<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[ ] SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _______________
Commission File No.: 0-27942
-----------
COMMONWEALTH BANCORP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2828883
---------------------------- ----------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
COMMONWEALTH BANK PLAZA
2 WEST LAFAYETTE STREET
NORRISTOWN, PENNSYLVANIA 19401
---------------------------- ----------------
(Address) (Zip Code)
Registrant's telephone number, including area code: (610) 313-1600
Securities registered pursuant to Section 12(b) of the Act:
NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act
COMMON STOCK (PAR VALUE $.10 PER SHARE)
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ___
As of March 8, 2000, the aggregate value of the 10,857,115 shares of Common
Stock of the Registrant outstanding on such date, which excludes 705,682 shares
held by all directors and officers of the Registrant as a group, was
approximately $168 million. This figure is based on the closing sales price of
$15.5 per share of the Registrant's Common Stock on March 8, 2000 as reported by
the Nasdaq Stock Market.
Number of shares of Common Stock outstanding as of March 8, 2000: 11,562,797
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the Part of
the Form 10-K into which the document is incorporated.
(1) Portions of the Annual Report to Stockholders for the year ended December
31, 1999 are incorporated into Part II, Items 5 through 8 of this Form
10-K.
(2) Portions of the definitive proxy statement for the Annual Meeting of
Stockholders to be filed within 120 days of December 31, 1999 are
incorporated into Part III, Items 10 through 13 of this Form 10-K.
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<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
Commonwealth Bancorp, Inc. ("Commonwealth" or the "Company"), a
Pennsylvania corporation, is the holding company for Commonwealth Bank ("Bank").
The Bank is a federally chartered stock savings bank, primarily regulated by the
Office of Thrift Supervision ("OTS"). The Bank conducts business from its
executive offices in Norristown, Pennsylvania and, as of December 31, 1999, 60
full-service offices located in southeast Pennsylvania.
ComNet Mortgage Services ("ComNet"), a division of the Bank, also located
in Norristown, conducts business through ten loan origination offices 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.
The Bank first issued stock on January 21, 1994, as a result of the
conversion of Commonwealth Federal Savings Bank from a federally chartered
mutual savings bank to a federally chartered stock savings bank. The Bank was a
subsidiary of Commonwealth Mutual Holding Company, a federally chartered mutual
holding company, which owned approximately 55% of the outstanding common stock
of the Bank. On June 14, 1996, the Company completed an offering of common stock
in connection with the second-step conversion and reorganization from the mutual
holding company form of ownership to the stock holding company form.
The Bank is subject to examination and comprehensive regulation by the OTS,
which is the Bank's chartering authority and primary regulator, and by the
Federal Deposit Insurance Corporation ("FDIC"), which, as administrator of the
Savings Association Insurance Fund ("SAIF") and the Bank Insurance Fund ("BIF"),
insures the Bank's deposits up to applicable limits. The Bank also is subject to
certain reserve requirements established by the Board of Governors of the
Federal Reserve System ("Federal Reserve Board"), and is a member of the Federal
Home Loan Bank ("FHLB") of Pittsburgh, which is one of the 12 regional banks
comprising the FHLB System.
MARKET AREA
At December 31, 1999, the Bank had 60 full-service branch offices located
throughout Berks, Bucks, Chester, Delaware, Lehigh, Montgomery, and Philadelphia
Counties, Pennsylvania. Of the 60 full-service branch offices, 20 were located
in supermarkets. The Bank's branch locations are concentrated in the Reading
area of Berks County; central and southern Montgomery County; and the northeast
Philadelphia community within Philadelphia County. 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,
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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.
LENDING ACTIVITIES
GENERAL. At December 31, 1999, loans held for investment totaled $1.4
billion, which represented 71% of total assets. The Company's loans consist
principally of conventional loans which are secured by first liens on
single-family residences. Conventional residential real estate loans are loans
which are neither insured by the Federal Housing Administration ("FHA") nor
partially guaranteed by the Veterans Administration ("VA"). The other principal
categories of loans in the Company's portfolio are consumer loans and commercial
loans, including commercial real estate loans and loans which are guaranteed by
the Small Business Administration ("SBA"). In addition, the Company's loan
portfolio includes a small amount of loans which are secured by multi-family
residential (five or more units) properties.
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LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition of
the Company's loans held for investment at the dates indicated.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------
1999 1998 1997
----------------- ------------------ ---------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans-Residential (1) $ 860,750 62.70 % $ 969,617 71.90 % $ 958,542 75.51 %
Consumer loans:
Second mortgages 184,844 13.47 126,360 9.37 98,934 7.79
Equity lines of credit 30,496 2.22 34,845 2.58 41,592 3.28
Recreational vehicles 60,998 4.44 39,920 2.96 22,182 1.75
Other 45,448 3.31 38,781 2.88 32,085 2.53
--------- ------ --------- ------ --------- ------
Total consumer loans 321,786 23.44 239,906 17.79 194,793 15.35
Commercial loans:
Business loans 113,178 8.24 79,490 5.90 37,207 2.93
Commercial real estate 66,158 4.82 45,021 3.34 58,757 4.63
Small Business Administration(2) 10,971 0.80 14,491 1.07 20,016 1.58
--------- ------ --------- ------ --------- ------
Total commercial loans 190,307 13.86 139,002 10.31 115,980 9.14
--------- ------ --------- ------ --------- ------
Total loans receivable 1,372,843 100.00 % 1,348,525 100.00 % 1,269,315 100.00 %
--------- ====== --------- ====== --------- ======
Less:
(Premium)/discount on
loans purchased (2,443) (2,880) (3,559)
Allowance for loan losses 10,478 9,589 9,024
Deferred loan fees 3,378 3,639 3,009
---------- ---------- ----------
Loans receivable, net $1,361,430 $1,338,177 $1,260,841
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1996 1995
------------------ -------------------
Amount Percent Amount Percent
------ ------- ------ -------
(dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans-Residential (1) $ 857,053 76.37 % $655,152 81.08 %
Consumer loans:
Second mortgages 77,304 6.89 48,653 6.03
Equity lines of credit 49,136 4.38 44,432 5.50
Recreational vehicles 11,884 1.06 791 0.10
Other 30,983 2.76 17,218 2.13
--------- ------ ------- ------
Total consumer loans 169,307 15.09 111,094 13.76
Commercial loans:
Business loans 35,380 3.15 2,801 0.35
Commercial real estate 35,452 3.15 9,386 1.16
Small Business Administration(2) 25,104 2.24 29,472 3.65
--------- ------ ------- ------
Total commercial loans 95,936 8.54 41,659 5.16
--------- ------ ------- ------
Total loans receivable 1,122,296 100.00 % 807,905 100.00 %
--------- ====== ------- ======
Less:
(Premium)/discount on
loans purchased (3,655) 1,004
Allowance for loan losses 9,971 7,485
Deferred loan fees 2,866 2,681
---------- --------
Loans receivable, net $1,113,114 $796,735
========== ========
</TABLE>
- ----------
(1) At December 31, 1999, $332 million, or 39%, of the Company's 1-4 family
residential loans had adjustable interest rates.
(2) Consists entirely of loans (or securities backed by loans) which are
guaranteed by the SBA, with the majority adjusting monthly or quarterly.
All such loans or securities were purchased by the Company.
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CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following table
sets forth the scheduled contractual amortization of the Company's loans held
for investment at December 31, 1999, as well as the dollar amount of such loans
which are scheduled to mature after one year which have fixed or adjustable
interest rates. Demand loans, loans having no schedule of repayments and no
stated maturity, and overdraft loans are reported as due in one year or less.
<TABLE>
<CAPTION>
============================================================================================================================
Principal Repayments Contractually Due
in Year(s) Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------
Total at
December 31, 2003- 2005- 2011- There-
1999 2000 2001 2002 2004 2010 2016 after
------------ ------ ------ ------ ------ ------ ------ -------
(in thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1-4 family residential $ 860,750 $26,296 $26,086 $27,433 $56,604 $182,308 $168,564 $373,459
Consumer 321,786 46,580 28,831 28,285 47,323 105,202 61,492 4,073
Business loans 113,178 11,445 12,210 16,941 22,188 37,314 13,080 -
Commercial real estate 66,158 6,012 6,193 6,721 18,164 28,940 128 -
SBA 10,971 569 614 662 1,487 6,026 1,613 -
---------- ------- ------- ------- -------- -------- -------- --------
Total (1) $1,372,843 $90,902 $73,934 $80,042 $145,766 $359,790 $244,877 $377,532
========== ======= ======= ======= ======== ======== ======== ========
============================================================================================================================
</TABLE>
(1) Of the $1.3 billion of loan principal repayments contractually due after
December 31, 2000, $798 million have fixed rates of interest and $484 million
have adjustable rates of interest.
Scheduled contractual amortization of loans does not reflect the expected
term of the Company's loan portfolio. The expected average life of the loan
portfolio is substantially less than its contractual term because of prepayments
and due-on-sale clauses, which give the Company the right to declare a
conventional loan immediately due and payable in the event, among other things,
that the borrower sells the real property subject to the mortgage and the loan
is not repaid. The average life of mortgage loans tends to increase when current
mortgage loan rates are higher than rates on existing mortgage loans and,
conversely, decrease when rates on current mortgage loans are lower than
existing mortgage loan rates (due to refinancing of adjustable-rate and
fixed-rate loans at lower rates). Under the latter circumstance, the weighted
average yield on loans decreases as higher-yielding loans are repaid or
refinanced at lower rates.
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<PAGE> 6
ACTIVITY IN LOANS HELD FOR INVESTMENT. The following table sets
forth the activity in the Company's loans held for investment during the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1999 1998 1997
------------------- ---------------- -------------
(in thousands)
<S> <C> <C> <C>
Gross loans held for investment at
beginning of period $ 1,348,525 $ 1,269,315 $ 1,122,296
Originations of loans held for
investment:
1-4 family residential 74,970 196,783 107,628
Consumer 159,330 101,878 75,383
Commercial 78,114 73,318 47,329
----------- ----------- -----------
Total originations 312,414 371,979 230,340
Purchases of loans held for investment:
1-4 family residential (1) 24,999 140,567 152,480
Consumer (2) 34,096 24,728 13,426
Commercial - - -
----------- ----------- -----------
Total purchases 59,095 165,295 165,906
Total originations and purchases 371,509 537,274 396,246
Repayments (347,191) (458,064) (249,227)
----------- ----------- -----------
Net activity in loans held for
investment 24,318 79,210 147,019
----------- ----------- -----------
Gross loans held for investment at end
of period $ 1,372,843 $ 1,348,525 $ 1,269,315
=========== =========== ===========
</TABLE>
(1) The $25 million and $141 million of 1-4 family residential loans purchased
during 1999 and 1998, respectively, consisted of loans generated through
Commonwealth's wholesale correspondent network. The $152 million of 1-4
family residential loans purchased during 1997 consisted of $21 million of
adjustable rate loans purchased by the Company from third parties and $131
million of loans generated through Commonwealth's wholesale correspondent
network.
(2) Represents purchases of recreational vehicle loans.
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RESIDENTIAL LOAN ORIGINATIONS AND SALES. A primary lending activity of the
Company involves the origination and sale, without recourse, of conventional and
insured/guaranteed real estate loans secured by first liens on 1-4 family
residences.
Retail loans are originated by Commonwealth's sales force of commissioned
or salaried loan originators through referrals from the Company, real estate
brokers, builders of new homes and others, as well as through direct contact
with borrowers. In connection with the origination of each loan, Commonwealth
prepares mortgage documentation, conducts credit checks, has the subject
property appraised by independent appraisers, and closes the loan.
The retail loan production office originating a loan is responsible for
taking the loan application and coordinating information flow between the
applicant and Commonwealth's processing center in Norristown, Pennsylvania.
Retail loan applications must be approved by Commonwealth's underwriting
department for compliance with underwriting criteria. Upon approval,
Commonwealth issues a formal commitment letter to the prospective borrower
specifying the amount of the loan, the prevailing interest rate or means for
determining the same, the fees to be paid to Commonwealth, and the date on which
the commitment expires.
Wholesale loans are purchased from correspondents/brokers or funded by
Commonwealth on behalf of correspondents and brokers. Commonwealth currently
employs three regional account executives to work with over 223 correspondents
and brokers. The correspondent or broker is responsible for the processing of
the loan application. When a wholesale loan enters the underwriting stage, for
the majority of correspondents and brokers, the underwriting is performed by
Commonwealth similar to retail loan originations above. In certain instances,
Commonwealth delegates the underwriting function to correspondents and brokers.
Such delegated underwriting meets Commonwealth's criteria of underwriting
standards. Once the underwriting approval is complete, the purchase or funding
is initiated.
Commonwealth originates conventional loans and, to a lesser extent,
FHA-insured and VA-guaranteed loans. The vast majority of conventional loans are
originated under terms and documentation which conform to the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC") guidelines and, as such, are eligible for sale in the secondary
market.
