<PAGE> 1
ANNUAL REPORT
[LOGO]
1999
COMMONWEALTH
BANCORP, INC.
<PAGE> 2
Table of Contents
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<TABLE>
<CAPTION>
<S> <C>
Selected Financial Highlights.........................................Page 1
Letter to Shareholders................................................Page 2
Detailed Financial Highlights.........................................Page 12
Management's Discussion and Analysis..................................Page 13
Report of Management..................................................Page 29
Independent Accountants' Internal Control Report......................Page 30
Report of Independent Public Accountants..............................Page 31
Consolidated Financial Statements.....................................Page 32
Directors and Officers................................................Page 59
Corporate Information.................................................Page 59
Locations.............................................................Page 60
Bank Locations Map....................................................Page 61
</TABLE>
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Commonwealth Bancorp, Inc., with consolidated assets of $1.9 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, Maryland, New Jersey, and Virginia and
operates under the trade name of Homestead Mortgage in Maryland.
<PAGE> 3
SELECTED FINANCIAL HIGHLIGHTS
(dollars in thousands, except per share and ratio data)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
AT YEAR END 1999 1998 1997
<S> <C> <C> <C>
Total assets $1,922,396 $2,257,499 $2,268,595
Loans receivable, net 1,361,430 1,338,177 1,260,841
Deposit accounts 1,503,746 1,605,299 1,552,824
Shareholders' equity 152,365 192,178 214,852
- ----------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR
Net interest income $ 70,613 $ 70,650 $ 70,388
Net income 16,668 10,932 16,369
Diluted earnings per share 1.32 0.73 1.02
Dividends per share 0.36 0.32 0.28
Book value per share at end of period 12.77 13.05 13.22
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS(1)
Total risk-based capital to risk-weighted assets at end of period(2) 11.29% 11.55% 13.35%
Return on assets 0.80 0.47 0.73
Return on equity 9.76 5.39 7.56
Net interest margin(3) 3.67 3.27 3.36
Nonperforming assets to total assets at end of period 0.54 0.49 0.42
Allowance for loan losses to nonperforming loans at end of period 134.69 95.78 100.96
</TABLE>
(1) 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.
(2) Represents ratios for Commonwealth Bank.
(3) Taxable equivalent basis.
1
<PAGE> 4
LETTER TO SHAREHOLDERS Commonwealth Bancorp, Inc. and Subsidiaries
DEAR SHAREHOLDERS,
CUSTOMERS AND FRIENDS:
Commonwealth Bancorp, Inc. enjoyed one of the most productive years in its
history in 1999. The Company achieved outstanding growth in key business areas
and reported record earnings per share. Net income was $16.7 million, or $1.32
per common share, in 1999. These results were well ahead of net income of $10.9
million, or $0.73 per common share, in 1998.
Commonwealth continued to focus on the execution of its core business strategy
during the past year. This strategy involves transitioning the Company's
business mix from that of a traditional thrift to that of a community bank.
Central to this strategy is a balanced focus on the Retail, Commercial and
Mortgage Banking businesses. In these areas, Commonwealth's accomplishments
during 1999 included the following:
- - Average core deposits, which represent the combination of checking, savings
and money market deposits, increased 11% to $956 million in 1999, compared to
$859 million in 1998. This outstanding growth was achieved despite the decrease
in escrow deposits related to the 1999 sale of the Company's third party
mortgage servicing portfolio.
- - Consumer loans increased 34% to $322 million at year-end 1999, compared to
$240 million at year-end 1998. Much of the growth in this area has been in
second mortgage loans, where the Company's credit experience has been good.
Consumer loans comprised 23% of total loans at December 31, 1999, compared to
18% at the end of 1998.
- - Commercial loans increased to $190 million at the end of the year, 37% above
the year-end 1998 level of $139 million. Asset quality in this portfolio remains
strong. Commercial loans accounted for 14% of total loans at year-end 1999, up
from 10% at the end of 1998.
[PHOTO]
CHARLES H. MEACHAM,
CHAIRMAN OF
THE BOARD AND
CHIEF EXECUTIVE OFFICER
- - We continued to reposition Commonwealth's branch network in 1999 to better
serve our customers, opening two branches in key markets and selling two in
non-strategic locations. At year-end 1999, Commonwealth had 40 traditional
branches and 20 supermarket branches in seven Southeastern Pennsylvania
counties.
- - We introduced Commonwealth OnLine and Commonwealth Business Online, our
internet-based banking products for consumers and businesses. These services
provide Commonwealth's individual and corporate customers the flexibility to do
their banking whenever it is convenient for them.
- - ComNet Mortgage Services, our mortgage banking division, achieved record net
income of $4.8 million in 1999, an increase of 75% over $2.8 million in 1998.
The increase was attributable to a strong mortgage origination environment
during the first half of 1999, as well as a significant gain on the sale of our
third party mortgage servicing portfolio.
- - We substantially exited the third party mortgage servicing business during
1999, selling approximately $1.0 billion of Commonwealth's third party mortgage
servicing portfolio for a pretax gain of $1.6 million. This transaction
reflected our philosophy that the Company's resources should be directed to
those businesses and markets where we have adequate presence to compete
effectively. Through this transaction, capital was made available for other
investments involving more attractive returns for our shareholders.
2
<PAGE> 5
Shortly after year-end 1999, we completed the acquisition of certain business
interests of the Tyler Group, a firm offering financial planning and investment
advisory services to individuals and small businesses in Southeastern
Pennsylvania. We are excited about the long-term growth potential of this sector
of the financial services industry and believe that Tyler Wealth Counselors,
Inc., the subsidiary through which we will market these services, is
well-positioned to benefit from that growth.
We believe the above accomplishments are indicative that the strategy of
positioning Commonwealth as the local community bank alternative to larger
regional and national competitors is working and will create significant value
for shareholders over the long-term. In 1999, shareholders benefited through a
7% increase in the common stock price from $15.5625 at December 31, 1998 to
$16.625 at December 31, 1999. This compared favorably to the share price
performance of peers, as the Nasdaq Stock Market Bank Index decreased 8% during
1999.
In addition to the execution of its fundamental business strategy, a critical
component of Commonwealth's story in recent years has been the effective
management of its capital structure. The Company's capital management activities
have been directed toward improving returns on capital, while prudently managing
Commonwealth Bank's regulatory capital position.
With respect to improving returns on capital, the Company purchased $51 million,
or 2.9 million shares, of its common stock during 1999. This brought total
purchases of treasury stock over the past two years to $84 million, or 4.5
million shares. These purchases contributed meaningfully to the improvement in
Commonwealth's return on equity from 5.39% in 1998 to 9.76% in 1999.
With respect to Commonwealth Bank's regulatory capital position, core and
risk-based capital ratios were 6.4% and 11.3%, respectively, at year-end 1999.
These levels were well above the regulatory guidelines for well-capitalized
institutions.
Looking forward, we believe that Commonwealth's future is quite promising. While
the evolution from a traditional thrift to a full-service community bank will
continue to be challenging, guiding us through these changes will be our
fundamental business philosophies. These philosophies include a commitment to
maximizing shareholder value through our core businesses of Retail, Commercial
and Mortgage Banking, while emphasizing prudent risk management, effective
capital management and superior customer service.
On a personal note, I would like to take this opportunity to express our
appreciation for the important and long-standing contributions of Nicholas
Sclufer, who retired from the Board of Directors in 1999 after 29 years of
service. While we will miss his advice and counsel as a member of the Board, he
has agreed to serve in the future as Director Emeritus of our subsidiary,
Commonwealth Bank.
We are encouraged by Commonwealth's accomplishments in 1999 and recognize that
at the core of our success are nearly 900 employees focused on providing
superior service to our customers and, in the process, creating value for our
shareholders. Our performance has been the result of their skill and dedication.
With good momentum in our core businesses and the continued commitment of our
employees, we are confident that Commonwealth is effectively positioned to
maximize the long-term value of your investment.
Sincerely,
/s/ CHARLES H. MEACHAM
CHARLES H. Meacham
Chairman of the Board and Chief Executive Officer
3
<PAGE> 6
COMMUNITY BANKING - RETAIL
The foundation of Commonwealth's strategy in retail banking is its branch
franchise in Southeast Pennsylvania. At year-end 1999, Commonwealth had a total
of 60 retail branch offices in its seven county region of Berks, Bucks, Chester,
Delaware, Lehigh, Montgomery and Philadelphia Counties. The Company has focused
on building a network of well-located full-service branches offering a full
array of financial products and services. Relative to larger regional and
national institutions, Commonwealth's strategic advantages include localized
decision-making and a more personalized approach to providing customer service.
There were a number of meaningful accomplishments in retail banking over the
past year. For example, in 1999, Commonwealth:
- - Opened two branches in key areas of Philadelphia County and sold two in
non-strategic locations in Lebanon County;
- - Increased consumer loans by 34% to $322 million at the end of the year;
- - Increased average core deposits (checking, savings and money market deposits)
by 11% to $956 million;
- - Increased the number of checking accounts, which consumers tend to view as
their primary banking relationship to nearly 100,000 at December 31, 1999;
- - Reduced the average cost of deposits by 38 basis points to 3.38%; and
- - Increased fee income by 14% to $12.7 million. In addition, the Company
introduced an internet banking product which currently serves over 4,000
customers. Through this service, customers can access their accounts, print
account information, transfer money between accounts, pay bills and even track
their stock portfolio. Commonwealth OnLine gives our customers the flexibility
to bank whenever it is convenient for them, 24 hours a day, 7 days a week.
In January of 2000, the Company completed the acquisition of certain business
interests of the Tyler Group. Tyler offers financial planning and investment
advisory services to individuals and small businesses in Southeast Pennsylvania.
Its products and services will be marketed to Commonwealth customers through
Tyler Wealth Counselors, Inc., a newly formed subsidiary of Commonwealth Bank.
4
<PAGE> 7
[PHOTO]
CONVENIENTLY LOCATED IN VIEW OF THE CITY'S FOUNDER, WILLIAM PENN, COMMONWEALTH
BANK'S NEW CENTER CITY PHILADELPHIA OFFICE IS LOCATED AT 30 SOUTH 15TH STREET IN
THE LOBBY OF THE BEAUTIFUL ONE PENN SQUARE WEST OFFICE BUILDING.
A key component of Commonwealth's retail banking strategy involves supermarket
banking. Of Commonwealth's 60 retail branch locations at year-end 1999, 20 were
in supermarket locations. The success of the supermarket banking strategy as a
low-cost way to enter new markets, while increasing customer convenience and
generating growth, was evident in 1999.
Core deposits in supermarket branches increased 31% from $65 million at the end
of 1998 to $85 million at the end of 1999. Just as importantly, consumer loan
originations in supermarket branches increased 87% to $41 million in 1999,
compared to $22 million in 1998.
5
<PAGE> 8
<TABLE>
<CAPTION>
YEAR-END
CONSUMER LOANS
<S> <C> <C> <C> <C>
$322 MILLION
$240 MILLION
$195 MILLION
$169 MILLION
$111 MILLION
1995 1996 1997 1998 1999
<CAPTION>
AVERAGE
CORE DEPOSITS
<S> <C> <C> <C> <C>
$956 MILLION
$859 MILLION
$796 MILLION
$713 MILLION
$539 MILLION
1995 1996 1997 1998 1999
</TABLE>
COMMONWEALTH HAS ACHIEVED SIGNIFICANT GROWTH IN CONSUMER LOANS AND CORE DEPOSITS
(CHECKING, SAVINGS AND MONEY MARKET DEPOSITS) SINCE 1995.
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 Company.
Customers benefit from supermarket branches because they better enable customers
to do their banking when and where it is convenient for them. Commonwealth also
benefits from supermarket branches, as these branches are typically good sources
of fee income, and provide increased opportunity to market the Company's
financial products and services in a location that the typical customer 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.
Commonwealth plans to continue to expand and strengthen its retail banking
franchise in the future. One traditional branch in Center City Philadelphia, and
one supermarket branch in Montgomeryville, Pennsylvania are scheduled to open
during 2000. The focus of these activities has been and will continue to be on
increasing customer convenience and improving Company profitability.
6
<PAGE> 9
[PHOTO]
ROBERT KRAMER, PRESIDENT OF MICROCISION, INC. (RT) INSPECTS A NEWLY MANUFACTURED
SURGICAL INSTRUMENT WITH COMMONWEALTH COMMERCIAL BANKERS ED FITZGERALD (LT) AND
CARMEN HOLLY (CR). THIS HIGH TECHNOLOGY COMPANY, A LEADING MANUFACTURER OF
PRECISION MINIATURE MEDICAL IMPLANT PARTS (AS SHOWN IN THE INSET IMAGE),
MAINTAINS ITS COMMERCIAL BANKING RELATIONSHIP WITH COMMONWEALTH BANK.
COMMUNITY BANKING -
COMMERCIAL
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. Similar to the Company's retail banking strategy,
Commonwealth's strategy in the commercial area is focused on building a
full-service institution capable of competing effectively with larger regional
and national banks, while emphasizing localized decision making and high quality
customer service.
The Company is steadfast in its commitment to provide the best possible products
and services to our business customers. In 1999, for example, Commonwealth
greatly improved the systems and infrastructure underlying its cash management
product line, which now includes key products such as positive pay, control
disbursement and account reconciliation. Recently, Commonwealth launched
Commonwealth Business OnLine, an internet-based cash management system for
corporate customers, complete with check imaging, electronic bill payment and
automated investment options. To better serve the Company's growing customer
base in this area, the cash management sales and support staff was doubled
during 1999.
7
<PAGE> 10
Commonwealth continued to improve the quality and experience level
of its relationship staff in 1999. The Company's 12 commercial lenders and 4
cash management representatives have an average of 16 years of banking
experience, much of that obtained in large commercial bank environments.
Commonwealth's target market is comprised of small and lower middle market
businesses operating within the Company's seven county region.
<TABLE>
<CAPTION>
YEAR-END
COMMERCIAL LOANS
<S> <C> <C> <C> <C>
$190 MILLION
$139 MILLION
$116 MILLION
$96 MILLION
$42 MILLION
1995 1996 1997 1998 1999
<CAPTION>
YEAR-END
COMMERCIAL DEPOSITS
<S> <C> <C> <C> <C>
$144 MILLION
$119 MILLION
$81 MILLION
$50 MILLION
$24 MILLION
1995 1996 1997 1998 1999
</TABLE>
COMMONWEALTH HAS ACHIEVED SIGNIFICANT GROWTH IN COMMERCIAL LOANS AND DEPOSITS
SINCE YEAR-END 1995. DEPOSITS INCLUDE COMMERCIAL REPURCHASE BALANCES.
