<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...........................March 31, 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.
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Pennsylvania 23-2828883
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(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
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(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code:
(610) 251-1600
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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
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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 May 5, 1997,
there were 17,991,901 issued and 17,094,301 outstanding shares of the
Registrant's Common Stock.
1
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Commonwealth Bancorp, Inc. and Subsidiaries
TABLE OF CONTENTS
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<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 March 31, 1997 and December 31, 1996 3
Consolidated Statements of Income for the Quarter Ended
March 31, 1997 and 1996 4
Consolidated Statements of Changes in Shareholders' Equity for the Quarter Ended
March 31, 1997 and 1996 5
Consolidated Statements of Cash Flows for the Quarter Ended
March 31, 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 23
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 24
</TABLE>
2
<PAGE> 3
Commonwealth Bancorp, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
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Assets: (Unaudited)
<S> <C> <C>
Cash and due from banks $36,792 $39,268
Interest-bearing deposits - 15,111
Short-term investments available for sale 31,507 5,723
Mortgage loans held for sale 35,213 17,335
Investment securities
Securities available for sale (cost of $70,069
and $53,815, respectively), at market value 69,905 53,935
Mortgage-backed securities
Securities held to maturity (market value of $227,802
and $239,447, respectively), at cost 227,893 237,743
Securities available for sale (cost of $603,677
and $511,833, respectively), at market value 600,888 514,964
Loans receivable, net 1,116,269 1,113,114
Accrued interest receivable, net 13,159 13,339
FHLB stock, at cost 14,175 11,159
Premises and equipment, net 15,715 25,369
Intangible assets 49,656 51,220
Mortgage servicing rights 7,770 7,677
Other assets, including net deferred taxes of $3,300 and
$1,144, respectively 17,066 14,004
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Total assets $2,236,008 $2,119,961
============ ===========
Liabilities:
Deposits $1,497,607 $1,491,450
Notes payable and other borrowings
Secured notes due to Federal Home Loan Bank of Pittsburgh 214,000 175,000
Securities sold under agreements to repurchase 250,467 176,674
Advances from borrowers for taxes and insurance 27,267 23,883
Accrued interest payable, accrued expenses and other liabilities 32,737 21,030
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Total liabilities 2,022,078 1,888,037
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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
18,008,425 shares issued and 17,110,825 outstanding at March 31, 1997
17,953,613 shares issued and outstanding at December 31, 1996 1,801 1,795
Additional paid-in capital 133,097 132,931
Retained earnings 109,169 105,577
Unearned stock benefit plan compensation (14,451) (10,510)
Unrealized (loss) gain on marketable securities, net (1,919) 2,131
Treasury stock, at cost; 897,600 shares at March 31, 1997 (13,767) -
------------ -----------
Total shareholders' equity 213,930 231,924
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Total liabilities and shareholders' equity $2,236,008 $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
Ended March 31,
1997 1996
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(Unaudited)
<S> <C> <C>
Interest income:
Interest on loans $22,055 $16,380
Interest and dividends on deposits and money
market investments 565 601
Interest on investment securities 1,014 722
Interest on mortgage-backed securities 13,821 8,970
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Total interest income 37,455 26,673
Interest expense:
Interest on deposits 13,915 10,540
Interest on notes payable and other borrowings 5,692 3,750
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Total interest expense 19,607 14,290
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Net interest income 17,848 12,383
Provision for loan losses 300 0
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Net interest income after provision for loan losses 17,548 12,383
Noninterest income:
Deposit fees and related income 1,534 1,072
Servicing fees 1,202 1,166
Net gain on sales of mortgage loans 719 872
Net loss on sales of foreclosed real estate (69) (55)
Other 1,982 350
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Total noninterest income 5,368 3,405
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Noninterest expense:
Compensation and employee benefits 7,938 5,722
Occupancy and office operations 2,427 1,947
FDIC premium (31) 613
Advertising and promotion 418 317
Amortization of intangible assets 1,578 573