The results of the Company's mortgage banking operations are significantly
dependent upon its ability to originate loans. This, in turn, is substantially
dependent upon prevailing interest rate levels, which affect the degree to which
consumers obtain new loans and refinance existing loans. Economic conditions in
the Company's service areas also have a significant effect on the residential
housing market and, thus, could have a similar effect on Commonwealth's loan
origination activity.
Mortgage loans originated and purchased totaled $621 million and $1,111
million during 1999 and 1998, respectively, which included $174 million and $376
million, respectively, of loans originated through the wholesale correspondent
lending network.
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<PAGE> 8
Commonwealth sells substantially all of the fixed-rate loans it originates
which conform to FNMA/FHLMC requirements to investors in the secondary market on
a servicing released basis. The Company retains the majority of the adjustable
rate loans, as well as certain loans which do not conform to FNMA and FHLMC
requirements, and loans to employees of the Company.
The Company's mortgage loans sold to others generally are sold in groups
through mortgage-backed securities issued by the FNMA or the FHLMC, or on a
loan-by-loan basis to these agencies or other investors. In the case of the
loans sold through mortgage-backed securities, the loans are grouped in pools of
$1.0 million or more and certain documents are delivered to the FNMA or the
FHLMC, which issues a mortgage-backed security representing an undivided
interest in the loan pool. For issuing the security, the FNMA or the FHLMC
receives an annual guarantor fee of approximately 0.17% to 0.29% of the
declining principal amount of the loan pool. Commonwealth, through investment
bankers, arranges to sell mortgage-backed securities to investors.
A period of 30 to 90 days generally lapses between Commonwealth=s
commitment to make a mortgage loan and the ultimate sale of the loan to an
investor. During this period, Commonwealth employs various hedging techniques,
such as forward commitments and put and call options, to protect the value of
its mortgage production. Mortgage loans generally will decrease in value during
periods of increasing interest rates and increase in value during periods of
decreasing interest rates. The cost of the various hedging techniques employed
by the Company are deducted from the net gain or loss on the sale of mortgage
loans. Accordingly, fluctuations in prevailing interest rates may result in a
gain or loss to Commonwealth as a result of adjustments to the carrying value of
loans held for sale, or on the sale of loans to the extent that Commonwealth has
not obtained prior commitments by investors to purchase such loans or otherwise
hedged the value of the loans against changes in interest rates. Moreover, the
amount of unhedged loans can increase as a result of increases in interest
rates, which can result in greater than anticipated closings of loans in
process.
The principal means by which Commonwealth hedges its mortgage production
are through the use of mandatory forward and option contracts, which are legal
agreements between two parties to purchase and sell a specific quantity of a
financial instrument, at a specified price, with delivery and settlement at a
specified future date. Commonwealth adjusts the amount of its unhedged loans in
process based on management's assessment of market conditions and loan closing
rates.
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<PAGE> 9
The following table sets forth certain information relating to the volume
and type of loans originated and sold by Commonwealth during the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ----------------------- ----------------------
Number Number Number
Principal of Principal of Principal Of
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Originations for the Company (1):
Conventional $ 96,568 549 $ 337,350 1,562 $ 238,799 1,286
FHA/VA - - - - - -
------- ----- --------- ------ -------- ------
Total Company 96,568 549 337,350 1,562 283,799 1,286
------- ----- --------- ------ -------- ------
Originations for others (1):
Conventional 448,616 3,513 667,129 5,351 249,741 2,081
FHA/VA 75,531 676 106,917 1,019 96,606 1,014
------- ----- --------- ------ -------- ------
Total Other 524,147 4,189 774,046 6,370 346,347 3,095
------- ----- --------- ------ -------- ------
Total Company and others $ 620,715 4,738 $ 1,111,396 7,932 $ 585,146 4,381
======= ===== ========= ====== ======= ======
Retained by the Company (1)(2):
Conventional $ 96,568 549 $ 337,350 1,562 $ 238,799 1,286
FHA/VA - - - - - -
------- ----- --------- ------ -------- ------
Total Company 96,568 549 337,350 1,562 238,799 1,286
-------- ------ --------- ------ -------- ------
Sales to Others (1)(3):
Conventional 544,881 3,342 597,889 5,455 233,299 2,116
FHA/VA 88,588 847 97,475 915 94,654 979
------- ----- --------- ------ -------- ------
Total Other 633,469 4,189 695,364 6,370 327,953 3,095
------- ----- --------- ------ -------- ------
Total Company and Other $ 730,037 4,738 $ 1,032,714 7,932 $ 566,752 4,381
======= ===== ========= ====== ======= ======
Other adjustments to
loans held for sale (4) $ 12,685 $ 4,386 $ 1,845
======== ======= =======
(Decrease)/increase in
mortgage loans held for sale $ (96,637) $ 83,068 $ 20,239
======== ====== ======
</TABLE>
(1) Consists entirely of 1-4 family residential loans.
(2) Consists primarily of 1-4 family residential loans which have adjustable
rates, are nonconforming due to the size of the loan, or are made to an
employee of the Company.
(3) Includes loans converted into mortgage-backed securities.
(4) Consists of repayments of loans held for sale, net gain on sale of loans,
and deferred loan fees.
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CONSUMER LENDING ACTIVITIES. The Company originates consumer loans directly
through its network of 60 full-service branches. In addition, recreational
vehicle loans are purchased on an indirect basis from a third party. At December
31, 1999, $322 million, or 23%, of the Company's total loan portfolio was
comprised of consumer loans.
A significant portion of the Company's consumer loan portfolio is comprised
of second mortgage loans, which are generally secured by the underlying equity
in a borrower's home or second residence. These loans are for a fixed amount,
have fixed interest rates, terms of one to 15 years, and loan-to-value ratios of
100% or less. At December 31, 1999, second mortgage loans totaled $185 million,
or 13%, of the Company's total loan portfolio.
The Company's consumer loan portfolio is also comprised of a significant
amount of recreational vehicle loans. These loans are purchased from a third
party, are for a fixed amount, have fixed interest rates, terms of three to
twenty years, and generally have loan-to-value ratios of 100% or less. At
December 31, 1999, recreational vehicle loans totaled $61 million, or 4%, of the
Company's total loan portfolio.
At December 31, 1999, home equity lines of credit amounted to $30 million,
or 2%, of the Company's total loan portfolio. Home equity lines of credit are a
form of revolving credit and are generally secured by the underlying equity in
the borrower's home or second residence. These loans have floating interest
rates, and loan-to-value ratios of 100% or less. The Company had $92 million of
total commitments pursuant to such equity lines of credit outstanding at
year-end 1999.
The remaining $45 million of the Company's consumer loan portfolio at
December 31, 1999 was comprised primarily of personal loans and lines of credit,
loans secured by new and used automobiles, and credit card loans. Such credit
card loans may be secured by the borrower's principal residence or unsecured,
and are serviced for the Company by a third-party servicer.
Consumer loans generally have shorter terms and higher interest rates than
mortgage loans, and involve more credit risk than mortgage loans because of the
type and nature of the collateral and, in certain cases, the absence of
collateral. These risks are mitigated somewhat in the Company's consumer loan
portfolio, because of the high percentage of home equity lines of credit and
second mortgages, which are secured by real estate.
COMMERCIAL LENDING ACTIVITIES. Commonwealth=s target market is comprised of
small and lower middle market businesses operating within the Company's seven
county region. The Company generally provides loans for commercial purposes to
borrowers only under circumstances where the borrower also has, or establishes,
a deposit relationship with the Company. The loans typically are under $1.0
million. Commercial real estate loans are generally made in the same amounts and
may be secured by office buildings, warehouses, and other special purpose
properties. Applications for commercial loans are obtained primarily through
loan officer solicitation, branch referrals, and direct inquiry. As of December
31, 1999, commercial loans totaled $190 million, or 14%, of the Company's total
loan portfolio. 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 SBA.
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<PAGE> 11
Commercial real estate loans originated by the Company generally have terms
of five to fifteen years, with fixed interest rates. Commercial business loans
originated by the Company generally have terms of one to five years and interest
rates which are fixed or float in accordance with the Company's prime lending
rate. Commercial loans are generally secured and backed by the personal
guarantees of the principals of the borrower. Although commercial loans involve
greater credit risk than other types of loans, management believes that the
greater income potential and positive effects on interest rate risk offset this
increased credit risk. Also, income opportunities are enhanced through the
generation of commercial loan origination fees and business deposit account fee
income. The Company intends to continue to expand its commercial lending
program.
LOAN ORIGINATION FEES. In addition to interest earned on loans, the Company
receives loan origination fees or "points" for originating loans. Loan points
are a percentage of the principal amount of the loan and are charged to the
borrower in connection with the origination of the loan.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
91, which addresses the accounting for non-refundable fees and costs associated
with originating or acquiring loans, the Company's loan origination fees and
certain related direct loan origination costs have been offset, and the
resulting net amount has been deferred and amortized as interest income over the
contractual life of the related loans as an adjustment to the yield of such
loans. At December 31, 1999, the Company had $3.4 million of loan fees related
to loans receivable which had been deferred and are being recognized as income
over the estimated maturities of the related loans using the level-yield method.
LOAN SERVICING ACTIVITIES
During 1999, Commonwealth exited substantially all of the third party
mortgage servicing business, selling approximately $1.0 billion of its third
party servicing portfolio. Commonwealth, a qualified seller servicer for the
FNMA and the FHLMC, continues to service residential real estate loans for
others, primarily related to current mortgage production awaiting transfer to
the ultimate servicer, as well as loans held by Commonwealth for investment and
sale. Servicing includes collecting and remitting loan payments, accounting for
principal and interest, holding escrow funds for the payment of real estate
taxes and insurance premiums, contacting delinquent borrowers, supervising
foreclosures in the event of unremedied defaults, and generally administering
the loans.
When Commonwealth receives the gross loan payment from the individual
mortgagees of serviced loans, it remits to the owner of the loan a predetermined
net amount based on the yield on that loan. The difference between the coupon on
the underlying loan and the predetermined net amount paid to the owner of the
loan is the gross servicing fee. Commonwealth retains a net servicing fee which
currently ranges from 0.25% to 0.50% of the declining principal amount of the
loans, plus any late charges, on current mortgage production awaiting sale to
the ultimate servicer. Commonwealth retains a monthly sub-servicing fee of $6
per loan on current mortgage production which has been sold to the ultimate
servicer and is awaiting final transfer.
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<PAGE> 12
At December 31, 1999, 1998, and 1997, Commonwealth was servicing $0.2
billion, $1.4 billion, and $1.3 billion of loans for others, respectively, as
well as $0.9 billion, $1.0 billion, and $0.9 billion of loans held by
Commonwealth for investment or sale, respectively. The servicing of $0.2 billion
of loans for others at December 31, 1999 was primarily related to current
mortgage production awaiting transfer to the ultimate servicer. The portfolio of
loans serviced by Commonwealth at December 31, 1999 consisted of approximately
8,671 loans with an average loan balance of approximately $123,662, a weighted
average service fee of approximately 0.31% per annum and a weighted average
remaining contractual term of approximately 23 years. The Company's loan
servicing fees totaled $3.3 million in 1999, $3.6 million in 1998, and $5.2
million in 1997.
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, capitalized mortgage servicing rights were zero,
compared to $10 million at December 31, 1998. The reduction in mortgage
servicing rights was primarily related to the sale of Commonwealth's $1.0
billion third party mortgage servicing portfolio.
During the years ended December 31, 1999, 1998, and 1997, Commonwealth sold
$419 million, $444 million and, $191 million of loans originated on a servicing
retained basis, respectively, and $214 million, $251 million, and $137 million
on a servicing released basis, respectively.
As part of its responsibilities as a servicer of mortgage-backed
securities, Commonwealth is required to remit to investors the monthly principal
collected and scheduled interest payments on most loans, including those for
which no interest payments have been received due to delinquency. At December
31, 1999 the principal amount of loans serviced by Commonwealth for others that
were subject to this condition aggregated $160 million, of which approximately
$6 million, or 4%, were more than 30 days delinquent. Substantially all of these
loans were sold without recourse and are guaranteed by the FNMA or the FHLMC.
-11-
<PAGE> 13
ASSET QUALITY
Loans on which the accrual of interest has been discontinued are designated
as nonaccrual loans. Accrual of interest on loans is discontinued when
reasonable doubt exists as to the full, timely collection of principal and
interest. When loans are placed on nonaccrual, interest previously accrued but
not collected is reversed against interest income in the current period. As a
matter of policy, the Company provides an allowance for accrued interest deemed
to be uncollectible when a loan is 90 days delinquent.
Real estate acquired by the Company as a result of foreclosure or by deed
in lieu of foreclosure, under generally accepted accounting principles ("GAAP"),
is classified as real estate owned until sold. Pursuant to Statement of Position
92-3 ("SOP 92-3"), such assets are carried at the lower of fair value less
estimated costs to sell the property, or cost (generally the balance of the loan
on the property at the date of acquisition). After the date of acquisition, all
costs incurred in maintaining the property are expensed and costs incurred for
the improvement or development of such property are capitalized to the extent of
their net realizable value. The Company's accounting for its real estate owned
complies with the guidance set forth in SOP 92-3.
