<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, 1998
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
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COMMONWEALTH BANCORP, INC.
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2828883
---------------------------------- -----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
COMMONWEALTH BANK PLAZA
2 WEST LAFAYETTE STREET
NORRISTOWN, PENNSYLVANIA 19401
--------------------------- ---------------------
(Address) (Zip Code)
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 9, 1999, the aggregate value of the 13,359,414 shares of Common
Stock of the Registrant outstanding on such date, which excludes 796,308 shares
held by all directors and officers of the Registrant as a group, was
approximately $205 million. This figure is based on the closing sales price of
$15.3125 per share of the Registrant's Common Stock on March 9, 1999 as
reported by the Nasdaq Stock Market.
Number of shares of Common Stock outstanding as of March 9, 1999: 14,155,722
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, 1998 are incorporated into Part II, Items 5 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, 1998 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, 1998, 60 full-service offices located in southeast Pennsylvania.
ComNet Mortgage Services ("ComNet"), a division of the Bank, also
located in Norristown, conducts business through eight loan origination offices
located in Pennsylvania, New Jersey, Rhode Island, and Virginia. ComNet
operates under the trade name of Homestead Mortgage in Maryland. Business is
also conducted by ComNet through its wholesale network, which includes
correspondents in 25 states.
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
OTS, which is the Bank's chartering authority and primary regulator, and by the
Federal Deposit Insurance Corporation ("FDIC"), which, as administrator of the
Savings Association Insurance Fund ("SAIF") and the Bank Insurance Fund
("BIF"), insures the Bank's deposits up to applicable limits. The Bank also is
subject to certain reserve requirements established by the Board of Governors
of the Federal Reserve System ("Federal Reserve Board"), and is a member of the
Federal Home Loan Bank ("FHLB") of Pittsburgh, which is one of the 12 regional
banks comprising the FHLB System.
MARKET AREA
The Bank's 60 full-service branch offices, which include 20
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, enables the Bank to compete effectively with larger
regional and national banks.
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<PAGE> 3
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, 1998, loans held for investment totaled $1.3
billion, which represented 59% 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, 1998,
approximately 52% of the Company's total mortgage loans held for investment
were secured by properties located in these states.
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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,
-------------------------------------------------------------
1998 1997
------------------------------ ---------------------------
Percent of Percent of
Amount Total Amount Total
------ ------------- ------ -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans-Residential (1) $ 969,617 71.90% $ 958,542 75.51%
Consumer loans:
Equity lines of credit 34,845 2.58 41,592 3.28
Second mortgages 126,360 9.37 98,934 7.79
Recreational vehicles 39,920 2.96 22,182 1.75
Other 38,781 2.88 32,085 2.53
---------- ------ ---------- ------
Total consumer loans 239,906 17.79 194,793 15.35
Commercial loans:
Small Business Administration(2) 14,491 1.07 20,016 1.58
Commercial real estate (3) 83,485 6.20 71,508 5.63
Business loans (3) 41,026 3.04 24,456 1.93
---------- ------ ---------- ------
Total commercial loans 139,002 10.31 115,980 9.14
---------- ------ ---------- ------
Total loans receivable 1,348,525 100.00% 1,269,315 100.00%
---------- ====== ---------- ======
Less:
(Premium)/Discount on
loans purchased (2,880) (3,559)
Allowance for loan losses 9,589 9,024
Deferred loan fees 3,639 3,009
Allowance for imputed interest - -
---------- ----------
Loans receivable, net $1,338,177 $1,260,841
========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- --------------------------- ------------------------------
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
------ ---------- ------ ---------- ------ ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans-Residential (1) $ 857,053 76.37% $655,152 81.08% $450,959 75.55%
Consumer loans:
Equity lines of credit 49,136 4.38 44,432 5.50 49,246 8.26
Second mortgages 77,304 6.89 48,653 6.03 42,883 7.18
Recreational vehicles 11,884 1.06 791 0.10 - -
Other 30,983 2.76 17,218 2.13 12,013 2.01
---------- ------- -------- ------- -------- -------
Total consumer loans 169,307 15.09 111,094 13.76 104,142 17.45
Commercial loans:
Small Business Administration(2) 25,104 2.24 29,472 3.65 35,482 5.94
Commercial real estate (3) 35,452 3.15 9,386 1.16 4,679 0.78
Business loans (3) 35,380 3.15 2,801 0.35 1,671 0.28
---------- ------- -------- ------- -------- -------
Total commercial loans 95,936 8.54 41,659 5.16 41,832 7.00
---------- ------- -------- ------- -------- -------
Total loans receivable 1,122,296 100.00% 807,905 100.00% 596,933 100.00%
--------- ====== ------- ====== ------- ======
Less:
(Premium)/Discount on
loans purchased (3,655) 1,004 2,864
Allowance for loan losses 9,971 7,485 7,307
Deferred loan fees 2,866 2,681 3,555
Allowance for imputed interest - - 63
---------- -------- --------
Loans receivable, net $1,113,114 $796,735 $583,144
========== ======== ========
</TABLE>
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(1) At December 31, 1998, $404 million, or 42%, 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.
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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, 1998, 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, 2002- 2004- 2010- There-
1998 1999 2000 2001 2003 2009 2015 after
--------------- ---------- -------- --------- --------- ----------- ---------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
1-4 family
residential $ 969,617 $27,386 $26,762 $28,264 $ 60,193 $194,350 $191,990 $440,672
Consumer 239,906 37,820 25,142 23,357 38,619 73,710 38,430 2,828
Commercial real estate 83,485 8,519 8,861 9,410 28,938 20,229 7,528 -
Business loans 41,026 4,659 5,056 6,509 5,928 9,442 9,432 -
SBA 14,491 1,373 922 932 1,997 5,584 3,671 12
--------- ------ ------ ------ ------- ------- ------- -------
Total (1) $1,348,525 $79,757 $66,743 $68,472 $135,675 $303,315 $251,051 $443,512
========= ====== ====== ====== ======= ======= ======= =======
</TABLE>
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(1) Of the $1.3 billion of loan principal repayments contractually due
after December 31, 1999, $762 million have fixed rates of interest and $507
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,
------------------------------------------------
1998 1997 1996
-------------- ---------------- --------------
(in thousands)
<S> <C> <C> <C>
Gross loans held for investment at
beginning of period $1,269,315 $1,122,296 $ 807,905
Originations of loans held for investment:
1-4 family residential 196,783 107,628 52,304
Consumer 101,878 75,383 46,157
Commercial real estate 41,508 32,905 16,848
Business loans 31,810 14,424 16,955
--------- --------- ---------
Total originations 371,979 230,340 132,264
Purchases of loans held for investment:
1-4 family residential (1) 140,567 152,480 257,575
Consumer (2) 24,728 13,426 57,833
Commercial real estate - - 26,110
Business loans - - 18,269
SBA - - -
--------- --------- ---------
Total purchases 165,295 165,906 359,787
Total originations and purchases 537,274 396,246 492,051
Repayments (458,064) (249,227) (177,660)
--------- --------- ---------
Net activity in loans held for
investment 79,210 147,019 314,391
--------- --------- ---------
Gross loans held for investment at end
of period $1,348,525 $1,269,315 $1,122,296
========= ========= =========
</TABLE>
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(1) The $141 million of 1-4 family residential loans purchased during 1998
consisted of loans generated through Commonwealth's wholesale correspondent
network. The $152 million of 1-4 family residential loans purchased during
1997 consisted of $21 million of adjustable rate loans purchased by the Company
from third parties and $131 million of loans generated through Commonwealth's
wholesale correspondent network. The $258 million of 1-4 family residential
loans purchased during 1996 consisted of $80 million of adjustable rate loans
purchased by the Company from third parties, $148 million of loans generated
through Commonwealth's wholesale correspondent network, and $30 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.
(2) Recreational vehicle loans totaling $25 million, $13 million, and $12
million were purchased during 1998, 1997, and 1996, respectively.
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<PAGE> 7
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.
Retail loans are originated by Commonwealth's sales force of
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 in 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 186 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.
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<PAGE> 8
Mortgage loan originated and purchased totaled $1,111 million and $585
million during 1998 and 1997, respectively, which included $376 million and
$192 million, respectively, of loans originated through the wholesale
correspondent lending network.
Commonwealth sells substantially all of the fixed-rate loans it
originates which conform to FNMA/FHLMC requirements to investors in the
secondary market on either a servicing retained or servicing released basis.
The Company retains essentially all of the adjustable rate loans, as well as
certain 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 $240,000 for loans secured by a single-family,
owner-occupied residence) and loans to employees of the Company.
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.
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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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,
------------------------------------------------------------------
1998 1997 1996
--------------------- ---------------------- ---------------------
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 $ 337,350 1,562 $238,799 1,286 $200,558 979
FHA/VA - - - - - -
----------- ------ -------- ------- -------- -----
Total Company 337,350 1,562 238,799 1,286 200,558 979
------------- ------ -------- ------- -------- -----
Originations for others (1):
Conventional 667,129 5,351 249,741 2,081 232,622 2,176
FHA/VA 106,917 1,019 96,606 1,014 28,893 322
--------- ------ -------- ------- -------- -----
Total Other 774,046 6,370 346,347 3,095 261,515 2,498
------- ----- ------- ----- ------- -----
Total Company and others $1,111,396 7,932 $585,146 4,381 $462,073 3,477
========= ===== ======= ===== ======= =====
Retained by the Company (1)(2):
Conventional $ 337,350 1,562 $238,799 1,286 $200,558 979
FHA/VA - - - - - -
------- ----- ------- ----- ------- -----
Total Company 337,350 1,562 238,799 1,286 200,558 979
------- ----- ------- ----- ------- -----
Sales to Others (1)(3):
Conventional 597,889 5,455 233,299 2,116 236,190 2,275
FHA/VA 97,475 915 94,654 979 29,781 331
-------- ------ -------- ------- -------- -----
Total Other 695,364 6,370 327,953 3,095 265,971 2,606
------- ------ -------- ------- -------- -----
Total Company and Other $1,032,714 7,932 $566,752 4,381 $466,529 3,585
========= ====== ======= ======= ======= =====
Other adjustments to
loans held for sale (4) $ 4,386 $ 1,845 $ (4,210)
========= ========= ==========
Increase/(decrease) in
mortgage loans held for sale $ 83,068 $ 20,239 $ (8,666)
======= ======== ==========
</TABLE>
- --------------------
(1) Consists entirely of 1-4 family residential loans.
(2) Consists primarily 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,
-------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------------------------------------------------------------------------
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 $367,033 3,004 $186,086 1,682 $166,770 1,542
Maryland 243,334 1,571 147,713 1,069 0 0
New Jersey 70,277 497 32,236 222 28,863 220
Rhode Island 24,438 230 19,776 207 20,328 222
Virginia 23,034 151 0 0 0 0
Connecticut 7,325 55 6,930 58 10,433 90
Florida 0 0 0 0 1,894 21
---------------- ---------- --------------- ---------- --------------- -----------
Total Retail 735,441 5,508 392,741 3,238 228,288 2,095
---------------- ---------- --------------- ---------- --------------- -----------
WHOLESALE:
Pennsylvania 117,121 880 37,551 276 44,328 336
Maryland 105,691 614 35,080 164 50,049 268
Virginia 56,128 322 29,624 139 42,326 207
Delaware 27,999 215 11,904 95 16,682 133
New Jersey 22,823 153 19,757 147 17,250 106
Massachusetts 12,821 59 4,960 25 1,276 4
Connecticut 12,514 73 2,241 18 234 1
North Carolina 3,967 17 12,276 66 7,570 54
Georgia 2,425 9 4,901 25 13,551 60
Washington, D.C. 2,407 16 633 2 460 2
Florida 1,979 12 1,559 13 9,156 54
New York 1,919 14 390 4 0 0
Texas 1,849 7 5,407 27 3,768 22
Ohio 1,058 3 2,948 18 2,831 14
Arizona 984 3 8,393 30 3,633 17
Indiana 894 4 1,644 13 1,670 13
Wisconsin 591 2 1,150 9 203 1
Rhode Island 586 6 90 1 0 0
South Carolina 564 3 1,756 13 1,151 6
Missouri 493 3 83 1 139 1
Illinois 308 1 3,011 15 6,214 32
Colorado 273 1 2,464 13 1,269 5
Michigan 272 3 2,045 13 0 0
West Virginia 155 2 100 1 171 2
Kansas 75 1 339 2 1,543 8
Tennessee 59 1 230 1 1,225 8
Louisiana 0 0 1,065 8 769 2
Kentucky 0 0 590 3 264 2
Alabama 0 0 214 1 6,053 24
---------------- ---------- --------------- ---------- --------------- -----------
Total Wholesale 375,955 2,424 192,405 1,143 233,785 1,382
---------------- ---------- --------------- ---------- --------------- -----------
Total Retail and Wholesale (1) $1,111,396 7,932 $585,146 4,381 $462,073 3,477
================ ========== =============== ========== =============== ===========
</TABLE>
- ---------------------
(1) Consists entirely of 1-4 family residential loans.
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<PAGE> 11
CONSUMER LENDING ACTIVITIES. The Company offers consumer loans, which
are obtained primarily through existing and walk-in customers and direct
advertising. The Company's recreational vehicle loans are purchased from a
third party. At December 31, 1998, $240 million, or 18%, 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 80% or less, and
are generally for amounts less than $100,000. At December 31, 1998, second
mortgage loans totaled $126 million, or 9%, of the Company's total loan
portfolio.
The Company's consumer loan portfolio is also comprised of a
significant amount of recreational vehicle loans. These loans are purchased
from a third party, are for a fixed amount, have fixed interest rates, terms of
four to 15 years, loan-to-value ratios of 100% or less, with the majority being
80% or less, and are generally for amounts less than $75,000. At December 31,
1998, recreational vehicle loans totaled $40 million, or 3%, of the Company's
total loan portfolio.
At December 31, 1998, home equity lines of credit amounted to $35
million, or 3%, of the Company's total loan portfolio. Home equity lines of
credit 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 75% or less, and are generally for amounts less than $100,000.
The Company had $92 million of total commitments pursuant to such equity lines
of credit outstanding at year-end 1998.
The remaining $39 million of the Company's consumer loan portfolio at
December 31, 1998 was comprised primarily of loans secured by new and used
automobiles, personal loans and lines of credit, and credit cards. 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. Commonwealth's target market is
comprised of small and lower middle market businesses operating within the
Bank's eight county region. 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 are under $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
-10-
<PAGE> 12
commercial loans are obtained primarily through loan officer solicitation,
branch referrals, and direct inquiry. As of December 31, 1998, commercial
loans totaled $139 million, or 10%, of the Company's total loan portfolio. At
December 31, 1998, commercial loans were comprised of $83 million of commercial
real estate loans, $41 million of business loans, and $15 million of loans
guaranteed by the SBA.
Commercial real estate loans originated by the Company generally have
terms of five to fifteen years, with 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. Commercial 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.
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, 1998, the Company had $3.6 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
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 0.50% of the declining principal amount of the loans, plus any late
charges.
-11-
<PAGE> 13
At December 31, 1998, Commonwealth was servicing $1.4 billion of loans
for others, as well as $1.0 billion of loans held by Commonwealth for
investment and sale. The portfolio of loans serviced by Commonwealth at
December 31, 1998 consisted of approximately 24,420 loans with an average loan
balance of approximately $97,263, a weighted average service fee of
approximately 0.34% per annum (inclusive of excess servicing associated with
loans serviced by Commonwealth for others) and a weighted average remaining
contractual term of approximately 23 years. The Company's loan servicing fees
totaled $3.6 million in 1998, $5.2 million in 1997, and $5.2 million in 1996.
The Company acquires mortgage servicing rights through the purchase
and origination of mortgage loans which are sold or securitized on either a
servicing retained or servicing released basis. SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," requires the Company to allocate the total cost of the mortgage
loans between 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.
At December 31, 1998, capitalized mortgage servicing rights relating
to loans originated by Commonwealth totaled $8.9 million, compared to $6.5
million at December 31, 1997. The weighted average coupon relating to this
portfolio was 7.2% at year-end 1998.
Purchased mortgage servicing rights totaled $1.1 million at December
31, 1998, compared to $1.6 million at the end of 1997. The weighted average
coupon relating to this portfolio was 9.8% at year-end 1998.
During the years ended December 31, 1998, 1997, and 1996, Commonwealth
sold $444 million, $191 million and, $227 million of loans originated on a
servicing retained basis, respectively, and $251 million, $137 million, and $39
million on a servicing released basis, respectively.
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, 1998 the principal amount of loans serviced by Commonwealth for
others that were subject to this condition aggregated $1.2 billion, of which
$21 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.
-12-
<PAGE> 14
The following table presents information regarding loans serviced by
Commonwealth at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
(in thousands)
<S> <C> <C> <C> <C>
Mortgage loans underlying pass-
through securities:
FNMA $ 891,909 $ 748,727 $ 714,472
FHLMC 300,738 350,216 340,928
Other investors 337 462 615
---------- ---------- ----------
1,192,984 1,099,405 1,056,015
Mortgage loan portfolios serviced
for:
FNMA 76,505 93,364 102,387
Other investors 87,730 110,747 181,488
---------- ---------- ----------
164,235 204,111 283,875
---------- ---------- ----------
Total loans serviced for others 1,357,219 1,303,516 1,339,890
---------- ---------- ----------
Mortgage loans serviced for the Company:
Loans held for investment 892,308 836,955 724,207
Loans held for sale by Commonwealth 125,646 58,594 23,610
---------- ---------- ----------
1,017,954 895,549 747,817
---------- ---------- ----------
Total loans serviced $2,375,173 $2,199,065 $2,087,707
========= ========== ==========
</TABLE>
- --------------------
-13-
<PAGE> 15
The following table sets forth the geographic distribution of
properties securing the loans serviced by Commonwealth at December 31, 1998.
<TABLE>
<CAPTION>
Percentage of Total Principal
State Principal Balance Balance
- ----------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
Pennsylvania $1,253,678 52.78%
New Jersey 314,554 13.24
Maryland 268,438 11.30
Virginia 152,748 6.43
Connecticut 95,485 4.02
Delaware 53,164 2.24
New York 42,308 1.78
Rhode Island 40,734 1.71
Washington, D.C. 24,702 1.04
Georgia 19,439 0.82
North Carolina 19,089 0.80
Florida 18,035 0.76
Massachusetts 17,274 0.73
Texas 8,425 0.35
Arizona 8,263 0.35
Ohio 5,358 0.23
South Carolina 5,043 0.21
Alabama 4,553 0.19
Illinois 3,253 0.14
California 2,636 0.11
Colorado 2,033 0.09
Other 15,961 0.68
------------ -------
Total $2,375,173 100.00%
============ =======
</TABLE>
-14-
<PAGE> 16
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,
--------------------------------------------------------------
1998 1997 1996
--------------------- ------------------ -------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
30 to 59 days $ 9,788 0.73% $13,083 1.03% $12,854 1.15%
60 to 89 days 2,418 0.18 2,503 0.20 7,980 0.71
90 days and over 10,012 0.74 8,938 0.70 8,058 0.72
------ ------ ------- ----- ------- ----
Total (1) $22,218 1.65% $24,524 1.93% $28,892 2.58%
====== ====== ======= ===== ======= ====
</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 and $1.4 million at December 31, 1997 and 1996, respectively. There
were no delinquent SBA loans at December 31, 1998.
-15-
<PAGE> 17
NONPERFORMING ASSETS. The following table sets forth information
relating to the Company's nonperforming assets at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Mortgage loans - Residential $ 5,119 $5,269 $5,240 $5,605 $4,137
Consumer loans 1,598 1,324 1,335 221 215
Commercial loans (1) 3,295 2,345 1,483 367 -
------- ------ ------- ------ ------
Total nonperforming loans 10,012 8,938 8,058 6,193 4,352
Real estate owned, net 1,049 626 1,090 752 1,927
Investment securities - - - 420(2) -
------- ------ ------- ------ ------
Total nonperforming assets (1) $11,061 $9,564 $9,148 $7,365 $6,279
====== ===== ===== ===== ======
Nonperforming loans to total loans held for
investment (1) 0.74% 0.70% 0.72% 0.77% 0.73%
==== ==== ==== ==== ====
Total nonperforming assets to total assets (1) 0.49% 0.42% 0.43% 0.51% 0.52%
==== ==== ==== ==== ====
</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, 1998, 1995, and 1994.
(2) Consisted of a deposit with a financial institution which was in
bankruptcy liquidation. The deposit was recovered by the Company in
1996.
-16-
<PAGE> 18
At December 31, 1998, the Company's $5.1 million of nonperforming
single-family residential loans consisted of 94 loans having an average balance
of $54,000.
Forgone interest income on nonaccruing loans totaled $0.9 million at
both December 31, 1998 and 1997. The actual amount of interest recorded as
income on such loans amounted to $0.3 million for each of the years ended
December 31, 1998, 1997, and 1996.
At December 31, 1998, the Company's real estate owned totaled $1.0
million, primarily consisting of 20 single-family residential properties
acquired through foreclosure or by deed-in-lieu of foreclosure. At December
31, 1997, 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 year-end 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.
During 1998, the Company sold 20 single-family residential
properties which were held as real estate owned for a nominal net gain and
acquired an additional 27 single-family residential properties through
foreclosure or deed-in-lieu thereof. 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 thereof. 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.
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", reflects those
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, 1998, the
Company had $5.3 million of assets classified as special mention.
-17-
<PAGE> 19
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,
-------------------------------------------------
1998 1997 1996 1995 1994
---- -------- -------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of year $9,024 $9,971 $7,485 $7,307 $7,309
----- ----- ----- ----- -----
Provision 3,500 1,600 601 578 168
Charge-offs:
Mortgage (566) (453) (189) (362) (103)
Consumer (1,857) (1,383) (478) (125) (191)
Commercial (706) (963) - - -
----- ------ ------ ------- ------
Total charge-offs (3,129) (2,799) (667) (487) (294)
Recoveries:
Mortgage 32 147 133 68 39
Consumer 78 74 29 19 85
Commercial 84 31 18 - -
----- ------ ------ ------- ------
Total recoveries 194 252 180 87 124
Allowance Acquired in
Berks Acquisition - - 2,372 - -
----- ------ ------ ------- ------
Allowance at end of year $9,589 $9,024 $9,971 $7,485 $7,307
===== ===== ===== ===== =====
Allowance for loan losses to
total nonperforming loans at end
of year 95.78% 100.96% 123.74% 120.86% 167.90%
===== ====== ====== ======= ======
Allowance for loan losses to
total loans held for investment
at end of year 0.71% 0.71% 0.89% 0.93% 1.22%
==== ==== ==== ==== ======
</TABLE>
- ----------------------
-18-
<PAGE> 20
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
-----------------------------------------------------------------------------
1998 1997 1996
---------------------- ----------------------- --------------------------
Percent of Percent of Percent of
Loans by Loans by Loans by
Amount Category(1) Amount Category(1) Amount Category (1)
------ ----------- ------- ----------- ------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Breakdown of allowance:
Mortgage loans $2,207 0.23% $2,536 0.26% $5,339 0.63%
Consumer loans 3,412 1.42 2,916 1.50 2,505 1.48
Commercial loans 3,970 2.86 3,572 3.72 2,127 3.00
SBA loans - - - - - -
------ ----- ------ ----- ------- -----
Total allowance for loan
losses $9,589 4.51% $9,024 5.48% $9,971 5.11%
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------
1995 1994
-------------------------- ------------------------
Percent of Percent of
Loans by Loans by
Amount Category (1) Amount Category(1)
------ ------------ ------ -----------
<S> <C> <C> <C> <C>
Breakdown of allowance:
Mortgage loans $5,228 0.80% $5,074 1.27%
Consumer loans 1,992 1.79 1,983 1.90
Commercial loans 265 2.18 250 3.94
SBA loans - - - -
------- ----- ------ -----
Total allowance for loan
losses $7,485 4.77% $7,307 7.11%
====== ====== ====== =====
</TABLE>
- ---------------
(1) Total loans exclude mortgage loans held for sale.
-19-
<PAGE> 21
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.
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," 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.
At December 31, 1998, the Company's $524 million of mortgage-backed
securities were comprised of $132 million and $392 million of held-to-maturity
and available-for-sale mortgage-backed securities, respectively. At December
31, 1998, $310 million, or 59%, of the Company's mortgage-backed securities
were issued or guaranteed by GNMA, FHLMC, or 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, 1998, $215 million, or
41%, of the Company's mortgage-backed securities portfolio were private
mortgage-backed securities. At December 31, 1998, $444 million, or 85%, of the
Company's mortgage-backed securities portfolio had fixed rates of interest, and
$80 million, or 15%, 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, 1998 and 1997, mortgage-backed securities with an
amortized cost of $164 million and $256 million, respectively, and a market
value of $165 million and $258 million, respectively, collateralized certain
securities sold under agreements to repurchase (see Note 8). Mortgage-backed
securities with an amortized cost at December 31, 1998 and 1997, of $34 million
and $19 million, respectively (market value of $34 million and $19 million,
respectively), were pledged as collateral for depositors. Mortgage-backed
securities with an amortized cost at December
-20-
<PAGE> 22
31, 1998 and 1997, of $0.2 million and $0.4 million, respectively (market value
of $0.2 million and $0.4 million, respectively), were pledged as collateral for
interest rate swap agreements.
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,
--------------------------------------------
1998 1997 1996
----------- ------------- -----------
(in thousands)
<S> <C> <C> <C>
Mortgage-backed securities at beginning of year $735,291 $752,707 $463,353
Purchases 156,958 189,818 412,676
Sales or call (30,000) (41,770) -
Repayments and prepayments (337,291) (166,838) (122,895)
Unrealized (loss) gain on available-for-sale
mortgage-backed securities (817) 1,374 (427)
--------- -------- --------
Mortgage-backed securities at end of year (1) $524,141 $735,291 $752,707
======= ======= =======
</TABLE>
- ----------------
(1) At December 31, 1998, 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 $520 million and
$526 million, respectively.
At December 31, 1998, 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 a 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 a 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
-21-
<PAGE> 23
prepay faster than anticipated, the Company may not be able to reinvest the
proceeds of such repayments and prepayments at a comparable rate.
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 amortized cost
and market value of the Company's investment securities at the dates indicated.
There were no held to maturity investment securities at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- ---------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---------- ------- ----------- ------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Available for sale (at
market):
U.S. Treasury and U.S.
Government agency
securities $12,000 $11,999 $39,980 $40,041 $47,963 $48,089
Corporate Bonds 19,997 20,140 - - - -
Mortgage Security Mutual
Fund - - 2,373 2,404 2,215 2,209
Equity Servicing 2,880 2,880
Partnership 1,700 1,700 4,819 4,819
Other Equity Investments 710 676 3,256 4,062 757 757
------- ------- ------- ------- ------- -------
Total $34,407 $34,515 $50,428 $51,326 $53,815 $53,935
====== ====== ====== ====== ====== ======
</TABLE>
-22-
<PAGE> 24
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, 1998.
<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 $11,999 5.48% $ - - %
securities - - 20,140 5.80
Corporate Bonds
Equity Servicing Partnership - - 1,700 N/A
Other Equity Investments - - 676 N/A
------- -------
$11,999 5.48% $22,516 5.80%
======= =======
</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. 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 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, 1998,
the branch offices of the Company consisted of 40 traditional full-
-23-
<PAGE> 25
service offices and 20 full-service offices located in supermarkets. The
Company opened its first supermarket branch in 1994 and opened an additional
nine, four, three, and three in 1995, 1996, 1997, and 1998 respectively.
Currently, the Company intends to open an additional supermarket branch and one
mini-traditional branch in its market area and address certain underperforming
branches during 1999.
In addition to the Company's extensive branch network, the Company
currently maintains 58 automated teller machine ("ATM") locations. The Company
also maintains a 24 hour telephone banking service known as COM-LINE.
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, 1998, total demand deposits and savings deposits
amounted to 44% and 14% of the Company's total deposits, respectively. During
1998, the weighted average rate paid on the Company's demand deposits and
savings deposits amounted to 2.41% and 2.23%, 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,
-------------------------------------------------------------------------------
1998 1997 1996
------------------------ ----------------------- ----------------------------
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 $ 216,668 13.50% $ 172,442 11.11% $ 171,567 11.50%
Money market deposits 390,822 24.34 324,959 20.93 278,527 18.68
Noninterest-bearing
deposits 103,327(1) 6.44 81,653 5.26 60,957 4.09
-------- ------ ---------- ------ -------- ------
Total demand deposits 710,817 44.28 579,054 37.30 511,051 34.27
-------- ------ ---------- ------ -------- ------
Savings deposits 227,423 14.17 229,290 14.77 260,089 17.44
Certificate of deposit
accounts:
6 months or less 317,232 19.76 259,519 16.71 304,674 20.43
7-12 months 151,258 9.42 220,341 14.19 175,425 11.76
13-36 months 148,958 9.28 216,011 13.91 199,292 13.36
More than 36 months 49,611 3.09 48,609 3.12 40,919 2.74
-------- ------ ---------- ------ -------- ------
Total certificates 667,059 41.55 744,480 47.93 720,310 48.29
-------- ------ ---------- ------ -------- ------
Total deposits $1,605,299 100.00% $1,552,824 100.00% $1,491,450 100.00%
========= ====== ========= ====== ========= ======
</TABLE>
- ------------
(1) Includes $57 million of business checking accounts.