Other 3,397 2,526
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Total noninterest expense 15,727 11,698
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Income before income taxes 7,189 4,090
Income tax provision 2,519 1,452
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Net income $4,670 $2,638
============ ===========
Weighted-average number of shares outstanding 16,556,570 7,996,103
============ ===========
Earnings per share $0.28 $0.33
============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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Commonwealth Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Unearned Unrealized
Common Additional Stock Gain/(Loss)
Shares Common Paid-In Retained Benefit Plan On Marketable Treasury
Outstanding Stock Capital Earnings Compensation Securities, net Stock
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fiscal 1996
- -----------
Balance at December 31, 1995 8,629 $863 $36,686 $99,165 ($2,337) $2,659 -
Net income 2,638
Dividends (468)
Release of ESOP shares (a) 133 131
Amortization of unearned compensation 75
Exercise of stock options 13 1 131
Decrease in unrealized gain on
marketable securities, net of tax (1,994)
----------------------------------------------------------------------------------
Balance at March 31, 1996 8,642 $864 $36,950 $101,335 ($2,131) $665 -
==================================================================================
Fiscal 1997
- -----------
Balance at December 31, 1996 (b) 17,954 $1,795 $132,931 $105,577 ($10,510)(c) $2,131 -
Net income 4,670
Dividends (1,078)
Release of ESOP shares (d) 170 230
Amortization of unearned compensation 324
Exercise of stock options 81 8 375
Cash in lieu of fractional shares (2) (21)
Stock retired (24) (2) (358)
Decrease in unrealized gain on marketable
securities, net of tax (4,050)
Common stock acquired by stock benefit plans (4,495)
Purchase of Treasury stock (898) (13,767)
----------------------------------------------------------------------------------
Balance at March 31, 1997 17,111 $1,801 $133,097 $109,169 ($14,451) ($1,919) ($13,767)
==================================================================================
</TABLE>
<TABLE>
<CAPTION>
Total
- ----------------------------------------------------------
<S> <C>
Fiscal 1996
- -----------
Balance at December 31, 1995 $137,036
Net income 2,638
Dividends (468)
Release of ESOP shares (a) 264
Amortization of unearned compensation 75
Exercise of stock options 132
Decrease in unrealized gain on marketable
securities, net of tax (1,994)
-----------
Balance at March 31, 1996 $137,683
===========
Fiscal 1997
- -----------
Balance at December 31, 1996 (b) $231,924
Net income 4,670
Dividends (1,078)
Release of ESOP shares (d) 400
Amortization of unearned compensation 324
Exercise of stock options 383
Cash in lieu of fractional shares (21)
Stock retired (360)
Decrease in unrealized gain on marketable
securities, net of tax (4,050)
Common stock acquired by stock benefit plans (4,495)
Purchase of Treasury stock (13,767)
-----------
Balance at March 31, 1997 $213,930
===========
</TABLE>
- ----------------------------
(a) Pre-conversion shares totaling 11,344 were released during the quarter
ended March 31, 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 26,234 were released during the quarter
ended March 31, 1997.
The accompanying notes are an integral part of the consolidated financial
statements.
5
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Commonwealth Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Quarter
Ended March 31,
1997 1996
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(Unaudited)
<S> <C> <C>
Operating activities:
Net income $4,670 $2,638
Adjustments to reconcile net income to net cash
provided by (used in) operating activities-
Proceeds from loans sold to others 50,296 68,571
Loans originated for sale (55,254) (51,318)
Purchases of loans held for sale (12,145) (33,486)
Principal collection on mortgage loans held for sale 75 364
Net gain on sales of mortgage loans (1,246) (872)
Increase in net deferred loan fees 113 122
Provision for loan losses and foreclosed real estate 320 100
Net (gain) loss on sales of assets (1,523) 47
Depreciation and amortization 763 665
Net amortization of other assets and liabilities 2,499 1,323
Interest reinvested on repurchase agreements (1,988) (791)
Changes in assets and liabilities-
Decrease (increase) in-
Accrued interest receivable, net 180 (912)
Deferred income taxes 0 (282)
Other assets (1,515) (3,565)
Increase in-
Advances from borrowers for taxes and insurance 3,384 2,170
Accrued interest payable, accrued expenses and other liabilities 11,642 6,704
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Net cash provided by (used in) operating activities $271 ($8,522)
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</TABLE>
(continued)
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 Quarter
Ended March 31,
1997 1996
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(Unaudited)
<S> <C> <C>
Investing activities:
Proceeds from maturities of investment securities $0 $3,249
Purchases of investment securities (16,194) 0