DELINQUENT LOANS. The following table sets forth information relating to
the Company's delinquent loans held for investment, and the relation to the
Company's total loans held for investment at the dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------
1999 1998 1997
--------------------- -------------------- --------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
30 to 59 days $ 8,867 0.65% $ 9,788 0.73% $13,083 1.03%
60 to 89 days 3,163 0.23 2,418 0.18 2,503 0.20
90 days and over 7,779 0.57 10,012 0.74 8,938 0.70
------- ---- ------- ---- ------- ----
Total (1) $19,809 1.45% $22,218 1.65% $24,524 1.93%
======= ==== ======= ==== ======= ====
</TABLE>
- ----------
(1) Does not include delinquent commercial loans which are fully guaranteed as
to principal and interest by the SBA, which amounted to $1.1 million at
December 31, 1997. There were no delinquent SBA loans at December 31, 1999
and 1998.
-12-
<PAGE> 14
NONPERFORMING ASSETS. The following table sets forth information relating
to the Company's nonperforming assets at the dates indicated.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------ ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Mortgage loans - Residential $ 4,044 $ 5,119 $ 5,269 $ 5,240 $ 5,605
Consumer loans 2,355 1,598 1,324 1,335 221
Commercial loans (1) 1,380 3,295 2,345 1,483 367
------- ------- ------- ------- -------
Total nonperforming loans 7,779 10,012 8,938 8,058 6,193
Real estate owned and other acquired assets, net 923 1,049 626 1,090 752
Investment securities 1,700(2) - - - 420(3)
------- ------- ------- ------- -------
Total nonperforming assets (1) $10,402 $11,061 $ 9,564 $ 9,148 $ 7,365
======= ======= ======= ======= =======
Nonperforming loans to total loans held for
investment (1) 0.57% 0.74% 0.70% 0.72% 0.77%
======= ======= ======= ======= =======
Total nonperforming assets to total assets (1) 0.54% 0.49% 0.42% 0.43% 0.51%
======= ======= ======= ======= =======
</TABLE>
(1) Does not include nonperforming commercial loans which are fully guaranteed
as to principal and interest by the SBA, which amounted to $1.1 million at
both December 31, 1997 and 1996. There were no nonperforming SBA loans at
December 31, 1999, 1998, and 1995.
(2) Represents an equity investment in a mortgage servicing partnership.
(3) Consisted of a deposit with a financial institution which was in bankruptcy
liquidation. The deposit was recovered by the Company in 1996.
-13-
<PAGE> 15
At December 31, 1999, the Company's $4.0 million of nonperforming
single-family residential loans consisted of 73 loans having an average balance
of $55,400.
Forgone interest income on nonaccruing loans totaled $0.6 million and $0.9
million at December 31, 1999 and 1998, respectively. The actual amount of
interest recorded as income on such loans amounted to $0.3 million for each of
the years ended December 31, 1999, 1998, and 1997.
At December 31, 1999, the Company's real estate owned and other assets
acquired totaled $0.9 million, primarily consisting of 15 single-family
residential properties acquired through foreclosure or by deed-in-lieu of
foreclosure and 11 recreational vehicle loans. At December 31, 1998, real estate
owned totaled $1.0 million, consisting of 20 single-family residential
properties acquired through foreclosure or by deed-in-lieu of foreclosure. At
year-end 1997, real estate owned totaled $0.6 million, consisting of 13
single-family residential properties acquired through foreclosure or by
deed-in-lieu of foreclosure.
During 1999, the Company sold 28 single-family residential properties which
were held as real estate owned for a nominal net gain and acquired an additional
23 single-family residential properties through foreclosure or deed-in-lieu
thereof. During 1998, the Company sold 20 single-family residential properties
which were held as real estate owned for a nominal net gain and acquired an
additional 27 single-family residential properties through foreclosure or
deed-in-lieu thereof. During 1997, the Company sold 27 single-family residential
properties which were held as real estate owned for a net loss of $0.1 million,
and acquired an additional 17 single-family residential properties through
foreclosure or deed-in-lieu thereof.
CLASSIFIED ASSETS. Federal regulations require that each insured savings
association classify its assets on a regular basis. Furthermore, in connection
with examinations of insured institutions, federal examiners have authority to
identify problem assets and, if appropriate, classify them. There are three
classifications for problem assets: "substandard," "doubtful," and "loss."
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full questionable on the basis of currently
existing facts, conditions and values, and there is a high possibility of loss.
Loss assets are considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. Classified assets
of the Company were essentially comprised of its nonperforming assets, as
discussed above.
A fourth category, designated "special mention", reflects those assets
which do not currently expose an insured institution to a sufficient degree of
risk to warrant classification as substandard, doubtful or loss, but which
represent potential future problem assets. At December 31, 1999, the Company had
$8.0 million of assets classified as special mention.
-14-
<PAGE> 16
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. In management's opinion, the allowance for
loan losses is sufficient to absorb estimated losses in the loan portfolio.
The following table sets forth the activity in the Company's allowance for
loan losses during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of year $ 9,589 $ 9,024 $ 9,971 $ 7,485 $ 7,307
-------- -------- -------- -------- --------
Provision 4,000 3,500 1,600 601 578
Charge-offs:
Mortgage (344) (566) (453) (189) (362)
Consumer (2,138) (1,857) (1,383) (478) (125)
Commercial (1,190) (706) (963) - -
-------- -------- -------- -------- --------
Total charge-offs (3,672) (3,129) (2,799) (667) (487)
Recoveries:
Mortgage 27 32 147 133 68
Consumer 237 78 74 29 19
Commercial 297 84 31 18 -
-------- -------- -------- -------- --------
Total recoveries 561 194 252 180 87
Allowance Acquired in
Berks Acquisition - - - 2,372 -
-------- -------- -------- -------- --------
Allowance at end of year $ 10,478 $ 9,589 $ 9,024 $ 9,971 $ 7,485
======== ======== ======== ======== ========
Allowance for loan losses to total
nonperforming loans at end of
year 134.69% 95.78% 100.96% 123.74% 120.86%
======== ======== ======== ======== ========
Allowance for loan losses to total
loans held for investment at end
of year 0.76% 0.71% 0.71% 0.89% 0.93%
======== ======== ======== ======== ========
</TABLE>
-15-
<PAGE> 17
The following table presents the Company's allowance for loan losses
allocated by categories of loans held for investment at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------------------
1999 1998 1997 1996
------------------------ ----------------------- ------------------------ -----------------------
Percent of Percent of Percent of Percent of
Loans by Loans by Loans by Loans by
Amount Category (1) Amount Category (1) Amount Category (1) Amount Category (1)
------ ------------ ------ ------------ ------ ------------ ------ ------------
(dollars in thousands)
Breakdown of
allowance:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans $ 2,442 0.28% $ 2,207 0.23% $ 2,536 0.26% $ 5,339 0.63%
Consumer loans 4,966 1.54 3,412 1.42 2,916 1.50 2,505 1.48
Commercial loans 3,070 1.61 3,970 2.86 3,572 3.72 2,127 3.00
----- ----- ----- -----
Total allowance for loan
losses $10,478 0.76% $ 9,589 0.71% $ 9,024 0.71% $ 9,971 0.89%
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------
1995
-------------------------
Percent of
Loans by
Amount Category (1)
------ ------------
Breakdown of
allowance:
<S> <C> <C>
Mortgage loans $ 5,228 0.80%
Consumer loans 1,992 1.79
Commercial loans 265 2.18
---
Total allowance for loan
losses $ 7,485 0.93%
=======
</TABLE>
- ----------
(1) Total loans exclude mortgage loans held for sale.
-16-
<PAGE> 18
INVESTMENT ACTIVITIES
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities (which are also
known as mortgage participation certificates or pass-through certificates)
represent a participation interest in a pool of single-family or multi-family
mortgages, the principal and interest payments on which are passed from the
mortgage originators, through intermediaries (generally U.S. Government agencies
and U.S. Government sponsored enterprises) that pool and repackage the
participation interests in the form of securities, to investors such as the
Company. Such U.S. Government agencies and U.S. Government sponsored
enterprises, which guarantee the payment of principal and interest to investors,
primarily include the Government National Mortgage Association ("GNMA"), the
FHLMC, and the FNMA.
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," the Company segregated its mortgage-backed and
investment securities into two categories, those held to maturity and those
available for sale. Held-to-maturity securities are recorded at amortized cost.
Available-for sale securities are recorded at fair value, with unrealized gains
and losses, net of related tax effects, excluded from earnings and reported as a
separate component of shareholders' equity.
At December 31, 1999, the Company's $291 million of mortgage-backed
securities were comprised of $94 million and $197 million of held-to-maturity
and available-for-sale mortgage-backed securities, respectively. At December 31,
1999, $199 million, or 68%, of the Company's mortgage-backed securities were
insured or guaranteed by the 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 comparable mortgage-backed
securities issued by the GNMA, FHLMC, or the FNMA. At December 31, 1999, $92
million, or 32%, of the Company's mortgage-backed securities were private
mortgage-backed securities. At December 31, 1999, $241 million, or 83%, of the
Company's mortgage-backed securities portfolio had fixed rates of interest, and
$50 million, or 17%, had adjustable rates of interest.
Mortgage-backed securities generally increase the quality of the Company's
assets by virtue of the insurance or guarantees related to the securities, are
more liquid than individual mortgage loans, and may be used to collateralize
borrowings or other obligations of the Company.
At December 31, 1999 and 1998, mortgage-backed securities with an amortized
cost of $116 million and $164 million, respectively, and a market value of $114
million and $165 million, respectively, collateralized certain securities sold
under agreements to repurchase (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
-17-
<PAGE> 19
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.
The following table sets forth the activity in the Company's
mortgage-backed securities portfolio during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1999 1998 1997
---------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Mortgage-backed securities at beginning of year $524,141 $735,291 $752,707
Purchases - 156,958 189,818
Sales or call (5,170) (30,000) (41,770)
Repayments and prepayments (219,534) (337,291) (166,838)
Unrealized (loss) gain on available-for-sale
mortgage-backed securities (8,483) (817) 1,374
-------- -------- --------
Mortgage-backed securities at end of year (1) $290,954 $524,141 $735,291
======= ======= =======
</TABLE>
- ----------
(1) At December 31, 1999, the amortized cost and market value of the Company's
total mortgage-backed securities (including held-to-maturity and
available-for-sale mortgage-backed securities) amounted to $296 million and
$290 million, respectively.
At December 31, 1999, the contractual maturity of substantially all of the
Company's mortgage-backed securities was in excess of ten years. The actual
maturity of a mortgage-backed security is less than its stated maturity due to
prepayments of the underlying mortgages. Prepayments also affect the yield to
maturity. The yield on a security is based upon the interest income and the
amortization of any premium or accretion of any discount related to the
mortgage-backed security. In accordance with generally accepted accounting
principles, premiums and discounts are amortized or accreted over the estimated
lives of the loans, which decrease and increase interest income, respectively.
The prepayment assumptions used to determine the amortization period for
premiums and discounts can significantly affect the yield of a mortgage-backed
security, and these assumptions are reviewed periodically to reflect actual and
anticipated prepayments. Although prepayments of underlying mortgages depend on
many factors, including the type of mortgages, the coupon rate, the age of
mortgages, the geographical location of the underlying real estate
collateralizing the mortgages, and general levels of market interest rates, the
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates, generally, is the most significant
determinant of the rate of prepayments. During periods of falling mortgage
interest rates, if the coupon rate of the underlying mortgages exceeds the
prevailing market interest rates offered for mortgage loans, refinancing
generally increases and accelerates the prepayment of the underlying mortgages
and the related security. Under such
-18-
<PAGE> 20
circumstances, the Company may be subject to reinvestment risk because to the
extent that the Company's mortgage-backed securities amortize or prepay faster
than anticipated, the Company may not be able to reinvest the proceeds of such
repayments and prepayments at a comparable rate.
INVESTMENT SECURITIES. The Company has the authority to invest in various
types of liquid assets, including United States Treasury obligations, securities
of various federal agencies and state and municipal governments, certificates of
deposit at federally-insured banks and savings and loan associations, certain
bankers' acceptances and federal funds. Subject to various restrictions,
federally chartered savings institutions may also invest a portion of their
assets in commercial paper, corporate debt securities, mutual funds, the assets
of which conform to the investments that federally chartered savings
institutions are otherwise authorized to make directly, and certain equity
investments.
The following table sets forth information regarding the amortized cost and
market value of the Company's investment securities at the dates indicated.
There were no held to maturity investment securities at the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------
1999 1998 1997
------------------------ ------------------------- -----------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- ------- ----------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Available for sale (at market):
U.S. Treasury and U.S.