Our target customer base involves organizations having annual revenues of $50
million or less, with credit requirements of $10 million or less. While the
Company 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 Company's prudent risk management and the relatively
modest credit needs, in absolute terms, of small business borrowers.
Commonwealth employs a multiple signature system to manage and control the
credit approval process. In addition to the originating officer, each loan
requires the approval of a Regional Vice President. 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 Senior Lending Officer is required for
credits over $500,000. 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 certain other senior officers of the
Company. This process has proven to be a competitive advantage in meeting the
response time requirements of our customers.
In 1999, Commonwealth made remarkable progress in expanding its commercial
banking business. For example, business deposits and commercial repurchase
balances totaled $144 million at December 31, 1999, an increase of 21% compared
to $119 million at year-end 1998. Commercial loans totaled $190 million at the
end of 1999, an increase of 37% from $139 million at year-end 1998. Importantly,
the Company's growth in business banking has been achieved without incurring
undue credit risk. Commercial net credit losses totaled $0.9 million in 1999, or
0.56% of the related average commercial loans. Nonperforming commercial loans
totaled $1.4 million, or 0.73%, of the related commercial loan portfolio at year
end 1999.
8
<PAGE> 11
[PHOTO]
COMMONWEALTH IS PROUD OF ITS HERITAGE AS A MORTGAGE LENDER. THE BANK HAS BEEN
HELPING PEOPLE BUY HOMES FOR OVER 60 YEARS. COMNET MORTGAGE SERVICES, THE BANK'S
MORTGAGE BANKING DIVISION, ACHIEVED RECORD NET INCOME IN 1999.
MORTGAGE BANKING
Operating under the trade names of ComNet Mortgage Services and Homestead
Mortgage, Commonwealth is involved in the retail and wholesale origination,
securitization and sale of residential mortgages. At year-end 1999, Commonwealth
had ten mortgage production offices in its Mid-Atlantic target market.
During 1999, Commonwealth substantially exited the third party mortgage
servicing business, selling approximately $1.0 billion of its third party
servicing portfolio for a pretax gain of $1.6 million. This aspect of the
mortgage banking business is dominated by some of the largest financial
institutions in the country. Competition is extremely fierce and, as a result,
margins have come under intense pressure in recent years. The decision to exit
this business reflected the Company's strategy to employ its resources in those
businesses and markets where it has adequate presence to compete effectively.
Through this transaction, capital was made available for other investments with
more attractive return characteristics for Commonwealth.
9
<PAGE> 12
With respect to the origination side of the mortgage banking business, the past
year was a particularly volatile one for the industry and Commonwealth. The
relatively low interest rate environment during the early part of the year
resulted in high levels of mortgage originations throughout the industry,
although somewhat lower than the record level of 1998. As interest rates climbed
during the middle and latter parts of 1999, the level of mortgage originations
decreased. Commonwealth's mortgage origination activity in 1999 followed a
similar pattern to that of the overall industry. For the full year 1999,
Commonwealth's mortgage originations totaled $621 million, compared to $1.1
billion in 1998. However, the $369 million originated in the first six months of
1999 was significantly higher than the $252 million originated during the second
half of the year.
<TABLE>
<CAPTION>
NET GAIN ON SALE
OF MORTGAGE LOANS
<S> <C> <C> <C> <C>
$11.7 MILLION
$10.8 MILLION
$5.0 MILLION
$2.1 MILLION
$0.9 MILLION
1995 1996 1997 1998 1999
</TABLE>
COMMONWEALTH HAS ACHIEVED SIGNIFICANT GROWTH IN THE NET GAIN ON SALE OF MORTGAGE
LOANS SINCE 1995.
Commonwealth's strategy has been to focus on the retail side of the mortgage
origination business. In 1999, retail mortgage originations totaled $447
million, compared to $735 million in 1998. Commonwealth's commitment to this
business was underscored in recent years with the acquisition of several loan
production offices in Maryland and Virginia. In 1999, the acquired offices
generated approximately $178 million of mortgages, or 40% of Commonwealth's
retail originations.
Wholesale mortgage originations totaled $174 million in 1999, compared to $376
million in 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 by economic considerations. It is the
Company's expectation that wholesale originations will continue to represent a
relatively small portion of overall volume in the future.
Commonwealth's strategy is to sell, on a servicing-released basis, 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 much of its jumbo fixed rate loan originations, while most
adjustable rate loans are retained by the Bank. Due primarily to favorable
pricing relating to forward delivery contracts with the purchaser of loans sold
by Commonwealth, the net gain on sale of mortgage loans increased to $11.7
million in 1999, compared to $10.8 million in 1998.
10
<PAGE> 13
[PHOTO]
VICE PRESIDENT, AL JONES (LT) AND BANKING OFFICER BRETT LONG (RT) TOUR THE
RECENTLY RENOVATED WYOMISSING CLUB, WITH REVEREND RODNEY WELLS (CR),
PRESIDENT/CEO OF PHOEBE MINISTRIES. THE WYOMISSING CLUB IS A 58 UNIT AFFORDABLE
HOUSING FACILITY FOR SENIOR CITIZENS LOCATED IN READING PENNSYLVANIA. THE
BUILDING WAS FORMERLY AN EXCLUSIVE BUSINESS CLUB.
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 $4.1 million
investment in lower income housing projects as of December 31, 1999.
Commonwealth's commitment to the community also includes the support, financial
and otherwise, of a number of organizations and community sponsored events, each
having a similar goal of making our community a better place to live and work.
Among the more meaningful of Commonwealth's 1999 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 Montgomery
County Cultural Association, Unity Days 1999, the Lower Providence Community
Library, the Phoenixville Area YMCA, the City of Reading's Operation Facelift,
and the Police Athletic League of Philadelphia.
11
<PAGE> 14
DETAILED FINANCIAL HIGHLIGHTS Commonwealth Bancorp, Inc. and Subsidiaries
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected consolidated financial and other data of the Company
does not purport to be complete and is qualified in its entirety by reference to
the more detailed financial information contained elsewhere herein including
without limitation the Consolidated Financial Statements.
<TABLE>
<CAPTION>
===========================================================================================================================
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA) DECEMBER 31,
---------------------------------------------------------------------------------
SELECTED FINANCIAL CONDITION DATA: 1999 1998 1997 1996 1995(10)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $1,922,396 $2,257,499 $2,268,595 $2,119,961 $1,455,700
Cash, interest-bearing deposits and
short-term investments 61,751 106,677 53,938 60,102 50,177
Investment securities 68,219 34,515 51,326 53,935 46,896
Mortgage-backed securities 290,954 524,141 735,291 752,707 463,353
Mortgage loans held for sale 24,005 120,642 37,574 17,335 26,001
Loans receivable, net 1,361,430 1,338,177 1,260,841 1,113,114 796,735
Intangible assets 33,048 39,830 45,244 51,220 17,279
Mortgage servicing rights -- 9,969 8,039 7,677 6,855
Deposit accounts 1,503,746 1,605,299 1,552,824 1,491,450 1,076,549
FHLB advances 127,000 240,500 213,000 175,000 120,614
Other borrowings 109,076 166,000 246,099 176,674 82,666
Shareholders' equity 152,365 192,178 214,852 231,924 137,036
Tangible shareholders' equity (1) 119,317 152,348 169,608 180,704 119,757
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------------------
SELECTED OPERATING DATA: 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 140,772 $ 158,104 $ 155,243 $ 127,306 $ 97,153
Interest expense 70,159 87,454 84,855 66,352 49,691
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 70,613 70,650 70,388 60,954 47,462
Provision for loan losses 4,000 3,500 1,600 601 578
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 66,613 67,150 68,788 60,353 46,884
Net gain on sale of mortgage loans 11,681 10,842 4,993 2,056 939
Other noninterest income 18,446 16,104 16,582 13,617 11,820
Amortization of intangible assets 4,823 5,413 5,990 4,542 1,598
Noninterest expenses, exclusive of
amortization of intangible assets 68,441 72,457 60,058 57,365 40,666
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 23,476 16,226 24,315 14,119 17,379
Income taxes 6,808 5,294 7,946 4,781 6,124
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 16,668 $ 10,932 $ 16,369 $ 9,338 $ 11,255
===========================================================================================================================
Diluted earnings per common share $ 1.32 $ 0.73 $ 1.02 $ 0.72 N/A(2)
===========================================================================================================================
Dividends per share $ 0.36 $ 0.32 $ 0.28 $ 0.24(3) $ 0.24(3)
===========================================================================================================================
OTHER DATA:
Number of full-service customer facilities (4) 60 60 56 53 36
Number of loan origination offices (5) 10 11 13 7 7
Loans serviced for others (in millions) $ 234 $ 1,357 $ 1,304 $ 1,340 $ 1,264
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
PERFORMANCE RATIOS: (6) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on assets 0.80% 0.47% 0.73% 0.51% 0.85%
Return on equity 9.76% 5.39% 7.56% 4.97% 8.95%
Interest-earning assets to
interest-bearing liabilities 103.62% 104.99% 106.30% 106.41% 106.20%
Interest rate spread (7) 3.54% 3.07% 3.11% 3.30% 3.55%
Net interest margin (7) 3.67% 3.27% 3.36% 3.54% 3.80%
Noninterest expenses, exclusive of
amortization of intangible
assets, to assets 3.28% 3.13% 2.68% 3.11% 3.06%
ASSET QUALITY RATIOS:
Nonperforming assets to total assets at end
of period (8) 0.54% 0.49% 0.42% 0.43% 0.51%
Allowance for loan losses to nonperforming
loans at end of period 134.69% 95.78% 100.96% 123.74% 120.86%
Allowance for loan losses to total loans held
for investment at end of period 0.76% 0.71% 0.71% 0.89% 0.93%
CAPITAL AND OTHER RATIOS:
Equity to assets 8.19% 8.75% 9.66% 10.17% 9.46%
Tangible equity to assets at end of period 6.21% 6.75% 7.48% 8.52% 8.23%
Dividend payout ratio (9) 26.10% 42.05% 26.66% 32.41% 17.14%
</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, twenty, and twenty supermarket branch
offices at December 31, 1995, 1996, 1997, 1998, and 1999, respectively.
(5) Consists of offices of ComNet Mortgage Services and Homestead Mortgage since
1997.
(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 taxable
equivalent weighted average yield on interest-earning assets and the weighted
average cost of interest-bearing liabilities, and net interest margin represents
net interest income, on a taxable equivalent basis, as a percentage of average
interest-earning assets.
(8) Nonperforming assets consist of nonaccrual loans, real estate and other
assets 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> 15
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, 1999, 60
full-service branches 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, 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. 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 ten loan origination offices as of
December 31, 1999. In addition to ComNet's offices located in Pennsylvania,
Maryland, New Jersey, and Virginia, ComNet also operates under the trade name of
Homestead Mortgage in Maryland and conducts business through its wholesale
network, which includes correspondents in 18 states.
ACQUISITIONS AND DIVESTITURES
In January of 2000, the Company completed the acquisition of certain
business interests of the Tyler Group ("Tyler"). Tyler offers financial planning
and investment advisory services to individuals and small businesses in
Southeast Pennsylvania. Its products and services will be marketed to
Commonwealth customers through Tyler Wealth Counselors, Inc., a newly formed
subsidiary of Commonwealth Bank.
During the third quarter of 1999, Commonwealth Bank exited substantially
all of the third party mortgage servicing business, and sold its existing $1.0
billion Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National
Mortgage Association ("FNMA") mortgage servicing portfolio to National City
Mortgage Co. The pre-tax gain resulting from the sale totaled $1.6 million in
the third quarter of 1999.
On June 28, 1999, Commonwealth Bank completed the sale of two branches in
Lebanon County, Pennsylvania to another financial institution, resulting in a
pre-tax gain of $1.0 million in the second quarter of 1999. As of June 28, 1999,
the two branches had $37 million of combined deposits and $11 million of
consumer and commercial loans.
On March 31, 1998, Commonwealth Bank acquired a Virginia mortgage
production 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.
13
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and Subsidiaries
CHANGES IN FINANCIAL CONDITION
GENERAL. Total assets were $1.9 billion at December 31, 1999, compared to
$2.3 billion at December 31, 1998. During 1999, decreases in the Company's
mortgage-backed securities, mortgage loans held for sale, cash, interest-bearing
deposits, short-term investments, and mortgage servicing rights were offset, in
part, by an increase in investment securities and loans receivable.
Total liabilities were $1.8 billion at December 31, 1999, compared to $2.1
billion at December 31, 1998. The decrease during 1999 was primarily
attributable to a decrease in notes payable and other borrowings, deposits, and
advances from borrowers for taxes and insurance.
Shareholders' equity was $152 million as of December 31, 1999, compared to
$192 million at December 31, 1998. This $40 million, or 21%, decrease was
primarily the result of the $51 million purchase of 2.9 million shares of
treasury stock offset, in part, by a $12 million increase in retained earnings.
CASH, INTEREST-BEARING DEPOSITS, AND SHORT-TERM INVESTMENTS ("CASH AND CASH
EQUIVALENTS"). Cash and cash equivalents decreased by $45 million, or 42%, from
$107 million at December 31, 1998, to $62 million at December 31, 1999.
MORTGAGE LOANS HELD FOR SALE. Mortgage loans held for sale decreased by $97
million, or 80%, from $121 million at December 31, 1998, to $24 million at
December 31, 1999. The decrease was attributable to a decrease in loans
originated during the fourth quarter of 1999, compared to the fourth quarter of
1998, primarily as a result of higher market interest rates and a reduction in
loan refinancing.
INVESTMENT SECURITIES. Investment securities increased by $34 million, or
98%, from $35 million at December 31, 1998, to $68 million at December 31, 1999.
The increase was primarily attributable to increases in highly rated short-term
corporate bonds, mortgage related mutual funds, and an equity investment. These
increases were offset, in part, by the maturity of U.S. Treasury and U.S.
Government agency securities. The increase in investment securities between
December 31, 1998 and December 31, 1999, coupled with a decrease in
mortgage-backed securities during the same time period, was part of a strategy
to increase the liquidity and shorten the average life of the Company's combined
investment and mortgage-backed securities portfolios.
During 1999, the Company realized a $0.3 million loss on the sale of mortgage
related mutual funds and corporate bonds. During 1998, the Company realized a
$1.0 million gain on the sale of equity investments and a mortgage related
mutual fund. The proceeds from Commonwealth's 1999 sale of corporate bonds and
mortgage related mutual funds were used to repurchase treasury stock and repay
notes payable and other borrowings.
