,753 1,399 367 -- --
Business loans (1) 592 84 -- -- --
------ ------ ------ ------ -------
Total nonperforming loans 8,938 8,058 6,193 4,352 5,978
Real estate owned, net 626 1,090 752 1,927 4,424
Investment securities -- -- 420 -- 4,420
------ ------ ------ ------ -------
Total nonperforming assets (1) $9,564 $9,148 $7,365 $6,279 $14,822
====== ====== ====== ====== =======
Nonperforming loans to total loans held for
investment (1) 0.70% 0.72% 0.77% 0.73% 1.17%
====== ====== ====== ====== =======
Total nonperforming assets to total assets (1) 0.42% 0.43% 0.51% 0.52% 1.26%
====== ====== ====== ====== =======
</TABLE>
(1) Does not include nonperforming commercial loans which are fully
guaranteed as to principal and interest by the SBA, which amounted to $1.1
million at both December 31, 1997 and 1996. There were no nonperforming SBA
loans at December 31, 1995, 1994, and 1993.
(2) Consisted of a deposit 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 nonperforming investment in commercial
paper which was sold in 1994.
-18-
<PAGE> 20
At December 31, 1997, the Company's $5.3 million of nonperforming
single-family residential loans consisted of 90 loans having an average balance
of $59,000.
Forgone interest income on nonaccruing loans was $0.7 million for the
year ended December 31, 1997 and $0.6 million for each of the years ended
December 31, 1996 and 1995. The actual amount of interest recorded as income on
such loans amounted to $0.3 million for each of the years ended December 31,
1997, 1996, and 1995.
At December 31, 1997, the Company's real estate owned totaled $0.6
million, consisting of 13 single-family residential properties acquired through
foreclosure or by deed-in-lieu of foreclosure At December 31, 1996, 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.
During 1997, the Company sold 27 single-family residential properties
which were held as real estate owned for a net loss of $0.1 million and acquired
an additional 17 single-family residential properties through foreclosure or
deed-in-lieu of foreclosure. 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.
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.
Classified 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, 1997, the Company had $6.4 million of assets classified special
mention.
-19-
<PAGE> 21
ALLOWANCE FOR LOAN LOSSES. It is management's policy to maintain an
allowance for estimated loan losses 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,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of year $ 9,971 $ 7,485 $ 7,307 $ 7,309 $ 6,935
------- ------- ------- ------- -------
Provision: (1)
Mortgage (2,497) 119 449 118 590
Consumer 1,720 457 114 (200) 120
Commercial 2,377 25 15 250 --
------- ------- ------- ------- -------
Total provision 1,600 601 578 168 710
Charge-offs:
Mortgage (453) (189) (362) (103) (226)
Consumer (1,383) (478) (125) (191) (215)
Commercial (963) -- -- -- --
------- ------- ------- ------- -------
Total charge-offs (2,799) (667) (487) (294) (441)
Recoveries:
Mortgage 147 133 68 39 19
Consumer 74 29 19 85 86
Commercial 31 18 -- -- --
------- ------- ------- ------- -------
Total recoveries 252 180 87 124 105
Allowance Acquired in
Berks Acquisition -- 2,372 -- -- --
------- ------- ------- ------- -------
Allowance at end of year $ 9,024 $ 9,971 $ 7,485 $ 7,307 $ 7,309
======= ======= ======= ======= =======
Allowance for loan losses to total
nonperforming loans at end of
year 100.96% 123.74% 120.86% 167.90% 122.26%
======= ======= ======= ======= =======
Allowance for loan losses to total
loans held for investment at end
of year 0.71% 0.89% 0.93% 1.22% 1.42%
======= ======= ======= ======= =======
</TABLE>
(1) Reflects a reclassification during 1997.
-20-
<PAGE> 22
The following table presents the Company's allowance for loan losses
allocated by categories of loans held for investment at the dates indicated.
<TABLE>
<CAPTION>
December 31
-------------------------------------------------------------------------------------------------
1997 1996 1995 1994
---------------------- -------------------- ----------------------- ---------------------
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 $2,536 0.26% $5,339 0.63% $5,228 0.80% $5,074 1.27%
Consumer loans 2,916 1.50 2,505 1.48 1,992 1.79 1,983 1.90
Commercial loans 3,572 3.72 2,127 3.00 265 2.18 250 3.94
SBA loans -- -- -- -- -- -- -- --
------ ---- ------ ---- ------ ---- ------ ----
Total allowance for loan
losses $9,024 5.48% $9,971 5.11% $7,485 4.77% $7,307 7.11%
====== ==== ====== ==== ====== ==== ====== ====
</TABLE>
<TABLE>
<CAPTION>
December 31
----------------------
1993
----------------------
Percent of
Loans by
Amount Category (1)
------ ------------
(dollars in thousands)
<S> <C> <C>
Breakdown of allowance:
Mortgage loans $5,020 1.36%
Consumer loans 2,289 2.33
Commercial loans -- --
SBA loans -- --
------ ----
Total allowance for loan
losses $7,309 3.69%
====== ====
</TABLE>
- -------------------
(1) Total loans exclude mortgage 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 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, 1997, the Company's $735.3 million of mortgage-backed
securities, representing 32% of the Company's $2.3 billion of total assets, were
comprised of $196.2 million and $539.1 million of held-to-maturity and
available-for-sale mortgage-backed securities, respectively. Included in the
Company's $735.3 million of mortgage-backed securities at December 31, 1997 were
$390.8 million of mortgage-backed securities, which were issued and guaranteed
by the FHLMC, the FNMA or the GNMA, and $339.2 million of Collateralized
Mortgage Obligations ("CMOs"). With respect to the CMOs, $88.6 million were
guaranteed by the FNMA and FHLMC, and $250.6 million were rated AAA by national
rating agencies. At December 31, 1997, $562.9 million, or 77%, of the Company's
mortgage-backed securities portfolio had fixed rates of interest, and $172.4
million, or 23%, had adjustable rates of interest.
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,
1997, $300.8 million, or 41%, 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
mortgage-backed securities portfolio during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1997 1996 1995
------ ------ -----
(in thousands)
<S> <C> <C> <C>
Mortgage-backed securities at beginning of year $ 752,707 $ 463,353 $ 430,119
Purchases 189,818 412,676 85,472
Sales (41,770) -- --
Repayments and prepayments (166,838) (122,895) (64,887)
Unrealized gains or (losses) on available-for-sale
mortgage-backed securities 1,374 (427) 12,649
--------- --------- ---------
Mortgage-backed securities at end of year (1) $ 735,291 $ 752,707 $ 463,353
========= ========= =========
</TABLE>
(1) At December 31, 1997, 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 $730.8 million and
$738.1 million, respectively.
At December 31, 1997, 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 accretion of any discount related to the
mortgage-backed security. In accordance with generally accepted accounting
principles, premiums and discounts are amortized or accreted 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 and
anticipated 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,
--------------------------------------------------------------------------
1997 1996 1995
------------------- ----------------------- --------------------
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. Treasury and U.S.
Government agency securities $ -- $ -- $ -- $ -- $ -- $ --
------- ------- ------- ------- ------- -------
Total Held to Maturity -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Available for sale (at market):
U.S. Treasury and U.S.
Government agency securities 39,980 40,041 47,963 48,089 38,789 39,263
Corporate and bank notes
receivable -- -- -- -- 5,498 5,483
Mortgage Security Mutual
Fund 2,373 2,404 2,215 2,209 2,077 2,150
Equity Servicing Partnership 4,819 4,819 2,880 2,880 -- --
Other Equity Investments 3,256 4,062 757 757 -- --
------- ------- ------- ------- ------- -------
Total Available for Sale 50,428 51,326 53,815 53,935 46,364 46,896
------- ------- ------- ------- ------- -------
Total $50,428 $51,326 $53,815 $53,935 $46,364 $46,896
======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
-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, 1997.
<TABLE>
<CAPTION>
Contractually Maturing
---------------------------------------------------------------------------------------------------
Weighted Weighted
Under 1 Average 1-5 Average
Year Yield Years Yield
---- ----- ----- -----
(dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and U.S.
Government agency securities $35,025 6.12% $ 5,016 6.02%
Mortgage Security
Mutual Fund -- -- 2,404 10.91
Equity Servicing Partnership -- -- 4,819 N/A
Other Equity Investments -- -- 4,062 N/A
------- -------
$35,025 6.12% $16,301 6.93%
======= =======
</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, noninterest-bearing
checking accounts, savings accounts, and certificate of deposit 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, 1997, the branch
offices of the Company consisted of 39 traditional full-service offices and 17
full-service offices located in supermarkets. The Company opened its first
-25-
<PAGE> 27
supermarket branch in 1994 and opened an additional nine, four, and three in
1995, 1996, and 1997, respectively. Currently, the Company intends to open three
supermarket branches and one mini-traditional branch in its market area in 1998.
In addition to the Company's extensive branch network, the Company currently
maintains 55 automated teller machine ("ATM") locations, and expects to further
increase its ATM network during 1998. 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 savings accounts, which generally
have rates which are substantially less than certificates of deposit. At
December 31, 1997, total demand deposits and savings deposits amounted to 37%
and 15% of the Company's total deposits, respectively. During 1997, the weighted
average rate paid on the Company's demand deposits and savings deposits amounted
to 2.47% and 2.24%, respectively, as compared to a weighted average rate paid of
5.46% 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,
-----------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- ------------------------- -------------------------
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 $ 172,442 11.11% $ 171,567 11.50% $ 109,756 10.20%
Money market accounts 324,959 20.93 278,527 18.68 264,239 24.54
Noninterest-bearing
deposit accounts 81,653(1) 5.26 60,957 4.09 44,651 4.15
---------- ------ ---------- ------ ---------- ------
Total demand deposits 579,054 37.30 511,051 34.27 418,646 38.89
---------- ------ ---------- ------ ---------- ------
Savings deposits 229,290 14.77 260,089 17.44 144,163 13.39
Certificate of deposit
accounts:
6 months or less 259,519 16.71 304,674 20.43 237,460 22.05
7-12 months 220,341 14.19 175,425 11.76 82,637 7.68
13-36 months 216,011 13.91 199,292 13.36 141,589 13.15
More than 36 months 48,609 3.12 40,919 2.74 52,054 4.84
---------- ------ ---------- ------ ---------- ------
Total certificates 744,480 47.93 720,310 48.29 513,740 47.72
---------- ------ ---------- ------ ---------- ------
Total deposits $1,552,824 100.00% $1,491,450 100.00% $1,076,549 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
- ----------------
(1) Includes $46.2 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,
-----------------------------------------------
1997 1996 1995
---------- ----------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Beginning balance $1,491,450 $1,076,549 $ 853,519
Net increase
before interest 9,540 371,952(2) 191,808(1)
Interest credited 51,834 42,949 31,222
---------- ---------- ----------
Net increase
in deposits 61,374 414,901 223,030
---------- ---------- ----------
Ending balance $1,552,824 $1,491,450 $1,076,549
========== ========== ==========
</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
Company's certificates of deposit at the dates indicated.
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1997 1996 1995
-------- -------- ---------
(dollars in thousands)
<S> <C> <C> <C>
0.00% to 2.99% $ 1,166 $ 3,132 $ 796
3.00% to 3.99% 6,051 79,101 69,108
4.00% to 4.99% 125,241 165,704 96,900
5.00% to 6.99% 608,379 465,258 336,762
7.00% to 8.99% 3,569 6,833 10,059
9.00% to 10.99% 74 282 115
11.00% and over -- -- --
-------- -------- --------
Total $744,480 $720,310 $513,740
======== ======== ========
</TABLE>
-27-
<PAGE> 29
The following table sets forth the amount and remaining maturities of
the Company's certificates of deposit at December 31, 1997.
<TABLE>
<CAPTION>
Over Six
Months Over One Over Two
Six Months Through One Year Through Years Through Over Three
and Less Year Two Years Three Years Years
---------- ----------- ------------ -------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
0.00% to 1.99% $ 1,131 $ -- $ -- $ -- $ --
2.00% to 2.99% 35 -- -- -- --
3.00% to 3.99% 6,021 10 16 4 --
4.00% to 4.99% 98,439 13,013 8,988 716 4,085
5.00% to 6.99% 153,473 207,147 151,574 52,515 43,670
7.00% to 8.99% 420 171 1,203 990 785
9.00% to 10.99% -- -- 5 -- 69
11.00% & over -- -- -- -- --
-------- -------- -------- ------- -------
Total $259,519 $220,341 $161,786 $54,225 $48,609
======== ======== ======== ======= =======
</TABLE>
At December 31, 1997, the Company had $92.2 million of certificates of
deposit in amounts equal to or greater than $100,000, of which $50.1 million was
scheduled to mature within six months, $23.4 million was scheduled to mature in
over six months through 12 months, and $18.7 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,
1997, the Company had $213.0 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, 1997, the Company had $246.1 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,
---------------------------------------------------------------------------
1997 1996 1995
-------------------- --------------------- ----------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
FHLB advances $213,000 5.83% $175,000 5.48% $120,614 6.05%
Repurchase
agreements(1) 246,099 5.73 176,674 5.47 81,112 6.65
Other borrowings -- -- -- -- 1,554 8.75
-------- -------- --------
Total Borrowings $459.099 5.78% $351,674 5.48% $203,280 6.31%
======== ======== ========
</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,
------------------------------------------------------------------
1997 1996 1995
------------------- ----------------- --------------
(dollars in thousands)
<S> <C> <C> <C>
FHLB advances:
Maximum balance $238,000 $202,500 $121,114
Average balance $211,107 $138,917 $ 77,249
Weighted average rate:
at end of period 5.83% 5.48% 6.05%
during the period 5.67% 5.62% 6.05%
Repurchase agreements:
Maximum balance $264,677 $176,674 $210,324
Average balance $242,794 $154,523 $143,313
Weighted average rate:
at end of period 5.73% 5.47% 6.65%
during the period 5.90% 5.91% 6.35%
</TABLE>
- ----------
-29-
<PAGE> 31
EMPLOYEES
The Company had 573 full-time employees and 318 part-time employees at
December 31, 1997. 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, 1997, 56 full-service offices, including 17 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 located in Norristown,
conducts business through ten 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. In January
1997, Commonwealth acquired selected assets of Homestead Mortgage, Inc.
("Homestead Mortgage"), a mortgage company headquartered in Millersville,
Maryland. Among the assets acquired by Commonwealth were production branches
located in Millersville, Bethesda, Whitemarsh, and Woodlawn, Maryland, and
Media, Pennsylvania. The Millersville, Bethesda, and Whitemarsh branches
continue to operate under the trade name of Homestead Mortgage. The Woodlawn,
Maryland and Media, Pennsylvania locations were closed subsequent to the
acquisition as a result of the consolidation of their operations with other
ComNet and Homestead Mortgage branches.
COMMONWEALTH INVESTMENT CORPORATION OF DELAWARE, INC. At December 31,
1997, $18.6 million, or 3%, of the Company's mortgage-backed securities were
held by Commonwealth Investment Corporation of Delaware, Inc., a wholly-owned
subsidiary of the Company which was incorporated under the laws of Delaware in
1996.
CFSL INVESTMENT CORPORATION. At December 31, 1997, $68.9 million, or
9%, 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.
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
architecturally significant buildings or structures. At December 31, 1997,
Firstcor had seven investments in such partnerships which had an aggregate
carrying value of $2.8 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.
-30-
<PAGE> 32
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,
1997, all of the units had been sold and closed. The third phase is currently
not being developed.
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 1993.
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 1976. At December 31, 1997, 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, 1997, the Company had net loss carryforwards for
state tax purposes totaling $9.2 million, which expire beginning in 1998.
-33-
<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, 1997, 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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<PAGE> 38
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. 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 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 $0.05 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 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. As of December 31,
1997, the FICO assessments were 6.3 and 1.3 basis points 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
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<PAGE> 39
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 $45.2 million of goodwill and other intangible assets at December
31, 1997. 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 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.
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<PAGE> 40
At December 31, 1997, the Bank exceeded all of its regulatory capital
requirements, with tangible, core and risk-based capital ratios of 6.6%, 6.6%
and 13.4%, 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' 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
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<PAGE> 41
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 Federal Deposit Insurance Corporation Improvement Act of 1991 ("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 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
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<PAGE> 42
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.
At December 31, 1997, 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
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<PAGE> 43
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 4%. At December 31, 1997, the Company's liquid asset ratio
was 11.07%.
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
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<PAGE> 44
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, 1997, 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 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
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<PAGE> 45
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.
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
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<PAGE> 46
basis in at least nine out of every 12 months. At December 31, 1997, the
qualified thrift investments of the Bank were approximately 106% 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, 1997, the Bank had $14.2 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, 1997,
dividends paid by the FHLB of Pittsburgh to the Bank amounted to $0.9 million,
compared to $0.7 million for the year ended December 31, 1996.
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, 1997, no
reserves were required to be maintained on the first $4.7 million of transaction
accounts, reserves of 3% were required to be maintained against the next $43.1
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.
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<PAGE> 47
ITEM 2. PROPERTIES
OFFICE AND PROPERTIES
At December 31, 1997, the Bank conducted its business from its
corporate offices in Norristown, Pennsylvania and 56 full-service offices,
including 17 supermarket branches, located in southeast Pennsylvania.
The following table sets forth certain information relating to the
Bank's offices at December 31, 1997.
<TABLE>
<CAPTION>
Net Book Value of
Property &
(in thousands) Leasehold
Lease Improvements at
Owned or Expiration December 31, Deposits at
Location Leased Date 1997(1) December 31, 1997
-------- ------ ---- ------- -----------------
<S> <C> <C> <C> <C>
CORPORATE HEADQUARTERS:
NORRISTOWN: Leased 02/12 $1,598 $29,075
2 West Lafayette Street
Norristown, PA 19401
TRADITIONAL FULL-SERVICE OFFICES:
NORRISTOWN: Leased 02/12 357 34,461
2 West Lafayette Street
Norristown, PA 19401
TRAPPE: Leased 10/10 233 30,021
Trappe Shopping Center
130 West Main Street, Suite 158
Trappe, PA 19426
KING OF PRUSSIA: Leased 09/03 181 40,310
DeKalb Plaza Shopping Center
338 West DeKalb Pike
King of Prussia, PA 19406
PARK RIDGE: Leased 01/03 1 56,981
Park Ridge Shopping Center
2701 West Main Street
Norristown, PA 19403
SWEDE SQUARE: Leased 10/01 90 74,016
Swede Square Shopping Center
2947 Swede Road
Norristown, PA 19401
</TABLE>
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<PAGE> 48
<TABLE>
<CAPTION>
Net Book Value of
Property &
(in thousands) Leasehold
Lease Improvements at
Owned or Expiration December 31, Deposits at
Location Leased Date 1997(1) December 31, 1997
-------- ------ ---- ------- -----------------
<S> <C> <C> <C> <C>
AUDUBON: Leased 12/09 $82 $39,197
Audubon Village Shopping Center
2806 Audubon Village Drive
Norristown, PA 19403
NEWTOWN SQUARE: Owned -- 335 38,213
3531 West Chester Pike
Newtown Square, PA 19073
FRANKFORD AVENUE: Owned -- 374 57,556
7149 Frankford Avenue
Philadelphia, PA 19135
CASTOR AVENUE: Owned -- 153 54,994
6537 Castor Avenue
Philadelphia, 19149
PENNDEL: Owned -- 133 25,075
U.S. # 1 & Durham Road
Penndel, PA 19047
WELSH ROAD: Owned -- 165 58,612
2501 Welsh Road
Philadelphia, PA 19114
GLENSIDE: Owned -- 334 61,536
139 South Easton Road
Glenside, PA 19038
WESTTOWN: Leased 11/99 15 33,262
Marketplace Shopping Center
1502 West Chester Pike
West Chester, PA 19382
KENNETT SQUARE: Leased 12/03 190 22,280
New Garden Center
345 Scarlett Road
Kennett Square, PA 19348
WEST GROVE: Owned -- 143 17,453
106 West Evergreen Street
West Grove, PA 19390
WAYNE: Leased 08/01 -- 24,085
Chesterbrook Village Center
500 Chesterbrook Boulevard, Suite B-5
Wayne, PA 19087
</TABLE>
-47-
<PAGE> 49
<TABLE>
<CAPTION>
Net Book Value of
Property &
(in thousands) Leasehold
Lease Improvements at
Owned or Expiration December 31, Deposits at
Location Leased Date 1997(1) December 31, 1997
-------- ------ ---- ------- -----------------
<S> <C> <C> <C> <C>
LANSDALE: Leased 06/99 $37 $45,638
521 West Main Street
Lansdale, PA 19446
HILLCREST: Leased 07/02 -- 30,698
Hillcrest Shopping Center
638 East Main Street
Lansdale, PA 19446
SUMNEY FORGE: Leased 08/99 21 40,384
Sumney Forge Square
1601 Valley Forge Road
Lansdale, PA 19446
SOUDERTON: Owned -- 208 17,519
705 Route 113
Souderton, PA 18964
CONSHOHOCKEN: Leased 10/09 268 81,028
Plymouth Square Shopping Center
200 West Ridge Pike, Suite 108
Conshohocken, PA 19428
PHOENIXVILLE: Leased 03/12 458 18,116
Maple Lawn Village Center
1007 Route 113
Phoenixville, PA 19460
ROYERSFORD: Leased 12/15 327 3,702
Limerick Square
70 Buckwalter Road, Suite 650
Royersford, PA 19468
TACONY: Leased 02/02 -- 58,261
6958 Torresdale Avenue
Philadelphia, PA 19135
HOLMESBURG: Leased 07/00 23 41,699
8729 Frankford Avenue
Philadelphia, PA 19136
ACADEMY: Leased 02/99 9 35,264
3292 Red Lion Road
Philadelphia, PA 19114
MAYFAIR: Owned -- 335 29,058
7425 Frankford Avenue
Philadelphia, PA 19136
</TABLE>
-48-
<PAGE> 50
<TABLE>
<CAPTION>
Net Book Value of
Property &
(in thousands) Leasehold
Lease Improvements at
Owned or Expiration December 31, Deposits at
Location Leased Date 1997(1) December 31, 1997
-------- ------ ---- ------- -----------------
<S> <C> <C> <C> <C>
5TH & PENN STREETS: Owned -- $1,039 $43,732
445 Penn Street
Reading, PA 19601
9TH & SPRING STREETS: Owned -- 418 31,634
956 North Ninth Street
Reading, PA 19604
LANCASTER AVENUE: Leased 12/99 63 39,311
830 Lancaster Avenue
Reading, PA 19607
MOHNTON: Owned -- 408 24,879
14 West Wyomissing Avenue
Mohnton, PA 19540
TEMPLE: Owned -- 331 43,717
4950 Kutztown Road
Temple, PA 19560
RIVERSIDE: Owned -- 340 31,607
2040 Centre Avenue
Reading, PA 19605
HEIDELBERG: Leased 06/07 83 30,355
4641 Penn Avenue
Sinking Spring, PA 19608
KUTZTOWN: Owned -- 281 20,178
601 East Main Street
Kutztown, PA 19530
EXETER: Leased 03/00 70 35,196
4215 Perkiomen Avenue
Reading, PA 19606
BIRDSBORO: Leased 09/01 22 15,384
350 West Main Street
Birdsboro, PA 19508
LEBANON VALLEY: Owned -- 281 28,103
2203 West Cumberland Street
Lebanon, PA 17042
LEBANON: Owned -- 99 1,310
152 North Eighth Street
Lebanon, PA 17046
</TABLE>
-49-
<PAGE> 51
<TABLE>
<CAPTION>
Net Book Value of
Property &
(in thousands) Leasehold
Lease Improvements at
Owned or Expiration December 31, Deposits at
Location Leased Date 1997(1) December 31, 1997
-------- ------ ---- ------- -----------------
<S> <C> <C> <C> <C>
SUPERMARKET BRANCHES:
GIANT-WHITEHALL: Leased 11/99 $73 $10,568
MacArthur Towne Centre
2540 MacArthur Road, Suite 200
Whitehall, PA 18052
REDNER'S COLLEGEVILLE: Leased 01/10 104 7,554
Redner's Warehouse Market
Marketplace at Collegeville
201 Second Avenue, Suite 100
Collegeville, PA 19426
GIANT-FAIRLESS HILLS: Leased 01/00 75 10,362
Fairless Hills Shopping Center
473 Oxford Road South
Fairless Hills, PA 19030
GIANT-SINKING SPRING: Leased 06/00 91 9,398
Spring Towne Center
2643 Shillington Road
Sinking Spring, PA 19608
GIANT-ALDEN: Leased 12/01 138 2,633
Providence Village
543 North Oak Avenue
Alden, PA 19018
GIANT-BLUE BELL: Leased 07/00 87 11,087
The Shoppes at Blue Bell
1760 DeKalb Pike
Blue Bell, PA 19422
GIANT-TREXLERTOWN: Leased 03/01 117 2,832
Trexler Mall
6900 Hamilton Boulevard, PO Box 977
Trexlertown, PA 18087
GIANT-TROOPER: Leased 03/01 118 6,117
Audubon Square Shopping Center
2668 Egypt Road
Norristown, PA 19403
REDNER'S-DOYLESTOWN: Leased 09/10 95 5,141
Doylestown Pointe
1661 Easton Road, Suite 2
Warrington, PA 18976
</TABLE>
-50-
<PAGE> 52
<TABLE>
<CAPTION>
Net Book Value of
Property &
(in thousands) Leasehold
Lease Improvements at
Owned or Expiration December 31, Deposits at
Location Leased Date 1997(1) December 31, 1997
-------- ------ ---- ------- -----------------
<S> <C> <C> <C> <C>
GUINTA'S THRIFTWAY: Leased 02/10 $89 $7,122
Bradford Plaza
700 Downingtown Pike, Suite 130
West Chester, PA 19380
CLEMENS-EXTON: Leased 06/10 85 4,332
Lionville Shopping Center
170 Eagleview Boulevard
Exton, PA 19341
WEIS-POTTSTOWN: Leased 07/10 93 9,668
The Pottstown Center
223 Shoemaker Road
Pottstown, PA 19464
THRIFTWAY-PORT RICHMOND: Leased 09/10 106 5,386
Port Richmond Village
2497 Aramingo Avenue, Suite 2
Philadelphia, PA 19125
SHOPRITE-FAR NORTHEAST: Leased 11/11 145 8,970
Boulevard Plaza
11000 Roosevelt Boulevard
Philadelphia, PA 19116
GIANT-SOUTHAMPTON: Leased 02/02 137 3,398
Southampton Shopping Center
466 A Second Street Pike
Southampton, PA 18966
SUPERFRESH-COTTMAN: Leased 05/12 163 2,564
Cottman & Bustleton Center
2151 Cottman Avenue
Philadelphia, PA 19149
GIANT-HORSHAM: Leased 06/02 149 1,792
Horsham Point Shopping Center
314 Horsham Road, Unit A
Horsham, PA 19044
</TABLE>
- ----------
(1) Does not include furniture, fixtures and equipment.
-51-
<PAGE> 53
The following table sets forth certain information relating to ComNet's offices
at December 31, 1997.
<TABLE>
<CAPTION>
Location Year Opened Owned or Leased Lease Expiration Date
-------- ----------- --------------- ---------------------
<S> <C> <C> <C>
WARWICK, RHODE ISLAND: 1988 Leased 05/98
875 Centerville Road
Warwick, RI 02886
HORSHAM, PENNSYLVANIA: 1988 Leased 11/00
Horsham Business Center
300 Welsh Road, Building #4 Suite 150
Horsham, PA 19044
MOUNT LAUREL, NEW JERSEY: 1988 Leased 03/99
533 Fellowship Road, Suite 250
Mount Laurel, NJ 08054
STRATFORD, CONNECTICUT: 1988 Leased 05/98
3241 Main Street, Suite A
Stratford, CT 06497
ALLENTOWN, PENNSYLVANIA: 1996 Leased 03/99
221 North Cedar Crest Boulevard
Allentown, PA 18104
READING, PENNSYLVANIA: 1997 Owned --
Commonwealth Bank Center
10 North Fifth Street
Reading, PA 19601
PITTSBURGH, PENNSYLVANIA: 1997 Leased 01/98
Penn Center West II, Suite 120
Pittsburgh, PA 15276
NORRISTOWN, PENNSYLVANIA: 1997 Leased 04/12
2 West Lafayette Street
Norristown , PA 19401
CONSHOHOCKEN, PENNSYLVANIA: 1997 Leased 12/98
207 Fayette Street
Conshohocken, PA 19428
WALL, NEW JERSEY 1997 Leased 12/99
1985 Highway 34, Suite A-5A
Wall, NJ 07719
</TABLE>
-52-
<PAGE> 54
<TABLE>
<CAPTION>
Location Year Opened Owned or Leased Lease Expiration Date
-------- ----------- --------------- ---------------------
<S> <C> <C> <C>
BALTIMORE, MARYLAND: (2) 1997 Leased 09/99
7939 Honeygo Boulevard
Building # 3, Suite 224
Baltimore, MD 21236
BETHESDA, MARYLAND: (2) 1997 Leased 09/99
4915 St. Elmo Avenue, Suite 205
Bethesda, MD 21236
MILLERSVILLE, MARYLAND: (2) 1997 Leased 08/00
1120 Benfield Boulevard, Suite A
Millersville, MD 21108
</TABLE>
- ----------
(2) Operate under the trade name of Homestead Mortgage.
-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.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
Not Applicable
-54-
<PAGE> 56
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, 1997, the 16,247,136 shares of common stock were held by 6,222
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 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>
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
1997
March 31 16.000 14.625 0.07
June 30 16.625 13.500 0.07
September 30 19.500 15.750 0.07
December 31 21.500 17.375 0.07
</TABLE>
- --------------------
(1) Adjusted to reflect the June 1996 exchange 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 $20 on March
10, 1998, 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
12 of the Company's 1997 Annual Report to Stockholders ("1997 Annual Report").
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
13 to 28 of the 1997 Annual Report.
-55-
<PAGE> 57
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from pages
32 to 58 of the 1997 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 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.
-56-
<PAGE> 58
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, 1997 and 1996
Consolidated Statements of Income for the years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995
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>
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 Agreements between Commonwealth Bancorp
and Commonwealth Bank and Charles H. Meacham***
10.9 Employment Agreements between Commonwealth Bancorp
and Commonwealth Bank and Patrick J. Ward***
10.10 Employment Agreements between Commonwealth Bancorp
and Commonwealth Bank and Charles M. Johnston***
10.11 Employment Agreement between Commonwealth Bank and William J. Monnich***
</TABLE>
-57-
<PAGE> 59
<TABLE>
<S> <C>
10.12 Employment Agreement between Commonwealth Bank and Peter A. Kehoe***
10.13 Employment Agreement between Commonwealth Bank and David K. Griest***
10.14 Employment Agreement between Commonwealth Bank and Brian C. Zwaan***
10.15 Excess Benefit Plan of Commonwealth Bank***
10.16 Supplemental Executive Retirement Plan of Commonwealth Bank***
13.0 1997 Annual Report to Stockholders
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.
Not Applicable.
-58-
<PAGE> 60
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.
/s/ Charles H. Meacham March 17, 1998
- -----------------------
Charles H. Meacham
Chairman of the Board,
Chief Executive Officer
(principal executive officer)
/s/ Patrick J. Ward March 17, 1998
- --------------------
Patrick J. Ward
President, Chief
Operating Officer
/s/ Charles M. Johnston March 17, 1998
- -----------------------
Charles M. Johnston
Senior Vice President, Chief
Financial Officer
(principal financial and
accounting officer)
-59-
<PAGE> 61
/s/ George C. Beyer, Jr. March 17, 1998
- -------------------------
George C. Beyer, Jr.
Director
March , 1998
- -------------------------
Joseph E. Colen, Jr.
Director
/s/ William B. Haines, Jr. March 17, 1998
- ---------------------------
William B. Haines, Jr.
Director
March , 1998
- ---------------------------
Joanne Harmelin
Director
/s/ Michael T. Kennedy March 17, 1998
- ---------------------------
Michael T. Kennedy
Director
/s/ Harry P. Mirabile March 17, 1998
- ---------------------------
Harry P. Mirabile
Director
/s/ Nicholas Sclufer March 17, 1998
- ---------------------------
Nicholas Sclufer
Director
/s/ Matthew T. Welde March 17, 1998
- ---------------------------
Matthew T. Welde
Director
-60-
<PAGE> 1
EXHIBIT 10.8
AGREEMENT
AGREEMENT, dated this 9th day of December 1997, between Commonwealth
Bancorp, Inc. (the "Corporation"), a Pennsylvania corporation, and Charles H.
Meacham (the "Executive").
WITNESSETH
WHEREAS, the Executive is presently Chairman of the Board and Chief
Executive Officer of the Corporation and Commonwealth Bank (the "Bank")
(together, the "Employers");
WHEREAS, the Employers desire to be ensured of the Executive's
continued active participation in the business of the Employers, and the Bank is
concurrently entering into a new Agreement with the Executive to supersede the
agreement with the Executive dated January 1, 1997;
WHEREAS, in accordance with Office of Thrift Supervision ("OTS")
Regulatory Bulletin 27a, the Corporation and the Bank desire to enter into
separate agreements with the Executive with respect to his employment by each of
the Employers; and
WHEREAS, in order to induce the Executive to remain in the employ of
the Employers and in consideration of the Executive's agreeing to remain in the
employ of the Employers, the parties desire to specify the terms of such
employment, including the severance benefits which shall be due the Executive by
the Corporation in the event that his employment with the Corporation is
terminated under specified circumstances;
NOW THEREFORE, in consideration of the mutual agreements herein
contained, and upon the other terms and conditions hereinafter provided, 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 Employers 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 paid to the Executive but excluding amounts relating to the vesting of
Management Recognition Plan shares.
(b) BASE SALARY. "Base Salary" shall mean the Executive's annual
salary exclusive of any pension or other retirement plan, profit sharing, stock
option, employee stock
<PAGE> 2
2
ownership, or other plans, benefits and privileges given to employees and
executives of the Employers.
(c) CAUSE. Termination by the Corporation 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.
(d) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of
the Corporation" 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, as amended ("Exchange
Act"), or any successor thereto, whether or not the Corporation is registered
under the 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 Corporation representing 25% or more of the
combined voting power of the Corporation'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 Corporation 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.
(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 Corporation 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 Employers 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 Corporation 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
<PAGE> 3
3
of Chairman of the Board and Chief Executive Officer
of the Employers or a material adverse change made by
the Employers in the Executive's functions, duties or
responsibilities as Chairman of the Board and Chief
Executive Officer of the Employers as they existed
immediately prior to a Change in Control of the
Corporation;
(ii) Without the Executive's express written consent, a
reduction by either of the Employers 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;
(iii) The principal executive office of either of the
Employers is relocated more than 25 miles from the
current principal executive office or, without the
Executive's express written consent, either of the
Employers requires the Executive to be based anywhere
other than an area in which the Employers' principal
executive office is located, except for required
travel on business of the Employers 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 Corporation 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 Corporation 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 the 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 Corporation's termination of the Executive's
employment for Cause, which shall be effective immediately; and (iv) is given in
the manner specified in Section 10 hereof.
<PAGE> 4
4
(k) RETIREMENT. "Retirement" shall mean voluntary termination by
the Executive in accordance with the Employers' 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 Corporation hereby employs the Executive as Chairman of
the Board and Chief Executive Officer and the Executive hereby accepts said
employment and agrees to render such services to the Corporation 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
and, upon approval of the Board of Directors of the Corporation, shall extend
for an additional year on each annual anniversary of the date of this Agreement
such that at any time the remaining term of this Agreement shall be from two to
three years. Prior to the first annual anniversary of the date of this Agreement
and each annual anniversary thereafter, the Board of Directors of the
Corporation shall consider and review (taking into account all relevant factors,
including the Executive's performance hereunder) an extension of the term of
this Agreement, and the term shall continue to extend each year if the Board of
Directors approves such extension unless the Executive gives written notice to
the Employers of the Executive's election not to extend the term, with such
written notice to be given not less than thirty (30) days prior to any such
anniversary date. If the Board of Directors elects not to extend the term, it
shall give written notice of such decision to the Executive not less than thirty
(30) days prior to any such anniversary date. If any party gives timely notice
that the term will not be extended as of any annual anniversary date, then this
Agreement shall terminate at the conclusion of its remaining term. 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 Corporation as may be consistent with his titles
and from time to time assigned to him by the Corporation's Board of Directors.
3. COMPENSATION AND BENEFITS.
(a) The Employers shall compensate and pay the Executive for his
services during the term of this Agreement at a minimum Base Salary of $337,833
per year, which may be increased from time to time in such amounts as may be
determined by the Boards of Directors of the Employers and may not be decreased
without the Executive's express written consent. 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 Boards of Directors of the
Employers.
<PAGE> 5
5
(b) During the term of this Agreement, the 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
Employers, to the extent commensurate with his then duties and responsibilities,
as fixed by the Boards of Directors of the Employers. The Corporation shall not
make any changes in such plans, benefits or privileges which would adversely
affect the Executive's rights or benefits thereunder, unless such change occurs
pursuant to a program applicable to all executive officers of the Corporation
and does not result in a proportionately greater adverse change in the rights of
or benefits to the Executive as compared with any other executive officer of the
Corporation. Nothing paid to the 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 the Executive pursuant to Section 3(a) hereof.
(c) During the term of this Agreement, the Executive shall be
entitled to paid annual vacation in accordance with the policies as established
from time to time by the Boards of Directors of the Employers, which shall in no
event be less than four weeks per annum. The Executive shall not be entitled to
receive any additional compensation from the Employers for failure to take a
vacation, nor shall the Executive be able to accumulate unused vacation time
from one year to the next, except to the extent authorized by the Boards of
Directors of the Employers.
(d) During the term of this Agreement, in keeping with past
practices, the Employers shall continue to provide the Executive with the use of
an Employer-owned automobile appropriate to his positions with the Employers and
to pay all costs associated with such automobile, including registration,
licensing, insurance and costs of operation.
(e) In the event the Executive's employment is terminated by the
Corporation for any reason other than Cause, the Employers shall provide
continued 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, and health and accident insurance substantially
identical to the coverage maintained by the Employers for the Executive
immediately prior to his termination. Such coverage shall cease upon the
expiration of the remaining term of this Agreement.
(f) The Executive's compensation, benefits and expenses shall be
paid by the Corporation and the Bank in the same proportion as the time and
services actually expended by the Executive on behalf of each respective
Employer.
4. EXPENSES. The Employers shall reimburse the Executive or
otherwise provide for or pay for all reasonable expenses incurred by the
Executive in furtherance of or in connection with the business of the Employers,
including, but not by way of limitation, automobile expenses described in
Section 3(d) hereof, traveling expenses, and all reasonable entertainment
expenses (whether incurred at the Executive's residence, while traveling or
<PAGE> 6
6
otherwise), subject to such reasonable documentation and other limitations as
may be established by the Boards of Directors of the Employers. If such expenses
are paid in the first instance by the Executive, the Employers shall reimburse
the Executive therefor.
5. TERMINATION.
(a) The Corporation 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 the Executive shall have the right, upon prior Notice of
Termination, to terminate his employment hereunder for any reason. The
Executive's employment and his status as an officer shall terminate (i)
immediately upon being given a Notice of Termination for Cause, or (ii) on the
Date of Termination for any other reason.
(b) In the event that (i) the Executive's employment is terminated
by the Corporation for Cause or (ii) the Executive terminates his employment
hereunder other than for Disability, Retirement, death or Good Reason, the
Executive shall have no right pursuant to this Agreement to compensation or
other benefits for any period after the applicable Date of Termination.
(c) In the event that the Executive's employment is terminated as
a result of Disability, Retirement or the Executive's death during the term of
this Agreement, the Executive shall have no right pursuant to this Agreement to
compensation or other benefits for any period after the applicable Date of
Termination, except as provided for in Section 3(e) hereof.
