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COMMONWEALTH BANCORP, INC., 2 WEST LAFAYETTE STREET, NORRISTOWN, PA 19401
WWW.COMMONWEALTHBANK.COM
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COMMONWEALTH BANCORP, INC.
1998
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Table of Contents
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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
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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
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<S> <C> <C> <C>
Total assets $2,257,499 $2,268,595 $2,119,961
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Loans receivable, net 1,338,177 1,260,841 1,113,114
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Deposit accounts 1,605,299 1,552,824 1,491,450
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Shareholders' equity 192,178 214,852 231,924(1)
============================================================================================================
FOR THE YEAR
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Net interest income $ 70,650 $ 70,388 $ 60,954
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Net income 10,932 16,369 9,338
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Diluted earnings per share 0.73 1.02 0.72
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Dividends per share 0.32 0.28 0.24(2)
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Book value per share at end of period 13.05 13.22 12.92
============================================================================================================
FINANCIAL RATIOS(3)
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Total risk-based capital to risk-weighted assets at end of period 11.55% 13.35% 14.17%
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Return on assets 0.47 0.73 0.51
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Return on equity 5.39 7.56 4.97
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Net interest margin 3.27 3.36 3.54
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Nonperforming assets to total assets at end of period 0.49 0.42 0.43
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Allowance for loan losses to nonperforming loans at end of period 95.78 100.96 123.74
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</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
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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
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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
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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
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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
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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
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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
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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
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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
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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