Purchases of mortgage-backed securities (112,158) (124,906)
Principal collected on mortgage-backed securities 30,163 28,393
Principal collected on loans 52,962 38,654
Loans originated (56,438) (27,115)
Loans purchased 0 (54,902)
Sales of real estate acquired through foreclosure 528 311
Purchase of FHLB Stock (3,016) (2,247)
Purchases of premises and equipment (718) (784)
Proceeds from sales of assets 11,132 9
---------------- ----------------
Net cash used in investing activities (93,739) (139,338)
---------------- ----------------
Financing activities:
Net increase in deposits 6,157 118,771
Proceeds from notes payable and other borrowings 213,315 171,719
Repayment of notes payable and other borrowings (98,534) (97,230)
Net (purchase) issuance of common stock (18,260) 132
Cash dividends paid (1,013) (468)
---------------- ----------------
Net cash provided by financing activities 101,665 192,924
---------------- ----------------
Net increase in cash and cash equivalents 8,197 45,064
Cash and cash equivalents at beginning of period 60,102 50,177
---------------- ----------------
Cash and cash equivalents at end of period $68,299 $95,241
================ ================
Supplemental disclosures of cash flow information:
Cash paid during the quarter for-
Interest $13,608 $10,051
================ ================
Income taxes $23 $679
================ ================
</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 March 31,
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 March 18, 1997, the Board of Directors declared a $0.07 per share
cash dividend for the three months ended March 31, 1997, which was made payable
to shareholders of record at the close of business on March 28, 1997. This
dividend was paid on April 11, 1997. During the first quarter of 1997, the
Company purchased 0.9 million shares of treasury stock, at share prices between
$15 and $16, 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
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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 impact on 1996 or first quarter 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 we were in compliance with the
existing capital structure disclosure requirements, we do not expect to
materially change our disclosure under the new standard.
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 $0.08 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
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Commonwealth Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Earnings Per Share
Earnings for the quarter ended March 31, 1997 were $0.28 per share,
compared to $0.33 per share for the quarter ended March 31, 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
and 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
ended March 31, 1997 and 1996 by the weighted average number of shares of
common stock outstanding during the quarter, 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 16,556,570 and
7,996,103 for the quarter ended March 31, 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. In 1996, these offices originated approximately
$160.0 million of mortgages in Virginia, Maryland, Delaware, Pennsylvania, and
the District of Columbia. Under the terms of the transaction, the group will
continue to operate under the Homestead Mortgage name in Maryland, Virginia,
and the District of Columbia. During the first quarter of 1997, subsequent to
the acquisition, the Homestead offices originated loans totaling $26.5 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, regulated by the Office of Thrift Supervision ("OTS"). The Bank
conducts business from its executive offices in Norristown, Pennsylvania and,
as of March 31, 1997, 54 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 29 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
$0.08 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 $116.0 million, or 5%, from $2.1
billion at December 31, 1996, to $2.2 billion at March 31, 1997. The major
component of this increase was related to an increase in mortgage-backed
securities. Increases in short-term investments available for sale, mortgage
loans held for sale, investment securities, and loans receivable also
contributed to the increase in total assets during the quarter, offset, in
part, by a decrease in premises and equipment. Total liabilities increased by
$134.0 million, or 7%, from $1.9 billion at December 31, 1996, to $2.0 billion
at March 31, 1997. This increase was primarily comprised of increases in
securities sold under agreements to repurchase, and secured notes due to the
Federal Home Loan Bank of Pittsburgh ("FHLB"). Shareholders' equity as of
March 31, 1997, equaled $213.9 million, compared to $231.9 million at December
31, 1996. This $18.0 million, or 8%, 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 the benefit plans.
CASH, INTEREST-BEARING DEPOSITS, AND SHORT-TERM INVESTMENTS. ("CASH
AND CASH EQUIVALENTS") Cash and cash equivalents increased by $8.2 million, or
14.0%, from $60.1 million at December 31, 1996, to $68.3 million at March 31,
1997. The increase was primarily related to the proceeds received from the
sale of the Company's previous headquarters building.