(d) In the event that (i) the Executive's employment is terminated
by the Corporation for other than Cause, Disability, Retirement or the
Executive's death or (ii) such employment is terminated by the Executive (a) due
to a material breach of this Agreement by the Corporation, which breach has not
been cured within fifteen (15) days after a written notice of non-compliance has
been given by the Executive to the Employers, or (b) for Good Reason, then the
Corporation shall
(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 that portion of the Executive's Average Annual
Compensation paid by the Corporation, 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)), on
a tax-adjusted basis at no cost to the Executive, the Executive's
continued participation in all group
<PAGE> 7
7
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 insurance,
and other employee benefit plans, programs and arrangements offered by
the Corporation in which the Executive was entitled to participate
immediately prior to the Date of Termination (other than stock option,
employee stock ownership and restricted stock plans of the Employers).
6. PAYMENT OF ADDITIONAL BENEFITS UNDER CERTAIN CIRCUMSTANCES.
(a) If the payments and benefits pursuant to Section 5 hereof,
either alone or together with other payments and benefits which the Executive
has the right to receive from the Employers (including, without limitation, the
payments and benefits which the Executive would have the right to receive from
the Bank pursuant to Section 5 of the Agreement between the Bank and the
Executive dated December 9, 1997 ("Bank Agreement"), before giving effect to any
reduction in such amounts pursuant to Section 6 of the Bank Agreement), would
constitute a "parachute payment" as defined in Section 280G(b)(2) of the Code
(the "Initial Parachute Payment," which includes the amounts paid pursuant to
clause (A) below), then the Corporation shall pay to the Executive, in
thirty-six (36) equal monthly installments beginning with the first business day
of the month following the Date of Termination or in a lump sum within five
business days of the Date of Termination (at the Executive's election), a cash
amount equal to the sum of the following:
(A) the amount by which the payments and benefits that
would have otherwise been paid by the Bank to the Executive pursuant to
Section 5 of the Bank Agreement are reduced by the provisions of
Section 6 of the Bank Agreement;
(B) twenty (20) percent (or such other percentage equal
to the tax rate imposed by Section 4999 of the Code) of the amount by
which the Initial Parachute Payment exceeds the Executive's "base
amount" from the Employers, as defined in Section 280G(b)(3) of the
Code, with the difference between the Initial Parachute Payment and the
Executive's base amount being hereinafter referred to as the "Initial
Excess Parachute Payment";
(C) such additional amount (tax allowance) as may be
necessary to compensate the Executive for the payment by the Executive
of state and federal income and excise taxes on the payment provided
under clause (B) above and on any
<PAGE> 8
8
payments under this clause (C). In computing such tax allowance, the
payment to be made under clause (B) above shall be multiplied by the
"gross up percentage" ("GUP"). The GUP shall be determined as follows:
Tax Rate
GUP = -----------
1- Tax Rate
The Tax Rate for purposes of computing the GUP shall be the highest
marginal federal and state income and employment-related tax rate,
including any applicable excise tax rate, applicable to the Executive
in the year in which the payment under clause (B) above is made.
(b) Notwithstanding the foregoing, if it shall subsequently be
determined in a final judicial determination or a final administrative
settlement to which the Executive is a party that the actual excess parachute
payment as defined in Section 280G(b)(1) of the Code is different from the
Initial Excess Parachute Payment (such different amount being hereafter referred
to as the "Determinative Excess Parachute Payment"), then the Corporation's
independent tax counsel or accountants shall determine the amount (the
"Adjustment Amount") which either the Executive must pay to the Corporation or
the Corporation must pay to the Executive in order to put the Executive (or the
Corporation, as the case may be) in the same position the Executive (or the
Corporation, as the case may be) would have been if the Initial Excess Parachute
Payment had been equal to the Determinative Excess Parachute Payment. In
determining the Adjustment Amount, the independent tax counsel or accountants
shall take into account any and all taxes (including any penalties and interest)
paid by or for the Executive or refunded to the Executive or for the Executive's
benefit. As soon as practicable after the Adjustment Amount has been so
determined, the Corporation shall pay the Adjustment Amount to the Executive or
the Executive shall repay the Adjustment Amount to the Corporation, as the case
may be.
(c) In each calendar year that the Executive receives payments of
benefits under this Section 6, the Executive shall report on his state and
federal income tax returns such information as is consistent with the
determination made by the independent tax counsel or accountants of the
Corporation as described above. The Corporation shall indemnify and hold the
Executive harmless from any and all losses, costs and expenses (including
without limitation, reasonable attorneys' fees, interest, fines and penalties)
which the Executive incurs as a result of so reporting such information. The
Executive shall promptly notify the Corporation in writing whenever the
Executive receives notice of the institution of a judicial or administrative
proceeding, formal or informal, in which the federal tax treatment under Section
4999 of the Code of any amount paid or payable under this Section 6 is being
reviewed or is in dispute. The Corporation shall assume control at its expense
over all legal and accounting matters pertaining to such federal tax treatment
(except to the extent necessary or appropriate for the Executive to resolve any
such proceeding with respect to any matter unrelated to amounts paid or payable
pursuant to this Section 6) and the
<PAGE> 9
9
Executive shall cooperate fully with the Corporation in any such proceeding. The
Executive shall not enter into any compromise or settlement or otherwise
prejudice any rights the Corporation may have in connection therewith without
the prior consent of the Corporation.
7. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) The Executive, unless his employment is terminated for
Disability, Retirement, death, a Change in Control of the Corporation or
pursuant to Section 5(d)(ii) hereof, 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(d)(i) 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, unless the termination was in connection
with a Change in Control of the Corporation.
(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 Employers pursuant to employee benefit plans
of the Employers or otherwise.
8. WITHHOLDING. All payments required to be made by the
Corporation hereunder to the Executive shall be subject to the withholding of
such amounts, if any, relating to tax and other payroll deductions as the
Corporation may reasonably determine should be withheld pursuant to any
applicable law or regulation.
9. ASSIGNABILITY. The Corporation 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 Corporation may
hereafter merge or consolidate or to which the Corporation 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 Corporation 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.
10. 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:
<PAGE> 10
10
To the Corporation: Secretary
Commonwealth Bancorp, Inc.
2 West Lafayette Street
Norristown, Pennsylvania 19401-4758
To the Bank: Secretary
Commonwealth Bank
2 West Lafayette Street
Norristown, Pennsylvania 19401-4758
To the Executive: Charles H. Meacham
130 Three Ponds Lane
Malvern, Pennsylvania 19355
11. CONFIDENTIALITY. The Executive acknowledges that by virtue of
his employment hereunder, he will maintain an intimate knowledge of the
activities and affairs of the Employers, including confidential matters. As a
result, the Executive agrees to maintain the confidentiality of all confidential
information relating to the Employers during the term of employment hereunder
and any period that the Executive may be receiving payments pursuant to this
Agreement, provided that nothing in this Section 11 shall be deemed to prevent
the Executive from either (a) being employed by any other corporation, firm or
entity upon termination of the Executive's employment by the Employers as long
as the Executive does not violate the foregoing proscription, or (b) responding
to inquiries from regulatory authorities.
12. ARBITRATION. The Executive and the Employers agree 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 Employers 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
<PAGE> 11
11
amended, 29 U.S.C. sec.701 et. seq., the Americans with Disabilities Act, 42
U.S.C. sec.12101 et. seq., and the Pennsylvania Human Relations Act, 43 P.S.
sec.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.
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 Corporation 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.
15. NATURE OF OBLIGATIONS. Nothing contained herein shall create
or require the Corporation 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 Corporation hereunder, such right shall be no
greater than the right of any unsecured general creditor of the Corporation.
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.
<PAGE> 12
12
19. ENTIRE AGREEMENT. This Agreement embodies the entire agreement
between the Corporation and the Executive with respect to the matters agreed to
herein. All prior agreements between the Corporation and the Executive with
respect to the matters agreed to herein, including without limitation the
Agreement between the Employers and the Executive dated January 1, 1997, are
hereby superseded and shall have no force or effect. Notwithstanding the
foregoing, nothing contained in this Agreement shall affect the agreement of
even date being entered into between the Bank and the Executive.
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
Attest: COMMONWEALTH BANCORP, INC.
__________________________ By: _________________________________
Patrick J. Ward, President ________________________,
and Secretary Director and Member of the
Compensation and Benefits
Committee of the Board of
Directors
Witness: EXECUTIVE
__________________________ By: _______________________________
Patrick J. Ward Charles H. Meacham
<PAGE> 13
AGREEMENT
AGREEMENT, dated this 9th day of December 1997, between Commonwealth
Bank (the "Bank"), a federally chartered savings bank, and Charles H. Meacham
(the "Executive").
WITNESSETH
WHEREAS, the Executive is presently Chairman of the Board and Chief
Executive Officer of Commonwealth Bancorp, Inc. (the "Corporation") and the Bank
(together, the "Employers");
WHEREAS, the Employers desire to be ensured of the Executive's
continued active participation in the business of the Employers, and the Bank
desires to have this new Agreement supersede its current agreement with the
Executive dated January 1, 1997;
WHEREAS, in accordance with Office of Thrift Supervision ("OTS")
Regulatory Bulletin 27a, the Corporation and the Bank desire to enter into
separate agreements with the Executive with respect to his employment by each of
the Employers; and
WHEREAS, in order to induce the Executive to remain in the employ of
the Employers and in consideration of the Executive's agreeing to remain in the
employ of the Employers, the parties desire to specify the terms of such
employment, including the severance benefits which shall be due the Executive by
the Bank in the event that his employment with the Bank is terminated under
specified circumstances;
NOW THEREFORE, in consideration of the mutual agreements herein
contained, and upon the other terms and conditions hereinafter provided, 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 Employers 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 paid to the Executive but excluding amounts relating to the vesting of
Management Recognition Plan shares.
(b) BASE SALARY. "Base Salary" shall mean the Executive's annual
salary exclusive of any pension or other retirement plan, profit sharing, stock
option, employee stock ownership, or other plans, benefits and privileges given
to employees and executives of the Employers.
<PAGE> 14
2
(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.
(d) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of
the Corporation" 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, as amended ("Exchange
Act"), or any successor thereto, whether or not the Corporation is registered
under the 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 Corporation representing 25% or more of the
combined voting power of the Corporation'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 Corporation 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.
(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 Employers 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 Corporation 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
of the Board and Chief Executive Officer of the
Employers or a material adverse change made by the
Employers in the Executive's functions, duties or
responsibilities as Chairman of the
<PAGE> 15
3
Board and Chief Executive Officer of the Employers as
they existed immediately prior to a Change in Control
of the Corporation;
(ii) Without the Executive's express written consent, a
reduction by either of the Employers 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;
(iii) The principal executive office of either of the
Employers is relocated more than 25 miles from the
current principal executive office or, without the
Executive's express written consent, either of the
Employers requires the Executive to be based anywhere
other than an area in which the Employers' principal
executive office is located, except for required
travel on business of the Employers 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 the 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 the Executive's
employment for Cause, which shall be effective immediately; and (iv) is given in
the manner specified in Section 10 hereof.
(k) RETIREMENT. "Retirement" shall mean voluntary termination by
the Executive in accordance with the Employers' retirement policies, including
early retirement, generally applicable to their salaried employees.
<PAGE> 16
4
(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 the 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 and, upon approval of the
Board of Directors of the Bank, shall extend for an additional year on each
annual anniversary of the date of this Agreement such that at any time the
remaining term of this Agreement shall be from two to three years. Prior to the
first annual anniversary of the date of this Agreement and each annual
anniversary thereafter, the Board of Directors of the Bank shall consider and
review (taking into account all relevant factors, including the Executive's
performance hereunder) an extension of the term of this Agreement, and the term
shall continue to extend each year if the Board of Directors approves such
extension unless the Executive gives written notice to the Employers of the
Executive's election not to extend the term, with such written notice to be
given not less than thirty (30) days prior to any such anniversary date. If the
Board of Directors elects not to extend the term, it shall give written notice
of such decision to the Executive not less than thirty (30) days prior to any
such anniversary date. If any party gives timely notice that the term will not
be extended as of any annual anniversary date, then this Agreement shall
terminate at the conclusion of its remaining term. 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 Employers shall compensate and pay the Executive for his
services during the term of this Agreement at a minimum Base Salary of $337,833
per year, which may be increased from time to time in such amounts as may be
determined by the Boards of Directors of the Employers and may not be decreased
without the Executive's express written consent. 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 Boards of Directors of the
Employers.
(b) During the term of this Agreement, the 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
Employers, to the extent commensurate with his then duties and responsibilities,
as fixed by the Boards of Directors of the Employers. The Bank
<PAGE> 17
5
shall not make any changes in such plans, benefits or privileges which would
adversely affect the 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 the Executive as compared with any other executive
officer of the Bank. Nothing paid to the 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 the Executive pursuant to Section 3(a) hereof.
(c) During the term of this Agreement, the Executive shall be
entitled to paid annual vacation in accordance with the policies as established
from time to time by the Boards of Directors of the Employers, which shall in no
event be less than four weeks per annum. The Executive shall not be entitled to
receive any additional compensation from the Employers for failure to take a
vacation, nor shall the Executive be able to accumulate unused vacation time
from one year to the next, except to the extent authorized by the Boards of
Directors of the Employers.
(d) During the term of this Agreement, in keeping with past
practices, the Employers shall continue to provide the Executive with the use of
an Employer-owned automobile appropriate to his positions with the Employers and
to pay all costs associated with such automobile, including registration,
licensing, insurance and costs of operation.
(e) In the event the Executive's employment is terminated by the
Bank for any reason other than Cause, the Employers shall provide continued
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, and health and accident insurance substantially
identical to the coverage maintained by the Employers for the Executive
immediately prior to his termination. Such coverage shall cease upon the
expiration of the remaining term of this Agreement.
(f) The Executive's compensation, benefits and expenses shall be
paid by the Corporation and the Bank in the same proportion as the time and
services actually expended by the Executive on behalf of each respective
Employer.
4. EXPENSES. The Employers shall reimburse the Executive or
otherwise provide for or pay for all reasonable expenses incurred by the
Executive in furtherance of or in connection with the business of the Employers,
including, but not by way of limitation, automobile expenses described in
Section 3(d) hereof, 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 Boards of Directors of the Employers. If such expenses
are paid in the first instance by the Executive, the Employers shall reimburse
the Executive therefor.
<PAGE> 18
6
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 the Executive shall have the right, upon prior Notice of
Termination, to terminate his employment hereunder for any reason. The
Executive's employment and his status as an officer shall terminate (i)
immediately upon being given a Notice of Termination for Cause, or (ii) on the
Date of Termination for any other reason.
(b) In the event that (i) the Executive's employment is terminated
by the Bank for Cause or (ii) the Executive terminates his employment hereunder
other than for Disability, Retirement, death or Good Reason, the Executive shall
have no right pursuant to this Agreement to compensation or other benefits for
any period after the applicable Date of Termination.
(c) In the event that the Executive's employment is terminated as
a result of Disability, Retirement or the Executive's death during the term of
this Agreement, the Executive shall have no right pursuant to this Agreement to
compensation or other benefits for any period after the applicable Date of
Termination, except as provided for in Section 3(e) hereof.
(d) In the event that (i) the Executive's employment is terminated
by the Bank for other than Cause, Disability, Retirement or the Executive's
death or (ii) such employment is terminated by the Executive (a) due to a
material breach of this Agreement by the Bank, which breach has not been cured
within fifteen (15) days after a written notice of non-compliance has been given
by the Executive to the Employers, or (b) for Good Reason, 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 that portion of the Executive's Average Annual
Compensation paid by the Corporation, 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)), on
a tax-adjusted basis 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 insurance and other employee benefit
plans, programs and arrangements offered by the Bank in which the
Executive was entitled to participate
<PAGE> 19
7
immediately prior to the Date of Termination (other than stock option,
employee stock ownership and restricted stock plans of the Employers).
6. 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 the Executive has the right to receive
from the Bank, would constitute a "parachute payment" under Section 280G of the
Code, the payments and benefits payable by the Bank 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 payable by the Bank under Section 5 being non-deductible to the Bank
pursuant to Section 280G of the Code and subject to the excise tax imposed under
Section 4999 of the Code. The parties hereto agree that the payments and
benefits payable pursuant to this Agreement by the Bank to the Executive upon
termination shall be limited to three times the Executive's "base amount" (as
defined in Section 280G(b)(3) of the Code) in accordance with OTS Regulatory
Bulletin 27a. 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
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. 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.
7. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) The Executive, unless his employment is terminated for
Disability, Retirement, death, a Change in Control of the Corporation or
pursuant to Section 5(d)(ii) hereof, 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(d)(i) 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, unless the termination was in connection
with a Change in Control of the Corporation.
(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 Employers pursuant to employee benefit plans
of the Employers or otherwise.
8. 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
<PAGE> 20
8
other payroll deductions as the Bank may reasonably determine should be withheld
pursuant to any applicable law or regulation.
9. 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.
10. 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: Secretary
Commonwealth Bank
2 West Lafayette Street
Norristown, Pennsylvania 19401-4758
To the Corporation: Secretary
Commonwealth Bancorp, Inc.
2 West Lafayette Street
Norristown, Pennsylvania 19401-4758
To the Executive: Charles H. Meacham
130 Three Ponds Lane
Malvern, Pennsylvania 19355
11. CONFIDENTIALITY. The Executive acknowledges that by virtue of
his employment hereunder, he will maintain an intimate knowledge of the
activities and affairs of the Employers, including confidential matters. As a
result, the Executive agrees to maintain the confidentiality of all confidential
information relating to the Employers during the term of employment hereunder
and any period that the Executive may be receiving payments pursuant to this
Agreement, provided that nothing in this Section 11 shall be deemed to prevent
the Executive from either (a) being employed by any other corporation, firm or
entity upon termination of the Executive's employment by the Employers as long
as the Executive does not violate the foregoing prescription, or (b) responding
to inquiries from regulatory authorities.
12. ARBITRATION. The Executive and the Employers agree to submit
to final and binding arbitration pursuant to the rules of the American
Arbitration Association, any and
<PAGE> 21
9
all claims arising from the termination, for any reason, of the Executive's
employment by the Employers 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. sec.2000 et. seq., the Civil Rights Act of 1866,
42 U.S.C. sec.1981, the Age Discrimination in Employment Act, as amended, 29
U.S.C. sec.621 et. seq., the Older Workers Benefit Protection Act, the
Rehabilitation Act of 1972, as amended, 29 U.S.C. sec.701 et. seq., the
Americans with Disabilities Act, 42 U.S.C. sec.12101 et. seq., and the
Pennsylvania Human Relations Act, 43 P.S. sec.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.
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.
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,
<PAGE> 22
10
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 bank and its employees pursuant to
Section 563.39(b) of the Regulations Applicable to all Savings Associations, 12
C.F.R. sec.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 the 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. secs.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 the 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 the 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.
ss.ss.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. sec.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.
<PAGE> 23
11
(d) All obligations under this Agreement shall be terminated
pursuant to 12 C.F.R. sec.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 OTS, or his/her designee, at the
time the Federal Deposit Insurance Corporation ("FDIC") 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. sec.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
Employers 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. sec.1828(k)) and any
regulations promulgated thereunder.
21. ENTIRE AGREEMENT. This Agreement embodies the entire agreement
between the Bank and the Executive with respect to the matters agreed to herein.
All prior agreements between the Bank and the Executive with respect to the
matters agreed to herein, including without limitation the Agreement between the
Employers and the Executive dated January 1, 1997, are hereby superseded and
shall have no force or effect. Notwithstanding the foregoing, nothing contained
in this Agreement shall affect the agreement of even date being entered into
between the Corporation and the Executive.
<PAGE> 24
12
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
Attest: COMMONWEALTH BANK
______________________________ By: _________________________________
Patrick J. Ward, President and __________________, Director and
Secretary Member of the Compensation and
Benefits Committee of the Board
of Directors
Witness: EXECUTIVE
______________________________ By: _________________________________
Patrick J. Ward Charles H. Meacham
<PAGE> 1
Exhibit 10.9
AGREEMENT
AGREEMENT, dated this 9th day of December 1997, between Commonwealth
Bancorp, Inc. (the "Corporation"), a Pennsylvania corporation, and Patrick J.
Ward (the "Executive").
WITNESSETH
WHEREAS, the Executive is presently President, Chief Operating Officer and
Secretary of the Corporation and Commonwealth Bank (the "Bank") (together, the
"Employers");
WHEREAS, the Employers desire to be ensured of the Executive's continued
active participation in the business of the Employers, and the Bank is
concurrently entering into a new Agreement with the Executive to supersede the
agreement with the Executive dated January 1, 1997;
WHEREAS, in accordance with Office of Thrift Supervision ("OTS")
Regulatory Bulletin 27a, the Corporation and the Bank desire to enter into
separate agreements with the Executive with respect to his employment by each of
the Employers; and
WHEREAS, in order to induce the Executive to remain in the employ of the
Employers and in consideration of the Executive's agreeing to remain in the
employ of the Employers, the parties desire to specify the terms of such
employment, including the severance benefits which shall be due the Executive by
the Corporation in the event that his employment with the Corporation is
terminated under specified circumstances;
NOW THEREFORE, in consideration of the mutual agreements herein contained,
and upon the other terms and conditions hereinafter provided, 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 Employers 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 paid to the Executive but excluding amounts relating to the vesting of
Management Recognition Plan shares.
(b) BASE SALARY. "Base Salary" shall mean the Executive's annual salary
exclusive of any pension or other retirement plan, profit sharing, stock option,
employee stock
<PAGE> 2
2
ownership, or other plans, benefits and privileges given to employees and
executives of the Employers.
(c) CAUSE. Termination by the Corporation 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.
(d) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the
Corporation" 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, as amended ("Exchange
Act"), or any successor thereto, whether or not the Corporation is registered
under the 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 Corporation representing 25% or more of the
combined voting power of the Corporation'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 Corporation 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.
(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 Corporation 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 Employers 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 Corporation 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
<PAGE> 3
3
of President, Chief Operating Officer and Secretary of the
Employers or a material adverse change made by the Employers
in the Executive's functions, duties or responsibilities as
President, Chief Operating Officer and Secretary of the
Employers as they existed immediately prior to a Change in
Control of the Corporation;
(ii) Without the Executive's express written consent, a reduction
by either of the Employers 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;
(iii) The principal executive office of either of the Employers is
relocated more than 25 miles from the current principal
executive office or, without the Executive's express written
consent, either of the Employers requires the Executive to be
based anywhere other than an area in which the Employers'
principal executive office is located, except for required
travel on business of the Employers 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 Corporation 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 Corporation 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 the 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 Corporation's termination of the Executive's employment for
Cause, which shall be effective immediately; and (iv) is given in the manner
specified in Section 10 hereof.
<PAGE> 4
4
(k) RETIREMENT. "Retirement" shall mean voluntary termination by the
Executive in accordance with the Employers' 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 Corporation hereby employs the Executive as President, Chief
Operating Officer and Secretary and the Executive hereby accepts said employment
and agrees to render such services to the Corporation 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
and, upon approval of the Board of Directors of the Corporation, shall extend
for an additional year on each annual anniversary of the date of this Agreement
such that at any time the remaining term of this Agreement shall be from two to
three years. Prior to the first annual anniversary of the date of this Agreement
and each annual anniversary thereafter, the Board of Directors of the
Corporation shall consider and review (taking into account all relevant factors,
including the Executive's performance hereunder) an extension of the term of
this Agreement, and the term shall continue to extend each year if the Board of
Directors approves such extension unless the Executive gives written notice to
the Employers of the Executive's election not to extend the term, with such
written notice to be given not less than thirty (30) days prior to any such
anniversary date. If the Board of Directors elects not to extend the term, it
shall give written notice of such decision to the Executive not less than thirty
(30) days prior to any such anniversary date. If any party gives timely notice
that the term will not be extended as of any annual anniversary date, then this
Agreement shall terminate at the conclusion of its remaining term. 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 Corporation as may be consistent with his titles and
from time to time assigned to him by the Corporation's Board of Directors.
3. COMPENSATION AND BENEFITS.
(a) The Employers shall compensate and pay the Executive for his services
during the term of this Agreement at a minimum Base Salary of $205,000 per year,
which may be increased from time to time in such amounts as may be determined by
the Boards of Directors of the Employers and may not be decreased without the
Executive's express written consent. 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 Boards of Directors of the Employers.
<PAGE> 5
5
(b) During the term of this Agreement, the 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
Employers, to the extent commensurate with his then duties and responsibilities,
as fixed by the Boards of Directors of the Employers. The Corporation shall not
make any changes in such plans, benefits or privileges which would adversely
affect the Executive's rights or benefits thereunder, unless such change occurs
pursuant to a program applicable to all executive officers of the Corporation
and does not result in a proportionately greater adverse change in the rights of
or benefits to the Executive as compared with any other executive officer of the
Corporation. Nothing paid to the 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 the Executive pursuant to Section 3(a) hereof.
(c) During the term of this Agreement, the Executive shall be entitled to
paid annual vacation in accordance with the policies as established from time to
time by the Boards of Directors of the Employers, which shall in no event be
less than four weeks per annum. The Executive shall not be entitled to receive
any additional compensation from the Employers for failure to take a vacation,
nor shall the Executive be able to accumulate unused vacation time from one year
to the next, except to the extent authorized by the Boards of Directors of the
Employers.
(d) During the term of this Agreement, in keeping with past practices, the
Employers shall continue to provide the Executive with the use of an
Employer-owned automobile appropriate to his positions with the Employers and to
pay all costs associated with such automobile, including registration,
licensing, insurance and costs of operation.
(e) In the event the Executive's employment is terminated by the
Corporation for any reason other than Cause, the Employers shall provide
continued 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, and health and accident insurance substantially
identical to the coverage maintained by the Employers for the Executive
immediately prior to his termination. Such coverage shall cease upon the
expiration of the remaining term of this Agreement.
(f) The Executive's compensation, benefits and expenses shall be paid by
the Corporation and the Bank in the same proportion as the time and services
actually expended by the Executive on behalf of each respective Employer.
4. EXPENSES. The Employers shall reimburse the Executive or otherwise
provide for or pay for all reasonable expenses incurred by the Executive in
furtherance of or in connection with the business of the Employers, including,
but not by way of limitation, automobile expenses described in Section 3(d)
hereof, traveling expenses, and all reasonable entertainment expenses (whether
incurred at the Executive's residence, while traveling or
<PAGE> 6
6
otherwise), subject to such reasonable documentation and other limitations as
may be established by the Boards of Directors of the Employers. If such expenses
are paid in the first instance by the Executive, the Employers shall reimburse
the Executive therefor.
5. TERMINATION.
(a) The Corporation 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 the Executive shall have the right, upon prior Notice of Termination, to
terminate his employment hereunder for any reason. The Executive's employment
and his status as an officer shall terminate (i) immediately upon being given a
Notice of Termination for Cause, or (ii) on the Date of Termination for any
other reason.
(b) In the event that (i) the Executive's employment is terminated by the
Corporation for Cause or (ii) the Executive terminates his employment hereunder
other than for Disability, Retirement, death or Good Reason, the Executive shall
have no right pursuant to this Agreement to compensation or other benefits for
any period after the applicable Date of Termination.
(c) In the event that the Executive's employment is terminated as a result
of Disability, Retirement or the Executive's death during the term of this
Agreement, the Executive shall have no right pursuant to this Agreement to
compensation or other benefits for any period after the applicable Date of
Termination, except as provided for in Section 3(e) hereof.
(d) In the event that (i) the Executive's employment is terminated by the
Corporation for other than Cause, Disability, Retirement or the Executive's
death or (ii) such employment is terminated by the Executive (a) due to a
material breach of this Agreement by the Corporation, which breach has not been
cured within fifteen (15) days after a written notice of non-compliance has been
given by the Executive to the Employers, or (b) for Good Reason, then the
Corporation shall
(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
that portion of the Executive's Average Annual Compensation paid by the
Corporation, 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)), on a tax-adjusted basis at no cost to the
Executive, the Executive's continued participation in all group
<PAGE> 7
7
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 insurance, and other
employee benefit plans, programs and arrangements offered by the
Corporation in which the Executive was entitled to participate immediately
prior to the Date of Termination (other than stock option, employee stock
ownership and restricted stock plans of the Employers).
6. PAYMENT OF ADDITIONAL BENEFITS UNDER CERTAIN CIRCUMSTANCES.
(a) If the payments and benefits pursuant to Section 5 hereof, either
alone or together with other payments and benefits which the Executive has the
right to receive from the Employers (including, without limitation, the payments
and benefits which the Executive would have the right to receive from the Bank
pursuant to Section 5 of the Agreement between the Bank and the Executive dated
December 9, 1997 ("Bank Agreement"), before giving effect to any reduction in
such amounts pursuant to Section 6 of the Bank Agreement), would constitute a
"parachute payment" as defined in Section 280G(b)(2) of the Code (the "Initial
Parachute Payment," which includes the amounts paid pursuant to clause (A)
below), then the Corporation shall pay to the Executive, in thirty-six (36)
equal monthly installments beginning with the first business day of the month
following the Date of Termination or in a lump sum within five business days of
the Date of Termination (at the Executive's election), a cash amount equal to
the sum of the following:
(A) the amount by which the payments and benefits that would have
otherwise been paid by the Bank to the Executive pursuant to Section 5 of
the Bank Agreement are reduced by the provisions of Section 6 of the Bank
Agreement;
(B) twenty (20) percent (or such other percentage equal to the tax
rate imposed by Section 4999 of the Code) of the amount by which the
Initial Parachute Payment exceeds the Executive's "base amount" from the
Employers, as defined in Section 280G(b)(3) of the Code, with the
difference between the Initial Parachute Payment and the Executive's base
amount being hereinafter referred to as the "Initial Excess Parachute
Payment";
(C) such additional amount (tax allowance) as may be necessary to
compensate the Executive for the payment by the Executive of state and
federal income and excise taxes on the payment provided under clause (B)
above and on any
<PAGE> 8
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payments under this clause (C). In computing such tax allowance, the
payment to be made under clause (B) above shall be multiplied by the
"gross up percentage" ("GUP"). The GUP shall be determined as follows:
Tax Rate
GUP = -----------
1- Tax Rate
The Tax Rate for purposes of computing the GUP shall be the highest
marginal federal and state income and employment-related tax rate,
including any applicable excise tax rate, applicable to the Executive in
the year in which the payment under clause (B) above is made.
(b) Notwithstanding the foregoing, if it shall subsequently be determined
in a final judicial determination or a final administrative settlement to which
the Executive is a party that the actual excess parachute payment as defined in
Section 280G(b)(1) of the Code is different from the Initial Excess Parachute
Payment (such different amount being hereafter referred to as the "Determinative
Excess Parachute Payment"), then the Corporation's independent tax counsel or
accountants shall determine the amount (the "Adjustment Amount") which either
the Executive must pay to the Corporation or the Corporation must pay to the
Executive in order to put the Executive (or the Corporation, as the case may be)
in the same position the Executive (or the Corporation, as the case may be)
would have been if the Initial Excess Parachute Payment had been equal to the
Determinative Excess Parachute Payment. In determining the Adjustment Amount,
the independent tax counsel or accountants shall take into account any and all
taxes (including any penalties and interest) paid by or for the Executive or
refunded to the Executive or for the Executive's benefit. As soon as practicable
after the Adjustment Amount has been so determined, the Corporation shall pay
the Adjustment Amount to the Executive or the Executive shall repay the
Adjustment Amount to the Corporation, as the case may be.
(c) In each calendar year that the Executive receives payments of benefits
under this Section 6, the Executive shall report on his state and federal income
tax returns such information as is consistent with the determination made by the
independent tax counsel or accountants of the Corporation as described above.
The Corporation shall indemnify and hold the Executive harmless from any and all
losses, costs and expenses (including without limitation, reasonable attorneys'
fees, interest, fines and penalties) which the Executive incurs as a result of
so reporting such information. The Executive shall promptly notify the
Corporation in writing whenever the Executive receives notice of the institution
of a judicial or administrative proceeding, formal or informal, in which the
federal tax treatment under Section 4999 of the Code of any amount paid or
payable under this Section 6 is being reviewed or is in dispute. The Corporation
shall assume control at its expense over all legal and accounting matters
pertaining to such federal tax treatment (except to the extent necessary or
appropriate for the Executive to resolve any such proceeding with respect to any
matter unrelated to amounts paid or payable pursuant to this Section 6) and the
<PAGE> 9
9
Executive shall cooperate fully with the Corporation in any such proceeding. The
Executive shall not enter into any compromise or settlement or otherwise
prejudice any rights the Corporation may have in connection therewith without
the prior consent of the Corporation.
7. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) The Executive, unless his employment is terminated for Disability,
Retirement, death, a Change in Control of the Corporation or pursuant to Section
5(d)(ii) hereof, 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(d)(i) 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, unless the termination was in connection with a Change
in Control of the Corporation.
(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 Employers pursuant to employee benefit plans
of the Employers or otherwise.
8. WITHHOLDING. All payments required to be made by the Corporation
hereunder to the Executive shall be subject to the withholding of such amounts,
if any, relating to tax and other payroll deductions as the Corporation may
reasonably determine should be withheld pursuant to any applicable law or
regulation.
9. ASSIGNABILITY. The Corporation 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 Corporation may hereafter merge or
consolidate or to which the Corporation 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
Corporation 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.
10. 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:
<PAGE> 10
10
To the Corporation: Secretary
Commonwealth Bancorp, Inc.
2 West Lafayette Street
Norristown, Pennsylvania 19401-4758
To the Bank: Secretary
Commonwealth Bank
2 West Lafayette Street
Norristown, Pennsylvania 19401-4758
To the Executive: Patrick J. Ward
20 Harvey Lane
Malvern, Pennsylvania 19355
11. CONFIDENTIALITY. The Executive acknowledges that by virtue of his
employment hereunder, he will maintain an intimate knowledge of the activities
and affairs of the Employers, including confidential matters. As a result, the
Executive agrees to maintain the confidentiality of all confidential information
relating to the Employers during the term of employment hereunder and any period
that the Executive may be receiving payments pursuant to this Agreement,
provided that nothing in this Section 11 shall be deemed to prevent the
Executive from either (a) being employed by any other corporation, firm or
entity upon termination of the Executive's employment by the Employers as long
as the Executive does not violate the foregoing proscription, or (b) responding
to inquiries from regulatory authorities.
12. ARBITRATION. The Executive and the Employers agree 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 Employers 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.
<PAGE> 11
11
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.
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 Corporation 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.
15. NATURE OF OBLIGATIONS. Nothing contained herein shall create or
require the Corporation 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 Corporation hereunder, such right shall be no
greater than the right of any unsecured general creditor of the Corporation.
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.
<PAGE> 12
12
19. ENTIRE AGREEMENT. This Agreement embodies the entire agreement
between the Corporation and the Executive with respect to the matters agreed to
herein. All prior agreements between the Corporation and the Executive with
respect to the matters agreed to herein, including without limitation the
Agreement between the Employers and the Executive dated January 1, 1997, are
hereby superseded and shall have no force or effect. Notwithstanding the
foregoing, nothing contained in this Agreement shall affect the agreement of
even date being entered into between the Bank and the Executive.
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
Attest: COMMONWEALTH BANCORP, INC.
- ---------------------------- By:
Charles H. Meacham, Chairman ---------------------------
of the Board ------------------------,
Director and Member of the
Compensation and Benefits
Committee of the Board of
Directors
Witness: EXECUTIVE
By:
- ---------------------------- ------------------------
Charles H. Meacham Patrick J. Ward
<PAGE> 13
AGREEMENT
AGREEMENT, dated this 9th day of December 1997, between Commonwealth Bank
(the "Bank"), a federally chartered savings bank, and Patrick J. Ward (the
"Executive").
WITNESSETH
WHEREAS, the Executive is presently President, Chief Operating Officer and
Secretary of Commonwealth Bancorp, Inc. (the "Corporation") and the Bank
(together, the "Employers");
WHEREAS, the Employers desire to be ensured of the Executive's continued
active participation in the business of the Employers, and the Bank desires to
have this new Agreement supersede its current agreement with the Executive dated
January 1, 1997;
WHEREAS, in accordance with Office of Thrift Supervision ("OTS")
Regulatory Bulletin 27a, the Corporation and the Bank desire to enter into
separate agreements with the Executive with respect to his employment by each of
the Employers; and
WHEREAS, in order to induce the Executive to remain in the employ of the
Employers and in consideration of the Executive's agreeing to remain in the
employ of the Employers, the parties desire to specify the terms of such
employment, including the severance benefits which shall be due the Executive by
the Bank in the event that his employment with the Bank is terminated under
specified circumstances;
NOW THEREFORE, in consideration of the mutual agreements herein contained,
and upon the other terms and conditions hereinafter provided, 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 Employers 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 paid to the Executive but excluding amounts relating to the vesting of
Management Recognition Plan shares.
(b) BASE SALARY. "Base Salary" shall mean the Executive's annual salary
exclusive of any pension or other retirement plan, profit sharing, stock option,
employee stock ownership, or other plans, benefits and privileges given to
employees and executives of the Employers.
<PAGE> 14
2
(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.
(d) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the
Corporation" 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, as amended ("Exchange
Act"), or any successor thereto, whether or not the Corporation is registered
under the 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 Corporation representing 25% or more of the
combined voting power of the Corporation'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 Corporation 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.
(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 Employers 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 Corporation 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 President, Chief Operating Officer
and Secretary of the Employers or a material adverse change
made by the Employers in the Executive's functions, duties or
responsibilities as President, Chief
<PAGE> 15
3
Operating Officer and Secretary of the Employers as they
existed immediately prior to a Change in Control of the
Corporation;
(ii) Without the Executive's express written consent, a reduction
by either of the Employers 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;
(iii) The principal executive office of either of the Employers is
relocated more than 25 miles from the current principal
executive office or, without the Executive's express written
consent, either of the Employers requires the Executive to be
based anywhere other than an area in which the Employers'
principal executive office is located, except for required
travel on business of the Employers 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 the 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 the Executive's employment for Cause,
which shall be effective immediately; and (iv) is given in the manner specified
in Section 10 hereof.
(k) RETIREMENT. "Retirement" shall mean voluntary termination by the
Executive in accordance with the Employers' retirement policies, including early
retirement, generally applicable to their salaried employees.
<PAGE> 16
4
(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, Chief Operating
Officer and Secretary and the 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 and, upon approval of the
Board of Directors of the Bank, shall extend for an additional year on each
annual anniversary of the date of this Agreement such that at any time the
remaining term of this Agreement shall be from two to three years. Prior to the
first annual anniversary of the date of this Agreement and each annual
anniversary thereafter, the Board of Directors of the Bank shall consider and
review (taking into account all relevant factors, including the Executive's
performance hereunder) an extension of the term of this Agreement, and the term
shall continue to extend each year if the Board of Directors approves such
extension unless the Executive gives written notice to the Employers of the
Executive's election not to extend the term, with such written notice to be
given not less than thirty (30) days prior to any such anniversary date. If the
Board of Directors elects not to extend the term, it shall give written notice
of such decision to the Executive not less than thirty (30) days prior to any
such anniversary date. If any party gives timely notice that the term will not
be extended as of any annual anniversary date, then this Agreement shall
terminate at the conclusion of its remaining term. 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 Employers shall compensate and pay the Executive for his services
during the term of this Agreement at a minimum Base Salary of $205,000 per year,
which may be increased from time to time in such amounts as may be determined by
the Boards of Directors of the Employers and may not be decreased without the
Executive's express written consent. 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 Boards of Directors of the Employers.
(b) During the term of this Agreement, the 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
Employers, to the extent commensurate with his then duties and responsibilities,
as fixed by the Boards of Directors of the Employers. The Bank
<PAGE> 17
5
shall not make any changes in such plans, benefits or privileges which would
adversely affect the 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 the Executive as compared with any other executive
officer of the Bank. Nothing paid to the 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 the Executive pursuant to Section 3(a) hereof.
(c) During the term of this Agreement, the Executive shall be entitled to
paid annual vacation in accordance with the policies as established from time to
time by the Boards of Directors of the Employers, which shall in no event be
less than four weeks per annum. The Executive shall not be entitled to receive
any additional compensation from the Employers for failure to take a vacation,
nor shall the Executive be able to accumulate unused vacation time from one year
to the next, except to the extent authorized by the Boards of Directors of the
Employers.
(d) During the term of this Agreement, in keeping with past practices, the
Employers shall continue to provide the Executive with the use of an
Employer-owned automobile appropriate to his positions with the Employers and to
pay all costs associated with such automobile, including registration,
licensing, insurance and costs of operation.