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 loss on available for sale investment securities was $0.1 million
at December 31, 1999, compared to a $0.1 million net unrealized gain at December
31, 1998.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities decreased by $233
million, or 44%, from $524 million at December 31, 1998, to $291 million at
December 31, 1999. The decrease in mortgage-backed securities during 1999 was
primarily related to repayments and prepayments.
The decrease in mortgage-backed securities between December 31, 1998 and
December 31, 1999, coupled with an increase in investment securities during the
same time period, was part of a strategy to increase the liquidity and shorten
the average life of the Company's combined investment and mortgage-backed
securities portfolios.
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 $94 million
at year-end 1999, compared to $132 million at year-end 1998. Mortgage-backed
securities classified as available for sale totaled $197 million at December 31,
1999, compared to $392 million at December 31, 1998. The net unrealized loss on
available for sale mortgage-backed securities was $4.8 million at year-end 1999,
compared to a net unrealized gain of $3.7 million at year-end 1998.
At December 31, 1999 and December 31, 1998, $199 million, or 68%, and $310
million, or 59%, respectively, of the Company's mortgage-backed securities were
insured or guaranteed by the Government National Mortgage Association ("GNMA"),
the FHLMC, or the 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
14
<PAGE> 17
comparable mortgage-backed securities issued by the GNMA, FHLMC, or the FNMA. At
December 31, 1999 and December 31, 1998, $92 million, or 32%, and $215 million,
or 41%, respectively, of the Company's mortgage-backed securities were private
mortgage-backed securities.
LOANS RECEIVABLE. Loans receivable, net of reserves, deferred loan fees, and
unamortized premiums and unaccreted discounts, increased by $23 million, or 2%,
during 1999, to $1.4 billion at December 31, 1999. The increase was primarily
attributable to growth in consumer and commercial loans offset, in part, by a
decrease in residential mortgage loans. The consumer and commercial loan growth
was impacted by the sale of two branches, with loans totaling $11 million, to
another financial institution on June 28, 1999.
Residential mortgage loans totaled $861 million at December 31, 1999, a
decrease of $109 million, or 11%, compared to December 31, 1998. Total mortgage
loans originated and purchased for the year ended December 31, 1999, decreased
by $491 million, or 44%, from $1,111 million for the year ended December 31,
1998, to $621 million for year ended December 31, 1999. The $491 million
decrease in mortgage originations was primarily due to higher market interest
rates and a reduction in loan refinancing. Originations relating to
Commonwealth's retail network totaled $447 million during the year ended
December 31, 1999, a decrease of 39% compared to $735 million for the year ended
December 31, 1998. Commonwealth's Wholesale Lending Department originates loans
through a network of correspondent brokers in 18 states. All loans are
underwritten using the same criteria as those used for retail originations.
Originations relating to Commonwealth's wholesale network totaled $174 million
during the year ended December 31, 1999, decrease of 54% compared to $376
million for the year ended December 31, 1998.
Consumer loans increased by $82 million, or 34%, from $240 million at
December 31, 1998, to $322 million at December 31, 1999. At December 31, 1999,
consumer loans represented 23% of the Company's loan portfolio and were
comprised of $30 million of equity lines of credit, $185 million of second
mortgage loans, $61 million of recreational vehicle loans, and $45 million of
other consumer loans. At December 31, 1998, consumer loans represented 18% of
total loans 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. Consumer loans are generally considered to
have greater risk that residential mortgage loans because the risk of borrower
default is greater. In addition, certain consumer loans are unsecured or involve
collateral which is more likely to decline in value than single family
residences.
As of December 31, 1999, commercial loans totaled $190 million, or 14%, of
the Company's total loan portfolio, as compared to $139 million, or 10%, at
December 31, 1998. At December 31, 1999, commercial loans were comprised of $66
million of commercial real estate loans, $113 million of business loans, and $11
million of loans guaranteed by the Small Business Administration ("SBA"). At
December 31, 1998, commercial loans were comprised of $45 million of commercial
real estate loans, $79 million of business loans, and $14 million of SBA loans.
Commercial loans are generally considered to have 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.
The increases in consumer and commercial loans and the decrease in mortgage
loans during 1999 were in line with the Company's strategy to shift its business
mix from that of a traditional thrift institution to one more representative of
a community bank.
NONPERFORMING ASSETS. The Company's nonperforming assets, which primarily
consist of nonaccrual loans, an equity investment in a mortgage servicing
partnership, and real estate acquired through foreclosure, decreased by $0.7
million, or 6%, from $11.1 million at December 31, 1998, to $10.4 million at
December 31, 1999. At December 31, 1999, the Company's $10.4 million of
nonperforming assets amounted to 0.54% of total assets. At December 31, 1998,
the Company's $11.1 million of nonperforming assets amounted to 0.49% of total
assets.
ALLOWANCE FOR LOAN LOSSES. The Company's allowance forloan losses amounted
to $10.5 million at December 31, 1999, compared to $9.6 million at December 31,
1998.
It is management's policy to maintain an allowance for estimated loan
losses based upon probable inherent losses which have occurred as of the date of
the financial statements. In determining the allowance for loan losses,
Commonwealth assesses prior loss experience, the volume and type of lending
conducted by the Company, industry standards, past due loans, general economic
conditions, and other factors related to the collectibility of the loan
portfolio. At December 31, 1999, the Company's allowance for loan losses
amounted to 135% of total nonperforming loans and 0.76% of total loans held for
investment, as compared to 96% of total nonperforming loans and 0.71% of total
loans held for investment at December 31, 1998. The Company utilizes these
percentages as only one of the
15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and Subsidiaries
factors in assessing the adequacy of the allowance for loan losses at various
points in time.
Over the past several years, Commonwealth has diversified its lending efforts
and increased its emphasis on providing its customers with consumer and
commercial loans. As a result of the increased risk inherent in these loan
products, management will continue to evaluate its loan portfolio and record
additional loan loss reserves as deemed necessary.
The provision for loan losses totaled $4.0 million and $3.5 million for the
years 1999 and 1998, respectively. For 1999, net credit losses totaled $3.1
million, or 0.23% of average loans, compared to $2.9 million, or 0.21%, in 1998.
INTANGIBLE ASSETS. Intangible assets, which are comprised of the excess of
cost over net assets acquired ("Goodwill") and core deposit intangibles ("CDI"),
were 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"). On June
28, 1999, Commonwealth sold two of the former Meridian branches, which resulted
in a $1.4 million and $0.6 million reduction in Goodwill (Berks Acquisition) and
CDI (Berks Acquisition), respectively. 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, 1999 and
1998:
<TABLE>
<CAPTION>
============================================================
DECEMBER 31,
------------------------
(IN THOUSANDS) 1999 1998
- ------------------------------------------------------------
<S> <C> <C>
Goodwill (Berks Acquisition) $16,010 $19,141
CDI (Berks Acquisition) 6,009 8,260
Goodwill (Fidelity Federal) 9,187 10,257
CDI (Fidelity Federal) 1,842 2,172
- ------------------------------------------------------------
Total $33,048 $39,830
============================================================
</TABLE>
MORTGAGE SERVICING RIGHTS. During the third quarter of 1999, Commonwealth
Bank exited substantially all of the third party mortgage servicing business,
and sold its existing $1.0 billion FHLMC and FNMA mortgage servicing portfolio
to National City Mortgage Co. The pre-tax gain resulting from the sale totaled
$1.6 million in the third quarter of 1999.
Prior to 1999, the Company acquired mortgage servicing rights through the
purchase and origination of mortgage loans which were 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," required 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 was 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 was recognized through a
valuation allowance.
At December 31, 1999, Commonwealth's mortgage servicing portfolio was $1.1
billion, a decrease of 55% compared to $2.4 billion at December 31, 1998. At
December 31, 1999, $0.2 billion was servicing of third party loans, which was
primarily related to current mortgage production awaiting transfer to the
ultimate servicer, and $0.9 billion was servicing of mortgages held by the
Company. At December 31, 1998, $1.4 billion was servicing of third party loans
and $1.0 billion was servicing of mortgages held by the Company. At December 31,
1999, capitalized mortgage servicing rights were zero, compared to $10 million
at December 31, 1998. The $1.3 billion reduction in the mortgage servicing
portfolio and the $10 million reduction in mortgage servicing rights was
primarily related to the sold portfolios. 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) 1999 1998 1997
- ------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of period $9,969 $8,039 $7,677
Additions -- 6,825 1,738
Amortization/Paydown (432) (2,202) (1,286)
Sales (1) (9,537) (2,693) (90)
- ------------------------------------------------------------
Balance, end of period $ -- $9,969 $8,039
============================================================
</TABLE>
(1) Includes $8.9 million related to the sale of substantially all of the
Company's third party mortgage servicing portfolio in the third quarter of 1999.
16
<PAGE> 19
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
decreased by $102 million, or 6%, to $1.5 billion at December 31, 1999,
primarily related to a decrease in certificates of deposit; the sale of two
branches, with combined deposits of $37 million, to another financial
institution on June 28, 1999; a reduction in principal and interest escrows
established pursuant to loan servicing agreements and outstanding mortgage
settlement checks. The principal and interest escrow decrease was primarily
related to the sale of the $1.0 billion FHLMC and FNMA mortgage servicing
portfolio in the third quarter of 1999. These decreases were offset, in part, by
an increase in demand and money market deposits.
BORROWINGS. The Company's borrowings consist primarily of advances from the
Federal Home Loan Bank ("FHLB") and securities sold under agreements to
repurchase. FHLB advances decreased by $114 million, or 47%, to $127 million at
December 31, 1999, from $241 million at December 31, 1998. Repurchase agreements
decreased by $66 million, or 40%, to $100 million at December 31, 1999, from
$166 million at December 31, 1998. These decreases were offset, in part, by a $9
million increase in the Company's commercial repurchase product, which was
introduced during the first quarter of 1999. 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.
ADVANCES FROM BORROWERS FOR TAXES AND INSURANCE. Advances from borrowers for
taxes and insurance decreased by $20 million, or 68%, to $9 million at December
31, 1999, from $29 million at December 31, 1998. The decrease was primarily
related to the sale of the $1.0 billion FHLMC and FNMA mortgage servicing
portfolio in the third quarter of 1999.
ACCRUED INTEREST PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES ("OTHER
LIABILITIES"). Other liabilities decreased by $4 million, or 15%, to $21 million
at December 31, 1999, from $25 million at December 31, 1998.
SHAREHOLDERS' EQUITY. At December 31, 1999, shareholders' equity equaled $152
million, compared to $192 million at December 31, 1998. This $40 million, or
21%, decrease was primarily the result of the $51 million purchase of 2.9
million shares of treasury stock offset, in part, by a $12 million increase in
retained earnings during 1999. The $12 million increase in retained earnings was
the result of earnings of $17 million offset, in part, by cash dividends of $4
million for the year ended December 31, 1999. The repurchased shares were held
as treasury stock as of December 31, 1999, and are reserved for general
corporate purposes and/or issuance pursuant to the Company's stock option plans.
At December 31, 1999, shareholders' equity represented 7.9% of assets, compared
to 8.5% at December 31, 1998. The Bank's core and risk-based capital ratios were
6.4% and 11.3%, respectively, at December 31, 1999, compared to 5.9% and 11.6%,
respectively, at December 31, 1998.
17
<PAGE> 20
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 rates; (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,
1999
- ------------------------------------------------------------------------------------
AVERAGE
AVERAGE YIELD/
(DOLLARS IN THOUSANDS) BALANCE INTEREST RATE
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Mortgage loans $ 936,997 $ 67,300 7.18%
Consumer loans 277,545 24,674 8.89
Commercial loans 158,356 13,602 8.59
---------- --------
Total loans receivable 1,372,898 105,576 7.69
---------- --------
Mortgage-backed securities 383,149 25,467 6.65
Investment securities 123,513 6,357 5.15
Other earning assets 53,450 3,633 6.80
---------- --------
Total interest-earning assets 1,933,010 141,033 7.30
--------
Noninterest-earning assets 151,669
----------
Total assets $ 2,084,679
==========
Interest-bearing liabilities:
Deposits:
Demand deposits $ 728,991 17,078 2.34
Savings deposits 227,423 5,046 2.22
Certificates of deposit 609,574 30,865 5.06
---------- --------
Total deposits 1,565,988 52,989 3.38
---------- --------
Total borrowings 299,455 17,170 5.73
---------- --------
Total interest-bearing liabilities 1,865,443 $ 70,159 3.76
--------
Noninterest-bearing liabilities 48,440
----------
Total liabilities 1,913,883
Shareholders' equity 170,796
----------
Total liabilities and equity $ 2,084,679
==========
Yield on interest earning assets 7.30%
=====
Cost of supporting funds 3.63%
=====
Net interest margin:
Taxable equivalent basis $ 70,874 3.67%
======== =====
Without taxable equivalent adjustments $ 70,613 3.65%
======== =====
<CAPTION>
YEAR ENDED DECEMBER 31,
1998
- ------------------------------------------------------------------------------------
AVERAGE
AVERAGE YIELD/
(DOLLARS IN THOUSANDS) BALANCE INTEREST RATE
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Mortgage loans $ 1,066,998 $ 76,714 7.19%
Consumer loans 219,076 19,735 9.01
Commercial loans 121,697 10,378 8.53
---------- --------
Total loans receivable 1,407,771 106,827 7.59
---------- --------
Mortgage-backed securities 683,522 46,360 6.78
Investment securities 42,525 2,313 5.44
Other earning assets 26,023 2,604 10.01
---------- --------
Total interest-earning assets 2,159,841 158,104 7.32
--------
Noninterest-earning assets 156,845
----------
Total assets $ 2,316,686
==========
Interest-bearing liabilities:
Deposits:
Demand deposits $ 631,088 15,203 2.41
Savings deposits 227,618 5,070 2.23
Certificates of deposit 707,858 38,673 5.46
---------- --------
Total deposits 1,566,564 58,946 3.76
---------- --------
Total borrowings 490,633 28,508 5.81
---------- --------
Total interest-bearing liabilities 2,057,197 $ 87,454 4.25
--------
Noninterest-bearing liabilities 56,762
----------
Total liabilities 2,113,959
Shareholders' equity 202,727
----------
Total liabilities and equity $ 2,316,686
==========
Yield on interest earning assets 7.32%
=====
Cost of supporting funds 4.05%
=====
Net interest margin:
Taxable equivalent basis $ 70,650 3.27%
======== =====
Without taxable equivalent adjustments $ 70,650 3.27%
======== =====
<CAPTION>
YEAR ENDED DECEMBER 31,
1997
- ------------------------------------------------------------------------------------
AVERAGE
AVERAGE YIELD/
(DOLLARS IN THOUSANDS) BALANCE INTEREST RATE
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Mortgage loans $ 934,539 $ 69,504 7.44%
Consumer loans 177,872 15,982 8.99
Commercial loans 104,522 8,699 8.32
---------- --------
Total loans receivable 1,216,933 94,185 7.74
---------- --------
Mortgage-backed securities 791,245 54,887 6.94
Investment securities 64,742 4,031 6.23
Other earning assets 23,521 2,140 9.10
---------- --------
Total interest-earning assets 2,096,441 155,243 7.41
--------
Noninterest-earning assets 145,222
----------
Total assets $ 2,241,663
==========
Interest-bearing liabilities:
Deposits:
Demand deposits $ 550,236 13,616 2.47
Savings deposits 245,813 5,494 2.24
Certificates of deposit 722,278 39,450 5.46
---------- --------
Total deposits 1,518,327 58,560 3.86
---------- --------
Total borrowings 453,901 26,295 5.79
---------- --------
Total interest-bearing liabilities 1,972,228 $ 84,855 4.30
--------
Noninterest-bearing liabilities 52,792
----------
Total liabilities 2,025,020
Shareholders' equity 216,643
----------
Total liabilities and equity $ 2,241,663
==========
Yield on interest earning assets 7.41%
=====
Cost of supporting funds 4.05%
=====
Net interest margin:
Taxable equivalent basis $ 70,388 3.36%
======== =====
Without taxable equivalent adjustments $ 70,388 3.36%
======== =====
</TABLE>
Note : Interest and yields were calculated on a taxable equivalent basis,
using a 35% tax rate and the actual number of days in the periods.