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<PAGE> 26
The following table sets forth the activity in the Company's deposits
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1998 1997 1996
------------- -------------- -----------
(dollars in thousands)
<S> <C> <C> <C>
Beginning balance $1,552,824 $1,491,450 $1,076,549
Net (decrease) increase
before interest (1) (2,595) 9,540 371,952
Interest credited 55,070 51,834 42,949
---------- ---------- ----------
Net increase
in deposits 52,475 61,374 414,901
---------- ---------- ----------
Ending balance $1,605,299 $1,552,824 $1,491,450
========= ========= =========
</TABLE>
- -------------------
(1) Includes $379.7 million of deposits assumed in connection with
the Berks Acquisition 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,
-----------------------------------------
1998 1997 1996
----------- ------------- -----------
(dollars in thousands)
<S> <C> <C> <C>
0.00% to 2.99% $ 1,295 $ 1,166 $ 3,132
3.00% to 3.99% 1,776 6,051 79,101
4.00% to 4.99% 224,329 125,241 165,704
5.00% to 6.99% 436,614 608,379 465,258
7.00% to 8.99% 2,965 3,569 6,833
9.00% to 10.99% 80 74 282
11.00% and over - - -
------- ------- -------
Total $667,059 $744,480 $720,310
======= ======= =======
</TABLE>
-25-
<PAGE> 27
The following table sets forth the amount and remaining maturities of
the Company's certificates of deposit at December 31, 1998.
<TABLE>
<CAPTION>
Over Six Months Over One Over Two Years
Six Months Through Year Through Through Over Three
and Less One Year Two Years Three Years Years
------------- --------------- -------------- -------------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
0.00% to 1.99% $ 1,178 $ - $ - $ - $ -
2.00% to 2.99% 117 - - - -
3.00% to 3.99% 1,756 16 4 - -
4.00% to 4.99% 140,799 43,304 30,734 6,863 2,629
5.00% to 6.99% 172,850 107,257 97,367 12,382 46,758
7.00% to 8.99% 527 681 960 573 224
9.00% to 10.99% 5 - - 75 -
11.00% & over - - - - -
-------- -------- ------- ------- -------
Total $317,232 $151,258 $129,065 $19,893 $49,611
======== ======= ======= ====== ======
</TABLE>
At December 31, 1998, the Company had $91 million of certificates of
deposit in amounts equal to or greater than $100,000, of which $64 million was
scheduled to mature within six months, $14 million was scheduled to mature in
over six months through 12 months, and $13 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, 1998, the Company had $241 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, 1998, the Company had $166
million of repurchase agreements outstanding.
-26-
<PAGE> 28
The following table sets forth the amount and weighted average rate of
the Company's borrowings at the dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1998 1997 1996
----------------- ----------------------- ------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
FHLB advances $240,500 5.32% $213,000 5.83% $175,000 5.48%
Repurchase
agreements 166,000 6.21 246,099 5.73 176,674 5.47
------- ------- -------
Total
Borrowings(1) $406.500 5.68% $459.099 5.78% $351,674 5.48%
======= ======= =======
</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,
------------------------------------------------------------
1998 1997 1996
--------------- -------------------- -------------------
(dollars in thousands)
<S> <C> <C> <C>
FHLB advances:
Maximum balance $368,000 $238,000 $202,500
Average balance $285,615 $211,107 $138,917
Weighted average rate:
at end of period 5.32% 5.83% 5.48%
during the period 5.65% 5.67% 5.62%
Repurchase agreements:
Maximum balance $240,521 $264,677 $176,674
Average balance $205,018 $242,794 $154,523
Weighted average rate:
at end of period 6.21% 5.73% 5.47%
during the period 5.88% 5.90% 5.91%
</TABLE>
- -----------------
-27-
<PAGE> 29
EMPLOYEES
The Company had 680 full-time employees and 241 part-time employees at
December 31, 1998. 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, 1998, 60 full-service offices, including
20 supermarket branch offices, located in southeast Pennsylvania. ComNet
Mortgage Services ("ComNet"), a division of the Bank, also located in
Norristown, conducts business through eight loan origination offices located in
Pennsylvania, New Jersey, Rhode Island, and Virginia. 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.
COMMONWEALTH INVESTMENT CORPORATION OF DELAWARE, INC. At December 31,
1998, $6 million, or 1%, 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, 1998, $47 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, 1998,
Firstcor had nine investments in such partnerships with an aggregate carrying
value of $4.1 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.
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
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<PAGE> 30
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.
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<PAGE> 31
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
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<PAGE> 32
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. For losses incurred in taxable years
beginning 1976 through August 6, 1997, a financial institution may carry back
net operating losses to the preceding three taxable years and forward to the
succeeding 15 taxable years. For taxable years beginning after August 6, 1997,
the carryback period is two years and the carryforward period is twenty years.
At December 31, 1998, 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, 1998, the Company had net loss carryforwards for
state tax purposes totaling $8.9 million, which expire beginning in 1999.
-31-
<PAGE> 33
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
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<PAGE> 34
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 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, 1998, the Bank was in compliance with the above
restrictions.
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<PAGE> 35
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 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).
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("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
-34-
<PAGE> 36
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.
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.
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,
1998, the FICO assessments were 6.1 and 1.2 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. It is anticipated that assessments for BIF and SAIF
members will be the same after 1999.
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.
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
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<PAGE> 37
accounts at the institution at the time of the termination, less subsequent
withdrawals, shall continue to be insured for a period of six months to two
years, as determined by the FDIC. There are no pending proceedings to terminate
the deposit insurance of the Bank.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings institutions
are required to maintain minimum levels of regulatory capital. Pursuant to
FIRREA, the OTS has established capital standards applicable to all savings
institutions. These standards generally must be as stringent as the comparable
capital requirements imposed on national banks. The OTS also is authorized to
impose capital requirements in excess of these standards on individual
institutions on a case-by-case basis.
Current OTS capital standards require savings institutions to satisfy
three different capital requirements. Under these standards, savings
institutions must maintain "tangible" capital equal to at least 1.5% of adjusted
total assets, "core" capital equal to at least 3.0% of adjusted total assets and
"total" capital (a combination of core and "supplementary" capital) equal to at
least 8.0% of "risk-weighted" assets. For purposes of the regulation, core
capital generally consists of common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits, and is reduced by intangible
assets, with a limited exception for purchased mortgage servicing rights and
originated mortgage servicing rights. Tangible capital is given the same
definition as core capital but does not include qualifying intangible assets.
The Bank had $40 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; 45% of any pretax unrealized gains on
available for sale equity securities; 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
-36-
<PAGE> 38
or the FHLMC, qualifying residential bridge loans made directly for the
construction of one- to four-family residences and qualifying multi-family
residential loans; and (iv) 100% for all other loans and investments, including
consumer loans, commercial loans, and single-family residential real estate
loans more than 90 days delinquent, and for repossessed assets.
At December 31, 1998, the Bank exceeded all of its regulatory capital
requirements, with tangible, core and risk-based capital ratios of 5.9%, 5.9%
and 11.6%, 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
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<PAGE> 39
to calculate an institution's interest rate risk and the effective date of each
quarter's interest rate risk component. However, in October 1994, the Director
of the OTS indicated that it would waive the capital deduction for institutions
with greater than "normal" interest rate risk until the OTS publishes an appeals
process. In August 1995, the OTS issued Thrift Bulletin No. 67 which allows
eligible institutions to request adjustment to their interest rate risk
component as calculated by the OTS, or to request to use their own models to
calculate their interest rate component. The OTS also indicated that it will
delay invoking its interest rate risk rule requiring institutions with above
normal interest rate risk exposure to adjust their regulatory capital
requirement until new procedures are implemented and evaluated. The OTS has not
yet established an effective date for the capital deduction. In any event,
management of the Bank does not believe that the OTS' adoption of an interest
rate risk component to the risk-based capital requirement will adversely affect
the Bank's regulatory capital position.
PROMPT CORRECTIVE ACTION. Under Section 38 of the FDIA, as amended by the
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.
-38-
<PAGE> 40
An institution which is required to submit a capital restoration plan
must concurrently submit a performance guaranty by each company that controls
the institution. Such guaranty shall be limited to the lesser of (i) an amount
equal to 5.0% of the institution's total assets at the time the institution was
notified or deemed to have notice that it was undercapitalized or (ii) the
amount necessary to restore the relevant capital measures of the institution to
the levels required for the institution to be classified as adequately
capitalized. Such a guarantee shall expire after the federal banking agency
notifies the institution that it has remained adequately capitalized for each of
four consecutive calendar quarters. An institution which fails to submit a
written capital restoration plan within the requisite period, including any
required performance guarantee(s), or fails in any material respect to implement
a capital restoration plan, shall be subject to the restrictions in Section 38
of the FDIA which are applicable to significantly undercapitalized institutions.
Immediately upon becoming undercapitalized, an institution shall become
subject to the provisions of Section 38 of the FDIA (i) restricting payment of
capital distributions and management fees, (ii) requiring that the appropriate
federal banking agency monitor the condition of the institution and its efforts
to restore its capital, (iii) requiring submission of a capital restoration
plan, (iv) restricting the growth of the institution's assets and (v) requiring
prior approval of certain expansion proposals. The appropriate federal banking
agency for an undercapitalized institution also may take any number of
discretionary supervisory actions if the agency determines that any of these
actions is necessary to resolve the problems of the institution at the least
possible long-term cost to the deposit insurance fund, subject in certain cases
to specified procedures. These discretionary supervisory actions include
requiring the institution to raise additional capital; restricting transactions
with affiliates; restricting interest rates paid by the institution on deposits;
requiring replacement of senior executive officers and directors; restricting
the activities of the institution and its affiliates; requiring divestiture of
the institution or the sale of the institution to a willing purchaser; and any
other supervisory action that the agency deems appropriate. These and additional
mandatory and permissive supervisory actions may be taken with respect to
significantly undercapitalized and critically undercapitalized institutions.
At December 31, 1998, 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
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<PAGE> 41
required to be prescribed by regulation pursuant to Section 39 of the FDIA. In
general, the standards relate to (1) operational and managerial matters; (2)
asset quality and earnings; and (3) compensation. The operational and managerial
standards cover (a) internal controls and information systems, (b) internal
audit systems, (c) loan documentation, (d) credit underwriting, (e) interest
rate exposure, (f) asset growth, and (g) compensation, fees and benefits. Under
the proposed asset quality and earnings standards, the Bank would be required to
establish and maintain systems to (i) identify problem assets and prevent
deterioration in those assets, and (ii) evaluate and monitor earnings and ensure
that earnings are sufficient to maintain adequate capital reserves. Finally, the
proposed compensation standard states that compensation will be considered
excessive if it is unreasonable or disproportionate to the services actually
performed by the individual being compensated. If a savings institution fails to
meet any of the standards promulgated by regulation, then such institution will
be required to submit a plan within 30 days to the OTS specifying the steps it
will take to correct the deficiency. In the event that a savings institution
fails to submit or fails in any material respect to implement a compliance plan
within the time allowed by the federal banking agency, Section 39 of the FDIA
provides that the OTS must order the institution to correct the deficiency and
may (1) restrict asset growth; (2) require the savings institution to increase
its ratio of tangible equity to assets; (3) restrict the rates of interest that
the savings institution may pay; or (4) take any other action that would better
carry out the purpose of prompt corrective action. The Bank believes that it has
been and will continue to be in compliance with each of the standards as they
have been adopted by the OTS.
LIQUIDITY REQUIREMENTS. All savings institutions are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At the present time, the required minimum
liquid asset ratio is 4%. At December 31, 1998, the Company's liquid asset ratio
was 6.25%.
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
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<PAGE> 42
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 applicable on December 31, 1994, as modified to reflect any
applicable individual minimum capital requirement imposed upon the institution.
Failure to meet fully phased-in or minimum capital requirements will result in
further restrictions on capital distributions, including possible prohibition
without explicit OTS approval.
Tier 2 institutions, which are institutions that before and after the
proposed distribution meet or exceed their minimum capital requirements, may
make capital distributions up to 75% of their net income over the most recent
four quarter period.
In order to make distributions under these safe harbors, Tier 1 and Tier
2 institutions must submit 30 days written notice to the OTS prior to making the
distribution. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. In addition, a Tier 1 institution deemed
to be in need of more than normal supervision by the OTS may be downgraded to a
Tier 2 or Tier 3 institution as a result of such a determination.
Tier 3 institutions, which are institutions that do not meet current
minimum capital requirements, or that have capital in excess of either their
fully phased-in capital requirement or minimum capital requirement but which
have been notified by the OTS that it will be treated as a Tier 3 institution
because they are in need of more than normal supervision, cannot make any
capital distribution without obtaining OTS approval prior to making such
distributions.
At December 31, 1998, the Bank was a Tier 1 institution for purposes of
this regulation.
The OTS amended its capital distribution regulation effective April 1,
1999. Under the new regulation, savings institutions are 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 new
regulation still requires the Bank to provide notice to the OTS of its intent to
make a capital distribution.
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.
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<PAGE> 43
BRANCHING BY FEDERAL SAVINGS INSTITUTIONS. Effective May 11, 1992, the
OTS amended its Policy Statement on Branching by Federal Savings Institutions to
permit interstate branching to the full extent permitted by statute (which is
essentially unlimited). Prior policy permitted interstate branching for federal
savings institutions only to the extent allowed for state-chartered institutions
in the states where the institution's home office is located and where the
branch is sought. Prior policy also permitted healthy out-of-state federal
institutions to branch into another state, regardless of the law in that state,
provided the branch office was the result of a purchase of an institution that
was in danger of default.
Generally, federal law prohibits federal savings institutions from
establishing, retaining or operating a branch outside the state in which the
federal institution has its home office unless the institution meets the IRS's
domestic building and loan test (generally, 60% of a thrift's assets must be
housing-related) ("IRS Test"). The IRS Test requirement does not apply if: (i)
the branch(es) result(s) from an emergency acquisition of a troubled savings
institution (however, if the troubled savings institution is acquired by a bank
holding company, does not have its home office in the state of the bank holding
company bank subsidiary and does not qualify under the IRS Test, its branching
is limited to the branching laws for state-chartered banks in the state where
the savings institution is located); (ii) the law of the state where the branch
would be located would permit the branch to be established if the federal
savings institution were chartered by the state in which its home office is
located; or (iii) the branch was operated lawfully as a branch under state law
prior to the savings institution's conversion to a federal charter.
Furthermore, the OTS will evaluate a branching applicant's record of
compliance with the Community Reinvestment Act of 1977 ("CRA"). An
unsatisfactory CRA record may be the basis for denial of a branching
application.
QUALIFIED THRIFT LENDER TEST ("QTL"). 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).
A 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
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<PAGE> 44
65% of the institution's "portfolio assets" (as defined) consist of certain
housing and consumer-related assets on a monthly average basis in at least nine
out of every 12 months. At December 31, 1998, the qualified thrift investments
of the Bank were approximately 100% 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, 1998, the Bank had $18 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, 1998,
dividends paid by the FHLB of Pittsburgh to the Bank amounted to $1.1 million,
compared to $0.9 million for the year ended December 31, 1997.
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, 1998, no reserves were
required to be maintained on the first $4.9 million of transaction accounts,
reserves of 3% were required to be maintained against the next $41.6 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> 45
ITEM 2. PROPERTIES
OFFICE AND PROPERTIES
At December 31, 1998, the Bank conducted its business from its corporate offices
in Norristown, Pennsylvania and 60 full-service offices, including 20
supermarket branches, located in southeast Pennsylvania.
The following table sets forth certain information relating to the Bank's
offices at December 31, 1998.
<TABLE>
<CAPTION>
Net Book Value of
Property &
(in thousands) Leasehold
Lease Improvements at
Owned or Expiration December 31, Deposits at
Location Leased Date 1998(1) December 31, 1998
- -------------------------------------- ----------------- --------------- ------------------------ ---------------------
<S> <C> <C> <C> <C>
CORPORATE HEADQUARTERS:
- -----------------------
NORRISTOWN: Leased 02/12 $1,658 $51,602
2 West Lafayette Street
Norristown, PA 19401
TRADITIONAL FULL-SERVICE OFFICES:
- ---------------------------------
NORRISTOWN: Leased 02/12 346 35,707
2 West Lafayette Street
Norristown, PA 19401
TRAPPE: Leased 10/10 201 31,272
Trappe Shopping Center
130 West Main Street, Suite 158
Trappe, PA 19426
KING OF PRUSSIA: Leased 09/03 149 39,941
DeKalb Plaza Shopping Center
338 West DeKalb Pike
King of Prussia, PA 19406
PARK RIDGE: Leased 01/03 -- 59,398
Park Ridge Shopping Center
2701 West Main Street
Norristown, PA 19403
SWEDE SQUARE: Leased 10/01 184 72,610
Swede Square Shopping Center
2947 Swede Road
Norristown, PA 19401
</TABLE>
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<PAGE> 46
<TABLE>
<CAPTION>
Net Book Value of
Property &
(in thousands) Leasehold
Lease Improvements at
Owned or Expiration December 31, Deposits at
Location Leased Date 1998(1) December 31, 1998
- -------------------------------------- ----------------- --------------- ------------------------ ---------------------
<S> <C> <C> <C> <C>
AUDUBON: Leased 08/03 $52 $43,807
Audubon Village Shopping Center
2806 Audubon Village Drive
Norristown, PA 19403
NEWTOWN SQUARE: Owned -- 320 38,200
3531 West Chester Pike
Newtown Square, PA 19073
FRANKFORD AVENUE: Owned -- 348 56,504
7149 Frankford Avenue
Philadelphia, PA 19135
CASTOR AVENUE: Owned -- 146 51,800
6537 Castor Avenue
Philadelphia, PA 19149
PENNDEL: Owned -- 128 25,806
U.S. # 1 & Durham Road
Penndel, PA 19047
WELSH ROAD: Owned -- 150 57,725
2501 Welsh Road
Philadelphia, PA 19114
GLENSIDE: Owned -- 316 64,092
139 South Easton Road
Glenside, PA 19038
WESTTOWN: Leased 11/99 7 32,496
Marketplace Shopping Center
1502 West Chester Pike
West Chester, PA 19382
KENNETT SQUARE: Leased 12/03 161 23,596
New Garden Center
345 Scarlett Road
Kennett Square, PA 19348
WEST GROVE: Owned -- 133 17,386
106 West Evergreen Street
West Grove, PA 19390
WAYNE: Leased 08/01 -- 25,491
Chesterbrook Village Center
500 Chesterbrook Boulevard, Suite B-5
Wayne, PA 19087
</TABLE>
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<PAGE> 47
<TABLE>
<CAPTION>
Net Book Value of
Property &
(in thousands) Leasehold
Lease Improvements at
Owned or Expiration December 31, Deposits at
Location Leased Date 1998(1) December 31, 1998
- -------------------------------------- ----------------- --------------- ------------------------ ---------------------
<S> <C> <C> <C> <C>
LANSDALE: Leased 06/99 $23 $50,791
521 West Main Street
Lansdale, PA 19446
HILLCREST: Leased 07/02 -- 31,459
Hillcrest Shopping Center
638 East Main Street
Lansdale, PA 19446
SUMNEY FORGE: Leased 08/99 8 39,102
Sumney Forge Square
1601 Valley Forge Road
Lansdale, PA 19446
SOUDERTON: Owned -- 198 17,162
705 Route 113
Souderton, PA 18964
CONSHOHOCKEN: Leased 10/09 245 81,304
Plymouth Square Shopping Center
200 West Ridge Pike, Suite 108
Conshohocken, PA 19428
PHOENIXVILLE: Leased 03/12 426 20,815
Maple Lawn Village Center
510 Kimberton Road
Phoenixville, PA 19460
ROYERSFORD: Leased 01/16 309 4,934
Limerick Square
70 Buckwalter Road, Suite 650
Royersford, PA 19468
TACONY: Leased 02/02 -- 57,954
6958 Torresdale Avenue
Philadelphia, PA 19135
HOLMESBURG: Leased 07/00 15 39,227
8729 Frankford Avenue
Philadelphia, PA 19136
ACADEMY: Leased 02/02 5 33,404
3292 Red Lion Road
Philadelphia, PA 19114
MAYFAIR: Owned -- 326 25,681
7425 Frankford Avenue
Philadelphia, PA 19136
</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 1998(1) December 31, 1998
- -------------------------------------- ----------------- --------------- ------------------------ ---------------------
<S> <C> <C> <C> <C>
5TH & PENN STREETS: Owned -- $1,105 $43,733
445 Penn Street
Reading, PA 19601
9TH & SPRING STREETS: Owned -- 404 29,799
956 North Ninth Street
Reading, PA 19604
LANCASTER AVENUE: Leased 12/04 31 38,556
830 Lancaster Avenue
Reading, PA 19607
MOHNTON: Owned -- 453 25,536
14 West Wyomissing Avenue
Mohnton, PA 19540
TEMPLE: Owned -- 322 44,643
4950 Kutztown Road
Temple, PA 19560
RIVERSIDE: Owned -- 330 31,071
2040 Centre Avenue
Reading, PA 19605
HEIDELBERG: Leased 06/07 75 30,914
4641 Penn Avenue
Sinking Spring, PA 19608
KUTZTOWN: Owned -- 273 20,316
601 East Main Street
Kutztown, PA 19530
EXETER: Leased 03/00 35 33,509
4215 Perkiomen Avenue
Reading, PA 19606
BIRDSBORO: Leased 09/01 18 15,367
350 West Main Street
Birdsboro, PA 19508
LEBANON VALLEY: Owned -- 317 28,966
2203 West Cumberland Street
Lebanon, PA 17042
LEBANON: Owned -- 149 1,828
152 North Eighth Street
Lebanon, PA 17046
WYOMISSING: Leased 03/00 2 2,554
320 Abington Drive
Wyomissing, PA 19610
</TABLE>
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<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 1998(1) December 31, 1998
- -------------------------------------- ----------------- --------------- ------------------------ ---------------------
SUPERMARKET BRANCHES:
<S> <C> <C> <C> <C>
GIANT-WHITEHALL: Leased 11/99 $33 $8,996
MacArthur Towne Centre
2540 MacArthur Road, Suite 200
Whitehall, PA 18052
REDNER'S COLLEGEVILLE: Leased 01/10 52 8,027
Redner's Warehouse Market
Marketplace at Collegeville
201 Second Avenue, Suite 100
Collegeville, PA 19426
GIANT-FAIRLESS HILLS: Leased 01/00 37 11,781
Fairless Hills Shopping Center
473 Oxford Road South
Fairless Hills, PA 19030
GIANT-SINKING SPRING: Leased 06/00 54 7,705
Spring Towne Center
2643 Shillington Road
Sinking Spring, PA 19608
GIANT-ALDEN: Leased 12/01 104 5,249
Providence Village
543 North Oak Avenue
Alden, PA 19018
GIANT-BLUE BELL: Leased 07/00 52 11,798
The Shoppes at Blue Bell
1760 DeKalb Pike
Blue Bell, PA 19422
GIANT-TREXLERTOWN: Leased 03/01 81 7,577
Trexler Mall
6900 Hamilton Boulevard, PO Box 977
Trexlertown, PA 18087
GIANT-TROOPER: Leased 03/01 82 6,208
Audubon Square Shopping Center
2668 Egypt Road
Norristown, PA 19403
REDNER'S-DOYLESTOWN: Leased 09/10 59 6,458
Doylestown Pointe
1661 Easton Road, Suite 2
Warrington, PA 18976
</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 1998(1) December 31, 1998
- -------------------------------------- ----------------- --------------- ------------------------ ---------------------
<S> <C> <C> <C> <C>
GUINTA'S THRIFTWAY: Leased 02/10 $48 $8,676
Bradford Plaza
700 Downingtown Pike, Suite 130
West Chester, PA 19380
CLEMENS-EXTON: Leased 06/10 49 5,366
Lionville Shopping Center
170 Eagleview Boulevard
Exton, PA 19341
WEIS-POTTSTOWN: Leased 07/10 57 6,158
The Pottstown Center
223 Shoemaker Road
Pottstown, PA 19464
THRIFTWAY-PORT RICHMOND: Leased 09/10 68 8,737
Port Richmond Village
2497 Aramingo Avenue, Suite 2
Philadelphia, PA 19125
SHOPRITE-FAR NORTHEAST: Leased 09/11 108 11,772
Boulevard Plaza
11000 Roosevelt Boulevard
Philadelphia, PA 19116
GIANT-SOUTHAMPTON: Leased 02/02 104 5,127
Southampton Shopping Center
466 A Second Street Pike
Southampton, PA 18966
SUPERFRESH-COTTMAN : Leased 04/02 126 4,592
Cottman & Bustleton Center
2151 Cottman Avenue
Philadelphia, PA 19149
GIANT-HORSHAM: Leased 06/02 107 3,191
Horsham Point Shopping Center
314 Horsham Road, Unit A
Horsham, PA 19044
GIANT-WARMINSTER: Leased 06/03 190 1,278
Cedar Pointe Plaza
720-D West Street Road
Warminster, PA 18974
SPRING HOUSE CLEMENS: Leased 11/03 196 320
Spring House Center/Clemens Market
563 Village Center, Suite - A
Spring House, PA 19477
</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 1998(1) December 31, 1998
- -------------------------------------- ----------------- --------------- ------------------------ ---------------------
<S> <C> <C> <C> <C>
OXFORD - SHOPRITE: Leased 11/03 $190 $225
Lawndale Plaza
6301 Oxford Avenue
Philadelphia, PA 19111
</TABLE>
- --------------------------------------------------------
(1) Does not include furniture, fixtures and equipment.
-50-
<PAGE> 52
The following table sets forth certain information relating to ComNet's offices
at December 31, 1998.
<TABLE>
<CAPTION>
Location Year Opened Owned or Leased Lease Expiration Date
- --------------------------------------- ------------------- -------------------- ---------------------------
<S> <C> <C> <C>
WARWICK, RHODE ISLAND: 1988 Leased 06/99
875 Centerville Road
Warwick, RI 02886
HORSHAM, PENNSYLVANIA: 1988 Leased 03/01
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
LEBANON, NEW JERSEY 1998 Leased 01/99
108 Main street
Lebanon, NJ 08833
READING, PENNSYLVANIA: 1997 Owned --
Commonwealth Bank Center
10 North Fifth Street
Reading, PA 19601
FAIRFAX, VIRGINIA: 1998 Leased 04/03
10400 Easton Plaza, Suite 103
Fairfax, VA 22030
CONSHOHOCKEN, PENNSYLVANIA: 1997 Leased 01/99
207 Fayette Street
Conshohocken, PA 19428
NORRISTOWN, PENNSYLVANIA: 1997 Owned --
104 West Main Street
Norristown, PA 19401
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.
-51-
<PAGE> 53
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.
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 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 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 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. As of February 1999, the Claims Court had ruled in favor of thrift
plaintiffs on liability for breach of contract in four additional
Winstar-related cases. In February 1999, the Bank filed a motion for summary
judgement on liability for breach of contract. However, the Courts 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-related 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 and others 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
-52-
<PAGE> 54
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.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
Not Applicable
-53-
<PAGE> 55
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required herein is incorporated by reference from page 59
of the Company's 1998 Annual Report to Stockholders ("1998 Annual Report").
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from page 12
of the 1998 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required herein is incorporated by reference from pages
13 to 28 of the 1998 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required herein is incorporated by reference from pages
22 to 25 of the 1998 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from pages
32 to 58 of the 1998 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.
-54-
<PAGE> 56
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.
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, 1998 and 1997
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
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
- --------------
Location
--------
<S> <C> <C>
3.1 Articles of Incorporation of Commonwealth Bancorp, Inc. (1)
3.2 Bylaws of Commonwealth Bancorp, Inc. (1)
4.1 Form of Stock Certificate of Commonwealth Bancorp, Inc. (1)
10.1 1993 Amended Stock Incentive Plan** (2)
10.2 1993 Amended Directors' Stock Option Plan** (2)
10.3 1993 Amended Management Recognition Plan for Officers** (2)
</TABLE>
-55-
<PAGE> 57
<TABLE>
<S> <C> <C>
10.4 1993 Amended Management Recognition Plan for Directors** (2)
10.5 1996 Amended Stock Option Plan** (2)
10.6 1996 Amended Recognition and Retention Plan** (2)
10.7 Employee Stock Ownership Plan and Trust** (1)
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** *
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** (3)
10.16 Supplemental Executive Retirement Plan of Commonwealth Bank** (3)
13.0 1998 Annual Report to Stockholders *
22.0 Subsidiaries of the Registrant - Reference is made to
"Item 1. Business - Subsidiaries" for the required information
23.0 Consent of Independent Public Accountants *
27.0 Financial Data Schedule *
</TABLE>
- --------------------------
* Filed hereto
** Management contract or compensatory plan or arrangement.
(1) Incorporated herein by reference from the Company's Registration Statement
on Form S-1 filed with the Commission on December 18, 1995, as amended.