(e) In the event the Executive's employment is terminated by the Bank for
any reason other than Cause, the Employers shall provide continued 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, and health and accident insurance substantially identical to the
coverage maintained by the Employers for the Executive immediately prior to his
termination. Such coverage shall cease upon the expiration of the remaining term
of this Agreement.
(f) The Executive's compensation, benefits and expenses shall be paid by
the Corporation and the Bank in the same proportion as the time and services
actually expended by the Executive on behalf of each respective Employer.
4. EXPENSES. The Employers shall reimburse the Executive or otherwise
provide for or pay for all reasonable expenses incurred by the Executive in
furtherance of or in connection with the business of the Employers, including,
but not by way of limitation, automobile expenses described in Section 3(d)
hereof, 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
Boards of Directors of the Employers. If such expenses are paid in the first
instance by the Executive, the Employers shall reimburse the Executive therefor.
<PAGE> 18
6
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 the Executive shall have the right, upon prior Notice of Termination, to
terminate his employment hereunder for any reason. The Executive's employment
and his status as an officer shall terminate (i) immediately upon being given a
Notice of Termination for Cause, or (ii) on the Date of Termination for any
other reason.
(b) In the event that (i) the Executive's employment is terminated by the
Bank for Cause or (ii) the Executive terminates his employment hereunder other
than for Disability, Retirement, death or Good Reason, the Executive shall have
no right pursuant to this Agreement to compensation or other benefits for any
period after the applicable Date of Termination.
(c) In the event that the Executive's employment is terminated as a result
of Disability, Retirement or the Executive's death during the term of this
Agreement, the Executive shall have no right pursuant to this Agreement to
compensation or other benefits for any period after the applicable Date of
Termination, except as provided for in Section 3(e) hereof.
(d) In the event that (i) the Executive's employment is terminated by the
Bank for other than Cause, Disability, Retirement or the Executive's death or
(ii) such employment is terminated by the Executive (a) due to a material breach
of this Agreement by the Bank, which breach has not been cured within fifteen
(15) days after a written notice of non-compliance has been given by the
Executive to the Employers, or (b) for Good Reason, 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
that portion of the Executive's Average Annual Compensation paid by the
Corporation, 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)), on a tax-adjusted basis 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 insurance, and other employee benefit
plans, programs and arrangements offered by the Corporation in which the
Executive was entitled to
<PAGE> 19
7
participate immediately prior to the Date of Termination (other than stock
option, employee stock ownership and restricted stock plans of the
Employers).
6. 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 the Executive has the right to receive from the
Bank, would constitute a "parachute payment" under Section 280G of the Code, the
payments and benefits payable by the Bank 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
payable by the Bank under Section 5 being non-deductible to the Bank pursuant to
Section 280G of the Code and subject to the excise tax imposed under Section
4999 of the Code. The parties hereto agree that the payments and benefits
payable pursuant to this Agreement by the Bank to the Executive upon termination
shall be limited to three times the Executive's "base amount" (as defined in
Section 280G(b)(3) of the Code) in accordance with OTS Regulatory Bulletin 27a.
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 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. 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.
7. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) The Executive, unless his employment is terminated for Disability,
Retirement, death, a Change in Control of the Corporation or pursuant to Section
5(d)(ii) hereof, 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(d)(i) 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, unless the termination was in connection with a Change
in Control of the Corporation.
(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 Employers pursuant to employee benefit plans
of the Employers or otherwise.
8. 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
<PAGE> 20
8
other payroll deductions as the Bank may reasonably determine should be withheld
pursuant to any applicable law or regulation.
9. 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.
10. 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: Secretary
Commonwealth Bank
2 West Lafayette Street
Norristown, Pennsylvania 19401-4758
To the Corporation: Secretary
Commonwealth Bancorp, Inc.
2 West Lafayette Street
Norristown, Pennsylvania 19401-4758
To the Executive: Patrick J. Ward
20 Harvey Lane
Malvern, Pennsylvania 19355
11. CONFIDENTIALITY. The Executive acknowledges that by virtue of his
employment hereunder, he will maintain an intimate knowledge of the activities
and affairs of the Employers, including confidential matters. As a result, the
Executive agrees to maintain the confidentiality of all confidential information
relating to the Employers during the term of employment hereunder and any period
that the Executive may be receiving payments pursuant to this Agreement,
provided that nothing in this Section 11 shall be deemed to prevent the
Executive from either (a) being employed by any other corporation, firm or
entity upon termination of the Executive's employment by the Employers as long
as the Executive does not violate the foregoing prescription, or (b) responding
to inquiries from regulatory authorities.
12. ARBITRATION. The Executive and the Employers agree to submit to final
and binding arbitration pursuant to the rules of the American Arbitration
Association, any and
<PAGE> 21
9
all claims arising from the termination, for any reason, of the Executive's
employment by the Employers 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.
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.
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,
<PAGE> 22
10
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 bank 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 the 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 the 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 the 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.
<PAGE> 23
11
(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 OTS, or his/her designee, at the time the
Federal Deposit Insurance Corporation ("FDIC") 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
Employers 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.
21. ENTIRE AGREEMENT. This Agreement embodies the entire agreement
between the Bank and the Executive with respect to the matters agreed to herein.
All prior agreements between the Bank and the Executive with respect to the
matters agreed to herein, including without limitation the Agreement between the
Employers and the Executive dated January 1, 1997, are hereby superseded and
shall have no force or effect. Notwithstanding the foregoing, nothing contained
in this Agreement shall affect the agreement of even date being entered into
between the Corporation and the Executive.
<PAGE> 24
12
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
Attest: COMMONWEALTH BANK
By:
____________________________ __________________________________
Charles H. Meacham, Chairman __________________, Director and
of the Board Member of the Compensation and
Benefits Committee of the Board
of Directors
Witness: EXECUTIVE
By:
____________________________ __________________________________
Charles H. Meacham Patrick J. Ward
<PAGE> 1
Exhibit 10.10
AGREEMENT
AGREEMENT, dated this 9th day of December 1997, between Commonwealth
Bancorp, Inc. (the "Corporation"), a Pennsylvania corporation, and Charles M.
Johnston (the "Executive").
WITNESSETH
WHEREAS, the Executive is presently Senior Vice President and Chief
Financial Officer of the Corporation and Commonwealth Bank (the "Bank")
(together, the "Employers");
WHEREAS, the Employers desire to be ensured of the Executive's continued
active participation in the business of the Employers, and the Bank is
concurrently entering into a new Agreement with the Executive to supersede the
agreement with the Executive dated January 1, 1997;
WHEREAS, in accordance with Office of Thrift Supervision ("OTS")
Regulatory Bulletin 27a, the Corporation and the Bank desire to enter into
separate agreements with the Executive with respect to his employment by each of
the Employers; and
WHEREAS, in order to induce the Executive to remain in the employ of the
Employers and in consideration of the Executive's agreeing to remain in the
employ of the Employers, the parties desire to specify the terms of such
employment, including the severance benefits which shall be due the Executive by
the Corporation in the event that his employment with the Corporation is
terminated under specified circumstances;
NOW THEREFORE, in consideration of the mutual agreements herein contained,
and upon the other terms and conditions hereinafter provided, 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 Employers 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 paid to the Executive but excluding amounts relating to the vesting of
Management Recognition Plan shares.
(b) BASE SALARY. "Base Salary" shall mean the Executive's annual salary
exclusive of any pension or other retirement plan, profit sharing, stock option,
employee stock
<PAGE> 2
2
ownership, or other plans, benefits and privileges given to employees and
executives of the Employers.
(c) CAUSE. Termination by the Corporation 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.
(d) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the
Corporation" 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, as amended ("Exchange
Act"), or any successor thereto, whether or not the Corporation is registered
under the 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 Corporation representing 25% or more of the
combined voting power of the Corporation'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 Corporation 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.
(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 Corporation 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 Employers 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 Corporation 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
<PAGE> 3
3
of Senior Vice President and Chief Financial Officer of the
Employers or a material adverse change made by the Employers in
the Executive's functions, duties or responsibilities as Senior
Vice President and Chief Financial Officer of the Employers as
they existed immediately prior to a Change in Control of the
Corporation;
(ii) Without the Executive's express written consent, a reduction by
either of the Employers 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;
(iii) The principal executive office of either of the Employers is
relocated more than 25 miles from the current principal
executive office or, without the Executive's express written
consent, either of the Employers requires the Executive to be
based anywhere other than an area in which the Employers'
principal executive office is located, except for required
travel on business of the Employers 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 Corporation 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 Corporation 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 the 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 Corporation's termination of the Executive's employment for
Cause, which shall be effective immediately; and (iv) is given in the manner
specified in Section 10 hereof.
<PAGE> 4
4
(k) RETIREMENT. "Retirement" shall mean voluntary termination by the
Executive in accordance with the Employers' 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 Corporation hereby employs the Executive as Senior Vice President
and Chief Financial Officer and the Executive hereby accepts said employment and
agrees to render such services to the Corporation 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 and, upon approval
of the Board of Directors of the Corporation, shall extend for an additional
year on each annual anniversary of the date of this Agreement such that at any
time the remaining term of this Agreement shall be from two to three years.
Prior to the first annual anniversary of the date of this Agreement and each
annual anniversary thereafter, the Board of Directors of the Corporation shall
consider and review (taking into account all relevant factors, including the
Executive's performance hereunder) an extension of the term of this Agreement,
and the term shall continue to extend each year if the Board of Directors
approves such extension unless the Executive gives written notice to the
Employers of the Executive's election not to extend the term, with such written
notice to be given not less than thirty (30) days prior to any such anniversary
date. If the Board of Directors elects not to extend the term, it shall give
written notice of such decision to the Executive not less than thirty (30) days
prior to any such anniversary date. If any party gives timely notice that the
term will not be extended as of any annual anniversary date, then this Agreement
shall terminate at the conclusion of its remaining term. 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 Corporation as may be consistent with his titles and
from time to time assigned to him by the Corporation's Board of Directors.
3. COMPENSATION AND BENEFITS.
(a) The Employers shall compensate and pay the Executive for his services
during the term of this Agreement at a minimum Base Salary of $130,900 per year,
which may be increased from time to time in such amounts as may be determined by
the Boards of Directors of the Employers and may not be decreased without the
Executive's express written consent. 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 Boards of Directors of the Employers.
<PAGE> 5
5
(b) During the term of this Agreement, the 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
Employers, to the extent commensurate with his then duties and responsibilities,
as fixed by the Boards of Directors of the Employers. The Corporation shall not
make any changes in such plans, benefits or privileges which would adversely
affect the Executive's rights or benefits thereunder, unless such change occurs
pursuant to a program applicable to all executive officers of the Corporation
and does not result in a proportionately greater adverse change in the rights of
or benefits to the Executive as compared with any other executive officer of the
Corporation. Nothing paid to the 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 the Executive pursuant to Section 3(a) hereof.
(c) During the term of this Agreement, the Executive shall be entitled to
paid annual vacation in accordance with the policies as established from time to
time by the Boards of Directors of the Employers, which shall in no event be
less than four weeks per annum. The Executive shall not be entitled to receive
any additional compensation from the Employers for failure to take a vacation,
nor shall the Executive be able to accumulate unused vacation time from one year
to the next, except to the extent authorized by the Boards of Directors of the
Employers.
(d) During the term of this Agreement, in keeping with past practices, the
Employers shall continue to provide the Executive with the use of an
Employer-owned automobile appropriate to his positions with the Employers and to
pay all costs associated with such automobile, including registration,
licensing, insurance and costs of operation.
(e) In the event the Executive's employment is terminated by the
Corporation for any reason other than Cause, the Employers shall provide
continued 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, and health and accident insurance substantially
identical to the coverage maintained by the Employers for the Executive
immediately prior to his termination. Such coverage shall cease upon the
expiration of the remaining term of this Agreement.
(f) The Executive's compensation, benefits and expenses shall be paid by
the Corporation and the Bank in the same proportion as the time and services
actually expended by the Executive on behalf of each respective Employer.
4. EXPENSES. The Employers shall reimburse the Executive or otherwise
provide for or pay for all reasonable expenses incurred by the Executive in
furtherance of or in connection with the business of the Employers, including,
but not by way of limitation, automobile expenses described in Section 3(d)
hereof, traveling expenses, and all reasonable entertainment expenses (whether
incurred at the Executive's residence, while traveling or
<PAGE> 6
6
otherwise), subject to such reasonable documentation and other limitations as
may be established by the Boards of Directors of the Employers. If such expenses
are paid in the first instance by the Executive, the Employers shall reimburse
the Executive therefor.
5. TERMINATION.
(a) The Corporation 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 the Executive shall have the right, upon prior Notice of Termination, to
terminate his employment hereunder for any reason. The Executive's employment
and his status as an officer shall terminate (i) immediately upon being given a
Notice of Termination for Cause, or (ii) on the Date of Termination for any
other reason.
(b) In the event that (i) the Executive's employment is terminated by the
Corporation for Cause or (ii) the Executive terminates his employment hereunder
other than for Disability, Retirement, death or Good Reason, the Executive shall
have no right pursuant to this Agreement to compensation or other benefits for
any period after the applicable Date of Termination.
(c) In the event that the Executive's employment is terminated as a result
of Disability, Retirement or the Executive's death during the term of this
Agreement, the Executive shall have no right pursuant to this Agreement to
compensation or other benefits for any period after the applicable Date of
Termination, except as provided for in Section 3(e) hereof.
(d) In the event that (i) the Executive's employment is terminated by the
Corporation for other than Cause, Disability, Retirement or the Executive's
death or (ii) such employment is terminated by the Executive (a) due to a
material breach of this Agreement by the Corporation, which breach has not been
cured within fifteen (15) days after a written notice of non-compliance has been
given by the Executive to the Employers, or (b) for Good Reason, then the
Corporation shall
(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
that portion of the Executive's Average Annual Compensation paid by the
Corporation, 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)), on a tax-adjusted basis at no cost to the
Executive, the Executive's continued participation in all group
<PAGE> 7
7
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 insurance, and other
employee benefit plans, programs and arrangements offered by the
Corporation in which the Executive was entitled to participate immediately
prior to the Date of Termination (other than stock option, employee stock
ownership and restricted stock plans of the Employers).
6. 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 the Executive has the right to receive from the
Employers (including, without limitation, the payments and benefits which the
Executive would have the right to receive from the Bank pursuant to Section 5 of
the Agreement between the Bank and the Executive dated December 9, 1997), would
constitute a "parachute payment" as defined in Section 280G(b)(2) of the Code,
the payments and benefits payable by the Corporation 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 payable by the Corporation under Section 5 being
non-deductible to the Corporation 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 counsel selected
by the Corporation's independent public accountants and paid by the Corporation.
Such counsel shall be reasonably acceptable to the Corporation 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. 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.
7. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) The Executive, unless his employment is terminated for Disability,
Retirement, death, a Change in Control of the Corporation or pursuant to Section
5(d)(ii) hereof, 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(d)(i) 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, unless the termination was in connection with a Change
in Control of the Corporation.
(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 Employers pursuant to employee benefit plans
of the Employers or otherwise.
<PAGE> 8
8
8. WITHHOLDING. All payments required to be made by the Corporation
hereunder to the Executive shall be subject to the withholding of such amounts,
if any, relating to tax and other payroll deductions as the Corporation may
reasonably determine should be withheld pursuant to any applicable law or
regulation.
9. ASSIGNABILITY. The Corporation 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 Corporation may hereafter merge or
consolidate or to which the Corporation 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
Corporation 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.
10. 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 Corporation: Secretary
Commonwealth Bancorp, Inc.
2 West Lafayette Street
Norristown, Pennsylvania 19401-4758
To the Bank: Secretary
Commonwealth Bank
2 West Lafayette Street
Norristown, Pennsylvania 19401-4758
To the Executive: Charles M. Johnston
38 Rosewood Lane
Malvern, Pennsylvania 19355
11. CONFIDENTIALITY. The Executive acknowledges that by virtue of his
employment hereunder, he will maintain an intimate knowledge of the activities
and affairs of the Employers, including confidential matters. As a result, the
Executive agrees to maintain the confidentiality of all confidential information
relating to the Employers during the term of employment hereunder and any period
that the Executive may be receiving payments pursuant to this Agreement,
provided that nothing in this Section 11 shall be deemed to prevent the
Executive from either (a) being employed by any other corporation, firm or
entity upon termination of the Executive's employment by the Employers as long
as the Executive does not violate the foregoing proscription, or (b) responding
to inquiries from regulatory authorities.
<PAGE> 9
9
12. ARBITRATION. The Executive and the Employers agree 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 Employers 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.
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 Corporation 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.
<PAGE> 10
10
15. NATURE OF OBLIGATIONS. Nothing contained herein shall create or
require the Corporation 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 Corporation hereunder, such right shall be no
greater than the right of any unsecured general creditor of the Corporation.
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. ENTIRE AGREEMENT. This Agreement embodies the entire agreement between
the Corporation and the Executive with respect to the matters agreed to herein.
All prior agreements between the Corporation and the Executive with respect to
the matters agreed to herein, including without limitation the Agreement between
the Employers and the Executive dated January 1, 1997, are hereby superseded and
shall have no force or effect. Notwithstanding the foregoing, nothing contained
in this Agreement shall affect the agreement of even date being entered into
between the Bank and the Executive.
<PAGE> 11
11
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
Attest: COMMONWEALTH BANCORP, INC.
By:
- ---------------------------- ----------------------------
Patrick J. Ward, President ------------------------,
and Secretary Director and Member of the
Compensation and Benefits
Committee of the Board of
Directors
Witness: EXECUTIVE
By:
- ---------------------------- ----------------------------
Patrick J. Ward Charles M. Johnston
<PAGE> 12
AGREEMENT
AGREEMENT, dated this 9th day of December 1997, between Commonwealth Bank
(the "Bank"), a federally chartered savings bank, and Charles M. Johnston (the
"Executive").
WITNESSETH
WHEREAS, the Executive is presently Senior Vice President and Chief
Financial Officer of Commonwealth Bancorp, Inc. (the "Corporation") and the Bank
(together, the "Employers");
WHEREAS, the Employers desire to be ensured of the Executive's continued
active participation in the business of the Employers, and the Bank desires to
have this new Agreement supersede its current agreement with the Executive dated
January 1, 1997;
WHEREAS, in accordance with Office of Thrift Supervision ("OTS")
Regulatory Bulletin 27a, the Corporation and the Bank desire to enter into
separate agreements with the Executive with respect to his employment by each of
the Employers; and
WHEREAS, in order to induce the Executive to remain in the employ of the
Employers and in consideration of the Executive's agreeing to remain in the
employ of the Employers, the parties desire to specify the terms of such
employment, including the severance benefits which shall be due the Executive by
the Bank in the event that his employment with the Bank is terminated under
specified circumstances;
NOW THEREFORE, in consideration of the mutual agreements herein contained,
and upon the other terms and conditions hereinafter provided, 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 Employers 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 paid to the Executive but excluding amounts relating to the vesting of
Management Recognition Plan shares.
(b) BASE SALARY. "Base Salary" shall mean the Executive's annual salary
exclusive of any pension or other retirement plan, profit sharing, stock option,
employee stock ownership, or other plans, benefits and privileges given to
employees and executives of the Employers.
<PAGE> 13
2
(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.
(d) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the
Corporation" 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, as amended ("Exchange
Act"), or any successor thereto, whether or not the Corporation is registered
under the 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 Corporation representing 25% or more of the
combined voting power of the Corporation'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 Corporation 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.
(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 Employers 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 Corporation 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 Senior Vice President and Chief
Financial Officer of the Employers or a material adverse
change made by the Employers in the Executive's functions,
duties or responsibilities as Senior Vice
<PAGE> 14
3
President and Chief Financial Officer of the Employers as they
existed immediately prior to a Change in Control of the
Corporation;
(ii) Without the Executive's express written consent, a reduction
by either of the Employers 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;
(iii) The principal executive office of either of the Employers is
relocated more than 25 miles from the current principal
executive office or, without the Executive's express written
consent, either of the Employers requires the Executive to be
based anywhere other than an area in which the Employers'
principal executive office is located, except for required
travel on business of the Employers 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 the 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 the Executive's employment for Cause,
which shall be effective immediately; and (iv) is given in the manner specified
in Section 10 hereof.
(k) RETIREMENT. "Retirement" shall mean voluntary termination by the
Executive in accordance with the Employers' retirement policies, including early
retirement, generally applicable to their salaried employees.
<PAGE> 15
4
(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 Senior Vice President and
Chief Financial Officer and the 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 and, upon approval of the
Board of Directors of the Bank, shall extend for an additional year on each
annual anniversary of the date of this Agreement such that at any time the
remaining term of this Agreement shall be from two to three years. Prior to the
first annual anniversary of the date of this Agreement and each annual
anniversary thereafter, the Board of Directors of the Bank shall consider and
review (taking into account all relevant factors, including the Executive's
performance hereunder) an extension of the term of this Agreement, and the term
shall continue to extend each year if the Board of Directors approves such
extension unless the Executive gives written notice to the Employers of the
Executive's election not to extend the term, with such written notice to be
given not less than thirty (30) days prior to any such anniversary date. If the
Board of Directors elects not to extend the term, it shall give written notice
of such decision to the Executive not less than thirty (30) days prior to any
such anniversary date. If any party gives timely notice that the term will not
be extended as of any annual anniversary date, then this Agreement shall
terminate at the conclusion of its remaining term. 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 Employers shall compensate and pay the Executive for his services
during the term of this Agreement at a minimum Base Salary of $130,900 per year,
which may be increased from time to time in such amounts as may be determined by
the Boards of Directors of the Employers and may not be decreased without the
Executive's express written consent. 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 Boards of Directors of the Employers.
(b) During the term of this Agreement, the 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
Employers, to the extent commensurate with his then duties and responsibilities,
as fixed by the Boards of Directors of the Employers. The Bank
<PAGE> 16
5
shall not make any changes in such plans, benefits or privileges which would
adversely affect the 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 the Executive as compared with any other executive
officer of the Bank. Nothing paid to the 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 the Executive pursuant to Section 3(a) hereof.
(c) During the term of this Agreement, the Executive shall be entitled to
paid annual vacation in accordance with the policies as established from time to
time by the Boards of Directors of the Employers, which shall in no event be
less than four weeks per annum. The Executive shall not be entitled to receive
any additional compensation from the Employers for failure to take a vacation,
nor shall the Executive be able to accumulate unused vacation time from one year
to the next, except to the extent authorized by the Boards of Directors of the
Employers.
(d) During the term of this Agreement, in keeping with past practices, the
Employers shall continue to provide the Executive with the use of an
Employer-owned automobile appropriate to his positions with the Employers and to
pay all costs associated with such automobile, including registration,
licensing, insurance and costs of operation.
(e) In the event the Executive's employment is terminated by the Bank for
any reason other than Cause, the Employers shall provide continued 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, and health and accident insurance substantially identical to the
coverage maintained by the Employers for the Executive immediately prior to his
termination. Such coverage shall cease upon the expiration of the remaining term
of this Agreement.
(f) The Executive's compensation, benefits and expenses shall be paid by
the Corporation and the Bank in the same proportion as the time and services
actually expended by the Executive on behalf of each respective Employer.
4. EXPENSES. The Employers shall reimburse the Executive or otherwise
provide for or pay for all reasonable expenses incurred by the Executive in
furtherance of or in connection with the business of the Employers, including,
but not by way of limitation, automobile expenses described in Section 3(d)
hereof, 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
Boards of Directors of the Employers. If such expenses are paid in the first
instance by the Executive, the Employers shall reimburse the Executive therefor.
<PAGE> 17
6
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 the Executive shall have the right, upon prior Notice of Termination, to
terminate his employment hereunder for any reason. The Executive's employment
and his status as an officer shall terminate (i) immediately upon being given a
Notice of Termination for Cause, or (ii) on the Date of Termination for any
other reason.
(b) In the event that (i) the Executive's employment is terminated by the
Bank for Cause or (ii) the Executive terminates his employment hereunder other
than for Disability, Retirement, death or Good Reason, the Executive shall have
no right pursuant to this Agreement to compensation or other benefits for any
period after the applicable Date of Termination.
(c) In the event that the Executive's employment is terminated as a result
of Disability, Retirement or the Executive's death during the term of this
Agreement, the Executive shall have no right pursuant to this Agreement to
compensation or other benefits for any period after the applicable Date of
Termination, except as provided for in Section 3(e) hereof.
(d) In the event that (i) the Executive's employment is terminated by the
Bank for other than Cause, Disability, Retirement or the Executive's death or
(ii) such employment is terminated by the Executive (a) due to a material breach
of this Agreement by the Bank, which breach has not been cured within fifteen
(15) days after a written notice of non-compliance has been given by the
Executive to the Employers, or (b) for Good Reason, 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
that portion of the Executive's Average Annual Compensation paid by the
Corporation, 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)), on a tax-adjusted basis 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 insurance, and other employee benefit
plans, programs and arrangements offered by the Corporation in which the
Executive was entitled to
<PAGE> 18
7
participate immediately prior to the Date of Termination (other than stock
option, employee stock ownership and restricted stock plans of the
Employers).
6. 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 the Executive has the right to receive from the
Bank, would constitute a "parachute payment" under Section 280G of the Code, the
payments and benefits payable by the Bank 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
payable by the Bank under Section 5 being non-deductible to the Bank pursuant to
Section 280G of the Code and subject to the excise tax imposed under Section
4999 of the Code. The parties hereto agree that the payments and benefits
payable pursuant to this Agreement by the Bank to the Executive upon termination
shall be limited to a maximum of three times the Executive's "base amount" (as
defined in Section 280G(b)(3) of the Code) in accordance with OTS Regulatory
Bulletin 27a. 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
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. 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.
7. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) The Executive, unless his employment is terminated for Disability,
Retirement, death, a Change in Control of the Corporation or pursuant to Section
5(d)(ii) hereof, 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(d)(i) 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, unless the termination was in connection with a Change
in Control of the Corporation.
(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 Employers pursuant to employee benefit plans
of the Employers or otherwise.
8. 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
<PAGE> 19
8
other payroll deductions as the Bank may reasonably determine should be withheld
pursuant to any applicable law or regulation.
9. 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.
10. 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: Secretary
Commonwealth Bank
2 West Lafayette Street
Norristown, Pennsylvania 19401-4758
To the Corporation: Secretary
Commonwealth Bancorp, Inc.
2 West Lafayette Street
Norristown, Pennsylvania 19401-4758
To the Executive: Charles M. Johnston
38 Rosewood Lane
Malvern, Pennsylvania 19355
11. CONFIDENTIALITY. The Executive acknowledges that by virtue of his
employment hereunder, he will maintain an intimate knowledge of the activities
and affairs of the Employers, including confidential matters. As a result, the
Executive agrees to maintain the confidentiality of all confidential information
relating to the Employers during the term of employment hereunder and any period
that the Executive may be receiving payments pursuant to this Agreement,
provided that nothing in this Section 11 shall be deemed to prevent the
Executive from either (a) being employed by any other corporation, firm or
entity upon termination of the Executive's employment by the Employers as long
as the Executive does not violate the foregoing prescription, or (b) responding
to inquiries from regulatory authorities.
<PAGE> 20
9
12. ARBITRATION. The Executive and the Employers agree 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 Employers 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.
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.
<PAGE> 21
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 bank 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 the 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 the 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 the 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.
<PAGE> 22
11
(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 OTS, or his/her designee, at the time the
Federal Deposit Insurance Corporation ("FDIC") 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
Employers 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.
21. ENTIRE AGREEMENT. This Agreement embodies the entire agreement
between the Bank and the Executive with respect to the matters agreed to herein.
All prior agreements between the Bank and the Executive with respect to the
matters agreed to herein, including without limitation the Agreement between the
Employers and the Executive dated January 1, 1997, are hereby superseded and
shall have no force or effect. Notwithstanding the foregoing, nothing contained
in this Agreement shall affect the agreement of even date being entered into
between the Corporation and the Executive.
<PAGE> 23
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IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
Attest: COMMONWEALTH BANK
By:
______________________________ ________________________________
Patrick J. Ward, President and __________________, Director and
Secretary Member of the Compensation and
Benefits Committee of the Board
of Directors
Witness: EXECUTIVE
By:
______________________________ ________________________________
Patrick J. Ward Charles M. Johnston
<PAGE> 1
Exhibit 10.11
AGREEMENT
AGREEMENT, dated this 9th day of December 1997, between Commonwealth Bank
(the "Bank"), a federally chartered savings bank, and William J. Monnich (the
"Executive").
WITNESSETH
WHEREAS, the Executive is presently Senior Vice President, Community
Banking of the Bank (the "Employer");
WHEREAS, the Employer desires to be ensured of the Executive's continued
active participation in the business of the Employer, and the Bank desires to
have this new Agreement supersede its current agreement with the Executive dated
January 1, 1997; and
WHEREAS, in order to induce the Executive to remain in the employ of the
Employer and in consideration of the Executive's agreeing to remain in the
employ of the Employer, the parties desire to specify the terms of such
employment, including the severance benefits which shall be due the Executive by
the Bank in the event that his employment with the Bank is terminated under
specified circumstances;
NOW THEREFORE, in consideration of the mutual agreements herein contained,
and upon the other terms and conditions hereinafter provided, 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 Employer 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 paid to the Executive but excluding amounts relating to the vesting of
Management Recognition Plan shares.
(b) BASE SALARY. "Base Salary" shall mean the Executive's annual salary
exclusive of any pension or other retirement plan, profit sharing, stock option,
employee stock ownership, or other plans, benefits and privileges given to
employees and executives of the Employer.
(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
<PAGE> 2
2
offenses) or final cease-and-desist order or material breach of any provision of
this Agreement.
(d) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the
Corporation" 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, as amended ("Exchange
Act"), or any successor thereto, whether or not Commonwealth Bancorp, Inc. (the
"Corporation") is registered under the 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 Corporation
representing 25% or more of the combined voting power of the Corporation'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 Corporation 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.
(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 Employer 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 Corporation 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 office of Senior Vice
President, Community Banking of the Employer or a
material adverse change made by the Employer in the
Executive's functions, duties or responsibilities as
Senior Vice President, Community Banking of the Employer
as they existed immediately prior to a Change in Control
of the Corporation;
<PAGE> 3
3
(ii) Without the Executive's express written consent, a
reduction by the Employer 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;
(iii) The principal executive office of the Employer is
relocated more than 25 miles from the current principal
executive office or, without the Executive's express
written consent, the Employer requires the Executive to
be based anywhere other than an area in which the
Employer's principal executive office is located, except
for required travel on business of the Employer 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 the 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 the Executive's employment for Cause,
which shall be effective immediately; and (iv) is given in the manner specified
in Section 10 hereof.
(k) RETIREMENT. "Retirement" shall mean voluntary termination by the
Executive in accordance with the Employer'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.
<PAGE> 4
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2. TERM OF EMPLOYMENT.
(a) The Bank hereby employs the Executive as Senior Vice President,
Community Banking and the 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 and, upon approval of the Board of
Directors of the Bank, shall extend for an additional year on each annual
anniversary of the date of this Agreement such that at any time the remaining
term of this Agreement shall be from two to three years. Prior to the first
annual anniversary of the date of this Agreement and each annual anniversary
thereafter, the Board of Directors of the Bank shall consider and review (taking
into account all relevant factors, including the Executive's performance
hereunder) an extension of the term of this Agreement, and the term shall
continue to extend each year if the Board of Directors approves such extension
unless the Executive gives written notice to the Employer of the Executive's
election not to extend the term, with such written notice to be given not less
than thirty (30) days prior to any such anniversary date. If the Board of
Directors elects not to extend the term, it shall give written notice of such
decision to the Executive not less than thirty (30) days prior to any such
anniversary date. If any party gives timely notice that the term will not be
extended as of any annual anniversary date, then this Agreement shall terminate
at the conclusion of its remaining term. 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 Employer shall compensate and pay the Executive for his services
during the term of this Agreement at a minimum Base Salary of $133,750 per year,
which may be increased from time to time in such amounts as may be determined by
the Board of Directors of the Employer and may not be decreased without the
Executive's express written consent. 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 Employer.
(b) During the term of this Agreement, the 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
Employer, to the extent commensurate with his then duties and responsibilities,
as fixed by the Board of Directors of the Employer. The Bank shall not make any
changes in such plans, benefits or privileges which would adversely affect the
Executive's rights or benefits thereunder, unless such change occurs pursuant to
a
<PAGE> 5
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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 the
Executive as compared with any other executive officer of the Bank. Nothing paid
to the 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
the Executive pursuant to Section 3(a) hereof.
(c) During the term of this Agreement, the 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 Employer, which shall in no event be less
than four weeks per annum. The Executive shall not be entitled to receive any
additional compensation from the Employer for failure to take a vacation, nor
shall the 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
Employer.
(d) During the term of this Agreement, in keeping with past practices, the
Employer shall continue to provide the Executive with the use of an
Employer-owned automobile appropriate to his positions with the Employer and to
pay all costs associated with such automobile, including registration,
licensing, insurance and costs of operation.
(e) In the event the Executive's employment is terminated by the Bank for
any reason other than Cause, the Employer shall provide continued 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, and health and accident insurance substantially identical to the
coverage maintained by the Employer for the Executive immediately prior to his
termination. Such coverage shall cease upon the expiration of the remaining term
of this Agreement.
4. EXPENSES. The Employer shall reimburse the Executive or otherwise
provide for or pay for all reasonable expenses incurred by the Executive in
furtherance of or in connection with the business of the Employer, including,
but not by way of limitation, automobile expenses described in Section 3(d)
hereof, 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 Employer. If such expenses are paid in the first
instance by the Executive, the Employer 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 the Executive shall have the right, upon prior Notice of Termination, to
terminate his employment hereunder for any reason. The Executive's employment
and his status as an officer shall terminate (i)
<PAGE> 6
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immediately upon being given a Notice of Termination for Cause, or (ii) on the
Date of Termination for any other reason.
(b) In the event that (i) the Executive's employment is terminated by the
Bank for Cause or (ii) the Executive terminates his employment hereunder other
than for Disability, Retirement, death or Good Reason, the Executive shall have
no right pursuant to this Agreement to compensation or other benefits for any
period after the applicable Date of Termination.
(c) In the event that the Executive's employment is terminated as a result
of Disability, Retirement or the Executive's death during the term of this
Agreement, the Executive shall have no right pursuant to this Agreement to
compensation or other benefits for any period after the applicable Date of
Termination, except as provided for in Section 3(e) hereof.
(d) In the event that (i) the Executive's employment is terminated by the
Bank for other than Cause, Disability, Retirement or the Executive's death or
(ii) such employment is terminated by the Executive (a) due to a material breach
of this Agreement by the Bank, which breach has not been cured within fifteen
(15) days after a written notice of non-compliance has been given by the
Executive to the Employer, or (b) for Good Reason, 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 cash severance amount equal to three (3) times the
Executive's Average Annual Compensation, 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)), on a tax-adjusted basis 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 insurance and other employee benefit
plans, programs and arrangements offered by the Bank in which the
Executive was entitled to participate immediately prior to the Date of
Termination (other than stock option, employee stock ownership and
restricted stock plans).
6. 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 the Executive has the right to receive from the
Bank, would constitute a "parachute payment" under Section 280G of the Code, the
payments and benefits payable by the Bank pursuant to Section 5 hereof shall be
reduced, in the manner determined by
<PAGE> 7
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the Executive, by the amount, if any, which is the minimum necessary to result
in no portion of the payments and benefits payable by the Bank under Section 5
being non-deductible to the Bank pursuant to Section 280G of the Code and
subject to the excise tax imposed under Section 4999 of the Code. The parties
hereto agree that the payments and benefits payable pursuant to this Agreement
by the Bank to the Executive upon termination shall be limited to a maximum of
three times the Executive's "base amount" (as defined in Section 280G(b)(3) of
the Code) in accordance with OTS Regulatory Bulletin 27a. 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 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. 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.
7. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) The Executive, unless his employment is terminated for Disability,
Retirement, death, a Change in Control of the Corporation or pursuant to Section
5(d)(ii) hereof, 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(d)(i) 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, unless the termination was in connection with a Change
in Control of the Corporation.
(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 Employer pursuant to employee benefit plans
of the Employer or otherwise.
8. 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.
9. 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
<PAGE> 8
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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.
10. 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: Secretary
Commonwealth Bank
2 West Lafayette Street
Norristown, Pennsylvania 19401-4758
To the Executive: William J. Monnich
1070 Old Schuylkill Road
Pottstown, Pennsylvania 19465
11. CONFIDENTIALITY. The Executive acknowledges that by virtue of his
employment hereunder, he will maintain an intimate knowledge of the activities
and affairs of the Employer, including confidential matters. As a result, the
Executive agrees to maintain the confidentiality of all confidential information
relating to the Employer during the term of employment hereunder and any period
that the Executive may be receiving payments pursuant to this Agreement,
provided that nothing in this Section 11 shall be deemed to prevent the
Executive from either (a) being employed by any other corporation, firm or
entity upon termination of the Executive's employment by the Employer as long as
the Executive does not violate the foregoing prescription, or (b) responding to
inquiries from regulatory authorities.
12. ARBITRATION. The Executive and the Employer agree 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 Employer 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
<PAGE> 9
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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.
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.
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.
<PAGE> 10
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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 bank 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 the 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 the 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 the 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 OTS, or his/her designee, at the time the
Federal Deposit Insurance Corporation ("FDIC") 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 Employer
as of the date of termination shall not be affected.
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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.
21. ENTIRE AGREEMENT. This Agreement embodies the entire agreement
between the Bank and the Executive with respect to the matters agreed to herein.
All prior agreements between the Bank and the Executive with respect to the
matters agreed to herein, including without limitation the Agreement between the
Employer and the Executive dated January 1, 1997, are hereby superseded and
shall have no force or effect.
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
Attest: COMMONWEALTH BANK
By:
________________________________________ __________________________________
Patrick J. Ward, President and Secretary __________________, Director and
Member of the Compensation and
Benefits Committee of the Board
of Directors
Witness: EXECUTIVE
By:
________________________________________ __________________________________
Patrick J. Ward William J. Monnich
<PAGE> 1
Exhibit 10.12
AGREEMENT
AGREEMENT, dated this 9th day of December 1997, between Commonwealth Bank
(the "Bank"), a federally chartered savings bank, and Peter A. Kehoe (the
"Executive").
WITNESSETH
WHEREAS, the Executive is presently President, ComNet Mortgage Services
Division of the Bank (the "Employer");
WHEREAS, the Employer desires to be ensured of the Executive's continued
active participation in the business of the Employer, and the Bank desires to
have this new Agreement supersede its current agreement with the Executive dated
January 1, 1997; and
WHEREAS, in order to induce the Executive to remain in the employ of the
Employer and in consideration of the Executive's agreeing to remain in the
employ of the Employer, the parties desire to specify the terms of such
employment, including the severance benefits which shall be due the Executive by
the Bank in the event that his employment with the Bank is terminated under
specified circumstances;
NOW THEREFORE, in consideration of the mutual agreements herein contained,
and upon the other terms and conditions hereinafter provided, 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 Employer 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 paid to the Executive but excluding amounts relating to the vesting of
Management Recognition Plan shares.
(b) BASE SALARY. "Base Salary" shall mean the Executive's annual salary
exclusive of any pension or other retirement plan, profit sharing, stock option,
employee stock ownership, or other plans, benefits and privileges given to
employees and executives of the Employer.
(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
<PAGE> 2
2
offenses) or final cease-and-desist order or material breach of any provision of
this Agreement.
(d) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the
Corporation" 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, as amended ("Exchange
Act"), or any successor thereto, whether or not Commonwealth Bancorp, Inc. (the
"Corporation") is registered under the 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 Corporation
representing 25% or more of the combined voting power of the Corporation'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 Corporation 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.
(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 Employer 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 Corporation 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 office of President,
ComNet Mortgage Services Division of the Employer or a
material adverse change made by the Employer in the
Executive's functions, duties or responsibilities as
President, ComNet Mortgage Services Division of the
Employer as they existed immediately prior to a Change
in Control of the Corporation;
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(ii) Without the Executive's express written consent, a
reduction by the Employer 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;
(iii) The principal executive office of the Employer is
relocated more than 25 miles from the current principal
executive office or, without the Executive's express
written consent, the Employer requires the Executive to
be based anywhere other than an area in which the
Employer's principal executive office is located, except
for required travel on business of the Employer 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 the 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 the Executive's employment for Cause,
which shall be effective immediately; and (iv) is given in the manner specified
in Section 10 hereof.
