<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..............................September 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.
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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
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(Address of principal executive offices) (Zip Code)
</TABLE>
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 November 6,
1997, there were 17,996,473 issued and 16,244,873 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 September 30, 1997 and December 31, 1996 3
Consolidated Statements of Income for the Quarter and Nine Month 4
Periods Ended September 30, 1997 and 1996
Consolidated Statements of Changes in Shareholders' Equity for the Nine Month
Periods Ended September 30, 1997 and 1996 5
Consolidated Statements of Cash Flows for the Nine Month
Periods Ended September 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 24
</TABLE>
2
<PAGE> 3
Commonwealth Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
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(Unaudited)
<S> <C> <C>
Assets:
Cash and due from banks $ 50,036 $ 39,268
Interest-bearing deposits - 15,111
Short-term investments available for sale 1,074 5,723
Mortgage loans held for sale 45,086 17,335
Investment securities
Securities available for sale (cost of $55,373
and $53,815, respectively), at market value 56,402 53,935
Mortgage-backed securities
Securities held to maturity (market value of $209,715
and $239,447, respectively), at cost 206,559 237,743
Securities available for sale (cost of $561,614
and $511,833, respectively), at market value 566,337 514,964
Loans receivable, net 1,233,319 1,113,114
Accrued interest receivable, net 14,261 13,339
FHLB stock, at cost 14,175 11,159
Premises and equipment, net 18,887 25,369
Intangible assets 46,661 51,220
Mortgage servicing rights 7,810 7,677
Other assets, including net deferred taxes of $364 and
$1,144, respectively 17,492 14,004
----------- -----------
Total assets $ 2,278,099 $ 2,119,961
=========== ===========
Liabilities:
Deposits $ 1,528,514 $ 1,491,450
Notes payable and other borrowings:
Secured notes due to Federal Home Loan Bank of Pittsburgh 213,000 175,000
Securities sold under agreements to repurchase 264,677 176,674
Advances from borrowers for taxes and insurance 16,844 23,883
Accrued interest payable, accrued expenses and other liabilities 43,581 21,030
----------- -----------
Total liabilities 2,066,616 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;
17,994,291 shares issued and 16,242,691 outstanding at September 30, 1997;
17,953,613 shares issued and outstanding at December 31, 1996 1,800 1,795
Additional paid-in capital 133,236 132,931
Retained earnings 114,652 105,577
Unearned stock benefit plan compensation (13,319) (10,510)
Unrealized gain on marketable securities, net 3,797 2,131
Treasury stock, at cost; 1,751,600 shares at September 30, 1997 (28,683) -
----------- -----------
Total shareholders' equity 211,483 231,924
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Total liabilities and shareholders' equity $ 2,278,099 $ 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 Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $24,274 $20,208 $69,378 $53,903
Interest and dividends on deposits and money
market investments 436 870 1,590 2,258
Interest on investment securities 966 991 3,214 2,494
Interest on mortgage-backed securities 13,861 12,707 41,928 32,078
------------ ------------ ------------ ------------
Total interest income 39,537 34,776 116,110 90,733
Interest expense:
Interest on deposits 14,942 13,759 43,368 35,264
Interest on notes payable and other borrowings 6,971 4,225 19,356 12,150
------------ ------------ ------------ ------------
Total interest expense 21,913 17,984 62,724 47,414
------------ ------------ ------------ ------------
Net interest income 17,624 16,792 53,386 43,319
Provision for loan losses 300 201 900 301
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 17,324 16,591 52,486 43,018
Noninterest income:
Deposit fees and related income 2,076 1,461 5,373 3,667
Servicing fees 1,468 1,323 3,794 3,950
Net gain on sales of mortgage loans 1,666 487 3,298 1,485
Net loss on sales of securities - - (175) -
Net loss on sales of foreclosed real estate (29) (78) (130) (204)
Other 512 1,519 2,862 2,234
------------ ------------ ------------ ------------
Total noninterest income 5,693 4,712 15,022 11,132
------------ ------------ ------------ ------------
Noninterest expense:
Compensation and employee benefits 8,679 6,952 24,500 18,618
Occupancy and office operations 2,613 2,348 7,634 6,279
FDIC premium 191 7,455 357 8,716
Advertising and promotion 501 560 1,383 1,296
Amortization of intangible assets 1,417 1,723 4,573 2,860
Other 3,631 3,367 10,427 8,518
------------ ------------ ------------ ------------
Total noninterest expense 17,032 22,405 48,874 46,287
------------ ------------ ------------ ------------
Income (loss) before income taxes 5,985 (1,102) 18,634 7,863
Income tax provision (benefit) 1,984 (423) 6,283 2,735
------------ ------------ ------------ ------------
Net income (loss) $4,001 ($679) $12,351 $5,128
============ ============ ============ ============
Weighted-average number of shares outstanding 15,968,267 17,124,366 16,195,633 11,603,803
============ ============ ============ ============
Earnings per share $0.25 ($0.04) $0.76 $0.44
============ ============ ============ ============
</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 Unrealized
Common Additional Stock Gain/(Loss)
Shares Common Paid-in Retained Benefit Plan On Marketable Treasury
Outstanding Stock Capital Earnings Compensation Securities, net Stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <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 - $137,036