(2) Incorporated herein by reference from the Company's Quarterly Report on Form
10-Q for the three months ended March 31, 1998 filed with the Commission on May
14, 1998.
(3) Incorporated herein by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1997 filed with the Commission on March 18,
1998.
(b) REPORTS ON FORM 8-K.
Not Applicable.
-56-
<PAGE> 58
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 16, 1999
- -----------------------
Charles H. Meacham
Chairman of the Board,
Chief Executive Officer
(principal executive officer)
/s/ Patrick J. Ward March 16, 1999
- --------------------
Patrick J. Ward
President, Chief
Operating Officer
/s/ Charles M. Johnston March 16, 1999
- -----------------------
Charles M. Johnston
Senior Vice President, Chief
Financial Officer
(principal financial and
accounting officer)
-57-
<PAGE> 59
/s/ George C. Beyer, Jr. March 16, 1999
- -------------------------
George C. Beyer, Jr.
Director
/s/ Joseph E. Colen, Jr. March 16, 1999
- -------------------------
Joseph E. Colen, Jr.
Director
/s/ Joanne Harmelin March 16, 1999
- -----------------------
Joanne Harmelin
Director
/s/ Michael T. Kennedy March 16, 1999
- -----------------------
Michael T. Kennedy
Director
/s/ Harry P. Mirabile March 16, 1999
- ----------------------
Harry P. Mirabile
Director
/s/ Nicholas Sclufer March 16, 1999
- ----------------------
Nicholas Sclufer
Director
-58-
<PAGE> 1
Exhibit 10.8
AGREEMENT
AMENDED AGREEMENT, dated this 20th day of October 1998 and
retroactively effective to December 9, 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 December 9, 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) 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.
(b) 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.
<PAGE> 2
2
(c) 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.
(d) CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) 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.
(f) 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.
(g) 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 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;
<PAGE> 3
3
(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.
(h) HIGHEST ANNUAL COMPENSATION. The Executive's "Highest Annual
Compensation" for purposes of this Agreement shall be deemed to mean the
highest level of compensation paid to the Executive by the Employers or any
subsidiary thereof during the most recent three taxable years preceding the
Date of Termination, including Base Salary (as defined in Section 1(a) hereof)
and bonuses paid to the Executive but excluding amounts relating to the vesting
of Management Recognition Plan shares.
(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.
(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.
<PAGE> 4
4
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 effective 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 effective
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 effective 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.
(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
<PAGE> 5
5
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 and other than 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.
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.
<PAGE> 6
6
(b) The Executive's employment and his status as an
officer of the Corporation shall terminate (i) immediately upon being given a
Notice of Termination for Cause, or (ii) on the Date of Termination for any
other reason. A Notice of Termination for other than Cause shall not affect
the Executive's right to compensation to the Date of Termination or for such
other period of time after the Date of Termination as specified in Section
5(c)(i) and (ii) hereof, if applicable.
(c)(i) In the event that the Executive's employment is
terminated by the Corporation for other than Cause, Disability, Retirement or
the Executive's death, or such employment is terminated by the Executive due to
a material breach of this Agreement by the Corporation which has not been cured
within fifteen (15) days after a written notice of non-compliance has been
given by the Executive to the Corporation, and as of the Executive's Date of
Termination no Change in Control of the Corporation has occurred and no written
agreement which contemplates a Change in Control of the Corporation and which
still is in effect has been entered into by the Corporation and/or the
Corporation, then the Corporation shall, subject to the provisions of Section 6
hereof, if applicable:
(A) pay to the Executive, in twenty-four (24)
equal monthly installments beginning with the
first business day of the month following the
Date of Termination, a cash severance amount
equal to two (2) times that portion of the
Executive's Base Salary paid by the
Corporation as of his Date of Termination,
and
(B) maintain and provide for a period ending at
the earlier of (i) the expiration of
twenty-four (24) months from the Executive's
Date of Termination or (ii) the date of the
Executive's full-time employment by another
employer (provided that the Executive is
entitled under the terms of such employment
to benefits substantially similar to those
described in this subparagraph (B)), at no
cost to the Executive, the Executive's
continued participation in all group
insurance (other than disability insurance
unless the Executive was disabled and was
receiving disability insurance benefits prior
to the Date of Termination and other than
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 and
other than defined contribution plans of the
Employers).
(ii) In the event that the Executive's employment is
terminated by the Corporation for other than Cause, Disability, Retirement or
the Executive's death, or such employment is terminated by the Executive due to
a material breach of this Agreement by the Corporation which has not been cured
within fifteen (15) days after a written notice of non-compliance has been
given
<PAGE> 7
7
by the Executive to the Corporation or for Good Reason, and prior to the
Executive's Date of Termination there has been a Change in Control of the
Corporation or a written agreement which contemplates a Change in Control of
the Corporation and which still is in effect has been entered into by the
Corporation and/or the Bank, then the Corporation 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 Highest
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)), 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 and other than
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 and
other than defined contribution plans of the
Employers).
(d) In the event that (i) the Executive's employment is terminated
by the Corporation for Cause or (ii) the Executive terminates his employment
hereunder for any reason other than Disability, Retirement, death or pursuant
to Section 5(c) hereof, the Executive shall have no right pursuant to this
Agreement to compensation or other benefits for any period after the applicable
Date of Termination.
(e) 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.
<PAGE> 8
8
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 of even date ("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 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 Executives 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 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:
GUP = Tax Rate
--------
1- Tax Rate
The Tax Rate for purposed 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
<PAGE> 9
9
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 in 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 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) Unless the Executive's employment is terminated for
Disability, Retirement, death or pursuant to Section 5(c)(ii) hereof, the
Executive shall be required to mitigate the amount of any payments and benefits
hereunder by seeking other employment or otherwise. In the event that the
Executive obtains other employment during the period that the Executive is
receiving payments pursuant to Section 5(c)(i)(A) hereof, the cash amounts to
be paid to the Executive pursuant thereto shall be reduced by any cash
compensation received by the Executive as a result of employment by another
employer after the Date of Termination.
(b) The specific arrangements referred to herein are not intended
to exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employers pursuant to employee benefit plans
of the Employers or otherwise, provided, however, that any cash compensation
the Executive receives from sources other than the Employers shall serve to
reduce the cash amount to be paid to the Executive pursuant to Section
5(c)(i)(A) hereof.
<PAGE> 10
10
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 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.
<PAGE> 11
11
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> 12
12
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 prior Agreements between the Employers and the Executive dated
January 1, 1997 and December 9, 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> 13
13
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
Attest: COMMONWEALTH BANCORP, INC.
<TABLE>
<S> <C>
/s/ Patrick J. Ward By: /s/ Joseph E. Colen, Jr.
- ------------------------------ ------------------------------
Patrick J. Ward, President Joseph E. Colen, Jr., Director
and Secretary and Member of the
Compensation and Benefits
Committee of the Board of
Directors
Witness: EXECUTIVE
/s/ Patrick J. Ward By: /s/ Charles H. Meacham
- ------------------------------ ------------------------------
Patrick J. Ward Charles H. Meacham
</TABLE>
<PAGE> 14
AMENDED AGREEMENT
AMENDED AGREEMENT, dated this 20th day of October 1998 and
retroactively effective to December 9, 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 December 9, 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) 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.
(b) 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.
(c) 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
<PAGE> 15
2
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.
(d) CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) 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.
(f) 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.
(g) 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 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;
<PAGE> 16
3
(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.
(h) HIGHEST ANNUAL COMPENSATION. The Executive's "Highest Annual
Compensation" for purposes of this Agreement shall be deemed to mean the
highest level of compensation paid to the Executive by the Employers or any
subsidiary thereof during the most recent three taxable years preceding the
Date of Termination, including Base Salary (as defined in Section 1(a) hereof)
and bonuses paid to the Executive but excluding amounts relating to the vesting
of Management Recognition Plan shares.
(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.
(l) GENDER NEUTRAL PRONOUN USAGE. The use of the masculine pronoun
shall be deemed to include the feminine pronoun throughout this Agreement.
<PAGE> 17
4
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 effective 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 effective 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 effective 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 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
<PAGE> 18
5
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 and other than 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.
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.
<PAGE> 19
6
(b) The Executive's employment and his status as an officer of the
Bank shall terminate (i) immediately upon being given a Notice of Termination
for Cause, or (ii) on the Date of Termination for any other reason. A Notice of
Termination for other than Cause shall not affect the Executive's right to
compensation to the Date of Termination or for such other period of time after
the Date of Termination as specified in Section 5(c)(i) and (ii) hereof, if
applicable.
(c)(i) In the event that the Executive's employment is terminated by
the Bank for other than Cause, Disability, Retirement or the Executive's death,
or such employment is terminated by the Executive due to a material breach of
this Agreement by the Bank which has not been cured within fifteen (15) days
after a written notice of non-compliance has been given by the Executive to the
Bank, and as of the Executive's Date of Termination no Change in Control of the
Corporation has occurred and no written agreement which contemplates a Change
in Control of the Corporation and which still is in effect has been entered
into by the Corporation and/or the Bank, then the Bank shall, subject to the
provisions of Section 6 hereof, if applicable:
(A) pay to the Executive, in twenty-four (24) equal
monthly installments beginning with the first
business day of the month following the Date of
Termination, a cash severance amount equal to two
(2) times that portion of the Executive's Base
Salary paid by the Bank as of his Date of
Termination, and
(B) maintain and provide for a period ending at the
earlier of (i) the expiration of twenty-four (24)
months from the Executive's Date of Termination or
(ii) the date of the Executive's full-time
employment by another employer (provided that the
Executive is entitled under the terms of such
employment to benefits substantially similar to
those described in this subparagraph (B)), at no
cost to the Executive, the Executive's continued
participation in all group insurance (other than
disability insurance unless the Executive was
disabled and was receiving disability insurance
benefits prior to the Date of Termination and
other than 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 of the Employers and
other than defined contribution plans of the
Employers).
(ii) In the event that the Executive's employment is
terminated by the Bank for other than Cause, Disability, Retirement or the
Executive's death, or such employment is terminated by the Executive due to a
material breach of this Agreement by the Bank which has not been cured within
fifteen (15) days after a written notice of non-compliance has been given by
the Executive to the Bank or for Good Reason, and prior to the Executive's Date
of Termination there has been a
<PAGE> 20
7
Change in Control of the Corporation or a written agreement which contemplates
a Change in Control of the Corporation and which still is in effect has been
entered into by the Corporation and/or the Bank, 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 Highest Annual
Compensation paid by the Bank, and
(B) maintain and provide for a period ending at the
earlier of (i) the expiration of thirty-six (36)
months from the Executive's Date of Termination
or (ii) the date of the Executive's full-time
employment by another employer (provided that the
Executive is entitled under the terms of such
employment to benefits substantially similar to
those described in this subparagraph (B)), at no
cost to the Executive, the Executive's continued
participation in all group insurance (other than
disability insurance unless the Executive was
disabled and was receiving disability insurance
benefits prior to the Date of Termination and
other than 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 of the Employers and
other than defined contribution plans of the
Employers).
(d) In the event that (i) the Executive's employment is terminated
by the Bank for Cause or (ii) the Executive terminates his employment hereunder
for any reason other than Disability, Retirement, death or pursuant to Section
5(c) hereof, the Executive shall have no right pursuant to this Agreement to
compensation or other benefits for any period after the applicable Date of
Termination.
(e) 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.
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
<PAGE> 21
8
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) Unless the Executive's employment is terminated for Disability,
Retirement, death or pursuant to Section 5(c)(ii) hereof, the Executive shall
be required to mitigate the amount of any payments and benefits hereunder by
seeking other employment or otherwise. In the event that the Executive obtains
other employment during the period that the Executive is receiving payments
pursuant to Section 5(c)(i)(A) hereof, the cash amounts to be paid to the
Executive pursuant thereto shall be reduced by any compensation received by the
Executive as a result of employment by another employer after the Date of
Termination.
(b) The specific arrangements referred to herein are not intended
to exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employers pursuant to employee benefit plans
of the Employers or otherwise, provided, however, that any salary the Executive
receives from sources other than the Employers shall serve to reduce the cash
amount paid to the Executive pursuant to Section 5(c)(i)(A) hereof.
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
<PAGE> 22
9
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 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;
<PAGE> 23
10
(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, 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> 24
11
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.
section 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
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
<PAGE> 25
12
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 prior
Agreements between the Employers and the Executive dated January 1, 1997 and
December 9, 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.
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
Attest: COMMONWEALTH BANK
<TABLE>
<S> <C>
/s/ Patrick J. Ward By: /s/Joseph E. Colen, Jr.
- ----------------------------------- -----------------------------------
Patrick J. Ward, President and Joseph E. Colen, Jr., Director and
Secretary Member of the Compensation and
Benefits Committee of the Board
of Directors
Witness: EXECUTIVE
/s/ Patrick J. Ward By: /s/Charles H. Meacham
- ----------------------------------- -----------------------------------
Patrick J. Ward Charles H. Meacham
</TABLE>
<PAGE> 1
Exhibit 10.9
AMENDED AGREEMENT
AMENDED AGREEMENT, dated this 20th day of October 1998 and
retroactively effective to December 9, 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 December 9, 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) 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.
(b) 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.
<PAGE> 2
2
(c) 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.
(d) CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) 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.
(f) 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.
(g) 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 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;
<PAGE> 3
3
(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.
(h) HIGHEST ANNUAL COMPENSATION. The Executive's "Highest Annual
Compensation" for purposes of this Agreement shall be deemed to mean the
highest level of compensation paid to the Executive by the Employers or any
subsidiary thereof during the most recent three taxable years preceding the
Date of Termination, including Base Salary (as defined in Section 1(a) hereof)
and bonuses paid to the Executive but excluding amounts relating to the vesting
of Management Recognition Plan shares.
(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.
(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.
<PAGE> 4
4
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 effective 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 effective
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 effective 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.
(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
<PAGE> 5
5
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 and other than 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.
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.
<PAGE> 6
6
(b) The Executive's employment and his status as an officer of the
Corporation shall terminate (i) immediately upon being given a Notice of
Termination for Cause, or (ii) on the Date of Termination for any other reason.
A Notice of Termination for other than Cause shall not affect the Executive's
right to compensation to the Date of Termination or for such other period of
time after the Date of Termination as specified in Section 5(c)(i) and (ii)
hereof, if applicable.
(c)(i) In the event that the Executive's employment is terminated by
the Corporation for other than Cause, Disability, Retirement or the Executive's
death, or such employment is terminated by the Executive due to a material
breach of this Agreement by the Corporation which has not been cured within
fifteen (15) days after a written notice of non-compliance has been given by
the Executive to the Corporation, and as of the Executive's Date of Termination
no Change in Control of the Corporation has occurred and no written agreement
which contemplates a Change in Control of the Corporation and which still is in
effect has been entered into by the Corporation and/or the Bank, then the
Corporation shall, subject to the provisions of Section 6 hereof, if
applicable:
(A) pay to the Executive, in twenty-four (24)
equal monthly installments beginning with
the first business day of the month
following the Date of Termination, a cash
severance amount equal to two (2) times
that portion of the Executive's Base Salary
paid by the Corporation as of his Date of
Termination, and
(B) maintain and provide for a period ending at
the earlier of (i) the expiration of
twenty-four (24) months from the
Executive's Date of Termination or (ii) the
date of the Executive's full-time
employment by another employer (provided
that the Executive is entitled under the
terms of such employment to benefits
substantially similar to those described in
this subparagraph (B)), at no cost to the
Executive, the Executive's continued
participation in all group insurance
(other than disability insurance unless the
Executive was disabled and was receiving
disability insurance benefits prior to the
Date of Termination and other than 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 and other than
defined contribution plans of the
Employers).
(ii) In the event that the Executive's employment is terminated by
the Corporation for other than Cause, Disability, Retirement or the Executive's
death, or such employment is terminated by the Executive due to a material
breach of this Agreement by the Corporation which has not been cured within
fifteen (15) days after a written notice of non-compliance has been given by
the
<PAGE> 7
7
Executive to the Corporation or for Good Reason, and prior to the Executive's
Date of Termination there has been a Change in Control of the Corporation or a
written agreement which contemplates a Change in Control of the Corporation and
which still is in effect has been entered into by the Corporation and/or the
Bank, then the Corporation 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 Highest 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)), 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 and other
than 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 and
other than defined contribution plans of
the Employers).
(d) In the event that (i) the Executive's employment is terminated
by the Corporation for Cause or (ii) the Executive terminates his employment
hereunder for any reason other than Disability, Retirement, death or pursuant
to Section 5(c) hereof, the Executive shall have no right pursuant to this
Agreement to compensation or other benefits for any period after the applicable
Date of Termination.
(e) 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.
<PAGE> 8
8
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 of even date ("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 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:
GUP = Tax Rate
----------
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
<PAGE> 9
9
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 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) Unless the Executive's employment is terminated for
Disability, Retirement, death or pursuant to Section 5(c)(ii) hereof, the
executive shall be required to mitigate the amount of any payments and benefits
hereunder by seeking other employment or otherwise. In the event that the
Executive obtains other employment during the period that the Executive is
receiving payments pursuant to Section 5(c)(i)(A) hereof, the cash amounts to
be paid to the Executive pursuant thereto shall be reduced by any cash
compensation received by the Executive as a result of employment by another
employer after the Date of Termination.
(b) The specific arrangements referred to herein are not intended
to exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employers pursuant to employee benefit plans
of the Employers or otherwise, provided, however that any cash compensation the
Executive receives from sources other than the Employers shall serve to reduce
the cash amount to be paid to the Executive pursuant to Section 5(c)(i)(A)
hereof.
<PAGE> 10
10
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: 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.
<PAGE> 11
11
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> 12
12
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 prior
Agreements between the Employers and the Executive dated January 1, 1997 and
December 9, 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> 13
13
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
<TABLE>
<S> <C>
Attest: COMMONWEALTH BANCORP, INC.
/s/ Charles H. Meacham By: /s/Joseph E. Colen, Jr.
- --------------------------------- ----------------------------------
Charles H. Meacham, Chairman Joseph E. Colen, Jr., Director
of the Board and Member of the Compensation
and Benefits Committee of the
Board of Directors
Witness: EXECUTIVE
/s/ Charles H. Meacham By: /s/Patrick J. Ward
- --------------------------------- ----------------------------------
Charles H. Meacham Patrick J. Ward
</TABLE>
<PAGE> 14
AMENDED AGREEMENT
AMENDED AGREEMENT, dated this 20th day of October 1998 and
retroactively effective to December 9, 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 December 9, 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) 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.
(b) 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.
(c) 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
<PAGE> 15
2
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.
(d) CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) DATE OF TERMINATION. "Date of Termination" shall mean the date
the Executive's employment is terminated for
(f) DISABILITY. Termination by the Bank of the Executive's
employment based on "Disability" shall mean termination 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.
(g) GOOD REASON. Termination by the Executive of the Executive's
employment for "Good Reason" shall mean 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 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;
<PAGE> 16
3
(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.
(h) HIGHEST ANNUAL COMPENSATION. The Executive's "Highest Annual
Compensation" for purposes of this Agreement shall be deemed to mean the
highest level of compensation paid to the Executive by the Employer or any
subsidiary thereof during the most recent three taxable years preceding the
Date of Termination, including Base Salary (as defined in Section 1(a) hereof)
and bonuses paid to the Executive but excluding amounts relating to the vesting
of Management Recognition Plan shares.
(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.
(l) GENDER NEUTRAL PRONOUN USAGE. The use of the masculine pronoun
shall be deemed to include the feminine pronoun throughout this Agreement.
<PAGE> 17
4
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 effective 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 effective 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
effective 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 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
<PAGE> 18
5
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 and other than 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.
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.
<PAGE> 19
6
(b) The Executive's employment and his status as an officer of the
Bank shall terminate (i) immediately upon being given a Notice of Termination
for Cause, or (ii) on the Date of Termination for any other reason. A Notice of
Termination for other than Cause shall not affect the Executive's right to
compensation to the Date of Termination or for such other period of time after
the Date of Termination as specified in Section 5(c)(i) and (ii) hereof, if
applicable.
(c)(i) In the event that the Executive's employment is terminated by
the Bank for other than Cause, Disability, Retirement or the Executive's death,
or such employment is terminated by the Executive due to a material breach of
this Agreement by the Bank which has not been cured within fifteen (15) days
after a written notice of non-compliance has been given by the Executive to the
Bank, and as of the Executive's Date of Termination no Change in Control of the
Corporation has occurred and no written agreement which contemplates a Change
in Control of the Corporation and which still is in effect has been entered
into by the Corporation and/or the Bank, then the Bank shall, subject to the
provisions of Section 6 hereof, if applicable:
(A) pay to the Executive, in twenty-four (24)
equal monthly installments beginning with
the first business day of the month
following the Date of Termination, a cash
severance amount equal to two (2) times
that portion of the Executive's Base Salary
paid by the Bank as of his Date of
Termination, and
(B) maintain and provide for a period ending at
the earlier of (i) the expiration of
twenty-four (24) months from the
Executive's Date of Termination of (ii) the
date of the Executive's full-time
employment by another employer (provided
that the Executive is entitled under the
terms of such employment to benefits
substantially similar to those described in
this subparagraph (B)), at no cost to the
Executive, the Executive's continued
participation in all group insurance
(other than disability insurance unless the
Executive was disabled and was receiving
disability insurance benefits prior to the
Date of Termination and other than 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 of the Employers and other than
defined contribution plans of the
Employers).
(ii) In the event that the Executive's employment is terminated by the
Bank for other than Cause, Disability, Retirement or the Executive's death, or
such employment is terminated by the Executive due to a material breach of this
Agreement by the Bank which has not been cured within fifteen (15) days after a
written notice of non-compliance has been given by the Executive to the
<PAGE> 20
7
Bank or for Good Reason, and prior to the Executive's Date of Termination there
has been a Change in Control of the Corporation or a written agreement which
contemplates a Change in Control of the
Corporation and which still is in effect has been entered into by the
Corporation and/or the Bank, 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 Highest Annual Compensation
paid by the Bank, and
(B) maintain and provide for a period ending at
the earlier of (i) the expiration of
thirty-six (36) months from the Executive's
Date of Termination or (ii) the date of the
Executive's full-time employment by another
employer (provided that the Executive is
entitled under the terms of such employment
to benefits substantially similar to those
described in this subparagraph (B)), at no
cost to the Executive, the Executive's
continued participation in all group
insurance (other than disability insurance
unless the Executive was disabled and was
receiving disability insurance benefits
prior to the Date of Termination and other
than 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 of the Employers and
other than defined contribution plans of
the Employers).
(d) In the event that (i) the Executive's employment is terminated
by the Bank for Cause or (ii) the Executive terminates his employment hereunder
for any reason other than Disability, Retirement, death or pursuant to Section
5(c) hereof, the Executive shall have no right pursuant to this Agreement to
compensation or other benefits for any period after the applicable Date of
Termination.
(e) 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.
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
<PAGE> 21
8
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) Unless the Executive's employment is terminated for
Disability, Retirement, death or pursuant to Section 5(c)(ii) hereof, the
Executive shall be required to mitigate the amount of any payments and benefits
hereunder by seeking other employment or otherwise. In the event that the
Executive obtains other employment during the period that the Executive is
receiving payments pursuant to Section 5(c)(i)(A) hereof, the cash amounts to
be paid to the Executive pursuant thereto shall be reduced by any cash
compensation received by the Executive as a result of employment by another
employer after the Date of Termination.
(b) The specific arrangements referred to herein are not intended
to exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employers pursuant to employee benefit plans
of the Employers or otherwise, provided, however, that any cash compensation
the Executive receives from sources other than the Employers shall serve to
reduce the cash amount to be paid to the Executive pursuant to Section
5(c)(i)(A) hereof.
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
<PAGE> 22
9
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 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);
<PAGE> 23
10
(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, 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.
<PAGE> 24
11
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.
(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,
<PAGE> 25
12
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 prior
Agreements between the Employers and the Executive dated January 1, 1997 and
December 9, 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.
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
Attest: COMMONWEALTH BANK
<TABLE>
<S> <C>
/s/ Charles H. Meacham By: /s/Joseph E. Colen, Jr.
- ------------------------------ ------------------------------------
Charles H. Meacham, Chairman Joseph E. Colen, Jr., Director and
of the Board Member of the Compensation and
Benefits Committee of the Board
of Directors
Witness: EXECUTIVE
/s/Charles H. Meacham By: /s/Patrick J. Ward
- ------------------------------ ------------------------------------
Charles H. Meacham Patrick J. Ward
</TABLE>
<PAGE> 1
Exhibit 10.10
AMENDED AGREEMENT
AMENDED AGREEMENT, dated this 20th day of October 1998 and
retroactively effective to December 9, 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 December 9, 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) 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.
(b) 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.
<PAGE> 2
2
(c) 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.
(d) CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) 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.
(f) 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.
(g) 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 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;
<PAGE> 3
3
(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.
(h) HIGHEST ANNUAL COMPENSATION. The Executive's "Highest Annual
Compensation" for purposes of this Agreement shall be deemed to mean the
highest level of compensation paid to the Executive by the Employers or any
subsidiary thereof during the most recent three taxable years preceding the
Date of Termination, including Base Salary (as defined in Section 1(a) hereof)
and bonuses paid to the Executive but excluding amounts relating to the vesting
of Management Recognition Plan shares.
(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.
(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.
<PAGE> 4
4
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 effective 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 effective
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 effective 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.
(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
<PAGE> 5
5
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 and other than 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.
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.
<PAGE> 6
6
(b) The Executive's employment and his status as an officer of the
Corporation shall terminate (i) immediately upon being given a Notice of
Termination for Cause, or (ii) on the Date of Termination for any other reason.
A Notice of Termination for other than Cause shall not affect the Executive's
right to compensation to the Date of Termination or for such other period of
time after the Date of Termination as specified in Section 5(c)(i) and (ii)
hereof, if applicable.
(c)(i) In the event that the Executive's employment is terminated by
the Corporation for other than Cause, Disability, Retirement or the Executive's
death, or such employment is terminated by the Executive due to a material
breach of this Agreement by the Corporation which has not been cured within
fifteen (15) days after a written notice of non-compliance has been given by
the Executive to the Corporation, and as of the Executive's Date of Termination
no Change in Control of the Corporation has occurred and no written agreement
which contemplates a Change in Control of the Corporation and which still is in
effect has been entered into by the Corporation and/or the Bank, then the
Corporation shall, subject to the provisions of Section 6 hereof, if
applicable:
(A) pay to the Executive, in twelve (12) equal monthly
installments beginning with the first business day
of the month following the Date of Termination, a
cash severance amount equal to one (1) times that
portion of the Executive's Base Salary paid by the
Corporation as of his Date of Termination, and
(B) maintain and provide for a period ending at the
earlier of (i) the expiration of twelve (12)
months from the Executive's Date of Termination or
(ii) the date of the Executive's full-time
employment by another employer (provided that the
Executive is entitled under the terms of such
employment to benefits substantially similar to
those described in this subparagraph (B)), at no
cost to the Executive, the Executive's continued
participation in all group insurance (other than
disability insurance unless the Executive was
disabled and was receiving disability insurance
benefits prior to the Date of Termination and
other than 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 and other than defined contribution
plans of the Employers).
(ii) In the event that the Executive's employment is terminated by the
Corporation for other than Cause, Disability, Retirement or the Executive's
death, or such employment is terminated by the Executive due to a material
breach of this Agreement by the Corporation which has not been cured within
fifteen (15) days after a written notice of non-compliance has been given by
the
<PAGE> 7
7
Executive to the Corporation or for Good Reason, and prior to the Executive's
Date of Termination there has been a Change in Control of the Corporation or a
written agreement which contemplates a Change in Control of the Corporation and
which still is in effect has been entered into by the Corporation and/or the
Bank, then the Corporation 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 two (2) times that
portion of the Executive's Highest 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)), 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 and
other than 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 and other than defined contribution
plans of the Employers).
(d) In the event that (i) the Executive's employment is terminated
by the Corporation for Cause or (ii) the Executive terminates his employment
hereunder for any reason other than Disability, Retirement, death or pursuant
to Section 5(c) hereof, the Executive shall have no right pursuant to this
Agreement to compensation or other benefits for any period after the applicable
Date of Termination.