(k) RETIREMENT. "Retirement" shall mean voluntary termination by the
Executive in accordance with the Employer'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.
<PAGE> 4
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2. TERM OF EMPLOYMENT.
(a) The Bank hereby employs the Executive as President, ComNet Mortgage
Services Division and the 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 and, upon approval of the Board of
Directors of the Bank, shall extend for an additional year on each annual
anniversary of the date of this Agreement such that at any time the remaining
term of this Agreement shall be from two to three years. Prior to the first
annual anniversary of the date of this Agreement and each annual anniversary
thereafter, the Board of Directors of the Bank shall consider and review (taking
into account all relevant factors, including the Executive's performance
hereunder) an extension of the term of this Agreement, and the term shall
continue to extend each year if the Board of Directors approves such extension
unless the Executive gives written notice to the Employer of the Executive's
election not to extend the term, with such written notice to be given not less
than thirty (30) days prior to any such anniversary date. If the Board of
Directors elects not to extend the term, it shall give written notice of such
decision to the Executive not less than thirty (30) days prior to any such
anniversary date. If any party gives timely notice that the term will not be
extended as of any annual anniversary date, then this Agreement shall terminate
at the conclusion of its remaining term. 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 Employer shall compensate and pay the Executive for his services
during the term of this Agreement at a minimum Base Salary of $154,440 per year,
which may be increased from time to time in such amounts as may be determined by
the Board of Directors of the Employer and may not be decreased without the
Executive's express written consent. 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 Employer.
(b) During the term of this Agreement, the 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
Employer, to the extent commensurate with his then duties and responsibilities,
as fixed by the Board of Directors of the Employer. The Bank shall not make any
changes in such plans, benefits or privileges which would adversely affect the
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
<PAGE> 5
5
proportionately greater adverse change in the rights of or benefits to the
Executive as compared with any other executive officer of the Bank. Nothing paid
to the 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
the Executive pursuant to Section 3(a) hereof.
(c) During the term of this Agreement, the 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 Employer, which shall in no event be less
than four weeks per annum. The Executive shall not be entitled to receive any
additional compensation from the Employer for failure to take a vacation, nor
shall the 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
Employer.
(d) During the term of this Agreement, in keeping with past practices, the
Employer shall continue to provide the Executive with the use of an
Employer-owned automobile appropriate to his positions with the Employer and to
pay all costs associated with such automobile, including registration,
licensing, insurance and costs of operation.
(e) In the event the Executive's employment is terminated by the Bank for
any reason other than Cause, the Employer shall provide continued 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, and health and accident insurance substantially identical to the
coverage maintained by the Employer for the Executive immediately prior to his
termination. Such coverage shall cease upon the expiration of the remaining term
of this Agreement.
4. EXPENSES. The Employer shall reimburse the Executive or otherwise
provide for or pay for all reasonable expenses incurred by the Executive in
furtherance of or in connection with the business of the Employer, including,
but not by way of limitation, automobile expenses described in Section 3(d)
hereof, 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 Employer. If such expenses are paid in the first
instance by the Executive, the Employer 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 the Executive shall have the right, upon prior Notice of Termination, to
terminate his employment hereunder for any reason. The Executive's employment
and his status as an officer shall terminate (i) immediately upon being given a
Notice of Termination for Cause, or (ii) on the Date of Termination for any
other reason.
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6
(b) In the event that (i) the Executive's employment is terminated by the
Bank for Cause or (ii) the Executive terminates his employment hereunder other
than for Disability, Retirement, death or Good Reason, the Executive shall have
no right pursuant to this Agreement to compensation or other benefits for any
period after the applicable Date of Termination.
(c) In the event that the Executive's employment is terminated as a result
of Disability, Retirement or the Executive's death during the term of this
Agreement, the Executive shall have no right pursuant to this Agreement to
compensation or other benefits for any period after the applicable Date of
Termination, except as provided for in Section 3(e) hereof.
(d) In the event that (i) the Executive's employment is terminated by the
Bank for other than Cause, Disability, Retirement or the Executive's death or
(ii) such employment is terminated by the Executive (a) due to a material breach
of this Agreement by the Bank, which breach has not been cured within fifteen
(15) days after a written notice of non-compliance has been given by the
Executive to the Employer, or (b) for Good Reason, 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 cash severance amount equal to three (3) times the
Executive's Average Annual Compensation, 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)), on a tax-adjusted basis 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 insurance and other employee benefit
plans, programs and arrangements offered by the Bank in which the
Executive was entitled to participate immediately prior to the Date of
Termination (other than stock option, employee stock ownership and
restricted stock plans).
6. 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 the Executive has the right to receive from the
Bank, would constitute a "parachute payment" under Section 280G of the Code, the
payments and benefits payable by the Bank 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
payable by the Bank under Section 5 being non-deductible to the Bank pursuant to
Section 280G of the Code and subject to the excise tax imposed under
<PAGE> 7
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Section 4999 of the Code. The parties hereto agree that the payments and
benefits payable pursuant to this Agreement by the Bank to the Executive upon
termination shall be limited to a maximum of three times the Executive's "base
amount" (as defined in Section 280G(b)(3) of the Code) in accordance with OTS
Regulatory Bulletin 27a. 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 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. 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.
7. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) The Executive, unless his employment is terminated for Disability,
Retirement, death, a Change in Control of the Corporation or pursuant to Section
5(d)(ii) hereof, 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(d)(i) 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, unless the termination was in connection with a Change
in Control of the Corporation.
(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 Employer pursuant to employee benefit plans
of the Employer or otherwise.
8. 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.
9. 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.
<PAGE> 8
8
10. 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: Secretary
Commonwealth Bank
2 West Lafayette Street
Norristown, Pennsylvania 19401-4758
To the Executive: Peter A. Kehoe
2 Country Lane
Malvern, Pennsylvania 19355
11. CONFIDENTIALITY. The Executive acknowledges that by virtue of his
employment hereunder, he will maintain an intimate knowledge of the activities
and affairs of the Employer, including confidential matters. As a result, the
Executive agrees to maintain the confidentiality of all confidential information
relating to the Employer during the term of employment hereunder and any period
that the Executive may be receiving payments pursuant to this Agreement,
provided that nothing in this Section 11 shall be deemed to prevent the
Executive from either (a) being employed by any other corporation, firm or
entity upon termination of the Executive's employment by the Employer as long as
the Executive does not violate the foregoing prescription, or (b) responding to
inquiries from regulatory authorities.
12. ARBITRATION. The Executive and the Employer agree 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 Employer 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.
<PAGE> 9
9
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.
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.
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.
<PAGE> 10
10
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 bank 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 the 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 the 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 the 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 OTS, or his/her designee, at the time the
Federal Deposit Insurance Corporation ("FDIC") 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 Employer
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.
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21. ENTIRE AGREEMENT. This Agreement embodies the entire agreement
between the Bank and the Executive with respect to the matters agreed to herein.
All prior agreements between the Bank and the Executive with respect to the
matters agreed to herein, including without limitation the Agreement between the
Employer and the Executive dated January 1, 1997, are hereby superseded and
shall have no force or effect.
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
Attest: COMMONWEALTH BANK
By:
________________________________________ ___________________________________
Patrick J. Ward, President and Secretary __________________, Director and
Member of the Compensation and
Benefits Committee of the Board
of Directors
Witness: EXECUTIVE
By:
________________________________________ ___________________________________
Patrick J. Ward Peter A. Kehoe
<PAGE> 1
EXHIBIT 10.13
AGREEMENT
AGREEMENT, dated this 9th day of December 1997, between Commonwealth
Bank (the "Bank"), a federally chartered savings bank, and David K. Griest
(the "Executive").
WITNESSETH
WHEREAS, the Executive is presently Senior Vice President, Chief
Information Officer of the Bank (the "Employer");
WHEREAS, the Employer desires to be ensured of the Executive's
continued active participation in the business of the Employer, and the Bank
desires to have this new Agreement supersede its current agreement with the
Executive dated January 1, 1997; and
WHEREAS, in order to induce the Executive to remain in the employ of
the Employer and in consideration of the Executive's agreeing to remain in the
employ of the Employer, the parties desire to specify the terms of such
employment, including the severance benefits which shall be due the Executive
by the Bank in the event that his employment with the Bank is terminated under
specified circumstances;
NOW THEREFORE, in consideration of the mutual agreements herein
contained, and upon the other terms and conditions hereinafter provided, 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 Employer 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 paid to the Executive but excluding amounts relating to the vesting of
Management Recognition Plan shares.
(b) BASE SALARY. "Base Salary" shall mean the Executive's annual
salary exclusive of any pension or other retirement plan, profit sharing, stock
option, employee stock ownership, or other plans, benefits and privileges given
to employees and executives of the Employer.
(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
<PAGE> 2
2
offenses) or final cease-and-desist order or material breach of any provision
of this Agreement.
(d) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of
the Corporation" 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, as amended
("Exchange Act"), or any successor thereto, whether or not Commonwealth
Bancorp, Inc. (the "Corporation") is registered under the 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 Corporation representing 25% or more of the combined voting power of the
Corporation'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 Corporation 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.
(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 Employer 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 Corporation 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 office of Senior Vice
President, Chief Information Officer of the Employer
or a material adverse change made by the Employer in
the Executive's functions, duties or responsibilities
as Senior Vice President, Chief Information Officer
of the Employer as they existed immediately prior to
a Change in Control of the Corporation;
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(ii) Without the Executive's express written consent, a
reduction by the Employer 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;
(iii) The principal executive office of the Employer is
relocated more than 25 miles from the current
principal executive office or, without the
Executive's express written consent, the Employer
requires the Executive to be based anywhere other
than an area in which the Employer's principal
executive office is located, except for required
travel on business of the Employer 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 the 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 the
Executive's employment for Cause, which shall be effective immediately; and
(iv) is given in the manner specified in Section 10 hereof.
(k) RETIREMENT. "Retirement" shall mean voluntary termination by
the Executive in accordance with the Employer'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.
<PAGE> 4
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2. TERM OF EMPLOYMENT.
(a) The Bank hereby employs the Executive as Senior Vice
President, Chief Information Officer and the 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
and, upon approval of the Board of Directors of the Bank, shall extend for an
additional year on each annual anniversary of the date of this Agreement such
that at any time the remaining term of this Agreement shall be from two to
three years. Prior to the first annual anniversary of the date of this
Agreement and each annual anniversary thereafter, the Board of Directors of the
Bank shall consider and review (taking into account all relevant factors,
including the Executive's performance hereunder) an extension of the term of
this Agreement, and the term shall continue to extend each year if the Board of
Directors approves such extension unless the Executive gives written notice to
the Employer of the Executive's election not to extend the term, with such
written notice to be given not less than thirty (30) days prior to any such
anniversary date. If the Board of Directors elects not to extend the term, it
shall give written notice of such decision to the Executive not less than
thirty (30) days prior to any such anniversary date. If any party gives timely
notice that the term will not be extended as of any annual anniversary date,
then this Agreement shall terminate at the conclusion of its remaining term.
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 Employer shall compensate and pay the Executive for his
services during the term of this Agreement at a minimum Base Salary of $115,700
per year, which may be increased from time to time in such amounts as may be
determined by the Board of Directors of the Employer and may not be decreased
without the Executive's express written consent. 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 Employer.
(b) During the term of this Agreement, the 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 Employer, to the extent commensurate with his then duties and
responsibilities, as fixed by the Board of Directors of the Employer. The Bank
shall not make any changes in such plans, benefits or privileges which would
adversely affect the 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
<PAGE> 5
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proportionately greater adverse change in the rights of or benefits to the
Executive as compared with any other executive officer of the Bank. Nothing
paid to the 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
the Executive pursuant to Section 3(a) hereof.
(c) During the term of this Agreement, the 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 Employer, which shall in no
event be less than four weeks per annum. The Executive shall not be entitled
to receive any additional compensation from the Employer for failure to take a
vacation, nor shall the 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 Employer.
(d) During the term of this Agreement, in keeping with past
practices, the Employer shall continue to provide the Executive with the use of
an Employer-owned automobile appropriate to his positions with the Employer and
to pay all costs associated with such automobile, including registration,
licensing, insurance and costs of operation.
(e) In the event the Executive's employment is terminated by the
Bank for any reason other than Cause, the Employer shall provide continued
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, and health and accident insurance substantially
identical to the coverage maintained by the Employer for the Executive
immediately prior to his termination. Such coverage shall cease upon the
expiration of the remaining term of this Agreement.
4. EXPENSES. The Employer shall reimburse the Executive or
otherwise provide for or pay for all reasonable expenses incurred by the
Executive in furtherance of or in connection with the business of the Employer,
including, but not by way of limitation, automobile expenses described in
Section 3(d) hereof, 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 Employer. If such expenses
are paid in the first instance by the Executive, the Employer 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 the Executive shall have the right, upon prior Notice of
Termination, to terminate his employment hereunder for any reason. The
Executive's employment and his status as an officer shall terminate (i)
immediately upon being given a Notice of Termination for Cause, or (ii) on the
Date of Termination for any other reason.
<PAGE> 6
6
(b) In the event that (i) the Executive's employment is terminated
by the Bank for Cause or (ii) the Executive terminates his employment hereunder
other than for Disability, Retirement, death or Good Reason, the Executive
shall have no right pursuant to this Agreement to compensation or other
benefits for any period after the applicable Date of Termination.
(c) In the event that the Executive's employment is terminated as
a result of Disability, Retirement or the Executive's death during the term of
this Agreement, the Executive shall have no right pursuant to this Agreement to
compensation or other benefits for any period after the applicable Date of
Termination, except as provided for in Section 3(e) hereof.
(d) In the event that (i) the Executive's employment is terminated
by the Bank for other than Cause, Disability, Retirement or the Executive's
death or (ii) such employment is terminated by the Executive (a) due to a
material breach of this Agreement by the Bank, which breach has not been cured
within fifteen (15) days after a written notice of non-compliance has been
given by the Executive to the Employer, or (b) for Good Reason, 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 cash severance amount equal
to three (3) times the Executive's Average Annual Compensation, 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)), on
a tax-adjusted basis 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 insurance and other employee benefit
plans, programs and arrangements offered by the Bank in which the
Executive was entitled to participate immediately prior to the Date of
Termination (other than stock option, employee stock ownership and
restricted stock plans).
6. 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 the Executive has the right to receive
from the Bank, would constitute a "parachute payment" under Section 280G of the
Code, the payments and benefits payable by the Bank 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 payable by the Bank under Section 5 being non-deductible
to the Bank pursuant to Section 280G of the Code and subject to the excise tax
imposed under
<PAGE> 7
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Section 4999 of the Code. The parties hereto agree that the payments and
benefits payable pursuant to this Agreement by the Bank to the Executive upon
termination shall be limited to a maximum of three times the Executive's "base
amount" (as defined in Section 280G(b)(3) of the Code) in accordance with OTS
Regulatory Bulletin 27a. 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 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. 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.
7. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) The Executive, unless his employment is terminated for
Disability, Retirement, death, a Change in Control of the Corporation or
pursuant to Section 5(d)(ii) hereof, 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(d)(i)
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, unless the termination was
in connection with a Change in Control of the Corporation.
(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 Employer pursuant to employee benefit plans
of the Employer or otherwise.
8. 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.
9. 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.
<PAGE> 8
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10. 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: Secretary
Commonwealth Bank
2 West Lafayette Street
Norristown, Pennsylvania 19401-4758
To the Executive: David K. Griest
4409 Dermond Avenue
Drexel Hill, Pennsylvania 19026
11. CONFIDENTIALITY. The Executive acknowledges that by virtue of
his employment hereunder, he will maintain an intimate knowledge of the
activities and affairs of the Employer, including confidential matters. As a
result, the Executive agrees to maintain the confidentiality of all
confidential information relating to the Employer during the term of employment
hereunder and any period that the Executive may be receiving payments pursuant
to this Agreement, provided that nothing in this Section 11 shall be deemed to
prevent the Executive from either (a) being employed by any other corporation,
firm or entity upon termination of the Executive's employment by the Employer
as long as the Executive does not violate the foregoing prescription, or (b)
responding to inquiries from regulatory authorities.
12. ARBITRATION. The Executive and the Employer agree 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 Employer 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
<PAGE> 9
9
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.
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.
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.
<PAGE> 10
10
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 bank 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 the 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 the 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 the 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 OTS, or his/her designee, at
the time the Federal Deposit Insurance Corporation ("FDIC") 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 Employer 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.
<PAGE> 11
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21. ENTIRE AGREEMENT. This Agreement embodies the entire
agreement between the Bank and the Executive with respect to the matters agreed
to herein. All prior agreements between the Bank and the Executive with
respect to the matters agreed to herein, including without limitation the
Agreement between the Employer and the Executive dated January 1, 1997, are
hereby superseded and shall have no force or effect.
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
Attest: COMMONWEALTH BANK
By:
- ---------------------------------------- ------------------------------
Patrick J. Ward, President and Secretary ________________, Director and
Member of the Compensation and
Benefits Committee of the
Board of Directors
Witness: EXECUTIVE
By:
- ---------------------------------------- ------------------------------
Patrick J. Ward David K. Griest
<PAGE> 1
EXHIBIT 10.14
AGREEMENT
AGREEMENT, dated this 6th day of February 1998, between Commonwealth
Bank (the "Bank"), a federally chartered savings bank, and Brian C. Zwaan (the
"Executive").
WITNESSETH
WHEREAS, the Executive has been elected to serve as Senior Vice
President, Business Banking of the Bank (the "Employer");
WHEREAS, the Employer desires to be ensured of the Executive's
continued active participation in the business of the Employer; and
WHEREAS, in order to induce the Executive to remain in the employ of
the Employer and in consideration of the Executive's agreeing to remain in the
employ of the Employer, the parties desire to specify the terms of such
employment, including the severance benefits which shall be due the Executive
by the Bank in the event that his employment with the Bank is terminated under
specified circumstances;
NOW THEREFORE, in consideration of the mutual agreements herein
contained, and upon the other terms and conditions hereinafter provided, 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 Employer 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 paid to the Executive but excluding amounts relating to the vesting of
Management Recognition Plan shares.
(b) BASE SALARY. "Base Salary" shall mean the Executive's annual
salary exclusive of any pension or other retirement plan, profit sharing, stock
option, employee stock ownership, or other plans, benefits and privileges given
to employees and executives of the Employer.
(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.
<PAGE> 2
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(d) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of
the Corporation" 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, as amended
("Exchange Act"), or any successor thereto, whether or not Commonwealth
Bancorp, Inc. (the "Corporation") is registered under the 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 Corporation representing 25% or more of the combined voting power of the
Corporation'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 Corporation 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.
(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 Employer 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 Corporation 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 office of Senior Vice
President, Business Banking of the Employer or a
material adverse change made by the Employer in the
Executive's functions, duties or responsibilities as
Senior Vice President, Business Banking of the
Employer as they existed immediately prior to a
Change in Control of the Corporation;
(ii) Without the Executive's express written consent, a
reduction by the Employer 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)
<PAGE> 3
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hereof, a reduction in the package of fringe benefits
provided to the Executive, taken as a whole;
(iii) The principal executive office of the Employer is
relocated more than 25 miles from the current
principal executive office or, without the
Executive's express written consent, the Employer
requires the Executive to be based anywhere other
than an area in which the Employer's principal
executive office is located, except for required
travel on business of the Employer 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 the 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 the
Executive's employment for Cause, which shall be effective immediately; and
(iv) is given in the manner specified in Section 10 hereof.
(k) RETIREMENT. "Retirement" shall mean voluntary termination by
the Executive in accordance with the Employer'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.
<PAGE> 4
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2. TERM OF EMPLOYMENT.
(a) The Bank hereby employs the Executive as Senior Vice
President, Business Banking and the 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 and, upon approval of
the Board of Directors of the Bank, shall extend for an additional year on each
annual anniversary of the date of this Agreement such that at any time the
remaining term of this Agreement shall be from two to three years. Prior to
the first annual anniversary of the date of this Agreement and each annual
anniversary thereafter, the Board of Directors of the Bank shall consider and
review (taking into account all relevant factors, including the Executive's
performance hereunder) an extension of the term of this Agreement, and the term
shall continue to extend each year if the Board of Directors approves such
extension unless the Executive gives written notice to the Employer of the
Executive's election not to extend the term, with such written notice to be
given not less than thirty (30) days prior to any such anniversary date. If the
Board of Directors elects not to extend the term, it shall give written notice
of such decision to the Executive not less than thirty (30) days prior to any
such anniversary date. If any party gives timely notice that the term will not
be extended as of any annual anniversary date, then this Agreement shall
terminate at the conclusion of its remaining term. 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 Employer shall compensate and pay the Executive for his
services during the term of this Agreement at a minimum Base Salary of $130,000
per year, which may be increased from time to time in such amounts as may be
determined by the Board of Directors of the Employer and may not be decreased
without the Executive's express written consent. 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 Employer.
(b) During the term of this Agreement, the 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 Employer, to the extent commensurate with his then duties and
responsibilities, as fixed by the Board of Directors of the Employer. The Bank
shall not make any changes in such plans, benefits or privileges which would
adversely affect the Executive's rights or benefits thereunder, unless such
change occurs pursuant to a
<PAGE> 5
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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 the
Executive as compared with any other executive officer of the Bank. Nothing
paid to the 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
the Executive pursuant to Section 3(a) hereof.
(c) During the term of this Agreement, the 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 Employer, which shall in no
event be less than four weeks per annum. The Executive shall not be entitled
to receive any additional compensation from the Employer for failure to take a
vacation, nor shall the 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 Employer.
(d) During the term of this Agreement, the Employer shall provide
the Executive with the use of an Employer-owned automobile appropriate to his
positions with the Employer and to pay all costs associated with such
automobile, including registration, licensing, insurance and costs of
operation.
(e) In the event the Executive's employment is terminated by the
Bank for any reason other than Cause, the Employer shall provide continued
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, and health and accident insurance substantially
identical to the coverage maintained by the Employer for the Executive
immediately prior to his termination. Such coverage shall cease upon the
expiration of the remaining term of this Agreement.
4. EXPENSES. The Employer shall reimburse the Executive or
otherwise provide for or pay for all reasonable expenses incurred by the
Executive in furtherance of or in connection with the business of the Employer,
including, but not by way of limitation, automobile expenses described in
Section 3(d) hereof, 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 Employer. If such expenses
are paid in the first instance by the Executive, the Employer 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 the Executive shall have the right, upon prior Notice of
Termination, to terminate his employment hereunder for any reason. The
Executive's employment and his status as an officer shall terminate (i)
<PAGE> 6
6
immediately upon being given a Notice of Termination for Cause, or (ii) on the
Date of Termination for any other reason.
(b) In the event that (i) the Executive's employment is terminated
by the Bank for Cause or (ii) the Executive terminates his employment hereunder
other than for Disability, Retirement, death or Good Reason, the Executive
shall have no right pursuant to this Agreement to compensation or other
benefits for any period after the applicable Date of Termination.
(c) In the event that the Executive's employment is terminated as
a result of Disability, Retirement or the Executive's death during the term of
this Agreement, the Executive shall have no right pursuant to this Agreement to
compensation or other benefits for any period after the applicable Date of
Termination, except as provided for in Section 3(e) hereof.
(d) In the event that (i) the Executive's employment is terminated
by the Bank for other than Cause, Disability, Retirement or the Executive's
death or (ii) such employment is terminated by the Executive (a) due to a
material breach of this Agreement by the Bank, which breach has not been cured
within fifteen (15) days after a written notice of non-compliance has been
given by the Executive to the Employer, or (b) for Good Reason, 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 cash severance amount equal
to three (3) times the Executive's Average Annual Compensation, 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)), on
a tax-adjusted basis 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 insurance and other employee benefit
plans, programs and arrangements offered by the Bank in which the
Executive was entitled to participate immediately prior to the Date of
Termination (other than stock option, employee stock ownership and
restricted stock plans).
6. 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 the Executive has the right to receive
from the Bank, would constitute a "parachute payment" under Section 280G of the
Code, the payments and benefits payable by the Bank pursuant to Section 5
hereof shall be reduced, in the manner determined by
<PAGE> 7
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the Executive, by the amount, if any, which is the minimum necessary to result
in no portion of the payments and benefits payable by the Bank under Section 5
being non-deductible to the Bank pursuant to Section 280G of the Code and
subject to the excise tax imposed under Section 4999 of the Code. The parties
hereto agree that the payments and benefits payable pursuant to this Agreement
by the Bank to the Executive upon termination shall be limited to a maximum of
three times the Executive's "base amount" (as defined in Section 280G(b)(3) of
the Code) in accordance with OTS Regulatory Bulletin 27a. 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 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. 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.
7. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) The Executive, unless his employment is terminated for
Disability, Retirement, death, a Change in Control of the Corporation or
pursuant to Section 5(d)(ii) hereof, 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(d)(i)
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, unless the termination was
in connection with a Change in Control of the Corporation.
(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 Employer pursuant to employee benefit plans
of the Employer or otherwise.
8. 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.
9. 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
<PAGE> 8
8
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.
10. 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: Secretary
Commonwealth Bank
2 West Lafayette Street
Norristown, Pennsylvania 19401-4758
To the Executive: Brian C. Zwaan
493 Green Hill Lane
Berwyn, Pennsylvania 19312
11. CONFIDENTIALITY. The Executive acknowledges that by virtue of
his employment hereunder, he will maintain an intimate knowledge of the
activities and affairs of the Employer, including confidential matters. As a
result, the Executive agrees to maintain the confidentiality of all
confidential information relating to the Employer during the term of employment
hereunder and any period that the Executive may be receiving payments pursuant
to this Agreement, provided that nothing in this Section 11 shall be deemed to
prevent the Executive from either (a) being employed by any other corporation,
firm or entity upon termination of the Executive's employment by the Employer
as long as the Executive does not violate the foregoing prescription, or (b)
responding to inquiries from regulatory authorities.
12. ARBITRATION. The Executive and the Employer agree 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 Employer 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
<PAGE> 9
9
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.
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.
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.
<PAGE> 10
10
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 bank 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 the 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 the 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 the 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 OTS, or his/her designee, at
the time the Federal Deposit Insurance Corporation ("FDIC") 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 Employer as of the date of termination shall not be affected.
<PAGE> 11
11
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.
21. ENTIRE AGREEMENT. This Agreement embodies the entire
agreement between the Bank and the Executive with respect to the matters agreed
to herein.
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
Attest: COMMONWEALTH BANK
By:
- ---------------------------------------- ------------------------------
Patrick J. Ward, President and Secretary ________________, Director and
Member of the Compensation and
Benefits Committee of the
Board of Directors
Witness: EXECUTIVE
By:
- ---------------------------------------- ------------------------------
Patrick J. Ward Brian C. Zwaan
<PAGE> 1
EXHIBIT 10.15
EXCESS BENEFIT PLAN
OF
COMMONWEALTH FEDERAL SAVINGS BANK
(AS AMENDED EFFECTIVE JANUARY 1, 1998)
This Commonwealth Bank Excess Benefit Plan (formerly named the
Commonwealth Federal Savings Bank Excess Benefit Plan) (the "Plan") was adopted
by Commonwealth Bank (formerly Commonwealth Federal Savings Bank) (the "Bank")
effective as of January 1, 1994. The Plan is established and maintained by the
Bank for the purpose of permitting one or more of its officers listed in
Appendix A attached hereto who participate in the Bank's Employee Stock
Ownership Plan ("ESOP"), to receive allocations representing shares of common
stock of the Bank pursuant to this Plan in excess of the number of shares of
common stock of the Bank which are allocable to their accounts within the ESOP
under the limitation imposed by Section 401(a)(17) of the Internal Revenue Code
of 1986, as amended by the Revenue Reconciliation Act of 1993 ("1993 Act").
The Plan is an unfunded plan maintained for the purpose of providing
deferred compensation for selected officers of the Bank, each of whom is a
member of a select group of management or highly compensated employees for
purposes of Title I of the Employee Retirement Income Security Act of 1974, as
amended.
The Bank amended the Plan effective January 1, 1998, to reflect the
Bank's current name and to designate an additional participant in the Plan.
Accordingly, the Bank hereby adopts the amended Plan pursuant to the
terms and provisions set forth below:
ARTICLE I
DEFINITIONS
Whenever used herein the following terms shall have the meanings
hereinafter set forth:
1.1. "Bank" means Commonwealth Bank, or, to the extent provided in
Section 8.8 below, any successor corporation or other entity resulting from a
merger or consolidation into or with the Bank or a transfer or sale of
substantially all of the assets of the Bank.
1.2. "Board" means the Board of Directors of the Bank.
1.3. "Code" means the Internal Revenue Code of 1986, as amended
from time to time, and any regulations relating thereto.
1.4. "Bank Common Stock" means shares of common stock of the Bank.
<PAGE> 2
1.5. "ESOP" means the Commonwealth Bank Employee Stock Ownership
Plan, and each successor or replacement employee stock ownership plan.
1.6. "ESOP Allocation" means the number of shares allocable to the
individual account of a participant in the ESOP pursuant to Article IV of the
ESOP.
1.7. "Participant" means a salaried employee of the Bank who is a
participant in the ESOP, who is a member of a select group of management or
highly compensated employees within the meaning of section 201 (2) of the
Employee Retirement Income Security Act of 1974, as amended, and who is
selected by the Board of Directors of the Bank to participate in the Plan.
1.8. "Plan Year" means the 12-consecutive-month period ending
December 31 of each year.
1.9. "Stock Unit" means a bookkeeping unit used for the purpose of
crediting amounts to the account of a Participant, each such Stock Unit being
equivalent to one share of Bank Common Stock.
1.10. "Supplemental ESOP Allocation" shall mean the number of Stock
Units allocated to a Participant's account pursuant to Section 3.1 of the Plan.
1.11. Words in the masculine gender shall include the feminine and
the singular shall include the plural, and vice versa, unless qualified by the
context. Any headings used herein are included for ease of reference only, and
are not to be construed so as to alter the terms hereof.
ARTICLE II
ELIGIBILITY
A salaried employee of the Bank who is eligible to receive the benefit
of an ESOP Allocation, the total amount of which is reduced by reason of the
limitation on compensation which may be taken into account for the purpose of
calculating allocations pursuant to Section 401(a)(17) of the Code, as amended
by the 1993 Act, shall be eligible to be selected by the Board of Directors of
the Bank to participate in the Plan.
ARTICLE III
SUPPLEMENTAL CONTRIBUTIONS
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<PAGE> 3
3.1. Supplemental ESOP Allocation.
A Participant in the Plan shall receive a Supplemental ESOP Allocation
of Stock Units each year at the same time that allocations of Bank Common Stock
are made pursuant to the ESOP. The number of Stock Units allocable to a
Participant for any Plan Year shall be an amount equal to the difference
between (a) and (b) below:
(a) The ESOP Allocation which would have been allocated
to the Participant for the Plan Year, as determined by Article
IV of the ESOP and the definition of "Compensation" in Section
1.10 of the ESOP; provided, however, that (i) a Participant's
Compensation shall be deemed to equal $235,840 if the
Participant's Compensation, without giving effect to the
limitation imposed by section 401 (a)(17) of the Code, equals
or exceeds $235,840 both in 1993 and in the year with respect
to which the allocation is made, and (ii) the Compensation of
a Participant who is not described in (i) shall be determined
without giving effect to the limitation imposed by section
401(a)(17) of the Code, but. shall not in any event exceed
$235,840;
LESS
(b) The ESOP Allocation actually allocated to the account
of the Participant in the ESOP for the Plan Year.
Supplemental ESOP Allocations made for the benefit of a Participant for any
Plan Year shall be credited to an account maintained under the Plan in the name
of each Participant.
ARTICLE IV
INVESTMENT OF SUPPLEMENTAL ESOP ALLOCATIONS
Amounts credited hereunder to the account of a Participant shall be
treated as if they were actually invested in the ESOP account of the
Participant and shall be credited with gains and losses at the same time and in
the same manner as is applicable to amounts invested in the ESOP account of
such Participant. A change by a Participant in the investment election
applicable to amounts in his ESOP account will be effective at the same time
that such change is applicable to his ESOP account.
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<PAGE> 4
ARTICLE V
VESTING; DISTRIBUTIONS
5.1. VESTING. The vested portion of a Participant's account shall be
a percentage of the total amount credited to the account determined on the
basis of the Participant's number of "Years of Service" (as defined in Section
1.56 (or any successor thereto) of the ESOP) according to the following
schedule:
<TABLE>
<CAPTION>
Years of Service Percentage
---------------- ----------
<S> <C>
Less than 3 0%
3 20%
4 40%
5 60%
6 80%
7 100%
</TABLE>
In determining Years of Service for purposes of vesting under the
Plan, Years of Service prior to January 1, 1993 shall be excluded.
Notwithstanding the above vesting schedule, a Participant shall be
100% vested in his account upon attainment of "Normal Retirement Age" (as
defined in Section 1.36 (or any successor thereto) of the ESOP).
5.2 DISTRIBUTION. The vested portion of amounts credited to a
Participant's account shall be distributed to a Participant at the same time,
and (except as provided in Section 8.1) in the same manner, as benefits shall
be distributed from the ESOP pursuant to Article VII of the ESOP.
If a Participant should die before distribution of the vested portion
of his account pursuant to the Plan has been made to him, any remaining vested
amounts shall be distributed to his beneficiary in the method designated by the
Participant in a writing delivered to the Bank prior to his death. If a
Participant has not designated a beneficiary, or method of distribution, or if
no designated beneficiary is living on the date of distribution, such vested
amounts shall be distributed to those persons entitled to receive distributions
of the Participant's account under the ESOP and in the same method as
distribution is made under the ESOP.
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<PAGE> 5
ARTICLE VI
ADMINISTRATION OF THE PLAN
6.1. Administration by the Bank. The Bank shall be responsible for
the general operation and administration of the Plan and for carrying out the
provisions thereof.
6.2 General Powers of Administration. All provisions set forth in
the ESOP with respect to the administrative powers and duties of the Bank,
expenses of administration, and procedures for filing claims shall also be
applicable with respect to the Plan. The Bank shall be entitled to rely
conclusively upon all tables, valuations, certificates, opinions and reports
tarnished by any actuary, accountant, controller, counsel or other person
employed or engaged by the Bank with respect to the Plan.
ARTICLE VII
AMENDMENT OR TERMINATION
7.1. Amendment or Termination. The Bank intends the Plan to be
permanent but reserves the right to amend or terminate the Plan when, in the
sole opinion of the Bank, such amendment or termination is advisable. Any such
amendment or termination shall be made pursuant to a resolution of the Board
and shall be effective as of the date of such resolution.
7.2 Effect of Amendment or Termination. No amendment or
termination of the Plan shall directly or indirectly reduce the vested portion
of any account held hereunder as of the effective date of such amendment or
termination. Upon termination of the Plan, distribution of vested amounts
credited to the account of a Participant shall be made to the Participant or
his beneficiary in the manner and at the time described in Section 5.2 of the
Plan. No additional credits of ESOP Allocations shall be made to the account
of a Participant and no additional Years of Service (within the "meaning of
Section 5.1) shall be credited after termination of the Plan, but the Bank
shall continue to credit gains and losses pursuant to Article IV until the
vested balance of his account has been fully distributed to the Participant or
his beneficiary.
ARTICLE VIII
GENERAL PROVISIONS
8.1. Participant's Rights Unsecured. To fund its obligations under
the Plan, the Bank may elect to form a trust, or to utilize a pre-existing
trust, to purchase and hold the alternative forms of assets which are permitted
under the ESOP, including shares of Bank Common Stock, subject to compliance
with all applicable securities laws. If the Bank elects to use a trust to fund
its obligations under the Plan, a Participant shall have no right to demand the
transfer to him of stock or other assets from the Bank, or from such a trust
formed, or utilized by the Bank. Any
-5-
<PAGE> 6
assets held in a trust, including shares of Bank Common Stock, may be
distributed to a Participant in payment of part or all of the Bank's
obligations under the Plan. The right of a Participant or his designated
beneficiary to receive a distribution hereunder shall be an unsecured claim
against the general assets of the Bank, and neither the Participant nor a
designated beneficiary shall have any rights in or against any specific assets
of the Bank.
8.2. General Conditions. Except as otherwise expressly provided
herein, all terms and conditions of the ESOP applicable to an ESOP Allocation
will also be applicable to an allocation of Stock Units pursuant to this Plan.
Nothing in this Plan shall operate or be construed in any way to modify, amend
or affect the terms and provisions of the ESOP.
8.3. No Guarantee of Benefits. Nothing contained in the Plan shall
constitute a guaranty by the Bank or any other person or entity that the assets
of the Bank will be sufficient to pay any benefit hereunder.
8.4. No Enlargement of Employee Rights. No Participant shall have
any right to receive a distribution of contributions made under the Plan except
in accordance with the terms of the Plan. Establishment of the Plan shall not
be construed to give any Participant the right to be retained in the service of
the Bank.
8.5. Spendthrift Provision. No interest of any person or entity in,
or right to receive a distribution under, the Plan shall be subject in any
manner to sale, transfer, assignment, pledge, attachment, garnishment, or other
alienation or encumbrance of, any kind; nor may such interest or right to
receive a distribution be taken, either voluntarily or involuntarily for the
satisfaction of the debts of, or other obligations or claims against, such
person or entity, including claims for alimony, support, separate maintenance
and claims in bankruptcy proceedings.
8.6. Applicable Law. The Plan shall be construed and administered
under the laws of the Commonwealth of Pennsylvania to the extent such laws are
not superseded by federal law.
8.7. Incapacity of Recipient. If any person entitled to a
distribution under the Plan is deemed by the Bank to be incapable of personally
receiving and giving a valid receipt for such payment, then, unless and until
claim therefor shall have been made by a duly appointed guardian or other legal
representative of such person, the Bank may provide for such payment or any
part thereof to be made to any other person or institution then contributing
toward or providing for the care and maintenance of such person. Any such
payment shall be a payment for the account of such person and a complete
discharge of any liability of the Bank and the Plan therefor.
8.8. Corporate Successors. The Plan shall not be automatically
terminated by a transfer or sale of assets of the Bank or by the merger of
consolidation of the Bank into or with any other corporation or other entity,
but the Plan shall be continued after such sale, merger or consolidation only
if and to the extent that the transferee, purchaser or successor entity agrees
to
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<PAGE> 7
continue the Plan. In the event that the Plan is not continued by the
transferee, purchaser or successor entity, then the Plan shall terminate
subject to the provisions of Section 7.2.
8.9. Unclaimed Benefit. Each Participant shall keep the Bank
informed of his current address and the current address of his designated
beneficiary. The Bank shall not be obligated to search for the whereabouts of
any person. If the location of a Participant is not made known to the Bank
within three (3) years after the date on which payment of the Participant's
account may first be made, payment may be made as though the Participant had
died at the end of the three-year period. If, within one additional year after
such three year period has elapsed, or, within three years after the actual
death of a Participant, the Bank is unable to locate any designated beneficiary
of the Participant, then the Bank shall have no further obligation to pay any
benefit hereunder to such Participant or designated beneficiary and such
benefit shall be irrevocably forfeited.
8.10. Limitations on Liability. Notwithstanding any of the
preceding provisions of the Plan, neither the Bank nor any individual acting as
employee or agent of the Bank shall be liable to any Participant, former
Participant or other person for any claim, loss, liability or expense incurred
in connection with the Plan.
IN WITNESS WHEREOF, Commonwealth Bank has caused these presents to be
duly executed as of the 9th day of December, 1997.
COMMONWEALTH BANK
Attest:
[SIG] By: /s/ PATRICK J. WARD
- ---------------------------- --------------------------
-7-
<PAGE> 8
APPENDIX A
The Bank has designated the following persons as Participants in its
Excess Benefit Plan:
1. Charles H. Meacham, Chairman and Chief Executive Officer, effective
January 1, 1994.
2. Patrick J. Ward, President and Chief Operating Officer, effective
January 1, 1998.