Net income 5,128 5,128
Dividends (1,948) (1,948)
Release of ESOP shares (a) 239 592 831
Amortization of unearned
compensation 189 189
Exercise of stock options 13 1 133 134
Decrease in unrealized gain on
marketable securities, net of tax (2,854) (2,854)
Issuance and exchange of common
stock as a result of the
conversion/reorganization (b) 9,311 931 95,791 (7,898)(c) 88,824
Assets consolidated from
Commonwealth Mutual Holding
Company 100 100
-------------------------------------------------------------------------------------------
Balance at September 30, 1996 17,953 $1,795 $132,849 $102,445 ($9,454) ($195) - $227,440
===========================================================================================
Fiscal 1997
- -----------
Balance at December 31, 1996 17,954 $1,795 $132,931 $105,577 ($10,510) $2,131 - $231,924
Net income 12,351 12,351
Dividends (3,276) (3,276)
Release of ESOP shares (d) 548 691 1,239
Amortization of unearned
compensation 995 995
Exercise of stock options 83 9 391 400
Cash in lieu of fractional shares (2) (21) (21)
Stock retired (40) (4) (613) (617)
Increase in unrealized gain on
marketable securities, net of tax 1,666 1,666
Common stock acquired by stock
benefit plans (4,495) (4,495)
Purchase of Treasury stock (1,752) (28,683) (28,683)
-------------------------------------------------------------------------------------------
Balance at September 30, 1997 16,243 $1,800 $133,236 $114,652 ($13,319) $3,797 ($28,683) $211,483
===========================================================================================
</TABLE>
- ----------
(a) Pre-conversion shares totaling 12,485 were released during the
quarter ended March 31, 1996; 52,468 post conversion shares were
released during the six months ended September 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 78,702 were released during the nine
months ended September 30, 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 Nine Months
Ended September 30,
1997 1996
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(Unaudited)
<S> <C> <C>
Operating activities:
Net income $ 12,351 $ 5,128
Adjustments to reconcile net income to net cash
provided by (used in) operating activities-
Proceeds from loans sold to others 218,294 217,864
Loans originated for sale (207,390) (138,804)
Purchases of loans held for sale (37,383) (73,729)
Principal collection on mortgage loans held for sale 384 3,721
Net gain on sales of mortgage loans (3,298) (1,485)
Increase in net deferred loan fees 126 396
Provision for loan losses and foreclosed real estate 965 561
Net (gain) loss on sales of assets (1,531) 204
Depreciation and amortization 2,341 2,194
Net amortization of other assets and liabilities 7,604 4,855
Interest reinvested on repurchase agreements (9,932) (5,318)
Changes in assets and liabilities-
(Increase) Decrease in-
Accrued interest receivable, net (922) (2,708)
Deferred income taxes 780 (282)
Other assets (6,918) (7,587)
(Decrease) Increase in-
Advances from borrowers for taxes and insurance (7,039) (10,547)
Accrued interest payable, accrued expenses and other liabilities 22,549 21,130
--------- ---------
Net cash provided by (used in) operating activities ($ 9,019) $ 15,593
--------- ---------
(continued)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
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Commonwealth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1997 1996
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(Unaudited)
<S> <C> <C>
Investing activities:
Proceeds from maturities of investment securities $38,000 $18,749
Purchases of investment securities (39,402) (32,894)
Proceeds from sale of mortgage-backed securities 41,770 -
Purchases of mortgage-backed securities (174,616) (412,676)
Principal collected on mortgage-backed securities 114,249 95,632
Principal collected on loans 169,153 89,296
Loans originated (267,917) (63,328)
Loans purchased (21,309) (152,440)
Sales of real estate acquired through foreclosure 1,134 433
Purchase of FHLB Stock (3,016) (5,343)
Sale of FHLB Stock - 3,096
Purchases of premises and equipment (5,473) (3,718)
Acquisition of Branch - 215,170
Proceeds from sales of assets 11,145 5
--------- ---------
Net cash used in investing activities (136,282) (248,018)
--------- ---------
Financing activities:
Net increase in deposits 37,064 12,213
Proceeds from notes payable and other borrowings 324,815 362,162
Repayment of notes payable and other borrowings (188,880) (220,923)
Net (purchase) issuance of common stock (33,416) 88,958
Cash dividends paid (3,274) (1,948)
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Net cash provided by financing activities 136,309 240,462
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Net (decrease) increase in cash and cash equivalents (8,992) 8,037
Cash and cash equivalents at beginning of period 60,102 50,177
--------- ---------
Cash and cash equivalents at end of period $51,110 $58,214
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for-
Interest $49,088 $35,185
========= =========
Income taxes $6,925 $4,266
========= =========
</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 September 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 September 16, 1997, the Board of Directors declared a $0.07 per
share cash dividend for the three months ended September 30, 1997, which was
payable on October 10, 1997 to shareholders of record at the close of business
on September 26, 1997. During both the first and third quarters of 1997, the
Company purchased 0.9 million shares of treasury stock, at an average share
price of $15.34 and $17.47, respectively, for an aggregate purchase of $13.8
million and $14.9 million, respectively.