Government agency securities $ - $ - $12,000 $11,999 $39,980 $40,041
Corporate Bonds 34,996 34,925 19,997 20,140 - -
Mortgage Related Mutual
Fund 20,751 20,479 - - 2,373 2,404
Equity Investment - Mortgage
Servicing Partnership 1,700 1,700 1,700 1,700 4,819 4,819
Other Equity Investments 10,854 11,115 710 676 3,256 4,062
------- ------- ------- ------- ------- -------
Total $68,301 $68,219 $34,407 $34,515 $50,428 $51,326
======= ======= ======= ======= ======= =======
</TABLE>
-19-
<PAGE> 21
The following table sets forth certain information regarding the maturities
of the Company's investment securities (all of which were classified as
available for sale) at December 31, 1999.
<TABLE>
<CAPTION>
CONTRACTUALLY MATURING
-------------------------------------------------------------------------------------------
Weighted Weighted
Under 1 Average 1- 5 Average
Year Yield Years Yield
---- ----- ----- -----
(dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and U.S.
Government agency
securities $ - - % $ - - %
Corporate Bonds 34,925 5.29 - -
Mortgage Related Mutual
Fund 20,479 5.30 - -
Equity Investment -
Mortgage Servicing
Partnership - - 1,700 N/A
Other Equity Investments - - 11,115 N/A
------- ------- -------
Total $55,404 5.29% $12,815 N/A
======= =======
</TABLE>
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Company's funds for lending
and other investment purposes. In addition to deposits, the Company derives
funds from loan principal repayments and prepayments, advances from the FHLB of
Pittsburgh, and securities sold under agreements to repurchase. Loan repayments
are a relatively stable source of funds, while deposit inflows and outflows are
influenced by general interest rates and money market conditions. Borrowings may
be used on a short-term basis to compensate for reductions in the availability
of funds from other sources. They may also be used on a longer term basis for
general business purposes.
DEPOSITS. The Company's deposit products include a broad selection of
deposit instruments, including NOW accounts, money market accounts,
noninterest-bearing checking accounts, savings accounts, and certificate of
deposit accounts. Deposit account terms vary, with the principal differences
being the minimum balance required, the length of time the funds must remain on
deposit, and the interest rate. In determining the characteristics of its
deposit accounts, consideration is given to the impact on the profitability of
the Company, matching terms of the deposits with loan products, the
attractiveness to customers, and the rates offered by the Company's competitors.
The Company's deposits are obtained primarily from residents and businesses
located in southeast Pennsylvania. Management of the Company estimates that a
deminimus portion of the Company's deposits are obtained from outside southeast
Pennsylvania. The Company does not pay fees to brokers to solicit funds for
deposit with the Company, nor does it actively solicit negotiable-rate
certificates of deposit with balances of $100,000 or more.
-20-
<PAGE> 22
The Company attracts deposits through a network of convenient branch office
locations by offering a wide variety of accounts and services, competitive
interest rates, and extended customer hours. At December 31, 1999, the branch
offices of the Company consisted of 40 traditional full-service offices and 20
full-service offices located in supermarkets. The Company opened its first
supermarket branch in 1994 and opened an additional nine, four, three, and three
in 1995, 1996, 1997, and 1998, respectively. Currently, the Company intends to
open an additional supermarket branch and one traditional branch in its market
area during 2000.
In addition to the Company's extensive branch network, the Company
currently maintains 60 automated teller machine ("ATM") locations. The Company
also maintains a 24 hour telephone banking service known as COM-LINE.
The Company's focus on customer service and convenience has facilitated its
acquisition of lower-cost demand deposits and savings accounts, which generally
have rates which are substantially less than certificates of deposit. At
December 31, 1999, total demand deposits and savings deposits amounted to 48%
and 15% of the Company's total deposits, respectively. During 1999, the weighted
average rate paid on the Company's demand deposits and savings deposits amounted
to 2.34% and 2.22%, respectively, as compared to a weighted average rate paid of
5.06% on the Company's certificates of deposit during this same period.
The following table sets forth certain information relating to the
Company's deposits at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ------------------------- ------------------------
Percent Percent Percent
of Total of Total of Total
Amount Deposits Amount Deposits Amount Deposits
------ -------- ------ -------- ------ --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW Accounts $ 188,003 12.50% $ 216,668 13.50% $ 172,442 11.11%
Money market deposits 388,605 25.85 390,822 24.34 324,959 20.93
Noninterest-bearing
deposits 146,477(1) 9.74 103,327 6.44 81,653 5.26
---------- ------ ---------- ------ ---------- ------
Total demand deposits 723,085 48.09 710,817 44.28 579,054 37.30
---------- ------ ---------- ------ ---------- ------
Savings deposits 221,074 14.70 227,423 14.17 229,290 14.77
Certificate of deposit
accounts:
6 months or less 279,109 18.56 317,232 19.76 259,519 16.71
7-12 months 157,895 10.50 151,258 9.42 220,341 14.19
13-36 months 88,110 5.86 148,958 9.28 216,011 13.91
More than 36 months 34,473 2.29 49,611 3.09 48,609 3.12
---------- ------ ---------- ------ ---------- ------
Total certificates 559,587 37.21 667,059 41.55 744,480 47.93
---------- ------ ---------- ------ ---------- ------
Total deposits $1,503,746 100.00% $1,605,299 100.00% $1,552,824 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
==============================================================================
(1) Includes $72 million of business checking accounts.
-21-
<PAGE> 23
The following table sets forth the activity in the Company's deposits
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1999 1998 1997
------ ------ -----
(dollars in thousands)
<S> <C> <C> <C>
Beginning balance $1,605,299 $1,552,824 $1,491,450
Net (decrease) increase
before interest (153,462) (2,595) 9,540
Interest credited 51,909 55,070 51,834
---------- ---------- ----------
Net (decrease) increase
in deposits (101,553) 52,475 61,374
---------- ---------- ----------
Ending balance $1,503,746 $1,605,299 $1,552,824
========== ========== ==========
</TABLE>
The following table sets forth by various interest rate categories the
Company's certificates of deposit at the dates indicated.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1999 1998 1997
------ ------ ------
(dollars in thousands)
<S> <C> <C> <C>
0.00% to 2.99% $ 979 $ 1,295 $ 1,166
3.00% to 3.99% 1,541 1,776 6,051
4.00% to 4.99% 321,421 224,329 125,241
5.00% to 6.99% 234,091 436,614 608,379
7.00% to 8.99% 1,473 2,965 3,569
9.00% and over 82 80 74
-------- -------- --------
Total $559,587 $667,059 $744,480
======== ======== ========
</TABLE>
-22-
<PAGE> 24
The following table sets forth the amount and remaining maturities of the
Company's certificates of deposit at December 31, 1999.
<TABLE>
<CAPTION>
Over Six Over Two
Months Over One Years
Six Months Through One Year Through Through Over Three
or less Year Two Years Three Years Years
---------- ------------ --------- ----------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
0.00% to 1.99% $ 808 $ - $ - $ - $ -
2.00% to 2.99% 171 - - - -
3.00% to 3.99% 1,541 - - - -
4.00% to 4.99% 182,217 77,990 44,983 7,607 8,624
5.00% to 6.99% 93,913 79,503 12,066 22,864 25,745
7.00% to 8.99% 459 402 427 81 104
9.00% and over - - 82 - -
-------- -------- -------- -------- --------
Total $279,109 $157,895 $ 57,558 $ 30,552 $ 34,473
======== ======== ======== ======== ========
</TABLE>
At December 31, 1999, the Company had $84 million of certificates of
deposit in amounts equal to or greater than $100,000, of which $58 million was
scheduled to mature within six months, $16 million was scheduled to mature in
over six months through 12 months, and $10 million was scheduled to mature in a
time period greater than 12 months.
BORROWINGS. The Company may obtain secured advances from the FHLB of
Pittsburgh by pledging certain assets, provided certain standards related to
creditworthiness have been met. Such advances are made pursuant to several
credit programs, each of which has its own interest rate and range of
maturities. Such advances are generally available to meet seasonal and other
withdrawals of deposit accounts and to permit increased lending. At December 31,
1999, the Company had $127 million of advances from the FHLB of Pittsburgh.
From time to time the Company enters into agreements to sell securities
under terms which require it to repurchase the same securities by a specified
date. Repurchase agreements are considered borrowings which are secured by the
sold securities. At December 31, 1999, the Company had $100 million of
repurchase agreements outstanding.
At December 31, 1999, the Company had $9 million of commercial repurchase
agreements outstanding. This product was introduced by Commonwealth during the
first quarter of 1999.
-23-
<PAGE> 25
The following table sets forth the amount and weighted average rate
of the Company's borrowings at the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------
1999 1998 1997
------------------------ ----------------------- ------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
FHLB advances $127,000 5.49% $240,500 5.32% $213,000 5.83%
Repurchase
Agreements 100,000 5.81 166,000 6.21 246,099 5.73
Other borrowings 9,076 4.32 - - - -
-------- ---- -------- ---- -------- ----
Total Borrowings (1) $236.076 5.58% $406.500 5.68% $459.099 5.78%
======== ======== ========
</TABLE>
(1) Does not include interest expense associated with interest rate swaps and
interest rate caps.
The following table sets forth certain information relating to the
Company's borrowings at the dates and for the periods indicated.
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
---------------------------------------------------------------
1999 1998 1997
--------- ----------- ------------
(dollars in thousands)
<S> <C> <C> <C>
FHLB advances:
Maximum balance $225,500 $368,000 $238,000
Average balance $159,929 $285,615 $211,107
Weighted average rate:
at end of period 5.49% 5.32% 5.83%
During the period 5.31% 5.65% 5.67%
Repurchase agreements:
Maximum balance $154,000 $240,521 $264,677
Average balance $132,657 $205,018 $242,794
Weighted average rate:
at end of period 5.81% 6.21% 5.73%
During the period 5.92% 6.04% 5.90%
Other borrowings:
Maximum balance $ 14,363 $ - $ -
Average balance $ 6,869 $ - $ -
Weighted average rate:
at end of period 4.32% - % - %
During the period 4.30% - % - %
</TABLE>
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<PAGE> 26
EMPLOYEES
The Company had 658 full-time employees and 203 part-time employees at
December 31, 1999. None of these employees are represented by a collective
bargaining agent.
SUBSIDIARIES
A brief description of the activities of the Company's active subsidiaries
is set forth below.
COMMONWEALTH BANK. The Bank is a federally chartered stock savings bank
which conducts business from its executive offices in Norristown, Pennsylvania
and, as of December 31, 1999, 60 full-service offices, including 20 supermarket
branch offices, located in southeast Pennsylvania. ComNet Mortgage Services
("ComNet"), a division of the Bank, also located in Norristown, conducts
business through 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.
COMMONWEALTH INVESTMENT CORPORATION OF DELAWARE, INC. Commonwealth
Investment Corporation of Delaware, Inc. is a wholly-owned subsidiary of the
Company which was incorporated under the laws of Delaware in 1996. At December
31, 1999, Commonwealth Investment Corporation of Delaware, Inc. held cash, and
investment securities totaling $4 million.
CFSL INVESTMENT CORPORATION. At December 31, 1999, $55 million, or 19%, of
the Company's mortgage-backed securities were held by CFSL Investment
Corporation, a wholly-owned subsidiary of the Bank which was incorporated under
the laws of Delaware in 1987.
FIRSTCOR, LTD. The activities of Firstcor, Ltd. ("Firstcor") consist
primarily of investing in limited partnerships which have been formed for the
purpose of investing in real estate for low income families, elderly housing
projects, and/or the preservation or restoration of historically or
architecturally significant buildings or structures. At December 31, 1999,
Firstcor had nine investments in such partnerships with an aggregate carrying
value of $4.1 million. The investments held by these partnerships are all
located in southeast Pennsylvania. In addition, Firstcor, through an independent
brokerage, makes available investments in annuities and mutual funds to
customers of the Company.
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<PAGE> 27
QME, INC. The activities of QME, Inc. ("QME") consisted of the ownership
and development of a 102 lot subdivision located in Bucks County, Pennsylvania,
which was acquired by the Bank in connection with the acquisition of another
savings association. As of December 31, 1997, all of the units had been sold and
closed. During 1999, QME sold its remaining interest in the development. As of
December 31, 1999, QME had no assets or liabilities.
COMPETITION
The Company faces strong competition in attracting deposits and making
loans. Its most direct competition for deposits has historically come from other
savings associations, credit unions and commercial banks located in eastern
Pennsylvania, including many large financial institutions which have greater
financial and marketing resources available to them. In addition, the Company
faces additional significant competition for investors' funds from short-term
money market securities, mutual funds, and other corporate and government
securities. The ability of the Company to attract and retain deposits depends on
its ability to generally provide a rate of return, liquidity, and risk
comparable to that offered by competing investment opportunities.