-8-
<PAGE> 1
EXHIBIT 10.16
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
OF
COMMONWEALTH BANK
(As amended effective January 1, 1998)
Purpose and Background
The purpose of the Commonwealth Bank Supplemental Executive
Retirement Plan (formerly the Commonwealth Federal Savings Bank Supplemental
Executive Retirement Plan) is to provide those officers of Commonwealth Bank
listed in Appendix A attached hereto with supplemental retirement benefits that
will assist them in maintaining an accustomed standard of living.
The Plan is an unfunded plan maintained for the purpose of
providing deferred compensation for selected officers of the Bank, each of whom
is a member of a select group of management or highly compensated employees for
purpose of Title I of the Employee Retirement Income Security Act of 1974, as
amended.
The Plan was originally adopted effective January 1, 1994. In
1997, Commonwealth Bank made the following changes to its tax-qualified benefit
programs: (1) adopted the Commonwealth Bank Target Benefit Plan effective
January 1, 1997; (2) amended the Commonwealth Bank Voluntary Investment Plan
to add matching contributions and profit sharing contributions effective July
1, 1997; and (3) terminated the Commonwealth Bank Pension Plan effective June
1, 1997. Commonwealth Bank wishes to amend the Commonwealth Bank Supplemental
Executive Retirement Plan to reflect these changes.
Accordingly, Commonwealth Bank hereby adopts the Plan as
amended effective January 1, 1998, pursuant to the terms and provisions set
forth below:
ARTICLE 1
Definitions
For purposes hereof, unless otherwise clearly apparent from
the context, the following phrases and terms shall have the indicated meanings:
"Accrued Benefit" shall mean a Participant's Target SERP
Benefit, multiplied by a factor, no greater than one, the numerator of which is
his or her Years of Participation and the denominator of which is 15.
"Actuarial Equivalent" or "Actuarially Equivalent" shall mean
an amount or a series of payments that, at a given point in time, is
determined to have the same or equivalent
<PAGE> 2
value, at that point in time, as another given amount or another given series
of payments, taking into consideration the time value of money, mortality and
such other actuarial factors as may be appropriate.
"Board" shall mean the Board of Directors of Commonwealth
Bank.
"Cause" is defined in Section 6.3 of this Plan.
"Change of Control" is defined in Article 10 of this Plan.
"Committee" shall mean the administrative committee appointed
to manage and administer this Plan in accordance with the provisions of
Article 13.
"Company" shall mean Commonwealth Bank and any of its
subsidiaries that are selected by the Board to participate in this Plan.
"Considered Compensation" shall mean the total of all payments
made to a Participant on account of employment with the Company for services
rendered, including any amounts of salary that the Participant may from time to
time elect to defer under the Company's Voluntary Investment Plan (or any
similar successor plan or plans) or under any cafeteria plan (within the
meaning of Section 125 of the Internal Revenue Code of 1986, as amended) or any
nonqualified deferred compensation plan from time to time maintained by the
Company, but excluding:
(a) Payments arising from any stock bonus, stock
option, stock appreciation rights or restricted stock plan;
(b) Contributions to and payments from any
qualified or nonqualified employee benefit plan of the Company (except as
provided above); and
(c) Cost of living differentials, and automobile
allowances.
Considered Compensation in a particular period shall include salary payments
actually received in that period as well as any amounts of salary that would
have been received in that period had payment not been deferred through
participation in the Company's Voluntary Investment Plan (or any similar
successor plan or plans) or in a cafeteria plan or nonqualified deferred
compensation plan of the Company.
"Disability" shall mean a condition which qualifies for
receipt of disability income payments under the Disability Plan.
"Disability Offset Amount" shall mean the sum of the
following:
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<PAGE> 3
(d) The annual amount of any disability
income payments received by a Participant or his or her family members under
the Social Security Act; and
(e) The annual amount of disability income
payments received by the Participant under the Disability Plan.
"Disability Plan" shall mean the long-term disability plan of
the Company, if any, as now or hereafter amended, including any similar
successor plan.
"Early Retirement Date" shall mean the first day of the month
coincident with or next following the date on which the Participant has both
attained age 55 and completed at least ten (10) Years of Vesting Service.
"Final Average Earnings" shall mean the average of the highest
annual Considered Compensation received by a Participant during the five
consecutive calendar years out of the current and preceding ten calendar years
during which his considered Compensation was the highest. At any point in
time, Final Average Earnings shall be computed to the date of determination by
taking into account actual Considered Compensation during the current calendar
year (without annualization) and the ten preceding calendar years.
"Normal Retirement Date" shall mean the first day of the month
following the month in which a Participant attains age 65.
"Participant" shall mean an executive of the Company
designated by the Committee and approved by the Board of Directors of the
Company who is a member of a select group of management or highly compensated
employees within the meaning of section 201(2) of the Employee Retirement
Income Security Act of 1974, as amended.
"Pension Plan" shall mean Commonwealth Bank Pension Plan.
"Plan" shall mean this Commonwealth Bank Supplemental
Executive Retirement Plan.
"Plan Year" shall mean the 12-consecutive-month period ending
December 31 of each year.
"Retirement Offset Amount" shall mean the sum of:
(a) the Participant's accrued benefit under the Pension Plan
as of June 1, 1997, if any, as listed on Appendix A; and
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<PAGE> 4
(b) the Actuarially Equivalent value of the Participant's
vested account balance under the Target Benefit Plan, expressed as an annual
benefit payable in the form of a single life annuity beginning at the
Participant's Normal Retirement Date; and
(c) the Actuarially Equivalent value of the Participant's
vested account balance under the Voluntary Investment Plan attributable to
matching contributions and profit sharing contributions, expressed as an annual
benefit payable in the form of a single life annuity beginning at the
Participant's Normal Retirement Date.
"Substantial Cause" is defined in Section 10.4 of this Plan.
"Target Benefit Plan" shall mean the Commonwealth Bank Target
Benefit Plan, as now or hereafter amended.
"Target SERP Benefit" shall mean, with respect to a
Participant, the amount described in Appendix A.
"Trust" shall mean the Deferred Compensation Trust Agreement
of Commonwealth Bank.
"Vested Amount" shall mean the percentage of a Participant's
Accrued Benefit which, subject to Section 6.2, is nonforfeitable. The Vested
Amount with respect to a Participant who has completed five Years of Service or
who has attained age 65 shall be 100%. Except as otherwise provided in Article
10 (regarding a Change of Control), the Vested Amount of a Participant who has
not completed five Years of Service or attained age 65 shall be 0%. If the
Participant has attained age 65, the Vested Amount will be 100%.
"Voluntary Investment Plan" shall mean the Commonwealth Bank
Voluntary Investment plan, as now or hereafter amended.
"Years of Participation" shall mean the sum of (1) the
Participant's "Years of Participation" as defined in Section 2.3 of the Pension
Plan as of June 1, 1997, including years prior to the effective date of this
Plan, plus (2) the number of calendar plan years for which the Participant's
account under the Target Benefit Plan receives an allocation of a Company
contribution under Section 4.2 of the Target Benefit Plan or the Participant's
account under the Voluntary Investment Plan receives an allocation of a
nonelective contribution under Section 4.3 of the Voluntary Investment Plan;
provided, however, that Years of Participation credited during a Participant's
Disability shall be determined pursuant to Section 4.3 of this Plan.
"Year of Service" shall mean "Year of Vesting Service" as
defined in Section 2.3 (or any successor thereto) of the Target Benefit Plan,
and shall include years prior to the effective date of this Plan; provided,
however, that Years of Service credited during a Participant's Disability
shall be determined pursuant to Section 4.3 of this Plan.
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ARTICLE 2
Participation
2.1. Participation. Upon nomination by the Board of
Directors of the Company and approval by the Committee, an executive of the
Company shall become a Participant effective as of the date specified in the
nomination document.
ARTICLE 3
Retirement
3.1. Normal Retirement Benefit. Except as provided in
Section 6.2 upon retirement from the Company at or after his or her Normal
Retirement Date, a Participant shall be entitled to receive an annual
retirement benefit equal to his or her Accrued Benefit as of the date of
retirement reduced by the Retirement Offset Amount.
3.2. Early Retirement Benefit. Except as provided in
Section 6.2, a Participant who retires on or after his or her Early Retirement
Date but prior to his or her Normal Retirement Date shall be entitled to
receive an annual benefit commencing on his or her Normal Retirement Date equal
to the Vested Amount of his or her Accrued Benefit as of the date of the
Participant's retirement, reduced by the Retirement Offset Amount. If,
pursuant to Section 3.3, the Participant's benefit commences prior to his or
her Normal Retirement Date, the Participant's benefit payable at the earlier
date shall be the Actuarial Equivalent of the benefit payable at his or her
Normal Retirement Date.
3.3. Form and Time of Retirement Payments Pursuant to
Articles 3 and 6.
(a) Form of Payment. Unless a Participant elects
an alternate method of payment before his or her separation from service, the
automatic form of payment of benefits pursuant to Articles 3 and 6 shall be (i)
for a Participant who is unmarried on his benefit commencement date, a single
life annuity in an annual amount equal to the annual benefit determined
pursuant to Section 3.1, 3.2 or 6.1, as applicable, and (ii) for a Participant
who is married on his or her benefit commencement date, a joint and 50%
survivor annuity that is the Actuarial Equivalent of the single life annuity
that the Participant would have received had he or she been unmarried. A
Participant may elect, before his or her separation from service, not to
receive his or her benefit in the automatic form, but to have his or her
benefit paid in a single cash payment that is the Actuarial Equivalent of the
automatic form of benefit otherwise payable to the Participant.
(b) Time of Payment. Annuity payments shall be
made in equal monthly installments commencing effective as of the first month
following retirement or termination. The single cash payment, if elected,
shall be paid within 90 days following the
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Participant's separation from service. Neither annuity payments nor the single
cash payment shall be adjusted on account of a Participant's deferral of
retirement past his or her Normal Retirement Date, except to the extent such
adjustment results from changes in a Participant's Final Average Earnings. The
Company may withhold from any payment, any income tax or other amounts as
required by law.
ARTICLE 4
Disability
4.1. Disability Benefit. If a Participant suffers a
Disability after his or her Early Retirement Date but prior to his or her
Normal Retirement Date for which he or she receives disability income payments
under the Disability Plan, the Participant shall be entitled to receive an
annual disability benefit under this Plan equal to 50% of the Participant's
Final Average Earnings, as of the date of onset of the Disability, reduced by
the Disability Offset Amount.
4.2. Form and Duration of Disability Payment. The annual
disability benefit under Section 4.1 shall be payable in equal monthly
installments commencing with the month in which payments commence under the
Disability Plan and continuing until the earliest of the following dates:
(a) The date the Participant returns to active
employment with either the Company or another employer;
(b) The date that disability income payments
cease under the Disability Plan; or
(c) The Participant's Normal Retirement Date or
date of death.
4.3. Benefits on Cessation of Disability Payments. After
a Participant's disability benefits cease pursuant to Section 4.2, the
Participant shall be entitled to benefits under this Plan determined as
follows:
(a) If the Participant's disability benefits
cease because the Participant returns to active employment with the Company, or
if they cease pursuant to Section 4.2(b) and the Participant returns to active
employment with the Company within six (6) months following such cessation,
then (i) the Participant shall be credited with Years of Service and Years of
Participation for the period during which disability benefits were provided
under this Plan; and (ii) the Participant shall thereafter be entitled to
receive such benefits, if any, as are available under the other provisions of
this Plan.
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(b) If the Participant's disability benefits
cease because the Participant returns to active employment with another
employer, or if they cease pursuant to Section 4.2(b) and the Participant does
not return to active employment with the Company within six (6) months
following such cessation, then (i) the Participant shall, for purposes of this
Plan, be considered to have terminated employment as of the date of onset of
his or her Disability and shall be credited with no further Years of Service or
Years of Participation after that date; and (ii) the Participant shall
thereafter be entitled to receive such benefits, if any, as are available under
the other provisions of this Plan.
(c) If the Participant's disability benefits
cease because the Participant reaches his or her Normal Retirement Date or
dies, then (i) the Participant shall be credited with Years of Service and
Years of Participation for the period during which disability benefits were
provided under this Plan; and (ii) the Participant shall be entitled to receive
the benefit specified in Section 3.1, as if he or she had retired on that date,
or the Participant's spouse shall be entitled to receive any death benefit
specified in Section 5.1 or 5.2, as the case may be. Such benefit shall be
computed as of the Participant's Normal Retirement Date or date of death, as
the case may be, based on the Participant's Final Average Earnings as of the
date of onset of the Participant's Disability, without reduction for disability
benefits paid under this Plan. Such benefit shall be paid at the time and in
the annuity form specified in Section 3.3, 5.l or 5.2, as the case may be,
except that, in the case of payments pursuant to Section 3.3, if any Disability
Offset Amounts continue to be paid following the Participant's Normal
Retirement Date, the annuity payments shall be offset by such amounts so long
as they continue to be paid.
4.4. Disability After Normal Retirement Date. If a
Participant suffers a Disability after his or her Normal Retirement Date but
prior to actual retirement, the Participant shall be deemed to have retired as
of the date of onset of the Disability and shall thereafter be entitled to
receive the benefit specified in Section 3.1. Such benefit shall be computed
as of the Participant's deemed date of retirement. Such benefit shall be paid
at the time and in the annuity form specified in Section 3.3, except that, if
any Disability Offset Amounts are paid following the Participant's deemed
retirement, the annuity payments shall be offset by such amounts so long as
they continue to be paid.
4.5. Disability Prior to Early Retirement Date. A
Participant who suffers a Disability prior to his or her Early Retirement Date
shall not be entitled to receive any disability benefit under this Plan.
ARTICLE 5
Death Benefit
5.1. Death After Early Retirement Date. If a Participant
dies after his or her Early Retirement Date but before receiving any benefits
under Article 3 of this Plan, then, if the Participant has a surviving spouse
to whom the Participant was married for at least 12 months
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prior to the Participant's death, such spouse shall be entitled to receive an
annual benefit, payable in equal monthly installments for the remainder of his
or her life, equal to 50% of the annual retirement benefit that the Participant
would have been entitled to receive under Section 3.2 (if the Participant dies
prior to his or her Normal Retirement Date) or Section 3.1 (if the Participant
dies on or after his or her Normal Retirement Date) if the Participant had
retired immediately prior to his or her death and such benefit had been paid
pursuant to Section 3.3 in the form of a 50% joint and survivor annuity. If a
Participant dies after his or her Early Retirement Date and before receiving
any benefits under Article 3 of this Plan, but the Participant does not have a
surviving spouse to whom the Participant was married for at least 12 months
prior to the Participant's death, no benefit shall be payable under this Plan
to any person on account of the death of the Participant.
5.2. Death On or Before Early Retirement Date. If a
Participant dies on or before his or her Early Retirement Date, but before
receiving any benefits under Article 6 of this Plan, then, if the Participant
has a surviving spouse to whom the Participant was married for at least 12
months prior to the Participant's death, such spouse shall be entitled to
receive an annual benefit, payable in equal monthly installments for the
remainder of his or her life, equal to 50% of the annual retirement benefit
that the Participant would have been entitled to receive under Section 6.1 if
the Participant had separated from service immediately prior to his or her
death, retired on his or her Early Retirement Date with an immediate joint and
50% survivor annuity pursuant to Section 3.3, and died on the day after his or
her Early Retirement Date. If a Participant dies on or prior to his or her
Early Retirement Date and before receiving any benefits under Article 6 of this
Plan, but the Participant does not have a surviving spouse to whom the
Participant was married for at least 12 months prior to the Participant's
death, no benefit shall be payable under this Plan to any person on account of
the death of the Participant.
5.3. Time of Payment of Death Benefit. Any benefits
payable under Article 5 shall be paid to the Participant's spouse commencing at
the same time as benefits commence under Section 9.5 (or any successor thereto)
of the Target Benefit Plan.
ARTICLE 6
Termination of Employment
6.1. Termination Prior to Early Retirement Date. Except
as provided in Sections 6.2 and 10.2, a Participant who terminates employment
with the Company prior to his or her Early Retirement Date for a reason other
than death or Disability shall be entitled to receive an annual benefit
commencing on his or her Normal Retirement Date equal to the Vested Amount of
his or her Accrued Benefit as of the date of termination from employment,
reduced by the Retirement Offset Amount. If, pursuant to Section 3.3, the
Participant's benefit commences prior to his or her Normal Retirement Date, the
Participant's annual benefit shall be the Actuarial Equivalent of his or her
annual benefit payable at Normal Retirement Date. The time and form of payment
of the annual benefit shall be determined under Section 3.3.
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6.2. Termination With Cause. If the Company terminates a
Participant's employment with Cause, then, except as expressly provided in
Section 10.2 below, the Participant shall not thereafter be entitled to any
benefits under this Plan.
6.3. Definition of Cause. As used in this Article 6 and
in Section 9.3 below, the term "Cause" shall include, without limitation,
significant deficiencies in the Participant's performance, disloyalty, fraud,
violation of any federal or state law involving the commission of a crime
against the Company, commission of a felony, or commission of a gross
misdemeanor which is determined by the Committee, in its sole and absolute
discretion, to be of such gravity as to cause significant injury to the
Company's business or reputation.
ARTICLE 7
Company/Participant Liability
7.1. General Assets. Amounts payable to a Participant
shall be paid from the general assets of the Company exclusively. However, the
Company has established the Trust to which the Company may make contributions
in order to provide for the payment of benefits under the Plan.
Notwithstanding the foregoing, Trust assets shall be treated as assets of the
Company and shall remain subject to the claims of the general creditors of the
Company.
7.2. Company's Liability. The Company's liability for the
payment of benefits shall be defined only by this Plan.
7.3. Limitation of Obligation. Except as expressly
provided for in this Plan, the Company shall have no obligation under this Plan
to a Participant or his or her spouse, if any.
7.4. Participant Cooperation. A Participant must at all
times cooperate with the Company and the Committee and furnish all information
requested by the Company or the Committee in order to facilitate the
determination of benefits or the administration of this Plan. Such cooperation
shall include, without limitation, taking a physical or mental examination if
so requested by the Company or the Committee. If a Participant fails promptly
to cooperate or furnish requested information, the Committee, in its sole and
absolute discretion, may withhold benefits from the Participant.
7.5. Unsecured General Creditor. A Participant and his or
her spouse, if any, shall not have, by reason of this Plan, any legal or
equitable rights, claims or interests in any property or assets of the Company
nor shall they be beneficiaries of, or have any legal or equitable rights,
claims or interest in the life insurance policies or annuities or the proceeds
therefrom owned, or which may be acquired, by the Company. Any and all of the
Company's assets shall be, and remain, the general, unpledged unrestricted
assets of the Company. The
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Company's obligations under this Plan shall be merely those of an unfunded and
unsecured promise of the Company to pay money in the future.
ARTICLE 8
No Guarantee of Employment
8.1. No Guarantee of Employment. Nothing in this Plan
shall alter in any manner the employment relationship with a Participant.
ARTICLE 9
Plan Amendment and Termination
9.1. Amendment. The Company may amend this Plan at any
time so long as the rights required to be preserved on termination under
Section 9.2 are not reduced. No amendment of this Plan or waiver of any of
the specific provisions of this Plan shall be valid unless made pursuant to a
duly executed written document.
9.2. Termination. Subject to Article 10, the Company may
terminate this Plan at any time, for any reason, as follows:
(a) Termination shall be by notice to the
Committee, which shall notify Participants of the termination. The effective
date of the termination shall not be earlier than the first day of the month in
which notice is given.
(b) After the effective date of termination, no
further executives shall be selected for participation and no further benefits
shall accrue for existing Participants.
(c) In the event of termination, the retirement
benefits of each existing Participant shall be paid at the time and in the
amount and form specified under the terms of this Plan as in effect on the day
before termination, except that the Participants' respective Accrued Benefits
and Vested Amounts shall be based on their Final Average Earnings, Years of
Service and Years of Participation as of the effective date of Plan
termination. Notwithstanding the foregoing, the Company shall be entitled to
provide retirement benefits in any alternative form that is the Actuarial
Equivalent of the form in which the retirement benefits were payable under the
terms of this Plan in effect before termination.
(d) Unless otherwise expressly provided at the
time of termination of the Plan, no Participant shall be entitled to any
benefit under this Plan on account of any Disability that commences following
the effective date of Plan termination.
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ARTICLE 10
Change of Control
10.1. Change of Control. For purposes of this Plan, the
term "Change of Control" means:
(a) The acquisition by any person or entity of
the power, directly or indirectly, to exercise a controlling influence over the
management or policies of the Company (either alone or pursuant to an
arrangement or understanding with one or more other persons or entities),
whether through ownership of voting securities, through one or more
intermediaries, by contract, or otherwise; or
(b) The acquisition by any person or entity
(either alone or pursuant to an arrangement or understanding with one or more
other persons or entities) of the ownership of or power to vote twenty-five
percent (25%) or more of the outstanding voting securities of the Company.
10.2. Termination of Employment Following a Change of
Control. If, during the three-year period following a Change of Control, the
employment of a Participant terminates prior to his or her Normal Retirement
Date (whether before or after his or her Early Retirement Date), then, except
as provided in the last sentence of this Section 10.2, the Participant shall be
deemed to have retired under the provisions of this Plan, as of his or her date
of termination, and shall be entitled to receive a retirement benefit in an
annual amount equal to the Participant's Target SERP Benefit (with the Target
SERP Benefit to be determined based on the Final Average Earnings of the
Participant as of the date of termination), reduced by the Retirement Offset
Amount. Such retirement benefit shall be paid in accordance with the
provisions of Section 3.3 of this Plan commencing effective as of the first
month following the Participant's termination. No benefits shall be payable
under this Section 10.2 if the Participant voluntarily terminates his or her
employment (unless such employment has been constructively terminated within
the meaning of Section 10.3 and the Participant terminates within six (6)
months thereafter following written notice to the Company of the reason for
such termination), if the Company terminates the Participant's employment for
Substantial Cause, or if the Participant's employment terminates on account of
Disability or death.
10.3. Constructive Termination of Employment. A
Participant's employment shall be deemed to be constructively terminated if:
(a) The Participant's salary is either reduced by
more than ten percent, or not increased for a period of two years, unless the
salaries of all other Participants and officers of the Company are reduced in
equal proportions or are not increased during the same period;
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(b) The title, duties or responsibilities of the
Participant's job are substantially reduced from those existing prior to the
Change of Control;
(c) The Participant's place of employment is
changed by a distance of more than twenty-five miles without such Participant's
consent; or
(d) The Participant's salary is reduced by
twenty-five percent or more.
10.4. Definition of Substantial Cause. For purposes of
this Plan, the Company shall have "Substantial Cause" to terminate the
employment of a Participant if such termination is based upon--
(a) The Participant's willful and continuous
failure to substantially perform his or her duties with the Company (other than
any such failure resulting from incapacity due to physical or mental illness)
after a demand for substantial performance is delivered to the Participant by
the Board which specifically identifies the manner in which the Board believes
that the Participant has not substantially performed his or her duties; or
(b) The Participant's willfully engaging in gross
misconduct demonstrably injurious to the Company.
For purposes of this Section 10.4, no act, or failure to act,
on the part of the Participant shall be considered "willful" if done, or
omitted to be done, by the participant in good faith and in the reasonable
belief that the act or omission was in the best interests of the Company. A
Participant shall not be deemed to have been terminated for Substantial Cause
unless and until the Participant receives a copy of a resolution duly adopted
by the affirmative vote of not less than three-fourths (3/4) of the entire
membership of the Board called and held for that purpose (after reasonable
notice to the Participant and an opportunity for the Participant, together with
his or her counsel, to be heard before the Board), finding that, in the good
faith opinion of the Board, the Participant was guilty of conduct set forth in
clause (a) or (b) above and specifying the particulars thereof.
ARTICLE 11
Other Benefits and Agreements
11.1. Coordination with Other Benefits. The benefits under
this Plan for a Participant and his or her spouse, if any, are in addition to
any other benefits available under any other plan or program for employees of
the Company. This Plan shall supplement and shall not supersede, modify or
amend any other such plan or program.
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ARTICLE 12
Restrictions on Alienation of Benefits
12.1. Nonassignability. Neither a Participant nor any
other person shall have any right to commute, sell, assign, transfer, pledge,
anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey, in
advance of actual receipt, the amounts, if any, payable hereunder, or any part
thereof. No part of the amounts payable hereunder shall, prior to actual
payment, be subject to any claims of creditors and, in particular, they shall
not be subject to attachment, garnishment, seizure or sequestration by any
creditor for the payment of any debts, judgments, obligations, alimony or
separate maintenance owed by a Participant or his or her spouse, if any.
ARTICLE 13
Administration of Plan
13.1. Committee Administration. The general administration
of this Plan, as well as construction and interpretation hereof, shall be the
responsibility of the Committee, the number of members of which shall be
designated from time to time by the Board and the members of which shall be
appointed from time to time by, and shall serve at the pleasure of, the Board.
13.2. Committee Authority. The Committee shall have the
exclusive right and authority--
(a) To from time to time establish rules, forms
and procedures for the administration of this Plan;
(b) To interpret this Plan and to correct any
defect, supply any information and reconcile any inconsistency in such manner
and to such extent as the Committee, in its sole and absolute discretion, shall
deem necessary or advisable to carry out the purpose of this Plan; and
(c) To make all other determinations that the
Committee, in its sole and absolute discretion, shall deem necessary or
advisable in connection with the administration of this Plan, including,
without limitation, determination of (i) the benefit amounts to which a
Participant is entitled (and the appropriate Final Average Earnings,
Retirement Offset Amount, Disability Offset Amount, Years of Service and/or
Years of Participation to be used in determining such benefit amounts); (ii)
whether Cause or Substantial cause existed for the termination of employment of
a Participant; (iii) whether a Participant's employment has been constructively
terminated (within the meaning of Section 10.3) and (iv) whether benefits are
to be withheld or terminated pursuant to Section 7.4.
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Subject to the claims procedures set forth in Article 14, all
rules, procedures, interpretations and determinations made by the Committee in
good faith shall be final, conclusive and binding upon all persons having or
claiming to have any right or interest under this Plan.
13.3. Committee Indemnity. No member of the Committee
shall be liable for any act or omission of any other member of the Committee,
nor for any act or omission on his or her own part, excepting his or her own
gross negligence. The Company shall indemnify and save harmless each member of
the Committee against any and all expenses and liabilities arising out of his
or her membership on the Committee, with the exception of expenses and
liabilities arising out of his or her own gross negligence.
ARTICLE 14
Claims Procedures
14.1. Presentation of Claim. Any Participant or the
surviving spouse, if any, of a deceased Participant (such Participant or spouse
being referred to below as a "Claimant") may deliver to the Committee a
written claim for a determination with respect to the amounts distributable
to such Claimant from this Plan. If such a claim relates to the contents of a
notice received by the Claimant, the claim must be made within sixty (60) days
after such notice was received by the Claimant. The claim must state with
particularity the determination desired by the Claimant.
14.2. Notification of Decision. The Committee shall
consider a Claimant's claim within a reasonable time and shall notify the
Claimant in writing:
(a) that the Claimant's requested determination
has been made, and that the claim has been allowed in full; or
(b) that the Committee has reached a conclusion
contrary, in whole or in part, to the Claimant's requested determination, and
such notice must set forth in a manner calculated to be understood by the
Claimant;
(i) the specific reason(s) for the
denial of the claim, or any part of it;
(ii) specific reference(s) to pertinent
provisions of this Plan upon which such denial was based;
(iii) a description of any additional
material or information necessary for the Claimant to perfect the claim, and an
explanation of why such material or information is necessary; and
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(iv) an explanation of the claim review
procedure set forth in Section 14.3.
14.3. Review of Denied Claim. Within sixty (60) days after
receiving a notice from the Committee that a claim has been denied, in whole
or in part, a Claimant (or the Claimant's duly authorized representative) may
file with the Committee a written request for a review of the denial of the
claim. Thereafter, but not later than thirty (30) days after filing of the
written request for review, the Claimant (or the Claimant's duly authorized
representative):
(a) may review pertinent documents;
(b) may submit written comments or other
documents; and/or
(c) may request a hearing, which request the
Committee, in its sole and absolute discretion, may grant.
14.4. Decision on Review. The Committee shall render its
decision on review promptly, and not later than sixty (60) days after the
filing of a written request for review of the denial, unless a hearing is held
or other special circumstances require additional time, in which case the
Committee's decision must be rendered within one hundred twenty (120)
days after such date. Such decision must be written in a manner calculated to
be understood by the Claimant, and it must contain:
(a) specific reasons for the decision;
(b) may submit written comments or other
documents; and/or
(c) such other matters as the Committee deems
relevant.
Any decision on review made by the Committee in good faith
shall be final, conclusive and binding upon the Claimant, unless the decision
is determined to have been arbitrary and capricious.
ARTICLE 15
Grantor Trust
15.1. Funding of Trust. The Company may from time to time
transfer to the trustee of the Trust such assets as the Committee determines,
in its sole and absolute discretion, should be transferred thereto.
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15.2. Interrelationship of the Plan and the Trust. The
provisions of this Plan shall govern the rights of a Participant and his or her
spouse to distributions pursuant to this Plan. The provisions of the Trust
shall govern the rights of the Company, Participants and their spouses and the
creditors of the Company to the assets, if any, transferred to the Trust. The
Company shall at all times remain liable to carry out its obligations under
this Plan. The Company's obligations under the Plan may be satisfied with Trust
assets distributed pursuant to the terms of the Trust.
ARTICLE 16
Miscellaneous
16.1. Notice. Any notice required or permitted to be given
under this Plan by a Participant or a Claimant shall be in writing and shall be
hand delivered against receipt, or mailed via registered or certified mail
return receipt requested, to:
Board of Directors
Commonwealth Bank
2 West Lafayette Avenue
Norristown, PA 19401
Any notice to a Participant or his or her spouse, if any,
required or permitted to be given under this Plan by the Committee or the Board
shall be in writing and shall be hand delivered to the Participant or spouse,
or mailed via registered or certified mail, return receipt requested, to the
last known address for the Participant or spouse as shown on the records of the
Company.
16.2. Successors. This Plan shall be binding upon the
Company and its successors and assigns, and upon a Participant, the
Participant's spouse, if any, and their permitted assigns, heirs, executors and
administrators.
16.3. Governing Law. This Plan shall be governed by and
construed under the laws of the Commonwealth of Pennsylvania to the extent such
laws are not superseded by federal law.
16.4. Pronouns. Masculine pronouns wherever used shall
include feminine pronouns and the singular shall include the plural.
16.5. Headings. The headings of the articles, sections and
paragraphs of this Plan are for convenience only and shall not control or
affect the meaning or construction of any of its provisions.
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16.6. Validity. In the event any provision of this Plan
shall be illegal or invalid for any reason, the illegality or invalidity of
that provision shall not affect the remaining provisions hereof, but this Plan
shall be construed and enforced as if such illegal and invalid provision had
never been inserted herein.
16.7. Incapacity of Recipient. If any person entitled to a
benefit under the Plan is deemed by the Company to be incapable of personally
receiving and giving a valid receipt for such payment, then, unless and until
claim therefor shall have been made by a duly appointed guardian or other legal
representative of such person, the Company may provide for such benefit or any
part thereof to be made to any other person or institution then contributing
toward or providing for the care and maintenance of such person. Any such
payment shall be a payment for the account of such person and a complete
discharge of any liability of the Company and the Plan therefor.
IN WITNESS WHEREOF, Commonwealth Bank has caused these
presents to be duly executed on this 9th day of Dec, 1997.
COMMONWEALTH BANK
Attest:
/s/ MICHAEL W. HARRINGTON By: /s/ CHARLES M. JOHNSTON
- ------------------------- -----------------------
Assistant Secretary Chief Financial Officer
-17-
<PAGE> 18
APPENDIX A
The Bank has designated the following persons as Participants
in its Supplemental Executive Retirement Plan:
1. Charles H. Meacham, Chairman and Chief Executive
Officer, effective January 1, 1994.
Annual Accrued Benefit under Pension Plan:
$ 73,061.52
Target SERP Benefit: an amount equal to 50% of the
Participant's Final Average Earnings.
2. Patrick J. Ward, President and Chief Operating
Officer, effective January 1, 1998.
Annual Accrued Benefit under Pension Plan:
$ 6,591.84
Target SERP Benefit: the sum of (1), (2) and (3),
where
(1) is 0.644% of "Average Annual Compensation," as
defined in the Target Benefit Plan, up to "Covered
Compensation," as defined in the Target Benefit Plan,
for a calendar year, multiplied by the Participant's
"Years of Projected Service," as defined in the
Target Benefit Plan, to the date of his actual
retirement, provided that the maximum number of years
taken into account shall be limited to 30 years; and
(2) is 1.03% of "Average Annual Compensation" in
excess of "Covered Compensation" for the calendar
year multiplied by the Participant's "Years of
Projected Service" to the date of his actual
retirement, provided that the maximum number of years
taken into account shall be limited to 30 years; and
(3) is 0.258% of "Average Annual Compensation"
multiplied by the Participant's "Years of Projected
Service" to the date of his actual retirement in
excess of 30 years;
determined without regard to the limitations
contained in the Target Benefit Plan and in Sections
401(a)(17) and 415 of the Internal Revenue Code of
1986, as amended.
<PAGE> 1
TABLE OF CONTENTS
<TABLE>
<S> <C>
Selected Financial Highlights..........................................Page 1
Letter to Shareholders.................................................Page 2
Detailed Financial Highlights..........................................Page 12
Management's Discussion and Analysis...................................Page 13
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 of $2.3 billion, is the
holding company for Commonwealth Bank, which has 56 branches throughout
southeast Pennsylvania. ComNet Mortgage Services, a division of Commonwealth
Bank, has offices in Pennsylvania, Connecticut, New Jersey, and Rhode Island and
operates under the trade name of Homestead Mortgage in Maryland.
IN EARLY 1997, COMMONWEALTH BANK RELOCATED ITS HEADQUARTERS TO COMMONWEALTH BANK
PLAZA (COVER PHOTO) IN NORRISTOWN, PENNSYLVANIA. THE MOVE TO THE NEW NORRISTOWN
HEADQUARTERS RESULTED IN MEANINGFUL COST SAVINGS AND WILL BETTER ACCOMMODATE
FUTURE GROWTH. STAFF MEMBERS ARE PICTURED ABOVE IN THE NEW HEADQUARTERS LOBBY.
NOT PICTURED ABOVE ARE OVER 700 STAFF MEMBERS WHO WORK THROUGHOUT THE
COMMONWEALTH AND COMNET BRANCH NETWORKS.
<PAGE> 2
SELECTED FINANCIAL HIGHLIGHTS (unaudited)
(dollars in thousands, except per share and ratio data)
<TABLE>
<CAPTION>
========================================================================================================================
AT YEAR END 1997 1996 1995
<S> <C> <C> <C>
Total assets $ 2,268,595 $ 2,119,961 $ 1,455,700
Loans receivable, net 1,259,596 1,113,114 796,735
Deposit accounts 1,552,824 1,491,450 1,076,549
Shareholders' equity 214,852 231,924(1) 137,036
========================================================================================================================
FOR THE YEAR
Net interest income $ 70,388 $ 60,954 $ 47,462
Net income 16,369 9,338 11,255
Diluted earnings per share 1.02 0.72 N/A(2)
Dividends per share 0.28 0.24(3) 0.24(3)
Book value per share at end of period 13.22 12.92 N/A(2)
========================================================================================================================
FINANCIAL RATIOS(4)
Total risk-based capital to risk-weighted
assets at end of period 13.35% 14.17% 18.96%
Return on assets 0.73 0.51 0.85
Return on equity 7.56 4.97 8.95
Net interest margin 3.36 3.54 3.80
Nonperforming assets to total assets at
end of period 0.42 0.43 0.51
Allowance for loan losses to nonperforming loans
at end of period 100.96 123.74 120.86
</TABLE>
(1) Reflects the receipt of $88.8 million of net proceeds from the Company's
second-step conversion in June 1996.
(2) Not applicable, as the Company completed its second-step conversion on June
14, 1996.
(3) Adjusted to reflect the exchange of 2.0775 shares of Company common stock
for each share of Bank common stock.
(4) 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> 3
LETTER TO SHAREHOLDERS Commonwealth Bancorp, Inc. and Subsidiaries
DEAR SHAREHOLDERS,
CUSTOMERS AND FRIENDS:
We are pleased to report that 1997 was a year of continued outstanding progress
for Commonwealth Bancorp, Inc. The Company achieved significant growth, reported
record earnings, and experienced a meaningful increase in its common stock price
in its fourth year of public ownership.
Net income in 1997 was $16.4 million, or $1.02 per common share on a diluted
basis. This compared to net income of $9.3 million, or $0.72 per share, in 1996.
The 1996 results included a one-time charge from the Federal Deposit Insurance
Corporation to recapitalize the Savings Association Insurance Fund. Exclusive of
this charge, net income would have been $13.9 million, or $1.06 per common share
in 1996. The decrease in diluted earnings per share in 1997, compared to 1996,
as adjusted, was primarily attributable to an increase in the number of common
shares outstanding after the completion of the Company's second-step conversion
in June 1996, as well as the time required to deploy the related capital into
investments with acceptable long-term profitability characteristics.
The investment community's assessment of Commonwealth's 1997 performance and
future earnings potential was reflected in the increase in the value of the
Company's common stock. During 1997, the price of Commonwealth common stock
increased by 33% from $15.00 per share at year-end 1996 to $19.875 at the end of
1997. Adjusted for the June 1996 exchange of common shares relating to the
Company's secondstep conversion, the price of Commonwealth common stock has
increased by 313% since its initial public offering price in January 1994.
The year was marked by a number of key accomplishments, all of which were
directed toward expanding and strengthening Commonwealth's community banking
franchise and its mortgage banking business through internal growth,
acquisitions, and supermarket banking. Reflecting this strategy, during 1997,
average assets increased 21% to $2.2 billion; average loans increased 25% to
$1.2 billion; and average deposits increased 15% to $1.5 billion. Additionally,
mortgage originations increased 27% to $585.1 million in 1997, while the
combination of net interest revenue and noninterest revenue increased 20% to
$92.0 million.
[PHOTO]
CHARLES H. MEACHAM,
CHAIRMAN OF
THE BOARD AND
CHIEF EXECUTIVE OFFICER
An additional critical component of Commonwealth's strategy has been the
effective management of its capital structure. During 1997, the Company
repurchased $33.2 million of its common stock, representing 2.1 million shares
at an average price of $16.15 per share. Of these repurchases, 0.3 million
shares were to fund a stock-based benefit plan for directors and employees. The
remaining 1.8 million shares were held as treasury stock at year-end. As an
additional component of its capital management strategy, Commonwealth increased
its common stock dividend 17% during 1997 to an annual rate of $0.28 per share.
These capital management activities were directed toward improving utilization
of capital, while prudently managing Commonwealth Bank's regulatory capital
position. In this latter regard, at year-end 1997, the Bank's regulatory
tangible and core capital ratios were 6.6%, unchanged from year-end 1996.
2
<PAGE> 4
During the year, Commonwealth continued to implement its supermarket banking
strategy, increasing the number of supermarket branches from 14 to 17. 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. The success of the supermarket banking strategy is
evident in the growth of supermarket deposits, which increased 67% during 1997
to $108.9 million at year-end. Combined with the Bank's 39 traditional branches,
Commonwealth now has 56 branches in its eight county region in southeast
Pennsylvania.
The Bank significantly increased its consumer lending activities in 1997.
Reflective of this effort, consumer loans increased 15% in 1997 to $194.8
million at year-end. Much of this growth was related to the origination of
second mortgage loans and indirect recreational vehicle lending, where
Commonwealth's historical credit experience has been excellent.
With respect to commercial lending, Commonwealth's significant investments in
systems, products and staffing bore positive results in 1997. Commercial loans,
exclusive of those guaranteed by the Small Business Administration, totaled
$96.0 million at year-end 1997, an increase of 35% compared to year-end 1996.
Commercial deposits also grew substantially during the year, from $49.6 million
at the end of 1996 to $81.1 million at year-end 1997, an increase of 64%.