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 for both interim and annual periods ending after
December 15, 1997, primary and fully diluted EPS will be replaced by basic and
diluted EPS. Prior period results will be restated. The most significant
difference is that basic EPS no longer assumes potentially dilutive securities
in the computation. Calculating EPS under the new method has no material impact
on 1996 or nine months ended September 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
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Commonwealth Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Earnings Per Share
Earnings per share of common stock were $0.25 in the third quarter of
1997, compared to a net loss of ($0.04) per share in the third quarter of 1996.
Earnings per share of common stock were $0.76 for the nine months ended
September 30, 1997, compared to $0.44 per share for the nine months ended
September 30, 1996. Exclusive of the SAIF special assessment, earnings per share
of common stock would have been $0.22 for the third quarter of 1996 and $0.83
for the nine months ended September 30, 1996. The decrease in earnings per share
for the nine months ended September 30, 1997 compared to the nine months ended
September 30, 1996, as adjusted, was primarily attributable to an increase in
the number of common shares outstanding after the completion of the Company's
second-step conversion in June 1996, as well as the time required to deploy the
related capital into investments with acceptable long-term profitability
characteristics.
Earnings per share were computed by dividing net income for the
quarter and nine months ended September 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
15,968,267 and 17,124,366 for the quarter ended September 30, 1997 and 1996,
respectively. The average shares outstanding were 16,195,633 and 11,603,803 for
the nine months ended September 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 nine
months of 1997, the Homestead offices originated loans totaling $113.2 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 September 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 $158.1 million, or 7%, from $2.1
billion at December 31, 1996, to $2.3 billion at September 30, 1997. The
increase was primarily the result of a $120.2 million increase in loans
receivable. Increases in mortgage loans held for sale and mortgage-backed
securities also contributed to the increase in total assets. These increases
were offset, in part, by a decrease in cash, interest-bearing deposits, and
short-term investments ("cash and cash equivalents"), premises and equipment,
and intangible assets. Total liabilities increased by $178.6 million, or 9%,
from $1.9 billion at December 31, 1996, to $2.1 billion at September 30, 1997.
This increase was primarily the result 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 September 30,
1997, equaled $211.5 million, compared to $231.9 million at December 31, 1996.
This $20.4 million, or 9%, decrease was primarily the result of the $28.7
million purchase of 1.8 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 $9.1 million, or 9%, increase in retained earnings.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents decreased by
$9.0 million, or 15%, from $60.1 million at December 31, 1996, to $51.1 million
at September 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 $27.8 million, or 160%, from $17.3 million at December 31, 1996, to $45.1
million at September 30, 1997. The increase was attributable to an increase in
loans originated during September 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 $2.5
million, or 5%, from $53.9 million at December 31, 1996, to $56.4 million at
September 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, offset, in part, by the
maturity or call of U.S. Treasury and U.S. Government agency securities.