(e) 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.
<PAGE> 8
8
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 of even date),
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) Unless the Executive employment is terminated for Disability,
Retirement, death or pursuant to Section 5(c)(ii) hereof, the Executive shall
be required to mitigate the amount of any payments and benefits hereunder by
seeking other employment or otherwise. In the event that the Executive obtains
other employment during the period that the Executive is receiving payments
pursuant to Section 5(c)(i)(A) hereof, the cash amounts to be paid to the
Executive pursuant thereto shall be reduced by any cash compensation received
by the Executive as a result of employment by another employer after the Date
of Termination.
(b) The specific arrangements referred to herein are not intended
to exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employers pursuant to employee benefit plans
of the Employers or otherwise, provided, however, that any cash compensation
the Executive receives from sources other than the Employers shall serve to
reduce the cash amount to be paid to the Executive pursuant to Section
5(c)(i)(A) hereof.
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
<PAGE> 9
9
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.
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:
<PAGE> 10
10
(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.
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.
<PAGE> 11
11
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 prior
Agreements between the Employers and the Executive dated January 1, 1997 and
December 9, 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> 12
12
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
Attest: COMMONWEALTH BANCORP, INC.
<TABLE>
<S> <C>
/s/ Patrick J. Ward Jr. By: /s/ Joseph E. Colen,
- ------------------------------ --------------------------------
Patrick J. Ward, President Joseph E. Colen, Jr., Director
and Secretary and Member of the Compensation
and Benefits Committee of the
Board of Directors
Witness: EXECUTIVE
/s/ Patrick J. Ward By: /s/Charles M. Johnston
- ------------------------------ --------------------------------
Patrick J. Ward Charles M. Johnston
</TABLE>
<PAGE> 13
AMENDED AGREEMENT
AMENDED AGREEMENT, dated this 20th day of October 1998 and
retroactively effective to December 9, 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 December 9, 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) 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.
(b) 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.
(c) 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
<PAGE> 14
2
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.
(d) CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) 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.
(f) 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.
(g) 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 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;
<PAGE> 15
3
(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.
(h) HIGHEST ANNUAL COMPENSATION. The Executive's "Highest Annual
Compensation" for purposes of this Agreement shall be deemed to mean the
highest level of compensation paid to the Executive by the Employers or any
subsidiary thereof during the most recent three taxable years preceding the
Date of Termination, including Base Salary (as defined in Section 1(a) hereof)
and bonuses paid to the Executive but excluding amounts relating to the vesting
of Management Recognition Plan shares.
(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.
(l) GENDER NEUTRAL PRONOUN USAGE. The use of the masculine pronoun
shall be deemed to include the feminine pronoun throughout this Agreement.
<PAGE> 16
4
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 effective 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 effective 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 effective 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 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
<PAGE> 17
5
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 and other than 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.
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.
<PAGE> 18
6
(b) The Executive's employment and his status as an officer of the
Bank shall terminate (i) immediately upon being given a Notice of Termination
for Cause, or (ii) on the Date of Termination for any other reason. A Notice of
Termination for other than Cause shall not affect the Executive's right to
compensation to the Date of Termination or for such other period of time after
the Date of Termination as specified in Section 5(c)(i) and (ii) hereof, if
applicable.
(c)(i) In the event that the Executive's employment is terminated by
the Bank for other than Cause, Disability, Retirement or the Executive's death,
or such employment is terminated by the Executive due to a material breach of
this Agreement by the Bank which has not been cured within fifteen (15) days
after a written notice of non-compliance has been given by the Executive to the
Bank, and as of the Executive's Date of Termination no Change in Control of the
Corporation has occurred and no written agreement which contemplates a Change
in Control of the Corporation and which still is in effect has been entered
into by the Corporation and/or the Bank, then the Bank shall, subject to the
provisions of Section 6 hereof, if applicable:
(A) pay to the Executive, in twelve (12) equal monthly
installments beginning with the first business day of
the month following the Date of Termination, a cash
severance amount equal to one (1) times that portion of
the Executive's Base Salary paid by the Bank as of his
Date of Termination, and
(B) maintain and provide for a period ending at the earlier
of (i) the expiration of twelve (12) months from the
Executive's Date of Termination or (ii) the date of the
Executive's full-time employment by another employer
(provided that the Executive is entitled under the
terms of such employment to benefits substantially
similar to those described in this subparagraph (B)),
at no cost to the Executive, the Executive's continued
participation in all group insurance (other than
disability insurance unless the Executive was disabled
and was receiving disability insurance benefits prior
to the Date of Termination and other than 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 of the Employers
and other than defined contribution plans of the
Employers).
(ii) In the event that the Executive's employment is terminated by
the Bank for other than Cause, Disability, Retirement or the Executive's death,
or such employment is terminated by the Executive due to a material breach of
this Agreement by the Bank which has not been cured within fifteen (15) days
after a written notice of non-compliance has been given by the Executive to the
Bank or for Good Reason, and prior to the Executive's Date of Termination there
has been a Change
<PAGE> 19
7
in Control of the Corporation or a written agreement which contemplates a
Change in Control of the Corporation and which still is in effect has been
entered into by the Corporation and/or the Bank, 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 two (2) times that portion of the
Executive's Highest Annual Compensation paid by the
Bank, and
(B) maintain and provide for a period ending at the earlier
of (i) the expiration of twenty four (24) months from
the Executive's Date of Termination or (ii) the date of
the Executive's full-time employment by another
employer (provided that the Executive is entitled under
the terms of such employment to benefits substantially
similar to those described in this subparagraph (B)),
at no cost to the Executive, the Executive's continued
participation in all group insurance (other than
disability insurance unless the Executive was disabled
and was receiving disability insurance benefits prior
to the Date of Termination and other than 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 of the Employers
and other than defined contribution plans of the
Employers).
(d) In the event that (i) the Executive's employment is terminated
by the Bank for Cause or (ii) the Executive terminates his employment hereunder
for any reason other than Disability, Retirement, death or pursuant to Section
5(c) hereof, the Executive shall have no right pursuant to this Agreement to
compensation or other benefits for any period after the applicable Date of
Termination.
(e) 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.
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
<PAGE> 20
8
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) Unless the Executive's employment is terminated for Disability,
Retirement, death or pursuant to Section 5(c)(ii) hereof, the Executive shall
be required to mitigate the amount of any payments and benefits hereunder by
seeking other employment or otherwise. In the event that the Executive obtains
other employment during the period that the Executive is receiving payments
pursuant to Section 5(c)(i)(A) hereof, the cash amounts to be paid to the
Executive pursuant thereto shall be reduced by any cash compensation received
by the Executive as a result of employment by another employer after the Date
of Termination.
(b) The specific arrangements referred to herein are not intended to
exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employers pursuant to employee benefit plans
of the Employers or otherwise, provided, however, that any cash compensation
the Executive receives from sources other than the Employers shall serve to
reduce the cash amount to be paid to the Executive pursuant to Section
5(c)(i)(A) hereof.
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
<PAGE> 21
9
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.
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);
<PAGE> 22
10
(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, 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.
<PAGE> 23
11
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.
(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,
<PAGE> 24
12
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 prior Agreements
between the Employers and the Executive dated January 1, 1997 and December 9,
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> 25
13
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
<TABLE>
<S> <C>
Attest: COMMONWEALTH BANK
/s/ Patrick J. Ward By: /s/ Joseph E. Colen, Jr.
- ---------------------------------- ------------------------------
Patrick J. Ward, President and Joseph E. Colen, Jr., Director and
Secretary Member of the Compensation and
Benefits Committee of the Board
of Directors
Witness: EXECUTIVE
/s/ Patrick J. Ward By: /s/ Charles M. Johnston
- ---------------------------------- -------------------------------
Patrick J. Ward Charles M. Johnston
</TABLE>
<PAGE> 1
Exhibit 10.11
AMENDED AGREEMENT
AMENDED AGREEMENT, dated this 20th day of October 1998 and retroactively
effective to December 9, 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 December 9, 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) 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.
(b) 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.
(c) 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
<PAGE> 2
2
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.
(d) CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) 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.
(f) 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.
(g) 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;
(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
<PAGE> 3
3
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.
(h) HIGHEST ANNUAL COMPENSATION. The Executive's "Highest Annual
Compensation" for purposes of this Agreement shall be deemed to mean the
highest level of compensation paid to the Executive by the Employer or any
subsidiary thereof during the most recent three taxable years preceding the
Date of Termination, including Base Salary (as defined in Section 1(a) hereof)
and bonuses paid to the Executive but excluding amounts relating to the vesting
of Management Recognition Plan shares.
(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.
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
<PAGE> 4
4
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
effective 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 effective 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 effective 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 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.
<PAGE> 5
5
(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 and other than 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.
(b) The Executive's employment and his status as an officer of
the Bank shall terminate (i) immediately upon being given a Notice of
Termination for Cause, or (ii) on the Date of Termination for any other reason.
A Notice of Termination for other than Cause shall not affect the Executive's
right to compensation to the Date of Termination or for such other period of
time after the Date of Termination as specified in Section 5(c)(i) and (ii)
hereof, if applicable.
<PAGE> 6
6
(c)(i) In the event that the Executive's employment is terminated by
the Bank for other than Cause, Disability, Retirement or the Executive's death,
or such employment is terminated by the Executive due to a material breach of
this Agreement by the Bank which has not been cured within fifteen (15) days
after a written notice of non-compliance has been given by the Executive to the
Bank, and as of the Executive's Date of Termination no Change in Control of the
Corporation has occurred and no written agreement which contemplates a Change
in Control of the Corporation and which still is in effect has been entered
into by the Corporation and/or the Bank, then the Bank shall, subject to the
provisions of Section 6 hereof, if applicable:
(A) pay to the Executive, in twelve (12) equal monthly
installments beginning with the first business day of
the month following the Date of Termination, a cash
severance amount equal to one (1) times the Executive's
Base Salary as of his Date of Termination, and
(B) maintain and provide for a period ending at the earlier
of (i) the expiration of twelve (12) months from the
Executive's Date of Termination or (ii) the date of the
Executive's full-time employment by another employer
(provided that the Executive is entitled under the
terms of such employment to benefits substantially
similar to those described in this subparagraph (B)),
at no cost to the Executive, the Executive's continued
participation in all group insurance (other than
disability insurance unless the Executive was disabled
and was receiving disability insurance benefits prior
to the Date of Termination and other than 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 of the Employer
and other than defined contribution plans of the
Employer).
(ii) In the event that the Executive's employment is terminated by the Bank
for other than CausDisability, Retirement or the Executive's death, or such
employment is termiby the Executive due to a material breach of this Agreement
by the Bank which has not been cured within fifteen (15) days after a written
notice of non-compliance has been given by the Executive to the Bank or for
Good Reason, and prior to the Executive's Date of Termination there has been a
Change in Control of the Corporation or a written agreement which contemplates
a Change in Control of the Corporation and which still is in effect has been
entered into by the Corporation and/or the Bank, 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 two (2) times the Executive's Highest
Annual Compensation, and
<PAGE> 7
7
(B) maintain and provide for a period ending at the earlier
of (i) the expiration of twenty four (24) months from
the Executive's Date of Termination or (ii) the date of
the Executive's full-time employment by another
employer (provided that the Executive is entitled under
the terms of such employment to benefits substantially
similar to those described in this subparagraph (B)),
at no cost to the Executive, the Executive's continued
participation in all group insurance (other than
disability insurance unless the Executive was disabled
and was receiving disability insurance benefits prior
to the Date of Termination and other than 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 of the Employer
and other than defined contribution plans of the
Employer).
(d) In the event that (i) the Executive's employment is terminated
by the Bank for Cause or (ii) the Executive terminates his employment hereunder
for any reason other than Disability, Retirement, death or pursuant to Section
5(c) hereof, the Executive shall have no right pursuant to this Agreement to
compensation or other benefits for any period after the applicable Date of
Termination.
(e) 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.
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
<PAGE> 8
8
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) Unless the Executive's employment is terminated for
Disability, Retirement, death or pursuant to Section 5(c)(ii) hereof, the
Executive shall be required to mitigate the amount of any payments and benefits
hereunder by seeking other employment or otherwise. In the event that the
Executive obtains other employment during the period that the Executive is
receiving payments pursuant to Section 5(c)(i)(A) hereof, the cash amounts to
be paid to the Executive pursuant thereto shall be reduced by any cash
compensation received by the Executive as a result of employment by another
employer after the Date of Termination.
(b) The specific arrangements referred to herein are not intended
to exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employer pursuant to employee benefit plans
of the Employer or otherwise, provided, however, that any cash compensation the
Executive receives from sources other than the Employer shall serve to reduce
the cash amount to be paid to the Executive pursuant to Section 5(c)(i)(A)
hereof.
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.
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> 9
9
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 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.;
<PAGE> 10
10
(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.
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
<PAGE> 11
11
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> 12
12
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 prior Agreements
between the Employer and the Executive dated January 1, 1997 and December 9,
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.
<TABLE>
<S> <C>
Attest: COMMONWEALTH BANK
/s/ Patrick J. Ward By: /s/ Joseph E. Colen
- ---------------------------------------- ----------------------------------------
Patrick J. Ward, President and Secretary Joseph E. Colen, Jr., Director and
Member of the Compensation and
Benefits Committee of the Board
of Directors
Witness: EXECUTIVE
/s/ Patrick J. Ward By: /s/ William J. Monnich
- ---------------------------------------- ----------------------------------------
Patrick J. Ward William J. Monnich
</TABLE>
<PAGE> 1
Exhibit 10.12
AMENDED AGREEMENT
AMENDED AGREEMENT, dated this 20th day of October 1998 and
retroactively effective to December 9, 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 December 9, 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) 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.
(b) 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.
(c) 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
<PAGE> 2
2
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.
(d) CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) 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.
(f) 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.
(g) 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;
(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
<PAGE> 3
3
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.
(h) HIGHEST ANNUAL COMPENSATION. The Executive's "Highest Annual
Compensation" for purposes of this Agreement shall be deemed to mean the
highest level of compensation paid to the Executive by the Employer or any
subsidiary thereof during the most recent three taxable years preceding the
Date of Termination, including Base Salary (as defined in Section 1(a) hereof)
and bonuses paid to the Executive but excluding amounts relating to the vesting
of Management Recognition Plan shares.
(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.
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
<PAGE> 4
4
this Agreement shall be for three years, commencing on the effective 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 effective 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
effective 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 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
<PAGE> 5
5
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 and other than 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.
(b) The Executive's employment and his status as an officer of the
Bank shall terminate (i) immediately upon being given a Notice of Termination
for Cause, or (ii) on the Date of Termination for any other reason. A Notice of
Termination for other than Cause shall not affect the Executive's right to
compensation to the Date of Termination or for such other period of time after
the Date of Termination as specified in Section 5(c)(i) and (ii) hereof, if
applicable.
(c)(i) In the event that the Executive's employment is terminated by
the Bank for other than Cause, Disability, Retirement or the Executive's death,
or such employment is terminated by the Executive due to a material breach of
this Agreement by the Bank which has not been cured within fifteen (15) days
after a written notice of non-compliance has been given by the Executive to the
<PAGE> 6
6
Bank, and as of the Executive's Date of Termination no Change in Control of the
Corporation has occurred and no written agreement which contemplates a Change
in Control of the Corporation and which still is in effect has been entered
into by the Corporation and/or the Bank, then the Bank shall, subject to the
provisions of Section 6 hereof, if applicable:
(A) pay to the Executive, in twelve (12) equal monthly
installments beginning with the first business day
of the month following the Date of Termination, a
cash severance amount equal to one (1) times the
Executive's Base Salary as of his Date of
Termination, and
(B) maintain and provide the expiration of twelve (12)
months from the Executive's Date of Termination or
(ii) the date of the Executive's full-time
employment by another employer (provided that the
Executive is entitled under the terms of such
employment to benefits substantially similar to
those described in this subparagraph (B)), at no
cost to the Executive, the Executive's continued
participation in all group insurance (other than
disability insurance unless the Executive was
disabled and was receiving disability insurance
benefits prior to the Date of Termination and
other than 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 of the Employer and
other than defined contribution plans of the
Employer).
(ii) In the event that the Executive's employment is terminated by
the Bank for other than Cause, Disability, Retirement or the Executive's death,
or such employment is terminated by the Executive due to a material breach of
this Agreement by the Bank which has not been cured within fifteen (15) days
after a written notice of non-compliance has been given by the Executive to the
Bank or for Good Reason, and prior to the Executive's Date of Termination there
has been a Change in Control of the Corporation or a written agreement which
contemplates a Change in Control of the Corporation and which still is in
effect has been entered into by the Corporation and/or the Bank, 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 two (2) times the
Executive's Highest Annual Compensation paid by the
Bank, 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
<PAGE> 7
7
by another employer (provided that the Executive is
entitled under the terms of such employment to
benefits substantially similar to those described
in this subparagraph (B)), at no cost to the
Executive, the Executive's continued participation
in all group insurance (other than disability
insurance unless the Executive was disabled and was
receiving disability insurance benefits prior to
the Date of Termination and other than 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 of the Employer and other than defined
contribution plans of the Employer).
(d) In the event that (i) the Executive's employment is terminated
by the Bank for Cause or (ii) the Executive terminates his employment hereunder
for any reason other than Disability, Retirement, death or pursuant to Section
5(c) hereof, the Executive shall have no right pursuant to this Agreement to
compensation or other benefits for any period after the applicable Date of
Termination.
(e) 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.
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.
<PAGE> 8
8
7. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) Unless the Executive's employment is terminated for
Disability, Retirement, death or pursuant to Section 5(c)(ii) hereof, the
Executive shall be required to mitigate the amount of any payments and benefits
hereunder by seeking other employment or otherwise. In the event that the
Executive obtains other employment during the period that the Executive is
receiving payments pursuant to Section 5(c)(i)(A) hereof, the cash amounts to
be paid to the Executive pursuant thereto shall be reduced by any cash
compensation received by the Executive as a result of employment by another
employer after the Date of Termination.
(b) The specific arrangements referred to herein are not intended
to exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employer pursuant to employee benefit plans
of the Employer or otherwise, provided, however, that any cash compensation the
Executive receives from sources other than the Employer shall serve to reduce
the cash amount to be paid to the Executive pursuant to Section 5(c)(i)(A)
hereof.
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.
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
<PAGE> 9
9
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. 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
<PAGE> 10
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(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.
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
<PAGE> 11
11
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.
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 prior Agreements
between the Employer and the Executive dated January 1, 1997 and December 9,
1997, are hereby superseded and shall have no force or effect.
<PAGE> 12
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IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
Attest: COMMONWEALTH BANK
/s/ Patrick J. Ward By: /s/ Joseph E. Colen,Jr.
- ---------------------------------------- ------------------------------
Patrick J. Ward, President and Secretary Joseph E. Colen, Jr.,
Director and Member of the
Compensation and Benefits
Committee of the Board of Directors
Witness: EXECUTIVE
/s/ Patrick J. Ward By: /s/ Peter A. Kehoe
- --------------------------------------- ------------------------------
Patrick J. Ward Peter A. Kehoe
<PAGE> 1
Exhibit 10.13
AMENDED AGREEMENT
AMENDED AGREEMENT, dated this 20th day of October 1998 and
retroactively effective to December 9, 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 December 9, 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) 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.
(b) 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.
(c) 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
<PAGE> 2
2
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.
(d) CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) 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.
(f) 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.
(g) 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;
(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
<PAGE> 3
3
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.
(h) HIGHEST ANNUAL COMPENSATION. The Executive's "Highest Annual
Compensation" for purposes of this Agreement shall be deemed to mean the
highest level of compensation paid to the Executive by the Employer or any
subsidiary thereof during the most recent three taxable years preceding the
Date of Termination, including Base Salary (as defined in Section 1(a) hereof)
and bonuses paid to the Executive but excluding amounts relating to the vesting
of Management Recognition Plan shares.
(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.
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
<PAGE> 4
4
Agreement shall be for three years, commencing on the effective 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 effective 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
effective 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 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
<PAGE> 5
5
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 and other than 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.
(b) The Executive's employment and his status as an officer of
the Bank shall terminate (i) immediately upon being given a Notice of
Termination for Cause, or (ii) on the Date of Termination for any other reason.
A Notice of Termination for other than Cause shall not affect the Executive's
right to compensation to the Date of Termination or for such other period of
time after the Date of Termination as specified in Section 5(c)(i) and (ii)
hereof, if applicable.
(c)(i) In the event that the Executive's employment is terminated by
the Bank for other than Cause, Disability, Retirement or the Executive's death,
or such employment is terminated by the Executive due to a material breach of
this Agreement by the Bank which has not been cured within fifteen (15) days
after a written notice of non-compliance has been given by the Executive to the
<PAGE> 6
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Bank, and as of the Executive's Date of Termination no Change in Control of the
Corporation has occurred and no written agreement which contemplates a Change
in Control of the Corporation and which still is in effect has been entered
into by the Corporation and/or the Bank, then the Bank shall, subject to the
provisions of Section 6 hereof, if applicable:
(A) pay to the Executive, in twelve (12) equal
monthly installments beginning with the first
business day of the month following the Date of
Termination, a cash severance amount equal to
one (1) times the Executive's Base Salary as of
his Date of Termination, and
(B) maintain and provide for a period ending at the
earlier of (i) the expiration of twelve (12)
months from the Executive's Date of Termination
or (ii) the date of the Executive's full-time
employment by another employer (provided that
the Executive is entitled under the terms of
such employment to benefits substantially
similar to those described in this subparagraph
(B)), at no cost to the Executive, the
Executive's continued participation in all
group insurance (other than disability
insurance unless the Executive was disabled and
was receiving disability insurance benefits
prior to the Date of Termination and other than
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 of the
Employer and other than defined contribution
plans of the Employer).
(ii) In the event that the Executive's employment is terminated by
the Bank for other than Cause, Disability, Retirement or the Executive's death,
or such employment is terminated by the Executive due to a material breach of
this Agreement by the Bank which has not been cured within fifteen (15) days
after a written notice of non-compliance has been given by the Executive to the
Bank or for Good Reason, and prior to the Executive's Date of Termination there
has been a Change in Control of the Corporation or a written agreement which
contemplates a Change in Control of the Corporation and which still is in
effect has been entered into by the Corporation and/or the Bank, 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 two (2) times
the Executive's Highest Annual Compensation
paid by the Bank, 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
<PAGE> 7
7
by another employer (provided that the
Executive is entitled under the terms of such
employment to benefits substantially similar to
those described in this subparagraph (B)), at
no cost to the Executive, the Executive's
continued participation in all group insurance
(other than disability insurance unless the
Executive was disabled and was receiving
disability insurance benefits prior to the Date
of Termination and other than 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 of the
Employer and other than defined contribution
plans of the Employer).
(d) In the event that (i) the Executive's employment is terminated
by the Bank for Cause or (ii) the Executive terminates his employment hereunder
for any reason other than Disability, Retirement, death or pursuant to Section
5(c) hererof, the Executive shall have no right pursuant to this Agreement to
compensation or other benefits for any period after the applicable Date of
Termination.
(e) 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.
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.
<PAGE> 8
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7. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) Unless the Executive's employment is terminated for
Disability, Retirement, death or pursuant to Section 5(c)(ii) hereof, the
Executive shall be required to mitigate the amount of any payments and benefits
hereunder by seeking other employment or otherwise. In the event that the
Executive obtains other employment during the period that the Executive is
receiving payments pursuant to Section 5(c)(i)(A) hereof, the cash amounts to
be paid to the Executive pursuant thereto shall be reduced by any cash
compensation received by the Executive as a result of employment by another
employer after the Date of Termination.
(b) The specific arrangements referred to herein are not intended
to exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employer pursuant to employee benefit plans
of the Employer or otherwise, provided, however, that any cash compensation the
Executive receives from sources other than the Employer shall serve to reduce
the cash amount to be paid to the Executive pursuant to Section 5(c)(i)(A)
hereof.
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.
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
<PAGE> 9
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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 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
<PAGE> 10
10
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.
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.
<PAGE> 11
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(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.
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 prior
Agreements between the Employer and the Executive dated January 1, 1997 and
December 9, 1997, are hereby superseded and shall have no force or effect.
<PAGE> 12
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IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
Attest: COMMONWEALTH BANK
/s/ Patrick J. Ward By: /s/ Joseph E. Colen, Jr.
- ---------------------------------------- --------------------------------
Patrick J. Ward, President and Secretary Joseph E. Colen, Jr., Director
and Member of the Compensation
and Benefits Committee of the
Board of Directors
Witness: EXECUTIVE
/s/ Patrick J. Ward By: /s/ David K. Griest
- ---------------------------------------- --------------------------------
Patrick J. Ward David K. Griest
<PAGE> 1
Exhibit 10.14
AMENDED AGREEMENT
AMENDED AGREEMENT, dated this 20th day of October 1998 and
retroactively effective to February 6, 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 the Bank
desires to have this new Agreement supersede its current agreement with the
Executive dated February 6, 1998; 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) 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.
(b) 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.
(c) 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
<PAGE> 2
2
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.
(d) CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) 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.
(f) 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.
(g) 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)
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;
<PAGE> 3
3
(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.
(h) HIGHEST ANNUAL COMPENSATION. The Executive's "Highest Annual
Compensation" for purposes of this Agreement shall be deemed to mean the
highest level of compensation paid to the Executive by the Employer or any
subsidiary thereof during the most recent three taxable years preceding the
Date of Termination, including Base Salary (as defined in Section 1(a) hereof)
and bonuses paid to the Executive but excluding amounts relating to the vesting
of Management Recognition Plan shares.
(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.
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 effective 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 effective date of this Agreement such
that at any time the remaining term of this
<PAGE> 4
4
Agreement shall be from two to three years. Prior to the first annual
anniversary of the effective 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 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
<PAGE> 5
5
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 and other than 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.
(b) The Executive's employment and his status as an officer of the
Bank shall terminate (i) immediately upon being given a Notice of Termination
for Cause, or (ii) on the Date of Termination for any other reason. A Notice of
Termination for other than Cause shall not affect the Executive's right to
compensation to the Date of Termination or for such other period of time after
the Date of Termination as specified in Section 5(c)(i) and (ii) hereof, if
applicable.
(c)(i) In the event that the Executive's employment is terminated by
the Bank for other than Cause, Disability, Retirement or the Executive's death,
or such employment is terminated by the Executive due to a material breach of
this Agreement by the Bank which has not been cured within fifteen (15) days
after a written notice of non-compliance has been given by the Executive to the
Bank, and as of the Executive's Date of Termination no Change in Control of the
Corporation has occurred and no written agreement which contemplates a Change
in Control of the Corporation and
<PAGE> 6
6
which still is in effect has been entered into by the Corporation and/or the
Bank, then the Bank shall, subject to the provisions of Section 6 hereof, if
applicable:
(A) pay to the Executive, in twelve (12) equal
monthly installments beginning with the first
business day of the month following the Date of
Termination, a cash severance amount equal to
one (1) times the Executive's Base Salary as of
his Date of Termination, and
(B) maintain and provide for a period ending at the
earlier of (i) the expiration of twelve (12)
months from the Executive's Date of Termination
or (ii) the date of the Executive's full-time
employment by another employer (provided that
the Executive is entitled under the terms of
such employment to benefits substantially
similar to those described in this subparagraph
(B)), at no cost to the Executive, the
Executive's continued participation in all
group insurance (other than disability
insurance unless the Executive was disabled and
was receiving disability insurance benefits
prior to the Date of Termination and other than
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 of the
Employer and other than defined contribution
plans of the Employer).
(ii) In the event that the Executive's employment is terminated by
the Bank for other than Cause, Disability, Retirement or the Executive's death,
or such employment is terminated by the Executive due to a material breach of
this Agreement by the Bank which has not been cured within fifteen (15) days
after a written notice of non-compliance has been given by the Executive to the
Bank or for Good Reason, and prior to the Executive's Date of Termination there
has been a Change in Control of the Corporation or a written agreement which
contemplates a Change in Control of the Corporation and which still is in
effect has been entered into by the Corporation and/or the Bank, 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 two (2) times
the Executive's Highest Annual Compensation
paid by the Bank, 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
<PAGE> 7
7
described in this subparagraph (B)), at no cost
to the Executive, the Executive's continued
participation in all group insurance (other
than disability insurance unless the Executive
was disabled and was receiving disability
insurance benefits prior to the Date of
Termination and other than 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 of the
Employer and other than defined contribution
plans of the Employer).
(d) In the event that (i) the Executive's employment is terminated
by the Bank for Cause or (ii) the Executive terminates his employment hereunder
for any reason other than Disability, Retirement, death or pursuant to Section
5(c) hereof, the Executive shall have no right pursuant to this Agreement to
compensation or other benefits for any period after the applicable Date of
Termination.