Mortgage banking has been an important component of Commonwealth's business
strategy for many years. In 1997, we expanded the operations of ComNet Mortgage
Services, the Bank's mortgage banking division, through the acquisition of
selected assets and offices of Homestead Mortgage, Inc. ("Homestead Mortgage"),
a mortgage company based in Millersville, Maryland. Homestead Mortgage
contributed significantly to the 27% increase in Commonwealth mortgage
originations to $585.1 million in 1997, from $462.1 million in 1996.
Looking forward, we are enthusiastic about the future and Commonwealth's
continuing evolution from a traditional savings bank to a community bank.
Recognizing this evolution and the importance of being centrally located among
the communities we serve, Commonwealth relocated its headquarters from Malvern,
Pennsylvania to Norristown, Pennsylvania in early 1997. In addition to more
closely aligning the Bank with its communities, the move to the new Norristown
headquarters resulted in meaningful cost savings and will better accommodate
future growth.
<TABLE>
<CAPTION>
Commonwealth Stock Price,
as Adjusted,
at Designated Dates
<S> <C>
Jan. 1994 $4.81
Dec. 1994 $5.95
Dec. 1995 $10.83
Dec. 1996 $15.00
Dec. 1997 $19.875
</TABLE>
COMMONWEALTH SHARES HAVE OUTPACED THE NASDAQ STOCK AND FINANCIAL INDICES,
APPRECIATING, ON AN ADJUSTED BASIS, FROM $4.81 PER SHARE IN JANUARY 1994 TO
$19.875 PER SHARE AS OF DECEMBER 31, 1997. STOCK PRICES HAVE BEEN ADJUSTED TO
REFLECT THE JUNE 1996 EXCHANGE 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> 5
[PHOTO]
PATRICK J. WARD,
PRESIDENT AND
CHIEF OPERATING
OFFICER, PICTURED TO
THE RIGHT OF
MR. MEACHAM.
Over the past few years, virtually every facet of our organization has
experienced great change. However, guiding us through those changes have been
our fundamental business philosophies, which have remained constant. These
philosophies include a commitment to increasing shareholder value through our
Wcore businesses of community banking and mortgage banking. Integral to these
philosophies is our commitment to prudent risk management, effective capital
management and superior customer service. In this latter area, our commitment 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 at the core of Commonwealth's future successes.
The Board of Directors and management are proud of Commonwealth's
accomplishments in 1997, and recognize the important role that our more than 800
employees played in these achievements. Their dedication, professionalism, and
commitment to customer service have been key factors driving our successful
expansion. They, too, should take pride in Commonwealth's 1997 accomplishments
and the many more that undoubtedly lie ahead.
Sincerely,
Charles H. Meacham
Chairman of the Board and Chief Executive Officer
4
<PAGE> 6
COMMUNITY BANKING - RETAIL
Commonwealth's retail banking strategy is based on the expansion and
strengthening of its branch banking franchise in southeast Pennsylvania. In this
regard, the Company's focus has been directed toward building a network of
strategically located full-service branches, emphasizing localized
decision-making and superior customer service, capable of competing effectively
with larger regional and national banks. At year-end 1997, Commonwealth had a
total of 56 retail branch offices in its eight county region of Berks, Bucks,
Chester, Delaware, Lehigh, Lebanon, Montgomery, and Philadelphia Counties,
Pennsylvania. This compared to 53 branch locations at year-end 1996, and 36 at
the end of 1995.
Commonwealth achieved a number of meaningful accomplishments in the area of
community banking over the past year. For example, in 1997, Commonwealth:
- - Increased consumer loans by 15% to $194.8
million at the end of the year;
- - Increased deposits by $61.4 million to $1.6
billion at year-end;
- - Increased deposit fee income by 34% to $7.3
million;
- - Increased the number of ATMs to 55 at
year-end; and
- - Increased sales of mutual funds by 30% to $35.5 million.
There are three facets to the retail branch growth strategy. The first is
internal growth, which involves expanding the product offering to better serve
customer needs; increasing the breadth and depth of our household relationships;
increasing revenue within the existing branch network; and maintaining focus
relative to the control of operating expense. This aspect of the strategy
represents the fundamentals of the business.
[PHOTO]
COMMONWEALTH'S SALES ORIENTED
SUPERMARKET BRANCHES PUT THE BANK
IN CONSUMERS' "WALKING PATH" EVERY
TIME THEY GO TO THE SUPERMARKET...
AN AVERAGE OF 2.2 TIMES
A WEEK.
With respect to internal growth, Commonwealth's structured approach to sales
training and tracking, coupled with a number of product line enhancements,
resulted in a meaningful increase in the number of households served during
1997. Customer households increased from 121,000 at the end of 1996 to 129,000
at year-end 1997. More importantly, the average number of Commonwealth products
used by each household increased to 1.9 by year-end.
Looking forward, a major initiative from the standpoint of internal growth will
be the introduction of Internet and PC Banking to our customer base. Expected to
be available in 1998, this product will better enable the Company to meet the
needs of the growing segment of emerging affluent individuals, while providing
improved convenience to Commonwealth's increasingly savvy client base.
5
<PAGE> 7
The second facet of the retail branch growth strategy involves expansion through
acquisition. In 1996, Commonwealth completed the purchase of 12 former branch
offices of Meridian Bank in Berks and Lebanon Counties. In 1995, the Bank
acquired 4 former Fidelity Federal branches in Philadelphia County. While this
part of the retail branch growth strategy is inherently difficult to predict,
Commonwealth will continue to be opportunistic from the standpoint of
acquisitions in the future.
The third key aspect of the retail branch growth strategy involves supermarket
banking. Of Commonwealth's 56 retail branch locations at year-end 1997, 17 were
located in supermarkets. This compared to 14 supermarket branch locations at
year-end 1996. The success of the supermarket banking strategy was evident in
1997, as deposits in supermarket branches grew from $65.1 million at the end of
1996 to $108.9 million at year-end 1997, an increase of 67%.
<TABLE>
<CAPTION>
NUMBER OF BANK
BRANCH LOCATIONS
<S> <C>
Dec. 31, 1994 26
Dec. 31, 1995 36
Dec. 31, 1996 53
Dec. 31, 1997 56
</TABLE>
<TABLE>
<CAPTION>
DEPOSIT
BALANCES
<S> <C>
Dec. 31, 1994 $0.9 Billion
Dec. 31, 1995 $1.1 Billion
Dec. 31, 1996 $1.5 Billion
Dec. 31, 1997 $1.6 Billion
</TABLE>
THE BANK HAS ACHIEVED SIGNIFICANT GROWTH IN BRANCH OFFICES AND DEPOSITS SINCE
YEAR-END 1994.
Supermarket branches provide a number of advantages over traditional branches in
that they offer extraordinary convenience to customers, while providing
significant marketing opportunities and cost advantages to the Bank. Customers
benefit from supermarket branches because they better enable customers to do
their banking when and where it is convenient for them. Supermarket branches are
open seven days per week, and the majority are located in newer, larger
supermarkets where weekly customer counts average in excess of 12,000.
Commonwealth also benefits from supermarket branches, as they provide increased
opportunity to market the Bank's financial products and services by putting
Commonwealth in a location that the typical household visits 2.2 times per week.
Additionally, supermarket branches enable Commonwealth to improve market
penetration more quickly and at significantly lower cost than would be possible
through traditional branches. The average supermarket banking facility requires
a capital expenditure of $0.3 million, about one-fourth that of a traditional
branch.
Commonwealth plans to continue to expand and strengthen its retail banking
franchise in the future through internal growth, acquisitions and supermarket
banking. Three supermarket branches and one mini-traditional branch are
scheduled to open during 1998, and the Bank expects to further increase its ATM
network. Additionally, Commonwealth will continue to look for ways to expand its
product line to increase customer convenience and customer profitability.
6
<PAGE> 8
[PHOTO]
WILHELM MOSER, PRESIDENT AND ROBERT MOSER, VICE PRESIDENT, OF JOMA MACHINE
COMPANY, INC., INSPECT A NEWLY MACHINED BEARING RACE WITH THEIR COMMONWEALTH
BERKS COUNTY BUSINESS BANKER, RAY CRESPO. THE 30 YEAR OLD PRECISION MACHINE AND
TOOLING COMPANY MAINTAINS ITS BUSINESS BANKING RELATIONSHIP WITH COMMONWEALTH.
COMMUNITY BANKING - BUSINESS
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
branch network. Commencing in late 1993, Commonwealth expanded its commercial
lending activities by developing the capacity to make loans to businesses in its
primary market area in southeast Pennsylvania.
Similar to the Company's branch banking strategy, Commonwealth's business
banking strategy is focused on building a full-service institution, emphasizing
localized decision making and superior customer service, capable of competing
effectively with larger regional and national banks. Over the past year, the
Bank continued to make significant investments in products, support systems and
staffing to meet the needs of local businesses. In 1997, for example,
7
<PAGE> 9
Commonwealth created a commercial deposit operations area to address the
specialized requirements of business customers. Commonwealth's staffing in
business banking now totals ten experienced commercial lenders and two cash
management specialists. In the future, we are committed to providing the best
possible products and services to our business customers, and stand ready to
allocate the financial and human resources necessary to back-up that commitment.
<TABLE>
<CAPTION>
BUSINESS
LOAN GROWTH
<S> <C>
Dec. 31, 1994 $ 6.4 Million
Dec. 31, 1995 $12.2 Million
Dec. 31, 1996 $70.8 Million
Dec. 31, 1997 $96.0 Million
</TABLE>
<TABLE>
<CAPTION>
BUSINESS
DEPOSIT GROWTH
<S> <C>
Dec. 31, 1994 $17.7 Million
Dec. 31, 1995 $24.1 Million
Dec. 31, 1996 $49.6 Million
Dec. 31, 1997 $81.1 Million
</TABLE>
THE BANK HAS ACHIEVED SIGNIFICANT GROWTH IN BUSINESS LOANS AND DEPOSITS SINCE
YEAR-END 1994.
Commonwealth's target market is comprised of small businesses operating within
the Bank's eight county region. 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 small business borrowers.
For credit exposures of up to $2.5 million, credit risk is managed through the
Credit Policy and Loan Administration Department. This Department is independent
of the loan origination group and is under the supervision of the Chief Credit
Officer. Approval authority for exposures above $2.5 million rests with
Commonwealth's Commercial Loan Credit Committee which, in addition to the Chief
Credit Officer, is comprised of other senior officers of the Bank.
In 1997, Commonwealth achieved meaningful progress relating to its efforts to
prudently manage growth in business banking. For example, during 1997, business
deposits increased 64% to $81.1 million at the end of 1997, compared to $49.6
million at year-end 1996. Additionally, commercial loans, exclusive of loans
guaranteed by the Small Business Administration, increased 35% from $70.8
million at the end of 1996, to $96.0 million at the end of 1997. Importantly,
the Company's growth in business banking has been achieved without incurring
undue credit risk. Nonperforming commercial loans totaled only $2.3 million, or
2.4%, of the Bank's related commercial loan portfolio at year end 1997.
8
<PAGE> 10
[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 has a long and proud history as a mortgage lender. Operating under
the trade names of ComNet Mortgage Services and Homestead Mortgage, Commonwealth
is involved in retail and wholesale residential mortgage originations,
securitization and sale of mortgage loans, and mortgage servicing.
Commonwealth's target market in the mortgage banking business is the I-95
corridor between Massachusetts and Virginia.
During 1997, substantial investments in technology were made to improve
efficiency and provide better service to our customers and mortgage investors.
Investments in a state-of- the-art desktop underwriting system and a new
mortgage servicing system, both of which will be fully operational in 1998,
will enable Commonwealth to handle a significant increase in volume without a
corresponding increase in staff.
9
<PAGE> 11
More importantly, these new systems will enable Commonwealth to reduce
turnaround time on mortgage applications, as well as improve the quality and
timeliness of information provided to investors in Commonwealth-originated
mortgages.
With respect to the origination of mortgage loans, Commonwealth's strategy has
been to focus on retail originations in those markets where the Company's local
presence gives it a competitive advantage. In 1997, retail mortgage loan
originations totaled $392.7 million, an increase of 72% compared to $228.3
million in 1996.
The origination of mortgages on a retail basis will continue to be a strategic
focus for the Company 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. In 1997, Homestead Mortgage originated approximately
$156.0 million in mortgages in Virginia, Maryland, Delaware, Pennsylvania, and
the District of Columbia. This acquisition gave Commonwealth an excellent
opportunity to expand an already profitable core business in important
Mid-Atlantic markets on a much faster basis than would be possible through de
novo branch expansion.
<TABLE>
<CAPTION>
MORTGAGE LOAN
ORIGINATIONS
<S> <C>
1994 $343.7 Million
1995 $494.8 Million
1996 $462.1 Million
1997 $585.1 Million
</TABLE>
THE ACQUISITION OF SELECTED ASSETS AND OFFICES OF HOMESTEAD MORTGAGE, INC., IN
EARLY 1997, CONTRIBUTED TO A 27% INCREASE IN MORTGAGE LOAN ORIGINATIONS IN
1997.
Wholesale mortgage originations totaled $192.4 million in 1997, compared to
$233.8 million in 1996. The decrease in this portion of Commonwealth's business
was attributable to the Company'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 the Company's disciplined approach to
wholesale pricing, which is driven primarily by economic, rather than volume,
considerations.
Commonwealth's strategy is to securitize substantially all of the fixed rate
loans which conform to Federal National Mortgage Association ("FNMA") or Federal
Home Loan Mortgage Corporation ("FHLMC") guidelines. Essentially all of the
jumbo fixed rate loans and adjustable rate loans are retained by the Bank.
Commonwealth's net gain on the sale of mortgage loans more than doubled in 1997
to $5.0 million, from $2.1 million in 1996.
The Bank generally retains the rights to service the conventional loans it
sells, while choosing not to service those loans insured by the Federal Housing
Administration or guaranteed by the Veterans Administration. At December 31,
1997, the mortgage servicing portfolio totaled $2.2 billion, an increase of 5%
from $2.1 billion at year-end 1996. Reflecting the run-off of more favorably
priced historical mortgage servicing rights, mortgage servicing fees were
essentially unchanged at $5.2 million in 1996 and 1997.
10
<PAGE> 12
[PHOTO]
THOMAS FORKER, VICE PRESIDENT OF COMNET MORTGAGE SERVICES, A DIVISION OF
COMMONWEALTH BANK, AND MICHAEL HARRINGTON, VICE PRESIDENT AND TREASURER OF
COMMONWEALTH, REVIEW RESEARCH STUDIES WITH PEDIATRIC CANCER RESEARCHER, DR.
STEPHAN GRUPP. COMMONWEALTH AND COMNET'S ANNUAL "TEE IT UP FOR KIDS" GOLF OUTING
HAS RAISED OVER $64,000 FOR THE CANCER RESEARCH CENTER OF THE CHILDREN'S
HOSPITAL OF PHILADELPHIA.
COMMUNITY ACTIVITIES
Commonwealth recognizes that, as a community bank, the performance of the
organization is tied directly to the health of the communities it serves. An
important aspect of maintaining strong and healthy communities involves having a
sufficient quantity of affordable housing available to meet the needs of lower
income families. Commonwealth's commitment to facilitating the financing of
affordable housing in southeast Pennsylvania was evidenced by its $2.2 million
investment in lower income housing projects in 1997.
Commonwealth's involvement in community sponsored events is further evidence of
its commitment to serve lower income and minority households. For example, for
the 5th consecutive year, Commonwealth contributed its time, efforts and
financial support to the ACORN & Friends Bank Fair 97. 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. Among the more meaningful of Commonwealth's 1997 donations and
involvements were for the benefit of the Children's Hospital of Philadelphia,
Montgomery County Cultural Center, Reading Public Museum, Lower Providence
Library, Neighborhood Housing of Reading, and the United Way.
11
<PAGE> 13
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.
<TABLE>
<CAPTION>
==========================================================================================================================
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA) DECEMBER 31,
--------------------------------------------------------------
SELECTED FINANCIAL CONDITION DATA: 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets $ 2,268,595 $ 2,119,961 $1,455,700
Cash, interest-bearing deposits and
short-term investments 53,938 60,102 50,177
Investment securities 51,326 53,935 46,896
Mortgage-backed securities 735,291 752,707 463,353
Mortgage loans held for sale 37,574 17,335 26,001
Loans receivable, net 1,259,596 1,113,114 796,735
Intangible assets 45,244 51,220 17,279
Mortgage servicing rights 8,039 7,677 6,855
Deposit accounts 1,552,824 1,491,450 1,076,549
FHLB advances 213,000 175,000 120,614
Other borrowings 246,099 176,674 82,666
Shareholders' equity 214,852 231,924 137,036
Tangible shareholders' equity (1) 169,608 180,704 119,757
</TABLE>
<TABLE>
<CAPTION>
================================================================================================
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA) DECEMBER 31,
-------------------------------------
SELECTED FINANCIAL CONDITION DATA: 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Total assets $1,213,960 $1,175,797
Cash, interest-bearing deposits and
short-term investments 45,913 112,992
Investment securities 78,412 37,585
Mortgage-backed securities 430,119 386,747
Mortgage loans held for sale 18,533 79,839
Loans receivable, net 583,144 498,974
Intangible assets 1,737 2,812
Mortgage servicing rights 6,941 7,091
Deposit accounts 853,519 882,222
FHLB advances 61,214 84,914
Other borrowings 147,470 87,359
Shareholders' equity 116,905 82,425
Tangible shareholders' equity (1) 115,168 79,613
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
SELECTED OPERATING DATA: 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 155,243 $ 127,306 $ 97,153
Interest expense 84,855 66,352 49,691
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 70,388 60,954 47,462
Provision for loan losses 1,600 601 578
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 68,788 60,353 46,884
Net gain on sales of mortgage loans 4,993 2,056 939
Other noninterest income 16,582 13,617 11,820
Amortization of intangible assets 5,990 4,542 1,598
Noninterest expenses, exclusive of
amortization of intangible assets 60,058 57,365 40,666
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 24,315 14,119 17,379
Income taxes 7,946 4,781 6,124
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 16,369 $ 9,338 $ 11,255
==========================================================================================================================
Diluted earnings per common share $ $1.02 $ 0.72 N/A(2)
==========================================================================================================================
Dividends per share $ 0.28 $ 0.24(3) $ 0.24(3)
==========================================================================================================================
OTHER DATA:
Number of full-service customer facilities (4) 56 53 36
Number of loan origination offices (5) 13 7 7
Loans serviced for others (in millions) $ 1,304 $ 1,340 $ 1,264
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
SELECTED OPERATING DATA: 1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income $ 80,374 $ 85,056
Interest expense 36,860 39,467
- -----------------------------------------------------------------------------------------------
Net interest income 43,514 45,589
Provision for loan losses 168 710
- -----------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 43,346 44,879
Net gain on sales of mortgage loans 318 5,420
Other noninterest income 12,617 9,174
Amortization of intangible assets 1,076 1,825
Noninterest expenses, exclusive of
amortization of intangible assets 41,445 42,913
- -----------------------------------------------------------------------------------------------
Income before income taxes 13,760 14,735
Income taxes 4,515 5,212
- -----------------------------------------------------------------------------------------------
Net income $ 9,245 $ 9,523
===============================================================================================
Diluted earnings per common share N/A(2) N/A(2)
===============================================================================================
Dividends per share $ 0.18(3) N/A(2)
===============================================================================================
OTHER DATA:
Number of full-service customer facilities (4) 26 26
Number of loan origination offices (5) 9 10
Loans serviced for others (in millions) $ 1,254 $ 1,271
</TABLE>
<TABLE>
<CAPTION>
KEY OPERATING RATIOS: AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
PERFORMANCE RATIOS: (6) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Return on assets 0.73% 0.51% 0.85%
Return on equity 7.56% 4.97% 8.95%
Interest-earning assets to
interest-bearing liabilities 106.25% 106.41% 106.20%
Interest rate spread (7) 3.11% 3.30% 3.55%
Net interest margin (7) 3.36% 3.54% 3.80%
Noninterest expenses, exclusive of
amortization of intangible assets, to assets 2.68% 3.11% 3.06%
ASSET QUALITY RATIOS:
Nonperforming assets to total assets at end
of period (8) 0.42% 0.43% 0.51%
Allowance for loan losses to nonperforming
loans at end of period 100.96% 123.74% 120.86%
Allowance for loan losses to total loans held
for investment at end of period 0.71% 0.89% 0.93%
CAPITAL AND OTHER RATIOS:
Equity to assets 9.66% 10.17% 9.46%
Tangible equity to assets at end of period 7.48% 8.52% 8.23%
Dividend payout ratio (9) 28.66% 33.50% 17.14%
</TABLE>
<TABLE>
<CAPTION>
KEY OPERATING RATIOS: AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
PERFORMANCE RATIOS: (6) 1994 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Return on assets 0.77% 0.81%
Return on equity 8.02% 12.55%
Interest-earning assets to
interest-bearing liabilities 108.51% 104.60%
Interest rate spread (7) 3.55% 3.94%
Net interest margin (7) 3.83% 4.10%
Noninterest expenses, exclusive of
amortization of intangible assets, to assets 3.46% 3.64%
ASSET QUALITY RATIOS:
Nonperforming assets to total assets at end
of period (8) 0.52% 1.26%
Allowance for loan losses to nonperforming
loans at end of period 167.90% 122.26%
Allowance for loan losses to total loans held
for investment at end of period 1.22% 1.42%
CAPITAL AND OTHER RATIOS:
Equity to assets 9.62% 6.45%
Tangible equity to assets at end of period 9.49% 6.77%
Dividend payout ratio (9) 15.69% N/A(2)
</TABLE>
(1) Shareholders' equity less intangible assets.
(2) Not applicable, as the Company completed its second-step conversion on June
14, 1996.
(3) Adjusted to reflect the exchange of 2.0775 shares of Company common stock
for each share of Bank common stock.
(4) Includes ten, fourteen, and seventeen supermarket branch offices at December
31, 1995, 1996, and 1997, respectively.
(5) Consists of offices of ComNet Mortgage Services and for 1997, Homestead
Mortgage.
(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) Nonperforming assets consist of nonaccrual loans, real estate acquired
through foreclosure or by deed-in-lieu thereof and nonperforming investment
securities.
(9) Aggregate dividends divided by net income.
12
<PAGE> 14
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"). The Bank is
a federally chartered stock savings bank, primarily regulated by the Office of
Thrift Supervision ("OTS"). The Bank conducts business from its executive
offices in Norristown, Pennsylvania and, as of December 31, 1997, 56
full-service offices located in southeast Pennsylvania.
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, net gains or losses relating to the
sale of loans, securities and real estate owned, and other revenue; the level of
noninterest expense, including compensation and employee benefits, occupancy and
office expense, FDIC premiums, advertising and promotion expense, amortization
of intangible assets and other expense; and income tax expense.
The Company's strategy is based on the expansion and strengthening of its
banking franchise in southeast Pennsylvania. In this regard, the Company's focus
has been directed toward building a full-service institution, emphasizing
localized decision-making and superior customer service, capable of competing
effectively with larger regional and national banks. As part of this strategy,
Commonwealth has developed a wide variety of products and services which meet
the needs of its retail and business customer base. The Company generally has
sought to achieve long-term financial strength by increasing the amount and
stability of its net interest income and noninterest income, while limiting
growth in operating expense. In pursuit of these goals, Commonwealth has adopted
a number of complementary business strategies, including growth of the retail
branch network through de novo supermarket branching and acquisitions of
traditional branches; increased focus on consumer lending and business banking;
controlled growth of the mortgage banking business; maintenance of excellent
asset quality and strong capital levels; and prudent management of interest rate
risk.
ComNet Mortgage Services ("ComNet"), a division of the Bank, also located in
Norristown, conducts business through ten 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. In January 1997, Commonwealth acquired selected assets of Homestead
Mortgage, Inc. ("Homestead Mortgage"), a mortgage company headquartered in
Millersville, Maryland. Among the assets acquired by Commonwealth were
production branches located in Millersville, Bethesda, Whitemarsh, and Woodlawn,
Maryland, and Media, Pennsylvania. The Millersville, Bethesda, and Whitemarsh
branches continue to operate under the trade name of Homestead Mortgage. The
Woodlawn, Maryland and Media, Pennsylvania locations were closed subsequent to
the acquisition as a result of the consolidation of their operations with other
ComNet and Homestead Mortgage branches.
ACQUISITIONS
On January 31, 1997, Commonwealth acquired five mortgage production offices
of Homestead Mortgage, Inc. located in Maryland and Pennsylvania. These offices
originate mortgages in Delaware, the District of Columbia, Maryland,
Pennsylvania, and Virginia. Under the terms of the transaction, the group
continued to operate under the trade name of Homestead Mortgage in the District
of Columbia, Maryland, and Virginia. During 1997, the Homestead Mortgage offices
originated loans totaling $156.0 million.
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 "Berks
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.
13
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and Subsidiaries
The Company assigned $14.7 million of the cost of the 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 Berks 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. The Homestead Mortgage Acquisition provided an excellent
opportunity to expand an already profitable core business in important
Mid-Atlantic markets on a much faster basis than would be possible through de
novo branch expansion.
CHANGES IN FINANCIAL CONDITION
GENERAL. Total assets increased by $148.6 million, or 7%, from $2.1 billion
at December 31, 1996, to $2.3 billion at December 31, 1997. The increase was
primarily the result of a $146.5 million increase in loans receivable.
Total liabilities increased by $165.7 million, or 9%, from $1.9 billion at
December 31, 1996, to $2.1 billion at December 31, 1997. This increase was
primarily the result of increases in securities sold under agreements to
repurchase, secured notes due to the Federal Home Loan Bank of Pittsburgh
("FHLB"), and deposits.
Shareholders' equity as of December 31, 1997, equaled $214.9 million,
compared to $231.9 million at December 31, 1996. This $17.1 million, or 7%,
decrease was primarily the result of the $28.7 million purchase of 1.8 million
shares of treasury stock, and the $4.5 million purchase of 0.3 million shares of
common stock for benefit plans, offset, in part, by the Company's $16.4 million
net income for 1997.
CASH, INTEREST-BEARING DEPOSITS AND SHORT-TERM INVESTMENTS (COLLECTIVELY
"CASH AND CASH EQUIVALENTS"). Cash and cash equivalents decreased by $6.2
million, or 10%, from $60.1 million at December 31, 1996, to $53.9 million at
December 31, 1997. The decrease was primarily related to the investment of
excess liquidity in loans receivable. As a matter of policy, the Company
generally emphasizes investments in loans receivable in order to enhance the
weighted average yield on its interest-earning assets.
MORTGAGE LOANS HELD FOR SALE. Mortgage loans held for sale increased by
$20.2 million, or 117%, from $17.3 million at December 31, 1996, to $37.6
million at December 31, 1997. The increase was attributable to an increase in
loans originated during December 1997, primarily as a result of loans closed by
the Homestead Mortgage offices.
INVESTMENT SECURITIES. Investment securities decreased by $2.6 million, or
5%, from $53.9 million at December 31, 1996, to $51.3 million at December 31,
1997. The decrease was primarily the result of the maturity or call of U.S.
Treasury and U.S. Government agency securities, offset, in part, by purchases of
U.S. Treasury and U.S. Government agency securities and other equity securities.
During 1997, the Company realized a $0.5 million gain on the sale of an equity
security that had been purchased earlier in the year.
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, 1997 and
December 31, 1996. Investment securities classified as available for sale
totaled $51.3 million at December 31, 1997, compared to $53.9 million at
December 31, 1996. The net unrealized gain on available for sale investment
securities was $0.9 million at December 31, 1997, compared to $0.1 million at
December 31, 1996.
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 decreased by $17.4
million, or 2%, from $752.7 million at December 31, 1996, to $735.3 million at
December 31, 1997. In addition to repayments and prepayments, the Company's
mortgage-backed securities portfolio decreased as a result of the $6.6 million
maturity of mortgage-backed securities during 1997. The decrease was offset, in
part, by a strategy during 1997 to enhance the Company's net interest income
through the purchase of mortgage-backed securities funded through FHLB advances
and repurchase agreements.
14
<PAGE> 16
Mortgage-backed 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. Mortgage-backed 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.
Mortgage-backed securities classified as held to maturity totaled $196.2
million at year-end 1997, compared to $237.7 million at year-end 1996.
Mortgage-backed securities classified as available for sale totaled $539.1
million at December 31, 1997, compared to $515.0 million at December 31, 1996.
The net unrealized gain on available for sale mortgage-backed securities was
$4.5 million at year-end 1997, compared to $3.1 million at year-end 1996.
During 1997, the Company sold mortgage-backed securities, which were
classified as available for sale, totaling $41.8 million and purchased
mortgage-backed securities, classified as available for sale, totaling $41.9
million. These transactions resulted in a $0.2 million net loss on the sale of
mortgage-backed securities. The sale was related to a restructuring of the
Company's mortgage-backed securities portfolio, which was undertaken to improve
future earnings relating to the portfolio.
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, 1997 and 1996,
$479.4 million, or 65%, and $511.8 million, or 68%, 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 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,
1997 and 1996, $255.9 million, or 35%, and $240.9 million, or 32%, respectively,
of the Company's mortgage-backed securities portfolio were private
mortgage-backed securities.
LOANS RECEIVABLE. Loans receivable, net of reserves and unamortized
discounts and unaccreted premiums, increased by $146.5 million, or 13%, from
$1.1 billion at December 31, 1996, to $1.3 billion at December 31, 1997. The
increase was primarily due to the Company's continued emphasis on building its
adjustable rate mortgage, consumer and commercial loan portfolios, as well as a
$21.1 million bulk loan purchase during 1997.
Total mortgage loans originated and purchased for the year ended December
31, 1997, increased by $123.1 million, or 27%, from $462.1 million for the year
ended December 31, 1996, to $585.1 million for the year ended December 31, 1997.
The $123.1 million increase in mortgage originations was primarily attributable
to a $156.0 million increase in mortgage loan originations relating to Homestead
Mortgage, offset, in part, by a decrease in originations generated through
Commonwealth'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.
Closed loans relating to Commonwealth's wholesale network totaled $192.4 million
during the year ended December 31, 1997, compared to $233.8 million for the year
ended December 31, 1996.
Commonwealth's strategy has been to focus on retail originations in those
markets where the Company's local presence gives it a competitive advantage.
Closed loans relating to Commonwealth's retail network totaled $392.7 million
during the year ended December 31, 1997, an increase of 72% compared to $228.3
million for the year ended December 31, 1996.
Consumer loans increased by $25.5 million, or 15%, from $169.3 million at
December 31, 1996, to $194.8 million at December 31, 1997. At December 31, 1997,
consumer loans represented 15% of the Company's loan portfolio and were
comprised of $41.6 million of equity lines of credit, $98.9 million of second
mortgage loans, and $54.3 million of other consumer loans. At December 31, 1996,
consumer loans represented 15% of total loans and were comprised of $49.1
million of equity lines of credit, $77.3 million of second mortgage loans, and
$42.9 million of other consumer loans.
As of December 31, 1997, commercial loans, exclusive of loans guaranteed by
the Small Business Administration ("SBA"), totaled $96.0 million, or 8%, of the
Company's total loan portfolio, as compared to $70.8 million, or 6%, at December
31, 1996. At December 31, 1997, commercial loans (other than SBA loans) were
comprised of $71.5 million of commercial real estate loans and $24.5 million of
business loans. 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. During December 1997, Commonwealth reclassified
approximately $11.5 million of business loans to commercial real estate loans.
However, previously reported amounts were
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and Subsidiaries
not restated. Commercial loans are generally considered to have a greater risk
than 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.
NONPERFORMING ASSETS. The Company's nonperforming assets, which primarily
consist of nonaccrual loans and real estate acquired through foreclosure,
increased by $0.4 million, or 5%, from $9.1 million at December 31, 1996, to
$9.6 million at December 31, 1997. At December 31, 1997, the Company's $9.6
million of nonperforming assets amounted to 0.42% of total assets. At December
31, 1996, the Company's $9.1 million of nonperforming assets amounted to 0.43%
of total assets. The increase in nonperforming assets was primarily related to
commercial loans acquired in the Berks Acquisition.
ALLOWANCE FOR LOAN LOSSES. The Company's allowance for loan losses amounted
to $9.0 million at December 31, 1997, as compared to $10.0 million at December
31, 1996. It is management's policy to maintain an allowance for estimated loan
losses 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 collectability of the loan
portfolio. At December 31, 1997, the Company's allowance for loan losses
amounted to 101% of total nonperforming loans and 0.71% of total loans held for
investment, as compared to 124% of total nonperforming loans and 0.89% of total
loans held for investment at December 31, 1996. 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 decrease in the allowance for loan losses was primarily attributable to
net credit losses on loans acquired in the Berks Acquisition. The Company
acquired a $2.4 million allowance for loan losses as part of the Berks
Acquisition. Through December 31, 1997, essentially all of that reserve had been
utilized through net credit losses.
The provision for loan losses totaled $1.6 million and $0.6 million for the
years 1997 and 1996, respectively. For 1997, net credit losses totaled $2.5
million, or 0.22% of average loans, compared to $0.5 million, or 0.05%, in 1996.
PREMISES AND EQUIPMENT. Premises and equipment decreased by $6.8 million, or
27%, from $25.4 million at December 31, 1996, to $18.6 million at December 31,
1997. The decrease was primarily attributable to the sale of the Company's
previous headquarters building and a branch property, which had a combined
carrying value of $9.5 million. These transactions resulted in a $1.6 million
nonrecurring net gain in 1997.
INTANGIBLE ASSETS. The Company's intangible assets consist of goodwill and
core deposit intangibles ("CDI") recorded in connection with the Berks
Acquisition in 1996 and the Fidelity Federal Acquisition in 1995. The CDI
relating to the Berks Acquisition are being amortized on an accelerated basis
over approximately 10 years. The goodwill relating to the Berks Acquisition and
the goodwill and CDI relating to the Fidelity Federal Acquisition are being
amortized on a straight-line basis over the period to be benefited, ranging
between 10 and 13 years.
The following is a summary of intangible assets as of December 31, 1997 and
1996:
<TABLE>
<CAPTION>
===============================================================================
DECEMBER 31,
----------------------------
(IN THOUSANDS) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Goodwill (Berks Acquisition) $20,973 $22,791
CDI (Berks Acquisition) 10,442 13,199
Goodwill (Fidelity Federal) 11,327 12,398
CDI (Fidelity Federal) 2,502 2,832
- -------------------------------------------------------------------------------
Total $45,244 $51,220
===============================================================================
</TABLE>
MORTGAGE SERVICING RIGHTS. In recent years, Commonwealth has emphasized the
servicing of residential mortgage loans as a source of fee income. At December
31, 1997, Commonwealth's servicing portfolio was $2.2 billion, an increase of 5%
compared to $2.1 billion at December 31, 1996. At both December 31, 1997 and
December 31, 1996, Commonwealth was servicing $1.3 billion of third party loans,
as well as $0.9 billion and $0.7 billion, respectively, of loans held by
Commonwealth for investment and sale.
From time to time, the Company evaluates purchased mortgage servicing rights
("PMSRs") as a means of enhancing noninterest income. In 1990 and 1991,
Commonwealth paid $19.1 million to acquire the servicing rights related to $1.1
billion of loans. In addition, during 1994, the Company 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,
16
<PAGE> 18
and an estimated prepayment assumption. The prepayment assumption is reviewed
quarterly and the amortization is adjusted based on actual and anticipated
prepayments, if necessary. PMSRs amounted to $1.6 million at December 31, 1997,
as compared to $2.2 million at December 31, 1996, and $3.0 million at December
31, 1995.
Commonwealth also has sought to expand its mortgage servicing portfolio by
increasing the amount of loans originated and sold 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 and anticipated
prepayments, if necessary. Capitalized excess mortgage servicing fees amounted
to $3.2 million at December 31, 1997, $3.6 million at December 31, 1996, and
$3.8 million at December 31, 1995.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights." The
Company 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.
Originated mortgage servicing rights ("OMSRs"), recorded for the first time
in 1996 relating to the January 1, 1996 implementation of SFAS No. 122, amounted
to $3.3 million and $1.9 million at December 31, 1997 and December 31, 1996,
respectively, net of a $1.6 million and $0.9 million valuation allowance,
respectively.
================================================================================
The following table sets forth an analysis of the activity in the Company's
mortgage servicing rights ("MSRs") during the periods indicated.
<TABLE>
<CAPTION>
Unpaid Principal Balance of
Carrying Value of MSRs Serviced Loans Relating to MSRs
---------------------------------- -------------------------------------------
Year Ended December 31, Year Ended December 31,
(in thousands) 1997 1996 1995 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of period $7,677 $6,855 $6,941 $1,042,614 $ 988,274 $955,973
Acquisitions 1,738 2,256 1,156 274,518 333,519 195,637
Amortization/Paydown (1,286) (1,059) (1,242) (130,979) (244,283) (163,336)
Sales (90) (375) -- (10,811) (34,896) --
- -------------------------------------------------------------------------------------------------------------------------
Balance, end of period $8,039 $7,677 $6,855 $1,175,342 $1,042,614 $988,274
=========================================================================================================================
</TABLE>
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and Subsidiaries
At December 31, 1997, the weighted average coupons on loans relating to the
Company's PMSRs, capitalized excess servicing fees, and OMSRs were 9.5%, 7.7%,
and 7.4%, respectively.
OTHER ASSETS. Other assets increased $17.5 million, or 125%, to $31.6
million at December 31, 1997, from $14.0 million at December 31, 1996. The
increase was primarily related to the Company's $15.2 million investment in Bank
Owned Life Insurance ("BOLI"), which the Company purchased relating to a
specific group of Bank employees. The insurance will generate earnings to
partially offset the cost of the Company's employee benefit obligations.
DEPOSITS. Deposits increased $61.4 million, or 4%, to $1.6 billion at
December 31, 1997, from $1.5 billion at December 31, 1996. The increase was
principally attributable to deposit growth in Commonwealth's supermarket
branches.
BORROWINGS. The Company's borrowings consist principally of advances from
the FHLB, and securities sold under agreements to repurchase. FHLB advances
increased by $38.0 million, or 22%, to $213.0 million at December 31, 1997, from
$175.0 million at December 31, 1996. Repurchase agreements increased by $69.4
million, or 39%, to $246.1 million at December 31, 1997, from $176.7 million at
December 31, 1996. 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. On June 14, 1996, the Company completed an offering of
common stock in connection with the second-step conversion and reorganization,
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
completion of the conversion and reorganization.
At December 31, 1997, shareholders' equity equaled $214.9 million, compared
to $231.9 million at December 31, 1996. This $17.1 million, or 7%, decrease was
primarily the result of the $28.7 million purchase of 1.8 million shares of
treasury stock, and the $4.5 million purchase of 0.3 million shares of common
stock for benefit plans, offset, in part, by the Company's $16.4 million net
income for 1997.
The Bank's tangible and core capital represented 6.6% of adjusted total
assets at both December 31, 1997 and December 31, 1996, which was in excess of
the 1.5% and 3.0% minimum regulatory requirements. At December 31, 1997 and
December 31, 1996, the Bank's risk-based capital totaled 13.4% and 14.2%,
respectively, of total risk-weighted assets, which exceeded the minimum 8.0%
requirement.