Investments in debt and equity securities at September 30, 1997 and December 31,
1996, were as follows:
<TABLE>
<CAPTION>
September 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 $39,972 $ 84 $ - $40,056
Mortgage Security Mutual Fund 2,326 26 - 2,352
Equity Servicing Partnership 4,819 - - 4,819
Other Equity Investments 8,256 919 - 9,175
---------------------------------------------------------------------
Total $55,373 $ 1,029 $ - $56,402
=====================================================================
</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 September 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
$20.2 million, or 3%, from $752.7 million at December 31, 1996, to $772.9
million at September 30, 1997. The increase was attributable to a $18.6 million
net increase in the balance of mortgage-backed securities and a $1.6 million
increase in the unrealized gain on available for sale mortgage-backed
securities. The increase in mortgage-backed securities during the first nine
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. The increase was offset, in part, by the
maturity of $6.6 million of mortgage-backed securities during the third quarter
of 1997. 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 on 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 September 30,
1997 and December 31, 1996, $494.7 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 September 30, 1997 and December 31, 1996, $278.2 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>
September 30, 1997
---------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Held to maturity:
GNMA $ 79,010 $ 2,416 $ 199 $ 81,227
FHLMC 45,390 692 - 46,082
FNMA 76,566 747 500 76,813
Private 5,593 - - 5,593
---------------------------------------------------------------------
Total $206,559 $ 3,855 $ 699 $209,715
=====================================================================
Available for sale:
GNMA $ 7,092 $ 572 $ - $ 7,664
FHLMC 103,421 2,882 17 106,286
CMO and REMIC 365,167 1,626 1,037 365,756
FNMA 85,934 951 254 86,631
---------------------------------------------------------------------
Total $561,614 $ 6,031 $ 1,308 $566,337
=====================================================================
</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 $120.2
million, or 11%, during the first nine months of 1997 to $1.2 billion at
September 30, 1997. The following table depicts the composition of the Company's
loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------------------ ------------------
% of % of
Amount Total Amount Total
------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Mortgage loans - Residential (1) $ 947,139 76.24% $ 857,053 76.37%
Consumer loans:
Equity lines of credit 43,784 3.52 49,136 4.38
Second mortgage 90,722 7.30 77,304 6.89
Other 49,927 4.02 42,867 3.82
---------- --------- ---------- ------
Total consumer loans 184,433 14.84 169,307 15.09
Commercial loans:
SBA variable rate loans (2) 20,630 1.66 25,104 2.24
Commercial real estate 53,067 4.27 35,452 3.15
Business loans 37,100 2.99 35,380 3.15
---------- --------- ---------- ------
Total commercial loans 110,797 8.92 95,936 8.54
---------- --------- ---------- ------
Total loans receivable 1,242,369 100.00% 1,122,296 100.00%
========== ========= ========== ======
Less:
Premium on loans purchased (2,846) (3,655)
Allowance for loan losses 9,148 9,971
Deferred loan fees 2,748 2,866
---------- ----------
Loans receivable, net $1,233,319 $1,113,114
========== ==========
</TABLE>
- ----------
(1) At September 30, 1997 and December 31, 1996, $623.8 million, or 66%,
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 $421.9 million for
the nine months ended September 30, 1997, compared to $369.4 million for the
nine months ended September 30, 1996. The $52.5 million increase in ComNet's
production was primarily attributable to a $113.2 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 $139.5
million during the nine months ended September 30, 1997, compared to $194.0
million for the nine months ended September 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 $282.5 million during
the nine months ended September 30, 1997, compared to $175.4 million for the
nine months ended September 30, 1996.
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
As of September 30, 1997, commercial loans (other than loans
guaranteed by the Small Business Administration ("SBA")) totaled $90.2 million,
or 7%, of the Company's total loan portfolio, as compared to $70.8 million, or
6%, at December 31, 1996. At September 30, 1997, commercial loans (other than
SBA loans) were comprised of $53.1 million of commercial real estate loans and
$37.1 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 $1.6 million, or 17%, from $9.1 million at December
31, 1996, to $10.7 million at September 30, 1997. At September 30, 1997, the
Company's $10.7 million of non-performing assets amounted to 0.47% 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>
September 30, 1997 December 31, 1996
------------------ -----------------
(Dollars in Thousands)
<S> <C> <C>
Mortgage loans - Residential $ 5,058 $5,240
Consumer loans 1,208 1,335
Commercial loans (1) 3,625 1,483
------- -----
Total non-performing loans 9,891 8,058
Real estate owned, net 814 1,090
------- -----
Total non-performing assets (1) $10,705 $9,148
======= =====
Non-performing loans to total loans held for
investment (1) 0.86% 0.72%
==== =====
Total non-performing assets to total assets (1) 0.47% 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 September 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 $9.1 million at September 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 September 30, 1997, the Company's
allowance for loan losses amounted to 92% of total non-performing loans and
0.74% 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. The Company
acquired a $2.4 million allowance for credit losses as part of the Berks
Acquisition. Through September 30, 1997, approximately $1.5 million of that
reserve had been utilized through net credit losses. The following table sets
forth the activity in the Company's allowance for loan losses during the periods
indicated.
