<PAGE> 1
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended.....................................June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from............... to ......................
Commission File No..............................................0-27942
Commonwealth Bancorp, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2828883
------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Commonwealth Bank Plaza
2 West Lafayette Street
Norristown, Pennsylvania 19401-4758
------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(610) 251-1600
--------------
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 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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: As of August 7,
1997, there were 17,993,750 issued and 17,044,650 outstanding shares of the
Registrant's Common Stock.
1
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Commonwealth Bancorp, Inc. and Subsidiaries
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
No. No.
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<S> <C> <C>
PART I - CONSOLIDATED FINANCIAL INFORMATION
1 Consolidated Financial Statements
Consolidated Balance Sheets at June 30, 1997 and December 31, 1996 3
Consolidated Statements of Income for the Quarter and Six Month
Periods Ended June 30, 1997 and 1996 4
Consolidated Statements of Changes in Shareholders' Equity for the Six Month
Periods Ended June 30, 1997 and 1996 5
Consolidated Statements of Cash Flows for the Six Month
Periods Ended June 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 8
2 Management's Discussion and Analysis of Financial Condition and Results of
Operations 11
PART II - OTHER INFORMATION
1 Legal Proceedings 24
2 Changes in Securities 24
3 Default Upon Senior Securities 24
4 Submission of Matters to a Vote of Security Holders 24
5 Other Information 24
6 Exhibits and Reports on Form 8-K 25
</TABLE>
2
<PAGE> 3
Commonwealth Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- ------------
Assets: (Unaudited)
<S> <C> <C>
Cash and due from banks $ 47,162 $ 39,268
Interest-bearing deposits - 15,111
Short-term investments available for sale 1,069 5,723
Mortgage loans held for sale 37,771 17,335
Investment securities
Securities available for sale (cost of $82,340
and $53,815, respectively), at market value 82,545 53,935
Mortgage-backed securities
Securities held to maturity (market value of $219,601
and $239,447, respectively), at cost 217,810 237,743
Securities available for sale (cost of $590,800
and $511,833, respectively), at market value 592,884 514,964
Loans receivable, net 1,188,511 1,113,114
Accrued interest receivable, net 14,016 13,339
FHLB stock, at cost 14,175 11,159
Premises and equipment, net 16,072 25,369
Intangible assets 48,078 51,220
Mortgage servicing rights 7,738 7,677
Other assets, including net deferred taxes of $1,488 and
$1,144, respectively 21,155 14,004
----------- -----------
Total assets $2,288,986 $2,119,961
=========== ===========
Liabilities:
Deposits $1,518,915 $1,491,450
Notes payable and other borrowings:
Secured notes due to Federal Home Loan Bank of Pittsburgh 234,000 175,000
Securities sold under agreements to repurchase 238,572 176,674
Advances from borrowers for taxes and insurance 34,672 23,883
Accrued interest payable, accrued expenses and other liabilities 42,422 21,030
----------- -----------
Total liabilities 2,068,581 1,888,037
----------- -----------
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;
17,993,315 shares issued and 17,095,715 outstanding at June 30, 1997;
17,953,613 shares issued and outstanding at December 31, 1996 1,800 1,795
Additional paid-in capital 133,015 132,931
Retained earnings 111,731 105,577
Unearned stock benefit plan compensation (13,885) (10,510)
Unrealized gain on marketable securities, net 1,511 2,131
Treasury stock, at cost; 897,600 shares at June 30, 1997 (13,767) -
----------- -----------
Total shareholders' equity 220,405 231,924
----------- -----------
Total liabilities and shareholders' equity $2,288,986 $2,119,961
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 4
Commonwealth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands, except share amounts)
<TABLE>
<CAPTION>
For the Quarter For the Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
----------- ---------- ----------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $23,049 $17,315 $45,104 $33,695
Interest and dividends on deposits and money
market investments 589 787 1,154 1,388
Interest on investment securities 1,234 781 2,248 1,503
Interest on mortgage-backed securities 14,246 10,401 28,067 19,371
----------- ---------- ----------- ----------
Total interest income 39,118 29,284 76,573 55,957
Interest expense:
Interest on deposits 14,511 10,965 28,426 21,505
Interest on notes payable and other borrowings 6,693 4,175 12,385 7,925
----------- ---------- ----------- ----------
Total interest expense 21,204 15,140 40,811 29,430
----------- ---------- ----------- ----------
Net interest income 17,914 14,144 35,762 26,527
Provision for loan losses 300 100 600 100
----------- ---------- ----------- ----------
Net interest income after provision for loan losses 17,614 14,044 35,162 26,427
Noninterest income:
Deposit fees and related income 1,763 1,134 3,297 2,206
Servicing fees 1,124 1,461 2,326 2,627
Net gain on sales of mortgage loans 913 126 1,632 998
Net loss on sales of securities (175) - (175) -
Net loss on sales of foreclosed real estate (32) (71) (101) (126)
Other 368 365 2,350 715
----------- ---------- ----------- ----------
Total noninterest income 3,961 3,015 9,329 6,420
----------- ---------- ----------- ----------
Noninterest expense:
Compensation and employee benefits 7,883 5,944 15,821 11,666
Occupancy and office operations 2,594 1,984 5,021 3,931
FDIC premium 197 648 166 1,261
Advertising and promotion 464 419 882 736
Amortization of intangible assets 1,578 564 3,156 1,137
Other 3,399 2,625 6,796 5,151
----------- ---------- ----------- ----------
Total noninterest expense 16,115 12,184 31,842 23,882
----------- ---------- ----------- ----------
Income before income taxes 5,460 4,875 12,649 8,965
Income tax provision 1,780 1,706 4,299 3,158
----------- ---------- ----------- ----------
Net income $3,680 $3,169 $8,350 $5,807
=========== ========== =========== ==========
Weighted average number of shares outstanding 16,068,527 9,695,017 16,311,200 8,862,186
=========== ========== =========== ==========
Earnings per share $0.23 $0.33 $0.51 $0.66
=========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 5
Commonwealth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Unearned
Common Additional Stock
Shares Common Paid-in Retained Benefit Plan
Outstanding Stock Capital Earnings Compensation
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fiscal 1996
- -----------
Balance at December 31, 1995 8,629 $ 863 $ 36,686 $ 99,165 ($2,337)
Net income 5,807
Dividends (936)
Release of ESOP shares (a) 183 362
Amortization of unearned compensation 132
Exercise of stock options 13 1 131
Decrease in unrealized gain on marketable
securities, net of tax
Issuance and exchange of common
stock as a result of the
conversion/reorganization (b) 9,311 931 95,891 (7,898)(c)
Assets consolidated from Commonwealth
Mutual Holding Company 100
------------------------------------------------------------------
Balance at June 30, 1996 17,953 $1,795 $132,891 $104,136 ($9,741)
==================================================================
Fiscal 1997
- -----------
Balance at December 31, 1996 17,954 $1,795 $132,931 $105,577 ($10,510)
Net income 8,350
Dividends (2,196)
Release of ESOP shares (d) 331 461
Amortization of unearned compensation 659
Exercise of stock options 82 9 387
Cash in lieu of fractional shares (2) (21)
Stock retired (40) (4) (613)
Decrease in unrealized gain on marketable
securities, net of tax
Common stock acquired by stock benefit plans (4,495)
Purchase of Treasury stock (898)
------------------------------------------------------------------
Balance at June 30, 1997 17,096 $1,800 $133,015 $111,731 ($13,885)
==================================================================
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Gain/(Loss)
On Marketable Treasury
Securities, net Stock Total
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fiscal 1996
- -----------
Balance at December 31, 1995 $2,659 - $137,036
Net income 5,807
Dividends (936)
Release of ESOP shares (a) 545
Amortization of unearned compensation 132
Exercise of stock options 132
Decrease in unrealized gain on marketable
securities, net of tax (4,219) (4,219)
Issuance and exchange of common
stock as a result of the
conversion/reorganization (b) 88,924
Assets consolidated from Commonwealth
Mutual Holding Company 100
----------------------------------
Balance at June 30, 1996 ($1,560) - $227,521
==================================
Fiscal 1997
- -----------
Balance at December 31, 1996 $2,131 - $231,924
Net income 8,350
Dividends (2,196)
Release of ESOP shares (d) 792
Amortization of unearned compensation 659
Exercise of stock options 396
Cash in lieu of fractional shares (21)
Stock retired (617)
Decrease in unrealized gain on marketable
securities, net of tax (620) (620)
Common stock acquired by stock benefit plans (4,495)
Purchase of Treasury stock (13,767) (13,767)
----------------------------------
Balance at June 30, 1997 $1,511 ($13,767) $220,405
==================================
</TABLE>
- ----------------------
(a) Pre-conversion shares totaling 11,344 were released during the
quarter ended March 31, 1996; 26,882 post conversion shares
were released during the quarter ended June 30, 1996.