18
<PAGE> 20
================================================================================
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following table sets forth, for the periods indicated, information
regarding (i) the total amount of interest income from interest-earning assets
and the resultant average yields; (ii) the total 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,
1997 1996
-----------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(dollars in thousands) Balance Interest Rate (5) Balance Interest Rate (5)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1):
Mortgage loans:
1-4 family residential $ 885,062 $ 65,945 7.45% $ 724,844 $ 54,849 7.57%
Consumer loans 176,909 15,982 9.03 140,806 12,698 9.02
Commercial real estate loans 49,320 4,447 9.02 26,566 2,035 7.66
Business loans 55,202 4,252 7.70 39,984 3,093 7.74
----------- --------- ----------- ---------
Total loans receivable 1,166,493 90,626 7.77 932,200 72,675 7.80
----------- --------- ----------- ---------
Mortgage loans held for sale 49,477 3,559 7.19 39,639 2,927 7.38
Mortgage-backed securities 791,245 54,887 6.94 654,586 45,471 6.95
Investment securities 64,742 4,031 6.23 63,018 3,386 5.37
Other earning assets(2) 23,521 2,140 9.10 31,192 2,847 9.13
----------- --------- ----------- ---------
Total interest-earning assets 2,095,478 155,243 7.41 1,720,635 127,306 7.40
--------- ---------
Noninterest-earning assets 146,185 126,810
----------- -----------
Total assets $ 2,241,663 $ 1,847,445
=========== ===========
Interest-bearing liabilities:
Deposits:
Demand deposits(3) $ 550,236 13,616 2.47 $ 472,755 12,182 2.58
Savings deposits 245,813 5,494 2.24 240,579 5,072 2.11
Certificates of deposit 722,278 39,450 5.46 609,510 32,104 5.27
----------- --------- ----------- ---------
Total deposits 1,518,327 58,560 3.86 1,322,844 49,358 3.73
----------- --------- ----------- ---------
Total borrowings 453,901 26,295 5.79 294,098 16,994 5.78
----------- --------- ----------- ---------
Total interest-bearing liabilities(4) 1,972,228 84,855 4.30 1,616,942 66,352 4.10
--------- ---------
Noninterest-bearing liabilities 52,792 42,665
----------- -----------
Total liabilities 2,025,020 1,659,607
Shareholders' equity 216,643 187,838
----------- -----------
Total liabilities and equity $ 2,241,663 $ 1,847,445
=========== ===========
Net interest-earning assets $ 123,250 $ 103,693
=========== ===========
Net interest income/interest rate spread $ 70,388 3.11% $ 60,954 3.30%
========= ======= ========= =======
Net interest margin 3.36% 3.54%
======= =======
Ratio of average interest-earning assets
to average interest-bearing liabilities 106.25% 106.41%
======= =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
1995
------------------------------------------
Average
Average Yield/
(dollars in thousands) Balance Interest Rate (5)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable (1):
Mortgage loans:
1-4 family residential $ 507,809 $41,222 8.12%
Consumer loans 105,316 10,291 9.77
Commercial real estate loans 6,865 618 9.00
Business loans 34,205 2,665 7.79
---------- -------
Total loans receivable 654,195 54,796 8.38
---------- -------
Mortgage loans held for sale 41,978 3,208 7.64
Mortgage-backed securities 472,651 33,587 7.11
Investment securities 59,885 3,754 6.27
Other earning assets(2) 20,462 1,808 8.84
---------- -------
Total interest-earning assets 1,249,171 97,153 7.78
-------
Noninterest-earning assets 80,598
----------
Total assets $1,329,769
==========
Interest-bearing liabilities:
Deposits:
Demand deposits(3) $ 402,753 11,172 2.77
Savings deposits 136,678 2,841 2.08
Certificates of deposit 414,360 21,740 5.25
---------- -------
Total deposits 953,791 35,753 3.75
---------- -------
Total borrowings 222,437 13,938 6.27
---------- -------
Total interest-bearing liabilities(4) 1,176,228 49,691 4.23
-------
Noninterest-bearing liabilities 27,793
----------
Total liabilities 1,204,021
Shareholders' equity 125,748
----------
Total liabilities and equity $1,329,769
==========
Net interest-earning assets $ 72,943
==========
Net interest income/interest rate spread $47,462 3.55%
======= =======
Net interest margin 3.80%
=======
Ratio of average interest-earning assets
to average interest-bearing liabilities 106.20%
=======
</TABLE>
(1) The average balance of loans receivable includes nonperforming 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.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and Subsidiaries
================================================================================
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>
1997 compared to 1996
Increase (decrease) due to
----------------------------------------------------------
Total Net
Rate/ Increase
(in thousands) Rate Volume Volume (Decrease)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Mortgage loans:
1-4 family residential $ (842) $12,124 $(186) $11,096
Consumer loans 22 3,256 6 3,284
Commercial real estate loans 360 1,743 309 2,412
Business loans (13) 1,177 (5) 1,159
- ---------------------------------------------------------------------------------------------------------------
Total loans receivable (473) 18,300 124 17,951
Mortgage loans held for sale (76) 727 (19) 632
Mortgage-backed securities (64) 9,493 (13) 9,416
Investment securities 538 92 15 645
Other earning assets (9) (700) 2 (707)
- ---------------------------------------------------------------------------------------------------------------
Total net change in income on interest-
earning assets (84) 27,912 109 27,937
Interest-bearing liabilities:
Deposits:
Demand deposits (483) 1,996 (79) 1,434
Savings deposits 305 110 7 422
Certificates of deposit 1,187 5,940 219 7,346
- ---------------------------------------------------------------------------------------------------------------
Total deposits 1,009 8,046 147 9,202
Borrowings 43 9,234 24 9,301
- ---------------------------------------------------------------------------------------------------------------
Total net change in expense on interest-
bearing liabilities 1,052 17,280 171 18,503
- ---------------------------------------------------------------------------------------------------------------
Net change in net interest income $(1,136) $10,632 $ (62) $ 9,434
===============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1996 compared to 1995
Increase (decrease) due to
------------------------------------------------------
Total Net
Rate/ Increase
(in thousands) Rate Volume Volume (Decrease)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Mortgage loans:
1-4 family residential $(2,796) $17,618 $(1,195) $13,627
Consumer loans (794) 3,468 (267) 2,407
Commercial real estate loans (92) 1,774 (265) 1,417
Business loans (19) 450 (3) 428
- ----------------------------------------------------------------------------------------------------------------
Total loans receivable (3,701) 23,310 (1,730) 17,879
Mortgage loans held for sale (108) (179) 6 (281)
Mortgage-backed securities (754) 12,928 (290) 11,884
Investment securities (536) 196 (28) (368)
Other earning assets 60 948 31 1,039
- ----------------------------------------------------------------------------------------------------------------
Total net change in income on interest-
earning assets (5,039) 37,203 (2,011) 30,153
Interest-bearing liabilities:
Deposits:
Demand deposits (794) 1,942 (138) 1,010
Savings deposits 41 2,160 30 2,231
Certificates of deposit 85 10,239 40 10,364
- ----------------------------------------------------------------------------------------------------------------
Total deposits (668) 14,341 (68) 13,605
Borrowings (968) 4,333 (309) 3,056
- ----------------------------------------------------------------------------------------------------------------
Total net change in expense on interest-
bearing liabilities (1,636) 18,674 (377) 16,661
- ----------------------------------------------------------------------------------------------------------------
Net change in net interest income $(3,403) $18,529 $(1,634) $13,492
================================================================================================================
</TABLE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
1996
GENERAL. Net income was $16.4 million for 1997, compared to $9.3 million
during 1996. Results for 1996 were affected by a $4.5 million after-tax charge
relating to the recapitalization of the Savings Association Insurance Fund
("SAIF"). Exclusive of this one-time charge, net income would have been $13.9
million in 1996.
Diluted earnings per share of common stock were $1.02 for 1997, compared to
$0.72 per share for 1996. Exclusive of the one-time SAIF assessment, diluted
earnings per share of common stock would have been $1.06 for 1996. The decrease
in diluted earnings per share for 1997 compared to 1996, as adjusted, was
primarily attributable to an increase in the number of common shares outstanding
after the completion of the Company's second-step conversion in June 1996, as
well as the time required to deploy the related capital into investments with
acceptable long-term profitability characteristics.
NET INTEREST INCOME. Net interest income increased by 15%, to $70.4 million
for the year ended December 31, 1997, compared to $61.0 million in 1996. The
increase was primarily attributable to higher interest-earning asset levels,
offset, in part, by a lower net interest margin.
Average interest-earning assets totaled $2.1 billion for 1997, compared to
$1.7 billion for 1996. The increase in
20
<PAGE> 22
average interest-earning assets was due primarily to increases in the Company's
loan portfolio. Compared to 1996, average mortgage loans increased 22% to $885.1
million, average consumer loans increased 26% to $176.9 million, and average
commercial loans increased 57% to $104.5 million in 1997. The increases in
average loans in 1997 were primarily attributable to growth in the Company's
core lending businesses and to the Berks Acquisition.
For 1997, the net interest margin was 3.36%, versus 3.54% in 1996. The
decrease was primarily attributable to a 0.20% increase in the cost of
interest-bearing liabilities in 1997, compared to 1996. The increase in the cost
of interest-bearing liabilities was due principally to a 0.19% increase in the
average cost of certificates of deposit, reflecting the continued competitive
environment for this product in southeast Pennsylvania.
PROVISION FOR LOAN LOSSES. Provision for loan losses totaled $1.6 million
for the year ended December 31, 1997, compared to $0.6 million in 1996. For
1997, net credit losses totaled $2.5 million, or 0.22% of average loans,
compared to $0.5 million, or 0.05%, in 1996.
At December 31, 1997, the allowance for loan losses totaled $9.0 million, or
0.71% of loans and 101% of nonperforming loans, compared to $10.0 million, or
0.89% of loans and 124% of nonperforming loans at December 31, 1996. The
decrease in the allowance for loan losses was primarily attributable to net
credit losses on loans acquired in the Berks Acquisition. The Company acquired a
$2.4 million allowance for loan losses as part of the Berks Acquisition. Through
December 31, 1997, essentially all of that reserve had been utilized through net
credit losses.
At December 31, 1997, nonperforming loans totaled $8.9 million, or 0.70% of
total loans, while nonperforming assets totaled $9.6 million, or 0.42% of total
assets. At December 31, 1996, nonperforming loans totaled $8.1 million, or 0.72%
of total loans, while nonperforming assets totaled $9.1 million, or 0.43% of
total assets.
NONINTEREST INCOME. Noninterest income was $21.6 million for 1997, compared
to $15.7 million in 1996. The increase reflected a $2.9 million increase in the
net gain on sale of mortgage loans, relating primarily to servicing released
premiums on Homestead Mortgage originations, a $0.5 million gain on the sale of
a security, and a $0.2 million gain on the sale of mortgage servicing rights. In
addition, deposit fees increased by $1.8 million in 1997, compared to 1996. The
increase in deposit fees was primarily attributable to growth in supermarket
banking, expansion of Commonwealth's business banking activities, and increased
ATM fees, as well as to deposit fees related to the Berks Acquisition. Also
contributing to the increase in noninterest income for 1997 was a $1.6 million
net gain on the sale of the Company's previous headquarters building and the
sale of a branch property. These increases were partially offset by the effect
of a favorable litigation settlement in the third quarter of 1996, a $0.2
million favorable effect relating to the sale of a branch property in the fourth
quarter of 1996, and a $0.2 million net loss on the sale of mortgage-backed
securities in the second quarter of 1997.
NONINTEREST EXPENSE. Noninterest expense was $66.0 million for 1997,
compared to $61.9 million for 1996. The increase was primarily attributable to
higher expenses relating to the acquisition of Homestead Mortgage offices, as
well as higher expenses relating to certain employee benefit plans, growth in
supermarket banking and business banking activities, and higher expenses
relating to the Berks Acquisition. The increase in noninterest expense was
offset, in part, by a $8.7 million decrease in FDIC premiums. This $8.7 million
decrease represented a $6.8 million one-time charge in the third quarter of 1996
to recapitalize the SAIF, a reduction in deposit insurance premiums from $0.23
to approximately $0.05 per $100 of deposits, and a $0.2 million refund of prior
year FDIC premiums received in the first quarter of 1997. In addition, during
the third quarter of 1996, Commonwealth recorded approximately $0.8 million in
one-time expenses associated with the Berks Acquisition and, in the fourth
quarter of 1996, Commonwealth recorded a one-time nonrecurring charge of $0.3
million relating to a management reorganization. Also partially offsetting the
increase in noninterest expense was a $0.4 million reversal of a liability
relating to a contract with the Company's data processing provider, and a $0.4
million reversal of the Bank's pension liability, both of which were recorded in
the second quarter of 1997. During 1997, the Bank terminated its defined benefit
pension plan, and replaced it with a target benefit plan.
INCOME TAXES. Income tax expense amounted to $7.9 million and $4.8 million
during 1997 and 1996, respectively, reflecting an effective tax rate of 33% in
1997 and 34% in 1996. The decrease in the income tax rate in 1997 was primarily
attributable to low income housing tax credits. As of December 31, 1997, the
Company had a deferred tax asset of $0.5 million, which was net of a valuation
allowance of $1.5 million. 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, 1996 AND
1995
GENERAL. Net income was $9.3 million, or $0.72 per diluted 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
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and Subsidiaries
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 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 diluted 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 Berks and Fidelity Federal 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 Berks and Fidelity Federal 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 1996, the net interest margin was 3.54%, compared to 3.80% in 1995. The
decrease was primarily attributable to a 25 basis point decrease in the net
interest spread. The decrease in the 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 nonperforming loans. At December 31, 1996, nonperforming loans
represented 0.72% of total loans, and nonperforming 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. 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 deposit fees was
attributable to the Berks Acquisition, growth in supermarket branches, and
expansion of Commonwealth's business banking activities. The net gain on sale 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 sale of foreclosed real estate, and the $0.5 million gain relating to the
sale of two branch properties during 1995. Net gain on sale 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. 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 Berks
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 Berks 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 Berks 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.
22
<PAGE> 24
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.
Asset and liability management policy is established and implemented by the
Asset/Liability Committee, which is comprised of members of senior management,
and reviewed by the Company's Board of Directors at least annually. 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. Interest-rate caps are contractual agreements
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. Interest-rate
collars combine 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 $0.2 million, $0.5 million, and
$39,000 during the years ended December 31, 1997, 1996, and 1995, 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.
23
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and Subsidiaries
The following tables set forth the interest-rate swap agreements and
interest-rate cap agreements which the Company had entered into as of December
31, 1997.
<TABLE>
<CAPTION>
===============================================================================
Interest-rate December 31, 1997
swap agreements: Interest Rates
--------------------------
Floating
Notional Fixed Rate
Maturity Principal Amount Rate Paid Received
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
(dollars in thousands)
01/17/98 $ 30,000 5.31% 5.96%
11/20/98 25,000 5.78 5.88
12/23/98 12,500 6.06 5.91
01/17/99 20,000 5.45 5.96
12/23/99 12,500 6.20 5.91
--------
Total $100,000 5.66(1) 5.93(1)
========
</TABLE>
(1) Reflects weighted average rates at December 31, 1997.
<TABLE>
<CAPTION>
===============================================================================
Interest-rate December 31, 1997
cap agreements: Interest Rates
-----------------------------
Notional Index
Maturity Principal Amount Strike Rate Rate
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
(dollars in thousands)
02/18/98 $15,000 5.25% 5.88%
05/12/00 50,000 6.82 5.78
09/22/00 15,000 6.72 5.91
--------
Total $80,000 6.50(1) 5.82(1)
========
</TABLE>
(1) Reflects weighted average rates at December 31, 1997.
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 1997, $65.0 million of
interest-rate swaps agreements matured and were not replaced. Also, during 1997,
a $5.0 million interest-rate cap agreement and a $10.0 million interest-rate
collar agreement matured. The $5.0 million interest-rate cap agreement was
replaced with $65 million of interest-rate cap agreements with maturities of
three years. The interest-rate collar agreement was not replaced.
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.
24
<PAGE> 26
The following table summarizes the anticipated maturities or repricing of
the Company's interest-earning assets and interest-bearing liabilities as of
December 31, 1997, based on the information and assumptions set forth in the
notes below.
<TABLE>
<CAPTION>
Four to More Than
Within Three Twelve One Year to
(dollars in thousands) Months Months Three Years
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-earning assets (1):
Loans receivable (2):
Single-family residential loans:
Fixed $ 13,628 $ 39,819 $ 80,285
Adjustable 83,560 219,440 100,298
Consumer loans 55,582 22,891 42,925
Commercial real estate loans 2,183 4,582 5,704
Business loans 20,573 10,634 2,815
Mortgage loans held for sale 37,574 -- --
Mortgage-backed securities (3) 198,320 61,855 126,603
Investment securities -- 42,728 6,109
Other interest-earning assets (4) 4,391 -- --
- ---------------------------------------------------------------------------------------------------------------------
Total $ 415,811 $ 401,949 $ 364,739
=====================================================================================================================
Interest-bearing liabilities:
Deposits (5):
NOW accounts (6) $ 4,311 $ 12,933 $ 29,488
Savings accounts (6) 14,331 42,992 75,236
Money market deposit accounts 119,368 142,332 59,305
Certificates of deposit 166,477 313,383 216,011
FHLB advances 205,000 5,000 2,000
Repurchase agreements 96,099 15,000 90,000
- ---------------------------------------------------------------------------------------------------------------------
Total 605,586 531,640 472,040
- ---------------------------------------------------------------------------------------------------------------------
Hedge impact (135,000) 37,500 97,500
- ---------------------------------------------------------------------------------------------------------------------
$ 470,586 $ 569,140 $ 569,540
(Deficiency) excess of interest-earning
assets over interest-bearing liabilities $ (54,775) $(167,191) $(204,801)
=====================================================================================================================
Cumulative (deficiency) excess of
interest-earning assets over interest-
bearing liabilities $ (54,775) $(221,966) $(426,767)
=====================================================================================================================
Cumulative (deficiency) excess of
interest-earning assets over interest-
bearing liabilities as a percent of
total assets (2.41)% (9.78)% (18.81)%
=====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
More Than
Three Years Over Five
(dollars in thousands) to Five Years Years Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest-earning assets (1):
Loans receivable (2):
Single-family residential loans:
Fixed $ 57,893 $ 144,937 $ 336,562
Adjustable 154,112 57,089 614,499
Consumer loans 32,265 40,597 194,260
Commercial real estate loans 23,992 33,294 69,755
Business loans 6,303 4,281 44,606
Mortgage loans held for sale -- -- 37,574
Mortgage-backed securities (3) 89,469 259,044 735,291
Investment securities 8,785 -- 57,622
Other interest-earning assets (4) -- 14,175 18,566
- -----------------------------------------------------------------------------------------------------------------
Total $ 372,819 $ 553,417 $2,108,735
=================================================================================================================
Interest-bearing liabilities:
Deposits (5):
NOW accounts (6) $ 23,885 $ 101,825 $ 172,442
Savings accounts (6) 42,320 54,411 229,290
Money market deposit accounts 3,707 247 324,959
Certificates of deposit 31,979 16,630 744,480
FHLB advances 1,000 -- 213,000
Repurchase agreements -- 45,000 246,099
- -----------------------------------------------------------------------------------------------------------------
Total 102,891 218,113 1,930,270
- -----------------------------------------------------------------------------------------------------------------
Hedge impact -- -- --
- -----------------------------------------------------------------------------------------------------------------
$ 102,891 $ 218,113 $1,930,270
(Deficiency) excess of interest-earning
assets over interest-bearing liabilities $ 269,928 $ 335,304 $ 178,465
=================================================================================================================
Cumulative (deficiency) excess of
interest-earning assets over interest-
bearing liabilities $(156,839) $ 178,465 --
=================================================================================================================
Cumulative (deficiency) excess of
interest-earning assets over interest-
bearing liabilities as a percent of
total assets (6.91)% 7.87% --
=================================================================================================================
</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 nonperforming loans, which amounted to $8.9
million at December 31, 1997.
(3) Reflects estimated prepayments in the current interest rate environment.
(4) Includes $14.2 million of stock in the FHLB of Pittsburgh.
(5) Does not include noninterest-bearing deposit accounts.
(6) Although the Company's negotiable order of withdrawal ("NOW") accounts and
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 savings accounts. If all of the Company's NOW accounts and 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 $549.1
million or 24% of total assets.
25
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and Subsidiaries
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 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 over a two year period. 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, 1997, 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 to be 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.
The following table presents an analysis of the sensitivity inherent in the
Company's net interest income and market value of portfolio equity (market value
of assets, less liabilities, adjusted for the market value of mortgage servicing
rights, and off-balance-sheet instruments). The interest rate scenarios
presented in the table include interest rates at December 31, 1997 and as
adjusted by instantaneous parallel rate changes upward and downward of up to 200
basis points. Each rate scenario reflects unique prepayment and repricing
assumptions.
Since there are limitations inherent in any methodology used to estimate the
exposure to changes in market interest rates, this analysis is not intended to
be a forecast of the actual effect of a change in market interest rates on the
Company. The net interest income variability reflects the Company's negative
interest rate sensitivity gap and does not include the decrease in earnings from
an increase in amortization of servicing intangible assets that may be caused by
higher prepayments when rates decline. The market value of portfolio equity is
significantly impacted by the estimated effect of prepayments on the value of
single family loans, MBS and servicing as rates decline. Further, this analysis
is based on the Company's assets, liabilities, mortgage servicing rights, and
off-balance-sheet instruments at December 31, 1997 and does not contemplate any
actions the Company might undertake in response to changes in market interest
rates, such as the creation of additional servicing value by refinancing the
single family loan portfolio. This action could minimize the decrease in market
value of portfolio equity in the downward rate scenarios.
<TABLE>
<CAPTION>
================================================================================
Change in Net interest Market value of
interest rates margin portfolio equity
- --------------------------------------------------------------------------------
<S> <C> <C>
+200 (0.95)% (14.35)%
+100 (0.30) (7.29)
0 -- --
-100 (2.23) (2.76)
-200 (1.75) (13.38)
</TABLE>
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.
26
<PAGE> 28
================================================================================
The following table sets forth the Bank's compliance with applicable
regulatory capital requirements at December 31, 1997:
<TABLE>
<CAPTION>
Minimum
For Capital
Adequacy
Actual Purposes
-------------------------------- ---------------------------
(dollars in thousands) Ratio Amount Ratio Amount
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shareholders' equity,
and ratio to OTS total assets 8.6% $ 192,632
--------
Intangible assets (45,244)
Unrealized gains on available-for-sale
securities, net of tax (2,969)
------------
Tangible capital, and ratio to
OTS adjusted total assets 6.6% $ 144,419 1.5% $32,898
-------- ============ ------- =========
Core capital, and ratio to OTS
adjusted total assets 6.6% $ 144,419 3.0% $65,796
-------- ============ ------- =========
Core capital, and ratio to OTS
risk-weighted assets 12.6% $ 144,419
-------- ------------
Allowance for loan losses 9,024
------------
Supplementary capital 9,024
------------
Total risk-based capital, and ratio to
OTS risk-weighted assets (1) 13.4% $ 153,443 8.0% $91,926
-------- ============ ------- =========
OTS Total assets $ 2,241,416
============
OTS Adjusted total assets $ 2,193,203
============
OTS Risk-weighted assets $ 1,149,075
============
</TABLE>
<TABLE>
<CAPTION>
To Be Well
Capitalized
For Prompt
Corrective Action
Provisions
-----------------------------
(dollars in thousands) Ratio Amount
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Shareholders' equity,
and ratio to OTS total assets
Intangible assets
Unrealized gains on available-for-sale
securities, net of tax
Tangible capital, and ratio to
OTS adjusted total assets
Core capital, and ratio to OTS
adjusted total assets 5.0% $109,660
-------- ========
Core capital, and ratio to OTS
risk-weighted assets 6.0% $ 68,944
-------- ========
Allowance for loan losses
Supplementary capital
Total risk-based capital, and ratio to
OTS risk-weighted assets (1) 10.0% $114,907
-------- ========
OTS Total assets
OTS Adjusted total assets
OTS Risk-weighted assets
</TABLE>
(1) Does not reflect the interest rate risk component to the risk-based capital
requirement, the effective date of which has been postponed.
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 4% 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 14.22% and 17.05% during the years
ended December 31, 1997 and 1996, respectively, and amounted to 11.07% and
16.00% at December 31, 1997 and 1996, respectively. The Asset/Liability
Committee reviews the Bank's liquidity position on a quarterly basis.
At December 31, 1997, the Company had commitments to originate $13.7 million
of loans, consisting of $12.7 million and $1.0 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 $479.9
million, including $259.5 million within six months. Scheduled maturities of
FHLB advances during the same 12-month period amounted to $210.0 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.
27
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and Subsidiaries
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
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("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 adopted SFAS No. 125,
as amended, on January 1, 1997, with no material impact to the financial
statements. The Company elected not to defer certain provisions of SFAS No. 125
as allowed in SFAS No. 127.
In February 1997, SFAS No. 128, "Earnings per share," was issued. This
statement specified the computation, presentation, and disclosure requirements
for earnings per share ("EPS"). The main objectives of the statement were to
simplify the EPS calculation and to make EPS comparable on an international
basis. Effective for both interim and annual periods ending after December 15,
1997, primary and fully diluted EPS have been replaced by basic and diluted EPS.
Prior period results have been restated. The most significant difference is that
basic EPS no longer assumes potentially dilutive securities in the computation.
Calculating EPS under the new method has no material impact on 1996 EPS figures.
In 1997, Commonwealth also adopted SFAS No. 129, "Disclosures of Information
about Capital Structure." This statement was issued in conjunction with the
earnings per share statement discussed above and is intended to centralize
capital structure disclosure requirements and to expand the number of companies
subject to the requirements. Since Commonwealth was in compliance with the
existing capital structure disclosure requirements, the impact on the Company's
financial statements is not material.
SFAS No. 130, "Reporting Comprehensive Income" was issued in July 1997. SFAS
No. 130 establishes standards for the reporting and display of comprehensive
income and its components. The main objective of the statement is to report a
measure of all changes in equity that result from transactions and other
economic events of the period other than transactions with owners. The Company
adopted SFAS No. 130 on January 1, 1998.
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" was issued in June 1997, and is effective for periods beginning
after December 15, 1997. SFAS No. 131 introduces a new model for segment
reporting, called the "management approach."The management approach is based on
the way the chief operating decision maker organizes segments within a company
for making operating decisions and assessing performance. Reportable segments
are based on product and services, geography, legal structure, management
structure - any manner in which management disaggregates a company. The
management approach replaces the notion of industry and geographic segments in
current FASB standards. The Company intends to report information on two
segments as a result of the adoption of SFAS No. 131, the Banking Operations and
the Mortgage Operations.
YEAR 2000
Commonwealth is primarily dependent on its suppliers of computer services to
become Year 2000 compliant. Commonwealth is monitoring its computer services
provider, as well as its third party system vendors, to ensure that the
Company's systems continue to meet its internal needs and those of its
customers. As a result of Commonwealth's arrangement with these vendors, the
Company does not expect material expenditures to be incurred over the next few
years to address the Year 2000 issue.
28
<PAGE> 30
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, 1997 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, 1997 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, 1997, the Company's
internal control structure was effective in achieving the objectives stated
above.
- --------------------------- ------------------------------
Charles M. Johnston Charles H. Meacham
Senior Vice President and Chairman of the Board and
Chief Financial Officer Chief Executive Officer
29
<PAGE> 31
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, 1997, 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, 1997, 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.,
January 30, 1998
30
<PAGE> 32
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, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Philadelphia, Pa.,
January 30, 1998
31
<PAGE> 33
CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS (in thousands)
<TABLE>
<CAPTION>
=================================================================================================================
DECEMBER 31,
-------------------------------------------
ASSETS 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 43,251 $ 39,268
Interest-bearing deposits 4,391 15,111
Short-term investments available for sale 6,296 5,723
Mortgage loans held for sale 37,574 17,335
Investment securities (Note 2):
Securities available for sale (cost of $50,428 and
$53,815, respectively), at market value 51,326 53,935
Mortgage-backed securities (Note 3):
Securities held to maturity (market value of $199,048
and $239,447, respectively), at cost 196,213 237,743
Securities available for sale (cost of $534,573 and
$511,833, respectively), at market value 539,078 514,964
Loans receivable, net (Note 4) 1,259,596 1,113,114
Accrued interest receivable, net (Note 5) 13,271 13,339
FHLB stock, at cost 14,175 11,159
Premises and equipment, net (Note 6) 18,590 25,369
Intangible assets (Note 1) 45,244 51,220
Mortgage servicing rights 8,039 7,677
Other assets, including net deferred taxes of $482
and $1,144, respectively 31,551 14,004
- -----------------------------------------------------------------------------------------------------------------
Total assets $2,268,595 $2,119,961
=================================================================================================================
</TABLE>
(Continued)
32
<PAGE> 34
CONSOLIDATED BALANCE SHEETS Continued (in thousands)
<TABLE>
<CAPTION>
======================================================================================================================
DECEMBER 31,
----------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities:
Deposits (Note 7) $1,552,824 $1,491,450
Notes payable and other borrowings (Note 8):
Secured notes due to Federal Home Loan Bank
of Pittsburgh 213,000 175,000
Securities sold under agreements to repurchase 246,099 176,674
Advances from borrowers for taxes and insurance 24,071 23,883
Accrued interest payable, accrued expenses and
other liabilities 17,749 21,030
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 2,053,743 1,888,037
- ----------------------------------------------------------------------------------------------------------------------
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 shares
authorized 17,998,736 shares issued and 16,247,136
outstanding at December 31, 1997; 17,953,613 shares
issued and outstanding at December 31, 1996 1,800 1,795
Additional paid-in capital 133,541 132,931
Retained earnings 117,582 105,577
Unearned stock benefit plan compensation (12,900) (10,510)
Unrealized gain on marketable securities, net 3,512 2,131
Treasury stock, at cost; 1,751,600 shares at December 31, 1997 (28,683) --
- ----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 214,852 231,924
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $2,268,595 $2,119,961
======================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
33
<PAGE> 35
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,
---------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest on loans $ 94,185 $ 75,602 $58,004
Interest and dividends on deposits and money
market investments 2,140 2,847 1,808
Interest on investment securities 4,031 3,386 3,754
Interest on mortgage-backed securities 54,887 45,471 33,587
- ------------------------------------------------------------------------------------------------------------------------
Total interest income 155,243 127,306 97,153
- ------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits (Note 7) 58,560 49,358 35,753
Interest on notes payable and other borrowings 26,295 16,994 13,938
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 84,855 66,352 49,691
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 70,388 60,954 47,462
Provision for loan losses (Note 4) 1,600 601 578
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 68,788 60,353 46,884
- ------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Deposit fees and related income 7,261 5,414 3,877
Servicing fees 5,185 5,155 5,531
Net gain on sale of mortgage loans 4,993 2,056 939
Net gain on sale of securities 345 -- --
Net (loss) gain on sale of foreclosed real estate (160) (245) 862
Other 3,951 3,293 1,550
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest income 21,575 15,673 12,759
- ------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Compensation and employee benefits 32,969 25,584 20,484
Occupancy and office operations 10,283 8,891 7,474
FDIC premium 552 9,239 2,174
Advertising and promotion 1,814 1,816 1,423
Amortization of intangible assets 5,990 4,542 1,598
Other 14,440 11,835 9,111
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 66,048 61,907 42,264
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes 24,315 14,119 17,379
Income tax provision (Note 9) 7,946 4,781 6,124
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 16,369 $ 9,338 $11,255
========================================================================================================================
Basic weighted average number of shares outstanding 15,501,202 12,613,572 N/A
========================================================================================================================
Basic earnings per share $ 1.06 $ 0.74 N/A
========================================================================================================================
Diluted weighted average number of shares outstanding 16,035,806 13,033,566 N/A
========================================================================================================================
Diluted earnings per share $ 1.02 $ 0.72 N/A
========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
34
<PAGE> 36
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands)
<TABLE>
<CAPTION>
==================================================================================================================
Common Additional
Shares Common Paid-in Retained
Outstanding Stock Capital Earnings
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 8,600 $ 860 $ 36,016 $ 89,737
Net income -- -- -- 11,255
Dividends -- -- -- (1,827)
Release of ESOP shares -- -- 385 --
Amortization of unearned compensation -- -- -- --
Exercise of stock options 29 3 285 --
Decrease in unrealized loss on marketable
securities, net of tax -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 8,629 863 36,686 99,165
==================================================================================================================
Net income -- -- -- 9,338
Dividends -- -- -- (3,026)
Release of ESOP shares (a) -- -- 341 --
Amortization of unearned compensation -- -- -- --
Exercise of stock options 14 1 135 --
Decrease in unrealized gain on marketable
securities, net of tax -- -- -- --
Issuance and exchange of common stock as a
result of the conversion/reorganization (b) 9,311 931 95,769 --
Assets consolidated from Commonwealth
Mutual Holding Company -- -- -- 100
Common stock acquired by stock benefit plans -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 17,954 1,795 132,931 105,577
==================================================================================================================
Net income -- -- -- 16,369
Dividends -- -- -- (4,364)
Release of ESOP shares (d) -- -- 829 --
Amortization of unearned compensation -- -- -- --
Exercise of stock options 87 9 415 --
Cash in lieu of fractional shares (2) -- (21) --
Stock retired (40) (4) (613) --
Increase in unrealized gain on marketable
securities, net of tax -- -- -- --
Common stock acquired by stock benefit plans -- -- -- --
Purchase of treasury stock (1,752) -- -- --
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 16,247 $ 1,800 $133,541 $117,582
==================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================
Unearned Unrealized
Stock Gain (Loss)
Benefit Plan on Marketable Treasury
Compensation Securities, net Stock Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 $ (3,189) $(6,519) $ -- $116,905
Net income -- -- -- 11,255
Dividends -- -- -- (1,827)
Release of ESOP shares 556 -- -- 941
Amortization of unearned compensation 296 -- -- 296
Exercise of stock options -- -- -- 288
Decrease in unrealized loss on marketable
securities, net of tax -- 9,178 -- 9,178
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 (2,337) 2,659 -- 137,036
====================================================================================================================
Net income -- -- -- 9,338
Dividends -- -- -- (3,026)
Release of ESOP shares (a) 826 -- -- 1,167
Amortization of unearned compensation 288 -- -- 288
Exercise of stock options -- -- -- 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 (b) (7,898)(c) -- -- 88,802
Assets consolidated from Commonwealth
Mutual Holding Company -- -- -- 100
Common stock acquired by stock benefit plans (1,389) -- -- (1,389)
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 (10,510) 2,131 -- 231,924
====================================================================================================================
Net income -- -- -- 16,369
Dividends -- -- -- (4,364)
Release of ESOP shares (d) 921 -- -- 1,750
Amortization of unearned compensation 1,184 -- -- 1,184
Exercise of stock options -- -- -- 424
Cash in lieu of fractional shares -- -- -- (21)
Stock retired -- -- -- (617)
Increase in unrealized gain on marketable
securities, net of tax -- 1,381 -- 1,381
Common stock acquired by stock benefit plans (4,495) -- -- (4,495)
Purchase of treasury stock -- -- (28,683) (28,683)
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $(12,900) $ 3,512 $(28,683) $214,852
====================================================================================================================
</TABLE>
(a) Pre-conversion shares totaling 12,485 were released during the quarter ended
March 31, 1996; 78,702 post-conversion shares were released during the nine
months ended December 31, 1996.
(b) Includes 3,889,598 shares of Commonwealth Bank outstanding at June 14, 1996,
converted into 8,080,538 shares of Commomwealth 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.
(c) Of the 9,872,155 conversion shares 8% were purchased by the ESOP.
(d) Post-conversion shares totaling 104,936 were released during 1997.
The accompanying notes are an integral part of these statements.
35
<PAGE> 37
CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
<TABLE>
<CAPTION>
===============================================================================================================================
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 16,369 $ 9,338 $ 11,255
Adjustments to reconcile net income to net cash
(used in) provided by operating activities -
Proceeds from loans sold to others 327,953 265,971 279,276
Loans originated for sale (285,113) (175,984) (141,461)
Purchases of loans held for sale (61,234) (85,531) (144,433)
Principal collection on mortgage loans held
for sale 552 427 334
Net gain on sale of mortgage loans (4,993) (2,056) (939)
Increase (decrease) in net deferred loan fees 210 339 (782)
Provision for loan losses and foreclosed
real estate 1,757 1,041 1,107
Net (gain) loss on sale of assets (1,595) 3 (1,406)
Depreciation and amortization 3,375 3,161 2,187
Net amortization of other assets and liabilities 9,967 7,173 4,092
Interest reinvested on repurchase agreements (13,346) (6,792) (7,782)
Changes in assets and liabilities -
Decrease (increase) in-
Accrued interest receivable, net 68 (3,523) (1,610)
Deferred income taxes (112) 747 1,201
Other assets (4,945) (2,843) (6,206)
Increase (decrease) in -
Advances from borrowers for taxes
and insurance 188 (1,914) 3,023
Accrued interest payable, accrued expenses
and other liabilities (3,292) 5,215 867
- -------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by
operating activities $ (14,191) $ 14,772 $ (1,277)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
36
<PAGE> 38
CONSOLIDATED STATEMENTS OF CASH FLOWS Continued (in thousands)
<TABLE>
<CAPTION>
====================================================================================================================
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investing activities:
Proceeds from maturities of investment securities $ 43,000 $ 29,249 $ 45,000
Purchases of investment securities (39,402) (36,530) (12,029)
Purchases of Bank Owned Life Insurance (15,156) -- --
Proceeds from sale of mortgage-backed securities 41,770 -- --
Purchases of mortgage-backed securities (189,818) (412,676) (85,472)
Principal collected on mortgage-backed securities 166,838 122,895 64,887
Principal collected on loans 249,227 177,660 117,799
Loans originated (243,766) (144,518) (93,487)
Loans purchased (152,480) (228,190) (234,963)
Sales of real estate acquired through foreclosure 1,431 809 3,270
Purchase of FHLB stock (3,016) (5,343) (1,035)
Sale of FHLB stock -- 3,096 --
Purchases of premises and equipment (6,209) (4,918) (4,254)
Acquisition of branches -- 215,904 178,610
Proceeds from sales of assets 11,208 107 615
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (136,373) (282,455) (21,059)
- --------------------------------------------------------------------------------------------------------------------
Financing activities:
Net increase in deposits 61,374 37,276 25,668
Proceeds from notes payable and other borrowings 327,815 429,475 320,294
Repayment of notes payable and other borrowings (207,044) (274,289) (317,916)
Net (purchase) issuance of common stock (33,392) 87,549 288
Cash dividends paid (4,353) (2,403) (1,734)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 144,400 277,608 26,600
- --------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and
cash equivalents (6,164) 9,925 4,264
Cash and cash equivalents at beginning of year 60,102 50,177 45,913
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 53,938 $ 60,102 $ 50,177
====================================================================================================================
Supplemental disclosures of cash flow information
Cash paid during the year for -
Interest $ 84,889 $ 65,133 $ 47,936
====================================================================================================================
Income taxes $ 8,925 $ 4,266 $ 5,532
====================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
37
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996, and 1995
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
second-step conversion and reorganization 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 completion of 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 of Delaware,
Inc.-Delaware investment subsidiary
All material intercompany accounts and transactions have been eliminated in
consolidation.
NATURE OF OPERATIONS
The Bank conducts business through 56 full-service offices located in Berks,
Bucks, Chester, Delaware, Lebanon, Lehigh, Montgomery, and Philadelphia
Counties, Pennsylvania, as well as through ComNet Mortgage Services ("ComNet")
and Homestead Mortgage. ComNet conducts business through ten 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. Homestead Mortgage conducts business through three
loan origination offices located in Maryland.
The Company's strategy is based on the expansion and strengthening of its
banking franchise in southeast Pennsylvania. In this regard, the Company's focus
has been directed toward building a full-service institution, emphasizing
localized decision-making and superior customer service, capable of competing
effectively with larger regional and national banks. As part of this strategy,
Commonwealth has developed a wide variety of products and services which meet
the needs of its retail and business customer base. The Company generally has
sought to achieve long-term financial strength by increasing the amount and
stability of its net interest income and noninterest income, while limiting
growth in operating expense. In pursuit of these goals, Commonwealth has adopted
a number of complementary business strategies, including growth of the retail
branch network through de novo supermarket branching and acquisitions of
traditional branches; increased focus on consumer lending and business banking;
controlled growth of the mortgage banking business; maintenance of excellent
asset quality and strong capital levels; and prudent management of interest rate
risk.
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 1995 and 1996 financial statements have been
reclassified in order to conform with the 1997 financial statement presentation.
FUTURE ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" was issued
38
<PAGE> 40
in July 1997 and is effective for periods beginning after December 15, 1997.
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components. The main objective of the statement is
to report a measure of all changes in equity that result from transactions and
other economic events of the period other than transactions with owners. The
Company adopted SFAS No. 130 on January 1, 1998 as required.
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" was issued in June 1997, and is effective for periods beginning
after December 15, 1997. SFAS No. 131 introduces a new model for segment
reporting, called the "management approach." The management approach is based on
the way the chief operating decision maker organizes segments within a company
for making operating decisions and assessing performance. Reportable segments
are based on product and services, geography, legal structure, management
structure - any manner in which management disaggregates a company. The
management approach replaces the notion of industry and geographic segments in
current FASB standards. The Company intends to report information on two
segments as a result of the adoption of SFAS No. 131, the Banking Operations and
the Mortgage Operations.