(e) 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.
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.
<PAGE> 8
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7. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) Unless the Executive's employment is terminated for
Disability, Retirement, death or pursuant to Section 5(c)(ii) hereof, the
Executive shall be required to mitigate the amount of any payments and benefits
hereunder by seeking other employment or otherwise. In the event that the
Executive obtains other employment during the period that the Executive is
receiving payments pursuant to Section 5(c)(i)(A) hereof, the cash amounts to
be paid to the Executive pursuant thereto shall be reduced by any cash
compensation received by the Executive as a result of employment by another
employer after the Date of Termination.
(b) The specific arrangements referred to herein are not intended
to exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employer pursuant to employee benefit plans
of the Employer or otherwise, provided, however, that any cash compensation the
Executive receives from sources other than the Employer shall serve to reduce
the cash amount to be paid to the Executive pursuant to Section 5(c)(i)(A)
hereof.
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.
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
<PAGE> 9
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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 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
<PAGE> 10
10
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.
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.
<PAGE> 11
11
(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.
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 February 6, 1998, are hereby
superseded and shall have no force or effect.
<PAGE> 12
12
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
<TABLE>
<CAPTION>
Attest: COMMONWEALTH BANK
<S> <C> <C>
/s/ Patrick J. Ward By: /s/ Joseph E. Colen,Jr.
- ---------------------------------------- ----------------------------------------
Patrick J. Ward, President and Secretary Joseph E. Colen, Jr., Director and
Member of the Compensation and
Benefits Committee of the Board
of Directors
</TABLE>
<TABLE>
<CAPTION>
Witness: EXECUTIVE
<S> <C> <C>
/s/ Patrick J. Ward By: /s/ Brian C. Zwaan
- ---------------------------------------- ----------------------------------------
Patrick J. Ward Brian C. Zwaan
</TABLE>
<PAGE> 1
COMMONWEALTH BANCORP, INC., 2 WEST LAFAYETTE STREET, NORRISTOWN, PA 19401
WWW.COMMONWEALTHBANK.COM
<PAGE> 2
COMMONWEALTH BANCORP, INC.
1998
<PAGE> 3
Table of Contents
- ------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------
Commonwealth Bancorp, Inc., with consolidated assets of $2.3 billion, is the
holding company for Commonwealth Bank, which has 60 branches throughout
southeast Pennsylvania. ComNet Mortgage Services, a division of Commonwealth
Bank, has offices in Pennsylvania, New Jersey, Rhode Island, and Virginia and
operates under the trade name of Homestead Mortgage in Maryland.
<PAGE> 4
SELECTED FINANCIAL HIGHLIGHTS (unaudited)
(dollars in thousands, except per share and ratio data)
<TABLE>
<CAPTION>
============================================================================================================
AT YEAR END 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets $2,257,499 $2,268,595 $2,119,961
- ------------------------------------------------------------------------------------------------------------
Loans receivable, net 1,338,177 1,260,841 1,113,114
- ------------------------------------------------------------------------------------------------------------
Deposit accounts 1,605,299 1,552,824 1,491,450
- ------------------------------------------------------------------------------------------------------------
Shareholders' equity 192,178 214,852 231,924(1)
============================================================================================================
FOR THE YEAR
- ------------------------------------------------------------------------------------------------------------
Net interest income $ 70,650 $ 70,388 $ 60,954
- ------------------------------------------------------------------------------------------------------------
Net income 10,932 16,369 9,338
- ------------------------------------------------------------------------------------------------------------
Diluted earnings per share 0.73 1.02 0.72
- ------------------------------------------------------------------------------------------------------------
Dividends per share 0.32 0.28 0.24(2)
- ------------------------------------------------------------------------------------------------------------
Book value per share at end of period 13.05 13.22 12.92
============================================================================================================
FINANCIAL RATIOS(3)
- ------------------------------------------------------------------------------------------------------------
Total risk-based capital to risk-weighted assets at end of period 11.55% 13.35% 14.17%
- ------------------------------------------------------------------------------------------------------------
Return on assets 0.47 0.73 0.51
- ------------------------------------------------------------------------------------------------------------
Return on equity 5.39 7.56 4.97
- ------------------------------------------------------------------------------------------------------------
Net interest margin 3.27 3.36 3.54
- ------------------------------------------------------------------------------------------------------------
Nonperforming assets to total assets at end of period 0.49 0.42 0.43
- ------------------------------------------------------------------------------------------------------------
Allowance for loan losses to nonperforming loans at end of period 95.78 100.96 123.74
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects the receipt of $89 million of net proceeds from the Company's
second-step conversion in June 1996.
(2) Adjusted to reflect the exchange of 2.0775 shares of Company common stock
for each share of Bank common stock.
(3) 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> 5
LETTER TO SHAREHOLDERS Commonwealth Bancorp, Inc. and Subsidiaries
DEAR SHAREHOLDERS,
CUSTOMERS AND FRIENDS:
As you are probably aware, 1998 was an especially challenging year for the
thrift industry, in general, and Commonwealth Bancorp, Inc., in particular.
Sharp decreases in market interest rates led to significant mortgage
refinancing activity during the year. This resulted in downward pressure on the
valuations of certain mortgage-related assets and on net interest margins, as
mortgages and mortgage-backed securities prepaid and were replaced with
lower-yielding assets.
Reflecting this pressure on earnings, thrift stocks performed poorly and,
unfortunately, Commonwealth common stock was no exception. During 1998, the
price of Commonwealth common stock decreased 22% from $19.88 at the end of 1997
to $15.56 at year-end 1998. Despite the decrease in Commonwealth's stock price
during 1998, the price of Commonwealth common stock, adjusted for the June 1996
exchange of the Bank's common shares relating to the Company's second step
conversion, has increased 224% since its initial public offering price of $4.81
per share in January 1994.
The true test of any Company is how well it executes its business strategy in
challenging times. In this regard, I'm pleased to report a number of positive
accomplishments relating to 1998:
- -Net income was $10.9 million, or $0.73 per share. While these results fell
short of what Commonwealth earned in the prior year, 1998 results represented
one of the best years in Commonwealth's history.
- -We opened four new branches during the year, including three new supermarket
locations. This increased our total number of branches to 60 at year-end,
including 20 supermarket branches.
- -Core deposits, which represent the combination of checking, savings and money
market deposits, increased 16% to $938 million at year-end.
[PHOTO]
CHARLES H. MEACHAM, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
- -Supermarket deposits increased 19% to $129 million at the end of the year.
Just as important, the percentage of supermarket deposits represented by core
deposits improved to 50% at year-end.
- -Consumer loans increased 23% to $240 million at year-end. Much of the growth
in this area was in second mortgage and recreational vehicle loans, where the
Company's credit experience has been excellent.
- -Commercial loans increased 20% to $139 million at the end of the year. Asset
quality in this portfolio remains sound.
- -Mortgage originations increased 90% to $1.1 billion, a new record for
Commonwealth.
Although the above accomplishments were quite significant, they were
overshadowed in 1998 by market events. Nevertheless, we believe they provide
compelling evidence that the strategy of positioning Commonwealth as the local
bank alternative to larger regional and national competitors is working and
will create significant value for shareholders over the long-term.
2
<PAGE> 6
In addition to the execution of our fundamental business strategy, a critical
component of Commonwealth's story in recent years has been the effective
management of its capital structure. During 1998, the Company purchased 1.6
million shares of treasury stock. This brought total purchases of treasury
stock over the past two years to 3.3 million shares. In January of 1999, the
Company announced that the Board of Directors had authorized the purchase of an
additional 0.7 million shares. It is the Company's expectation that this new
purchase program will be completed during the first half of 1999.
Regular dividend increases are also a part of the Company's capital management
strategy. Commonwealth increased its common stock dividend 14% during 1998 to
an annual rate of $0.32 per share.
The Company's capital management activities have been directed toward improving
utilization of capital, while prudently managing Commonwealth Bank's regulatory
capital position. In this latter regard, at year-end 1998, the Bank's core and
risk-based capital ratios were well above the regulatory guidelines for
well-capitalized institutions at 5.9% and 11.6%, respectively.
Departing from my discussion of the business for just a moment, I would like to
take this opportunity to recognize the important contributions of two
individuals who have recently retired from the Board of Directors. Matthew T.
Welde retired from the organization at the end of 1998, after serving the
Company for 36 years, including 22 as a member of the Board of Directors. Matt
served as Commonwealth's Chairman from 1976 to 1992, and his record with the
Company was superb. Matt's imprint on Commonwealth is profound and his
contributions and companionship will be greatly missed. Also recently retired
from the Board of Directors is William B. Haines, Jr., after 18 years of
admirable service in that capacity. Bill's loyalty, counsel and sense of humor
will also be missed by his colleagues at Commonwealth.
Looking forward, we are optimistic about Commonwealth's future and its
continuing evolution from a traditional thrift to a full-service community
bank. In previous letters to you, I mentioned that this evolution would
require that every facet of our organization manage and adapt to great change.
I also mentioned that guiding us through these changes would be our fundamental
business philosophies, which would remain constant. These philosophies include
a commitment to maximizing shareholder value through our core businesses of
retail banking, commercial banking and mortgage banking, and emphasizing
prudent risk management, effective capital management and superior customer
service. The importance of this latter commitment is reflected in our corporate
slogan "Putting the Customer First" prominently displayed in each of our
branches.
The Board of Directors and management are encouraged by Commonwealth's
accomplishments in 1998, and recognize the important role that our employees
played in these achievements. Our progress has been the result of their skill
and commitment. You can be confident, as I am, that the Commonwealth team will
do everything in its power to maximize the long-term value of your investment.
Sincerely,
Charles H. Meacham
Chairman of the Board and Chief Executive Officer
3
<PAGE> 7
RETAIL BANKING
Commonwealth's retail banking strategy is based on the expansion and
strengthening of its branch banking franchise in southeast Pennsylvania. The
Company's focus has been directed toward building a network of well-located
full-service branches capable of competing effectively with larger regional and
national banks. Commonwealth's strategic advantages in this regard include
localized decision-making and a more personalized approach to providing
customer service than is available at the larger providers of banking services.
At year-end 1998, Commonwealth had a total of 60 retail branch offices in its
eight county region of Berks, Bucks, Chester, Delaware, Lehigh, Lebanon,
Montgomery, and Philadelphia Counties, Pennsylvania. This compared to 56 branch
locations at year-end 1997.
Commonwealth achieved a number of meaningful accomplishments in the area of
community banking over the past year. For example, in 1998, Commonwealth:
- - Increased consumer loans by 23% to $240 million at the end of the year;
- - Increased core deposits (checking, savings and money market deposits) by 16%
to $938 million at year-end;
- - Reduced the average cost of total deposits to 3.76%; and
- - Increased deposit fee income by 21% to $8.8 million.
There are three key aspects of our 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.
With respect to internal growth, Commonwealth's structured approach to sales
training and tracking, coupled with a number of product line enhancements,
resulted in an increase in the number of households served by our branch
network from 104,000 at the end of 1997 to 108,000 at year-end 1998. More
importantly, the number of checking accounts, which consumers tend to view as
their primary banking relationship, increased from 76,000 at year-end 1997 to
84,000 at the end of 1998.
The second facet of the retail branch growth strategy involves expansion
through acquisition. In 1995, the Bank acquired four former Fidelity Federal
branches in Philadelphia County.
In 1996, Commonwealth completed the purchase of 12 former branch offices of
Meridian Bank in Berks and Lebanon Counties. In 1997 and 1998, the Company
reviewed numerous opportunities to expand through acquisition. Commonwealth is
committed to this part of its strategy and will continue to look for
appropriate acquisition opportunities in the future.
4
<PAGE> 8
The third key aspect of the retail branch growth strategy involves supermarket
banking. Of Commonwealth's 60 retail branch locations at year-end 1998, 20 were
in supermarket locations. This compared to 17 supermarket branch locations at
year-end 1997. The success of the supermarket banking strategy was evident in
1998, as deposits in supermarket branches increased 19% to $129 million at
December 31, 1998, from $109 million at the end of 1997. Similarly, consumer
loan originations in the supermarket branches increased 72% to $22 million in
1998, compared to $13 million in 1997.
[PHOTO]
COMMONWEALTH PRESIDENT, PATRICK J. WARD, CONVERSING WITH A SHOPPER AT ONE OF THE
BANK'S TWENTY SUPERMARKET BRANCHES. DEPOSITS IN COMMONWEALTH SUPERMARKET
BRANCHES INCREASED 19% AND CONSUMER LOAN ORIGINATIONS, IN SUPERMARKET BRANCHES,
INCREASED 72% IN 1998.
5
<PAGE> 9
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
supermarket facilities.
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 several 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 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, acquisition and supermarket
banking. One supermarket branch and one mini-traditional branch are scheduled
to open during 1999. Additionally, the Bank is developing plans to address
underperforming branches. The focus of these activities has been and will
continue to be on increasing customer convenience and improving Company
profitability.
CONSUMER LOAN GROWTH
<TABLE>
<S> <C> <C> <C> <C>
$104 MILLION $111 MILLION $169 MILLION $195 MILLION $240 MILLION
Dec. 31, 1994 Dec. 31, 1995 Dec. 31, 1996 Dec. 31, 1997 Dec. 31, 1998
</TABLE>
CORE DEPOSIT GROWTH
<TABLE>
<S> <C> <C> <C> <C>
$527 MILLION $563 MILLION $771 MILLION $808 MILLION $938 MILLION
Dec. 31, 1994 Dec. 31, 1995 Dec. 31, 1996 Dec. 31, 1997 Dec. 31, 1998
</TABLE>
COMMONWEALTH HAS ACHIEVED SIGNIFICANT GROWTH IN CONSUMER LOANS AND CORE
DEPOSITS (CHECKING, SAVINGS AND MONEY MARKET DEPOSITS) SINCE YEAR-END 1994.
6
<PAGE> 10
COMMERCIAL BANKING
One of the key elements of Commonwealth's transition from a traditional thrift
to a full-service community bank has been the development of a commercial
banking function to meet the needs of businesses located in markets served by
our branch network. Commencing in late 1993, Commonwealth launched 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 retail banking strategy, Commonwealth's commercial banking strategy
is focused on building a full-service institution capable of competing
effectively with larger regional and national banks, with an emphasis on
localized decision making and high quality customer service.
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 1998, for example, Commonwealth created a commercial repurchase product to
address the specialized cash management requirements of business customers, and
made several "tax free" loans to qualifying not-for-profit organizations. We
also increased our activity in the commercial real estate construction market
to better serve the needs of a select group of strong local developers. During
the past year, Commonwealth significantly improved the quality and experience
level of its relationship staff, beginning with the addition of an experienced
senior lending officer.
[PHOTO]
PAUL PITCHER, PRESIDENT OF ACCUMETRICS, INC., INSPECTS A ROLL OF PRECISION ALLOY
TUBING WITH COMMONWEALTH COMMERCIAL BANKERS, ED FITZGERALD AND BUD MACKELLAR.
THE 20 YEAR OLD DESIGNER AND MANUFACTURER OF SMALL DIAMETER TUBING PRODUCTS
MAINTAINS ITS COMMERCIAL BANKING RELATIONSHIP WITH COMMONWEALTH BANK.
7
<PAGE> 11
The Company's ten commercial lenders and two cash management representatives
have an average of 15 years of banking experience, typically obtained in large
commercial bank environments. In the future, we remain committed to providing
the best possible products and services to our business customers, and are
prepared to allocate the financial and human resources necessary to back-up
that commitment.
Commonwealth's target market is comprised of small and lower middle market
businesses operating within the Bank's eight county region. Our target customer
base involves organizations having annual revenues of up to $50 million, with
credit requirements of $10 million or less. While the Bank has the legal
lending capacity to extend credit in larger amounts, most of Commonwealth's
approximately 700 business credit relationships are under $1.0 million,
reflecting the Bank's prudent risk management and the relatively modest credit
needs, in absolute terms, of small business borrowers.
The Company employs a dual signature system to manage and control the credit
approval process. In addition to the originating officer, each loan requires
the approval of a regional commercial officer of the Bank. For credit exposures
of up to $500,000, the approval of the Vice President of Commercial and
Industrial Lending is required. The approval of the Bank's Senior Lending
Officer is required for credits ranging from $500,000 to $1.0 million. Approval
authority for exposures above $1.0 million rests with Commonwealth's Commercial
Loan Credit Committee which, in addition to the Senior Lending Officer, is
comprised of other senior officers of the Bank.
In 1998, Commonwealth achieved meaningful progress relating to its efforts to
prudently manage growth in commercial banking. For example, commercial deposits
totaled $119 million at December 31, 1998, an increase of 47% compared to $81
million at year-end 1997. Commercial loans totaled $139 million at the end of
1998, an increase of 20% from $116 million at year-end 1997. Importantly, the
Company's growth in commercial banking has been achieved without incurring
undue credit risk. Commercial net credit losses totaled only $0.6 million in
1998, or 0.51% of the related average commercial loans. Nonperforming
commercial loans totaled $3.3 million, or 2.4%, of the Bank's related
commercial loan portfolio at year end 1998.
COMMERCIAL LOAN GROWTH
<TABLE>
<S> <C> <C> <C> <C>
$42 MILLION $42 MILLION $96 MILLION $116 MILLION $139 MILLION
Dec. 31, 1994 Dec. 31, 1995 Dec. 31, 1996 Dec. 31, 1997 Dec. 31, 1998
</TABLE>
COMMERCIAL DEPOSIT GROWTH
<TABLE>
<S> <C> <C> <C> <C>
$18 MILLION $24 MILLION $50 MILLION $81 MILLION $119 MILLION
Dec. 31, 1994 Dec. 31, 1995 Dec. 31, 1996 Dec. 31, 1997 Dec. 31, 1998
</TABLE>
COMMONWEALTH HAS ACHIEVED SIGNIFICANT GROWTH IN COMMERCIAL LOANS AND DEPOSITS
SINCE YEAR-END 1994.
8
<PAGE> 12
MORTGAGE BANKING
The past year was a particularly exciting one for the mortgage industry. The
general interest rate decline during 1998 resulted in a record $1.4 trillion of
mortgage originations in the United States. As Mortgage Banking has been a key
part of Commonwealth's strategy in recent years, the Company was well
positioned to participate in the mortgage origination boom. Commonwealth's
mortgage originations totaled more than $1.1 billion in 1998, an increase of
90% compared to $585 million in 1997.
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 1998, substantial investments in technology were made to improve
efficiency and provide better service to our customers and mortgage investors.
For example, the Company's investment in a state-of-the-art desktop
underwriting system, which became fully operational in 1998, enabled
Commonwealth to handle the near doubling of volume in 1998 with only a modest
increase in staff. More importantly, this new system has positioned
Commonwealth to be able to make underwriting decisions at the point of sale.
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
presence gives it a competitive advantage. In 1998, retail mortgage loan
originations totaled $735 million, an increase of 87% compared to $393 million
in 1997.
[PHOTO]
COMMONWEALTH IS PROUD OF ITS HERITAGE AS A MORTGAGE LENDER. THE BANK HAS BEEN
HELPING PEOPLE BUY HOMES FOR OVER 50 YEARS. COMMONWEALTH MORTGAGE LOAN
ORIGINATIONS INCREASED 90% IN 1998.
9
<PAGE> 13
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
has been highlighted in recent years with the 1997 acquisition of certain
offices of Homestead Mortgage, Inc., and the 1998 acquisition of the Annandale,
Virginia office of Edmunds Financial Corporation d/b/a Service First Mortgage.
In 1998, the acquired offices originated approximately $266 million of
mortgages in Virginia, Maryland and the District of Columbia. These
acquisitions enabled Commonwealth 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.
Wholesale mortgage originations totaled $376 million in 1998, an increase of
95% compared to $192 million in 1997. The sharp increase in wholesale
originations in 1998 was attributable in large part to the particularly strong
mortgage finance market throughout much of 1998. With respect to wholesale
originations, the Company's focus is on smaller mortgage originators using
Commonwealth as their primary outlet for product. However, because the wholesale
origination business is inherently less relationship driven than retail, volume
tends to be more volatile and dependent on market conditions. In light of this,
Commonwealth employs a disciplined approach to wholesale pricing, driven
primarily by economic, rather than volume considerations. It is the Company's
expectation that as the mortgage finance market normalizes, Commonwealth's
wholesale origination volume will decrease in 1999 from the level achieved in
1998.
Commonwealth's strategy is to sell substantially all of the fixed rate loans
which conform to Federal National Mortgage Association or Federal Home Loan
Mortgage Corporation guidelines. In addition, the Company sells a portion of
its jumbo fixed rate loan originations. Essentially, all adjustable rate loans
are retained by the Bank. Commonwealth's net gain on the sale of mortgage loans
more than doubled in 1998 to $10.8 million, from $5.0 million in 1997.
The Company does not service loans insured by the Federal Housing
Administration or guaranteed by the Veterans Administration. However, prior to
the second quarter of 1998, the Bank generally retained the rights to service
conventional loans it originated and sold. Beginning in April 1998, the Bank
altered its strategy in this latter area to take advantage of favorable market
conditions for the sale of originated servicing rights. Of the $1.1 billion in
originations in 1998, more than half were sold or were designated to be sold on
a servicing released basis. Even with this change, the mortgage servicing
portfolio increased by 8% in 1998 to $2.4 billion at year-end, compared to $2.2
billion at year-end 1997. Reflecting higher amortization of mortgage servicing
rights relating to prepayments and the run-off of more favorably priced
historical mortgage servicing rights, third party mortgage servicing fees
decreased to $3.6 million in 1998, compared to $5.2 million in 1997.
MORTGAGE LOAN ORIGINATIONS
<TABLE>
<S> <C> <C> <C> <C>
$344 MILLION $495 MILLION $462 MILLION $585 MILLION $1.1 BILLION
1994 1995 1996 1997 1998
</TABLE>
THE ACQUISITION OF SELECTED ASSETS AND OFFICES OF HOMESTEAD MORTGAGE, INC., AND
SERVICE FIRST MORTGAGE, IN 1997 AND 1998 RESPECTIVELY, ALONG WITH A ROBUST
MORTGAGE MARKET, RESULTED IN A NEAR DOUBLING OF MORTGAGE ORIGINATION VOLUME IN
1998. RECENT INVESTMENTS IN LOAN ORIGINATION TECHNOLOGY ENABLED COMMONWEALTH TO
HANDLE THIS INCREASED VOLUME WITH ONLY A MODEST INCREASE TO STAFF.
10
<PAGE> 14
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 $1.5
million investment in lower income housing projects in 1998.
Commonwealth's involvement in community sponsored events is further evidence of
its commitment to serve lower income and minority households. For example, for
the 6th consecutive year, Commonwealth contributed its time, efforts and
financial support to the ACORN & Friends Bank Fair '98. 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 1998 donations and
involvements were for the benefit of the Children's Hospital of Philadelphia,
the Norristown Chapter of the Salvation Army, Norristown's Elmwood Park Zoo,
the Greater Plymouth Township Community Center, the Montgomery County Cultural
Association, the Lower Providence Community Library, the Phoenixville Area
YMCA, the City of Reading's Operation Facelift, and the Police Athletic League
of Philadelphia.
[PHOTO]
COMMONWEALTH BANK AND ITS COMNET MORTGAGE DIVISION SUPPORTED UNITY DAYS 1998
WITH AN INFORMATIONAL AND EDUCATIONAL EXHIBIT. SEVERAL OF THE COMMONWEALTH
BANKERS WHO STAFFED THE EVENT ARE PICTURED WITH CHARLES M. WARFIELD (FOURTH
FROM LEFT), GENERAL MANAGER OF WDAS RADIO, WHICH SPONSORS THE ANNUAL EVENT AND
COMNET'S VICE PRESIDENT OF RESIDENTIAL OPERATIONS, TRACY L. JOHNSON (THIRD FROM
LEFT). OVER 500,000 PEOPLE ATTENDED THE EVENT WHICH WAS HELD ON PHILADELPHIA'S
BENJAMIN FRANKLIN PARKWAY.
11
<PAGE> 15
DETAILED FINANCIAL HIGHLIGHTS Commonwealth Bancorp, Inc. and Subsidiaries
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected consolidated financial and other data of the Company
does not purport to be complete and is qualified in its entirety by reference
to the more detailed financial information contained elsewhere herein including
without limitation the Consolidated Financial Statements.
<TABLE>
<CAPTION>
===========================================================================================================================
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DECEMBER 31,
AND RATIO DATA) --------------------------------------------------------------------------------
SELECTED FINANCIAL CONDITION DATA: 1998 1997 1996 1995(10) 1994(10)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $2,257,499 $2,268,595 $2,119,961 $1,455,700 $1,213,960
Cash, interest-bearing deposits and
short-term investments 106,677 53,938 60,102 50,177 45,913
Investment securities 34,515 51,326 53,935 46,896 78,412
Mortgage-backed securities 524,141 735,291 752,707 463,353 430,119
Mortgage loans held for sale 120,642 37,574 17,335 26,001 18,533
Loans receivable, net 1,338,177 1,260,841 1,113,114 796,735 583,144
Intangible assets 39,830 45,244 51,220 17,279 1,737
Mortgage servicing rights 9,969 8,039 7,677 6,855 6,941
Deposit accounts 1,605,299 1,552,824 1,491,450 1,076,549 853,519
FHLB advances 240,500 213,000 175,000 120,614 61,214
Other borrowings 166,000 246,099 176,674 82,666 147,470
Shareholders' equity 192,178 214,852 231,924 137,036 116,905
Tangible shareholders' equity (1) 152,348 169,608 180,704 119,757 115,168
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
SELECTED OPERATING DATA: 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 158,104 $ 155,243 $ 127,306 $ 97,153 $ 80,374
Interest expense 87,454 84,855 66,352 49,691 36,860
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 70,650 70,388 60,954 47,462 43,514
Provision for loan losses 3,500 1,600 601 578 168
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 67,150 68,788 60,353 46,884 43,346
Net gain on sale of mortgage loans 10,842 4,993 2,056 939 318
Other noninterest income 16,104 16,582 13,617 11,820 12,617
Amortization of intangible assets 5,413 5,990 4,542 1,598 1,076
Noninterest expenses, exclusive of
amortization of intangible assets 72,457 60,058 57,365 40,666 41,445
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 16,226 24,315 14,119 17,379 13,760
Income taxes 5,294 7,946 4,781 6,124 4,515
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 10,932 $ 16,369 $ 9,338 $ 11,255 $ 9,245
===========================================================================================================================
Diluted earnings per common share $ 0.73 $ 1.02 $ 0.72 N/A(2) N/A(2)
===========================================================================================================================
Dividends per share $ 0.32 $ 0.28 $ 0.24(3) $ 0.24(3) $ 0.18(3)
===========================================================================================================================
OTHER DATA:
Number of full-service customer
facilities(4) 60 56 53 36 26
Number of loan origination offices (5) 11 13 7 7 9
Loans serviced for others (in millions) $ 1,357 $ 1,304 $ 1,340 $ 1,264 $ 1,254
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
KEY OPERATING RATIOS: -------------------------------------------------------------------------------
PERFORMANCE RATIOS: (6) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on assets 0.47% 0.73% 0.51% 0.85% 0.77%
Return on equity 5.39% 7.56% 4.97% 8.95% 8.02%
Interest-earning assets to
interest-bearing liabilities 104.99% 106.30% 106.41% 106.20% 108.51%
Interest rate spread (7) 3.07% 3.11% 3.30% 3.55% 3.55%
Net interest margin (7) 3.27% 3.36% 3.54% 3.80% 3.83%
Noninterest expenses, exclusive of
amortization of intangible assets,
to assets 3.13% 2.68% 3.11% 3.06% 3.46%
ASSET QUALITY RATIOS:
Nonperforming assets to total assets
at end of period (8) 0.49% 0.42% 0.43% 0.51% 0.52%
Allowance for loan losses
to nonperforming loans at end
of period 95.78% 100.96% 123.74% 120.86% 167.90%
Allowance for loan losses to total
loans held for investment at
end of period 0.71% 0.71% 0.89% 0.93% 1.22%
CAPITAL AND OTHER RATIOS:
Equity to assets 8.75% 9.66% 10.17% 9.46% 9.62%
Tangible equity to assets at end
of period 6.75% 7.48% 8.52% 8.23% 9.49%
Dividend payout ratio (9) 42.05% 26.66% 32.41% 17.14% 15.69%
</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,seventeen, and twenty supermarket branch offices at
December 31, 1995, 1996, 1997, and 1998, respectively.
(5) Consists of offices of ComNet Mortgage Services and for 1997 and 1998,
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.
(10) The financial data for periods prior to June 14, 1996 is for Commonwealth
Bank.