Loan fees, as well as nonaccrual loans and their related income effect,
have been included in the calculation of average interest yields/rates.
18
<PAGE> 21
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>
1999 COMPARED TO 1998 1998 COMPARED TO 1997
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 $ (77) $ (9,346) $ 9 $ (9,414) $(2,313) $ 9,852 $(328) $ 7,211
Consumer loans (259) 5,267 (69) 4,939 41 3,703 10 3,754
Commercial loans 75 3,126 23 3,224 214 1,430 35 1,679
- ---------------------------------------------------------------------------------------------------------------------------
Total loans receivable (261) (953) (37) (1,251) (2,058) 14,985 (283) 12,644
Mortgage-backed securities (928) (20,373) 408) (20,893) (1,221) (7,472) 166 (8,527)
Investment securities (124) 4,405 (237) 4,044 (510) (1,382) 175 (1,717)
Other earning assets (835) 2,744 (880) 1,029 214 229 23 466
- ---------------------------------------------------------------------------------------------------------------------------
Total net change in income on interest-
earning assets (2,148) (14,177) (746) (17,071) (3,575) 6,360 81 2,866
Interest-bearing liabilities
Deposits:
Demand deposits (419) 2,359 (65) 1,875 (361) 2,002 (53) 1,588
Savings deposits (20) (4) -- (24) (19) (406) 1 (424)
Certificates of deposit (2,832) (5,369) 393 (7,808) 11 (787) -- (776)
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits (3,271) (3,014) 328 (5,957) (369) 809 (52) 388
Borrowings (376) (11,109) 147 (11,338) 79 2,131 6 2,216
- ---------------------------------------------------------------------------------------------------------------------------
Total net change in expense on interest-
bearing liabilities (3,647) (14,123) 475 (17,295) (290) 2,940 (46) 2,604
- ---------------------------------------------------------------------------------------------------------------------------
Net change in net interest income $ 1,499 $ (54) $(1,221) $ 224 $(3,285) $ 3,420 $ 127 $ 262
===========================================================================================================================
</TABLE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31,
1999 AND 1998
GENERAL. Net income for 1999 was $16.7 million, or $1.32 per common share on
a diluted basis, compared to $10.9 million, or $0.73 per common share on a
diluted basis, for 1998. The results for 1999 and 1998 included a number of
significant factors which affected the comparability of the reported results,
including the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1999 AFTER-TAX 1998 AFTER-TAX
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Reported net income $16.7 $10.9
Net gain on sale of mortgage servicing rights 1.2 --
Charge primarily relating to computer hardware/software upgrades (0.4) --
(Loss)/gain on sale of securities (0.2) 0.6
Gain on sale of two branches 0.7 --
Charge involving assets acquired in a 1996 branch acquisition (0.3) --
Charge relating to an equity investment -- (2.4)
Other -- (0.2)
- ---------------------------------------------------------------------------------------------------------------------------
Adjusted net income $15.7 $12.9
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Exclusive of the above items, net income for 1999 would have been $15.7 million,
or $1.25 per common share on a diluted basis, compared to $12.9 million, or
$0.86 per common share on a diluted basis, for 1998.
19
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and Subsidiaries
NET INTEREST INCOME. Net interest income was $70.6 million for 1999,
compared to $70.7 million for 1998. Compared to 1998, net interest income in
1999 reflected a decrease in average interest earning assets offset by a higher
net interest margin.
Average interest-earning assets totaled $1.9 billion for 1999, compared to
$2.2 billion for 1998. The decrease in average interest-earning assets was due
primarily to a $301 million decrease in the Company's mortgage-backed securities
portfolio, from $684 million in 1998 to $383 million in 1999.
Average loans were $1.4 billion in 1999 and 1998. Compared to 1998, average
mortgage loans decreased 12% to $937 million, average consumer loans increased
27% to $278 million, and average commercial loans increased 30% to $158 million
in 1999. Average loans represented 88% of average deposits for 1999, compared to
90% for 1998.
For 1999, the net interest margin on a fully taxable equivalent basis was
3.67%, versus 3.27% in 1998. The increase was primarily attributable to a 0.49%
decrease in the cost of interest-bearing liabilities. The decrease in the cost
of interest-bearing liabilities, relative to 1998, was primarily related to a
reduction in the average cost of certificates of deposit, which decreased from
5.46% for 1998 to 5.06% for 1999. Also contributing to the decrease in the cost
of interest-bearing liabilities was a favorable change in funding mix, involving
an increase in lower costing demand and money market deposits, and a decrease in
higher costing certificates and wholesale borrowings.
PROVISION FOR LOAN LOSSES. Provision for loan losses totaled $4.0 million in
1999, compared to $3.5 million in 1998. For 1999, net credit losses totaled $3.1
million, or 0.23% of average loans, compared to $2.9 million, or 0.21%, in 1998.
At December 31, 1999, the allowance for loan losses totaled $10.5 million,
or 0.76% of loans and 135% of nonperforming loans, compared to $9.6 million, or
0.71% of loans and 96% of nonperforming loans at December 31, 1998.
At December 31, 1999, nonperforming loans totaled $7.8 million, or 0.57% of
loans, while nonperforming assets totaled $10.4 million, or 0.54% of assets. 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.
NONINTEREST INCOME. Noninterest income was $30.1 million for 1999, compared
to $26.9 million for 1998. The increase primarily reflected a $1.6 million net
gain on sale on mortgage servicing rights during the third quarter of 1999 and a
$1.3 million increase in deposit fees and related income. The latter increase
was primarily attributable to an increase in transaction accounts. Also
impacting the comparison was a $1.0 million gain on the sale of two branches in
Lebanon County, Pennsylvania during the second quarter of 1999 and a $0.8
million increase in the net gain on sale of mortgage loans. The latter was
primarily attributable to favorable pricing on forward delivery contracts with
the ultimate servicer. These increases were offset, in part, by a $1.2 million
decrease in the net gain on sale of securities and a $0.3 million decrease in
servicing fees. The decrease in servicing fees was attributable to the sale of
mortgage servicing rights during the third quarter of 1999.
NONINTEREST EXPENSE. Noninterest expense was $73.3 million for 1999,
compared to $77.9 million for 1998. The decrease was primarily attributable to a
$3.5 million charge during 1998 relating to an equity investment in a mortgage
servicing partnership. In addition, the decrease was also attributable to
reduced mortgage banking expenses, including a $0.9 million decrease in
commissions on mortgage originations given the substantial decrease in
production. Also contributing to the decrease was a $0.6 million reduction in
the amortization of intangible assets and a $0.4 million decrease in advertising
and promotion expense. These decreases were partially offset by higher expenses
relating to an increase in transaction accounts. Also partially offsetting these
decreases were a $0.6 million charge during the third quarter of 1999, primarily
relating to computer hardware and software upgrades, and a $0.5 million
nonrecurring charge in the second quarter of 1999, relating to certain assets
acquired in the 1996 acquisition of 12 branches in Lebanon and Berks Counties,
Pennsylvania.
INCOME TAXES. Provision for income taxes was $6.8 million, or 29% of income
before income taxes in 1999, compared to $5.3 million, or 33%, in 1998.
The decrease in the tax rate in 1999, relative to 1998, was primarily
attributable to historic and low income housing tax credits. As of December 31,
1999, the Company had a deferred tax asset of $7.5 million, which was net of a
valuation allowance of $1.2 million. 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.
20
<PAGE> 23
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 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 experienced significant
prepayments in its mortgage servicing portfolio during 1998. 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.
21
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and Subsidiaries
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.
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, 1999, the Company had a negative 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
liabilities exceeded its interest-rate-sensitive assets. In a rising rate
environment, liabilities would reprice faster at higher interest rates, thereby
decreasing net interest income. In a falling rate environment, liabilities would
reprice faster at lower interest rates, thereby increasing 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 increase
the Company's interest expense by $0.3 million in 1999 and decrease it by $0.1
million in 1998.
22
<PAGE> 25
There were no interest-rate swap agreements at December 31, 1999. The
following table sets forth the Company's interest-rate cap agreements as of
December 31, 1999.
<TABLE>
<CAPTION>
INTEREST-RATE DECEMBER 31, 1999
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% 6.07%
09/22/00 15,000 6.72% 6.16%
------
Total $65,000 6.79(1) 6.09(1)
======
</TABLE>
(1) Reflects weighted average rates at December 31, 1999.
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> 26
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, 1999, 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 $ 16,504 $ 48,284 $ 103,453 $ 80,114 $275,001 $ 523,356
Adjustable 39,255 134,188 76,710 45,061 35,223 330,437
Consumer loans 63,973 63,667 87,696 42,769 63,668 321,773
Commercial loans 69,346 40,859 50,149 18,053 10,155 188,562
Mortgage loans held for sale 24,005 -- -- -- -- 24,005
Mortgage-backed securities (3) 66,788 45,764 70,121 42,298 65,983 290,954
Investment securities 3,523 55,748 5,000 1,700 5,823 71,794
Other interest-earning assets (4) 3,499 -- -- -- 18,400 21,899
- ---------------------------------------------------------------------------------------------------------------------------
Total $286,893 $ 388,510 $ 393,129 $ 229,995 $474,253 $ 1,772,780
===========================================================================================================================
Interest-bearing liabilities:
Deposits (5):
Checking accounts (6) $ 8,294 $ 24,882 $ 56,731 $ 45,952 $195,900 $ 331,759
Savings accounts (6) 5,527 16,581 37,803 30,621 130,542 221,074
Money market deposit accounts 82,413 61,992 108,487 61,024 77,410 391,326
Certificates of deposit 179,908 257,096 88,169 23,444 10,970 559,587
FHLB advances 55,000 21,000 51,000 -- -- 127,000
Repurchase agreements 35,000 50,000 15,000 -- -- 100,000
Other borrowings 9,076 -- -- -- -- 9,076
- ---------------------------------------------------------------------------------------------------------------------------
Total 375,218 431,551 357,190 161,041 414,822 1,739,822
- ---------------------------------------------------------------------------------------------------------------------------
Hedge impact (65,000) 65,000 -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
$310,218 $ 496,551 $357,190 $ 161,041 $414,822 $ 1,739,822
(Deficiency) excess of interest-earning
assets over interest-bearing
liabilities $(23,325) $(108,041) $ 35,939 $ 68,954 $ 59,431 $ 32,958
===========================================================================================================================
Cumulative (deficiency) excess of
interest-earning assets over
interest-bearing liabilities $(23,325) $(131,366) $ (95,427) $ (26,473) $ 32,958 $ --
===========================================================================================================================
Cumulative (deficiency) excess of
interest-earning assets over
interest-bearing liabilities
as a percent of total assets -1.21% -6.83% -4.96% -1.38% 1.71% --
===========================================================================================================================
</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 $7.8
million at December 31, 1999.
(3) Reflects estimated prepayments in the current interest rate environment.
(4) Includes $18.4 million of stock in the FHLB of Pittsburgh.
(5) Includes noninterest-bearing deposit accounts.
(6) Although the Company's checking 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 checking and savings accounts. If all of the Company's
checking 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 $629 million or 33% of total assets.
24
<PAGE> 27
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, 1999, 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 off-balance-sheet
contracts). The interest rate scenarios presented in the table reflect interest
rates at December 31, 1999 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 market value of portfolio equity is significantly impacted by the
estimated effect of prepayments on the value of loans and mortgage-backed
securities. Further, this analysis is based on the Company's assets,
liabilities, and off-balance-sheet instruments at December 31, 1999 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
INTEREST RATES INCOME (1) OF PORTFOLIO EQUITY
- -----------------------------------------------------------
<S> <C> <C>
+2.00% (6.45)% (22.68)%
+1.00% (2.34) (9.93)
-- -- --
-1.00% 0.85 10.14
-2.00% 0.76 9.63
- -----------------------------------------------------------
</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. A summary of the Bank's capital
amounts and ratios as of December 31, 1999 follows:
25
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and Subsidiaries
<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 7.9% $ 151,270
-------
Intangible assets (33,048)
Unrealized loss on available-for-sale
securities, net of tax 3,150
-----------
Tangible capital, and ratio to
OTS adjusted total asset 6.4% $ 121,372 1.5% $28,362
------- =========== ------ =======
Core capital, and ratio to OTS
adjusted total assets 6.4% $ 121,372 3.0% $56,724 5.0% $ 94,539
------- =========== ------ ======= ------ =========
Core capital, and ratio to OTS
risk-weighted assets 10.4% $ 121,372 6.0% $ 70,080
------- ----------- ------ =========
Allowance for loan losses 10,478
-----------
Supplementary capital 10,478
-----------
Total risk-based capital, and ratio to
OTS risk-weighted asset (1) 11.3% $ 131,850 8.0% $93,439 10.0% $116,799
------- =========== ------ ======= ------ =========
OTS Total assets $1,920,686
===========
OTS Adjusted total assets $1,890,787
===========
OTS Risk-weighted assets $1,167,993
===========
</TABLE>
(1) Does not reflect the interest rate risk component to the risk-based capital
requirement, the effective date of which has been postponed.