(b) Includes 3,889,598 shares of Commonwealth Bank outstanding at June
14, 1996, converted into 8,080,538 shares of Commonwealth
Bancorp, Inc. based on the 2.0775 exchange ratio; 9,872,155
shares of Commonwealth Bancorp, Inc. sold in the subscription
and community offering; and the cancellation of 4,752,000
shares of Commonwealth Bank previously held by Commonwealth
Mutual Holding Company.
(c) Of the 9,872,155 conversion shares, 8% were purchased by the ESOP.
(d) Post-conversion shares totaling 52,468 were released during the
six months ended June 30, 1997.
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 6
Commonwealth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
1997 1996
---------- ---------
(Unaudited)
<S> <C> <C>
Operating activities:
Net income $8,350 $5,807
Adjustments to reconcile net income to net cash
provided by (used in) operating activities-
Proceeds from loans sold to others 127,827 156,473
Loans originated for sale (130,718) (106,646)
Purchases of loans held for sale (16,695) (51,674)
Principal collection on mortgage loans held for sale 234 1,178
Net gain on sales of mortgage loans (1,632) (998)
Increase in net deferred loan fees 328 366
Provision for loan losses and foreclosed real estate 608 206
Net (gain) loss on sales of assets (1,531) 118
Depreciation and amortization 1,538 1,273
Net amortization of other assets and liabilities 5,104 2,461
Interest reinvested on repurchase agreements (6,620) (3,543)
Changes in assets and liabilities-
(Increase) in-
Accrued interest receivable, net (677) (2,107)
Deferred income taxes (344) (282)
Other assets (8,157) (2,394)
Increase in-
Advances from borrowers for taxes and insurance 10,789 7,715
Accrued interest payable, accrued expenses and other liabilities 21,341 27,706
---------- ---------
Net cash provided by (used in) operating activities $9,745 $35,659
---------- ---------
(continued)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE> 7
Commonwealth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
1997 1996
--------- ---------
(Unaudited)
<S> <C> <C>
Investing activities:
Proceeds from maturities of investment securities $10,000 $18,749
Purchases of investment securities (38,402) (32,894)
Proceeds from sale of mortgage-backed securities 41,770 -
Purchases of mortgage-backed securities (164,692) (348,747)
Principal collected on mortgage-backed securities 63,887 64,469
Principal collected on loans 108,470 64,089
Loans originated (184,144) (39,255)
Loans purchased - (116,802)
Sales of real estate acquired through foreclosure 887 433
Purchase of FHLB Stock (3,016) (5,343)
Purchases of premises and equipment (1,850) (1,917)
Acquisition of Branch - 215,440
Proceeds from sales of assets 11,140 9
--------- ---------
Net cash used in investing activities (155,950) (181,769)
--------- ---------
Financing activities:
Net increase in deposits 27,465 30,583
Proceeds from notes payable and other borrowings 241,815 242,815
Repayment of notes payable and other borrowings (114,297) (182,500)
Net (purchase) issuance of common stock (18,504) 89,056
Cash dividends paid (2,145) (936)
--------- ---------
Net cash provided by financing activities 134,334 179,018
--------- ---------
Net (decrease) increase in cash and cash equivalents (11,871) 32,908
Cash and cash equivalents at beginning of period 60,102 50,177
--------- ---------
Cash and cash equivalents at end of period $48,231 $83,085
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for-
Interest $31,840 $20,821
========= =========
Income taxes $5,273 $3,008
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
7
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Commonwealth Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary for a fair presentation of Commonwealth Bancorp,
Inc.'s ("Commonwealth" or the "Company") financial condition as of June 30,
1997, and the results of operations, changes in shareholders' equity, and cash
flows for the periods presented. The financial data for periods prior to June
14, 1996 is for Commonwealth Bank ("Bank").
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. The
accompanying unaudited consolidated financial statements were prepared in
accordance with the instructions for Form 10-Q. For further information, refer
to the Company's consolidated financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996. Certain items in the 1996 financial statements have been
reclassified in order to conform with the 1997 financial statement
presentation.
The Company is a Pennsylvania corporation which is the holding
company for the Bank. On June 14, 1996, the Company completed an offering of
common stock in connection with the Conversion and Reorganization of
Commonwealth Mutual Holding Company, the former parent company of the Bank,
from the mutual holding company form of ownership to the stock holding company
form ("the Conversion and Reorganization"). Headquartered in Norristown, PA,
Commonwealth Bank has offices located in Berks, Bucks, Chester, Delaware,
Lebanon, Lehigh, Montgomery, and Philadelphia Counties. ComNet Mortgage
Services ("ComNet"), a division of the Bank, has offices in Pennsylvania,
Connecticut, Maryland, New Jersey, and Rhode Island.
2. Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Commonwealth; Commonwealth Bank; Commonwealth Investment
Corporation of Delaware, Inc.; CFSL Investment Corporation; QME, Inc.; and
Firstcor, Ltd. All significant intercompany accounts and transactions have
been eliminated in consolidation.
3. Shareholders' Equity
On June 17, 1997, the Board of Directors declared a $0.07 per share
cash dividend for the three months ended June 30, 1997, which was made payable
to shareholders of record at the close of business on June 27, 1997. This
dividend was paid on July 11, 1997. During the first quarter of 1997, the
Company purchased 0.9 million shares of treasury stock, at an average share
price of $15.34, for an aggregate purchase of $13.8 million.