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
1997 1996
---- ----
(Dollars in Thousands)
<S> <C> <C>
Allowance at beginning of period $ 9,971 $ 7,485
Provision for credit losses 900 300
Charge-offs:
Mortgage loans - Residential (425) (97)
Consumer loans (1,102) (75)
Commercial loans (387) -
-------- --------
Total charge-offs (1,914) (172)
Recoveries:
Mortgage loans - Residential 126 74
Consumer loans 42 16
Commercial loans 23 7
-------- --------
Total recoveries 191 97
Allowance acquired in Berks
Acquisition - 2,372
-------- --------
Allowance at end of period $ 9,148 $ 10,082
======== ========
Allowance for loan losses to
total non-performing loans at
end of period 92.49% 143.39%
======== ========
Allowance for loan losses to
total loans held for investment
at end of period 0.74% 0.96%
======== ========
</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 $6.5
million, or 26%, from $25.4 million at December 31, 1996, to $18.9 million at
September 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. This decrease was
offset, in part, by a $2.8 million increase related to capitalized costs of the
Norristown headquarters building.
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>
September 30, 1997 December 31, 1996
------------------ -----------------
(In Thousands)
<S> <C> <C>
Goodwill (Meridian) $21,431 $22,791
CDI (Meridian) 11,051 13,199
Goodwill (Fidelity Federal) 11,595 12,398
CDI (Fidelity Federal) 2,584 2,832
------- -------
Total $46,661 $51,220
======= =======
</TABLE>
MORTGAGE SERVICING RIGHTS. At September 30, 1997, ComNet's total
servicing portfolio was $2.4 billion compared to $2.1 billion at December 31,
1996. During the nine months ended September 30, 1997, ComNet's servicing
portfolio increased by $296.7 million, or 14%. At September 30, 1997 and
December 31, 1996, ComNet was servicing $1.5 billion and $1.3 billion,
respectively, of third party loans, as well as $879.1 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>
September 30, 1997 December 31, 1996
------------------ -----------------
(In Thousands)
<S> <C> <C>
Purchased Mortgage Servicing Rights $1,730 $2,243
Capitalized Excess Servicing Fees 3,254 3,573
Originated Mortgage Servicing Rights 2,826 1,861
------ ------
Total $7,810 $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 $38.0 million, or 22%, to $213.0 million at September 30, 1997,
from $175.0 million at December 31, 1996. Repurchase agreements increased by
$88.0 million, or 50%, to $264.7 million at September 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 September 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 8.4% $ 187,684
-----
Intangible assets (46,661)
Unrealized gains on
available-for-sale
securities, net of tax (3,131)
----------
Tangible capital,
and ratio to OTS
adjusted total assets 6.3% $ 137,892 1.5% $32,960
===== ========== ===== =======
Core capital,
and ratio to OTS
adjusted total assets 6.3% $ 137,892 3.0% $65,919 5.0% $109,865
===== ========== ===== ======= ===== ========
Core capital,
and ratio to OTS
risk-weighted assets 12.2% $ 137,892 6.0% $ 67,978
===== ========== ===== ========
Allowance for loan
and lease losses 9,148
==========
Supplementary capital 9,148
==========
Total risk-based capital,
and ratio to OTS
risk-weighted assets (1) 13.0% $ 147,040 8.0% $90,637 10.0% $113,296
===== ========== ===== ======= ===== ========
OTS total assets $2,247,096
==========
OTS adjusted total assets $2,197,304
==========
OTS risk-weighted assets $1,132,959
==========
</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
(in thousands)
<TABLE>
<CAPTION>
Quarter Ended September 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 $912,516 $16,946 7.37% $753,563 $14,262 7.53%
Consumer loans 178,030 4,020 8.96% 165,670 3,569 8.57%
Commercial real estate loans 51,305 1,188 9.19% 42,099 785 7.42%
Business loans 55,533 1,115 7.97% 46,467 906 7.76%
---------- ---------- -------- ---------- ---------- -------
Total loans receivable 1,197,384 23,269 7.71% 1,007,799 19,522 7.71%
---------- ---------- -------- ---------- ---------- -------
Mortgage loans held for sale 55,085 1,005 7.24% 36,062 686 7.57%
Mortgage-backed securities 798,389 13,861 6.89% 739,056 12,707 6.84%
Investment securities 62,068 966 6.17% 71,835 991 5.49%
Other earning assets(b) 13,386 436 12.92% 39,851 870 8.69%
---------- ---------- -------- ---------- ---------- -------
Total interest-earning assets 2,126,312 39,537 7.38% 1,894,603 34,776 7.30%
Non- interest-earning assets 147,621 ---------- -------- 155,662 ---------- -------
---------- ----------
Total assets $2,273,933 $2,050,265
========== ==========
Interest-bearing liabilities
Deposits:
Demand deposits(c) $571,529 3,502 2.43% $522,157 3,138 2.39%
Passbook savings deposits 243,061 1,365 2.23% 290,101 1,593 2.18%
Certificates of deposit 723,233 10,076 5.53% 682,668 9,028 5.26%
---------- ---------- ------- ---------- ---------- -------
Total deposits 1,537,823 14,943 3.86% 1,494,926 13,759 3.66%
---------- ---------- ------- ---------- ---------- -------
Notes payable and other borrowings
Repurchase agreements 247,923 3,660 5.86% 155,466 2,321 5.94%
FHLB Advances 229,337 3,310 5.73% 135,043 1,904 5.61%
Other Borrowings 0 0 0.00% 0 0 0.00%
---------- ---------- ------- ---------- ---------- -------
Total borrowings 477,260 6,970 5.79% 290,509 4,225 5.79%
---------- ---------- ------- ---------- ---------- -------
Total interest-bearing liabilities (d) 2,015,083 21,913 4.31% 1,785,435 17,984 4.01%
Non- interest-bearing liabilities 41,213 ---------- ------- 36,854 ---------- -------
---------- ----------
Total liabilities 2,056,296 1,822,289
Shareholders' Equity 217,637 227,976
---------- ----------
Total liabilities and equity $2,273,933 $2,050,265
========== ==========
Net interest-earning assets $111,229 $109,168
========== ==========
Net interest income/
interest rate spread $17,624 3.07% $16,792 3.29%
========== ======= ========== =======
Net interest margin 3.29% 3.53%
======= =======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 105.52% 106.11%
======= =======
</TABLE>
Commonwealth Bancorp, Inc. and Subsidiaries
Average Balance Report
(in thousands)
<TABLE>
<CAPTION>
Year To Date Ended September 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 $867,737 $48,851 7.53% $694,396 $39,278 7.56%
Consumer loans 172,931 11,615 8.98% 131,600 8,914 9.05%
Commercial real estate loans 44,678 3,006 9.00% 22,974 1,339 7.79%
Business loans 58,219 3,375 7.75% 36,071 2,059 7.62%
---------- ---------- ------- ---------- ---------- -------
Total loans receivable 1,143,565 66,847 7.82% 885,041 51,590 7.79%
---------- ---------- ------- ---------- ---------- -------
Mortgage loans held for sale 46,539 2,531 7.27% 42,302 2,313 7.30%
Mortgage-backed securities 803,065 41,928 6.98% 616,906 32,078 6.95%
Investment securities 68,628 3,214 6.26% 61,679 2,494 5.40%
Other earning assets(b) 23,691 1,590 8.97% 34,358 2,258 8.78%
---------- ---------- ------- ---------- ---------- -------
Total interest-earning assets 2,085,488 116,110 7.44% 1,640,286 90,733 7.39%
Non- interest-earning assets 143,579 ---------- ------- 118,249 ---------- -------
---------- ----------
Total assets $2,229,067 $1,758,535
========== ==========
Interest-bearing liabilities
Deposits:
Demand deposits(c) $547,735 10,034 2.45% $465,719 9,008 2.58%
Passbook savings deposits 250,355 4,181 2.23% 230,757 3,591 2.08%
Certificates of deposit 719,223 29,154 5.42% 578,053 22,665 5.24%
---------- ---------- ------- ---------- ---------- -------
Total deposits 1,517,313 43,369 3.82% 1,274,529 35,264 3.70%
---------- ---------- ------- ---------- ---------- -------
Notes payable and other borrowings
Repurchase agreements 237,104 10,465 5.90% 153,940 6,899 5.99%
FHLB Advances 210,458 8,890 5.65% 122,360 5,194 5.67%
Other Borrowings 0 0 0.00% 899 57 8.47%
---------- ---------- ------- ---------- ---------- -------
Total borrowings 447,562 19,355 5.78% 277,199 12,150 5.85%
---------- ---------- ------- ---------- ---------- -------
Total interest-bearing liabilities (d) 1,964,875 62,724 4.27% 1,551,728 47,414 4.08%
Non- interest-bearing liabilities 45,821 ---------- ------- 32,897 ---------- -------
---------- ----------
Total liabilities 2,010,696 1,584,625
Shareholders' Equity 218,371 173,910
---------- ----------
Total liabilities and equity $2,229,067 $1,758,535
========== ==========
Net interest-earning assets $120,613 $88,558
========== ==========
Net interest income/
interest rate spread $53,386 3.17% $43,319 3.31%
========== ======= ========== =======
Net interest margin 3.42% 3.53%
======= =======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 106.14% 105.71%
======= =======
</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 NINE
MONTHS ENDED SEPTEMBER 30, 1997 AND 1996.
GENERAL. Net income was $4.0 million for the third quarter of 1997
compared to a net loss of ($0.7) million for the third quarter of 1996. For the
nine months ended September 30, 1997, net income was $12.4 million compared to
$5.1 million for the nine months ended September 30, 1996. Results for the 1996
periods were affected by a $4.5 million after-tax charge relating to the
recapitalization of the Savings Association Insurance Fund (SAIF). Exclusive of
this one-time charge, net income would have been $3.8 million for the third
quarter of 1996 and $9.6 million for the nine months ended September 30, 1996.