MORTGAGE LOANS HELD FOR SALE. Mortgage loans held for sale increased
by $17.9 million, or 103%, from $17.3 million at December 31, 1996, to $35.2
million at March 31, 1997. The increase was attributable to an increase in
loans originated during March 1997, primarily as a result of loans closed by
the Homestead production offices.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
INVESTMENT SECURITIES. Investment securities increased by $16.0
million, or 30%, from $53.9 million at December 31, 1996, to $69.9 million at
March 31, 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 March 31, 1997 and December 31, 1996, were as follows:
<TABLE>
<CAPTION>
March 31, 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 $ 57,965 $ 24 $ 191 $ 57,798
Mortgage Security Mutual Fund 2,251 - 34 2,217
Equity Servicing Partnership 4,097 - - 4,097
Other Equity Investments 5,756 87 50 5,793
-----------------------------------------------------------------
Total $ 70,069 $ 111 $ 275 $ 69,905
==================================================================
<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 March 31, 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 $76.1
million, or 10%, from $752.7 million at December 31, 1996, to $828.8 million at
March 31, 1997. The increase was attributable to an $82.0 million net increase
in the balance of mortgage-backed securities and a $5.9 million decrease in the
unrealized gain on available for sale mortgage-backed securities. The increase
in mortgage-backed securities during the first three 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.
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 March 31, 1997 and December
31, 1996, $560.1 million, or 68%, 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 March
31, 1997 and December 31, 1996, $268.7 million, or 32%, 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>
March 31, 1997
-----------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-----------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Held to maturity:
GNMA $ 86,397 $1,606 $ 343 $ 87,660
FHLMC 50,745 449 188 51,006
FNMA 84,580 324 1,939 82,965
Private 6,171 - - 6,171
-----------------------------------------------------------------
Total $227,893 $2,379 $2,470 $227,802
=================================================================
Available for sale:
GNMA $ 19,265 $1,553 $ 294 $ 20,524
FHLMC 123,371 2,165 668 124,868
CMO and REMIC 378,708 35 5,074 373,669
FNMA 82,333 225 731 81,827
-----------------------------------------------------------------
Total $603,677 $3,978 $6,767 $600,888
=================================================================
</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 $3.2 million
during the first three months of 1997 to $1.1 billion at March 31, 1997. The
following table depicts the composition of the Company's loan portfolio at the
dates indicated.
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------------------- ------------------
% of % of
Amount Total Amount Total
------ -------- ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Mortgage loans - Residential (1) $ 851,055 75.60% $ 857,053 76.37%
Consumer loans:
Equity lines of credit 47,473 4.22 49,136 4.38
Second mortgage 79,085 7.02 77,304 6.89
Other 43,494 3.86 42,867 3.82
---------- --------- ---------- --------
Total consumer loans 170,052 15.10 169,307 15.09
Commercial loans:
SBA variable rate loans (2) 24,554 2.18 25,104 2.24
Commercial real estate 42,085 3.74 35,452 3.15
Business loans 38,027 3.38 35,380 3.15
---------- --------- ----------- --------
Total commercial loans 104,666 9.30 95,936 8.54
---------- --------- ----------- --------
Total loans receivable 1,125,773 100.00% 1,122,296 100.00%
---------- ========= ----------- =========
Less:
Premium on loans purchased (3,326) (3,655)
Allowance for loan losses 10,044 9,971
Deferred loan fees 2,786 2,866
---------- ----------
Loans receivable, net $1,116,269 $1,113,114
========== ==========
- ---------------------------------
</TABLE>
(1) At March 31, 1997 and December 31, 1996, $528.7 million, or 62%, 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 adjusting monthly or quarterly.
All such loans or securities were purchased by the Company.
Loans originated and purchased by ComNet totaled $98.2 million for the
quarter ended March 31, 1997, compared to $129.0 million for the quarter ended
March 31, 1996. The $30.8 million decrease in ComNet's production was
primarily attributable to a decrease in originations generated through ComNet's
Wholesale Lending Department. This Department originates loans through a
network of correspondent brokers in 29 states. All loans are underwritten
using the same criteria as those used for retail originations. Registered
applications and closed loans relating to ComNet's wholesale network totaled
$83.8 million and $30.4 million, respectively, during the quarter ended March
31, 1997, compared to $134.7 million and $71.6 million, respectively, for the
quarter ended March 31, 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.