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 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.
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.
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. Realized gains or
losses on the sale 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 and anticipated 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
It is management's policy to maintain an allowance for estimated loan losses
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 collectability of the loan
portfolio. 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
39
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and
Subsidiaries
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 $3.5 million and $3.3 million at
December 31, 1997 and 1996, respectively, of which $0.5 million and $0.4
million, 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,
Commonwealth 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 both December 31, 1997 and 1996, advances for taxes
and insurance totaled $1.4 million.
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 30
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 Berks Acquisition in 1996 and the Fidelity Federal Acquisition in 1995
(see Note 16). The CDI relating to the Berks Acquisition are being amortized on
an accelerated basis over approximately 10 years. The goodwill relating to the
Berks Acquisition and the goodwill and CDI relating to the Fidelity Federal
Acquisition are being amortized on a straight-line basis over the period to be
benefited, ranging between 10 and 13 years.
The following is a summary of intangible assets as of December 31, 1997 and
1996:
<TABLE>
<CAPTION>
==================================================================================
DECEMBER 31,
---------------------------------
(IN THOUSANDS) 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
Goodwill (Berks Acquisition) $20,973 $22,791
CDI (Berks Acquisition) 10,442 13,199
Goodwill (Fidelity Federal) 11,327 12,398
CDI (Fidelity Federal) 2,502 2,832
- ----------------------------------------------------------------------------------
Total $45,244 $51,220
==================================================================================
</TABLE>
MORTGAGE SERVICING RIGHTS
On January 1, 1996, the Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights." The Company 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. Originated mortgage
servicing rights ("OMSRs") amounted to $3.3 million and $1.9 million at December
31, 1997 and 1996, respectively, net of a $1.6 million and $0.9 million
valuation allowance, respectively.
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. The
Company 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
40
<PAGE> 42
servicing fee rate, the excess servicing value 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 and anticipated
prepayments, if necessary.
The Company adopted SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" on January 1, 1997 with no
material impact to the financial statements. SFAS No. 125 establishes standards
for transfers and servicing of financial assets and extinguishments of
liabilities and supersedes SFAS No. 122. SFAS No. 127 "Deferral of the Effective
Date of Certain Provisions of SFAS No. 125" was 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 elected not to defer certain provisions of SFAS No.
125 as allowed in SFAS No. 127.
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, 1997 and 1996, real estate owned totaled $0.6 million and $1.1
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
In February 1997, SFAS No. 128, "Earnings per share," was issued. This
statement specified the computation, presentation, and disclosure requirements
for earnings per share ("EPS"). The main objectives of the statement were to
simplify the EPS calculation and to make EPS comparable on an international
basis. Effective for both interim and annual periods ending after December 15,
1997, primary and fully diluted EPS have been replaced by basic and diluted EPS.
Prior period results have been restated. The most significant difference is that
basic EPS no longer assumes potentially dilutive securities in the computation.
Calculating EPS under the new method has no material impact on 1996 EPS figures.
Basic EPS is calculated by dividing net income available to common
shareholders by the weighted average number of common shares outstanding during
the period. Options, warrants, and other potentially dilutive securities are
excluded from the basic calculation, as follows:
<TABLE>
<CAPTION>
=================================================================================
1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C>
Basic weighted average
numbers of shares
outstanding 15,501,202 12,613,572
- ---------------------------------------------------------------------------------
Effect of diluted securities:
Stock options 423,096 316,991
Recognition Plan stock 111,508 103,003
- ---------------------------------------------------------------------------------
Diluted weighted average
numbers of shares
outstanding 16,035,806 13,033,566
=================================================================================
</TABLE>
Diluted EPS 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
41
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and
Subsidiaries
outstanding shares using the treasury stock method, unless such options are
antidilutive. Common shares outstanding exclude treasury shares.
Basic EPS of common stock were $1.06 for 1997, compared to $0.74 per share
for 1996. Diluted EPS of common stock were $1.02 for 1997, compared to $0.72 per
share for 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"). Net income per common share for the year ended December 31, 1995 is
not applicable, as the Company completed its conversion and reorganization on
June 14, 1996.
In 1997, Commonwealth also adopted SFAS No. 129, "Disclosures of Information
about Capital Structure." This statement was issued in conjunction with the
earnings per share statement discussed above and is intended to centralize
capital structure disclosure requirements and to expand the number of companies
subject to requirements. Since Commonwealth was in compliance with the existing
capital structure disclosure requirements, the impact on the Company's financial
statements is not material.
OFF-BALANCE-SHEET ITEMS
The Company uses various derivative financial instruments ("derivatives")
such as interest rate swaps and caps, forward contracts, and options as part of
its risk management strategy to reduce interest rate exposure, and where
appropriate, to synthetically lower its cost of funds. Derivatives are
classified as hedges of specific on-balance-sheet items, off-balance-sheet items
or anticipated transactions. In order for derivatives to quality for hedge
accounting treatment, the following conditions must be met: 1) the underlying
item being hedged by derivatives exposes the Company to interest rate risk, 2)
the derivative used serves to reduce the Company's sensitivity to interest rate
risk, and 3) the derivative used is designated and deemed effective in hedging
the Company's exposure to interest rate risk.
For derivatives designated as hedges of interest rate exposure, gains or
losses are deferred and included in the carrying amounts of the related item
exposing the Company to interest rate risk and ultimately recognized in income
as part of those carrying amounts. Gains or losses resulting from early
terminations of derivatives are deferred and amortized over the remaining term
of the underlying balance sheet item or the remaining term of the derivative, as
appropriate.
Derivatives not qualifying for hedge accounting treatment would be carried
at market value with realized and unrealized gains and losses included in
noninterest income. At December 31, 1997, 1996, and 1995, all the Company's
derivatives qualified as hedges.
INTEREST RATE SWAP, 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.
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, 1997, the Company had a negative
42
<PAGE> 44
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.
Asset and liability management policy is established and implemented by the
Asset/Liability Committee, which is comprised of members of senior management,
and reviewed by the Company's Board of Directors at least annually. 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, 1997, 1996, and 1995,
reclassifications of mortgage loans to real estate owned were $1.6 million, $1.5
million, and $1.2 million, respectively.
OTHER INFORMATION
The deposits of Commonwealth 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 Company's assessment amounted to $6.8 million ($4.5
million, net of income tax benefit). As a result of the special assessment, the
Company's deposit insurance premiums decreased from the previous rate of $0.23
per $100 of deposits to approximately $0.05 per $100 of deposits.
2. INVESTMENT SECURITIES:
Investments in debt and equity securities at December 31, 1997 and 1996,
were as follows:
<TABLE>
<CAPTION>
================================================================================================================
December 31, 1997
Available for Sale
- ----------------------------------------------------------------------------------------------------------------
Unrealized
Amortized ------------------ Market
(in thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and U.S. Government agency
securities maturing:
Within one year $34,979 $ 46 -- $35,025
After one year but within five years 5,001 15 -- 5,016
After five years but within ten years -- -- -- --
- ----------------------------------------------------------------------------------------------------------------
Total U.S. Treasury and U.S.
Government agency securities 39,980 61 -- 40,041
- ----------------------------------------------------------------------------------------------------------------
Mortgage Security Mutual Fund 2,373 31 -- 2,404
Equity Servicing Partnership 4,819 -- -- 4,819
Other Equity Investments 3,256 806 -- 4,062
- ----------------------------------------------------------------------------------------------------------------
Total $50,428 $898 -- $51,326
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
===============================================================================================================
December 31, 1996
Available for Sale
- ---------------------------------------------------------------------------------------------------------------
Unrealized
Amortized --------------------- Market
(in thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and U.S. Government agency
securities maturing:
Within one year $27,953 $ 93 $-- $28,046
After one year but within five years 9,988 31 -- 10,019
After five years but within ten years 10,022 2 -- 10,024
- ---------------------------------------------------------------------------------------------------------------
Total U.S. Treasury and U.S.
Government agency securities 47,963 126 -- 48,089
- ---------------------------------------------------------------------------------------------------------------
Mortgage Security Mutual Fund 2,215 -- 6 2,209
Equity Servicing Partnership 2,880 -- -- 2,880
Other Equity Investments 757 -- -- 757
- ---------------------------------------------------------------------------------------------------------------
Total $53,815 $126 $ 6 $53,935
===============================================================================================================
</TABLE>
43
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc.
and Subsidiaries
3. MORTGAGE-BACKED SECURITIES:
Mortgage-backed securities at December 31, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
===============================================================================================================================
DECEMBER 31, 1997
------------------------------------------------------------------------------------------------
UNREALIZED
AMORTIZED --------------------------------- MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity:
GNMA $ 74,677 $2,251 $ 174 $ 76,754
FHLMC 43,256 485 -- 43,741
FNMA 72,970 506 233 73,243
Private 5,310 -- -- 5,310
- -------------------------------------------------------------------------------------------------------------------------------
Total $196,213 $3,242 $ 407 $199,048
===============================================================================================================================
Available for sale:
GNMA $ 16,572 $ 560 $ 16 $ 17,116
FHLMC 98,092 2,682 26 100,748
CMO and REMIC 338,378 1,589 761 339,206
FNMA 81,531 865 388 82,008
- -------------------------------------------------------------------------------------------------------------------------------
Total $534,573 $5,696 $1,191 $539,078
===============================================================================================================================
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------------------------------------------------
UNREALIZED
AMORTIZED --------------------------------- MARKET
(IN THOUSANDS) 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>
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 1997,
the Company sold mortgage-backed securities, which were classified as available
for sale, totaling $41.8 million and purchased mortgage-backed securities,
classified as available for sale, totaling $41.9 million. These transactions
resulted in a $0.2 million net loss on the sale of mortgage-backed securities.
The sale was related to a restructuring of the Company's mortgage-backed
securities portfolio, which was undertaken to improve future earnings on the
portfolio. During 1996, there were no sales of mortgage-backed securities.
At December 31, 1997 and 1996, Federal Home Loan Mortgage Corporation
("FHLMC") mortgage-backed securities with a carrying value of $107.3 million and
$64.8 million, respectively (market value of $108.3 million and $64.7 million,
respectively); Government National Mortgage Association ("GNMA") mortgage-backed
securities with a carrying value of $36.4 million and $46.7 million,
respectively (market value of $37.5 million and $47.9 million, respectively);
and Federal National Mortgage Association ("FNMA") mortgage-backed securities
with a carrying value of $106.6 million and $77.1 million, respectively (market
value of $106.3 million and $76.3 million, respectively), collateralized certain
securities sold under agreements to repurchase. At December 31, 1997 private
mortgage-backed securities with a carrying value and market value of $6.2
million
44
<PAGE> 46
collateralized certain securities sold under agreements to repurchase
(see Note 8). Mortgage-backed securities with a carrying value at December 31,
1997 and 1996, of $19.0 million and $10.4 million, respectively (market value of
$19.1 million and $10.5 million, respectively), were pledged as collateral for
depositors. Mortgage-backed securities with a carrying value at December 31,
1997 and 1996, of $0.4 million and $1.6 million, respectively (market value of
$0.4 million and $1.6 million, respectively), were pledged as collateral for
interest rate swap agreements.
4. LOANS RECEIVABLE, NET:
A summary of mortgage and other loans at December 31, 1997 and 1996,
follows:
<TABLE>
<CAPTION>
================================================================================
DECEMBER 31,
-------------------------------
(IN THOUSANDS) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans:
1-4 family residential,
principally conventional $ 958,542 $ 857,053
- --------------------------------------------------------------------------------
Commercial loans:
Small Business Administration 20,016 25,104
Commercial real estate (1) 71,508 35,452
Business loans (1) 24,456 35,380
- --------------------------------------------------------------------------------
Total commercial loans 115,980 95,936
- --------------------------------------------------------------------------------
Consumer loans:
Equity lines of credit 41,592 49,136
Second mortgages 98,934 77,304
Other 54,267 42,867
- --------------------------------------------------------------------------------
Total consumer loans 194,793 169,307
- --------------------------------------------------------------------------------
Total loans receivable 1,269,315 1,122,296
- --------------------------------------------------------------------------------
Less:
Net premium on
loans purchased (2,314) (3,655)
Allowance for loan losses 9,024 9,971
Deferred loan fees 3,009 2,866
- --------------------------------------------------------------------------------
9,719 9,182
- --------------------------------------------------------------------------------
Loans receivable, net $1,259,596 $1,113,114
================================================================================
</TABLE>
(1) Approximately $11.5 million of business loans were reclassified to
commercial real estate loans in December 1997. Previously reported amounts were
not restated.
At December 31, 1997 and 1996, approximately 47% and 48%, 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, 1997 and 1996, were $8.9 million and $8.1
million, respectively. For the year ended December 31, 1997, 1996, and 1995
forgone interest income on nonaccruing loans totaled $0.7 million, $0.6 million,
and $0.6 million, respectively.
A summary of activity relating to loans in excess of $60,000 outstanding to
directors and executive officers follows:
<TABLE>
<CAPTION>
=================================================================================
FOR THE YEAR ENDED
DECEMBER 31,
- ---------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 918 $937 $1,319
New loans 500 207 27
Loan repayments (344) (226) (409)
- ---------------------------------------------------------------------------------
Balance, end of year $1,074 $918 $ 937
=================================================================================
</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:
<TABLE>
<CAPTION>
================================================================================
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------------
(IN THOUSANDS) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $9,971 $7,485 $7,307
Loans charged off (2,799) (667) (487)
Recoveries of loans 252 180 87
- --------------------------------------------------------------------------------
Net loans charged off (2,547) (487) (400)
Provision for loan losses 1,600 601 578
Allowance acquired in
Berks Acquisition -- 2,372 --
- --------------------------------------------------------------------------------
Balance, end of year $9,024 $9,971 $7,485
================================================================================
</TABLE>
45
<PAGE> 47
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,
1997 and 1996:
<TABLE>
<CAPTION>
=======================================================================
DECEMBER 31,
-----------------------------
(IN THOUSANDS) 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C>
Investment securities $ 820 $ 1,027
Mortgage-backed securities 4,447 4,733
Loans receivable, net 8,004 7,579
- -----------------------------------------------------------------------
Total $13,271 $13,339
=======================================================================
</TABLE>
6. PREMISES AND EQUIPMENT:
A summary of premises and equipment, less accumulated depreciation and
amortization, at December 31, 1997 and 1996, follows:
<TABLE>
<CAPTION>
=======================================================================
DECEMBER 31,
-----------------------------
(IN THOUSANDS) 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C>
Land $ 1,247 $ 3,947
Office buildings 6,800 16,738
Furniture, fixtures and equipment 21,387 18,525
Leasehold improvements 9,610 6,972
- -----------------------------------------------------------------------
Premises and equipment 39,044 46,182
Less-accumulated depreciation
and amortization (20,454) (20,813)
- -----------------------------------------------------------------------
Premises and equipment, net $18,590 $25,369
=======================================================================
</TABLE>
7. DEPOSITS:
A summary of interest expense, average balances, and interest rates on
deposits follows:
<TABLE>
<CAPTION>
================================================================================================================================
MONEY
CHECKING MARKET SAVINGS CERTIFICATES
(IN THOUSANDS) DEPOSITS DEPOSITS DEPOSITS OF DEPOSIT
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For the year ended December 31, 1997:
Balance at year-end $254,095 $324,959 $229,290 $744,480
Average balance 238,633 311,603 245,813 722,278
Interest expense 2,187 11,429 5,494 39,450
Average rate paid 0.92% 3.67% 2.24% 5.46%
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%
</TABLE>
Certificates of deposit of $100,000 or more, totaled $92.2 million and $68.3
million at December 31, 1997 and 1996, respectively. Deposits in excess of
$100,000 are not federally insured by the FDIC.
The scheduled maturities of certificate accounts at December 31, 1997 and 1996,
were as follows:
<TABLE>
<CAPTION>
==============================================================================================================
DECEMBER 31,
------------------------------------------------------------------------------------
1997 1996
(IN THOUSANDS) AMOUNT PERCENT AMOUNT PERCENT
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Under 12 months $479,860 64% $480,099 67%
12 to 36 months 216,011 29 199,292 28
Over 36 months 48,609 7 40,919 5
- --------------------------------------------------------------------------------------------------------------
$744,480 100% $720,310 100%
==============================================================================================================
</TABLE>
46
<PAGE> 48
8. NOTES PAYABLE AND OTHER BORROWINGS:
Notes payable and other borrowings at December 31, 1997 and 1996, were as
follows:
<TABLE>
<CAPTION>
===============================================================================================================================
DECEMBER 31,
--------------------------------------------------------------------------------------------
1997 1996
------------------------------ -----------------------------
(in thousands) Due Date Rate Amount Rate Amount
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Secured notes due to
FHLB of Pittsburgh:
Maturing in 1997 $ -- $167,000
1998 210,000 5,000
1999 1,000 1,000
2000 1,000 1,000
2001 1,000 1,000
-------- --------
Total 5.24%-7.27% $213,000 5.24%-7.27% $175,000
======== ========
Securities sold under
agreement to repurchase:
Maturing in 1997 $ -- $106,674
1998 111,099 40,000
1999 35,000 25,000
2000 55,000 5,000
2001 -- --
2002 45,000 --
-------- --------
Total 4.98%-6.71% $246,099 4.98%-6.71% $176,674
======== ========
</TABLE>
All stock in the FHLB of Pittsburgh at December 31, 1997, was pledged as
collateral for the notes due to the FHLB. The Company had a $123.1 million
Flexline commitment with the FHLB at December 31, 1997. At December 31, 1997,
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,
1997 and 1996, 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 $256.5 million and $188.7 million,
respectively (market value of $258.3 million and $188.9 million, respectively),
at December 31, 1997 and 1996 (see Notes 2 and 3).
The maximum amounts of outstanding reverse repurchase agreements during the
years ended December 31, 1997 and 1996, were $264.7 million and $176.7 million,
respectively. Average agreements outstanding for the years ended December 31,
1997 and 1996, were $242.8 million and $154.5 million, respectively. The
weighted average interest rates relating to the agreements for the years ended
December 31, 1997 and 1996, were 5.90% and 5.91%, respectively.
47
<PAGE> 49
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, 1997, 1996, and 1995, follows:
<TABLE>
<CAPTION>
==========================================================================
(IN THOUSANDS) CURRENT DEFERRED TOTAL
- --------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1997:
Federal $8,055 $ (112) $7,943
State 3 -- 3
- --------------------------------------------------------------------------
Total $8,058 $ (112) $7,946
==========================================================================
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
==========================================================================
</TABLE>
Income tax expense has been provided at the effective rates of 33%, 34%, and
35% for the years ended December 31, 1997, 1996, and 1995, respectively. These
rates differ from the statutory rate of 35%, as follows:
<TABLE>
<CAPTION>
================================================================================
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------------------
(IN THOUSANDS) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income
taxes $24,315 $14,119 $17,379
================================================================================
Income tax expense at
federal statutory rate $ 8,511 $ 4,942 $ 6,083
Goodwill 27 244 377
ESOP 258 111 138
Low-income housing
credits (771) (132) (132)
Change in valuation
allowance (106) (104) --
Other 28 (280) (342)
- --------------------------------------------------------------------------------
Income tax expense at
effective rate $ 7,946 $ 4,781 $ 6,124
================================================================================
</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, 1997 and 1996,
respectively:
<TABLE>
<CAPTION>
=====================================================================
DECEMBER 31,
------------------------------
(IN THOUSANDS) 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C>
Depreciation $ 356 $ 643
Loan loss reserves 2,968 2,773
Mortgage servicing rights 993 692
Post retirement and post
employment benefits 401 412
Accrued expenses not
currently deductible 227 145
Tax deductible goodwill 1,355 539
Other 74 643
- ---------------------------------------------------------------------
Total gross assets 6,374 5,847
Less valuation allowance (1,480) (1,586)
- ---------------------------------------------------------------------
Gross assets net of
valuation allowance 4,894 4,261
- ---------------------------------------------------------------------
Deferred loan fees (185) (125)
Unrealized gain on securities (1,891) (1,120)
Capitalized mortgage
servicing fees (1,919) (1,224)
Other (417) (648)
- ---------------------------------------------------------------------
Total gross liabilities (4,412) (3,117)
- ---------------------------------------------------------------------
Net deferred tax asset $ 482 $ 1,144
=====================================================================
</TABLE>
The net deferred tax asset recognized by the Company is based on the
combination of future reversals of existing taxable temporary differences,
carryback availability and future taxable income.
At December 31, 1997, the Company had net loss carryforwards for state tax
purposes totaling $9.2 million, which expire beginning in 1998.
48
<PAGE> 50
10. MORTGAGE BANKING ACTIVITIES:
During the years ended December 31, 1997 and 1996, the Company sold mortgage
loans and mortgage-backed securities collateralized by loans originated by
ComNet totaling $311.0 million and $266.0 million, respectively, generally with
servicing retained.
A summary of the principal balances of loans serviced for others follows:
<TABLE>
<CAPTION>
==================================================================================
DECEMBER 31,
------------------------------------------------
(IN THOUSANDS) 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage loans underlying
pass-through securities:
FNMA $ 748,727 $ 714,472 $ 708,138
FHLMC 350,216 340,928 346,765
Other investors 462 615 20,694
- ----------------------------------------------------------------------------------
Total 1,099,405 1,056,015 1,075,597
Mortgage loan portfolios
serviced for:
FNMA 93,364 102,387 103,184
Other investors 110,747 181,488 85,195
- ----------------------------------------------------------------------------------
Total $1,303,516 $1,339,890 $1,263,976
==================================================================================
</TABLE>
The Company 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, 1997, the principal amount of mortgages
outstanding that are subject to this condition aggregated approximately $1.1
billion, of which approximately $26.0 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, 1997, follows:
<TABLE>
<CAPTION>
====================================================================
(in thousands)
Year Ending December 31, Amount
- --------------------------------------------------------------------
<S> <C>
1998 $ 4,522
1999 4,389
2000 3,523
2001 2,416
2002 2,070
2003 and thereafter 16,340
- --------------------------------------------------------------------
Total $33,260
====================================================================
</TABLE>
Rent expense under operating leases was $3.1 million, $1.7 million, and $1.3
million for the years ended December 31, 1997, 1996, and 1995, respectively.
COMMITMENTS TO ORIGINATE LOANS
The Company had outstanding commitments to originate fixed and adjustable
rate residential mortgage loans of $12.7 million (interest rates ranged between
5.25% and 8.50%) and $1.0 million (interest rates ranged between 4.30% to
6.44%), respectively, at December 31, 1997. 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 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, 1997, the aggregate commitment for payments to the executives upon
termination, without a change in control, was $3.2 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 damages
or other monetary relief for the loss 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
49
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and
Subsidiaries
the Bank and the 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 $61.0 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 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 had breached
contractual agreements with these thrift institutions regarding the accounting
rules. However, the Claims Court may determine that the Bank's claims involve
materially 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 is currently being 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 in excess of $5.0 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, 1997, the Bank met all capital
adequacy requirements to which it is subject.
As of December 31, 1997, 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> 52
A summary of the Bank's capital amounts and ratios as of December 31, 1997
follows:
<TABLE>
<CAPTION>
==============================================================================================================================
Minimum To Be Well
For Capital Capitalized For
Adequacy Prompt Corrective
Actual Purposes Action Provisions
------------------------ ------------------- -------------------
(dollars in thousands) Ratio Amount Ratio Amount Ratio Amount
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shareholders' equity,
and ratio to OTS total assets 8.6% $ 192,632
------
Intangible assets (45,244)
Unrealized gains on available-for-sale
securities, net of tax (2,969)
-----------
Tangible capital, and ratio to
OTS adjusted total assets 6.6% $ 144,419 1.5% $32,898
------ =========== ----- =======
Core capital, and ratio to OTS
adjusted total assets 6.6% $ 144,419 3.0% $65,796 5.0% $109,660
------ =========== ----- ======= ------ ========
Core capital, and ratio to OTS
risk-weighted assets 12.6% $ 144,419 6.0% $ 68,944
------ ----------- ------ ========
Allowance for loan losses 9,024
-----------
Supplementary capital 9,024
-----------
Total risk-based capital, and ratio to
OTS risk-weighted assets (1) 13.4% $ 153,443 8.0% $91,926 10.0% $114,907
------ =========== ----- ======= ------ ========
OTS Total assets $2,241,416
===========
OTS Adjusted total assets $2,193,203
===========
OTS Risk-weighted assets $1,149,075
===========
</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, 1996,
follows:
<TABLE>
<CAPTION>
===============================================================================================================================
Minimum To Be Well
For Capital Capitalized For
Adequacy Prompt Corrective
Actual Purposes Action Provisions
---------------------- --------------------- ------------------
(dollars in thousands) 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 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.
51
<PAGE> 53
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 $56.7 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, net of tax, of $3.0 million were deducted
from core and tangible capital as of December 31, 1997. These unrealized gains,
net of tax, however, are added back to shareholders' equity under generally
accepted accounting principles. Risk-based capital, for regulatory requirements,
includes the $9.0 million allowance for loan losses at December 31, 1997.
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 carryforwards) 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 $0.8 million at December 31, 1997, in the regulatory
amounts due to the realizability of these tax benefits through carryback
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, 1997, 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.
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 1997 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 1997 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.
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
52
<PAGE> 54
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
<TABLE>
<CAPTION>
=================================================================================
CONTRACT OR NOTIONAL AMOUNT
DECEMBER 31,
-------------------------------------
(IN THOUSANDS) 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C>
Interest rate swap agreements $100,000 $165,000
Interest rate caps 80,000 20,000
Interest rate collars -- 10,000
Mandatory forward contracts 31,000 26,750
Option Contracts:
Puts 5,000 6,000
Calls 2,000 --
</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, 1997 and 1996, the Company had notional balances of interest
rate exchange agreements totaling $100.0 million and $165.0 million,
respectively, with interest payable at fixed rates. The weighted average rates
to be paid by the Company at December 31, 1997 and 1996, were 5.66% and 5.89%,
respectively. In return, the Company was to receive variable interest payments
at the London Interbank Offer Rate (LIBOR) payable every three or six months. At
December 31, 1997 and 1996, the weighted average variable yields were 5.93% and
5.69%, 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 $1.5 million and $2.1 million at December 31,
1997 and 1996, respectively. These agreements have expiration dates between
January 1998 and December 1999.
FHLMC, FNMA, and GNMA mortgage-backed securities, with a combined carrying
value of $0.4 million and $1.6 million (market value of $0.4 million and $1.6
million), were pledged by the Company as collateral for the interest rate swaps
outstanding as of December 31, 1997 and 1996, respectively.
In the event of nonperformance by the other parties to the interest rate
swap agreements, credit risk to the Company totaled $0.2 million, representing
the fair value of the benefit (cost) of these agreements at December 31, 1997.
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, 1997 and 1996, the Company
had notional balances of interest rate cap agreements totaling $80.0 million and
$20.0 million, respectively. 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, 1997 and 1996, was 6.50% and 5.32%, respectively. Unamortized fees at
December 31, 1997 and 1996, were $0.5 million and $0.1 million, respectively,
and were included in other assets. These agreements have expiration dates
between February 1998 and September 2000. Credit risk to the Company for
interest rate cap agreements of $0.7 million at December 31, 1997 represented
the unamortized fees of $0.5 million, plus the cost of contract replacement of
$0.2 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 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
53
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and
Subsidiaries
rate and the strike rate multiplied by the notional principal amount. The
Company had no interest rate collars at December 31, 1997. At December 31, 1996,
the Company's interest rate collar had a notional principal balance of $10.0
million. The Company was to pay 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 was less than the strike rate. The Company
was to receive variable rate interest payments based on the spread between the
LIBOR rate and the strike rate of the cap (6.10%) if LIBOR was higher than the
strike rate. This agreement was executed without exchange of premiums between
counter parties and expired in June 1997. Any obligations which may have arisen
under this contract would have been recorded to interest expense on an accrual
basis.
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 $31.0 million and $26.8 million, respectively, as
of December 31, 1997 and 1996.
At December 31, 1997, the Company had no exposure to credit loss in the
event of nonperformance by other parties to the mandatory forward commitments,
compared to approximately $0.1 million at December 31, 1996, which represented
the difference between the contractual amount and the fair value of 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 $5.0 million and $6.0 million at December 31, 1997
and 1996, respectively. The Company had call options of $2.0 million outstanding
at December 31, 1997, compared to no call options outstanding at December 31,
1996. The Company's exposure to loss on these options was not material at
December 31, 1997.
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.
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.
54
<PAGE> 56
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, 1997 and 1996, the estimated fair values of the Company's
financial instruments were as follows:
<TABLE>
<CAPTION>
==============================================================================================================================
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
(IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 53,938 $ 53,938 $ 60,102 $ 60,102
Mortgage loans held for sale 37,574 37,574 17,335 17,335
Investment securities 51,326 51,326 53,935 53,935
Mortgage-backed securities 735,291 738,126 752,707 754,411
Loans receivable, net 1,259,596 1,258,864 1,113,114 1,110,691
FHLB stock 14,175 14,175 11,159 11,159
Mortgage servicing rights 8,039 10,050 7,677 7,677
Financial liabilities:
Deposits 1,552,824 1,550,276 1,491,450 1,487,141
Secured notes due to FHLB of Pittsburgh 213,000 213,037 175,000 175,032
Securities sold under agreements to repurchase 246,099 245,677 176,674 175,844
</TABLE>
<TABLE>
<CAPTION>
==========================================================================================================
DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------------------------------------------------
COST FAIR COST FAIR
(IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unrecognized Financial Instruments:
Commitments to originate loans $ -- $ -- $ -- $ --
Interest rate swaps 121 212 42 439
Interest rate caps 527 183 134 99
Interest rate collars -- -- -- --
Mandatory forward commitments -- -- -- (129)
Put and call options 18 18 26 26
</TABLE>
15. EMPLOYEE BENEFIT PLANS:
The Company terminated its noncontributory defined benefit pension plan
during 1997, and replaced it with a Target Benefit Plan, a Profit Sharing Plan,
and a 401(k) Match Plan which cover substantially all employees. Commonwealth's
contributions to the Target Benefit Plan are designed to meet the targeted
benefit for each participant based on an actuarially determined formula and are
paid annually to each participant. The Company's Board of Directors determines
the amount that will be contributed annually to each employees' Profit Sharing
account based on Commonwealth's
55
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and
Subsidiaries
performance. Participant contributions to the Company's 401(k), up to a maximum
of 3% of salary, are matched 25% by the Company. All funds contributed to the
Target Benefit Plan, Profit Sharing Plan, and 401(k) Match Plan are held in a
trust fund, and are invested at the discretion of the employee in various
alternative investment funds, including a Company common stock fund. During
1997, the Company contributed $0.5 million to the Target Benefit Plan, Profit
Sharing Plan, and 401(k) Match Plan.
The defined benefit pension plan assets were distributed to the participants
during 1997 and satisfied all benefit liabilities under the plan. As of December
31, 1996, benefits were based on years of service and the employees'
compensation during the last five years of employment. Investments of the plan
primarily included 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:
<TABLE>
<CAPTION>
==========================================================================
DECEMBER 31,
(IN THOUSANDS) 1996
- --------------------------------------------------------------------------
<S> <C>
Actuarial present value of accumulated
benefit obligations, including vested
benefits of $3,438 $3,515
- --------------------------------------------------------------------------
Projected benefit obligations for services
rendered to date $4,778
Plan assets at fair value 5,571
- --------------------------------------------------------------------------
Projected benefit obligations less
than plan assets 793
Unrecognized net gain from past experience,
different from that assumed (766)
Unrecognized net asset being
amortized over 18 years (490)
- --------------------------------------------------------------------------
Accrued pension liability $ (463)
==========================================================================
</TABLE>
A summary of net pension costs for the year ended December 31, 1996 follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN THOUSANDS) 1996
- ---------------------------------------------------------------------------
<S> <C>
Service cost $ 411
Interest cost on projected
benefit obligations 340
Return on plan assets (686)
Net amortization and deferral 235
- ---------------------------------------------------------------------------
Net pension cost $ 300
===========================================================================
</TABLE>
At December 31, 1996, the projected annual salary growth rate used in
determining the projected benefit obligations was 5.00%, while the weighted
average discount rate used in determining the projected benefit obligation was
8.00%. The expected long-term rate of return on plan assets was 8.00% for the
year ended December 31, 1996.
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 $1.2 million and $0.9 million for the years ended December
31, 1997 and 1996, 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. Participant contributions to
the Company's 401(k), up to a maximum of 3% of salary, are matched 25% by the
Company. Company stock totaled $8.0 million, or 49% of the plan's assets at
December 31, 1997.
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 remaining maturity of nine
years. Unallocated shares are released annually and allocated to 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 $1.7 million and $1.1 million relating to the
ESOP for the year ended December 31, 1997 and 1996, respectively. As of December
31, 1997, the ESOP held 1.3 million shares, of which 0.4 million had been
allocated. The fair value of unearned ESOP shares at December 31, 1997,
approximated $17.2 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 and officers with a proprietary
interest in the Company as an incentive to contribute to its success. The Bank
contributed funds to the
56
<PAGE> 58
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. 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 $1.2 million and $0.3 million for
the years ended December 31, 1997 and December 31, 1996, respectively, 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 for the year ended December
31, 1996, as a significant portion of outstanding stock options were granted on
December 17, 1996, and vest over a five year period. For the year ended December
31, 1997, the Company's net income and earnings per share would have been
reduced as follows:
<TABLE>
<CAPTION>
=============================================================================
(in thousands, except per share data) 1997
- -----------------------------------------------------------------------------
<S> <C>
Net Income - as reported $16,369
Net Income - pro forma $15,643
Basic earnings per share - as reported $ 1.06
Basic earnings per share - pro forma $ 1.01
Diluted earnings per share - as reported $ 1.02
Diluted earnings per share - pro forma $ 0.98
</TABLE>
Because the SFAS No. 123 method has not been applied to stock 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 stock option was estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions used for
grants in 1997 and 1996, respectively: risk-free interest rate of 5.41% and
6.21%; expected volatility of 32% and 20%; dividend yield of 1.42% and 2.0%; and
an expected life of seven years.
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
57
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and
Subsidiaries
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, 1997, 1996, and 1995 follows:
<TABLE>
<CAPTION>
================================================================================
Weighted
Average
Exercise
Option Price $4.81-$21.375 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 941,098 14.40
Exercised (27,081) 4.91
Forfeited (11,797) 4.81
- --------------------------------------------------------------------------------
Options outstanding December 31, 1996 1,527,677 $10.77
================================================================================
Granted 50,716 18.37
Exercised (87,763) 4.81
Forfeited (43,864) 12.02
- --------------------------------------------------------------------------------
Options outstanding December 31, 1997 1,446,766 $11.36
================================================================================
Options exercisable December 31, 1997 508,807 $ 8.29
================================================================================
</TABLE>
16. ACQUISITIONS:
On January 31, 1997, Commonwealth acquired five mortgage production offices
of Homestead Mortgage, Inc. located in Maryland and Pennsylvania. These offices
originate mortgages in Delaware, the District of Columbia, Maryland,
Pennsylvania, and Virginia. Under the terms of the transaction, the group
continued to operate under the trade name of Homestead Mortgage in the District
of Columbia, Maryland, and Virginia. During 1997, the Homestead Mortgage offices
originated loans totaling $156.0 million.
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 "Berks
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, 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.
17. CONVERSION AND REORGANIZATION:
On June 14, 1996, the Company completed an offering of common stock in
connection with the second-step conversion and reorganization, 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 completion of the
conversion and reorganization.
58
<PAGE> 60
SHAREHOLDER INFORMATION Commonwealth Bancorp, Inc. and Subsidiaries
BOARD OF DIRECTORS
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
JOANNE HARMELIN President & Chief Executive Officer
Harmelin and Associates, Inc.
MICHAEL T. KENNEDY Chairman & CEO, Radnor Holdings Corp.
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
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
Brian C. Zwaan Senior Vice President, Commercial Lending
Ellen L. Benson Vice President, Human Resources
Paul Donovan Vice President, Consumer Lending
Robert P. Gehring Vice President, Chief Credit Officer
Michael W. Harrington Vice President, Treasurer
James L. Jillson Vice President, Consumer Credit
Robert D. Kane Vice President, Controller
Kathleen J. Lippincott Vice President, Operations Support Services
W. David McHugh Vice President, Computer Systems and Services
Patricia Collins Morris Vice President, Marketing
William P. Mulholland Vice President, General Auditor
Cynthia Mullen Vice President, Service Quality
James E. Schwartz Vice President, Traditional Banking
Rose Marie J. Smith Vice President, Administrative Services
COMNET MORTGAGE SERVICES OFFICERS
A DIVISION OF COMMONWEALTH BANK
Peter A. Kehoe President
Katherine M. Solomon Senior Vice President, Loan Administration
Theodore T. Aicher Vice President, Secondary Marketing/
Correspondent Lending
Tracy L. Johnson Vice President, Residential Operations
CORPORATE INFORMATION
ANNUAL MEETING:
April 21, 1998
9:00 am
The Plymouth Country Club
Plymouth and Belvoir Roads
Norristown, PA 19404
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
* Director Emeritus
Printed on recycled paper.
59
<PAGE> 61
BRANCH INFORMATION Commonwealth Bancorp, Inc. and Subsidiaries
LOCATIONS OF
COMMONWEALTH BANK
- - CORPORATE HEADQUARTERS
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
- - HORSHAM
Giant Food Stores
Horsham Point Shopping Center
- - 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
- 2 West Lafayette 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
PHILADELPHIA COUNTY
- PHILADELPHIA (10)
- 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
- Superfresh
Cottman & Bustleton Center
Office Listings as of March 7, 1998
60
<PAGE> 62
- - 39 Traditional Branches
17 Supermarket Branches
+ Corporate Headquarters
LOCATIONS OF
COMMONWEALTH BANK
BUSINESS BANKING
OFFICES
- Reading, PA
- King of Prussia, PA
- Lansdale, PA
- Mayfair, PA
- Norristown, PA
- Phoenixville, PA
LOCATIONS OF COMNET
MORTGAGE SERVICES
- Allentown, PA
- Conshohocken, PA
- Horsham, PA
- Mt. Laurel, NJ
- Norristown, PA
- Pittsburgh, PA
- Reading, PA
- Stratford, CT
- Wall, NJ
- Warwick, RI
LOCATIONS OF
HOMESTEAD MORTGAGE
- Baltimore, MD
- Bethesda, MD
- Millersville, MD
COM-LINE(R)
24 Hour Automated Service Line
1-800-327-9885
61
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 43,251
<INT-BEARING-DEPOSITS> 4,391
<FED-FUNDS-SOLD> 6,296
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 627,978
<INVESTMENTS-CARRYING> 196,213
<INVESTMENTS-MARKET> 199,048
<LOANS> 1,268,620
<ALLOWANCE> 9,024
<TOTAL-ASSETS> 2,268,595
<DEPOSITS> 1,576,895
<SHORT-TERM> 0
<LIABILITIES-OTHER> 17,749
<LONG-TERM> 459,099
0
0
<COMMON> 93,758
<OTHER-SE> 121,094
<TOTAL-LIABILITIES-AND-EQUITY> 2,268,595
<INTEREST-LOAN> 94,185
<INTEREST-INVEST> 6,171
<INTEREST-OTHER> 54,887
<INTEREST-TOTAL> 155,243
<INTEREST-DEPOSIT> 58,560
<INTEREST-EXPENSE> 84,855
<INTEREST-INCOME-NET> 70,388
<LOAN-LOSSES> 1,600
<SECURITIES-GAINS> 345
<EXPENSE-OTHER> 66,048
<INCOME-PRETAX> 24,315
<INCOME-PRE-EXTRAORDINARY> 24,315
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,369
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 1.02
<YIELD-ACTUAL> 7.41
<LOANS-NON> 8,938
<LOANS-PAST> 0
<LOANS-TROUBLED> 626
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,971
<CHARGE-OFFS> 2,799
<RECOVERIES> 252
<ALLOWANCE-CLOSE> 9,024
<ALLOWANCE-DOMESTIC> 9,024
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
