<PAGE> 1
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended.......................................June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from....................to ....................
Commission File No................................................0-27942
Commonwealth Bancorp, Inc.
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2828883
------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Commonwealth Bank Plaza
2 West Lafayette Street
Norristown, Pennsylvania 19401-4758
------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(610) 313-1600
--------------
Indicate by check mark whether the registrant (1) has filed all
reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
-- --
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: As of August 3,
1998, there were 18,042,639 issued and 15,274,039 outstanding shares of the
Registrant's Common Stock.
1
<PAGE> 2
Commonwealth Bancorp, Inc. and Subsidiaries
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
No. No.
---- ---
<S> <C> <C>
PART I - CONSOLIDATED FINANCIAL INFORMATION
1 Consolidated Financial Statements
Consolidated Balance Sheets at June 30, 1998 and December 31, 1997 3
Consolidated Statements of Income for the Quarter and Six Month
Periods Ended June 30, 1998 and 1997 4
Consolidated Statements of Changes in Shareholders' Equity for the Six Month
Periods Ended June 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for the Six Month
Periods Ended June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 8
2 Management's Discussion and Analysis of Financial Condition and Results of
Operations 12
3 Quantitative and Qualitative Disclosures about Market Risk 24
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, except share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ -------------
Assets: (Unaudited)
<S> <C> <C>
Cash and due from banks $49,959 $43,251
Interest-bearing deposits 3,398 4,391
Short-term investments available for sale 6,853 6,296
Mortgage loans held for sale 73,958 37,574
Investment securities
Securities available for sale (cost of $37,441
and $50,428, respectively), at market value 37,893 51,326
Mortgage-backed securities
Securities held to maturity (market value of $167,049
and $199,048, respectively), at cost 164,170 196,213
Securities available for sale (cost of $541,669
and $534,573, respectively), at market value 544,832 539,078
Loans receivable, net 1,352,888 1,260,841
Accrued interest receivable, net 12,617 13,271
FHLB stock, at cost 18,400 14,175
Premises and equipment, net 17,641 18,590
Intangible assets 42,409 45,244
Mortgage servicing rights 9,837 8,039
Other assets, including net deferred taxes of $1,689
and $482, respectively 33,392 30,306
------------ -------------
Total assets $2,368,247 $2,268,595
============ =============
Liabilities:
Deposits $1,579,067 $1,552,824
Notes payable and other borrowings:
Secured notes due to Federal Home Loan Bank of Pittsburgh 308,000 213,000
Securities sold under agreements to repurchase 212,683 246,099
Advances from borrowers for taxes and insurance 37,078 24,071
Accrued interest payable, accrued expenses and other liabilities 31,658 17,749
------------ -------------
Total liabilities 2,168,486 2,053,743
------------ -------------
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;
18,037,183 shares issued and 15,473,583 outstanding at June 30, 1998;
17,998,736 shares issued and 16,247,136 outstanding at December 31, 1997 1,804 1,800
Additional paid-in capital 134,766 133,541
Retained earnings 120,482 117,582
Unearned stock benefit plan compensation (11,706) (12,900)
Unrealized gain on marketable securities, net 2,350 3,512
Treasury stock, at cost; 2,563,600 and 1,751,600 shares respectively (47,935) (28,683)
------------ -------------
Total shareholders' equity 199,761 214,852
------------ -------------
Total liabilities and shareholders' equity $2,368,247 $2,268,595
============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
Commonwealth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands, except share amounts)
<TABLE>
<CAPTION>
For the Quarter For the Six Months
Ended June 30, Ended June 30
------------------------ --------------------------
1998 1997 1998 1997
----------- ---------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $26,527 $23,049 $51,910 $45,104
Interest and dividends on deposits and money
market investments 775 589 1,458 1,154
Interest on investment securities 609 1,234 1,352 2,248
Interest on mortgage-backed securities 12,750 14,246 25,020 28,067
----------- ---------- ----------- -----------
Total interest income 40,661 39,118 79,740 76,573
Interest expense:
Interest on deposits 14,949 14,511 29,893 28,426
Interest on notes payable and other borrowings 8,017 6,693 14,637 12,385
----------- ---------- ----------- -----------
Total interest expense 22,966 21,204 44,530 40,811
----------- ---------- ----------- -----------
Net interest income 17,695 17,914 35,210 35,762
Provision for loan losses 1,000 300 1,500 600
----------- ---------- ----------- -----------
Net interest income after provision for loan losses 16,695 17,614 33,710 35,162
Noninterest income:
Deposit fees and related income 2,275 1,763 4,326 3,297
Servicing fees 1,027 1,124 2,074 2,326
Net gain on sale of mortgage loans 2,745 913 4,837 1,632
Net gain (loss) on sale of securities 687 (175) 687 (175)
Net loss on sale of foreclosed real estate (59) (32) (91) (101)
Other 704 368 1,552 2,350