Registered applications and closed loans relating to ComNet's retail network
totaled $126.8 million and $67.8 million, respectively, during the quarter
ended March 31, 1997, compared to $94.4 million and $57.4 million,
respectively, for the quarter ended March 31, 1996.
As of March 31, 1997, commercial loans (other than loans guaranteed by
the Small Business Administration ("SBA")) totaled $80.1 million, or 7%, of the
Company's total loan portfolio, as compared to $70.8 million, or 6%, at
December 31, 1996. At March 31, 1997, commercial loans (other than SBA loans)
were comprised of $42.1 million of commercial real estate loans and $38.0
million of business loans. At December 31, 1996, commercial loans (other than
SBA
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
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 $0.3 million, or 3%, from $9.1 million at December
31, 1996, to $9.4 million at March 31, 1997. At March 31, 1997, the Company's
$9.4 million of non-performing assets amounted to 0.42% 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 following table sets forth information relating
to the Company's non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
(Dollars in Thousands)
<S> <C> <C>
Mortgage loans - Residential $4,943 $5,240
Consumer loans 1,516 1,335
Commercial loans (1) 1,799 1,399
----- -----
Total non-performing loans 8,258 8,058
Real estate owned, net 1,187 1,090
----- -----
Total non-performing assets (1) $9,445 $9,148
===== =====
Non-performing loans to total loans held
for investment (1) 0.73% 0.72%
==== ====
Total non-performing assets to total assets (1) 0.42% 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 March 31, 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 $10.0 million at March 31, 1997 and 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 March 31, 1997, the Company's allowance for loan losses
amounted to 122% of total non-performing loans and 0.89% 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 following table sets
forth the activity in the Company's allowance for loan losses during the
periods indicated.
<TABLE>
<CAPTION>
For the Quarter Ended March 31,
-------------------------------
1997 1996
------ ------
(Dollars in Thousands)
<S> <C> <C>
Allowance at beginning of period $ 9,971 $7,485
Provision for credit losses 300 -
Charge-offs:
Mortgage loans - Residential (81) (4)
Consumer loans (218) (13)
Commercial loans - -
------- -----
Total charge-offs (299) (17)
Recoveries:
Mortgage loans - Residential 63 58
Consumer loans 4 12
Commercial loans 5 -
------ -----
Total recoveries 72 70
------ -----
Allowance at end of period $10,044 $7,538
====== =====
Allowance for loan losses to
total non-performing
loans at end of period 121.63% 121.76%
====== ======
Allowance for loan losses to
total loans held for
investment at end of period 0.89% 0.89%
==== ====
</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 $9.7
million, or 38%, from $25.4 million December 31, 1996, to $15.7 million at
March 31, 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 $1.0
million (after-tax) 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>
March 31, 1997 December 31, 1996
-------------- -----------------
(In Thousands)
<S> <C> <C>
Goodwill (Meridian) $22,347 $22,791
CDI (Meridian) 12,430 13,199
Goodwill (Fidelity Federal) 12,130 12,398
CDI (Fidelity Federal) 2,749 2,832
------- -------
Total $49,656 $51,220
======= =======
</TABLE>
MORTGAGE SERVICING RIGHTS. At March 31, 1997, ComNet's total servicing
portfolio was $2.2 billion, compared to $2.1 billion at December 31, 1996.