LIQUIDITY AND COMMITMENTS
The Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S. Treasury,
U.S. Government agency, and other investments having maturities of five years or
less. Current OTS regulations require that a savings association maintain
average liquid assets of not less than 4% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less.
Additionally, OTS regulations require a minimum level of liquid assets, at any
given time, equal to 1% or more of net withdrawable deposit accounts and
borrowings payable in one year or less. Monetary penalties may be imposed for
failure to meet applicable liquidity requirements. The Bank's liquidity, as
measured for regulatory purposes, averaged 10.29% and 8.10% during the years
ended December 31, 1999 and 1998, respectively, and amounted to 6.34% and 6.25%
at December 31, 1999 and 1998, respectively. The Asset/Liability Committee
reviews the Bank's liquidity position on a quarterly basis.
At December 31, 1999, the Company had commitments to originate $7 million of
fixed-rate loans and $4 million of adjustable-rate loans. At the same date,
scheduled maturities of certificates of deposit during the succeeding 12 months
amounted to $437 million, including $279 million within six months. Scheduled
maturities of FHLB advances during the same 12-month period amounted to $76
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.
26
<PAGE> 29
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in relative
purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the Company's assets and
liabilities are monetary in nature. As a result, interest rates generally have a
more significant impact on a financial institution's performance than does the
effect of inflation.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("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.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No.
133," which delayed the effective date of SFAS No. 133 until fiscal years
beginning after June 15, 2000. The adoption of SFAS No. 133 as of December 31,
1999 would not have had a material impact on the consolidated statements of
income or comprehensive income.
YEAR 2000 READINESS DISCLOSURE
As the year 2000 approached, a critical business issue 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 needed 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 needed 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. Since 1998, Commonwealth worked with these service
providers to confirm that action plans were in place to ensure Year 2000
compliance. Testing efforts were organized and completed to validate compliance
of core systems and the related key interfaces.
Commonwealth upgraded substantially all of its equipment and software
systems where necessary and analyzed its technology partners and secondary
service providers to ensure that low impact business components were also fully
compliant. Total expenditures for Year 2000 compliance were less than $0.4
million and were charged to expense as incurred.
Additionally, Commonwealth was proactive in assessing the Year 2000
readiness of our larger deposit and loan customers. An assessment was made of
existing customers to determine Commonwealth's exposure to customer
non-compliance with Year 2000 issues. Processes were also established to
evaluate the Year 2000 readiness of new customers. Cash management and liquidity
management plans were established, as well as detailed plans to extend our
customer service capabilities to address special customer service needs around
the century change-over. Management was not aware of potential non-compliance
conditions which represented material exposure to the Company.
27
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS Commonwealth Bancorp, Inc. and Subsidiaries
As a result of the above, management believes Commonwealth's application
software programs and operating systems were fully compliant with Year 2000
requirements. The Company has experienced no Year 2000 related problems and does
not anticipate any issues in the future.
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> 31
REPORT OF MANAGEMENT
The management of Commonwealth Bancorp, Inc. (the "Company") is responsible for
the preparation, integrity, and fair presentation of the Company's annual
financial statements. The December 31, 1999 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 circumstances.
Management has made its own assessment of the effectiveness of the Company's
internal control structure over financial reporting as of December 31, 1999 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, 1999, 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> 32
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Commonwealth Bancorp, Inc.
We have examined management's assertion that Commonwealth Bancorp, Inc.
maintained an effective internal control structure over financial reporting as
of December 31, 1999, 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, 1999, 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.,
February 7, 2000
30
<PAGE> 33
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Commonwealth Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Commonwealth
Bancorp, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
Philadelphia, Pa.,
February 7, 2000
31
<PAGE> 34
CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts)
===========================================================================================================
DECEMBER 31,
-------------------------------
ASSETS 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 54,677 $ 58,028
Interest-bearing deposits 3,499 43,829
Short-term investments available for sale 3,575 4,820
Mortgage loans held for sale 24,005 120,642
Investment securities
Securities available for sale
(cost of $68,301 and $34,407, respectively), at market value 68,219 34,515
Mortgage-backed securities
Securities held to maturity
(market value of $92,965 and $133,735, respectively), at cost 93,674 132,105
Securities available for sale
(cost of $202,076 and $388,349, respectively), at market value 197,280 392,036
Loans receivable, net 1,361,430 1,338,177
Accrued interest receivable, net 9,499 11,260
FHLB stock, at cost 18,400 18,400
Premises and equipment, net 15,535 16,887
Intangible assets 33,048 39,830
Mortgage servicing rights -- 9,969
Other assets, including net deferred taxes
of $7,460 and $2,508, respectively 39,555 37,001
- ------------------------------------------------------------------------------------------------------------
Total assets $1,922,396 $2,257,499
============================================================================================================
</TABLE>
(Continued)
32
<PAGE> 35
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS Continued (in thousands, except share and per share amounts)
==========================================================================================================================
DECEMBER 31,
---------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities:
Deposits $1,503,746 $1,605,299
Notes payable and other borrowings:
Secured notes due to Federal Home Loan Bank of Pittsburgh 127,000 240,500
Securities sold under agreements to repurchase 100,000 166,000
Other borrowings 9,076 --
Advances from borrowers for taxes and insurance 9,326 28,960
Accrued interest payable, accrued expenses and other liabilities 20,883 24,562
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,770,031 2,065,321
- --------------------------------------------------------------------------------------------------------------------------
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;
18,068,127 shares issued and 11,934,695 outstanding at December 31, 1999
18,054,315 shares issued and 14,721,408 outstanding at December 31, 1998 1,807 1,806
Additional paid-in capital 136,966 135,588
Retained earnings 135,780 123,917
Unearned stock benefit plan compensation (8,504) (10,666)
Accumulated other comprehensive (loss) income (3,171) 2,467
Treasury stock, at cost; 6,133,432 and 3,332,907 shares, respectively (110,513) (60,934)
- --------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 152,365 192,178
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,922,396 $2,257,499
==========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
33
<PAGE> 36
CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME (in thousands, except share and per share amounts)
==================================================================================================================================
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest on loans $ 105,371 $ 106,827 $ 94,185
Interest and dividends on deposits and money
market investments 3,633 2,604 2,140
Interest on investment securities 6,301 2,313 4,031
Interest on mortgage-backed securities 25,467 46,360 54,887
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest income 140,772 158,104 155,243
- ----------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 52,989 58,946 58,560
Interest on notes payable and other borrowings 17,170 28,508 26,295
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 70,159 87,454 84,855
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income 70,613 70,650 70,388
Provision for loan losses 4,000 3,500 1,600
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 66,613 67,150 68,788
- ----------------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Deposit fees and related income 10,113 8,822 7,261
Servicing fees 3,281 3,594 5,185
Net gain on sale of mortgage loans 11,681 10,842 4,993
Net (loss) gain on sale of securities (250) 985 345
Other 5,302 2,703 3,791
- ----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 30,127 26,946 21,575
- ----------------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Compensation and employee benefits 36,655 37,866 32,969
Occupancy and office operations 11,201 10,907 10,283
Amortization of intangible assets 4,823 5,413 5,990
Valuation adjustment relating to an equity investment
in a mortgage servicing partnership -- 3,533 --
Other 20,585 20,151 16,806
- ----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 73,264 77,870 66,048
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 23,476 16,226 24,315
Income tax provision 6,808 5,294 7,946
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 16,668 $ 10,932 $ 16,369
==================================================================================================================================
Basic weighted average number of shares outstanding 12,202,004 14,307,132 15,501,202
==================================================================================================================================
Basic earnings per share $ 1.37 $ 0.76 $ 1.06
==================================================================================================================================
Diluted weighted average number of shares outstanding 12,604,768 14,891,545 16,035,806
==================================================================================================================================
Diluted earnings per share $ 1.32 $ 0.73 $ 1.02
==================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
34
<PAGE> 37
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands)
=============================================================================================================================
ACCUMULATED
COMMON ADDITIONAL STOCK OTHER
SHARES COMMON PAID--IN RETAINED BENEFIT PLAN COMPREHENSIVE
OUTSTANDING STOCK CAPITAL EARNINGS COMPENSATION INCOME (LOSS)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 17,954 $1,795 $132,931 $105,577 $(10,510) $ 2,131
=============================================================================================================================
Comprehensive Income:
Net income -- -- -- 16,369 -- --
Other--unrealized gain on marketable
securities, net of $744 tax expense -- -- -- -- -- 1,381
Total comprehensive income -- -- -- -- -- --
Dividends -- -- -- (4,364) -- --
Release of ESOP shares -- -- 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) 3,512
=============================================================================================================================
Comprehensive Income:
Net income -- -- -- 10,932 -- --
Other--unrealized loss on marketable
securities, net of $563 tax benefit -- -- -- -- -- (1,045)
Total comprehensive income -- -- -- -- -- --
Dividends -- -- -- (4,597) -- --
Release of ESOP shares -- -- 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) 2,467
=============================================================================================================================
Comprehensive Income:
Net income -- -- -- 16,668 -- --
Other--unrealized loss on marketable
securities, net of $3,036 tax benefit -- -- -- -- -- (5,638)
Total comprehensive income -- -- -- -- -- --
Dividends -- -- -- (4,350) -- --
Release of ESOP shares -- -- 819 -- 920 --
Amortization of unearned compensation -- -- -- -- 1,242 --
Stock issued pursuant to benefit plans 120 1 288 (455) -- --
Purchase of treasury stock (2,906) -- -- -- -- --
Tax Benefit on employee stock plans -- -- 271 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 11,935 $1,807 $136,966 $135,780 $ (8,504) $(3,171)
=============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
===============================================================================
TREASURY
STOCK TOTAL
- -------------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1996 $ -- $231,924
===============================================================================
Comprehensive Income:
Net income -- 16,369
Other--unrealized gain on marketable
securities, net of $744 tax expense -- 1,381
---------
Total comprehensive income -- 17,750
---------
Dividends -- (4,364)
Release of ESOP shares -- 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 (28,683) 214,852
===============================================================================
Comprehensive Income:
Net income -- 10,932
Other--unrealized loss on marketable
securities, net of $563 tax benefit -- (1,045)
---------
Total comprehensive income -- 9,887
---------
Dividends -- (4,597)
Release of ESOP shares -- 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 (60,934) 192,178
===============================================================================
Comprehensive Income:
Net income -- 16,668
Other--unrealized loss on marketable
securities, net of $3,036 tax benefit -- (5,638)
---------
Total comprehensive income -- 11,030
---------
Dividends -- (4,350)
Release of ESOP shares -- 1,739
Amortization of unearned compensation -- 1,242
Stock issued pursuant to benefit plans 1,782 1,616
Purchase of treasury stock (51,361) (51,361)
Tax Benefit on employee stock plans -- 271
- -------------------------------------------------------------------------------
Balance at December 31, 1999 $(110,513) $152,365
===============================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
35
<PAGE> 38
CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
===================================================================================================================================
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 16,668 $ 10,932 $ 16,369
Adjustments to reconcile net income to net cash
provided by (used in) operating activities-
Proceeds from loans sold to others 633,469 695,364 327,953
Loans originated for sale (375,527) (538,658) (285,113)
Purchases of loans held for sale (148,620) (235,388) (61,234)
Principal collection on mortgage loans held for sale 690 1,034 552
Net gain on sale of mortgage loans (11,681) (10,842) (4,993)
(Decrease) increase in net deferred loan fees (261) 452 210
Provision for loan losses and foreclosed real estate 4,110 3,609 1,757
Loss (gain) on sale of investment securities 250 (985) (345)
Gain on sale of mortgage servicing rights (1,646) -- --
Valuation adjustment on an equity investment -- 3,533 --
Gain on sale of assets (1,027) (35) (1,595)
Depreciation and amortization 3,366 3,364 3,375
Net amortization of other assets and liabilities 6,480 10,354 9,967
Interest reinvested on repurchase agreements (7,127) (10,001) (13,346)
Changes in assets and liabilities-
Decrease (increase) in-
Accrued interest receivable, net 1,761 2,011 68
Deferred income taxes (1,917) (1,463) (112)
Other assets (2,363) (6,538) (4,756)
(Decrease) increase in-
Advances from borrowers for taxes and insurance (13,038) 4,889 188
Accrued interest payable, accrued expenses and other liabilities (3,779) 6,813 (3,292)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities $ 99,808 $ (61,555) $ (14,347)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
36
<PAGE> 39
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS Continued (in thousands)
===============================================================================================================
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investing activities:
Proceeds from sale of investment securities $ 177,063 $ 6,704 $ 5,000
Proceeds from maturities of investment securities 5,000 35,000 38,000
Purchases of investment securities (214,500) (27,000) (39,402)
Purchases of Bank Owned Life Insurance -- -- (15,000)
Proceeds from sale of mortgage-backed securities 5,170 -- 41,770
Proceeds from call of mortgage-backed securities -- 30,000 --
Purchases of mortgage-backed securities -- (156,958) (189,818)
Principal collected on mortgage-backed securities 219,534 337,291 166,838
Principal collected on loans 335,689 458,064 249,227
Loans originated (312,414) (371,979) (230,340)
Loans purchased (59,095) (165,295) (165,906)
Sales of real estate acquired through foreclosure 1,673 1,016 1,431
Purchase of FHLB Stock -- (4,225) (3,016)
Purchases of premises and equipment (3,032) (1,766) (6,209)
Proceeds from sale of assets (22,134) 105 11,208
Net proceeds from sale of mortgage servicing rights 3,984 -- --
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 136,938 140,957 (136,217)
- ---------------------------------------------------------------------------------------------------------------
Financing activities:
Net (decrease) increase in deposits (64,280) 52,475 61,374
Proceeds from notes payable and other borrowings 593,076 615,000 327,815
Repayment of notes payable and other borrowings (756,373) (657,598) (207,044)
Net purchase of common stock (49,745) (31,943) (33,392)
Cash dividends paid (4,350) (4,597) (4,353)
- ---------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (281,672) (26,663) 144,400
- ---------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and
cash equivalents (44,926) 52,739 (6,164)
Cash and cash equivalents at beginning of period 106,677 53,938 60,102
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 61,751 $ 106,677 $ 53,938
===============================================================================================================
Supplemental disclosures of cash flow information
Cash paid during the year for -
Interest $ 71,068 $ 87,871 $ 84,889
===============================================================================================================
Income taxes $ 9,150 $ 5,350 $ 8,925
===============================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
37
<PAGE> 40
<TABLE>
<S> <C>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and Subsidiaries
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1999, 1998, and 1997
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-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, Lehigh, Montgomery, and Philadelphia Counties,
Pennsylvania, as well as through ComNet Mortgage Services ("ComNet") and
Homestead Mortgage. ComNet conducts business through ten loan origination
offices located in Pennsylvania, Maryland, New Jersey, and Virginia. ComNet also
originates loans through a network of correspondents, primarily in the eastern
United States. ComNet operates under the trade name of Homestead Mortgage 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 1998 and 1997 financial statements and footnotes have
been reclassified in order to conform with the 1999 financial statement and
footnote presentation.