12
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
GENERAL
Commonwealth Bancorp, Inc. ("Commonwealth" or the "Company"), a Pennsylvania
corporation, is the holding company for Commonwealth Bank ("Bank"). 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, 1998, 60
full-service offices located in southeast Pennsylvania.
The Company's results of operations depend primarily on 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 commercial 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 commercial
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 eight loan origination offices located in
Pennsylvania, New Jersey, Rhode Island, and Virginia. ComNet operates under the
trade name of Homestead Mortgage in Maryland. Business is also conducted by
ComNet through its wholesale network, which includes correspondents in 25
states.
ACQUISITIONS
On March 31, 1998, Commonwealth Bank acquired certain assets and the
Annandale, Virginia office of Edmunds Financial Corporation d/b/a Service First
Mortgage. Under the terms of the transaction, this operation conducts business
under the ComNet Mortgage Services name.
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
continues to operate under the trade name of Homestead Mortgage in the District
of Columbia, Maryland, and Virginia. The Service First Mortgage and Homestead
Mortgage Acquisitions 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 were $2.3 billion at both December 31, 1998 and 1997.
During 1998, decreases in mortgage-backed securities and investment securities
were offset by increases in mortgage loans held for sale, loans receivable,
interest-bearing deposits, and cash. Total liabilities
13
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and Subsidiaries
were $2.1 billion at both December 31, 1998 and 1997. During 1998, increases in
deposits, accrued interest payable, accrued expenses and other liabilities, and
advances from borrowers for taxes and insurance were offset by decreases in
notes payable and other borrowings. Shareholders' equity as of December 31,
1998 equaled $192 million, compared to $215 million at December 31, 1997. This
$23 million, or 11%, decrease was primarily the result of the $32 million
purchase of 1.6 million shares of treasury stock, offset, in part, by a $6
million, or 5%, increase in retained earnings during 1998.
CASH, INTEREST-BEARING DEPOSITS, AND SHORT-TERM INVESTMENTS (COLLECTIVELY
"CASH AND CASH EQUIVALENTS"). Cash and cash equivalents increased by $53
million, or 98%, from $54 million at December 31, 1997, to $107 million at
December 31, 1998. The increase was primarily related to repayment proceeds
from the Company's mortgage-backed securities and investment portfolios.
MORTGAGE LOANS HELD FOR SALE. Mortgage loans held for sale increased by $83
million, or 221%, from $38 million at December 31, 1997, to $121 million at
December 31, 1998. The increase was attributable to an increase in loans
originated during December 1998, primarily as a result of the current low
interest rate environment.
INVESTMENT SECURITIES. Investment securities decreased by $17 million, or
33%, from $51 million at December 31, 1997, to $35 million at December 31,
1998. The decrease was primarily attributable to the maturity of U.S. Treasury
and U.S. Government agency securities, the recording of a valuation adjustment
relating to an equity investment in a mortgage servicing partnership, and the
sale of a mortgage related mutual fund and certain equity investments. These
decreases were offset, in part, by the purchase of corporate bonds and U.S.
Government agency securities. During 1998, the Company realized a $1.0 million
gain on the sale of equity investments and a mortgage related mutual fund.
All investment securities are classified as available for sale and 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. The
net unrealized gain on available for sale investment securities was $0.1
million at December 31, 1998, compared to $0.9 million at December 31, 1997.
At December 31, 1998 and 1997, $12 million, or 35%, and $40 million, or 78%,
respectively, of the Company's investment securities were U.S. Treasury and
U.S. Government agency securities with maturities of less than five years. As
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
part of its investment policy, the Company also has the ability to invest in
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 $211
million, or 29%, from $735 million at December 31, 1997, to $524 million at
December 31, 1998. The decrease in mortgage-backed securities during 1998 was
related to repayments and prepayments and a $30 million call of mortgage-backed
securities during the first quarter of 1998. The decrease was offset, in part,
by a strategy to enhance the Company's net interest income through the purchase
of mortgage-backed securities funded through Federal Home Loan Bank ("FHLB")
advances.
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 $132
million at year-end 1998, compared to $196 million at year-end 1997.
Mortgage-backed securities classified as available for sale totaled $392
million at December 31, 1998, compared to $539 million at December 31, 1997.
The net unrealized gain on available for sale mortgage-backed securities was
$3.7 million at year-end 1998, compared to $4.5 million at year-end 1997.
During 1997, the Company sold mortgage-backed securities, which were
classified as available for sale, totaling $42 million and purchased
mortgage-backed securities, classified as available for sale, totaling $42
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
14
<PAGE> 18
borrowings or other obligations of the Company. At December 31, 1998 and 1997,
$310 million, or 59%, and $479 million, or 65%, 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,
1998 and 1997, $215 million, or 41%, and $256 million, or 35%, respectively, of
the Company's mortgage-backed securities portfolio were private mortgage-backed
securities.
LOANS RECEIVABLE. Loans receivable, net of reserves, deferred loan fees, and
unamortized premiums and unaccreted discounts, increased by $77 million, or 6%,
during 1998 to $1.3 billion at December 31, 1998. The increase was related to
growth in the Company's mortgage, consumer, and commercial loan portfolios.
Residential mortgage loans totaled $970 million at December 31, 1998, an
increase of $11 million, or 1%, compared to December 31, 1997. Total mortgage
loans originated and purchased for the year ended December 31, 1998, increased
by $526 million, or 90%, from $585 million for the year ended December 31,
1997, to $1,111 million for the year ended December 31, 1998. The $526 million
increase in mortgage originations was attributable in large part to the
particularly strong mortgage finance market throughout much of 1998. Closed
loans relating to Commonwealth's retail network totaled $735 million for the
year ended December 31, 1998, an increase of 87% compared to $393 million for
the year ended December 31, 1997. Commonwealth's Wholesale Lending Department
originates loans through a network of correspondent brokers in 25 states. All
loans are underwritten using the same criteria as those used for retail
originations. Closed loans relating to Commonwealth's wholesale network totaled
$376 million for the year ended December 31, 1998, an increase of 95% compared
to $192 million for the year ended December 31, 1997.
Consumer loans increased by $45 million, or 23%, from $195 million at
December 31, 1997, to $240 million at December 31, 1998. At December 31, 1998,
consumer loans represented 18% of the Company's loan portfolio and were
comprised of $35 million of equity lines of credit, $126 million of second
mortgage loans, $40 million of recreational vehicle loans, and $39 million of
other consumer loans.
At December 31, 1997, consumer loans represented 15% of total loans and were
comprised of $42 million of equity lines of credit, $99 million of second
mortgage loans, $22 million of recreational vehicle loans, and $32 million of
other consumer loans.
As of December 31, 1998, commercial loans totaled $139 million, or 10%, of
the Company's total loan portfolio, as compared to $116 million, or 9%, at
December 31, 1997. At December 31, 1998, commercial loans were comprised of $83
million of commercial real estate loans, $41 million of business loans, and $14
million of loans guaranteed by the Small Business Administration ("SBA"). At
December 31, 1997, commercial loans were comprised of $72 million of commercial
real estate loans, $24 million of business loans, and $20 million of SBA loans.
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 $1.5 million, or 16%, from $9.6 million at December 31, 1997, to
$11.1 million at December 31, 1998. At December 31, 1998, the Company's $11.1
million of nonperforming assets amounted to 0.49% of total assets. At December
31, 1997, the Company's $9.6 million of nonperforming assets amounted to 0.42%
of total assets. The increase in nonperforming assets was primarily related to
increases in nonperforming commercial loans.
ALLOWANCE FOR LOAN LOSSES. The Company's allowance for loan losses amounted
to $9.6 million at December 31, 1998, compared to $9.0 million at December 31,
1997. 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, 1998, the
15
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and Subsidiaries
Company's allowance for loan losses amounted to 96% of total nonperforming
loans and 0.71% of total loans held for investment, compared to 101% of total
nonperforming loans and 0.71% of total loans held for investment at December
31, 1997. The Company utilizes these percentages as only one factor in
assessing the adequacy of the allowance for loan losses at various points in
time.
The provision for loan losses totaled $3.5 million and $1.6 million for the
years 1998 and 1997, respectively. For 1998, net credit losses totaled $2.9
million, or 0.21% of average loans, compared to $2.5 million, or 0.21%, in
1997.
INTANGIBLE ASSETS. The Company's intangible assets consist of goodwill and
core deposit intangibles ("CDI") recorded in connection with the acquisition of
twelve former Meridian branches in 1996 (the "Berks Acquisition") and the
acquisition of four former Fidelity Federal branches in 1995 (the "Fidelity
Federal Acquisition"). The CDI relating to the Berks Acquisition is being
amortized on an accelerated basis over approximately 7 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, 1998 and
1997:
<TABLE>
<CAPTION>
===================================================
DECEMBER 31,
---------------------
(IN THOUSANDS) 1998 1997
- ---------------------------------------------------
<S> <C> <C>
Goodwill (Berks Acquisition) $19,141 $20,973
CDI (Berks Acquisition) 8,260 10,442
Goodwill (Fidelity Federal) 10,257 11,327
CDI (Fidelity Federal) 2,172 2,502
- ---------------------------------------------------
Total $39,830 $45,244
===================================================
</TABLE>
MORTGAGE SERVICING RIGHTS. At December 31, 1998, Commonwealth's mortgage
servicing portfolio was $2.4 billion, an increase of 8% compared to $2.2
billion at December 31, 1997. At December 31, 1998 and 1997, Commonwealth was
servicing $1.4 billion and $1.3 billion of third party loans, as well as $1.0
billion and $0.9 billion, respectively, of loans held by Commonwealth for
investment and sale.
The Company acquires mortgage servicing rights through the purchase and
origination of mortgage loans which are sold or securitized on either a
servicing retained or servicing released basis. SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," requires the Company to allocate the total cost of the mortgage
loans between 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.
At December 31, 1998, capitalized mortgage servicing rights relating to
loans originated by Commonwealth totaled $8.9 million, compared to $6.5 million
at December 31, 1997. The weighted average coupon relating to this portfolio
was 7.2% at year-end 1998.
Purchased mortgage servicing rights totaled $1.1 million at December 31,
1998, compared to $1.6 million at the end of 1997. The weighted average coupon
relating to this portfolio was 9.8% at year-end 1998.
The following table sets forth an analysis of the activity in the Company's
mortgage servicing rights ("MSRs") during the periods indicated.
<TABLE>
<CAPTION>
===============================================================
CARRYING VALUE OF MSRs
------------------------------
YEAR ENDED DECEMBER 31,
------------------------------
(IN THOUSANDS) 1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of period $8,039 $7,677 $6,855
Additions 6,825 1,738 2,256
Amortization/Paydown (2,202) (1,286) (1,059)
Sales (2,693) (90) (375)
- ---------------------------------------------------------------
Balance, end of period $9,969 $8,039 $7,677
===============================================================
</TABLE>
16
<PAGE> 20
DEPOSITS. With respect to deposits, the Company's strategy is to emphasize
growth in relatively low-cost core deposits (demand, money market, and savings
deposits) through its retail and commercial banking activities, while
deemphasizing growth of relatively high-cost certificates of deposit. Deposits
increased $52 million, or 3%, to $1.6 billion at December 31, 1998, primarily
related to increases in demand and money market deposits, as well as increases
in principal and interest escrows established pursuant to loan servicing
agreements, and outstanding mortgage settlement checks. These increases were
offset, in part, by decreases in savings deposits and certificates of deposits.
BORROWINGS. The Company's borrowings consist principally of advances from
the FHLB, and securities sold under agreements to repurchase. FHLB advances
increased by $28 million, or 13%, to $241 million at December 31, 1998, from
$213 million at December 31, 1997. Repurchase agreements decreased by $80
million, or 33%, to $166 million at December 31, 1998, from $246 million at
December 31, 1997. The Company's borrowings are used to fund lending and
investment activities, withdrawals from deposit accounts, and other
disbursements which occur in the normal course of business. Dependent upon the
funding requirements and interest rate risk considerations, these borrowings
are hedged with off-balance-sheet financial instruments. See "Asset and
Liability Management."
SHAREHOLDERS' EQUITY. At December 31, 1998, shareholders' equity equaled
$192 million, compared to $215 million at December 31, 1997. This $23 million,
or 11%, decrease was primarily the result of the $32 million purchase of 1.6
million shares of treasury stock, offset, in part, by a $6 million, or 5%,
increase in retained earnings during 1998. During 1998, the Company purchased
1.6 million shares, or $32 million, of its common stock. This compared to
purchases totaling 1.8 million shares, or $29 million, in 1997. The repurchased
shares were held as treasury stock at December 31, 1998 and are reserved for
general corporate purposes and/or issuance pursuant to the Company's benefit
plans. At December 31, 1998, shareholders' equity represented 8.5% of assets,
compared to 9.5% at December 31, 1997. Subsequent to December 31, 1998, the
Company's Board of Directors authorized the repurchase of up to 0.7 million
shares of its outstanding common stock.
The Bank's tangible and core capital represented 5.9% of adjusted total
assets at December 31, 1998 and 6.6% at December 31, 1997, compared to the 1.5%
tangible capital and 3.0% core capital minimum regulatory requirements. At
December 31, 1998 and December 31, 1997, the Bank's risk-based capital totaled
11.6% and 13.4%, respectively, of total risk-weighted assets, compared to the
minimum 8.0% requirement.
17
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and Subsidiaries
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following table sets forth, for the periods indicated, information
regarding (i) the total 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,
1998 1997 1996
----------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
(DOLLARS IN THOUSANDS) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1):
Mortgage loans $1,066,998 $ 76,714 7.19% $ 934,539 $ 69,504 7.44% $ 764,483 $ 57,776 7.56%
Consumer loans 219,076 19,735 9.01 177,872 15,982 8.99 140,806 12,698 9.02
Commercial loans 121,697 10,378 8.53 104,522 8,699 8.32 66,550 5,128 7.71
--------- ------- ---------- ------- --------- -------
Total loans receivable 1,407,771 106,827 7.59 1,216,933 94,185 7.74 971,839 75,602 7.78
--------- ------- ---------- ------- --------- -------
Mortgage-backed securities 683,522 46,360 6.78 791,245 54,887 6.94 654,586 45,471 6.95
Investment securities 42,525 2,313 5.44 64,742 4,031 6.23 63,018 3,386 5.37
Other earning assets(2) 26,023 2,604 10.01 23,521 2,140 9.10 31,192 2,847 9.13
--------- ------- ---------- ------- --------- -------
Total interest-earning assets 2,159,841 158,104 7.32 2,096,441 155,243 7.41 1,720,635 27,306 7.40
Noninterest-earning assets 156,845 ------- 145,222 ------- 126,810 ------
--------- ---------- ---------
Total assets $2,316,686 $ 2,241,663 $1,847,445
========= ========== =========
Interest-bearing liabilities:
Deposits:
Demand deposits(3) $ 631,088 15,203 2.41 $ 550,236 13,616 2.47 $ 472,755 12,182 2.58
Savings deposits 227,618 5,070 2.23 245,813 5,494 2.24 240,579 5,072 2.11
Certificates of deposit 707,858 38,673 5.46 722,278 39,450 5.46 609,510 32,104 5.27
--------- ------- ---------- ------- --------- -------
Total deposits 1,566,564 58,946 3.76 1,518,327 58,560 3.86 1,322,844 49,358 3.73
--------- ------- ---------- ------- --------- -------
Total borrowings 490,633 28,508 5.81 453,901 26,295 5.79 294,098 16,994 5.78
--------- ------- ---------- ------- --------- -------
Total interest-bearing
liabilities(4) 2,057,197 87,454 4.25 1,972,228 84,855 4.30 1,616,942 66,352 4.10
Noninterest-bearing liabilities 56,762 ------- 52,792 ------- 42,665 -------
--------- ---------- ---------
Total liabilities 2,113,959 2,025,020 1,659,607
Shareholders' equity 202,727 216,643 187,838
--------- ---------- ---------
Total liabilities and
equity 2,316,686 2,241,663 1,847,445
========= ========== =========
Net interest-earning assets $ 102,644 $ 124,213 $ 103,693
========= ========== =========
Net interest income/interest
rate spread $ 70,650 3.07% $ 70,388 3.11% $ 60,954 3.30%
======= ====== ======= ======= ====== =======
Net interest margin 3.27% 3.36% 3.54%
====== ======= =======
Ratio of average interest
earning assets to average
interest-bearing liabilities 104.99% 106.30% 106.41%
====== ======= =======
</TABLE>
(1) The average balance of loans receivable includes nonperforming loans,
interest on which is recognized on a cash basis, and mortgage loans held
for sale.
(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.
18
<PAGE> 22
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 net interest income attributable to changes in volume (changes in
volume multiplied by prior rate); (ii) effects on net 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>
1998 COMPARED TO 1997 1997 COMPARED TO 1996
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
------------------------------------------------------------------------------------
TOTAL NET TOTAL NET
RATE/ INCREASE RATE/ INCREASE
(IN THOUSANDS) RATE VOLUME VOLUME (DECREASE) RATE VOLUME VOLUME (DECREASE)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Mortgage loans $(2,313) $ 9,852 $(328) $ 7,211 $ (919) $12,852 $(205) $11,728
Consumer loans 41 3,703 10 3,754 22 3,256 6 3,284
Commercial loans 214 1,430 35 1,679 411 2,926 234 3,571
- -----------------------------------------------------------------------------------------------------------------
Total loans receivable (2,058) 14,985 (283) 12,644 (486) 19,034 35 18,583
Mortgage-backed securities (1,221) (7,472) 166 (8,527) (64) 9,493 (13) 9,416
Investment securities (510) (1,382) 175 (1,717) 538 92 15 645
Other earning assets 214 229 23 466 (9) (700) 2 (707)
- -----------------------------------------------------------------------------------------------------------------
Total net change in income
on interest-earning assets (3,575) 6,360 81 2,866 (21) 27,919 39 27,937
Interest-bearing liabilities
Deposits:
Demand deposits (361) 2,002 (53) 1,588 (483) 1,996 (79) 1,434
Savings deposits (19) (406) 1 (424) 305 110 7 422
Certificates of deposit 11 (787) 0 (776) 1,187 5,940 219 7,346
- -----------------------------------------------------------------------------------------------------------------
Total deposits (369) 809 (52) 388 1,009 8,046 147 9,202
Borrowings 79 2,131 6 2,216 43 9,234 24 9,301
- -----------------------------------------------------------------------------------------------------------------
Total net change in expense
on interest-bearing
liabilities (290) 2,940 (46) 2,604 1,052 17,280 171 18,503
- -----------------------------------------------------------------------------------------------------------------
Net change in net
interest income $(3,285) $ 3,420 $ 127 $ 262 $(1,073) $10,639 $(132) $ 9,434
=================================================================================================================
</TABLE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND
1997
GENERAL. Net income was $10.9 million, or $0.73 per common share on a
diluted basis for 1998, compared to $16.4 million, or $1.02 per common share,
for 1997. The decrease in net income for 1998, relative to 1997, was primarily
due to increases in operating expenses and provision for loan losses, offset,
in part, by higher noninterest income and net interest income.
NET INTEREST INCOME. Net interest income was $70.7 million for 1998, versus
$70.4 million in 1997. Interest income increased by 2%, to $158.1 million for
1998, compared to $155.2 million in 1997. Interest expense increased by 3%, to
$87.5 million for 1998, compared to $84.9 million in 1997.
Average interest-earning assets totaled $2.2 billion for 1998, compared to
$2.1 billion for 1997. Compared to 1997, average mortgage loans increased 14%
to $1,067 million, average consumer loans increased 23% to $219 million, and
average commercial loans increased 16% to $122 million in 1998. Average loans
represented 90% of average deposits for 1998, compared to 80% for 1997.
For 1998, the net interest margin was 3.27%, down somewhat from 3.36% in
1997. The decrease was primarily attributable to a 0.09% reduction in the yield
on interest-earning assets for 1998, relative to 1997, which was primarily
related to lower market interest rates.
PROVISION FOR LOAN LOSSES. Provision for loan losses totaled $3.5 million
for the year ended December 31, 1998, compared to $1.6 million in 1997. For
1998, net credit
19
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and Subsidiaries
losses totaled $2.9 million, or 0.21% of average loans, compared to $2.5
million, or 0.22%, in 1997.
At December 31, 1998, the allowance for loan losses totaled $9.6 million,
or 0.71% of loans and 96% of nonperforming loans, compared to $9.0 million, or
0.71% of loans and 101% of nonperforming loans at December 31, 1997.
At December 31, 1998, nonperforming loans totaled $10.0 million, or 0.74% of
loans, while nonperforming assets totaled $11.1 million, or 0.49% of assets. 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.
NONINTEREST INCOME. Noninterest income was $26.9 million for 1998, compared
to $21.6 million in 1997. The increase reflected a $5.8 million increase in the
net gain on sale of mortgage loans and a $1.6 million increase in deposit fees.
The increase in the net gain on sale of mortgage loans was attributable to
sharply higher mortgage origination volume, which totaled $1,111 million for
the full year 1998, versus $585 million for the full year 1997. The increase in
deposit fees was primarily attributable to growth in retail banking, expansion
of Commonwealth's commercial banking activities, and increased ATM fees. Also
contributing to the increase in noninterest income for the full year 1998 was a
$0.6 million increase in the net gain on the sale of securities and a $0.7
million increase in the cash surrender value of an investment in an insurance
product. These increases were partially offset by the effect of a $1.6 million
net gain on the sale of the Company's previous headquarters building and the
sale of a branch property in the first quarter of 1997, and a $1.6 million
decrease in servicing fees for the full year 1998. The decrease in servicing
fees was primarily attributable to an increase in the amortization of mortgage
servicing rights due to prepayments in the mortgage servicing portfolio, and to
the run-off of more favorably priced historical mortgage servicing rights.
NONINTEREST EXPENSE. Noninterest expense was $77.9 million for 1998,
compared to $66.0 million for 1997. The increase was primarily attributable to
higher commission expenses relating to growth in mortgage originations, as well
as an increase in legal expense and an increase in expenses relating to
supermarket banking and commercial banking. In addition, the increase was
attributable to a $3.5 million valuation adjustment relating to an equity
investment in a mortgage servicing partnership which is experiencing
significant prepayments in its mortgage servicing portfolio. The increase in
noninterest expense was also due to the $0.4 million reversal of the Bank's
pension liability, and the $0.4 million reversal of a liability relating to a
contract with the Company's data processing provider during the second quarter
of 1997, as well as a $0.2 million refund of prior year FDIC premiums received
in the first quarter of 1997. Partially offsetting these increases was a $0.6
million decrease in the amortization of intangible assets.
INCOME TAXES. Provision for income taxes was $5.3 million, or 33% of income
before income taxes in 1998, compared to $7.9 million, or 33%, in 1997. As of
December 31, 1998, the Company had a deferred tax asset of $2.5 million, which
was net of a valuation allowance of $1.4 million. 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.
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 average interest-earning assets was due
primarily to increas-
20
<PAGE> 24
es in the Company's loan portfolio. Compared to 1996, average mortgage loans
increased 22% to $885 million, average consumer loans increased 26% to $177
million, and average commercial loans increased 57% to $105 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 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 relating to 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 commercial 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 commercial 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.
INCOME TAXES. Provision for income taxes 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.
21
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and Subsidiaries
ASSET AND LIABILITY MANAGEMENT
The ability to maximize net interest income is largely dependent upon the
achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap," provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates. A gap is considered positive when
interest-rate sensitive assets exceed interest-rate sensitive liabilities, and
is considered negative when interest-rate sensitive liabilities exceed
interest-rate sensitive assets. Generally, during a period of rising interest
rates, a negative gap within shorter maturities would adversely affect net
interest income, while a positive gap within shorter maturities would result in
an increase in net interest income. During a period of falling interest rates,
a negative gap within shorter maturities generally would result in an increase
in net interest income, while a positive gap within shorter maturities
generally would have the opposite effect.
As of December 31, 1998, the Company had a positive gap relating to assets
and liabilities maturing or repricing within one year, indicating that within
shorter maturities, the amount of the Company's interest-rate-sensitive assets
exceeded its interest-rate-sensitive liabilities. In a rising rate environment,
assets would reprice faster at higher interest rates, thereby increasing net
interest income. In a falling rate environment, assets would reprice faster at
lower interest rates, thereby decreasing 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.
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 and interest-rate cap 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.
The Company generally uses interest-rate swaps and caps 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 jumbo 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 and caps was to decrease
the Company's interest expense by $0.1 million in 1998 and increase it by $0.2
million in 1997.
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, 1998.
<TABLE>
<CAPTION>
=====================================================
INTEREST-RATE DECEMBER 31, 1998
SWAP AGREEMENTS: INTEREST RATES
----------------------
FLOATING
NOTIONAL FIXED RATE
MATURITY PRINCIPAL AMOUNT RATE PAID RECEIVED
- -----------------------------------------------------
(dollars in thousands)
<C> <C> <C> <C>
01/17/99 $ 20,000 5.45% 5.69%
12/23/99 12,500 6.20 5.50
02/27/08 13,000 4.96 5.25
02/27/08 30,000 5.46 5.25
02/27/08 7,000 4.75 5.25
03/20/08 15,000 5.41 5.28
03/20/08 5,000 4.75 5.28
03/20/08 10,000 4.95 5.28
--------
Total $112,500 5.35(1) 5.36(1)
========
</TABLE>
(1) Reflects weighted average rates at December 31, 1998.
22
<PAGE> 26
<TABLE>
<CAPTION>
===========================================================
INTEREST-RATE DECEMBER 31, 1998
CAP AGREEMENTS: INTEREST RATES
-------------------------
NOTIONAL INDEX
MATURITY PRINCIPAL AMOUNT STRIKE RATE RATE
- -----------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
05/12/00 $50,000 6.82% 5.34%
09/22/00 15,000 6.72 5.23
-------
Total $65,000 6.79(1) 5.31(1)
=======
</TABLE>
(1) Reflects weighted average rates at December 31, 1998.
The Company's investment in mortgage servicing rights provides some
protection against increases in interest rates. In addition to providing
servicing fees, management believes that mortgage 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 mortgage 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.
23
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and
Subsidiaries
The following table summarizes the anticipated maturities or repricing of the
Company's interest-earning assets and interest-bearing liabilities as of
December 31, 1998, based on the information and assumptions set forth in the
notes below.
<TABLE>
<CAPTION>
FOUR TO MORE THAN MORE THAN
WITHIN THREE TWELVE ONE YEAR TO THREE YEARS OVER FIVE
(DOLLARS IN THOUSANDS) MONTHS MONTHS THREE YEARS TO FIVE YEARS YEARS TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets (1):
Loans receivable (2):
Single-family residential loans:
Fixed $ 27,724 $ 81,332 $ 155,790 $102,214 $195,006 $ 562,066
Adjustable 76,354 216,164 54,499 39,906 12,335 399,258
Consumer loans 65,190 52,662 71,235 29,407 22,132 240,626
Commercial loans 54,298 22,014 31,983 14,789 12,720 135,804
Mortgage loans held for sale 120,642 -- -- -- -- 120,642
Mortgage-backed securities (3) 114,785 95,856 148,902 77,747 86,851 524,141
Investment securities 10,638 17,001 9,996 1,700 -- 39,335
Other interest-earning assets (4) 43,829 -- -- -- 18,400 62,229
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 513,460 $485,029 $472,405 $265,763 $347,444 $2,084,101
================================================================================================================================
Interest-bearing liabilities:
Deposits (5):
NOW accounts (6) $ 5,416 $ 16,250 $ 37,051 $ 30,011 $127,940 $ 216,668
Savings accounts (6) 5,686 17,057 38,889 31,500 134,291 227,423
Money market deposit accounts 87,818 60,790 106,463 59,841 75,910 390,822
Certificates of deposit 189,839 278,651 148,958 33,934 15,677 667,059
FHLB advances 167,500 1,000 72,000 -- -- 240,500
Repurchase agreements 26,000 10,000 85,000 45,000 -- 166,000
- --------------------------------------------------------------------------------------------------------------------------------
Total 482,259 383,748 488,361 200,286 353,818 1,908,472
- --------------------------------------------------------------------------------------------------------------------------------
Hedge impact (145,500) 12,500 133,000 -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
$ 336,759 $396,248 $621,361 $200,286 $353,818 $1,908,472
Excess (deficiency) of
interest-earning
assets over interest-bearing
liabilities $176,701 $ 88,781 $(148,956) $ 65,477 $ (6,374) $ 175,629
================================================================================================================================
Cumulative excess of
interest-earning assets over
interest-bearing liabilities $176,701 $265,482 $116,526 $182,003 $175,629 --
================================================================================================================================
Cumulative excess of
interest-earning assets over
interest-bearing liabilities
as a percent of total assets 7.83% 11.76% 5.16% 8.06% 7.78% --
================================================================================================================================
</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 $10.0
million at December 31, 1998.
(3) Reflects estimated prepayments in the current interest rate environment.
(4) Includes $18.4 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 $134 million or 6% of total assets.