4. New Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" was issued in 1996 and is effective for 1997. SFAS No. 125
establishes standards for transfers and servicing of financial assets and
extinguishments of liabilities. SFAS No. 127 was also issued in 1996, and
amended SFAS No. 125 by deferring for one year the effective date for certain
provisions of SFAS No. 125. The Company adopted SFAS No. 125, as amended, on
January 1, 1997, with no material impact to the financial statements. In
addition, the Company intends to adopt SFAS No. 127 on January 1, 1998, and
does not anticipate the impact on the financial statements to be material.
8
<PAGE> 9
Commonwealth Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 1997, SFAS No. 128, "Earnings per share," was issued.
This statement specified the computation, presentation, and disclosure
requirements for earnings per share ("EPS"). The main objectives of the
statement were to simplify the EPS calculation and to make EPS comparable on an
international basis. Effective in the 1997 Annual Report, primary and fully
diluted EPS will be replaced by basis and diluted EPS. Prior period results
will be restated. The most significant difference is that basis EPS no longer
assumes potentially dilutive securities in the computation. Calculating EPS
under the new method has no material impact on 1996 or six months ended June
30, 1997 EPS figures.
In 1997, Commonwealth will also adopt SFAS No. 129, "Disclosures of
Information about Capital Structure." This statement was issued in conjunction
with the earnings per share statement discussed above and is intended to
centralize capital structure disclosure requirements and to expand the number
of companies subject to the requirements. Since Commonwealth was in compliance
with the existing capital structure disclosure requirements, the impact on the
Company's financial statements is not expected to be material.
SFAS No. 130, "Reporting Comprehensive Income" was issued in July
1997. SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components. The main objective of the statement
is to report a measure of all changes in equity that result from transactions
and other economic events of the period other than transactions with owners.
The Company intends to adopt SFAS No. 130 on January 1, 1998.
5. Other Information
The deposits of the Bank are insured by either the Savings Association
Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF"), both of which are
administered by the Federal Deposit Insurance Corporation ("FDIC"). The SAIF
and BIF are required by law to attain and maintain a reserve ratio of 1.25% of
insured deposits. As a result of the BIF achieving a fully funded status, the
FDIC promulgated a regulation in November 1995, which reduced deposit premiums
paid by BIF-insured banks in the lowest risk category from 27 basis points to
zero (subject to an annual minimum of $2,000).
On September 30, 1996, legislation was enacted into law to
recapitalize the SAIF through a one-time special assessment on SAIF-insured
deposits as of March 31, 1995. The special assessment amounted to
approximately $0.65 for every $100 of assessable deposits. The 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
$0.06 per $100 of deposits.
The Company is a Pennsylvania corporation which is the holding company
for the Bank. On June 14, 1996, the Company completed an offering of common
stock in connection with the second step Conversion and Reorganization of
Commonwealth Mutual Holding Company, the former parent company of the Bank,
from the mutual holding company form of ownership to the stock holding company
form. In the offering, 9.9 million shares of common stock of the Company were
sold in a subscription and community offering at $10.00 per share. In
addition, 8.1 million shares of common stock of the Company were issued in
exchange for shares of stock of the Bank previously held by public stockholders
at an exchange ratio of 2.0775 shares for each share of Bank common stock,
resulting in 18.0 million shares of common stock of the Company outstanding at
the completion of the Conversion and Reorganization and Stock Offering.
9
<PAGE> 10
Commonwealth Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Earnings Per Share
Earnings per share of common stock were $0.23 in the second quarter of
1997, compared to $0.33 in the second quarter of 1996. Earnings per share of
common stock were $0.51 for the six months ended June 30, 1997, compared to
$0.66 for the six months ended June 30, 1996. The decrease in earnings per
share in the 1997 periods, relative to the 1996 periods, was primarily
attributable to an increase in the number of common shares outstanding after
the completion of the Company's Conversion, Reorganization and Stock Offering
in June 1996. As part of that transaction, former holders of Commonwealth Bank
common stock exchanged each of their shares for 2.0775 shares of Commonwealth
Bancorp, Inc. common stock.
Earnings per share were computed by dividing net income for the
quarter and six months ended June 30, 1997 and 1996 by the weighted average
number of shares of common stock 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. Stock
options are considered common stock equivalents and are included in the
computation of the number of outstanding shares using the treasury stock
method, unless such options are antidilutive. Such average shares outstanding
were 16,068,527 and 9,695,017 for the quarter ended June 30, 1997 and 1996,
respectively. The average shares outstanding were 16,311,200 and 8,862,186 for
the six months ended June 30, 1997 and 1996, respectively. Common shares
outstanding exclude treasury shares.
7. Acquisitions
On June 28, 1996, the Company completed the acquisition of twelve
former branch offices of Meridian Bank located in Berks County (ten offices)
and Lebanon County (two offices), Pennsylvania from CoreStates Bank, (the
"Berks Acquisition"). In connection with this transaction, the Company assumed
approximately $379.7 million of deposits and acquired approximately $122.4
million of single-family residential, commercial, and consumer loans. In
addition, Commonwealth received approximately $3.1 million of real property and
approximately $215.8 million of cash, net of a deposit premium of approximately
$38.4 million. The Company assigned $14.7 million of the cost of the
acquisition to the value of the core deposit intangible asset. The excess of
the cost over the identifiable assets acquired, less liabilities assumed of
$23.7 million, was recorded as goodwill.
On January 31, 1997, Commonwealth Bank, through ComNet, acquired five
mortgage production offices of Homestead Mortgage, Inc. ("Homestead") located
in Maryland and Pennsylvania. These offices originate mortgages in Delaware,
the District of Columbia, Maryland, Pennsylvania, and Virginia. Under the
terms of the transaction, the group will continue to operate under the
Homestead Mortgage name in the District of Columbia, Maryland, and Virginia.
During the first six months of 1997 the Homestead offices originated loans
totaling $71.3 million.
8. Sale of Headquarters Building
On February 18, 1997, the Company completed the sale of its
headquarters building, resulting in an after-tax gain of $1.0 million. The Bank
has relocated its headquarters from Malvern, Pennsylvania to Norristown,
Pennsylvania, which is the county seat of Montgomery County. The move is
anticipated to result in annual cost savings to the Company and provide
increased business opportunities by centering its operations in the county seat
of an economically strong and diverse county.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL. The Company is a Pennsylvania corporation which is the
holding company for the Bank. Commonwealth 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 June 30, 1997, 56 full-service offices located in
southeast Pennsylvania. ComNet Mortgage Services, a division of the Bank,
also located in Norristown, conducts business through loan origination offices
located in Pennsylvania, Connecticut, Maryland, New Jersey, and Rhode Island.
ComNet also conducts business through its wholesale network, which includes
correspondents in 25 states.
On June 14, 1996, the Company completed an offering of common stock in
connection with the second step Conversion and Reorganization of Commonwealth
Mutual Holding Company, the former parent company of the Bank, from the mutual
holding company form of ownership to the stock holding company form. In the
offering, 9.9 million shares of common stock of the Company were sold in a
subscription and community offering at $10.00 per share. In addition, 8.1
million shares of common stock of the Company were issued in exchange for
shares of stock of the Bank previously held by public stockholders at an
exchange ratio of 2.0775 shares for each share of Bank common stock, resulting
in 18.0 million shares of common stock of the Company outstanding at the
completion of the Conversion and Reorganization and Stock Offering.