During the quarter ended March 31, 1997, ComNet's servicing portfolio increased
by $67.6 million, or 3%. At March 31, 1997 and December 31, 1996, ComNet was
servicing $1.4 billion and $1.3 billion, respectively, of third party loans, as
well as $778.1 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>
March 31, 1997 December 31, 1996
-------------- -----------------
(In Thousands)
<S> <C> <C>
Purchased Mortgage Servicing Rights $2,141 $2,243
Capitalized Excess Servicing Fees 3,506 3,573
Originated Mortgage Servicing Rights 2,123 1,861
------ ------
Total $7,770 $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 $39.0 million, or 22%, to $214.0 million at March 31, 1997, from
$175.0 million at December 31, 1996. Repurchase agreements increased by $73.8
million, or 42%, to $250.5 million at March 31, 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 March 31, 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 8.6% $190,304
------
Intangible assets (49,656)
Unrealized losses on
available-for-sale
securities, net of tax 1,855
----------
Tangible capital,
and ratio to OTS
adjusted total assets 6.6% $142,503 1.5% $32,349
------ ========== --------- ==========
Core capital,
and ratio to OTS
adjusted total assets 6.6% $142,503 3.0% $64,699 5.0% $107,831
------ ========== --------- ========== -------- ==========
Core capital,
and ratio to OTS
risk-weighted assets 13.3% $142,503 6.0% $ 64,059
------ ---------- -------- ==========
Allowance for loan
and lease losses 10,044
----------
Supplementary capital 10,044
----------
Total risk-based capital,
and ratio to OTS
risk-weighted assets (1) 14.3% $152,547 8.0% $85,412 10.0% $106,765
---------- ========== ---------- ========== ---------- ==========
OTS total assets $2,204,419
==========
OTS adjusted total assets $2,156,618
==========
OTS risk-weighted assets $1,067,651
==========
</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
Commonwealth Bancorp, Inc. and Subsidiaries
AVERAGE BALANCE REPORT
<TABLE>
<CAPTION>
Quarter Ended March 31,
---------------------------------------- ------------------------------------
1997 1996
---------------------------------------- ------------------------------------
Average Average
Average Yield / Average Yield /
Balance Interest Rate(e) Balance Interest Rate(e)
------------- ----------- ------------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(a):
Mortgage loans - residential $838,096 $15,879 7.68% $646,581 $12,247 7.62%
Consumer loans 168,323 3,687 8.88% 110,135 2,601 9.50%
Commercial real estate loans 38,062 841 8.96% 10,307 230 8.98%
Business loans 60,585 1,144 7.66% 31,455 537 6.87%
---------- --------- -------- ----------- --------- -------
Total loans receivable 1,105,066 21,551 7.91% 798,478 15,615 7.87%
---------- --------- -------- ----------- --------- -------
Mortgage loans held for sale 27,765 504 7.36% 40,041 765 7.68%
Mortgage-backed securities 794,722 13,821 7.05% 511,381 8,970 7.05%
Investment securities 63,191 1,014 6.51% 44,396 722 6.54%
Other earning assets(b) 31,097 565 7.37% 40,509 601 5.97%
---------- --------- -------- ----------- --------- -------
Total interest-earning assets 2,021,841 37,455 7.51% 1,434,805 26,673 7.48%
--------- -------- --------- -------
Non- interest-earning assets 138,658 94,618
---------- -----------
Total assets $2,160,499 $1,529,423
========== ===========
Interest-bearing liabilities:
Deposits:
Demand deposits(c) $520,592 3,155 2.46% $436,436 2,952 2.72%
Passbook savings deposits 260,443 1,419 2.21% 165,228 832 2.03%
Certificates of deposit 714,037 9,341 5.31% 516,602 6,756 5.26%
---------- --------- -------- ----------- --------- -------
Total deposits 1,495,072 13,915 3.77% 1,118,266 10,540 3.79%
---------- --------- -------- ----------- --------- -------
Notes payable and other borrowings
Repurchase agreements 216,360 3,171 5.94% 140,897 2,208 6.30%
FHLB advances 185,122 2,521 5.52% 105,492 1,509 5.75%
Other borrowings 0 0 0.00% 2,363 33 5.62%
---------- --------- -------- ------------ --------- -------
Total borrowings 401,482 5,692 5.75% 248,752 3,750 6.06%
---------- --------- -------- ------------ --------- -------
Total interest-bearing liabilities(d) 1,896,554 19,607 4.19% 1,367,018 14,290 4.20%
--------- -------- --------- -------
Non- interest-bearing liabilities 40,291 25,572
---------- ------------