24
<PAGE> 28
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.
Although "gap" analysis is a useful measurement device available to
management in determining the existence of exposure to changes in interest
rates, its static focus as of a particular date requires utilization of other
techniques to measure exposure to changes in interest rates. Accordingly, the
Company also uses simulation models to analyze the estimated effects on net
interest income under multiple interest rate scenarios, including increases and
decreases in interest rates amounting to 100, 200, and 300 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, 1998, 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 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 reflect interest rates at December 31, 1998
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 interest
rate sensitivity position and does not include the change in earnings relating
to an increase or decrease in amortization of servicing intangible assets that
may be caused by different levels of prepayments when rates rise or fall. The
market value of portfolio equity is significantly impacted by the estimated
effect of prepayments on the value of single family loans, mortgage-backed
securities and servicing as rates change. Further, this analysis is based on
the Company's assets, liabilities, mortgage servicing rights, and
off-balance-sheet instruments at December 31, 1998 and does not contemplate any
actions the Company might undertake in response to changes in market interest
rates.
<TABLE>
<CAPTION>
PERCENT CHANGE PERCENT CHANGE
CHANGE IN IN NET INTEREST IN MARKET VALUE OF
INTEREST RATES INCOME (1) PORTFOLIO EQUITY
- -------------------------------------------------------
<S> <C> <C>
+2.00% 1.31% (7.04)%
+1.00% 2.18 (1.61)
-- -- --
-1.00% (5.52) (14.87)
-2.00% (12.22) (32.31)
</TABLE>
(1) Over a two year period.
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.
25
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and
Subsidiaries
The following table sets forth the Bank's compliance with applicable regulatory
capital requirements at December 31, 1998:
<TABLE>
<CAPTION>
TO BE WELL
MINIMUM CAPITALIZED
FOR CAPITAL FOR PROMPT
ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES 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 7.7% $ 172,313
------
Intangible assets (39,830)
Unrealized gain on available-for-sale
securities, net of tax (2,487)
------------
Tangible capital, and ratio to
OTS adjusted total asset 5.9% $ 129,996 1.5% $32,973
------ =========== ----- =======
Core capital, and ratio to OTS
adjusted total assets 5.9% $ 129,996 3.0% $65,947 5.0% $109,911
------ =========== ----- ======= ------ ========
Core capital, and ratio to OTS
risk-weighted assets 10.8% $ 129,996 6.0% $ 72,507
------ ----------- ------ =========
Allowance for loan losses 9,589
-----------
Supplementary capital 9,589
-----------
Total risk-based capital, and ratio to
OTS risk-weighted asset (1) 11.6% $ 139,585 8.0% $96,676 10.0% $120,845
------ =========== ----- ======== ------ =========
OTS Total assets $ 2,240,535
===========
OTS Adjusted total assets $ 2,198,218
===========
OTS Risk-weighted assets $ 1,208,447
===========
</TABLE>
(1) Does not reflect the interest rate risk component of the risk-based capital
requirement, which is not yet effective.
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 8.10% and 14.22% during the years
ended December 31, 1998 and 1997, respectively, and amounted to 6.25% and
11.07% at December 31, 1998 and 1997, respectively. The Asset/Liability
Committee reviews the Bank's liquidity position on a quarterly basis.
At December 31, 1998, the Company had commitments to originate $17 million
of fixed-rate loans. There were no commitments to originate adjustable-rate
loans at December 31, 1998. At the same date, scheduled maturities of
certificates of deposit during the succeeding 12 months amounted to $468
million, including $317 million within six months. Scheduled maturities of FHLB
advances during the same 12-month period amounted to $169 million. Management
of the Company believes that the Company has adequate resources to fund all of
its commitments to the extent required, and that it can adjust the rates on
certificates of deposit to retain deposits in changing interest rate
environments.
IMPACT OF INFLATION AND CHANGING PRICES
26
<PAGE> 30
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in relative
purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the Company's assets and
liabilities are monetary in nature. As a result, interest rates generally have
a more significant impact on a financial institution's performance than does
the effect of inflation.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." 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 has reported information on two segments
as a result of the adoption of SFAS No. 131, the Banking Operations and the
Mortgage Operations.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued in June 1998. The statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999.
A company may also implement the statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS No. 133 cannot be applied retroactively and must be applied
to derivative instruments and certain derivative instruments embedded in hybrid
contracts that were issued, acquired, or substantively modified after December
31, 1997 (and, at the company's election, before January 1, 1998). Commonwealth
has not yet determined the timing of the adoption of SFAS No. 133. The adoption
of SFAS No. 133 as of December 31, 1998 would not have a material impact on the
consolidated statements of income, however comprehensive income would have been
reduced by approximately $3.1 million due to the mark to market adjustment of
interest rate swap agreements.
YEAR 2000 READINESS DISCLOSURE
As the year 2000 approaches, a critical business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Many existing application software products in the
marketplace were designed to accommodate only two digit date entries. Beginning
in the year 2000, these systems and products will need to be able to accept
four - digit entries to distinguish years beginning with 2000 from prior years.
As a result, computer systems and software used by many companies may need to
be upgraded to comply with such Year 2000 requirements.
In 1997, Commonwealth initiated an extensive review of operations that could
be impacted by Year 2000 non-compliant computer systems and microprocessors. An
inventory of over 175 computer systems, outside service providers, security
systems, HVAC systems and power systems was compiled and reviewed for risk of
non-compliance. The Company's core processing systems are outsourced with
outside service providers. Throughout 1998, Commonwealth worked with these
service providers to confirm that action plans are in place to ensure Year 2000
compliance. Testing efforts were organized and completed to validate compliance
of core systems and the related key interfaces. Currently, management believes
all of Commonwealth's core systems being used to support daily business
operations are fully compliant.
Commonwealth continues to work with its technology
27
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and
Subsidiaries
partners and secondary service providers to ensure that low impact business
components are also fully compliant. Action plans are in place to upgrade
equipment and software systems where necessary. Total expenditures for Year
2000 compliance are estimated to be less than $0.3 million and are charged to
expense as incurred.
Additionally, Commonwealth has been proactive in assessing the Year 2000
readiness of our larger deposit and loan customers. An initial assessment has
been made of existing customers and ongoing monitoring processes are in place
to assess Commonwealth's exposure to customer non-compliance with Year 2000 in
order to minimize its impact. Presently, management is not aware of potential
non-compliance conditions which represent material exposure to the Company.
Processes are also in place to evaluate the Year 2000 readiness of new
customers.
Although Commonwealth believes its Year 2000 program is adequate to address
the Year 2000 issue, there can be no assurance to that effect. The Company will
implement its existing Business Resumption Plan in the event of non-compliance
with 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.
FORWARD LOOKING STATEMENTS
When used in filings by the Company with the Securities and Exchange
Commission, in the Company's press releases or other public or shareholder
communications, or in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result", "are expected
to", "will continue", "is anticipated", "estimate", "project" or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties including changes in
economic conditions in the Company's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area and competition that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results
for future periods to differ materially from any opinions or statements
expressed with respect to future periods in any current statements.
28
<PAGE> 32
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, 1998 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 LLP during 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, 1998 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, 1998, 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> 33
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, 1998, 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, 1998, 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 29, 1999
30
<PAGE> 34
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, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Philadelphia, Pa.,
January 29, 1999
31
<PAGE> 35
CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS (in thousands)
<TABLE>
<CAPTION>
=====================================================================================================
DECEMBER 31,
-----------------------------------
ASSETS 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 58,028 $ 43,251
Interest-bearing deposits 43,829 4,391
Short-term investments available for sale 4,820 6,296
Mortgage loans held for sale 120,642 37,574
Investment securities
Securities available for sale (cost of $34,407
and $50,428, respectively), at market value 34,515 51,326
Mortgage-backed securities
Securities held to maturity (market value of
$133,735 and $199,048, respectively), at cost 132,105 196,213
Securities available for sale (cost of $388,349
and $534,573, respectively), at market value 392,036 539,078
Loans receivable, net 1,338,177 1,260,841
Accrued interest receivable, net 11,260 13,271
FHLB stock, at cost 18,400 14,175
Premises and equipment, net 16,887 18,590
Intangible assets 39,830 45,244
Mortgage servicing rights 9,969 8,039
Other assets, including net deferred taxes of $2,508
and $482, respectively 37,001 30,306
- -----------------------------------------------------------------------------------------------------
Total assets $2,257,499 $2,268,595
=====================================================================================================
</TABLE>
(Continued)
32
<PAGE> 36
CONSOLIDATED BALANCE SHEETS Continued (in thousands)
<TABLE>
<CAPTION>
===========================================================================================================================
DECEMBER 31,
--------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities:
Deposits $1,605,299 $1,552,824
Notes payable and other borrowings:
Secured notes due to Federal Home Loan Bank of Pittsburgh 240,500 213,000
Securities sold under agreements to repurchase 166,000 246,099
Advances from borrowers for taxes and insurance 28,960 24,071
Accrued interest payable, accrued expenses and other liabilities 24,562 17,749
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,065,321 2,053,743
- ---------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
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;
18,054,315 shares issued and 14,721,408 outstanding at December 31, 1998;
17,998,736 shares issued and 16,247,136 outstanding at December 31, 1997 1,806 1,800
Additional paid-in capital 135,588 133,541
Retained earnings 123,917 117,582
Unearned stock benefit plan compensation (10,666) (12,900)
Unrealized gain on marketable securities, net 2,467 3,512
Treasury stock, at cost; 3,332,907 and 1,751,600 shares respectively (60,934) (28,683)
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 192,178 214,852
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $2,257,499 $2,268,595
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
33
<PAGE> 37
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,
--------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest on loans $ 106,827 $ 94,185 $ 75,602
Interest and dividends on deposits and money
market investments 2,604 2,140 2,847
Interest on investment securities 2,313 4,031 3,386
Interest on mortgage-backed securities 46,360 54,887 45,471
- -----------------------------------------------------------------------------------------------------
Total interest income 158,104 155,243 127,306
- -----------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 58,946 58,560 49,358
Interest on notes payable and other borrowings 28,508 26,295 16,994
- -----------------------------------------------------------------------------------------------------
Total interest expense 87,454 84,855 66,352
- -----------------------------------------------------------------------------------------------------
Net interest income 70,650 70,388 60,954
Provision for loan losses 3,500 1,600 601
- -----------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 67,150 68,788 60,353
- -----------------------------------------------------------------------------------------------------
Noninterest income:
Deposit fees and related income 8,822 7,261 5,414
Servicing fees, net 3,594 5,185 5,155
Net gain on sale of mortgage loans 10,842 4,993 2,056
Net gain on sale of securities 985 345 --
Other 2,703 3,791 3,048
- -----------------------------------------------------------------------------------------------------
Total noninterest income 26,946 21,575 15,673
- -----------------------------------------------------------------------------------------------------
Noninterest expense:
Compensation and employee benefits 37,866 32,969 25,584
Occupancy and office operations 10,907 10,283 8,891
FDIC premium 771 552 9,239
Advertising and promotion 2,137 1,814 1,816
Amortization of intangible assets 5,413 5,990 4,542
Valuation adjustment relating to an equity investment
in a mortgage servicing partnership 3,533 -- --
Other 17,243 14,440 11,835
- -----------------------------------------------------------------------------------------------------
Total noninterest expense 77,870 66,048 61,907
- -----------------------------------------------------------------------------------------------------
Income before income taxes 16,226 24,315 14,119
Income tax provision 5,294 7,946 4,781
- -----------------------------------------------------------------------------------------------------
Net income $ 10,932 $ 16,369 $ 9,338
=====================================================================================================
Basic weighted average number of shares outstanding 14,307,132 15,501,202 12,613,572
=====================================================================================================
Basic earnings per share $ 0.76 $ 1.06 $ 0.74
=====================================================================================================
Diluted weighted average number of shares outstanding 14,891,545 16,035,806 13,033,566
=====================================================================================================
Diluted earnings per share $ 0.73 $ 1.02 $ 0.72
=====================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
34
<PAGE> 38
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands)
<TABLE>
<CAPTION>
==================================================================================================================================
Unearned
Common Additional Stock
Shares Common Paid-in Retained Benefit Plan
Outstanding Stock Capital Earnings Compensation
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 8,629 $ 863 $ 36,686 $ 99,165 $ (2,337)
==================================================================================================================================
Comprehensive Income:
Net income -- -- -- 9,338 --
Other-unrealized loss on marketable
securities, net of $284 tax benefit -- -- -- -- --
Total comprehensive income -- -- -- -- --
Dividends -- -- -- (3,026) --
Release of ESOP shares (a) -- -- 341 -- 826
Amortization of unearned compensation -- -- -- -- 288
Exercise of stock options 14 1 135 -- --
Issuance and exchange of common stock as a
result of the conversion/reorganization (b) 9,311 931 95,769 -- (7,898)(c)
Assets consolidated from Commonwealth
Mutual Holding Company -- -- -- 100 --
Common stock acquired by stock benefit plans -- -- -- -- (1,389)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 17,954 1,795 132,931 105,577 (10,510)
==================================================================================================================================
Comprehensive Income:
Net income -- -- -- 16,369 --
Other-unrealized gain on marketable
securities, net of $744 tax expense -- -- -- -- --
Total comprehensive income -- -- -- -- --
Dividends -- -- -- (4,364) --
Release of ESOP shares (d) -- -- 829 -- 921
Amortization of unearned compensation -- -- -- -- 1,184
Exercise of stock options 87 9 415 -- --
Cash in lieu of fractional shares (2) -- (21) -- --
Stock retired (40) (4) (613) -- --
Common stock acquired by stock benefit plans -- -- -- -- (4,495)
Purchase of treasury stock (1,752) -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 16,247 1,800 133,541 117,582 (12,900)
==================================================================================================================================
Comprehensive Income:
Net income -- -- -- 10,932 --
Other-unrealized loss on marketable
securities, net of $563 tax benefit -- -- -- -- --
Total comprehensive income -- -- -- -- --
Dividends -- -- -- (4,597) --
Release of ESOP shares (d) -- -- 1,087 -- 920
Amortization of unearned compensation -- -- -- -- 1,314
Exercise of stock options 55 6 302 -- --
Purchase of treasury stock (1,581) -- -- -- --
Tax Benefit on employee stock plans -- -- 658 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 14,721 $1,806 $135,588 $123,917 $(10,666)
==================================================================================================================================
<CAPTION>
====================================================================================================
Unrealized
Gain (Loss)
on Marketable Treasury
Securities, net Stock Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1995 $2,659 $ -- $ 137,036
====================================================================================================
Comprehensive Income:
Net income -- -- 9,338
Other-unrealized loss on marketable
securities, net of $284 tax benefit (528) -- (528)
---------
Total comprehensive income -- -- 8,810
---------
Dividends -- -- (3,026)
Release of ESOP shares (a) -- -- 1,167
Amortization of unearned compensation -- -- 288
Exercise of stock options -- -- 136
Issuance and exchange of common stock as a
result of the conversion/reorganization (b) -- -- 88,802
Assets consolidated from Commonwealth
Mutual Holding Company -- -- 100
Common stock acquired by stock benefit plans -- -- (1,389)
- ----------------------------------------------------------------------------------------------------
Balance at December 31, 1996 2,131 -- 231,924
====================================================================================================
Comprehensive Income:
Net income -- -- 16,369
Other-unrealized gain on marketable
securities, net of $744 tax expense 1,381 -- 1,381
---------
Total comprehensive income -- -- 17,750
---------
Dividends -- -- (4,364)
Release of ESOP shares (d) -- -- 1,750
Amortization of unearned compensation -- -- 1,184
Exercise of stock options -- -- 424
Cash in lieu of fractional shares -- -- (21)
Stock retired -- -- (617)
Common stock acquired by stock benefit plans -- -- (4,495)
Purchase of treasury stock -- (28,683) (28,683)
- ----------------------------------------------------------------------------------------------------
Balance at December 31, 1997 3,512 (28,683) 214,852
====================================================================================================
Comprehensive Income:
Net income -- -- 10,932
Other-unrealized loss on marketable
securities, net of $563 tax benefit (1,045) -- (1,045)
---------
Total comprehensive income -- -- 9,887
---------
Dividends -- -- (4,597)
Release of ESOP shares (d) -- -- 2,007
Amortization of unearned compensation -- -- 1,314
Exercise of stock options -- -- 308
Purchase of treasury stock -- (32,251) (32,251)
Tax Benefit on employee stock plans -- -- 658
- ----------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $2,467 $(60,934) $192,178
====================================================================================================
</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 1998 and 1997
The accompanying notes are an integral part of these statements.
35
<PAGE> 39
CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
<TABLE>
<CAPTION>
=======================================================================================================================
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 10,932 $ 16,369 $ 9,338
Adjustments to reconcile net income to net cash
(used in) provided by operating activities -
Proceeds from loans sold to others 695,364 327,953 265,971
Loans originated for sale (538,658) (285,113) (175,984)
Purchases of loans held for sale (235,388) (61,234) (85,531)
Principal collection on mortgage loans held
for sale 1,034 552 427
Net gain on sale of mortgage loans (10,842) (4,993) (2,056)
Increase in net deferred loan fees 452 210 339
Provision for loan losses and foreclosed
real estate 3,609 1,757 1,041
Gain on sale of investment securities (985) (345) --
Valuation adjustment on an equity investment 3,533 -- --
Net (gain) loss on sale of assets (35) (1,595) 3
Depreciation and amortization 3,364 3,375 3,161
Net amortization of other assets and liabilities 10,354 9,967 7,173
Interest reinvested on repurchase agreements (10,001) (13,346) (6,792)
Changes in assets and liabilities -
Decrease (increase) in-
Accrued interest receivable, net 2,011 68 (3,523)
Deferred income taxes (1,463) (112) 747
Other assets (6,538) (4,600) (2,843)
Increase (decrease) in -
Advances from borrowers for taxes
and insurance 4,889 188 (1,914)
Accrued interest payable, accrued expenses
and other liabilities 6,813 (3,292) 5,215
- -----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by
operating activities $ (61,555) $ (14,191) $ 14,772
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
36
<PAGE> 40
CONSOLIDATED STATEMENTS OF CASH FLOWS Continued (in thousands)
<TABLE>
<CAPTION>
=====================================================================================================
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investing activities:
Proceeds from sale of investment securities $ 6,704 $ 5,000 $ --
Proceeds from maturities of investment securities 35,000 38,000 29,249
Purchases of investment securities (27,000) (39,402) (36,530)
Purchases of Bank Owned Life Insurance -- (15,156) --
Proceeds from sale of mortgage-backed securities -- 41,770 --
Proceeds from call of mortgage-backed securities 30,000 -- --
Purchases of mortgage-backed securities (156,958) (189,818) (412,676)
Principal collected on mortgage-backed securities 337,291 166,838 122,895
Principal collected on loans 458,064 249,227 177,660
Loans originated (371,979) (230,340) (132,264)
Loans purchased (165,295) (165,906) (240,444)
Sales of real estate acquired through foreclosure 1,016 1,431 809
Purchase of FHLB stock (4,225) (3,016) (5,343)
Sale of FHLB stock -- -- 3,096
Purchases of premises and equipment (1,766) (6,209) (4,918)
Acquisition of branches -- -- 215,904
Proceeds from sales of assets 105 11,208 107
- -----------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities 140,957 (136,373) (282,455)
- -----------------------------------------------------------------------------------------------------
Financing activities:
Net increase in deposits 52,475 61,374 37,276
Proceeds from notes payable and other borrowings 615,000 327,815 429,475
Repayment of notes payable and other borrowings (657,598) (207,044) (274,289)
Net (purchase) issuance of common stock (31,943) (33,392) 87,549
Cash dividends paid (4,597) (4,353) (2,403)
- -----------------------------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (26,663) 144,400 277,608
- -----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 52,739 (6,164) 9,925
Cash and cash equivalents at beginning of year 53,938 60,102 50,177
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 106,677 $ 53,938 $ 60,102
=====================================================================================================
Supplemental disclosures of cash flow information
Cash paid during the year for -
Interest $ 87,871 $ 84,889 $ 65,133
=====================================================================================================
Income taxes $ 5,350 $ 8,925 $ 4,266
=====================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
37
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1998, 1997, and 1996
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"). The Company
prepares its consolidated financial statements in accordance with generally
accepted accounting principles. 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
- - Comlife, Inc.-Inactive insurance subsidiary
All material intercompany accounts and transactions have been eliminated in
consolidation.
NATURE OF OPERATIONS
The Bank conducts business through 60 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 eight loan origination
offices located in Pennsylvania, New Jersey, Rhode Island, and Virginia. 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.
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 1997 and 1996 financial statements have been
reclassified in order to conform with the 1998 financial statement
presentation.
RECENTLY ADOPTED AND FUTURE ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income," on January 1, 1998, as required. SFAS
No. 130 established standards for the reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. 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. Currently, such non-owner
changes in equity include only unrealized gains or losses on marketable
securities, net of tax.
A summary of the reclassification adjustment for realized gains or losses on
marketable securities, net of tax, for the years ended December 31, 1998, 1997,
and 1996 follows:
<TABLE>
<CAPTION>
======================================================================================
(IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized (loss) gain on
marketable securities, net of
tax, arising during period $ (405) $ 1,605 $ (528)
Less: reclassification
adjustment for gains included
in net income 640 224 --
------- ------- -------
Net unrealized (loss) gain on
marketable securities,
net of tax $(1,045) $ 1,381 $ (528)
======================================================================================
</TABLE>
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement requires that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for
38
<PAGE> 42
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999.
A company may also implement the statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS No. 133 cannot be applied retroactively and must be applied
to derivative instruments and certain derivative instruments embedded in hybrid
contracts that were issued, acquired, or substantively modified after December
31, 1997 (and, at the company's election, before January 1, 1998). Commonwealth
has not yet determined the timing of the adoption of SFAS No. 133. The adoption
of SFAS No. 133 as of December 31, 1998 would not have a material impact on the
consolidated statements of income, however comprehensive income would have been
reduced by approximately $3.1 million due to the mark to market adjustment of
interest rate swap agreements.
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 or 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.
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition
and Disclosures," require creditors to measure certain impaired loans based on
the present value of expected future cash flows discounted at the loan's
effective interest rate, or as a practical expedient, at the loan's observable
market price, or the fair value of the collateral if the loan is collateral
dependent. Loans excluded from these statements include large groups of
smaller-balance homogenous loans that are collectively evaluated for
impairment, loans that are measured at fair value or at the lower of
39
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and
Subsidiaries
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 $4.3 million and $3.5 million at
December 31, 1998 and 1997, respectively, of which $0.7 million and $0.5
million, respectively, were related to mortgage loans held for sale.
The Company sells whole interests in loans and mortgage-backed securities.
In certain transactions involving sales of loans or mortgage-backed securities
that are backed by loans originated by the Company, the Company may continue 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. Advances for taxes and insurance were $1.1 million and
$1.4 million at December 31, 1998 and 1997, respectively.
MORTGAGE SERVICING RIGHTS
The Company acquires mortgage servicing rights through the purchase and
origination of mortgage loans which are sold or securitized, on either a
servicing retained or servicing released basis. SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," requires the Company to allocate the total cost of the mortgage
loans between 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.
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.
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. The CDI relating to the Berks Acquisition are being amortized on an
accelerated basis over approximately 7 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, 1998 and
1997:
<TABLE>
<CAPTION>
=====================================================
DECEMBER 31,
----------------------
(IN THOUSANDS) 1998 1997
- -----------------------------------------------------
<S> <C> <C>
Goodwill (Berks Acquisition) $19,141 $20,973
CDI (Berks Acquisition) 8,260 10,442
Goodwill (Fidelity Federal) 10,257 11,327
CDI (Fidelity Federal) 2,172 2,502
- -----------------------------------------------------
Total $39,830 $45,244
=====================================================
</TABLE>
40
<PAGE> 44
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, 1998 and 1997, real estate owned totaled $1.0
million and $0.6 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
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes
financial accounting and reporting standards for stock-based employee
compensation plans. The statement encourages all entities to adopt a 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.
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>
=================================================================================
(IN THOUSANDS) 1998 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic weighted average
numbers of shares
outstanding 14,307,132 15,501,202 12,613,572
- ---------------------------------------------------------------------------------
Effect of dilutive securities:
Stock options 477,044 423,096 316,991
Recognition Plan stock 107,369 111,508 103,003
- ---------------------------------------------------------------------------------
Diluted weighted average
numbers of shares
outstanding 14,891,545 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 outstanding shares using the treasury stock
method, unless such options are antidilutive. Common shares outstanding exclude
treasury shares.
Basic EPS was $0.76 for 1998, compared to $1.06 per share for 1997, and
$0.74 per share for 1996. Diluted EPS was $0.73 for 1998, compared to $1.02 per
share for 1997, and $0.72 per share for 1996.
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 qualify 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.
41
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and
Subsidiaries
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, 1998, 1997, and 1996, all of the Company's
significant derivatives qualified for hedge accounting treatment.
INTEREST RATE SWAP AND CAP AGREEMENTS
The Company enters into interest rate swaps and caps 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 and cap
transactions are included in interest on notes payable and other borrowings.
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 and call
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
expire. 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, 1998, the Company had a positive gap relating to assets
and liabilities maturing or repricing within one year, indicating that within
shorter maturities, the amount of the Company's interest-rate-sensitive assets
exceeded its interest-rate-sensitive liabilities. In a rising rate environment,
assets would reprice faster at higher interest rates, thereby increasing net
interest income. In a falling rate environment, assets would reprice faster at
lower interest rates, thereby decreasing 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, 1998, 1997, and
1996, reclassifications of mortgage loans to real estate owned were $2.0
million, $1.6 million, and $1.5 million, respectively.
42
<PAGE> 46
2. INVESTMENT SECURITIES:
Investments in debt and equity securities at December 31, 1998 and 1997,
were as follows:
<TABLE>
<CAPTION>
===================================================================================================================================
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------ -----------------
AVAILABLE FOR SALE AVAILABLE FOR SALE
-----------------------------------------------------------------------------------------
UNREALIZED UNREALIZED
AMORTIZED ------------------ MARKET AMORTIZED ---------------- MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Corporate Bonds maturing:
After one year but within five years $19,997 $143 $-- $20,140 $ -- $ -- $-- $ --
U.S. Treasury and U.S. Government agency
securities maturing:
Within one year 12,000 1 2 11,999 34,979 46 -- 35,025
After one year but within five years -- -- -- -- 5,001 15 -- 5,016
- -----------------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury and U.S.
Government agency securities 12,000 1 2 11,999 39,980 61 -- 40,041
- -----------------------------------------------------------------------------------------------------------------------------------
Mortgage Security Mutual Fund -- -- -- -- 2,373 31 -- 2,404
Equity Servicing Partnership 1,700 -- -- 1,700 4,819 -- -- 4,819
Other Equity Investments 710 -- 34 676 3,256 806 -- 4,062
- -----------------------------------------------------------------------------------------------------------------------------------
Total $34,407 $144 $36 $34,515 $50,428 $898 $-- $51,326
===================================================================================================================================
</TABLE>
3. MORTGAGE-BACKED SECURITIES:
Mortgage-backed securities at December 31, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
=====================================================================================================
DECEMBER 31, 1998
-----------------------------------------------------------
UNREALIZED
AMORTIZED ------------------------ MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity:
GNMA $ 50,856 $1,284 $ 108 $ 52,032
FHLMC 28,871 193 151 28,913
FNMA 48,345 443 31 48,757
Private 4,033 -- -- 4,033
- -----------------------------------------------------------------------------------------------------
Total $132,105 $1,920 $ 290 $133,735
=====================================================================================================
Available for sale:
GNMA $ 13,049 $ 475 $ -- $ 13,524
FHLMC 65,987 1,927 17 67,897
FNMA 67,773 718 177 68,314
CMO and REMIC 241,540 972 211 242,301
- -----------------------------------------------------------------------------------------------------
Total $388,349 $4,092 $ 405 $392,036
=====================================================================================================
<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
FNMA 81,531 865 388 82,008
CMO and REMIC 338,378 1,589 761 339,206
- -----------------------------------------------------------------------------------------------------
Total $534,573 $5,696 $1,191 $539,078
=====================================================================================================
</TABLE>
43
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and
Subsidiaries
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 1998,
$30 million of mortgage-backed securities were called by the issuer at par
value with no gain or loss recognized. During 1997, the Company sold
mortgage-backed securities, which were classified as available for sale,
totaling $42 million and purchased mortgage-backed securities, classified as
available for sale, totaling $42 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.