On June 28, 1996, the Company completed the acquisition of twelve
former branch offices of Meridian Bank located in Berks County (ten offices)
and Lebanon County (two offices), Pennsylvania from CoreStates Bank (the "Berks
Acquisition"). In connection with this transaction, the Company assumed
approximately $379.7 million of deposits and acquired approximately $122.4
million of single-family residential, commercial, and consumer loans. In
addition, Commonwealth received approximately $3.1 million of real property and
approximately $215.8 million of cash, net of a deposit premium of approximately
$38.4 million. The Company assigned $14.7 million of the cost of the
acquisition to the value of the core deposit intangible asset. The excess of
the cost over the identifiable assets acquired, less liabilities assumed of
$23.7 million, was recorded as goodwill.
The deposits of the Bank are insured by either the Savings Association
Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF"), both of which are
administered by the Federal Deposit Insurance Corporation ("FDIC"). The SAIF
and BIF are required by law to attain and maintain a reserve ratio of 1.25% of
insured deposits. As a result of the BIF achieving a fully funded status, the
FDIC promulgated a regulation in November 1995, which reduced deposit premiums
paid by BIF-insured banks in the lowest risk category from 27 basis points to
zero (subject to an annual minimum of $2,000).
On September 30, 1996, legislation was enacted into law to
recapitalize the SAIF through a one-time special assessment on SAIF-insured
deposits as of March 31, 1995. The special assessment amounted to
approximately $0.65 for every $100 of assessable deposits. The 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
$0.06 per $100 of deposits.
On January 31, 1997, Commonwealth Bank, through ComNet, acquired five
mortgage production offices of Homestead Mortgage, Inc. located in Maryland and
Pennsylvania. Also during the first quarter of 1997, Commonwealth completed
the sale of its previous headquarters building in Malvern, Pennsylvania and
relocated to lower-cost facilities in Norristown, Pennsylvania.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
FINANCIAL CONDITION
GENERAL. Total assets increased by $169.0 million, or 8%, from $2.1
billion at December 31, 1996, to $2.3 billion at June 30, 1997. The major
component of this increase were increases in mortgage-backed securities and
loans receivable. Increases in mortgage loans held for sale and investment
securities also contributed to the increase in total assets. These increases
were offset, in part, by a decrease in interest-bearing deposits, short-term
investments available for sale, and premises and equipment. Total liabilities
increased by $180.5 million, or 10%, from $1.9 billion at December 31, 1996, to
$2.1 billion at June 30, 1997. This increase was primarily comprised of
increases in securities sold under agreements to repurchase, secured notes due
to the Federal Home Loan Bank of Pittsburgh ("FHLB"), and deposits.
Shareholders' equity as of June 30, 1997, equaled $220.4 million, compared to
$231.9 million at December 31, 1996. This $11.5 million, or 5%, decrease was
primarily the result of the $13.8 million purchase of 0.9 million shares of
treasury stock, and to the $4.5 million purchase of 0.3 million shares of
common stock for benefit plans, offset, in part, by a $6.2 million, or 6%,
increase in retained earnings.
CASH, INTEREST-BEARING DEPOSITS, AND SHORT-TERM INVESTMENTS. ("CASH
AND CASH EQUIVALENTS") Cash and cash equivalents decreased by $11.9 million,
or 20%, from $60.1 million at December 31, 1996, to $48.2 million at June 30,
1997. The decrease was primarily related to the investment of excess liquidity
in loans receivable.
MORTGAGE LOANS HELD FOR SALE. Mortgage loans held for sale increased
by $20.4 million, or 118%, from $17.3 million at December 31, 1996, to $37.8
million at June 30, 1997. The increase was attributable to an increase in
loans originated during June 1997, primarily as a result of loans closed by
the Homestead mortgage production offices.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
INVESTMENT SECURITIES. Investment securities increased by $28.6
million, or 53%, from $53.9 million at December 31, 1996, to $82.5 million at
June 30, 1997. The increase was primarily the result of purchases of U.S.
Treasury and U.S. Government agency securities and other equity securities,
which further diversify the Company's earning assets. Investments in debt and
equity securities at June 30, 1997 and December 31, 1996, were as follows:
<TABLE>
<CAPTION>
June 30, 1997
--------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury and U.S.
Government agency securities $ 67,977 $ 71 $ 20 $ 68,028
Mortgage Security Mutual Fund 2,288 4 - 2,292
Equity Servicing Partnership 4,819 - - 4,819
Other Equity Investments 7,256 150 - 7,406
--------------------------------------------------------------------
Total $ 82,340 $ 225 $ 20 $ 82,545
====================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury and U.S.
Government agency securities $ 47,963 $ 126 $ - $ 48,089
Mortgage Security Mutual Fund 2,215 - 6 2,209
Equity Servicing Partnership 2,880 - - 2,880
Other Equity Investments 757 - - 757
--------------------------------------------------------------------
Total $ 53,815 $ 126 $ 6 $ 53,935
====================================================================
</TABLE>
Investment securities classified as held to maturity are carried at
amortized cost and are adjusted for amortization of premiums and accretion of
discounts over the life of the related security pursuant to the level-yield
method. Investment securities classified as available for sale are reported at
fair value, with unrealized gains and losses, net of tax, excluded from
earnings and reported as a separate component of shareholders' equity. There
were no investment securities classified as held to maturity at June 30, 1997
and December 31, 1996.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities increased by
$58.0 million, or 8%, from $752.7 million at December 31, 1996, to $810.7
million at June 30, 1997. The increase was attributable to a $59.0 million net
increase in the balance of mortgage-backed securities and a $1.0 million
decrease in the unrealized gain on available for sale mortgage-backed
securities. The increase in mortgage-backed securities during the first six
months of 1997 was related to a strategy to enhance the Company's net interest
income through the purchase of mortgage-backed securities funded through FHLB
advances and repurchase agreements. During the second quarter of 1997, the
Company sold mortgage-backed securities, which were classified as available for
sale, totaling $41.8 million and purchased mortgage-backed securities,
classified as available for sale, totaling $41.9 million. These transactions
resulted in a $0.2 million net loss on the sale of mortgage-backed securities.
The sale was related to a restructuring of the Company's mortgage-backed
securities portfolio, which was undertaken to improve future earnings from the
portfolio.
Mortgage-backed securities generally increase the quality of the
Company's assets by virtue of the insurance or guarantees related to the
securities, are more liquid than individual mortgage loans, and may be used to
collateralize borrowings or other obligations of the Company. At June 30, 1997
and December 31, 1996, $517.1 million, or 64%, and $511.8 million, or 68%,
respectively, of the Company's mortgage-backed securities were insured or
guaranteed by the Government National Mortgage Association ("GNMA"), the
Federal Home Loan Mortgage Corporation ("FHLMC"), or the Federal National
Mortgage Association ("FNMA"). As part of its investment policy, the Company
also has the ability to invest in private mortgage-backed securities. These
non-federally-insured mortgage-backed securities, which are generally rated AA
or better, yield a higher rate of return and involve a higher risk of loss than
comparable mortgage-backed securities issued by the GNMA, FHLMC, or the FNMA,
and serve to further diversity the Company's mortgage-backed securities
portfolio. At June 30, 1997 and December 31, 1996, $293.6 million, or 36%, and
$240.9 million, or 32%, respectively, of the Company's mortgage-backed
securities were private mortgage-backed securities. The following table sets
forth the Company's mortgage-backed securities portfolio at the dates
indicated.