Earnings per share of common stock were $0.25 in the third quarter of
1997, compared to a net loss of ($0.04) per share in the third quarter of 1996.
Earnings per share of common stock were $0.76 for the nine months ended
September 30, 1997, compared to $0.44 per share for the nine months ended
September 30, 1996. Exclusive of the SAIF special assessment, earnings per share
of common stock would have been $0.22 for the third quarter of 1996 and $0.83
for the nine months ended September 30, 1996. The decrease in earnings per share
for the nine months ended September 30, 1997 compared to the nine months ended
September 30, 1996, as adjusted, was primarily attributable to an increase in
the number of common shares outstanding after the completion of the Company's
second-step conversion in June 1996, as well as the time required to deploy the
related capital into investments with acceptable long-term profitability
characteristics.
NET INTEREST INCOME. Net interest income was $17.6 million in the
third quarter of 1997, an increase of 5% compared to $16.8 million in the third
quarter of 1996. For the nine months ended September 30, 1997, net interest
income increased by 23%, to $53.4 million, versus $43.3 million for the same
period in 1996. The increases were primarily attributable to higher
interest-earning asset levels, offset, in part, by a lower net interest margin.
Average interest-earning assets totaled $2.1 billion for both the
third quarter and nine months ended September 30, 1997. This compared to $1.9
billion and $1.6 billion for the third quarter and nine months ended September
30, 1996, respectively. The increases in the third quarter and nine months
average interest-earning assets were due primarily to an increase in the
Company's loan portfolio. Compared to the third quarter of 1996, average
mortgage loans increased 21% to $912.5 million, average consumer loans increased
7% to $178.0 million, and average commercial loans increased 21% to $106.8
million in the third quarter of 1997. Compared to the first nine months of 1996,
average mortgage loans increased 25% to $867.7 million, average consumer loans
increased 31% to $172.9 million, and average commercial loans increased 74% to
$102.9 million in the first nine months of 1997. The increases in average loans
in the third quarter of 1997, relative to the third quarter of 1996, were
primarily attributable to growth in the Company's core businesses of mortgage
banking, retail banking, and business banking. In addition to growth in the
Company's core businesses, the increases in average loans for the first nine
months of 1997, relative to the first nine months of 1996, were also partially
attributable to the June 1996 acquisition of 12 branch offices located in Berks
and Lebanon Counties, PA ("Berks Acquisition").
The net interest margin was 3.29% in the third quarter of 1997, down
from 3.53% in the third quarter of 1996. The decrease was primarily attributable
to a 0.22% 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 third 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.
For the nine months ended September 30, 1997, the net interest margin
was 3.42%, versus 3.53% in the comparable 1996 period. The decrease was
primarily attributable to a 0.14% decrease in the net interest spread. The
reduction in the net interest spread for the first nine months of 1997 was
attributable to the same factors responsible for the third quarter decrease.
22
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
NONINTEREST INCOME. Noninterest income totaled $5.7 million in the
third quarter of 1997 compared to $4.7 million in the third quarter of 1996. The
increase reflected a $1.2 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 mortgage production offices acquired from
Homestead Mortgage, Inc. ("Homestead") in the first quarter of 1997. Also
contributing to the increase in noninterest income in the third quarter of 1997
was a $0.6 million increase in deposit fees, which was primarily attributable to
growth in supermarket banking, expansion of Commonwealth's business banking
activities, and increased ATM fees. Servicing fee income increased primarily as
a result of a $0.2 million gain on the sale of mortgage servicing rights. These
favorable effects were offset, in part, by a $1.0 million decrease in other
noninterest income, primarily due to a favorable litigation settlement in the
third quarter of 1996.
Noninterest income was $15.0 million for the nine months ended
September 30, 1997 compared to $11.1 million for the same 1996 period. The
increase reflected a $1.8 million increase in the net gain on sale of mortgage
loans and a $1.7 million increase in deposit fees. These increases were
primarily attributable to the same factors responsible for the increases in the
third quarter of 1997, as well as to deposit fees related to the Berks
Acquisition. Also contributing to the increase in noninterest income for the
nine months ended September 30, 1997 was a $1.5 million net gain on the sale of
the Company's previous headquarters building and the sale of a branch property.
These increases were partially offset by the effect of the favorable litigation
settlement in the third quarter of 1996, a $0.2 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.
NONINTEREST EXPENSE. Noninterest expense was $17.0 million in the
third quarter of 1997 compared to $22.4 million in the third quarter of 1996.