The Company experiences strong competition for loans principally from other
savings associations, commercial banks, and mortgage banking companies. The
Company competes for loans principally through the interest rates and loan fees
it charges, and through the efficiency and quality of services it provides
borrowers.
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<PAGE> 28
TAXATION
FEDERAL. The Company is subject to federal income taxation in the same
general manner as other corporations. The following discussion of federal
taxation is intended only to summarize certain pertinent federal income tax
matters and is not a comprehensive description of the tax rules applicable to
the Company. The Company's federal income tax returns have been audited or
closed without audit by the Internal Revenue Service through 1995.
METHOD OF ACCOUNTING. For federal income tax purposes, the Company
currently reports its income and expenses on the accrual method of accounting
and uses a tax year ending December 31 for filing its federal income tax
returns.
DISTRIBUTIONS. If the Bank distributes cash or property to its
shareholders, and the distribution is treated as being from its accumulated bad
debt reserves, the distribution will cause the Company to have additional
taxable income. A distribution to shareholders is deemed to have been made from
accumulated bad debt reserves to the extent that the distribution is a
"non-dividend distribution." A distribution in respect of stock is a
non-dividend distribution to the extent that, for federal income tax purposes,
(i) it is in redemption of shares, (ii) it is pursuant to a liquidation of the
institution, or (iii) in the case of a current distribution, together with all
other such distributions during the taxable year, it exceeds the Company's
current and post-1951 accumulated earnings and profits. The amount of additional
taxable income created by a non-dividend distribution is an amount that when
reduced by the tax attributable to it is equal to the amount of the
distribution.
MINIMUM TAX. The Code imposes an alternative minimum tax at a rate of 20%
of regular taxable income plus certain tax preferences ("alternative minimum
taxable income" or "AMTI"). The alternative minimum tax is payable to the extent
such AMTI is in excess of an exemption amount. Items of tax preference that
constitute AMTI include (a) tax exempt interest on newly-issued (generally,
issued on or after August 8, 1986) private activity bonds other than certain
qualified bonds and (b) for taxable years beginning after 1989, 75% of the
excess (if any) of (i) adjusted current earnings as defined in the Code, over
(ii) AMTI (determined without regard to this preference and prior to reduction
by net operating losses). Net operating losses ("NOLs") can offset no more than
90% of AMTI. Certain payments of alternative minimum tax may be used as credits
against regular tax liabilities in future years. The Company has not been
subject to the alternative minimum tax and has no such amounts available as
credits for carryover.
Legislation adopted in August 1996 (i) repealed the provision of the Code
which authorizes use of the percentage method by qualifying savings institutions
to determine deductions for bad debts, effective for taxable years beginning
after 1995, and (ii) required that a savings institution recapture for tax
purposes (i.e. take into income) over a six-year period its applicable excess
reserves, which for a thrift institution such as the Bank generally is the
excess of the balance of its bad debt reserves as of the close of its last
taxable year beginning before January 1,1996 over the balance of such reserves
as of the close of its last taxable year beginning before January 1,
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<PAGE> 29
1988. These provisions did not have a material adverse effect on the Company's
financial condition or operations.
NET OPERATING LOSS CARRYOVERS. For losses incurred in taxable years
beginning 1976 through August 6, 1997, a financial institution may carry back
net operating losses to the preceding three taxable years and forward to the
succeeding 15 taxable years. For taxable years beginning after August 6, 1997,
the carryback period is two years and the carryforward period is twenty years.
At December 31, 1999, the Company had no net operating loss carryforwards for
federal income tax purposes.
CAPITAL GAINS AND CORPORATE DIVIDENDS-RECEIVED DEDUCTION. The capital gains
income tax, which was previously imposed at a rate of 28% of net long-term
capital gains, was repealed effective December 31, 1986. From that time until
January 1, 1993, corporate net capital gains were taxed at a maximum rate of
34%. The Omnibus Budget Reconciliation Act of 1993 increased the maximum
corporate capital gains rate to 35% effective January 1, 1993. The corporate
dividends-received deduction is 80% in the case of dividends received from
corporations with which a corporate recipient does not file a consolidated tax
return. Corporations which own less than 20% of the stock of a corporation
distributing a dividend may deduct only 70% of dividends received or accrued on
their behalf. However, a corporation may deduct 100% of dividends from a member
of the same affiliated group of corporations.
STATE. The Company is subject to the Pennsylvania corporate net income tax,
which imposes a tax at the rate of 9.99% based on federal taxable income. The
Company is also subject to the Pennsylvania capital stock tax based on the
deemed value of its capital at the rate of 1.099%.
The Bank is subject to tax under the Pennsylvania Mutual Thrift
Institutions Tax Act, which imposes a tax at the rate of 11.5% of the Bank's net
earnings, determined in accordance with GAAP. For fiscal years beginning in
1983, and thereafter, NOLs may be carried forward and allowed as a deduction for
three succeeding years. This Act exempts the Bank from all other corporate taxes
imposed by Pennsylvania for state tax purposes, and from all local taxes imposed
by political subdivisions thereof, except taxes on real estate and real estate
transfers. At December 31, 1999, the Company had a net loss carryforward for
state tax purposes totaling $2.9 million, which expires in 2001.
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<PAGE> 30
REGULATION
Set forth below is a brief description of those laws and regulations which
are deemed material to an understanding of the extent to which the Company and
the Bank are regulated. The description of the laws and regulations hereunder
does not purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations.
THE COMPANY
GENERAL. The Company is a registered savings and loan holding company under
the Home Owners' Loan Act ("HOLA") and is subject to OTS regulations,
examinations, supervision, and reporting requirements. As a subsidiary of a
savings and loan holding company, the Bank is subject to certain restrictions in
its dealings with the Company and affiliates thereof.
ACTIVITIES RESTRICTIONS. There are generally no restrictions on the
activities of a savings and loan holding company which holds only one subsidiary
savings institution. However, if the Director of the OTS determines that there
is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings institution, the
Director may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings institution; (ii)
transactions between the savings institution and its affiliates; and (iii) any
activities of the savings institution that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings institution. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
institution subsidiary of such a holding company fails to meet the Qualified
Thrift Lender ("QTL") test, then such unitary holding company also shall become
subject to the activities restrictions applicable to multiple savings and loan
holding companies and, unless the savings institution requalifies as a QTL
within one year thereafter, shall register as, and become subject to the
restrictions applicable to, a bank holding company.
If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution meets the QTL
test, as set forth below, the activities of the Company and any of its
subsidiaries (other than the Bank or other subsidiary savings institutions)
would thereafter be subject to further restrictions. Among other things, no
multiple savings and loan holding company or subsidiary thereof which is not a
savings institution shall commence or continue for a limited period of time
after becoming a multiple savings and loan holding company or subsidiary thereof
any business activity, upon prior notice to, and no objection by the OTS, other
than: (i) furnishing or performing management services for a subsidiary savings
institution; (ii) conducting an insurance agency or escrow business; (iii)
holding, managing, or liquidating assets owned by or acquired
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<PAGE> 31
from a subsidiary savings institution; (iv) holding or managing properties used
or occupied by a subsidiary savings institution; (v) acting as trustee under
deeds of trust; (vi) those activities authorized by regulation as of March 5,
1987 to be engaged in by multiple savings and loan holding companies; or (vii)
unless the Director of the OTS by regulation prohibits or limits such activities
for savings and loan holding companies, those activities authorized by the
Federal Reserve Board as permissible for bank holding companies. Those
activities described in (vii) above also must be approved by the Director of the
OTS prior to being engaged in by a multiple savings and loan holding company.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings institution is any company or
entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company of
a savings institution (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B,
no savings institution may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the savings institution.
In addition, Sections 22(h) and (g) of the Federal Reserve Act places
restrictions on loans to executive officers, directors, and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a savings institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the institution's
loans to one borrower limit (generally equal to 15% of the institution's
unimpaired capital and surplus). Section 22(h) also requires that loans to
directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons
and also requires prior board approval for certain loans. In addition, the
aggregate amount of extensions of credit by a savings institution to all
insiders cannot exceed the institution's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers. At December 31, 1999, the Bank was in compliance with the above
restrictions.
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<PAGE> 32
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS, (i) control of any other savings institution or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5% of the voting shares of a savings institution or holding company
thereof which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may acquire control of any savings institution, other than
a subsidiary savings institution, or of any other savings and loan holding
company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if (i) the multiple savings and loan holding
company involved controls a savings institution which operated a home or branch
office located in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act ("FDIA"); or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by the state-chartered institutions or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings institutions).
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") amended provisions of the Bank Holding Company Act of 1956 to
specifically authorize the Federal Reserve Board to approve an application by a
bank holding company to acquire control of a savings institution. FIRREA also
authorized a bank holding company that controls a savings institution to merge
or consolidate the assets and liabilities of the savings institution with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking agency and the Federal
Reserve Board. As a result of these provisions, there have been a number of
acquisitions of savings institutions by bank holding companies in recent years.
FEDERAL SECURITIES LAWS. The Company's common stock is registered with the
SEC under Section 12(g) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Company is subject to the information, proxy solicitation,
insider trading restrictions, and other requirements under the Exchange Act.
THE BANK
GENERAL. The OTS has extensive authority over the operations of federally
chartered savings institutions. As part of this authority, savings institutions
are required to file periodic reports with the OTS, and are subject to periodic
examinations by the OTS and the Federal Deposit Insurance Corporation ("FDIC").
The investment and lending authority of savings institutions are prescribed by
federal laws and regulations, and such institutions are prohibited from engaging
in any activities
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<PAGE> 33
not permitted by such laws and regulations. Those laws and regulations generally
are applicable to all federally chartered savings institutions and may also
apply to state chartered savings institutions. Such regulation and supervision
is primarily intended for the protection of depositors.
INSURANCE OF ACCOUNTS. The deposits of the Bank are insured to the maximum
extent permitted by either the SAIF or the BIF, both of which are administered
by the FDIC, and are backed by the full faith and credit of the U.S. Government.
As insurer, the FDIC is authorized to conduct examinations of, and to require
reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious threat to the FDIC. The FDIC also has the authority to
initiate enforcement actions against savings institutions, after giving the OTS
an opportunity to take such action.
The SAIF and BIF are required by law to attain and maintain a reserve ratio
of 1.25% of insured deposits. On September 30, 1996, legislation was enacted
into law to recapitalize the SAIF through a one-time special assessment on
SAIF-insured deposits as of March 31, 1995. The Bank's assessment amounted to
$6.8 million ($4.5 million, net of income tax benefit). As a result of the
special assessment, the Bank's deposit insurance premiums decreased from the
previous rate of $0.23 per $100 of deposits to approximately $0.05 per $100 of
deposits.
Beginning January 1, 1997, Financing Corporation ("FICO") assessments of
6.5 and 1.3 basis points were added to the regular assessment for the
SAIF-assessable and the BIF-assessable base, respectively. As of December 31,
1999, the FICO assessments were 5.8 and 1.2 basis points for the SAIF-assessable
and the BIF-assessable base, respectively. The FICO rate is not tied to the FDIC
risk classification, referred to above, and was the result of the Deposit
Insurance Act of 1996. It is anticipated that assessments for BIF and SAIF
members will be the same after 1999.
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<PAGE> 34
Under current FDIC regulations, institutions are assigned to one of three
capital groups based solely on the level of an institution's capital--"well
capitalized," "adequately capitalized," and "undercapitalized." The three groups
are defined in the same manner as per the regulations establishing the prompt
corrective action system under Section 38 of the FDIA, as discussed below. These
three groups are then divided into three subgroups which reflect varying levels
of supervisory concern, from those which are considered to be healthy to those
which are considered to be of substantial supervisory concern. The matrix so
created results in nine assessment risk classifications, with deposit insurance
rates ranging from 0% for well capitalized, healthy institutions to 0.27% for
undercapitalized institutions with substantial supervisory concerns.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. There are no pending proceedings to terminate the deposit insurance of
the Bank.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings institutions are
required to maintain minimum levels of regulatory capital. Pursuant to FIRREA,
the OTS has established capital standards applicable to all savings
institutions. These standards generally must be as stringent as the comparable
capital requirements imposed on national banks. The OTS also is authorized to
impose capital requirements in excess of these standards on individual
institutions on a case-by-case basis.
Current OTS capital standards require savings institutions to satisfy three
different capital requirements. Under these standards, savings institutions must
maintain "tangible" capital equal to at least 1.5% of adjusted total assets,
"core" capital equal to at least 3.0% of adjusted total assets and "total"
capital (a combination of core and "supplementary" capital) equal to at least
8.0% of "risk-weighted" assets. For purposes of the regulation, core capital
generally consists of common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus, minority interests
in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits, and is reduced by intangible
assets, with a limited exception for purchased mortgage servicing rights and
originated mortgage servicing rights. Tangible capital is given the same
definition as core capital but does not include qualifying intangible assets.