<TABLE>
<CAPTION>
June 30, 1997
--------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Held to maturity:
GNMA $ 82,688 $2,035 $ 256 $ 84,467
FHLMC 48,275 653 36 48,892
FNMA 80,926 585 1,190 80,321
Private 5,921 - - 5,921
--------------------------------------------------------------------
Total $217,810 $3,273 $1,482 $219,601
====================================================================
Available for sale:
GNMA $ 7,384 $ 581 $ - $ 7,965
FHLMC 106,972 2,431 93 109,310
CMO and REMIC 386,055 1,022 1,973 385,104
FNMA 90,389 619 503 90,505
--------------------------------------------------------------------
Total $590,800 $4,653 $2,569 $592,884
====================================================================
</TABLE>
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Held to maturity:
GNMA $ 89,715 $ 1,900 $ 254 $ 91,361
FHLMC 54,162 514 34 54,642
FNMA 87,484 392 814 87,062
Private 6,221 - - 6,221
Other 161 - - 161
--------------------------------------------------------------------
Total $ 237,743 $ 2,806 $1,102 $ 239,447
====================================================================
Available for sale:
GNMA $ 20,343 $ 1,656 $ 312 $ 21,687
FHLMC 116,884 3,038 217 119,705
CMO and REMIC 289,718 858 2,244 288,332
FNMA 84,888 732 380 85,240
--------------------------------------------------------------------
Total $ 511,833 $ 6,284 $3,153 $ 514,964
====================================================================
</TABLE>
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.
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
LOANS RECEIVABLE, NET. Loans receivable, net, increased by $75.4
million during the first six months of 1997 to $1.2 billion at June 30, 1997.
The following table depicts the composition of the Company's loan portfolio at
the dates indicated.
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------------------ -----------------------
% of % of
Amount Total Amount Total
------ ------ ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Mortgage loans - Residential(1) $ 912,467 76.16% $ 857,053 76.37%
Consumer loans:
Equity lines of credit 45,437 3.79 49,136 4.38
Second mortgage 85,165 7.11 77,304 6.89
Other 45,951 3.84 42,867 3.82
--------- ------ ---------- ------
Total consumer loans 176,553 14.74 169,307 15.09
Commercial loans:
SBA variable rate loans(2) 22,231 1.86 25,104 2.24
Commercial real estate 49,556 4.14 35,452 3.15
Business loans 37,163 3.10 35,380 3.15
--------- ------ ---------- ------
Total commercial loans 108,950 9.10 95,936 8.54
--------- ------ ---------- ------
Total loans receivable 1,197,970 100.00% 1,122,296 100.00%
--------- ======= ---------- ======
Less:
Premium on loans purchased (3,101) (3,655)
Allowance for loan losses 9,815 9,971
Deferred loan fees 2,745 2,866
---------- ----------
Loans receivable, net $1,188,511 $1,113,114
========== ==========
</TABLE>
- -------------------------
(1) At June 30, 1997 and December 31, 1996, $593.3 million, or 65%, and
$533.9 million, or 62%, respectively, of the Company's residential
mortgage loans had adjustable interest rates.
(2) Consists entirely of loans (or securities backed by loans) which are
guaranteed by the SBA, with the majority of interest rates adjusting
monthly or quarterly. All such loans or securities were purchased by
the Company.
Loans originated and purchased by ComNet totaled $270.2 million for
the six months ended June 30, 1997, compared to $257.3 million for the six
months ended June 30, 1996. The $13.0 million increase in ComNet's production
was primarily attributable to a $71.3 million increase in mortgage loans
originated through five Homestead mortgage production offices acquired in the
first quarter of 1997, offset, in part, by a decrease in originations generated
through ComNet's Wholesale Lending Department. This Department originates
loans through a network of correspondent brokers in 25 states. All loans are
underwritten using the same criteria as those used for retail originations.
Closed loans relating to ComNet's wholesale network totaled $92.1 million
during the six months ended June 30, 1997, compared to $136.3 million for the
six months ended June 30, 1996.
ComNet's strategy has been to focus on retail originations in those
markets where the Company's local presence gives it a competitive advantage.
Closed loans relating to ComNet's retail network totaled $178.1 million during
the six months ended June 30, 1997, compared to $121.0 million for the six
months ended June 30, 1996.
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
As of June 30, 1997, commercial loans (other than loans guaranteed by
the Small Business Administration ("SBA")) totaled $86.7 million, or 7%, of the
Company's total loan portfolio, as compared to $70.8 million, or 6%, at
December 31, 1996. At June 30, 1997, commercial loans (other than SBA loans)
were comprised of $49.6 million of commercial real estate loans and $37.2
million of business loans. At December 31, 1996, commercial loans (other than
SBA loans) were comprised of $35.5 million of commercial real estate loans and
$35.4 million of business loans. Commercial loans are generally considered to
have a greater risk than residential mortgage loans because the risk of
borrower default is greater, and the collateral is more likely to decline in
value and may be more difficult to liquidate than single-family residences.
NON-PERFORMING ASSETS. The Company's non-performing assets, which
primarily consist of non-accrual loans and real estate acquired through
foreclosure, increased by $2.2 million, or 24%, from $9.1 million at December
31, 1996, to $11.3 million at June 30, 1997. At June 30, 1997, the Company's
$11.3 million of non-performing assets amounted to 0.50% of total assets. At
December 31, 1996, the Company's $9.1 million of non-performing assets amounted
to 0.43% of total assets. The increase in non-performing assets was primarily
related to loans acquired in the Berks Acquisition. The following table sets
forth information relating to the Company's non-performing assets at the dates
indicated.
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -------------------
(Dollars in Thousands)
<S> <C> <C>
Mortgage loans - Residential $ 5,206 $5,240
Consumer loans 1,635 1,335
Commercial loans(1) 3,574 1,483
------ -----
Total non-performing loans 10,415 8,058
Real estate owned, net 927 1,090
------ -----
Total non-performing assets(1) $11,342 $9,148
====== =====
Non-performing loans to total loans held for
investment(1) 0.87% 0.72%
==== ====
Total non-performing assets to total assets(1) 0.50% 0.43%
==== ====
</TABLE>
- -------------------------
(1) Does not include non-performing commercial loans which are fully
guaranteed as to principal and interest by the SBA, which amounted to $1.1
million at both June 30, 1997 and December 31, 1996.
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
ALLOWANCE FOR LOAN LOSSES. The Company's allowance for loan losses
amounted to $9.8 million at June 30, 1997, compared to $10.0 million at
December 31, 1996. It is management's policy to maintain an allowance for
estimated losses on loans based upon an assessment of prior loss experience,
the volume and type of lending conducted by the Company, industry standards,
past due loans, general economic conditions, and other factors related to the
collectability of the loan portfolio. At June 30, 1997, the Company's
allowance for loan losses amounted to 94% of total non-performing loans and
0.82% of total loans held for investment, as compared to 124% of total
non-performing loans and 0.89% of total loans held for investment at December
31, 1996. The Company utilizes these percentages as only one of the factors in
assessing the adequacy of the allowance for loan losses at various points in
time. The decrease in the allowance for loan losses was primarily attributable
to net credit losses on loans acquired in the Berks Acquisition, which were
provided for at the time of the purchase. The following table sets forth the
activity in the Company's allowance for loan losses during the periods
indicated.