FUTURE ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 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.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No.
133," which delayed the effective date of SFAS No. 133 until fiscal years
beginning after June 15, 2000. The adoption of SFAS No. 133 as of December 31,
1999 would not have had a material impact on the consolidated statements of
income or comprehensive income.
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
38
<PAGE> 41
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 probable inherent losses which have occurred as of the date of
the financial statements. In determining the allowance for loan losses,
Commonwealth assesses prior loss experience, the volume and type of lending
conducted by the Company, industry standards, past due loans, general economic
conditions, and other factors related to the collectibility of the loan
portfolio. 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 cost or fair value,
leases and debt securities. The in-substance foreclosure rules also changed in
that "in-substance foreclosures" are classified as loans and stated at the lower
of cost or fair value, as defined.
LOAN ORIGINATION FEES AND SERVICING FEES
The net amount of nonrefundable loan origination fees and certain direct
loan origination costs relating to completed loans are deferred and recognized
over the contractual life of the loans using the level-yield method. Deferred
loan fees, net of loan origination costs, were $3.5 million and $4.3 million at
December 31, 1999 and 1998, respectively, of which $0.1 million and $0.7
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 $0.7 million and
$1.1 million at December 31, 1999 and 1998, respectively.
MORTGAGE SERVICING RIGHTS
During the third quarter of 1999, Commonwealth Bank exited substantially
all of the third party mortgage servicing business, and sold its existing $1.0
billion Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National
39
<PAGE> 42
<TABLE>
<S> <C>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and Subsidiaries
</TABLE>
Mortgage Association ("FNMA") mortgage servicing portfolio to National City
Mortgage Co. (see Note 17).
Prior to 1999, the Company acquired mortgage servicing rights through the
purchase and origination of mortgage loans which were 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," required 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 was 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 was recognized through a
valuation allowance.
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
Intangible assets, which are comprised of the excess of cost over net
assets acquired ("Goodwill") and core deposit intangibles ("CDI"), were recorded
in connection with the acquisition of twelve former Meridian Bank branches in
1996 (the "Berks Acquisition") and the acquisition of four former Fidelity
Federal branches in 1995 (the "Fidelity Federal Acquisition"). On June 28, 1999,
Commonwealth sold two of the former Meridian Bank branches, which resulted in a
$1.4 million and $0.6 million reduction in Goodwill (Berks Acquisition) and CDI
(Berks Acquisition), respectively. 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, 1999 and
1998:
<TABLE>
<CAPTION>
================================================================================
DECEMBER 31,
-----------------------------
(IN THOUSANDS) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Goodwill (Berks Acquisition) $16,010 $19,141
CDI (Berks Acquisition) 6,009 8,260
Goodwill (Fidelity Federal) 9,187 10,257
CDI (Fidelity Federal) 1,842 2,172
- --------------------------------------------------------------------------------
Total $33,048 $39,830
================================================================================
</TABLE>
REAL ESTATE OWNED AND OTHER ACQUIRED ASSETS
Real estate and other assets acquired through foreclosure or deed in lieu
of foreclosure are presumed to be held for sale, and are 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, 1999 and 1998, real estate owned and other
acquired assets totaled $0.9 million and $1.0 million, respectively, and are
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
40
<PAGE> 43
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
SFAS No. 128, "Earnings Per Share," specifies 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.
Basic EPS is calculated by dividing net income available to common
shareholders by the weighted average number of common shares outstanding during
the period, 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. Options, warrants, and other potentially dilutive securities
and treasury shares are excluded from the basic calculation, as follows:
<TABLE>
<CAPTION>
================================================================================
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic weighted average
number of shares
outstanding 12,202,004 14,307,132 15,501,202
- --------------------------------------------------------------------------------
Effect of dilutive securities:
Stock options 353,689 477,044 423,096
Recognition Plan stock 49,075 107,369 111,508
- --------------------------------------------------------------------------------
Diluted weighted average
number of shares
outstanding 12,604,768 14,891,545 16,035,806
================================================================================
</TABLE>
Diluted EPS is computed by dividing net income available to common
shareholders by the weighted average number of shares of common stock
outstanding during the year, adjusted for ESOP shares that have not been
committed to be released, and the effects of shares held by the Recognition
Plans. The effect of dilutive securities, such as stock options and Recognition
Plan stock, are considered common stock equivalents and are included in the
computation of the number of outstanding shares using the treasury stock method.
Common shares outstanding exclude treasury shares.
Basic EPS was $1.37 for 1999, compared to $0.76 per share for 1998, and
$1.06 per share for 1997. Diluted EPS was $1.32 for 1999, compared to $0.73 per
share for 1998, and $1.02 per share for 1997.
COMPREHENSIVE INCOME
The Company adopted 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, 1999,
1998, and 1997 follows:
<TABLE>
<CAPTION>
================================================================================
(IN THOUSANDS) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized (loss) gain on
marketable securities, net of tax,
arising during period $(5,801) $ (405) $1,605
- --------------------------------------------------------------------------------
Less: reclassification adjustment
for (losses) gains included
in net income (163) 640 224
- --------------------------------------------------------------------------------
Net unrealized (loss) gain on
marketable securities, net of tax $(5,638) $(1,045) $1,381
================================================================================
</TABLE>
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> 44
<TABLE>
<S> <C>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and Subsidiaries
</TABLE>
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, 1999, 1998, and 1997, 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, 1999, the Company had a negative 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
liabilities exceeded its interest-rate-sensitive assets. In a rising rate
environment, liabilities would reprice faster at higher interest rates, thereby
decreasing net interest income. In a falling rate environment, liabilities would
reprice faster at lower interest rates, thereby increasing 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, 1999, 1998, and 1997,
reclassifications of loans to real estate owned were $2.2 million, $2.0 million,
and $1.6 million, respectively.
42
<PAGE> 45
2. INVESTMENT SECURITIES:
Investments in debt and equity securities at December 31, 1999 and 1998,
were as follows:
<TABLE>
<CAPTION>
=================================================================================================================================
DECEMBER 31, 1999 DECEMBER 31, 1998
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:
Within one year $34,996 $ -- $ 71 $34,925 $19,997 $143 $-- $20,140
U.S. Treasury and U.S. Government agency
securities maturing:
Within one year -- -- -- -- 12,000 1 2 11,999
- ---------------------------------------------------------------------------------------------------------------------------------
Mortgage Related Mutual Fund 20,751 -- 272 20,479 -- -- -- --
Equity Investment -
Mortgage Servicing Partnership 1,700 -- -- 1,700 1,700 -- -- 1,700
Other Equity Investments 10,854 394 133 11,115 710 -- 34 676
- ---------------------------------------------------------------------------------------------------------------------------------
Total $68,301 $394 $476 $68,219 $34,407 $144 $36 $34,515
=================================================================================================================================
</TABLE>
3. MORTGAGE-BACKED SECURITIES:
Mortgage-backed securities at December 31, 1999 and 1998, were as follows:
<TABLE>
<CAPTION>
================================================================================================
DECEMBER 31, 1999
------------------------------------------------------------------
UNREALIZED
AMORTIZED --------------------------- MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity:
GNMA $ 36,136 $ 365 $ 115 $ 36,386
FHLMC 17,693 54 75 17,672
FNMA 36,836 169 1,107 35,898
Private 3,009 -- -- 3,009
- ------------------------------------------------------------------------------------------------
Total $ 93,674 $ 588 $1,297 $ 92,965
================================================================================================
Available for sale:
GNMA $ 9,832 $ 161 $ 287 $ 9,706
FHLMC 41,995 544 216 42,323
FNMA 44,834 2 675 44,161
CMO and REMIC 105,415 135 4,460 101,090
- ------------------------------------------------------------------------------------------------
Total $202,076 $ 842 $5,638 $197,280
================================================================================================
<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
================================================================================================
</TABLE>
43
<PAGE> 46
<TABLE>
<S> <C>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and Subsidiaries
</TABLE>
Expected and actual maturities of mortgage-backed securities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations, with or without call or prepayment penalties. During 1999,
$5 million of available for sale mortgage-backed securities were sold with no
gain or loss recognized. 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 available for sale mortgage-backed securities totaling
$42 million and purchased mortgage-backed securities, classified as available
for sale, totaling $42 million. The latter 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, 1999 and 1998, FHLMC mortgage-backed securities with both
an amortized cost and market value of $36 million and $59 million, respectively;
Government National Mortgage Association ("GNMA") mortgage-backed securities
with both an amortized cost and market value of $18 million and $11 million,
respectively; and FNMA mortgage-backed securities with an amortized cost of $51
million and $94 million, respectively (market value of $49 million and $95
million, respectively), collateralized certain securities sold under agreements
to repurchase. At December 31, 1999, FNMA mortgage-backed securities with both
an amortized cost and market value of $11 million collateralized commercial
repurchase agreements (see Note 8). Mortgage-backed securities with an amortized
cost at December 31, 1999 and 1998, of $44 million and $33 million, respectively
(market value of $42 million and $34 million, respectively), were pledged as
collateral for depositors. There were no mortgage-backed securities pledged as
collateral for interest rate swap agreements at December 31, 1999.
Mortgage-backed securities with both an amortized cost and market value of $0.2
million were pledged as collateral for interest rate swap agreements at December
31, 1998.
4. LOANS RECEIVABLE, NET:
A summary of loans receivable at December 31, 1999 and 1998, follows:
<TABLE>
<CAPTION>
================================================================================
DECEMBER 31,
-----------------------------
(IN THOUSANDS) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans - Residential $ 860,750 $ 969,617
- --------------------------------------------------------------------------------
Consumer loans:
Equity lines of credit 30,496 34,845
Second mortgages 184,844 126,360
Recreational vehicles 60,998 39,920
Other 45,448 38,781
- --------------------------------------------------------------------------------
Total consumer loans 321,786 239,906
- --------------------------------------------------------------------------------
Commercial loans:
Small Business Administration 10,971 14,491
Commercial real estate 66,158 45,021
Business loans 113,178 79,490
- --------------------------------------------------------------------------------
Total commercial loans 190,307 139,002
- --------------------------------------------------------------------------------
Total loans receivable 1,372,843 1,348,525
- --------------------------------------------------------------------------------
Less:
Net premium on loans purchased (2,443) (2,880)
Allowance for loan losses 10,478 9,589
Deferred loan fees 3,378 3,639
- --------------------------------------------------------------------------------
Loans receivable, net $1,361,430 $1,338,177
================================================================================
</TABLE>
44
<PAGE> 47
Nonaccruing loans at December 31, 1999 and 1998, were $7.8 million and
$10.0 million, respectively. Forgone interest income on nonaccruing loans
totaled $0.6 million and $0.9 million at December 31, 1999 and 1998,
respectively. Impaired loans totaled $7.3 million and $9.8 million at December
31, 1999 and 1998, respectively. Reserves associated with impaired loans totaled
$2.4 million and $3.6 million at December 31, 1999 and 1998, respectively.
A summary of activity relating to loans in excess of $60,000 outstanding to
directors and executive officers follows:
<TABLE>
<CAPTION>
================================================================================
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------------
(IN THOUSANDS) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $1,802 $1,074 $ 918
New loans 3,183 765 500
Loan repayments (796) (37) (344)
- --------------------------------------------------------------------------------
Balance, end of year $4,189 $1,802 $1,074
================================================================================
</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) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 9,589 $9,024 $9,971
Loans charged off (3,672) (3,129) (2,799)
Recoveries of loans 561 194 252
- --------------------------------------------------------------------------------
Net loans charged off (3,111) (2,935) (2,547)
Provision for loan losses 4,000 3,500 1,600
- --------------------------------------------------------------------------------
Balance, end of year $10,478 $9,589 $9,024
================================================================================
</TABLE>
5. ACCRUED INTEREST RECEIVABLE:
Accrued interest receivable was related to the following at December 31,
1999 and 1998:
<TABLE>
<CAPTION>
================================================================================
DECEMBER 31,
---------------------------
(IN THOUSANDS) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Investment securities $ 433 $ 473
Mortgage-backed securities 1,812 3,234
Loans receivable, net 7,254 7,553
- --------------------------------------------------------------------------------
Total $9,499 $11,260
================================================================================
</TABLE>
6. PREMISES AND EQUIPMENT:
A summary of premises and equipment, less accumulated depreciation and
amortization, at December 31, 1999 and 1998, follows:
<TABLE>
<CAPTION>
================================================================================
DECEMBER 31,
----------------------------
(IN THOUSANDS) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 884 $ 1,247
Office buildings 6,312 7,340
Furniture, fixtures and equipment 22,278 22,352
Leasehold improvements 10,951 9,766
- --------------------------------------------------------------------------------
Premises and equipment 40,425 40,705
Less-accumulated depreciation
and amortization (24,890) (23,818)
- --------------------------------------------------------------------------------
Premises and equipment, net $15,535 $16,887
================================================================================
</TABLE>
45
<PAGE> 48
<TABLE>
<S> <C>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and Subsidiaries
</TABLE>
7. DEPOSITS:
A summary of interest expense, average balances, and interest rates on
deposits follows:
<TABLE>
<CAPTION>
======================================================================================================================
MONEY
CHECKING MARKET SAVINGS CERTIFICATES
(IN THOUSANDS) DEPOSITS DEPOSITS DEPOSITS OF DEPOSIT
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For the year ended December 31, 1999:
Balance at year-end $331,759 $391,326 $221,074 $559,587
Average balance 326,019 402,972 227,423 609,574
Interest expense 2,428 14,650 5,046 30,865
Average rate paid 0.74% 3.64% 2.22% 5.06%
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%
</TABLE>
Certificates of deposits of $100,000 or more totaled $84 million and $91 million
at December 31, 1999 and 1998, respectively. Deposits in excess of $100,000 are
not federally insured by the FDIC.