Total liabilities 1,936,845 1,392,590
Shareholders' Equity 223,654 136,833
---------- ------------
Total liabilities and equity $2,160,499 $1,529,423
========== ============
Net interest-earning assets $125,287 $67,787
========== ============
Net interest income/
interest rate spread $17,848 3.32% $12,383 3.28%
========= ======== ========= =======
Net interest margin 3.58% 3.47%
======== =======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 106.61% 104.96%
======== =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------- ------------------------------------
1996 1995
------------------------------------- ------------------------------------
Average Average
Average Yield / Average Yield /
Balance Interest Rate(e) Balance Interest Rate(e)
------------- ----------------------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(a):
Mortgage loans - residential $724,844 $54,849 7.57% $507,809 $41,222 8.12%
Consumer loans 140,806 12,698 9.02% 105,316 10,291 9.77%
Commercial real estate loans 26,566 2,035 7.66% 6,865 618 9.00%
Business loans 39,984 3,093 7.74% 34,205 2,665 7.79%
---------- --------- -------- ----------- --------- --------
Total loans receivable 932,200 72,675 7.80% 654,195 54,796 8.38%
---------- --------- -------- ----------- --------- --------
Mortgage loans held for sale 39,639 2,927 7.38% 41,978 3,208 7.64%
Mortgage-backed securities 654,586 45,471 6.95% 472,651 33,587 7.11%
Investment securities 63,018 3,386 5.37% 59,885 3,754 6.27%
Other earning assets(b) 31,192 2,847 9.13% 20,462 1,808 8.84%
---------- --------- -------- ------------ --------- --------
Total interest-earning assets 1,720,635 127,306 7.40% 1,249,171 97,153 7.78%
--------- -------- --------- --------
Non- interest-earning assets 126,810 80,598
---------- ------------
Total assets $1,847,445 $1,329,769
========== ============
Interest-bearing liabilities:
Deposits:
Demand deposits(c) $472,755 12,182 2.58% $402,753 11,172 2.77%
Passbook savings deposits 240,579 5,072 2.11% 136,678 2,841 2.08%
Certificates of deposit 609,510 32,104 5.27% 414,360 21,740 5.25%
---------- --------- -------- ------------ --------- --------
Total deposits 1,322,844 49,358 3.73% 953,791 35,753 3.75%
---------- --------- -------- ------------ --------- --------
Notes payable and other borrowings
Repurchase agreements 154,523 9,126 5.91% 143,313 9,096 6.35%
FHLB advances 138,917 7,811 5.62% 77,249 4,674 6.05%
Other borrowings 658 57 8.66% 1,875 168 8.96%
---------- --------- -------- ------------ --------- --------
Total borrowings 294,098 16,994 5.78% 222,437 13,938 6.27%
---------- --------- -------- ------------ --------- --------
Total interest-bearing liabilities(d) 1,616,942 66,352 4.10% 1,176,228 49,691 4.23%
--------- -------- --------- --------
Non- interest-bearing liabilities 42,665 27,793
---------- ------------
Total liabilities 1,659,607 1,204,021
Shareholders' Equity 187,838 125,748
---------- ------------
Total liabilities and equity $1,847,445 $1,329,769
========== ============
Net interest-earning assets $103,693 $72,943
========== ============
Net interest income/
interest rate spread $60,954 3.30% $47,462 3.55%
========= ======== ========= ========
Net interest margin 3.54% 3.80%
======== ========
Ratio of average interest-
earning assets to average
interest-bearing liabilities 106.41% 106.20%
======== ========
</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 ENDED MARCH 31, 1997 AND
1996.
GENERAL. Net income was $4.7 million, or $0.28 per common share, for
the first quarter of 1997, as compared to $2.6 million, or $0.33 per common
share, for the first quarter of 1996. The $2.0 million, or 77%, increase in
net income in the first quarter of 1997, compared to the same period in 1996,
was primarily attributable to a $1.0 million (after-tax) nonrecurring net gain
on the sale of the Company's previous headquarters building and a branch
property, as well as earnings relating to the 1996 acquisition of 12 branch
offices in Berks and Lebanon Counties, PA ("Berks Acquisition"). In addition,
the leveraging of the capital raised in the Company's June 1996 Conversion and
Reorganization and stock offering contributed to the increase in first quarter
1997 net income. 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 and Reorganization and stock offering in June 1996.