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
1997 1996
---- ----
(Dollars in Thousands)
<S> <C> <C>
Allowance at beginning of period $9,971 $7,485
Provision for credit losses 600 100
Charge-offs:
Mortgage loans - Residential (253) (59)
Consumer loans (461) (35)
Commercial loans (181) -
------ ------
Total charge-offs (895) (94)
Recoveries:
Mortgage loans - Residential 114 73
Consumer loans 12 12
Commercial loans 13 -
------ ------
Total recoveries 139 85
Allowance acquired in Berks
Acquisition - 2,372
------ ------
Allowance at end of period $9,815 $9,948
====== ======
Allowance for loan losses to
total non-performing loans at
end of period 94.24% 142.16%
===== ======
Allowance for loan losses to
total loans held for investment
at end of period 0.82% 0.98%
==== ====
</TABLE>
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
PREMISES AND EQUIPMENT. Premises and equipment decreased by $9.3
million, or 37%, from $25.4 million at December 31, 1996, to $16.1 million at
June 30, 1997. The decrease was primarily attributable to the sale of the
Company's previous headquarters building and a branch property, which had a
combined carrying value of $9.5 million. These transactions resulted in a $1.5
million nonrecurring net gain in the first quarter of 1997.
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 acquisitions of the
Meridian branches in 1996 and the Fidelity Federal branches in 1995. The
following table details the components of intangible assets at the dates
indicated.
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
(In Thousands)
<S> <C> <C>
Goodwill (Meridian) $21,889 $22,791
CDI (Meridian) 11,660 13,199
Goodwill (Fidelity Federal) 11,862 12,398
CDI (Fidelity Federal) 2,667 2,832
------- -------
Total $48,078 $51,220
======= =======
</TABLE>
MORTGAGE SERVICING RIGHTS. At June 30, 1997, ComNet's total servicing
portfolio was $2.3 billion, compared to $2.1 billion at December 31, 1996.
During the six months ended June 30, 1997, ComNet's servicing portfolio
increased by $253.5 million, or 12%. At June 30, 1997 and December 31, 1996,
ComNet was servicing $1.5 billion and $1.3 billion, respectively, of third
party loans, as well as $871.6 million and $747.8 million, respectively, of
loans held by the Company for investment and sale. The following table details
the components of mortgage servicing rights, at the dates indicated.
<TABLE>
<CAPTION>
June 30, 1997 December 31,1996
------------- ----------------
(In Thousands)
<S> <C> <C>
Purchased Mortgage Servicing Rights $1,928 $2,243
Capitalized Excess Servicing Fees 3,362 3,573
Originated Mortgage Servicing Rights 2,448 1,861
------ ------
Total $7,738 $7,677
====== ======
</TABLE>
BORROWINGS. The Company's borrowings consist primarily of advances
from the FHLB and securities sold under agreements to repurchase. FHLB
advances increased by $59.0 million, or 34%, to $234.0 million at June 30,
1997, from $175.0 million at December 31, 1996. Repurchase agreements
increased by $61.9 million, or 35%, to $238.6 million at June 30, 1997, from
$176.7 million at December 31, 1996. The Company's borrowings are used to fund
lending and investment activities, withdrawals from deposit accounts, and other
disbursements which occur in the normal course of business. Dependent upon the
funding requirements and interest rate risk considerations, these borrowings
are hedged with off-balance-sheet financial instruments.
19
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
REGULATORY CAPITAL REQUIREMENTS.
The following table sets forth the Bank's compliance with applicable regulatory
capital requirements at June 30, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
To Be Well
Minimum Capitalized
For Capital For Prompt
Adequacy Corrective Action
Actual Purposes Provisions
-----------------------------------------------------------------------------------
Ratio Amount Ratio Amount Ratio Amount
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity,
and ratio to OTS
total assets 8.7% $ 197,511
-----
Intangible assets (48,078)
Unrealized losses on
available-for-sale
securities, net of tax (1,385)
-----------
Tangible capital,
and ratio to OTS
adjusted total assets 6.7% $ 148,048 1.5% $33,124
----- ========== ----- =======
Core capital,
and ratio to OTS
adjusted total assets 6.7% $ 148,048 3.0% $66,249 5.0% $110,415
----- =========== ---- ======= ----- ========
Core capital,
and ratio to OTS
risk-weighted assets 13.3% $ 148,048 6.0% $ 66,968
----- ---------- ----- ========
Allowance for loan
and lease losses 9,815
----------
Supplementary capital 9,815
----------
Total risk-based capital,
and ratio to OTS
risk-weighted assets (1) 14.1% $ 157,863 8.0% $89,290 10.0% $111,613
----- =========== ---- ======= ----- ========
OTS total assets $2,257,760
==========
OTS adjusted total assets $2,208,297
==========
OTS risk-weighted assets $1,116,129
==========
</TABLE>
(1) Does not reflect the interest rate risk component to the risk-based capital
requirement, the effective date of which has been postponed.