The scheduled maturities of certificate accounts at December 31, 1999 and 1998,
were as follows:
<TABLE>
<CAPTION>
=====================================================================================================================
DECEMBER 31,
---------------------------------------------------------------------
1999 1998
----------------------------- -----------------------------
(IN THOUSANDS) AMOUNT PERCENT AMOUNT PERCENT
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Under 12 months $437,004 78% $468,490 70%
12 to 36 months 88,110 16 148,958 22
Over 36 months 34,473 6 49,611 8
- ---------------------------------------------------------------------------------------------------------------------
Total $559,587 100% $667,059 100%
=====================================================================================================================
</TABLE>
46
<PAGE> 49
8. NOTES PAYABLE AND OTHER BORROWINGS:
Notes payable and other borrowings at December 31, 1999 and 1998, were as
follows:
<TABLE>
<CAPTION>
==========================================================================================================
DECEMBER 31,
---------------------------------------
(IN THOUSANDS) DUE DATE 1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Secured notes due to
FHLB of Pittsburgh:
Maturing in 1999 $ -- $168,500
2000 76,000 21,000
2001 51,000 51,000
-------- --------
Total $127,000 $240,500
======== ========
Weighted average rate 5.49% 5.32%
Securities sold under
agreement to repurchase:
Maturing in 1999 $ -- $ 36,000
2000 40,000 70,000 (1)
2001 15,000 15,000
2002 45,000 (2) 45,000 (2)
-------- --------
Total $100,000 $166,000
======== ========
Weighted average rate 5.81% 6.21%
Commercial repurchase agreement $ 9,076 $ --
======== ========
Weighted average rate 4.32% --
==========================================================================================================
</TABLE>
(1) Includes $30 million callable in 1999.
(2) Callable in 2000.
All stock in the FHLB of Pittsburgh at December 31, 1999 and 1998, 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,
1999 and 1998, 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 $116 million and $164
million, respectively (market value of $114 million and $165 million,
respectively), at December 31, 1999 and 1998 (see Note 3).
The maximum amounts of outstanding reverse repurchase agreements during the
years ended December 31, 1999 and 1998, were $154 million and $241 million,
respectively. Average agreements outstanding for the years ended December 31,
1999 and 1998, were $133 million and $205 million, respectively. The weighted
average interest rates relating to the agreements for the years ended December
31, 1999 and 1998, were 6.31% and 6.04%, respectively.
47
<PAGE> 50
<TABLE>
<S> <C>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and Subsidiaries
</TABLE>
9. INCOME TAXES:
A summary of the provision (benefit) for income taxes for the years ended
December 31, 1999, 1998, and 1997, follows:
<TABLE>
<CAPTION>
================================================================================
(IN THOUSANDS) CURRENT DEFERRED TOTAL
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1999:
Federal $8,725 $(1,917) $6,808
State -- -- --
- --------------------------------------------------------------------------------
Total $8,725 $(1,917) $6,808
================================================================================
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
================================================================================
</TABLE>
Income tax expense has been provided at the effective rates of 29%, 33%,
and 33% for the years ended December 31, 1999, 1998, and 1997, respectively.
These rates differ from the statutory rate of 35%, as follows:
<TABLE>
<CAPTION>
================================================================================
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------------
(IN THOUSANDS) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income
taxes $23,476 $16,226 $24,315
================================================================================
Income tax expense at
federal statutory rate $ 8,217 $ 5,679 $ 8,511
ESOP 226 351 258
Low--income housing
credits (1,094) (548) (771)
Change in deferred tax
valuation allowance (150) (124) (106)
Increase in Bank Owned
Life Insurance (312) (300) --
Tax exempt interest, net (84) (1) --
Other 5 237 54
- --------------------------------------------------------------------------------
Income tax expense at
effective rate $ 6,808 $ 5,294 $ 7,946
================================================================================
</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, 1999 and 1998,
respectively:
<TABLE>
<CAPTION>
================================================================================
DECEMBER 31,
----------------------------
(IN THOUSANDS) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Depreciation $ 820 $ 656
Loan loss reserves 3,667 2,436
Mortgage servicing rights -- 1,295
Post retirement and post
employment benefits 142 228
Unrealized loss (gain)
on securities 1,707 (1,328)
Accrued expenses not
currently deductible 144 227
Servicing partnership
valuation adjustment 1,155 1,155
Tax deductible goodwill 2,125 2,549
Other 257 573
- --------------------------------------------------------------------------------
Total gross assets 10,017 7,791
Less valuation allowance (1,206) (1,356)
- --------------------------------------------------------------------------------
Gross assets net of
valuation allowance 8,811 6,435
- --------------------------------------------------------------------------------
Deferred loan fees (351) (174)
Capitalized mortgage
servicing fees -- (2,942)
Tax loss from investment
partnerships (628) (290)
Other (372) (521)
- --------------------------------------------------------------------------------
Total gross liabilities (1,351) (3,927)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 7,460 $2,508
================================================================================
</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, 1999, the Company had a net loss carryforward for state tax
purposes totaling $2.9 million, which expires in 2001.
48
<PAGE> 51
10. MORTGAGE BANKING ACTIVITIES:
During the years ended December 31, 1999 and 1998, the Company sold
mortgage loans and mortgage-backed securities collateralized by loans originated
by ComNet totaling $632 million and $692 million, respectively, on a servicing
retained or servicing released basis. At December 31, 1999, the principal
balance of loans serviced by the Company for others totaled $0.2 billion, which
was primarily related to current mortgage production awaiting transfer to the
ultimate servicer. The principal balances of loans serviced by the Company for
others totaled $1.4 billion and $1.3 billion at December 31, 1998 and 1997,
respectively.
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, 1999, the principal amount of mortgages
outstanding that are subject to this condition aggregated approximately $160
million, of which approximately $6 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, 1999 follows:
<TABLE>
<CAPTION>
============================================================
(IN THOUSANDS)
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------------------------------------------
<S> <C>
2000 $ 3,834
2001 3,615
2002 3,160
2003 2,735
2004 2,332
2005 and thereafter 14,599
- ------------------------------------------------------------
Total $30,275
============================================================
</TABLE>
Rent expense under operating leases was $3.7 million, $3.5 million, and
$3.1 million for the years ended December 31, 1999, 1998, and 1997,
respectively.
COMMITMENTS TO ORIGINATE LOANS
The Company had outstanding commitments to originate fixed and adjustable
rate residential mortgage loans of $7 million (interest rates ranged between
5.00% and 8.75%) and $4 million (interest rates ranged between 6.50% and 9.88%),
respectively, at December 31, 1999. 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, 1999, the aggregate commitment for payments to the executives upon
termination, without a change in control, was $2.0 million.
GUARANTY
During 1999, the Company guaranteed a $2 million loan between the lessor of
its headquarters building and a third party.
49
<PAGE> 52
<TABLE>
<S> <C>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and Subsidiaries
</TABLE>
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 recent 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
2000, the Claims Court had ruled in favor of thrift plaintiffs on liability for
breach of contract in a number of additional Winstar-related cases. In 1999, the
United States appealed the Claims Court liability ruling in the CalFed case to
the U.S. Court of Appeals for the Federal Circuit. Also, in 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. During 1999, the Claims Court issued decisions
relating to the amount of damages claimed by plaintiffs in three Winstar-related
cases. In these three cases, the Courts accepted and rejected various damages
claims by the respective thrift plaintiffs. The Claims Court damages awards
were: Glendale case, $909 million; CalFed case, $23 million; LaSalle Talman
case, $5 million. The damages decisions in these three cases have been appealed
to the U.S. Court of Appeals for the Federal Circuit. There can be no assurance
that the Bank will prevail in its action, and if it does prevail, that the
Courts 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. EMPLOYEE BENEFIT PLANS:
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 for each of the years ended December 31,
1999, 1998, and 1997.
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
50
<PAGE> 53
the Company. All funds contributed to the Target Benefit Plan, Profit Sharing,
and 401(k) Match are held in a trust fund. The Company contributed $0.6 million,
$0.6 million, and $0.5 million for the year ended December 31, 1999, 1998, and
1997, respectively, to the Target Benefit Plan, Profit Sharing, and 401(k)
Match.
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. Investment categories available within the plan
include mutual funds and Company stock. Company stock totaled $6 million, or 35%
of the plan's assets at December 31, 1999.
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 made scheduled
discretionary cash contributions to the ESOP sufficient to amortize the
principal and interest on the loan, which was scheduled to mature in March 2006.
On March 31, 1999, the ESOP entered into an agreement with the Bank to borrow
$7.3 million to repay the remaining principal amount of the loan with the
Company. The loan is payable in equal quarterly installments and matures in
March 2006. 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 $1.6 million, $1.9 million, and $1.7 million
relating to the ESOP for the year ended December 31, 1999, 1998, and 1997,
respectively. As of December 31, 1999, the ESOP held 1.3 million shares, of
which 0.6 million had been allocated. The fair value of unearned ESOP shares at
December 31, 1999 approximated $10.9 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 $1.4 million, $1.3 million, and $1.2 million for the year ended
December 31, 1999, 1998, and 1997, respectively.
In connection with the 1994 reorganization and stock offering, the Company
adopted the 1993 Directors' Stock Option Plan. Authorized shares of common stock
equal to 1.5% of the common stock in the stock offering (or 0.1 million shares
adjusted for the 2.0775 exchange ratio) were reserved for issuance pursuant to
the Directors' Stock Option Plan. The 1996 Stock Option Plan provides the
Directors the option to purchase, as a group, 2.1% of the common stock in the
1996 stock offering, or 0.2 million shares of common stock. The Stock Option
Plans provide that each current director who is not an officer or employee of
the Company be granted compensatory options to purchase shares of common stock.
The per share exercise price of a compensatory stock option shall at least equal
the fair market value of a share of common stock on the date the option is
granted. Options granted under the 1996 Stock Option Plan vest and are
exercisable 20% per year over a five-year period, commencing on the first
anniversary of the date of grant. An option granted under the Stock Option Plan
will be exercisable until the earlier of ten years after its date of grant or
three years after the date on which the optionee ceases to be a nonemployee
director.
Additionally, the Company adopted the 1993 and 1996 Stock Incentive Plans
("Stock Option Plans") in connection with the 1994 and 1996 reorganization and
stock offerings, respectively. The Stock Option Plans authorize the grant of
stock options and stock appreciation rights equal to 8.5% and 7.9% of the common
stock in the 1994 and 1996 stock offerings, respectively. Under
51
<PAGE> 54
<TABLE>
<S> <C>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and Subsidiaries
</TABLE>
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 for the years ended December 31, 1999, 1998, and 1997 would have been
reduced as follows:
<TABLE>
<CAPTION>
================================================================================
(IN THOUSANDS,
EXCEPT PER SHARE DATA) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income - as reported $16,668 $10,932 $16,369
Net Income - pro forma $15,669 $ 9,985 $15,643
- --------------------------------------------------------------------------------
Basic earnings
per share - as reported $ 1.37 $ 0.76 $ 1.06
Basic earnings
per share - pro forma $ 1.28 $ 0.70 $ 1.01
Diluted earnings
per share - as reported $ 1.32 $ 0.73 $ 1.02
Diluted earnings
per share - pro forma $ 1.24 $ 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 1999, 1998 and 1997, respectively: risk-free interest rate of 6.53%,
4.69%, and 5.41%; expected volatility of 25%, 65%, and 32%; dividend yield of
2.93%, 1.98%, and 1.42%; and an expected life of seven years.
A summary of activity under the various stock option plans for the years
ended December 31, 1999, 1998, and 1997 follows:
<TABLE>
<CAPTION>
================================================================================
WEIGHTED
AVERAGE
OPTIONS PRICE
- --------------------------------------------------------------------------------
<S> <C> <C>
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
Granted 77,032 16.80
Exercised (115,307) 11.96
Forfeited (42,635) 12.59
- --------------------------------------------------------------------------------
Options outstanding
December 31, 1999 1,386,926 $13.40
- --------------------------------------------------------------------------------
Options exercisable
December 31, 1999 963,381 $10.71
================================================================================
</TABLE>
13. 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.
52
<PAGE> 55
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, 1999, the Bank met all capital
adequacy requirements to which it is subject.
As of December 31, 1999, 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.
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 $46 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 losses on
securities held available for sale, net of tax, of $3.2 million were added to
core and tangible capital as of December 31, 1999. These unrealized losses, net
of tax, however, are deducted from shareholders' equity under generally accepted
accounting principles. Risk-based capital, for regulatory requirements, includes
the $10.5 million allowance for loan losses at December 31, 1999.
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,
1999, 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.
53
<PAGE> 56
<TABLE>
<S> <C>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and Subsidiaries
</TABLE>
A summary of the Bank's capital amounts and ratios as of December 31, 1999
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 7.9% $ 151,270
----
Intangible assets (33,048)
Unrealized loss on available-for-sale
securities, net of tax 3,150
----------
Tangible capital, and ratio to
OTS adjusted total assets 6.4 $ 121,372 1.5% $28,362
---- ========== ---- =======
Core capital, and ratio to OTS
adjusted total assets 6.4 $ 121,372 3.0 $56,724 5.0% $ 94,539
---- ========== ---- ======= ---- ========
Core capital, and ratio to OTS
risk-weighted assets 10.4 $ 121,372 6.0 $ 70,080
---- ---------- ---- ========
Allowance for loan losses 10,478
----------
Supplementary capital 10,478
----------
Total risk-based capital, and ratio to
OTS risk-weighted assets (1) 11.3 $ 131,850 8.0 $93,439 10.0 $116,799
---- ========== ---- ======= ---- ========
OTS Total assets $1,920,686
==========
OTS Adjusted total assets $1,890,787
==========
OTS Risk-weighted assets $1,167,993
==========
</TABLE>
(1) Does not reflect the interest rate risk component to the risk-based capital
requirement, the effective date of which has been postponed.
A summary of the Bank's capital amounts and ratios as of December 31, 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 gain 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, the effective date of which has been postponed.
54
<PAGE> 57
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to reduce its exposure to fluctuations in
interest rates (hedging). These off-balance-sheet financial instruments as of
December 31, 1999, include interest rate caps and mandatory and optional forward
commitments. During 1999, the Company terminated all interest rate swap
agreements to which it was a party. 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 volume limitations and periodic monitoring. Each
broker, dealer or bank is carefully evaluated on the basis of its financial
strength, reputation and expertise. Unless noted otherwise, the Company does not
require collateral or other securities to support financial instruments with
credit risk.
SUMMARY OF FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
<TABLE>
<CAPTION>
============================================================================
CONTRACT OR NOTIONAL AMOUNT
DECEMBER 31,
----------------------------
(IN THOUSANDS) 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Interest rate swap agreements $ -- $112,500
Interest rate cap agreements 65,000 65,000
Mandatory forward contracts 28,000 102,600
Option Contracts:
Puts 2,000 15,000
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.