The Bank had $33 million of goodwill and other intangible assets at December 31,
1999. Both core and tangible capital are further reduced by an amount equal to a
savings institution's debt and equity investments in subsidiaries engaged in
activities not permissible to national banks (other than subsidiaries engaged in
activities undertaken as agent for customers or in mortgage banking activities
and subsidiary depository institutions or their holding companies).
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<PAGE> 35
These adjustments do not affect the Bank's regulatory capital. Supplementary
capital generally consists of hybrid capital instruments; perpetual preferred
stock which is not eligible to be included as core capital; subordinated debt
and intermediate-term preferred stock; 45% of any pretax unrealized gains on
available for sale equity securities; and general allowances for loan losses up
to a maximum of 1.25% of risk-weighted assets.
In determining compliance with the risk-based capital requirement, a
savings institution is allowed to include both core capital and supplementary
capital in its total capital, provided that the amount of supplementary capital
included does not exceed the savings institution's core capital. In determining
the required amount of risk-based capital, total assets, including certain
off-balance sheet items, are multiplied by a risk weight based on the risks
inherent in the type of assets. The risk weights assigned by the OTS for
principal categories of assets are (i) 0% for cash and securities issued by the
U.S. Government or unconditionally backed by the full faith and credit of the
U.S. Government; (ii) 20% for securities (other than equity securities) issued
by U.S. Government-sponsored agencies and mortgage-backed securities issued by,
or fully guaranteed as to principal and interest by, the FNMA or the FHLMC,
except for those classes with residual characteristics or stripped
mortgage-related securities; (iii) 50% for prudently underwritten permanent one-
to four-family first lien mortgage loans not more than 90 days delinquent and
having a loan-to-value ratio of not more than 80% at origination unless insured
to such ratio by an insurer approved by the FNMA or the FHLMC, qualifying
residential bridge loans made directly for the construction of one- to
four-family residences and qualifying multi-family residential loans; and (iv)
100% for all other loans and investments, including consumer loans, commercial
loans, and single-family residential real estate loans more than 90 days
delinquent, and for repossessed assets.
At December 31, 1999, the Bank exceeded all of its regulatory capital
requirements, with tangible, core and risk-based capital ratios of 6.4%, 6.4%
and 11.3%, respectively. For additional information, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Regulatory Capital Requirements" in Item 7 hereto.
A savings institution which is not in capital compliance or which is
otherwise deemed to require more than normal supervision is subject to
restrictions on its ability to grow pursuant to Regulatory Bulletin 3a-1. In
addition, a provision of HOLA generally provides that the Director of OTS must
restrict the asset growth of savings institutions not in regulatory capital
compliance, subject to a limited exception for growth not exceeding interest
credited.
A savings institution which is not in capital compliance is also
automatically subject to the following: (i) new directors and senior executive
officers and employment contracts for senior executive officers must be approved
by the OTS in advance; (ii) the savings institution may not accept or renew any
brokered deposits; (iii) the savings institution is subject to higher OTS
assessments as a capital-deficient institution; and (iv) the savings institution
may not make any capital distributions without prior written approval.
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<PAGE> 36
Any savings institution that fails any of the capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such actions
could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on the institution's operations,
termination of federal deposit insurance, and the appointment of a conservator
or receiver. The OTS' capital regulation provides that such actions, through
enforcement proceedings or otherwise, could require one or more of a variety of
corrective actions.
In August 1993, the OTS adopted a final rule incorporating an interest-rate
risk component into the risk-based capital regulation. Under the rule, an
institution with a greater than "normal" level of interest rate risk is subject
to a deduction of its interest rate risk component from total capital for
purposes of calculating its risk-based capital. As a result, such an institution
is required to maintain additional capital in order to comply with the
risk-based capital requirement. An institution with a greater than "normal"
interest rate risk is defined as an institution that would suffer a loss of net
portfolio value exceeding 2.0% of the estimated economic value of its assets in
the event of a 200 basis point increase or decrease (with certain minor
exceptions) in interest rates. The interest rate risk component is calculated,
on a quarterly basis, as one-half of the difference between an institution's
measured interest rate risk and 2.0%, multiplied by the economic value of its
assets. The rule also authorizes the Director of the OTS, or his designee, to
waive or defer an institution's interest rate risk component on a case-by-case
basis. The final rule was originally to be effective as of January 1, 1994,
subject however to a three quarter "lag" time between the reporting date of the
data used to calculate an institution's interest rate risk and the effective
date of each quarter's interest rate risk component. However, in October 1994,
the Director of the OTS indicated that it would waive the capital deduction for
institutions with greater than "normal" interest rate risk until the OTS
publishes an appeals process. In August 1995, the OTS issued Thrift Bulletin No.
67 which allows eligible institutions to request adjustment to their interest
rate risk component as calculated by the OTS, or to request to use their own
models to calculate their interest rate component. The OTS also indicated that
it will delay invoking its interest rate risk rule requiring institutions with
above normal interest rate risk exposure to adjust their regulatory capital
requirement until new procedures are implemented and evaluated. The OTS has not
yet established an effective date for the capital deduction. In any event,
management of the Bank does not believe that the OTS' adoption of an interest
rate risk component to the risk-based capital requirement will adversely affect
the Bank's regulatory capital position.
PROMPT CORRECTIVE ACTION. Under Section 38 of the FDIA, as amended by the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), each
federal banking agency was required to implement a system of prompt corrective
action for institutions which it regulates. The federal banking agencies,
including the OTS, adopted substantially similar regulations to implement
Section 38 of the FDIA, effective as of December 19, 1992. Under the
regulations, an institution is deemed to be (i) "well capitalized" if it has
total risk-based capital of 10.0% or more, has a Tier 1 risk-based capital
ratio of 6.0% or more, has a Tier 1 leverage capital ratio of 5.0% or more, and
is not subject to any order or final capital directive to meet and maintain a
specific capital level for any capital measure, (ii) "adequately capitalized"
if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based
capital ratio of 4.0% or more, and a Tier 1 leverage capital ratio
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<PAGE> 37
of 4.0% or more (3.0% under certain circumstances), and does not meet the
definition of "well capitalized," (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital
ratio that is less than 4.0%, or a Tier 1 leverage capital ratio that is less
than 4.0% (3.0% under certain circumstances), (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier 1 risk-based capital ratio that is less than 3.0%, or a Tier 1
leverage capital ratio that is less than 3.0%, and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%. Section 38 of the FDIA and the regulations
promulgated thereunder also specify circumstances under which a federal banking
agency may reclassify a well capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category (except that the FDIC may not reclassify a significantly
undercapitalized institution as critically undercapitalized).
An institution generally must file a written capital restoration plan which
meets specified requirements with an appropriate federal banking agency within
45 days of the date that the institution receives notice or is deemed to have
notice that it is undercapitalized, significantly undercapitalized or critically
undercapitalized. A federal banking agency must provide the institution with
written notice of approval or disapproval within 60 days after receiving a
capital restoration plan, subject to extensions by the agency.
An institution which is required to submit a capital restoration plan must
concurrently submit a performance guaranty by each company that controls the
institution. Such guaranty shall be limited to the lesser of (i) an amount equal
to 5.0% of the institution's total assets at the time the institution was
notified or deemed to have notice that it was undercapitalized or (ii) the
amount necessary to restore the relevant capital measures of the institution to
the levels required for the institution to be classified as adequately
capitalized. Such a guarantee shall expire after the federal banking agency
notifies the institution that it has remained adequately capitalized for each of
four consecutive calendar quarters. An institution which fails to submit a
written capital restoration plan within the requisite period, including any
required performance guarantee(s), or fails in any material respect to implement
a capital restoration plan, shall be subject to the restrictions in Section 38
of the FDIA which are applicable to significantly undercapitalized institutions.
Immediately upon becoming undercapitalized, an institution shall become
subject to the provisions of Section 38 of the FDIA (i) restricting payment of
capital distributions and management fees, (ii) requiring that the appropriate
federal banking agency monitor the condition of the institution and its efforts
to restore its capital, (iii) requiring submission of a capital restoration
plan, (iv) restricting the growth of the institution's assets and (v) requiring
prior approval of certain expansion proposals. The appropriate federal banking
agency for an undercapitalized institution also may take any number of
discretionary supervisory actions if the agency determines that any of these
actions is necessary to resolve the problems of the institution at the least
possible long-term cost to the deposit insurance fund, subject in certain cases
to specified procedures. These discretionary supervisory actions include
requiring the institution to raise additional capital; restricting transactions
with affiliates; restricting interest rates paid by the institution on deposits;
requiring
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<PAGE> 38
replacement of senior executive officers and directors; restricting the
activities of the institution and its affiliates; requiring divestiture of the
institution or the sale of the institution to a willing purchaser; and any other
supervisory action that the agency deems appropriate. These and additional
mandatory and permissive supervisory actions may be taken with respect to
significantly undercapitalized and critically undercapitalized institutions.
At December 31, 1999, the Bank was deemed a "well capitalized" institution
for purposes of the above regulations and as such was not subject to the above
mentioned restrictions.
SAFETY AND SOUNDNESS. FDICIA requires each federal banking regulatory
agency to prescribe, by regulation or guideline, standards for all insured
depository institutions and depository institution holding companies relating to
(i) internal controls, information systems and audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v)
asset growth; (vi) compensation, fees and benefits; and (vii) such other
operational and managerial standards as the agency determines to be appropriate.
The compensation standards would prohibit employment contracts or other
compensatory arrangements that provide excess compensation, fees or benefits or
could lead to material financial loss. In addition, each federal banking
regulatory agency must prescribe, by regulation or guideline, standards relating
to asset quality, earnings and stock valuation as the agency determines to be
appropriate. On July 10, 1995, the federal banking agencies, including the OTS,
adopted final rules and proposed guidelines concerning standards for safety and
soundness required to be prescribed by regulation pursuant to Section 39 of the
FDIA. In general, the standards relate to (1) operational and managerial
matters; (2) asset quality and earnings; and (3) compensation. The operational
and managerial standards cover (a) internal controls and information systems,
(b) internal audit systems, (c) loan documentation, (d) credit underwriting, (e)
interest rate exposure, (f) asset growth, and (g) compensation, fees and
benefits. Under the proposed asset quality and earnings standards, the Bank
would be required to establish and maintain systems to (i) identify problem
assets and prevent deterioration in those assets, and (ii) evaluate and monitor
earnings and ensure that earnings are sufficient to maintain adequate capital
reserves. Finally, the proposed compensation standard states that compensation
will be considered excessive if it is unreasonable or disproportionate to the
services actually performed by the individual being compensated. If a savings
institution fails to meet any of the standards promulgated by regulation, then
such institution will be required to submit a plan within 30 days to the OTS
specifying the steps it will take to correct the deficiency. In the event that a
savings institution fails to submit or fails in any material respect to
implement a compliance plan within the time allowed by the federal banking
agency, Section 39 of the FDIA provides that the OTS must order the institution
to correct the deficiency and may (1) restrict asset growth; (2) require the
savings institution to increase its ratio of tangible equity to assets; (3)
restrict the rates of interest that the savings institution may pay; or (4) take
any other action that would better carry out the purpose of prompt corrective
action. The Bank believes that it has been and will continue to be in compliance
with each of the standards as they have been adopted by the OTS.
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<PAGE> 39
LIQUIDITY REQUIREMENTS. All savings institutions are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At the present time, the required minimum
liquid asset ratio is 4%. At December 31, 1999, the Company's liquid asset ratio
was 6.34%.
CAPITAL DISTRIBUTIONS. OTS regulations govern capital distributions by
savings institutions, which include cash dividends, stock redemptions or
repurchases, cash-out mergers, interest payments on certain convertible debt and
other transactions charged to the capital account of a savings institution to
make capital distributions. Generally, the regulations create a safe harbor for
specified levels of capital distributions from institutions meeting at least
their minimum capital requirements, so long as such institutions notify the OTS
and receive no objection to the distribution from the OTS. Savings institutions
and distributions that do not qualify for the safe harbor are required to obtain
prior OTS approval before making any capital distributions.
Generally, a savings institution that before and after the proposed
distribution meets or exceeds its fully phased-in capital requirements may make
capital distributions equal to or less than the sum of retained net income for
the current and preceding two calendar years. To the extent that requested
capital distributions exceed the sum of retained net income for the current and
preceding two calendar years, specific OTS approval of the requested capital
distribution is required.
The Bank's retained net income after dividends for the calendar years 1998
and 1999 totaled ($40.8) million. As a result, it is anticipated that any
proposed capital distributions from the Bank during 2000 would require specific
OTS approval prior to the proposed distributions.
LOANS TO ONE BORROWER. FIRREA imposed limitations on the aggregate amount
of loans that a savings institution could make to any one borrower, including
related entities. Under FIRREA, the permissible amount of loans-to-one borrower
now follows the national bank standard for all loans made by savings
institutions, as compared to the pre-FIRREA rule that applied that standard only
to commercial loans made by federally chartered savings institutions. The
regulations promulgated pursuant to FIRREA generally do not permit loans-to-one
borrower to exceed the greater of $0.5 million, or 15% of unimpaired capital and
surplus. Loans in an amount equal to an additional 10% of unimpaired capital and
surplus also may be made to a borrower if the loans are fully secured by readily
marketable securities.