20
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
Commonwealth Bancorp, Inc. and Subsidiaries
Average Balance Report
<TABLE>
<CAPTION>
Quarter Ended June 30,
----------------------------------- --------------------------------------
1997 1996
----------------------------------- --------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost(e) Balance Interest Cost(e)
------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(a):
Mortgage loans - residential $851,782 $16,026 7.55% $682,395 $12,770 7.53%
Consumer loans 172,338 3,908 9.10% 118,540 2,744 9.31%
Commercial real estate loans 44,522 977 8.80% 16,303 324 7.99%
Business loans 58,594 1,116 7.64% 30,135 615 8.21%
---------- ------- ----- ---------- ------- -----
Total loans receivable 1,127,236 22,027 7.84% 847,373 16,453 7.81%
---------- ------- ----- ---------- ------- -----
Mortgage loans held for sale 56,466 1,022 7.26% 50,872 862 6.82%
Mortgage-backed securities 815,991 14,246 7.00% 598,940 10,401 6.98%
Investment securities 80,634 1,234 6.14% 48,283 781 6.51%
Other earning assets(b) 26,785 589 8.82% 43,062 787 7.35%
---------- ------- ----- ---------- ------- -----
Total interest-earning assets 2,107,112 39,118 7.45% 1,588,530 29,284 7.41%
Non-interest-earning assets 149,436 ------- ----- 104,051 ------- -----
---------- ----------
Total assets $2,256,548 $1,692,581
========== ----------
Interest-bearing liabilities
Deposits:
Demand deposits(c) $548,707 3,377 2.47% $439,976 2,918 2.67%
Passbook savings deposits 254,639 1,397 2.20% 236,291 1,166 1.98%
Certificates of deposit 720,300 9,737 5.42% 533,740 6,881 5.19%
---------- ------- ----- ---------- ------- -----
Total deposits 1,523,646 14,511 3.82% 1,210,007 10,965 3.64%
---------- ------- ----- ---------- ------- -----
Notes payable and other borrowings
Repurchase agreements 246,681 3,634 5.91% 164,074 2,370 5.81%
FHLB Advances 216,429 3,059 5.67% 126,404 1,781 5.67%
Other borrwings 0 0 0.00% 1,255 24 7.69%
---------- ------- ----- ---------- ------- -----
Total borrowings 463,110 6,693 5.80% 291,733 4,175 5.76%
---------- ------- ----- ---------- ------- -----
Total interest-bearing liabilities(d) 1,986,756 21,204 4.28% 1,501,740 15,140 4.05%
Non-interest-bearing liabilities 55,943 ------- ----- 34,512 ------- -----
---------- ----------
Total liabilities 2,042,699 1,536,252
Shareholders' Equity 213,849 156,329
---------- ----------
Total liabilities and equity $2,256,548 $1,692,581
========== ==========
Net interest-earning assets $120,356 $86,790
========== ==========
Net interest income/
interest rate spread $17,914 3.17% $14,144 3.36%
======= ======= ======= =======
Net interest margin 3.41% 3.58%
======= =======
Ratio of average interest-earning assets
to average interest-bearing liabilities 106.06% 105.78%
======= =======
</TABLE>
<TABLE>
<CAPTION>
Year To Date Ended June 30,
----------------------------------------- --------------------------------------
1997 1996
----------------------------------------- --------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost(e) Balance Interest Cost(e)
------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(a):
Mortgage loans - residential $844,977 $31,905 7.61% $664,487 $25,017 7.57%
Consumer loans 170,342 7,595 8.99% 114,338 5,345 9.40%
Commercial real estate loans 41,310 1,818 8.87% 13,306 554 8.37%
Business loans 59,584 2,260 7.65% 30,793 1,152 7.52%
---------- ------- ----- ---------- ------- -----
Total loans receivable 1,116,213 43,578 7.87% 822,924 32,068 7.84%
---------- ------- ----- ---------- ------- -----
Mortgage loans held for sale 42,195 1,526 7.29% 45,457 1,627 7.20%
Mortgage-backed securities 805,416 28,067 7.03% 555,160 19,371 7.02%
Investment securities 71,961 2,248 6.30% 46,340 1,503 6.52%
Other earning assets(b) 28,929 1,154 8.04% 41,788 1,388 6.68%
---------- ------- ----- ---------- ------- -----
Total interest-earning assets 2,064,714 76,573 7.48% 1,511,669 55,957 7.44%
Non-interest-earning assets 145,246 ------- ----- 99,333 ------- -----
---------- ----------
Total assets $2,209,960 $1,611,002
========== ==========
Interest-bearing liabilities
Deposits:
Demand deposits(c) $535,903 6,532 2.46% $437,223 5,871 2.70%
Passbook savings deposits 257,525 2,816 2.21% 200,759 1,998 2.00%
Certificates of deposit 717,186 19,078 5.36% 525,136 13,636 5.22%
---------- ------- ----- ---------- ------- -----
Total deposits 1,510,614 28,426 3.79% 1,163,118 21,505 3.72%
---------- ------- ----- ---------- ------- -----
Notes payable and other borrowings
Repurchase agreements 231,604 6,805 5.93% 152,531 4,579 6.04%
FHLB Advances 200,862 5,580 5.60% 115,948 3,290 5.71%
Other borrwings 0 0 0.00% 1,809 56 6.23%
---------- ------- ----- ---------- ------- -----
Total borrowings 432,466 12,385 5.78% 270,288 7,925 5.90%
---------- ------- ----- ---------- ------- -----
Total interest-bearing liabilities(d) 1,943,080 40,811 4.24% 1,433,406 29,430 4.13%
Non-interest-bearing liabilities 48,156 ------- ----- 31,015 ------- -----
---------- ----------
Total liabilities 1,991,236 1,464,421
Shareholders' Equity 218,724 146,581
---------- ----------
Total liabilities and equity $2,209,960 $1,611,002
========== ==========
Net interest-earning assets $121,634 $78,263
========== ==========
Net interest income/
interest rate spread $35,762 3.24% $26,527 3.31%
======= ======= ======= =======
Net interest margin 3.49% 3.53%
======= =======
Ratio of average interest-earning assets
to average interest-bearing liabilities 106.26% 105.46%
======= =======
</TABLE>
(a) The average balance of loans receivable includes non-performing loans,
interest on which is recognized on a cash basis.
(b) Includes FHLB stock, money market accounts, FHLB deposits and
interest-earning bank deposits.
(c) Includes checking and money market accounts.
(d) Includes interest expense associated with interest rate swaps and interest
rate caps.
(e) Annualized
21
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
COMPARISON OF RESULTS OF OPERATIONS FOR THE QUARTER AND SIX MONTHS ENDED JUNE
30, 1997 AND 1996.
GENERAL. Net income was $3.7 million, or $0.23 per common share, for
the second quarter of 1997, as compared to $3.2 million, or $0.33 per common
share, for the second quarter of 1996. For the six months ended June 30, 1997,
net income was $8.4 million, or $0.51 per common share, compared to $5.8
million, or $0.66 per common share, for the six months ended June 30, 1996.
The decrease in earnings per share was primarily attributable to an increase in
the number of common shares outstanding after the completion of the Company's
Conversion, Reorganization and Stock Offering in June 1996. As part of that
transaction, former holders of Commonwealth Bank common stock exchanged each of
their shares for 2.0775 shares of Commonwealth Bancorp, Inc. common stock.
NET INTEREST INCOME. Net interest income was $17.9 million in the
second quarter of 1997, an increase of 27% compared to $14.1 million in the
second quarter of 1996. For the six months ended June 30, 1997, net interest
income increased by 35%, to $35.8 million, versus $26.5 million for the same
period in 1996. The increases were primarily attributable to sharply higher
interest-earning asset levels, offset, in part, by a lower net interest margin.
Average interest-earning assets totaled $2.1 billion for both the
second quarter and six months ended June 30, 1997. This compared to $1.6
billion and $1.5 billion in the second quarter and six months ended June 30,
1996, respectively. The increases were due primarily to the Berks Acquisition
and to the leveraging of capital raised in the Company's Conversion,
Reorganization and Stock Offering. In addition, growth in supermarket banking
and business banking contributed to the increase in interest-earning assets.
The net interest margin was 3.41% in the second quarter of 1997, down
from 3.58% in the second quarter of 1996. The decrease was primarily
attributable to a 0.19% reduction in the spread between the yield on
interest-earning assets and the cost of interest-bearing liabilities (net
interest spread). The reduction in the second quarter net interest spread was
primarily due to an increase in the average cost of the Bank's certificates of
deposit, which, in turn, was primarily attributable to the maturity of
favorably priced certificates of deposit. The decrease in the net interest
spread was offset, in part, by a 0.02% increase in the favorable effect
relating to interest free funds. The 0.02% increase in the favorable effect
relating to interest free funds in the second quarter of 1997 was net of a
0.05% unfavorable effect relating to the Company's repurchase of common stock.
For the six months ended June 30, 1997, the net interest margin was
3.49%, versus 3.53% in the comparable 1996 period. The decrease was
attributable to a 0.07% decrease in the net interest spread, offset, in part,
by a 0.03% increase in the favorable effect relating to interest free funds.
The reduction in the net interest spread for the first six months of 1997, was
attributable to the same factors responsible for the second quarter decrease.