The decrease was due to a $7.3 million decrease in FDIC premiums, $6.8 million
of which represented a one-time charge in the third quarter of 1996 to
recapitalize the SAIF and $0.5 million of which primarily represented a
reduction in deposit insurance premiums from $0.23 to approximately $0.06 per
$100 of deposits. During the third quarter of 1996, Commonwealth also recorded
approximately $0.8 million in one-time expenses associated with the Berks
Acquisition. Also contributing to the decrease was a $0.3 million decrease in
amortization of intangibles in the third quarter of 1997, versus the third
quarter of 1996. Partially offsetting these favorable effects were higher
expenses relating to the acquisition of the Homestead mortgage production
offices, as well as higher expenses relating to certain benefit plans and growth
in supermarket banking and business banking activities.
Noninterest expense was $48.9 million for the nine months ended
September 30, 1997 compared to $46.3 million for the same period in 1996. In
addition to the factors identified for the third quarter of 1997, the increase
was primarily attributable to higher expenses relating to the Berks Acquisition.
The increase in noninterest expense was offset, in part, by a $0.2 million
refund of prior year FDIC premiums received in the first quarter of 1997. Also
partially offsetting the increase in noninterest expense was a $0.4 million
reversal of a liability relating to a contract with the Company's data
processing provider, and a $0.4 million reversal of the Bank's pension
liability. During 1997, the Bank terminated its defined benefit pension plan,
and replaced it with a target benefit plan.
PROVISION FOR CREDIT LOSSES. Provision for credit losses totaled $0.3
million and $0.9 million in the third quarter and nine months ended September
30, 1997, respectively. The provision for credit losses totaled $0.2 million and
$0.3 million in the third quarter and nine months ended September 30, 1996,
respectively. At September 30, 1997, the allowance for credit losses totaled
$9.1 million, or 0.74% of loans, compared to $10.1 million, or 0.96%, at
September 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. The Company acquired a
$2.4 million allowance for credit losses as part of the Berks Acquisition.
Through September 30, 1997, approximately $1.5 million of that reserve had been
utilized through net credit losses.
PROVISION FOR INCOME TAXES. Provision for income taxes was $2.0
million, or 33% of income before income taxes in the third quarter of 1997,
compared to a ($0.4) million benefit, or 38%, in the third quarter of 1996. For
the first nine months of 1997, provision for income taxes was $6.3 million, or
34% of income before income taxes, compared to $2.7 million, or 35%, in the
first nine months of 1996. The decrease in the income tax rate in the third
quarter and first nine 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
Not applicable
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
a) Not applicable.
b) 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. On September 26, 1997, the Company filed a Current Report
on Form 8-K to report under Item 5, its completion of the stock
repurchase program and its declared cash dividend. On October
22, 1997, the Company filed a Current Report on Form 8-K to
report under Item 5, its earnings for the third 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.
DATE: November 7, 1997 /s/ Charles H. Meacham
----------------------
Charles H. Meacham
Chairman and Chief Executive Officer
(Principal Executive Officer)
DATE: November 7, 1997 /s/ Charles M. Johnston
------------------------
Charles M. Johnston
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
25
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 50,036
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,074
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 667,825
<INVESTMENTS-CARRYING> 206,559
<INVESTMENTS-MARKET> 209,715
<LOANS> 1,242,467
<ALLOWANCE> 9,148
<TOTAL-ASSETS> 2,278,099
<DEPOSITS> 1,545,358
<SHORT-TERM> 0
<LIABILITIES-OTHER> 43,581
<LONG-TERM> 477,677
0
0
<COMMON> 93,034
<OTHER-SE> 118,449
<TOTAL-LIABILITIES-AND-EQUITY> 2,278,099
<INTEREST-LOAN> 69,378
<INTEREST-INVEST> 4,809
<INTEREST-OTHER> 41,928
<INTEREST-TOTAL> 116,110
<INTEREST-DEPOSIT> 43,368
<INTEREST-EXPENSE> 62,724
<INTEREST-INCOME-NET> 53,386
<LOAN-LOSSES> 900
<SECURITIES-GAINS> (175)
<EXPENSE-OTHER> 48,874
<INCOME-PRETAX> 18,634
<INCOME-PRE-EXTRAORDINARY> 18,634
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,351
<EPS-PRIMARY> 0.76
<EPS-DILUTED> 0.76
<YIELD-ACTUAL> 7.44
<LOANS-NON> 9,891
<LOANS-PAST> 0
<LOANS-TROUBLED> 814
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,971
<CHARGE-OFFS> 1,914
<RECOVERIES> 191
<ALLOWANCE-CLOSE> 9,148
<ALLOWANCE-DOMESTIC> 9,148
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