BRANCHING BY FEDERAL SAVINGS INSTITUTIONS. Effective May 11, 1992, the OTS
amended its Policy Statement on Branching by Federal Savings Institutions to
permit interstate branching to the full extent permitted by statute (which is
essentially unlimited). Prior policy permitted interstate branching for federal
savings institutions only to the extent allowed for state-chartered institutions
in the states where the institution's home office is located and where the
branch is sought. Prior
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<PAGE> 40
policy also permitted healthy out-of-state federal institutions to branch into
another state, regardless of the law in that state, provided the branch office
was the result of a purchase of an institution that was in danger of default.
Generally, federal law prohibits federal savings institutions from
establishing, retaining or operating a branch outside the state in which the
federal institution has its home office unless the institution meets the IRS's
domestic building and loan test (generally, 60% of a thrift's assets must be
housing-related) ("IRS Test"). The IRS Test requirement does not apply if: (i)
the branch(es) result(s) from an emergency acquisition of a troubled savings
institution (however, if the troubled savings institution is acquired by a bank
holding company, does not have its home office in the state of the bank holding
company bank subsidiary and does not qualify under the IRS Test, its branching
is limited to the branching laws for state-chartered banks in the state where
the savings institution is located); (ii) the law of the state where the branch
would be located would permit the branch to be established if the federal
savings institution were chartered by the state in which its home office is
located; or (iii) the branch was operated lawfully as a branch under state law
prior to the savings institution's conversion to a federal charter.
Furthermore, the OTS will evaluate a branching applicant's record of
compliance with the Community Reinvestment Act of 1977 ("CRA"). An
unsatisfactory CRA record may be the basis for denial of a branching
application.
QUALIFIED THRIFT LENDER TEST ("QTL"). All savings institutions are required
to meet the QTL test set forth in Section 10(m) of the HOLA and regulations of
the OTS thereunder to avoid certain restrictions on their operations. A savings
institution that does not meet the QTL test set forth in the HOLA and
implementing regulations must either convert to a bank charter or comply with
the following restrictions on its operations: (i) the institution may not engage
in any new activity or make any new investment, directly or indirectly, unless
such activity or investment is permissible for a national bank; (ii) the
branching powers of the institution shall be restricted to those of a national
bank; (iii) the institution shall not be eligible to obtain any advances from
its FHLB; and (iv) payment of dividends by the institution shall be subject to
the rules regarding payment of dividends by a national bank. Upon the expiration
of three years from the date the savings institution ceases to be a QTL, it must
cease any activity and not retain any investment not permissible for a national
bank and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations).
A savings institution is a QTL if (i) it qualifies as a domestic building
and loan association under Section 7701(a)(19) of the Internal Revenue Code
(which generally requires that at least 60% of the institution's assets
constitute housing-related and other qualifying assets) or (ii) at least 65% of
the institution's "portfolio assets" (as defined) consist of certain housing and
consumer-related assets on a monthly average basis in at least nine out of every
12 months. At December 31, 1999, the qualified thrift investments of the Bank
were approximately 100% of its portfolio assets.
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<PAGE> 41
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of
Pittsburgh, which is one of 12 regional FHLBs that administers the home
financing credit function of savings institutions. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Pittsburgh in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At December 31, 1999, the Bank had $18 million in
FHLB stock, which was in compliance with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. These contributions also could have an adverse effect on the
value of FHLB stock in the future. For the year ended December 31, 1999,
dividends paid by the FHLB of Pittsburgh to the Bank amounted to $1.2 million,
compared to $1.1 million for the year ended December 31, 1998.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all depository
institutions to maintain reserves against their transaction accounts (primarily
NOW and Super NOW checking accounts). As of December 31, 1999, no reserves were
required to be maintained on the first $5.0 million of transaction accounts,
reserves of 3% were required to be maintained against the next $44.3 million of
net transaction accounts (with such dollar amounts subject to adjustment by the
Federal Reserve Board), and a reserve of 10% (which is subject to adjustment by
the Federal Reserve Board to a level between 8% and 14%) against all remaining
net transaction accounts. Because required reserves must be maintained in the
form of vault cash or a noninterest-bearing account at a Federal Reserve Bank,
the effect of this reserve requirement is to reduce an institution's earning
assets.
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<PAGE> 42
ITEM 2. PROPERTIES
OFFICE AND PROPERTIES
At December 31, 1999, the Bank conducted business from its corporate
offices in Norristown, Pennsylvania and 60 full-service offices, including 20
supermarket branches, located in southeast Pennsylvania.
The following table sets forth certain information relating to the Bank's
offices at December 31, 1999.
<TABLE>
<CAPTION>
Net Book Value of
Property and
(in thousands) Leasehold
Lease Improvements at
Owned or Expiration December 31, Deposits at
Location Leased Date 1999(1) December 31, 1999
- ------------------------------------- ---------------- ------------------ ------------------------------ -------------------
<S> <C> <C> <C> <C>
CORPORATE HEADQUARTERS:
- -----------------------
NORRISTOWN: Leased 02/12 $1,647 $14,473
2 West Lafayette Street
Norristown, PA 19401
TRADITIONAL FULL-SERVICE OFFICES:
- ---------------------------------
NORRISTOWN: Leased 02/12 134 31,234
2 West Lafayette Street
Norristown, PA 19401
TRAPPE: Leased 10/10 169 32,358
Trappe Shopping Center
130 West Main Street, Suite 158
Trappe, PA 19426
KING OF PRUSSIA: Leased 09/03 118 39,341
DeKalb Plaza Shopping Center
338 West DeKalb Pike
King of Prussia, PA 19406
PARK RIDGE: Leased 01/03 -- 73,960
Park Ridge Shopping Center
2701 West Main Street
Norristown, PA 19403
EAST NORRITON: Leased 05/19 851 71,494
East Norriton Crossing
5 West Germantown Pike
Norristown, PA 19401
AUDUBON: Leased 08/03 20 39,903
Audubon Village Shopping Center
2806 Audubon Village Drive
Norristown, PA 19403
</TABLE>
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<PAGE> 43
<TABLE>
<CAPTION>
Net Book Value of
Property and
(in thousands) Leasehold
Lease Improvements at
Owned or Expiration December 31, Deposits at
Location Leased Date 1999(1) December 31, 1999
- ------------------------------------- ---------------- ------------------ ------------------------------ -------------------
<S> <C> <C> <C> <C>
NEWTOWN SQUARE: Owned -- $305 $40,140
3531 West Chester Pike
Newtown Square, PA 19073
FRANKFORD AVENUE: Owned -- 328 52,931
7149 Frankford Avenue
Philadelphia, PA 19135
CASTOR AVENUE: Owned -- 160 45,996
6537 Castor Avenue
Philadelphia, PA 19149
PENNDEL: Owned -- 119 25,358
U.S. # 1 & Durham Road
Penndel, PA 19047
WELSH ROAD: Owned -- 134 47,608
2501 Welsh Road
Philadelphia, PA 19114
GLENSIDE: Owned -- 299 71,495
139 South Easton Road
Glenside, PA 19038
WESTTOWN: Leased 08/04 -- 32,098
Marketplace Shopping Center
1502 West Chester Pike
West Chester, PA 19382
KENNETT SQUARE: Leased 12/03 131 25,541
New Garden Center
345 Scarlett Road
Kennett Square, PA 19348
WEST GROVE: Owned -- 123 17,888
106 West Evergreen Street
West Grove, PA 19390
WAYNE: Leased 08/01 -- 23,049
Chesterbrook Village Center
500 Chesterbrook Boulevard, Suite B-5
Wayne, PA 19087
PAUL'S RUN: Leased 12/00 -- 2,598
9896 Bustleton Ave.
Philadelphia, PA 19115
LANSDALE: Leased 06/04 10 48,787
521 West Main Street
Lansdale, PA 19446
</TABLE>
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<PAGE> 44
<TABLE>
<CAPTION>
Net Book Value of
Property and
(in thousands) Leasehold
Lease Improvements at
Owned or Expiration December 31, Deposits at
Location Leased Date 1999(1) December 31, 1999
- ------------------------------------- ---------------- ------------------ ------------------------------ -------------------
<S> <C> <C> <C> <C>
HILLCREST: Leased 07/02 $ -- $28,289
Hillcrest Shopping Center
638 East Main Street
Lansdale, PA 19446
SUMNEY FORGE: Leased 07/04 -- 33,415
Sumney Forge Square
1601 Valley Forge Road
Lansdale, PA 19446
SOUDERTON: Owned -- 192 16,706
705 Route 113
Souderton, PA 18964
CONSHOHOCKEN: Leased 10/09 223 78,060
Plymouth Square Shopping Center
200 West Ridge Pike, Suite 108
Conshohocken, PA 19428
PHOENIXVILLE: Leased 07/11 394 18,718
Maple Lawn Village Center
510 Kimberton Road
Phoenixville, PA 19460
ROYERSFORD: Leased 01/16 291 6,046
Limerick Square
70 Buckwalter Road, Suite 650
Royersford, PA 19468
PROTESTANT HOME: Leased 03/04 2 6,053
6500 Tabor Road
Philadelphia, PA 19135
TACONY: Leased 02/02 -- 52,776
6958 Torresdale Avenue
Philadelphia, PA 19135
HOLMESBURG: Leased 07/00 6 35,163
8729 Frankford Avenue
Philadelphia, PA 19136
ACADEMY: Leased 02/02 4 29,904
3292 Red Lion Road
Philadelphia, PA 19114
MAYFAIR: Owned -- 318 22,633
7425 Frankford Avenue
Philadelphia, PA 19136
5TH & PENN STREETS: Owned -- 1,069 38,209
445 Penn Street
Reading, PA 19601
</TABLE>
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<PAGE> 45
<TABLE>
<CAPTION>
Net Book Value of
Property and
(in thousands) Leasehold
Lease Improvements at
Owned or Expiration December 31, Deposits at
Location Leased Date 1999(1) December 31, 1999
- ------------------------------------- ---------------- ------------------ ------------------------------ -------------------
<S> <C> <C> <C> <C>
9TH & SPRING STREETS: Owned -- $390 $27,821
956 North Ninth Street
Reading, PA 19604
LANCASTER AVENUE: Leased 12/04 -- 39,500
830 Lancaster Avenue
Reading, PA 19607
MOHNTON: Owned -- 446 23,041
14 West Wyomissing Avenue
Mohnton, PA 19540
TEMPLE: Owned -- 311 42,991
4950 Kutztown Road
Temple, PA 19560
RIVERSIDE: Owned -- 319 30,226
2040 Centre Avenue
Reading, PA 19605
HEIDELBERG: Leased 06/07 66 25,155
4641 Penn Avenue
Sinking Spring, PA 19608
KUTZTOWN: Owned -- 266 20,706
601 East Main Street
Kutztown, PA 19530
EXETER: Leased 03/05 10 37,767
4215 Perkiomen Avenue
Reading, PA 19606
BIRDSBORO: Leased 09/01 12 16,582
350 West Main Street
Birdsboro, PA 19508
WYOMISSING: Leased 03/01 2 1,895
320 Abington Drive
Wyomissing, PA 19610
</TABLE>
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<PAGE> 46
<TABLE>
<CAPTION>
Net Book Value of
Property and
(in thousands) Leasehold
Lease Improvements at
Owned or Expiration December 31, Deposits at
Location Leased Date 1999(1) December 31, 1999
- ------------------------------------- ---------------- ------------------ ------------------------------ -------------------
<S> <C> <C> <C> <C>
SUPERMARKET BRANCHES:
REDNER'S COLLEGEVILLE: Leased 01/10 $ -- $7,524
Redner's Warehouse Market
Marketplace at Collegeville
201 Second Avenue, Suite 100
Collegeville, PA 19426
GIANT-WHITEHALL: Leased 11/04 -- 6,557
MacArthur Towne Centre
2540 MacArthur Road, Suite 200
Whitehall, PA 18052
GIANT-FAIRLESS HILLS: Leased 01/05 -- 11,289
Fairless Hills Shopping Center
473 Oxford Road South
Fairless Hills, PA 19030
GIANT-SINKING SPRING: Leased 06/00 18 6,957
Spring Towne Center
2643 Shillington Road
Sinking Spring, PA 19608
GIANT-ALDEN: Leased 12/01 69 6,708
Providence Village
543 North Oak Avenue
Alden, PA 19018
GIANT-BLUE BELL: Leased 07/05 17 12,219
The Shoppes at Blue Bell
1760 DeKalb Pike
Blue Bell, PA 19422
GIANT-TREXLERTOWN: Leased 03/01 -- 6,566
Trexler Mall
6900 Hamilton Boulevard, PO Box 977
Trexlertown, PA 18087
GIANT-HORSHAM: Leased 06/02 66 3,890
Horsham Point Shopping Center
314 Horsham Road, Unit A
Horsham, PA 19044
GIANT-SOUTHAMPTON: Leased 02/02 70 6,132
Southampton Shopping Center
466 A Second Street Pike
Southampton, PA 18966
GIANT-TROOPER: Leased 03/01 45 7,533
Audubon Square Shopping Center
2668 Egypt Road
Norristown, PA 19403
</TABLE>
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<PAGE> 47
<TABLE>
<CAPTION>
Net Book Value of
Property and
(in thousands) Leasehold
Lease Improvements at
Owned or Expiration December 31, Deposits at
Location Leased Date 1999(1) December 31, 1999
- ------------------------------------- ---------------- ------------------ ------------------------------ -------------------
<S> <C> <C> <C> <C>
REDNER'S-DOYLESTOWN: Leased 09/10 $24 $6,089
Doylestown Pointe
1661 Easton Road, Suite 2
Warrington, PA 18976
GUINTA'S THRIFTWAY: Leased 02/10 7 9,295
Bradford Plaza
700 Downingtown Pike, Suite 130
West Chester, PA 19380
CLEMENS-EXTON: Leased 06/10 12 5,976
Lionville Shopping Center
170 Eagleview Boulevard
Exton, PA 19341
WEIS-POTTSTOWN: Leased 07/10 21 5,375
The Pottstown Center
223 Shoemaker Road
Pottstown, PA 19464
THRIFTWAY-PORT RICHMOND: Leased 09/10 29 10,703
Port Richmond Village
2497 Aramingo Avenue, Suite 2
Philadelphia, PA 19125
SHOPRITE-FAR NORTHEAST: Leased 09/11 71 11,328
Boulevard Plaza
11000 Roosevelt Boulevard
Philadelphia, PA 19116
SUPERFRESH-COTTMAN : Leased 04/02 89 5,973
Cottman & Bustleton Center
2151 Cottman Avenue
Philadelphia, PA 19149
GIANT-WARMINSTER: Leased 06/03 171 2,252
Cedar Pointe Plaza
720-D West Street Road
Warminster, PA 18974
SPRING HOUSE CLEMENS: Leased 11/03 168 1,374
Spring House Center/Clemens Market
563 Village Center, Suite - A
Spring House, PA 19477
SHOPRITE-OXFORD: Leased 11/03 173 2,098
Lawndale Plaza
6301 Oxford Avenue
Philadelphia, PA 19111
</TABLE>
- -------------------------
(1) Does not include furniture, fixtures and equipment.