The 0.03% increase in the favorable effect relating to interest free funds in
the first six months of 1997 was net of a 0.04% unfavorable effect relating to
the Company's repurchase of common stock.
NONINTEREST INCOME. Noninterest income totaled $4.0 million in the
second quarter of 1997, compared to $3.0 million in the second quarter of 1996.
The increase reflected a $0.8 million increase in the net gain on sale of
mortgage loans, which was primarily attributable to an increase in servicing
released premiums on loans originated through five Homestead mortgage
production offices acquired in the first quarter of 1997. Also contributing to
the increase in noninterest income in the second quarter of 1997 was a $0.6
million increase in deposit fees. The increase in deposit fees was primarily
attributable to the Berks Acquisition, growth in supermarket banking, expansion
of Commonwealth's business banking activities, and increased ATM fees. These
increases were partially offset by a $0.3 million decrease in mortgage
servicing fees and a $0.2 million net loss on the sale of mortgage-backed
securities in the second quarter of 1997. The sale of mortgage-backed
securities was related to a restructuring of the Company's mortgage-backed
securities portfolio, which was undertaken to improve future earnings from the
portfolio.
22
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
Noninterest income was $9.3 million for the six months ended June 30,
1997, compared to $6.4 million for the same 1996 period. The increase
reflected a $1.5 million net gain on the sale of the Company's previous
headquarters building and the sale of a branch property. Also contributing to
the increase in noninterest income for the six months ended June 30, 1997 was a
$1.1 million increase in deposit fees and a $0.6 million increase in the net
gain on sale of mortgage loans. These increases were primarily attributable to
the same factors responsible for the increases in the second quarter of 1997.
Partially offsetting the preceding favorable effects, was a $0.3 million
decrease in servicing fees and a $0.2 million net loss on the sale of
mortgage-backed securities.
NONINTEREST EXPENSE. Noninterest expense was $16.1 million in the
second quarter of 1997, compared to $12.2 million in the second quarter of
1996. The increase was primarily attributable to higher expenses relating to
the Berks Acquisition and the acquisition of the Homestead mortgage production
offices, as well as to expenses related to growth in supermarket banking and
expansion of business banking activities. The increase in noninterest expense
was offset, in part, by a $0.5 million decrease in FDIC premium expense. This
decrease was related to a reduction in deposit insurance premiums from $0.23 to
approximately $0.06 per $100 of deposits. Also partially offsetting the
increase in noninterest expense was 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, the Bank terminated its defined benefit pension plan, and
replaced it with a target benefit plan.
Noninterest expense was $31.8 million for the six months ended June
30, 1997, compared to $23.9 million for the same period in 1996. The increase
was primarily attributable to the same factors responsible for the increase in
the second quarter of 1997. The increase in noninterest expense was offset, in
part, by a $1.1 million decrease in FDIC premium expense, relating to a
reduction in deposit insurance premiums and to a $0.2 million refund of prior
year FDIC premiums received in the first quarter of 1997.
PROVISION FOR CREDIT LOSSES. Provision for credit losses totaled $0.3
million and $0.6 million in the second quarter and six months ended June 30,
1997, respectively. The provision for credit losses totaled $0.1 million in
the second quarter and six months ended June 30, 1996. At June 30, 1997, the
allowance for credit losses totaled $9.8 million, or 0.82% of loans, compared
to $9.9 million, or 0.98%, at June 30, 1996 and $10.0 million, or 0.89%, at
December 31, 1996. The decrease in the allowance for loan losses was primarily
attributable to net credit losses on loans acquired in the Berks Acquisition,
which were provided for at the time of the purchase.
PROVISION FOR INCOME TAXES. Provision for income taxes was $1.8
million, or 33% of income before income taxes in the second quarter of 1997,
compared to $1.7 million, or 35%, in the second quarter of 1996. For the first
six months of 1997, provision for income taxes was $4.3 million, or 34% of
income before income taxes, compared to $3.2 million, or 35%, in the first six
months of 1996. The decrease in the income tax rate in the second quarter and
first six months of 1997 was primarily attributable to low income housing tax
credits in 1997.
23
<PAGE> 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings 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.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
(a) An annual meeting of stockholders of the Company was held on
April 24, 1997 ("Annual Meeting").
(b) Not applicable.
(c) There were 17,655,682 shares of Common Stock of the Company
eligible to be voted at the Annual Meeting and 14,288,711 shares
were represented at the meeting by the holders thereof, which
constituted a quorum.
The items voted upon at the Annual Meeting and the vote for each
proposal were as follows:
1. Election of directors for a three-year term.
<TABLE>
<CAPTION>
FOR WITHHELD
--- --------
<S> <C> <C>
Charles H. Meacham 14,183,364 105,347
Harry P. Mirabile 14,177,814 110,897
</TABLE>
2. Proposal to ratify the appointment of Arthur Andersen LLP as the
Company's independent auditors for the year ending December
31, 1997
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C>
14,148,453 36,538 103,719
</TABLE>
The proposals were adopted by the stockholders of the Company. There
were no broker non-votes at the meeting.
(d) Not applicable
Item 5. Other Information
Not applicable.
24
<PAGE> 25
PART II - OTHER INFORMATION-CONTINUED
Item 6. Exhibits and Reports on Form 8-K.
a) Not applicable.
b) On June 18, 1997, the Company filed a Current Report on Form 8-K
to report under Item 5, its commencement of the stock repurchase
program and its declared cash dividend. On July 16, 1997, the
Company filed a Current Report on Form 8-K to report under Item 5,
its earnings for the second quarter of 1997.
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMMONWEALTH BANCORP, INC.
DATE: August 8, 1997 /s/ Charles H. Meacham
--------------------------------------------------
Charles H. Meacham
Chairman and Chief Executive Officer
(Principal Executive Officer)
DATE: August 8, 1997 /s/ Charles M. Johnston
--------------------------------------------------
Charles M. Johnston
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
26
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 47,162
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,069
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 713,200
<INVESTMENTS-CARRYING> 217,810
<INVESTMENTS-MARKET> 219,601
<LOANS> 1,198,326
<ALLOWANCE> 9,815
<TOTAL-ASSETS> 2,288,986
<DEPOSITS> 1,553,587
<SHORT-TERM> 0
<LIABILITIES-OTHER> 42,422
<LONG-TERM> 472,572
0
0
<COMMON> 107,163
<OTHER-SE> 113,242
<TOTAL-LIABILITIES-AND-EQUITY> 2,288,986
<INTEREST-LOAN> 45,104
<INTEREST-INVEST> 3,402
<INTEREST-OTHER> 28,067
<INTEREST-TOTAL> 76,573
<INTEREST-DEPOSIT> 28,426
<INTEREST-EXPENSE> 40,811
<INTEREST-INCOME-NET> 35,762
<LOAN-LOSSES> 600
<SECURITIES-GAINS> (175)
<EXPENSE-OTHER> 31,842
<INCOME-PRETAX> 12,649
<INCOME-PRE-EXTRAORDINARY> 12,649
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,350
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.51
<YIELD-ACTUAL> 7.48
<LOANS-NON> 10,415
<LOANS-PAST> 0
<LOANS-TROUBLED> 927
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<ALLOWANCE-OPEN> 9,971
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<ALLOWANCE-CLOSE> 9,815
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</TABLE>