The Company was not a party to interest rate swap agreements at December
31, 1999. At December 31, 1998, the Company had notional balances of interest
rate exchange agreements totaling $113 million with interest payable at fixed
rates. The weighted average rate to be paid by the Company at December 31, 1998
was 5.35%. 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, the weighted average variable yield was 5.36%. The amounts
receivable or payable are credited or charged to interest expense on notes
payable and other borrowings. There were no swap receivables or swap payables at
December 31, 1999. Included in other assets were swap receivables of $0.8
million at December 31, 1998. Included in other liabilities were swap payables
of $1.5 million at December 31, 1998.
Since the Company had no interest rate swaps outstanding as of December 31,
1999, there were no FHLMC, FNMA, and GNMA mortgage-backed securities pledged by
the Company as collateral as of December 31, 1999. FHLMC, FNMA, and GNMA
mortgage-backed securities, with a combined amortized cost and market value of
$0.2 million were pledged by the Company as collateral for the interest rate
swaps outstanding as of December 31, 1998.
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 both December 31, 1999 and 1998, the
Company had notional balances of interest rate cap agreements totaling $65
million. The Company receives variable interest pay-
55
<PAGE> 58
<TABLE>
<S> <C>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and Subsidiaries
</TABLE>
ments 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
both December 31, 1999 and 1998 was 6.79%. These agreements have expiration
dates between May 2000 and September 2000. There were no unamortized fees at
December 31, 1999. Unamortized fees at December 31, 1998 were $0.3 million and
were included in other assets. In the event of nonperformance by the other
parties to the interest rate cap agreements, there was no credit risk to the
Company at December 31, 1999. The 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 $28 million and $103 million, respectively, as of
December 31, 1999 and 1998.
At December 31, 1999, the Company had $0.3 million exposure to credit loss
in the event of nonperformance by other parties relating to the mandatory
forward commitments, which represented the difference between the contractual
amount and the fair value of these agreements. The Company had no exposure to
credit loss in the event of nonperformance by other parties to the mandatory
forward commitments at December 31, 1998.
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 $2 million and $15 million at December 31, 1999 and 1998,
respectively. The Company had call options outstanding of $2 million at December
31, 1999, compared to no call options outstanding at December 31, 1998.
15. 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.
56
<PAGE> 59
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.
At December 31, 1999 and 1998, the estimated fair values of the Company's
financial instruments were as follows:
<TABLE>
<CAPTION>
=================================================================================================================================
DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
(IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 61,751 $ 61,751 $ 106,677 $ 106,677
Mortgage loans held for sale 24,005 24,005 120,642 120,642
Investment securities 68,219 68,219 34,515 34,515
Mortgage-backed securities 290,954 290,245 524,141 525,771
Loans receivable, net 1,361,430 1,330,312 1,338,177 1,347,918
FHLB stock 18,400 18,400 18,400 18,400
Mortgage servicing rights -- -- 9,969 10,176
Financial liabilities:
Deposits 1,503,746 1,496,263 1,605,299 1,604,870
Secured notes due to FHLB of Pittsburgh 127,000 126,563 240,500 241,147
Securities sold under agreements to repurchase 100,000 99,757 166,000 167,732
Other borrowings 9,076 9,071 -- --
<CAPTION>
=================================================================================================================================
DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------------------------------------------------------
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)
Interest rate caps -- 5 301 14
Mandatory forward commitments -- 300 -- --
Put and call options 16 2 34 57
</TABLE>
57
<PAGE> 60
<TABLE>
<S> <C>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commonwealth Bancorp, Inc. and Subsidiaries
</TABLE>
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,
---------------------------------------------------------------------------------
1999 1998
-------------------------------------- ---------------------------------------
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 $ 62,744 $ 3,869 $ 66,613 $ 62,085 $ 5,065 $ 67,150
Noninterest income:
Servicing fees (2,509) 5,790 3,281 (2,832) 6,426 3,594
Net gain on sale of
mortgage loans (525) 12,206 11,681 (1,297) 12,139 10,842
Other 13,519 1,646 15,165 12,619 (109) 12,510
-------------------------------------- ---------------------------------------
Total noninterest income 10,485 19,642 30,127 8,490 18,456 26,946
-------------------------------------- ---------------------------------------
Noninterest expense:
Compensation and
employee benefits 26,672 9,983 36,655 25,369 12,497 37,866
Other 30,472 6,137 36,609 33,215 6,789 40,004
-------------------------------------- ---------------------------------------
Total noninterest expense 57,144 16,120 73,264 58,584 19,286 77,870
-------------------------------------- ---------------------------------------
Income before
income taxes 16,085 7,391 23,476 11,991 4,235 16,226
Income tax provision 4,221 2,587 6,808 3,812 1,482 5,294
-------------------------------------- ---------------------------------------
Net income $ 11,864 $ 4,804 $ 16,668 $ 8,179 $ 2,753 $ 10,932
====================================== =======================================
Total assets $1,874,887 $47,509 $1,922,396 $2,106,127 $151,372 $2,257,499
====================================== =======================================
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1997
------------------------------------------
BANKING MORTGAGE
(IN THOUSANDS) OPERATIONS OPERATIONS CONSOLIDATED
------------------------------------------
<S> <C> <C> <C>
Net interest income
after provision
for loan losses $65,571 $ 3,217 $68,788
Noninterest income:
Servicing fees (2,577) 7,762 5,185
Net gain on sale of
mortgage loans (811) 5,804 4,993
Other 11,396 1 11,397
------------------------------------------
Total noninterest income 8,008 13,567 21,575
------------------------------------------
Noninterest expense:
Compensation and
employee benefits 24,333 8,636 32,969
Other 26,893 6,186 33,079
------------------------------------------
Total noninterest expense 51,226 14,822 66,048
------------------------------------------
Income before
income taxes 22,353 1,962 24,315
Income tax provision 7,282 664 7,946
------------------------------------------
Net income $15,071 $ 1,298 $16,369
==========================================
Total assets
</TABLE>
17. ACQUISITIONS AND DIVESTITURES:
In January of 2000, the Company completed the acquisition of certain
business interests of the Tyler Group. Tyler offers financial planning and
investment advisory services to individuals and small businesses in Southeast
Pennsylvania. Its products and services will be marketed to Commonwealth
customers through Tyler Wealth Counselors, Inc., a newly formed subsidiary of
Commonwealth Bank.
During the third quarter of 1999, Commonwealth Bank exited substantially
all of the third party mortgage servicing business, and sold its existing $1.0
billion FHLMC and FNMA mortgage servicing portfolio to National City Mortgage
Co. The pre-tax gain resulting from the sale totaled $1.6 million in the third
quarter of 1999.
On June 28, 1999, Commonwealth Bank completed the sale of two branches in
Lebanon County, Pennsylvania to another financial institution, resulting in a
pre-tax gain of $1.0 million in the second quarter of 1999. As of June 28, 1999,
the two branches had $37 million of combined deposits and $11 million of
consumer and commercial loans.
On March 31, 1998, Commonwealth Bank acquired a Virginia mortgage
production 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.
58
<PAGE> 61
SHAREHOLDER INFORMATION Commonwealth Bancorp, Inc. and Subsidiaries
BOARD OF DIRECTORS
GEORGE C. BEYER, JR. President and Chief Executive Officer
of Valley Forge Financial Group, Inc.
JOSEPH E. COLEN, JR. Chairman of Machined Metals Co., Inc.,
President of Jennings International Co. and
President of Oak-Corson Realty Co.
RICHARD J. CONNER* Retired, previously President
of Connor's Firestone Service
JOANNE HARMELIN President and Chief Executive Officer of
Harmelin and Associates, Inc.
MICHAEL T. KENNEDY Chairman, President and Chief Executive Officer
of Radnor Holdings Corporation
MARTIN E. KENNEY, JR. Chairman and Chief Executive Officer
of WRC Media, Inc.
CHARLES H. MEACHAM Chairman and Chief Executive Officer of
Commonwealth Bancorp, Inc. and Commonwealth Bank
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 Banking
Theodore T. Aicher Vice President, Treasurer
Lisa H. Albany Vice President, Consumer Lending
Ellen L. Benson Vice President, Human Resources
James L. Jillson Vice President, Consumer Credit
Robert D. Kane Vice President, Controller
Kathleen J. Lippincott Vice President, Operations Support Services
Malcolm W. MacKellar Vice President, Commercial Lending
Brian J. Maguire Vice President, Marketing
Karen S. Magurn Vice President, Supermarket Banking
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
Andrew J. Stackhouse Vice President, Cash Management Services
Nicholas J. Wright Vice President, Network and Desktop Services
COMNET MORTGAGE SERVICES OFFICERS
A DIVISION OF COMMONWEALTH BANK
Peter A. Kehoe President
James N. Busciacco Vice President, Loan Administration
Tracy L. Johnson Vice President, Residential Operations
* Director Emeritus
TYLER WEALTH COUNSELORS, INC.
A SUBSIDIARY OF COMMONWEALTH BANK
Harry R. Tyler President
CORPORATE INFORMATION
ANNUAL MEETING:
April 18, 2000 at 9:00 a.m.
The Best Western Hotel, 815 North Pottstown Pike
Exton, Pennsylvania 19341
TRANSFER AGENT AND REGISTRAR:
Address changes and all shareholder inquiries should be directed to:
Registrar & Transfer Company
10 Commerce Drive, Cranford, New Jersey 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 obtained through our website at www.CommonwealthBank.com.
MARKET FOR COMMON STOCK:
Commonwealth Bancorp, Inc.'s common stock is traded on The Nasdaq Stock Market
under the symbol "CMSB". At December 31, 1999, the 11,934,695 shares of common
stock were held by 5,533 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
1998_______________________________________________________________________
<S> <C> <C> <C>
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
1999_______________________________________________________________________
March 31 16.750 14.688 0.09
June 30 18.375 13.125 0.09
September 30 19.375 16.875 0.09
December 31 17.500 15.500 0.09
</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
================================================================================
[RECYCLE LOGO] Printed on recycled paper.
COMMONWEALTH WEBSITE: COMNET WEBSITE:
http://www.CommonwealthBank.com http://www.ComMortgage.com
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<PAGE> 62
BRANCH INFORMATION Commonwealth Bancorp, Inc. and Subsidiaries
LOCATIONS OF COMMONWEALTH BANK
o CORPORATE HEADQUARTERS
Commonwealth Bank Plaza
2 West Lafayette Street
Norristown, PA 19401-4758
BERKS COUNTY
o BIRDSBORO
350 West Main Street
o EXETER
4215 Perkiomen Avenue
o HEIDELBERG
4641 Penn Avenue
o KUTZTOWN
601 East Main Street
o MOHNTON
14 West Wyomissing Avenue
o READING (4)
- 830 Lancaster Avenue
- 2040 Centre Avenue
- 445 Penn Street
- 956 North Ninth Street
o SINKING SPRING
Giant Food Stores
Spring Towne Center
o TEMPLE
4950 Kutztown Road
o WYOMISSING
Wyomissing Hills Professional Center
BUCKS COUNTY
o FAIRLESS HILLS
Giant Food Stores
Fairless Hills Shopping Center
o PENNDEL
U.S. #1 & Durham Road
o SOUDERTON
705 Route 113
o SOUTHAMPTON
Giant Food Stores
Southampton Shopping Center
o WARMINSTER
Giant Food Stores
Cedar Point Plaza
o WARRINGTON
Redner's Warehouse Market
Doylestown Pointe
CHESTER COUNTY
o EXTON
Clemens Markets
Lionville Shopping Center
o KENNETT SQUARE
New Garden Shopping Center
o PHOENIXVILLE
Maple Lawn Center
o WAYNE
Chesterbrook Village Center
o WEST CHESTER (2)
- Marketplace Shopping Center
- Giunta's Thriftway
Bradford Plaza
o WEST GROVE
106 West Evergreen Street
DELAWARE COUNTY
o ALDAN
Giant Food Stores
Providence Village
o NEWTOWN SQUARE
3531 West Chester Pike
LEHIGH COUNTY
o TREXLERTOWN
Giant Food Stores - Trexler Mall
o WHITEHALL
Giant Food Stores
MacArthur Towne Centre
MONTGOMERY COUNTY
o AUDUBON
Audubon Village Shopping Center
o BLUE BELL
Giant Food Stores
The Shoppes at Blue Bell
o COLLEGEVILLE
Redner's Warehouse Markets
The Marketplace at Collegeville
o CONSHOHOCKEN
Plymouth Square Shopping Center
o GLENSIDE
139 South Easton Road
o HORSHAM
Giant Food Stores
Horsham Point Shopping Center
o KING OF PRUSSIA
DeKalb Plaza Shopping Center
o LANSDALE (3)
- Hillcrest Shopping Center
- Sumney Forge Square
- 521 West Main Street
o MONTGOMERYVILLE
Giant Food Stores
Montgomeryville Square
o NORRISTOWN (2)
- 5 West Germantown Pike
- 2 West Lafayette Street
o POTTSTOWN
Weis Markets
The Pottstown Center
o ROYERSFORD
Limerick Square
o SPRING HOUSE
Clemens Markets
Spring House Center
o TRAPPE
Trappe Shopping Center
o TROOPER (2)
- Park Ridge Shopping Center
- Giant Food Stores
Audubon Square Shopping Center
PHILADELPHIA COUNTY
o PHILADELPHIA (14)
- One Penn Square West
- 3292 Red Lion Road
- 8729 Frankford Ave.
- 7149 Frankford Ave.
- 7425 Frankford Ave.
- 2501 Welsh Road
- 6537 Castor Ave.
- 6958 Torresdale Ave.
- 6500 Tabor Road
- 9896 Bustleton Ave.
- Gross' Thriftway
Port Richmond Village
- ShopRite Food Stores
Boulevard Plaza
Lawndale Plaza
- Superfresh
Cottman & Bustleton Center
Office Listings as of February 29, 2000
60
<PAGE> 63
o 41 Traditional Branches
21 Supermarket Branches
* Corporate Headquarters
LOCATIONS OF COMNET MORTGAGE SERVICES
o Fairfax, VA
o Horsham, PA
o Skillman, NJ
o Mt. Laurel, NJ
o Norristown, PA
o Reading, PA
o Pikesville, MD
LOCATIONS OF HOMESTEAD MORTGAGE
o Bethesda, MD
o Millersville, MD
LOCATION OF TYLER WEALTH COUNSELORS, INC.
o West Chester, PA
o 610-344-0900
LOCATIONS OF COMMONWEALTH BANK COMMERCIAL BANKING OFFICES
o Norristown, PA
o Reading, PA
COM-LINE(R)
o 24 Hour Automated Service Line
o 1-800-327-9885
www.CommonwealthBank.com
61
<PAGE> 64
COMMONWEALTH BANCORP, INC.
2 WEST LAFAYETTE STREET, NORRISTOWN, PA 19401
WWW.COMMONWEALTH.COM