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<PAGE> 48
The following table sets forth certain information relating to ComNet's offices
at December 31, 1999.
<TABLE>
<CAPTION>
Location Year Opened Owned or Leased Lease Expiration Date
------------------------------------------- ------------------------ -------------------------- ----------------------------
<S> <C> <C> <C>
HORSHAM, PENNSYLVANIA: 1988 Leased 03/01
Horsham Business Center
300 Welsh Road, Building #4 Suite 150
Horsham, PA 19044
MOUNT LAUREL, NEW JERSEY: 1988 Leased 03/01
533 Fellowship Road, Suite 250
Mount Laurel, NJ 08054
SKILLMAN, NEW JERSEY 1999 Leased 08/00
1330 Rt. 206
Skillman, NJ 08558
READING, PENNSYLVANIA: 1997 Owned --
Commonwealth Bank Center
10 North Fifth Street
Reading, PA 19601
FAIRFAX, VIRGINIA: 1998 Leased 04/03
10400 Easton Plaza, Suite 103
Fairfax, VA 22030
PIKESVILLE, MARYLAND: 1999 Leased 05/03
25 Hooks Lane, Suite 200
Baltimore, MD 21208
NORRISTOWN, PENNSYLVANIA: 1999 Leased 10/01
2947 Swede Road
Norristown, PA 19401
BETHESDA, MARYLAND: (2) 1997 Leased 09/01
4915 St. Elmo Avenue, Suite 205
Bethesda, MD 21236
MILLERSVILLE, MARYLAND: (2) 1997 Leased 08/03
1120 Benfield Boulevard, Suite A
Millersville, MD 21108
BALTIMORE, MARYLAND: (2) 1997 Leased 02/00
7939 Honeygo Boulevard
Building #3, Suite # 224
Millersville, MD 21236
</TABLE>
- -----------------------------
(2) Operate under the trade name of Homestead Mortgage.
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<PAGE> 49
ITEM 3. LEGAL PROCEEDINGS.
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.
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<PAGE> 50
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.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
Not Applicable
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<PAGE> 51
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required herein is incorporated by reference from page 59
of the Company's 1999 Annual Report to Stockholders ("1999 Annual Report").
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from page 12
of the 1999 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required herein is incorporated by reference from pages 13
to 28 of the 1999 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required herein is incorporated by reference from pages 22
to 25 of the 1999 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from pages 32
to 58 of the 1999 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
-50-
<PAGE> 52
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required herein is incorporated by reference from the
definitive proxy statement of the Company for the 2000 Annual Meeting of
Stockholders to be filed with the Commission ("Definitive Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from the
Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required herein is incorporated by reference from the
Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from the
Definitive Proxy Statement.
-51-
<PAGE> 53
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS PART OF THIS REPORT.
(1) The following financial statements are incorporated by reference from Item 8
hereof (see Exhibit 13):
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for the years ended December 31, 1999,
1998 and 1997
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
(2) All schedules for which provision is made in the applicable accounting
regulation of the Commission are omitted because of the absence of
conditions under which they are required or because the required
information is included in the financial statements and related notes
thereto.
(3) The following exhibits are filed as part of this Form 10-K and this list
includes the Exhibit Index.
Exhibit Index
- -------------
<TABLE>
<CAPTION>
Location
--------
<S> <C> <C>
3.1 Articles of Incorporation of Commonwealth Bancorp, Inc. (1)
3.2 Bylaws of Commonwealth Bancorp, Inc. (1)
4.1 Form of Stock Certificate of Commonwealth Bancorp, Inc. (1)
10.1 1993 Amended Stock Incentive Plan** (2)
10.2 1993 Amended Directors' Stock Option Plan** (2)
10.3 1993 Amended Management Recognition Plan for Officers** (2)
10.4 1993 Amended Management Recognition Plan for Directors** (2)
10.5 1996 Amended Stock Option Plan** (2)
10.6 1996 Amended Recognition and Retention Plan** (2)
10.7 Employee Stock Ownership Plan and Trust** (1)
</TABLE>
-52-
<PAGE> 54
<TABLE>
<S> <C> <C>
10.8 Employment Agreements between Commonwealth Bancorp
and Commonwealth Bank and Charles H. Meacham** (4)
10.9 Employment Agreements between Commonwealth Bancorp
and Commonwealth Bank and Patrick J. Ward** (4)
10.10 Employment Agreements between Commonwealth Bancorp
and Commonwealth Bank and Charles M. Johnston** (4)
10.11 Employment Agreement between Commonwealth Bank and William J. Monnich** (4)
10.12 Employment Agreement between Commonwealth Bank and Peter A. Kehoe** (4)
10.13 Employment Agreement between Commonwealth Bank and David K. Griest** (4)
10.14 Employment Agreement between Commonwealth Bank and Brian C. Zwaan** (4)
10.15 Excess Benefit Plan of Commonwealth Bank** (3)
10.16 Supplemental Executive Retirement Plan of Commonwealth Bank** (3)
10.17 Directors' Stock Retainer Plan** (5)
10.18 2000 Incentive Stock Option Plan** (6)
13.0 1999 Annual Report to Stockholders *
22.0 Subsidiaries of the Registrant - Reference is made to
"Item 1. Business - Subsidiaries" for the required information -
23.0 Consent of Independent Public Accountants *
27.0 Financial Data Schedule *
</TABLE>
- ----------
* Filed hereto
** Management contract or compensatory plan or arrangement.
(1) Incorporated herein by reference from the Company's Registration Statement
on Form S-1 filed with the Commission on December 18, 1995, as amended.
(2) Incorporated herein by reference from the Company's Quarterly Report on
Form 10-Q for the three months ended March 31, 1998 filed with the
Commission on May 14, 1998.
(3) Incorporated herein by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1997 filed with the Commission on
March 18, 1998.
(4) Incorporated herein by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1998 filed with the Commission on
March 17, 1999.
(5) Incorporated herein by reference from the Company's Registration Statement
on Form S-8 filed with the Commission on April 22, 1999.
(6) Incorporated by reference from the Company's Definitive Proxy Statement
dated March 17, 2000, filed with the commission.
-53-
<PAGE> 55
(b) REPORTS ON FORM 8-K.
On October 21, 1999, the Company filed a Current Report on Form 8-K to
report under Item 5, its earnings for the third quarter of 1999. On December 23,
1999, the Company filed a Current Report on Form 8-K to report under Item 5, its
declared cash dividend. On January 20, 2000, the Company filed a Current Report
on Form 8-K to report under Item 5, its earnings for the fourth quarter of 1999.
On February 1, 2000, the Company filed a Current Report on Form 8-K to report
under Item 5, the acquisition of certain business interests of the Tyler Group.
On March 8, 2000, the Company filed a Current Report on Form 8-K to report under
Item 5, the completion of its previously announced stock repurchase program.
-54-
<PAGE> 56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMMONWEALTH BANCORP, INC.
By: /s/ Charles H. Meacham
----------------------
Charles H. Meacham
Chairman of the Board,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Charles H. Meacham March 14, 2000
- -----------------------------
Charles H. Meacham
Chairman of the Board,
Chief Executive Officer
(principal executive officer)
/s/ Patrick J. Ward March 14, 2000
- -----------------------------
Patrick J. Ward
President, Chief
Operating Officer
/s/ Charles M. Johnston March 14, 2000
- -----------------------
Charles M. Johnston
Senior Vice President, Chief
Financial Officer
(principal financial and
accounting officer)
-55-
<PAGE> 57
/s/ George C. Beyer, Jr. March 14, 2000
- ------------------------
George C. Beyer, Jr.
Director
/s/ Joseph E. Colen, Jr. March 14, 2000
- -------------------------
Joseph E. Colen, Jr.
Director
/s/ Joanne Harmelin March 14, 2000
- -------------------
Joanne Harmelin
Director
/s/ Michael T. Kennedy March 14, 2000
- -----------------------
Michael T. Kennedy
Director
/s/ Martin E. Kenney, Jr. March 14, 2000
- --------------------------
Martin E. Kenney, Jr.
Director
/s/ Harry P. Mirabile March 14, 2000
- ----------------------
Harry P. Mirabile
Director
-56-
<PAGE> 1
ANNUAL REPORT
[LOGO]
1999
COMMONWEALTH
BANCORP, INC.
<PAGE> 2
Table of Contents
- ------------------------------------------------------------------------------
<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>
- ------------------------------------------------------------------------------
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
59
<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
<PAGE> 1
EXHIBIT 23.0
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in the Registration Statements on Form S-8 (Nos. 333-07107, 333-48785
and 333-76785) of our report dated February 7, 2000 incorporated by reference in
Commonwealth Bancorp, Inc.'s Form 10-K for the year ended December 31, 1999.
/s/ Arthur Andersen LLP
Philadelphia, Pennsylvania
March 14, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 54,677
<INT-BEARING-DEPOSITS> 3,499
<FED-FUNDS-SOLD> 3,575
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 289,504
<INVESTMENTS-CARRYING> 93,674
<INVESTMENTS-MARKET> 92,965
<LOANS> 1,371,908
<ALLOWANCE> 10,478
<TOTAL-ASSETS> 1,922,396
<DEPOSITS> 1,513,072
<SHORT-TERM> 125,076
<LIABILITIES-OTHER> 20,883
<LONG-TERM> 111,000
0
0
<COMMON> 19,756
<OTHER-SE> 132,609
<TOTAL-LIABILITIES-AND-EQUITY> 1,922,396
<INTEREST-LOAN> 105,371
<INTEREST-INVEST> 9,934
<INTEREST-OTHER> 25,467
<INTEREST-TOTAL> 140,772
<INTEREST-DEPOSIT> 52,989
<INTEREST-EXPENSE> 70,159
<INTEREST-INCOME-NET> 70,613
<LOAN-LOSSES> 4,000
<SECURITIES-GAINS> (250)
<EXPENSE-OTHER> 73,264
<INCOME-PRETAX> 23,476
<INCOME-PRE-EXTRAORDINARY> 23,476
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,668
<EPS-BASIC> 1.37
<EPS-DILUTED> 1.32
<YIELD-ACTUAL> 7.30
<LOANS-NON> 7,779
<LOANS-PAST> 0
<LOANS-TROUBLED> 923
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,589
<CHARGE-OFFS> 3,672
<RECOVERIES> 561
<ALLOWANCE-CLOSE> 10,478
<ALLOWANCE-DOMESTIC> 10,478
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