NET INTEREST INCOME. Net interest income was $17.8 million in the
first quarter of 1997, an increase of 44% compared to $12.4 million in the
first quarter of 1996. The increase was primarily attributable to sharply
higher interest-earning asset levels, and a modestly higher net interest
margin.
Average interest-earning assets were $2.0 billion in the first quarter
of 1997, compared to $1.4 billion in the first quarter of 1996. The increase
was due primarily to the Berks Acquisition and to the leveraging of the capital
raised in the stock offering. In addition, growth in supermarket banking and
business banking contributed to the increase in interest-earning assets.
The net interest margin was 3.58% in the first quarter of 1997, up
slightly from 3.47% in the first quarter of 1996. The increase was
attributable to a 0.07% improvement in the favorable effect relating to
interest free funds and a 0.04% improvement in the spread between the yield on
interest-earning assets and the cost of interest-bearing liabilities (net
interest spread).
NONINTEREST INCOME. Noninterest income totaled $5.4 million in the
first quarter of 1997, compared to $3.4 million in the first quarter of 1996.
The increase primarily reflected a $1.5 million (pre-tax) net gain on the sale
of the Company's previous headquarters building and a branch property. Also
contributing to the increase in noninterest income in the first quarter of 1997
was a $0.5 million increase in deposit fees. The increase in deposit fees was
primarily attributable to the Berks Acquisition, growth in supermarket banking,
and expansion of Commonwealth's business banking activities.
NONINTEREST EXPENSE. Noninterest expense was $15.7 million in the
first quarter of 1997, compared to $11.7 million in the first 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 $0.6 million decrease in FDIC premium expense. This
decrease was related to a reduction in deposit insurance premiums from $0.23 to
approximately $0.08 per $100 of deposits, 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 in the first quarter of 1997, compared to no provision recorded in the
first quarter of 1996. At March 31, 1997 and December 31, 1996, the allowance
for credit losses totaled $10.0 million, or 0.89% of loans.
22
<PAGE> 23
PART II - OTHER INFORMATION
Item 1. 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 the value 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 $48.4 million.
In the past several years, the Claims Court, the United States Court
of Appeals for the Federal Circuit, and the United States Supreme Court have
handed down decisions relating to the liability portion of the breach of
contract claims brought by three 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
became responsible for any breaches to its original agreements with the
institutions regarding the accounting rules. The Supreme Court's decision in
the Winstar case was based upon the specific facts of each of the three
consolidated cases and, accordingly, the Claims Court may determine that the
Bank's claims involve sufficiently 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 plaintiff thrift institutions
remains to be litigated and could take several years to resolve. There can be
no assurance that the Bank will prevail in its action, and that if it does
prevail, that the Claims Court will find that the Bank is entitled to any
substantial amount of damages.
On October 31, 1996, the Bank filed a complaint against CoreStates
Financial Corporation 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. The complaint alleges damages
incurred by Commonwealth of approximately $5.2 million from the additional
run-off of deposits from former Meridian customers and other losses and
expenses.
Item 2. Changes in Securities
Not applicable.
23
<PAGE> 24
PART II - OTHER INFORMATION-CONTINUED
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.
Item 6. Exhibits and Reports on Form 8-K.
a) Not applicable.
b) On January 27, 1997, the Company filed a Current Report on Form 8-K
to report under Item 5, its earnings for the fourth quarter of 1996
and commencement of the stock repurchase program. On April 23,
1997, the Company filed a Current Report on Form 8-K to report
under Item 5, its earnings for the first quarter of 1997.
24
<PAGE> 25
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.
<TABLE>
<S> <C>
DATE: May 7, 1997 /s/ Charles H. Meacham
---------------------------------------------------
Charles H. Meacham
Chairman and Chief Executive Officer
(Principal Executive Officer)
DATE: May 7, 1997 /s/ Charles M. Johnston
---------------------------------------------------
Charles M. Johnston
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
</TABLE>
25
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001005126
<NAME> COMMONWEALTH BANCORP INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 36,792
<INT-BEARING-DEPOSITS> 0
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0
0
<COMMON> 106,680
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