At December 31, 1998 and 1997, Federal Home Loan Mortgage Corporation
("FHLMC") mortgage-backed securities with an amortized cost of $59 million and
$107 million, respectively (market value of $59 million and $108 million,
respectively); Government National Mortgage Association ("GNMA")
mortgage-backed securities with an amortized cost of $11 million and $36
million, respectively (market value of $11 million and $37 million,
respectively); and Federal National Mortgage Association ("FNMA")
mortgage-backed securities with an amortized cost of $94 million and $106
million, respectively (market value of $95 million and $106 million,
respectively), collateralized certain securities sold under agreements to
repurchase. At December 31, 1997 private mortgage-backed securities with an
amortized cost of $6 million and market value of $6 million collateralized
certain securities sold under agreements to repurchase (see Note 8).
Mortgage-backed securities with a amortized cost at December 31, 1998 and 1997,
of $33 million and $19 million, respectively (market value of $34 million and
$19 million, respectively), were pledged as collateral for depositors.
Mortgage-backed securities with an amortized cost at December 31, 1998 and
1997, of $0.2 million and $0.4 million, respectively (market value of $0.2
million and $0.4 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, 1998 and 1997,
follows:
<TABLE>
<CAPTION>
================================================================================
DECEMBER 31,
------------------------------
(IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans - Residential $ 969,617 $ 958,542
- --------------------------------------------------------------------------------
Consumer loans:
Equity lines of credit 34,845 41,592
Second mortgages 126,360 98,934
Recreational vehicles 39,920 22,182
Other 38,781 32,085
- --------------------------------------------------------------------------------
Total consumer loans 239,906 194,793
- --------------------------------------------------------------------------------
Commercial loans:
Small Business Administration 14,491 20,016
Commercial real estate 83,485 71,508
Business loans 41,026 24,456
- --------------------------------------------------------------------------------
Total commercial loans 139,002 115,980
- --------------------------------------------------------------------------------
Total loans receivable 1,348,525 1,269,315
- --------------------------------------------------------------------------------
Less:
Net Premium on loans purchased (2,880) (3,559)
Allowance for loan losses 9,589 9,024
Deferred loan fees 3,639 3,009
- --------------------------------------------------------------------------------
Loans receivable, net $1,338,177 $1,260,841
================================================================================
</TABLE>
At December 31, 1998 and 1997, approximately 52% and 47%, 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.
44
<PAGE> 48
Nonaccruing loans at December 31, 1998 and 1997, were $10.0 million and $8.9
million, respectively. Forgone interest income on nonaccruing loans totaled
$0.9 million at both December 31, 1998 and 1997.
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) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 1,074 $ 918 $937
New loans 765 500 207
Loan repayments (37) (344) (226)
- --------------------------------------------------------------------------------
Balance, end of year $1,802 $1,074 $918
================================================================================
</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) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $9,024 $9,971 $7,485
Loans charged off (3,129) (2,799) (667)
Recoveries of loans 194 252 180
- --------------------------------------------------------------------------------
Net loans charged off (2,935) (2,547) (487)
Provision for loan losses 3,500 1,600 601
Allowance acquired in
Berks Acquisition -- -- 2,372
- --------------------------------------------------------------------------------
Balance, end of year $9,589 $9,024 $9,971
================================================================================
</TABLE>
5. ACCRUED INTEREST RECEIVABLE:
Accrued interest receivable was related to the following at December 31,
1998 and 1997:
<TABLE>
<CAPTION>
==================================================
DECEMBER 31,
-------------------
(IN THOUSANDS) 1998 1997
- --------------------------------------------------
<S> <C> <C>
Investment securities $ 473 $ 820
Mortgage-backed securities 3,234 4,447
Loans receivable, net 7,553 8,004
- --------------------------------------------------
Total $11,260 $13,271
==================================================
</TABLE>
6. PREMISES AND EQUIPMENT:
A summary of premises and equipment, less accumulated depreciation and
amortization, at December 31, 1998 and 1997, follows:
<TABLE>
<CAPTION>
==============================================================================
DECEMBER 31,
---------------------------
(IN THOUSANDS) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,247 $ 1,247
Office buildings 7,340 6,800
Furniture, fixtures and equipment 22,352 21,387
Leasehold improvements 9,766 9,610
- ------------------------------------------------------------------------------
Premises and equipment 40,705 39,044
Less-accumulated depreciation
and amortization (23,818) (20,454)
- ------------------------------------------------------------------------------
Premises and equipment, net $16,887 $18,590
==============================================================================
</TABLE>
45
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and
Subsidiaries
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, 1998:
Balance at year-end $319,995 $390,822 $227,423 $667,059
Average balance 290,518 340,570 227,618 707,858
Interest expense 2,209 12,994 5,070 38,673
Average rate paid 0.76% 3.82% 2.23% 5.46%
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%
</TABLE>
Certificates of deposits of $100,000 or more, totaled $91 million and $92
million at December 31,1998 and 1997, respectively. Deposits in excess of
$100,000 are not federally insured by the FDIC.
The scheduled maturities of certificate accounts at December 31, 1998 and 1997,
were as follows:
<TABLE>
<CAPTION>
===============================================================================================================================
DECEMBER 31,
-----------------------------------------------------------------------------------
1998 1997
-------------------------------------- -----------------------------------
(IN THOUSANDS) AMOUNT PERCENT AMOUNT PERCENT
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Under 12 months $468,490 70% $479,860 64%
12 to 36 months 148,958 22 216,011 29
Over 36 months 49,611 8 48,609 7
- -------------------------------------------------------------------------------------------------------------------------------
$667,059 100% $744,480 100%
===============================================================================================================================
</TABLE>
46
<PAGE> 50
8. NOTES PAYABLE AND OTHER BORROWINGS:
Notes payable and other borrowings at December 31, 1998 and 1997, were as
follows:
<TABLE>
<CAPTION>
============================================================================================================================
DECEMBER 31,
-------------------------------------------------------------------------------------
1998 1997
------------------------ --------------------------
(IN THOUSANDS) DUE DATE RATE AMOUNT RATE AMOUNT
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Secured notes due to
FHLB of Pittsburgh:
Maturing in 1998 $ -- $210,000
1999 168,500 1,000
2000 21,000 1,000
2001 51,000 1,000
-------- --------
Total 4.75%-7.27% $240,500 5.24%-7.27% $213,000
======== ========
Securities sold under
agreement to repurchase:
Maturing in 1998 $ -- $111,099
1999 36,000 35,000
2000 70,000 (1) 55,000 (1)
2001 15,000 --
2002 45,000 (2) 45,000 (2)
-------- --------
Total 5.31%-6.71% $166,000 4.98%-6.71% $246,099
======== ========
</TABLE>
(1) Includes $30 million callable in 1999.
(2) Callable in 2000.
All stock in the FHLB of Pittsburgh at December 31, 1998 and 1997, was
pledged as collateral for the notes due to the FHLB.
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, 1998 and 1997, all of the agreements were to repurchase identical
securities.
Securities underlying these reverse repurchase agreements consisted of
mortgage-backed securities with an amortized cost of $164 million and $256
million, respectively (market value of $165 million and $258 million,
respectively), at December 31, 1998 and 1997 (see Note 3).
The maximum amounts of outstanding reverse repurchase agreements during
the years ended December 31, 1998 and 1997, were $241 million and $265 million,
respectively. Average agreements outstanding for the years ended December 31,
1998 and 1997, were $205 million and $243 million, respectively. The weighted
average interest rates relating to the agreements for the years ended December
31, 1998 and 1997, were 6.04% and 5.90%, respectively.
47
<PAGE> 51
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, 1998, 1997, and 1996, follows:
<TABLE>
<CAPTION>
================================================================================
(IN THOUSANDS) CURRENT DEFERRED TOTAL
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1998:
Federal $6,757 $(1,463) $5,294
State -- -- --
- --------------------------------------------------------------------------------
Total $6,757 $(1,463) $5,294
================================================================================
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
================================================================================
</TABLE>
Income tax expense has been provided at the effective rates of 33%, 33%,
and 34% for the years ended December 31, 1998, 1997, and 1996, respectively.
These rates differ from the statutory rate of 35%, as follows:
<TABLE>
<CAPTION>
================================================================================
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------------------
(IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income
taxes $ 16,226 $ 24,315 $ 14,119
================================================================================
Income tax expense at
federal statutory rate 5,679 8,511 4,942
Goodwill 27 27 244
ESOP 351 258 111
Low-income housing
credits (548) (771) (132)
Change in valuation
allowance (124) (106) (104)
Other (91) 28 (280)
- --------------------------------------------------------------------------------
Income tax expense at
effective rate $ 5,294 $ 7,946 $ 4,781
================================================================================
</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, 1998 and 1997,
respectively:
<TABLE>
<CAPTION>
================================================================================
December 31,
----------------------------
(IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Depreciation $ 656 $ 356
Loan loss reserves 2,436 2,968
Mortgage servicing rights 1,295 993
Post retirement and post
employment benefits 228 401
Accrued expenses not
currently deductible 227 227
Servicing partnership
valuation adjustment 1,155 --
Tax deductible goodwill 2,549 1,355
Other 573 74
- --------------------------------------------------------------------------------
Total gross assets 9,119 6,374
Less valuation allowance (1,356) (1,480)
- --------------------------------------------------------------------------------
Gross assets net of
valuation allowance 7,763 4,894
- --------------------------------------------------------------------------------
Deferred loan fees (174) (185)
Unrealized gain on securities (1,328) (1,891)
Capitalized mortgage
servicing fees (2,942) (1,919)
Other (811) (417)
- --------------------------------------------------------------------------------
Total gross liabilities (5,255) (4,412)
- --------------------------------------------------------------------------------
Net deferred tax asset $2,508 $ 482
================================================================================
</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, 1998, the Company had net loss carryforwards for state
tax purposes totaling $8.9 million, which expire beginning in 1999.
48
<PAGE> 52
10. MORTGAGE BANKING ACTIVITIES:
During the years ended December 31, 1998 and 1997, the Company sold
mortgage loans and mortgage-backed securities collateralized by loans originated
by ComNet totaling $692 million and $311 million, respectively, on a servicing
retained or servicing released basis.
A summary of the principal balances of loans serviced for others follows:
<TABLE>
<CAPTION>
================================================================================
DECEMBER 31,
-----------------------------------------------
(IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage loans underlying
pass-through securities:
FNMA $ 891,909 $ 748,727 $ 714,472
FHLMC 300,738 350,216 340,928
Other investors 337 462 615
- --------------------------------------------------------------------------------
Total 1,192,984 1,099,405 1,056,015
Mortgage loan portfolios
serviced for:
FNMA 76,505 93,364 102,387
Other investors 87,730 110,747 181,488
- --------------------------------------------------------------------------------
Total $ 1,357,219 $ 1,303,516 $ 1,339,890
================================================================================
</TABLE>
The Company is required to remit to mortgage-backed securities 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, 1998, the principal amount of mortgages
outstanding that are subject to this condition aggregated approximately $1.2
billion, of which approximately $21 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, 1998 follows:
<TABLE>
<CAPTION>
================================================================================
(IN THOUSANDS)
YEAR ENDING DECEMBER 31, AMOUNT
- --------------------------------------------------------------------------------
<S> <C>
1999 $ 4,785
2000 3,968
2001 2,791
2002 2,417
2003 2,176
2004 and thereafter 15,006
- --------------------------------------------------------------------------------
Total $ 31,143
================================================================================
</TABLE>
Rent expense under operating leases was $3.5 million, $3.1 million, and
$1.7 million for the years ended December 31, 1998, 1997, and 1996,
respectively.
COMMITMENTS TO ORIGINATE LOANS
The Company had outstanding commitments to originate fixed rate
residential mortgage loans of $17 million (interest rates ranged between 5.25%
and 8.75%) at December 31, 1998. There were no outstanding commitments to
originate adjustable rate residential mortgage loans at December 31, 1998. 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, 1998, the aggregate commitment for payments to the executives upon
termination, without a change in control, was $1.8 million.
49
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and
Subsidiaries
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 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 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 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. As of February 1999, the Claims Court had ruled in favor of thrift
plaintiffs on liability for breach of contract in four additional
Winstar-related cases. In February 1999, the Bank filed a motion of summary
judgment on liability for breach of contract. However, the Courts 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-related 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 and others 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.
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, 1998, the Bank met all capital
adequacy requirements to which it is subject.
As of December 31, 1998, 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> 54
A summary of the Bank's capital amounts and ratios as of December 31, 1998
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 7.7% $ 172,313)
-------
Intangible assets (39,830)
Unrealized gains on available-for-sale
securities, net of tax (2,487)
----------
Tangible capital, and ratio to
OTS adjusted total assets 5.9% $ 129,996 1.5% $32,973
------- ========== ------- =======
Core capital, and ratio to OTS
adjusted total assets 5.9% $ 129,996 3.0% $65,947 5.0% $109,911
------- ========== ------- ======= ------- ========
Core capital, and ratio to OTS
risk-weighted assets 10.8% $ 129,996 6.0% $ 72,507
------- ---------- ------- ========
Allowance for loan losses 9,589
----------
Supplementary capital 9,589
----------
Total risk-based capital, and ratio to
OTS risk-weighted assets (1) 11.6% $ 139,585 8.0% $96,676 10.0% $120,845
------- ========== ------- ======= ------- ========
OTS Total assets $2,240,535
==========
OTS Adjusted total assets $2,198,218
==========
OTS Risk-weighted assets $1,208,447
==========
</TABLE>
(1) Does not reflect the interest rate risk component of the risk-based capital
requirement, which is not yet effective.
A summary of the Bank's capital amounts and ratios as of December 31, 1998
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 of the risk-based capital
requirement, which is not yet effective.
51
<PAGE> 55
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 $42 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 $2.5 million were deducted
from core and tangible capital as of December 31, 1998. 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 $9.6 million allowance for loan losses at December 31, 1998.
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 $2.5 million at December 31, 1998, 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,
1998, 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 1998 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 1998 financial statements cannot presently be determined.
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE 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, 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 options contracts, the
contract or notional amounts do not represent exposure to credit loss. The
Company controls credit risk by conducting transactions only with "primary" U.S.
Government dealers as established by the Federal Reserve Bank, money center
banks, recognized GNMA dealers, and major investment firms, and by setting
policies for transaction vol-
52
<PAGE> 56
ume 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) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Interest rate swap agreements $112,500 $100,000
Interest rate cap agreements 65,000 80,000
Mandatory forward contracts 102,600 31,000
Option Contracts:
Puts 15,000 5,000
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, 1998 and 1997, the Company had notional balances of
interest rate exchange agreements totaling $113 million and $100 million,
respectively, with interest payable at fixed rates. The weighted average rates
to be paid by the Company at December 31, 1998 and 1997, were 5.35% and 5.66%,
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, 1998 and 1997, the weighted average variable yields were 5.36% and
5.93%, 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 $0.8 million and $1.5 million at December 31,
1998 and 1997, respectively. Included in other liabilities were swap payables of
$1.5 million and $1.4 million at December 31, 1998 and 1997, respectively. These
agreements have expiration dates between January 1999 and March 2008.
FHLMC, FNMA, and GNMA mortgage-backed securities, with a combined
amortized cost of $0.2 million and $0.4 million (market value of $0.2 million
and $0.4 million), were pledged by the Company as collateral for the interest
rate swaps outstanding as of December 31, 1998 and 1997, respectively.
In the event of nonperformance by the other parties to the interest rate
swap agreements, there was no credit risk to the Company at December 31, 1998.
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,
1998 and 1997, the Company had notional balances of interest rate cap agreements
totaling $65 million and $80 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, 1998 and 1997, was 6.79% and 6.50%, respectively.
Unamortized fees at December 31, 1998 and 1997, were $0.3 million and $0.5
million, respectively, and were included in other assets. These agreements have
expiration dates between May 2000 and September 2000. Unamortized fees of $0.3
million represented the credit risk to the Company for interest rate cap
agreements at December 31, 1998.
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 $103 million and $31 million,
respectively, as of December 31, 1998 and 1997.
At December 31, 1998 and December 31, 1997, the Company had no exposure
to credit loss in the event of nonperformance by other parties to the mandatory
forward commitments.
53
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and
Subsidiaries
The Company purchases put and call options on U.S. Treasury bond futures
as an alternative to mandatory forward contracts. The Company had outstanding
put options of $15 million and $5 million at December 31, 1998 and 1997,
respectively. The Company had no call options outstanding at December 31, 1998,
compared to call options of $2 million outstanding at December 31, 1997. 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 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.
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, forwards, options and lending
commitments) are based on quoted prices, current settlement values,
pricing models or other formulas.
54
<PAGE> 58
At December 31, 1998 and 1997, the estimated fair values of the Company's
financial instruments were as follows:
<TABLE>
<CAPTION>
================================================================================================================================
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
(IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 106,677 $ 106,677 $ 53,938 $ 53,938
Mortgage loans held for sale 120,642 120,642 37,574 37,574
Investment securities 34,515 34,515 51,326 51,326
Mortgage-backed securities 524,141 525,771 735,291 738,126
Loans receivable, net 1,338,177 1,347,918 1,260,841 1,260,109
FHLB stock 18,400 18,400 14,175 14,175
Mortgage servicing rights 9,969 10,176 8,039 10,050
Financial liabilities:
Deposits 1,605,299 1,604,870 1,552,824 1,550,276
Secured notes due to FHLB of Pittsburgh 240,500 241,147 213,000 213,037
Securities sold under agreements to repurchase 166,000 167,732 246,099 245,677
</TABLE>
<TABLE>
<CAPTION>
================================================================================================================================
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
(IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unrecognized Financial Instruments:
Commitments to originate loans $ -- $ -- $ -- $ --
Interest rate swaps (690) (3,060) 121 212
Interest rate caps 301 14 527 183
Mandatory forward commitments -- -- -- --
Put and call options 34 57 18 18
</TABLE>
55
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and
Subsidiaries
15. EMPLOYEE BENEFIT PLANS:
The Company terminated its noncontributory defined benefit pension plan
during 1997, and replaced it with a Target Benefit Plan and an enhanced 401(k)
Plan to include a Profit Sharing and a 401(k) Match component. 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 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, and
401(k) Match are held in a trust fund. During 1998 and 1997, the Company
contributed $0.6 million and $0.5 million, respectively, to the Target Benefit
Plan, Profit Sharing, and 401(k) Match.
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.
Participants contribute monthly through payroll deductions. The Company's
contributions totaled $1.2 million, $1.2 million, and $0.9 million for the years
ended December 31, 1998, 1997, and 1996, respectively.
The Company's employee savings plan (401(k)) is 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, and a stable value fund. 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 $6 million, or 38% of the plan's assets at
December 31, 1998.
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 eight
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 $1.9 million and $1.7 million relating to the
ESOP for the year ended December 31, 1998 and 1997, respectively. As of December
31, 1998, the ESOP held 1.3 million shares, of which 0.5 million had been
allocated. The fair value of unearned ESOP shares at December 31, 1998,
approximated $11.8 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 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 value of the common
stock at the date of 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 $1.3 million, $1.2 million, and $0.3 million for the years ended
December 31, 1998, 1997, and 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
56
<PAGE> 60
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 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, 1998 and 1997, the Company's net income and earnings per share would have
been reduced as follows:
<TABLE>
<CAPTION>
================================================================================
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Net Income - as reported $ 10,932 $ 16,369
Net Income - pro forma $ 9,985 $ 15,643
Basic earnings per share - as reported $ 0.76 $ 1.06
Basic earnings per share - pro forma $ 0.70 $ 1.01
Diluted earnings per share - as reported $ 0.73 $ 1.02
Diluted earnings per share - pro forma $ 0.67 $ 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 1998, 1997 and 1996, respectively: risk-free interest rate of 4.69%,
5.41%, and 6.21%; expected volatility of 65%, 32%, and 20%; dividend yield of
1.98%, 1.42%, and 2.00%; and an expected life of seven years.
A summary of activity under the various stock option plans for the years
ended December 31, 1998, 1997, and 1996 follows:
<TABLE>
<CAPTION>
================================================================================
WEIGHTED
AVERAGE
EXERCISE
OPTION PRICE $4.81-$23.75 PRICES
================================================================================
<S> <C> <C>
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
================================================================================
Granted 141,044 19.61
Exercised (55,543) 5.61
Forfeited (64,431) 13.29
- --------------------------------------------------------------------------------
Options outstanding December 31, 1998 1,467,836 $ 12.28
================================================================================
Options exercisable December 31, 1998 706,053 $ 9.70
================================================================================
</TABLE>
57
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and
Subsidiaries
16. SEGMENT REPORTING:
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was issued in June 1997 and is effective for fiscal years
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 Company's segment reports follow:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------
1998 1997
------------------------------------- ------------------------------------------
BANKING MORTGAGE BANKING MORTGAGE
(IN THOUSANDS) OPERATIONS OPERATIONS CONSOLIDATED OPERATIONS OPERATIONS CONSOLIDATED
------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income
after provision
for loan losses $ 62,085 $ 5,065 $ 67,150 $ 65,571 $ 3,217 $ 68,788
Noninterest income:
Servicing fees, net (2,832) 6,426 3,594 (2,577) 7,762 5,185
Net gain on sale of
mortgage loans (1,297) 12,139 10,842 (811) 5,804 4,993
Other 12,619 (109) 12,510 11,396 1 11,397
------------------------------------- ------------------------------------------
Total noninterest income 8,490 18,456 26,946 8,008 13,567 21,575
------------------------------------- ------------------------------------------
Noninterest expense:
Compensation and
employee benefits 25,369 12,497 37,866 24,333 8,636 32,969
Other 33,215 6,789 40,004 26,893 6,186 33,079
------------------------------------- ------------------------------------------
Total noninterest expense 58,584 19,286 77,870 51,226 14,822 66,048
------------------------------------- ------------------------------------------
Income before
income taxes 11,991 4,235 16,226 22,353 1,962 24,315
Income tax provision 3,812 1,482 5,294 7,282 664 7,946
------------------------------------- ------------------------------------------
Net income $ 8,179 $ 2,753 $ 10,932 $ 15,071 $ 1,298 $ 16,369
===================================== ==========================================
Total assets $2,106,127 $151,372 $2,257,499 $2,199,425 $ 69,170 $ 2,268,595
===================================== ==========================================
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------
1996
-----------------------------------------------
BANKING MORTGAGE
(IN THOUSANDS) OPERATIONS OPERATIONS CONSOLIDATED
-----------------------------------------------
<S> <C> <C> <C>
Net interest income
after provision
for loan losses $ 57,565 $ 2,788 $ 60,353
Noninterest income:
Servicing fees, net (2,124) 7,279 5,155
Net gain on sale of
mortgage loans (423) 2,479 2,056
Other 8,475 (13) 8,462
-----------------------------------------------
Total noninterest income 5,928 9,745 15,673
-----------------------------------------------
Noninterest expense:
Compensation and
employee benefits 20,237 5,347 25,584
Other 31,130 5,193 36,323
-----------------------------------------------
Total noninterest expense 51,367 10,540 61,907
-----------------------------------------------
Income before
income taxes 12,126 1,993 14,119
Income tax provision 4,081 700 4,781
-----------------------------------------------
Net income $ 8,045 $ 1,293 $ 9,338
===============================================
Total assets
</TABLE>
17. ACQUISITIONS:
On March 31, 1998, Commonwealth Bank acquired certain assets and the
Annandale, Virginia office of Edmunds Financial Corporation d/b/a Service First
Mortgage. Under the terms of the transaction, this operation conducts business
under the ComNet Mortgage Services name.
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.
On June 28, 1996, the Company completed the acquisition of twelve 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 $380 million of deposits and acquired approximately $122 million
of single-family residential, commercial, and consumer loans. In addition,
Commonwealth received approximately $3 million of real property and
approximately $216 million of cash, net of a deposit premium of approximately
$38 million.
58
<PAGE> 62
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
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
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
Theodore T. Aicher Vice President, Treasurer
Ellen L. Benson Vice President, Human Resources
Paul Donovan Vice President, Consumer Lending
James L. Jillson Vice President, Consumer Credit
Robert D. Kane Vice President, Controller
Kathleen J. Lippincott Vice President, Operations Support Services
Brian J. Maguire Vice President, Marketing
Karen S. Magurn Vice President, Supermarket Banking
Malcolm W. MacKellar Vice President, Commercial Lending
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
Nicholas J. Wright Vice President, Network and Desktop Services
COMNET MORTGAGE SERVICES OFFICERS
A division of Commonwealth Bank
Peter A. Kehoe President
Katherine M. Solomon Senior Vice President, Loan Administration
Tracy L. Johnson Vice President, Residential Operations
* Director Emeritus
CORPORATE INFORMATION
ANNUAL MEETING:
April 20, 1999 at 9:00 am
The Plymouth Country Club, Plymouth and Belvoir Roads
Norristown, PA 19404
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:
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 or through our website at
www.CommonwealthBank.com.
MARKET FOR COMMON STOCK:
Commonwealth Bancorp, Inc.'s common stock is traded on the National Association
of Securities Dealers Automated Quotation ("NASDAQ") National Market System
under the symbol "CMSB". At December 31, 1998, the 14,721,408 shares of common
stock were held by 5,820 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 common stock during the periods indicated.
<TABLE>
<CAPTION>
Quarter Ended: Dividends Declared
High Low Per Share
<S> <C> <C> <C>
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
1998
-----------------------------------------------------------------------
March 31 22.500 18.625 0.08
June 30 24.563 21.313 0.08
September 30 23.500 13.375 0.08
December 31 16.000 10.422 0.08
</TABLE>
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
===============================================================================
Printed on recycled paper.
COMMONWEALTH WEBSITE: COMNET WEBSITE:
http://www.CommonwealthBank.com http://www.ComMortgage.com
59
<PAGE> 63
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
4215Perkiomen 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
- - WYOMISSING
Wyomissing Hills Professional Center
BUCKS COUNTY
- - 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
- - WARMINSTER
Giant Food Stores
Cedar Point Plaza
- - WARRINGTON
Redner's Warehouse Market
Doylestown Pointe
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
- - SPRING HOUSE
Clemens Markets
Spring House Center
- - TRAPPE
Trappe Shopping Center
- - TROOPER (2)
- Park Ridge Shopping Center
- Giant Food Stores
Audubon Square Shopping Center
PHILADELPHIA COUNTY
- - PHILADELPHIA (11)
- 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
Lawndale Plaza
- Superfresh
Cottman & Bustleton Center
Office Listings as of March 1, 1999
60
<PAGE> 64
- - 40 Traditional Branches
20 Supermarket Branches
* Corporate Headquarters
LOCATIONS OF COMNET
MORTGAGE SERVICES
- Conshohocken, PA
- Fairfax, VA
- Horsham, PA
- Lebanon, NJ
- Mt. Laurel, NJ
- Norristown, PA
- Reading, PA
- Warwick, RI
LOCATIONS OF
HOMESTEAD MORTGAGE
- Baltimore, MD
- Bethesda, MD
- Millersville, MD
LOCATIONS OF
COMMONWEALTH BANK
COMMERCIAL BANKING
OFFICES
- Norristown, PA
- Reading, PA
COM-LINE(R)
24 Hour Automated Service Line
1-800-327-9885
www.CommonwealthBank.com
61
<PAGE> 1
EXHIBIT 23
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in the Registration Statements on Form S-8 (Nos. 333-07107 and
333-48785) of Commonwealth Bancorp, Inc. of our report, dated January 29, 1999,
incorporated by reference in the December 31, 1998 Annual Report on Form 10-K
of Commonwealth Bancorp, Inc.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
March 10, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 58,028
<INT-BEARING-DEPOSITS> 43,829
<FED-FUNDS-SOLD> 4,820
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 547,193
<INVESTMENTS-CARRYING> 132,105
<INVESTMENTS-MARKET> 133,735
<LOANS> 1,347,766
<ALLOWANCE> 9,589
<TOTAL-ASSETS> 2,257,499
<DEPOSITS> 1,634,259
<SHORT-TERM> 0
<LIABILITIES-OTHER> 24,562
<LONG-TERM> 406,500
0
0
<COMMON> 65,794
<OTHER-SE> 126,384
<TOTAL-LIABILITIES-AND-EQUITY> 2,257,499
<INTEREST-LOAN> 106,827
<INTEREST-INVEST> 4,917
<INTEREST-OTHER> 46,360
<INTEREST-TOTAL> 158,104
<INTEREST-DEPOSIT> 58,946
<INTEREST-EXPENSE> 87,454
<INTEREST-INCOME-NET> 70,650
<LOAN-LOSSES> 3,500
<SECURITIES-GAINS> 985
<EXPENSE-OTHER> 77,870
<INCOME-PRETAX> 16,226
<INCOME-PRE-EXTRAORDINARY> 16,226
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,932
<EPS-PRIMARY> 0.76
<EPS-DILUTED> 0.73
<YIELD-ACTUAL> 7.32
<LOANS-NON> 10,012
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,049
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,024
<CHARGE-OFFS> 3,129
<RECOVERIES> 194
<ALLOWANCE-CLOSE> 9,589
<ALLOWANCE-DOMESTIC> 9,589
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