----------- ---------- ----------- -----------
Total noninterest income 7,379 3,961 13,385 9,329
----------- ---------- ----------- -----------
Noninterest expense:
Compensation and employee benefits 10,130 7,883 19,119 15,821
Occupancy and office operations 2,569 2,594 5,169 5,021
FDIC premium 195 197 388 166
Advertising and promotion 542 464 979 882
Amortization of intangible assets 1,417 1,578 2,834 3,156
Other 6,995 3,399 10,730 6,796
----------- ---------- ----------- -----------
Total noninterest expense 21,848 16,115 39,219 31,842
----------- ---------- ----------- -----------
Income before income taxes 2,226 5,460 7,876 12,649
Income tax provision 757 1,780 2,555 4,299
----------- ---------- ----------- -----------
Net income $1,469 $3,680 $5,321 $8,350
=========== ========== =========== ===========
Basic weighted average number of shares outstanding 14,661,101 15,631,154 14,821,577 15,873,064
=========== ========== =========== ===========
Basic earnings per share $0.10 $0.24 $0.36 $0.53
=========== ========== =========== ===========
Diluted weighted average number of shares outstanding 15,427,517 16,068,527 15,533,608 16,311,200
=========== ========== =========== ===========
Diluted earnings per share $0.10 $0.23 $0.34 $0.51
=========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
Commonwealth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Unearned
Common Additional Stock
Shares Common Paid-In Retained Benefit Plan
Outstanding Stock Capital Earnings Compensation
- ---------------------------------------------------------------------------------------------------------------------
Fiscal 1997
- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 17,954 $1,795 $132,931 $105,577 ($10,510)
Net income 8,350
Dividends (2,196)
Release of ESOP shares (a) 331 461
Amortization of unearned compensation 659
Exercise of stock options 82 9 387
Cash in lieu of fractional shares (2) (21)
Stock retired (40) (4) (613)
Decrease in unrealized gain on marketable
securities, net of tax
Common stock acquired by stock benefit plans (4,495)
Purchase of Treasury stock (898)
----------------------------------------------------------------
Balance at June 30, 1997 17,096 $1,800 $133,015 $111,731 ($13,885)
================================================================
Fiscal 1998
- -----------
Balance at December 31, 1997 16,247 $1,800 $133,541 $117,582 ($12,900)
Net income 5,321
Dividends (2,421)
Release of ESOP shares (a) 678 460
Amortization of unearned compensation 734
Exercise of stock options 39 4 218
Decrease in unrealized gain on marketable
securities, net of tax
Purchase of Treasury stock (812)
Tax benefit on employee stock plans 329
----------------------------------------------------------------
Balance at June 30, 1998 15,474 $1,804 $134,766 $120,482 ($11,706)
================================================================
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Gain/(Loss)
On Marketable Treasury
Securities, net Stock Total
- -------------------------------------------------------------------------------------------------
Fiscal 1997
- -----------
<S> <C> <C> <C>
Balance at December 31, 1996 $2,131 $ - $231,924
Net income 8,350
Dividends (2,196)
Release of ESOP shares (a) 792
Amortization of unearned compensation 659
Exercise of stock options 396
Cash in lieu of fractional shares (21)
Stock retired (617)
Decrease in unrealized gain on marketable
securities, net of tax (620) (620)
Common stock acquired by stock benefit plans (4,495)
Purchase of Treasury stock (13,767) (13,767)
---------------------------------------------
Balance at June 30, 1997 $1,511 ($13,767) $220,405
=============================================
Fiscal 1998
- -----------
Balance at December 31, 1997 $3,512 ($28,683) $214,852
Net income 5,321
Dividends (2,421)
Release of ESOP shares (a) 1,138
Amortization of unearned compensation 734
Exercise of stock options 222
Decrease in unrealized gain on marketable
securities, net of tax (1,162) (1,162)
Purchase of Treasury stock (19,252) (19,252)
Tax benefit on employee stock plans 329
---------------------------------------------
Balance at June 30, 1998 $2,350 ($47,935) $199,761
=============================================
</TABLE>
- -------------------------------------
(a) Shares totaling 52,468 were released during the six month periods
ended June 30, 1998 and 1997.
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
Commonwealth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
Operating activities:
Net income $5,321 $8,350
Adjustments to reconcile net income to net cash
(used in) provided by operating activities-
Proceeds from loans sold to others 316,560 127,827
Loans originated for sale (248,673) (130,718)
Purchases of loans held for sale (101,942) (16,695)
Principal collection on mortgage loans held for sale 439 234
Net gain on sale of mortgage loans (4,837) (1,632)
Increase in net deferred loan fees 471 328
Provision for loan losses and foreclosed real estate 1,537 608
Gain on sale of investment securities (687) -
Valuation adjustment on an equity investment 2,818 -
Net gain on sale of assets - (1,531)
Depreciation and amortization 1,709 1,538
Net amortization of other assets and liabilities 4,973 5,104
Interest reinvested on repurchase agreements (5,571) (6,620)
Changes in assets and liabilities-
Decrease (increase) in-
Accrued interest receivable, net 654 (677)
Deferred income taxes (1,207) (344)
Other assets (2,701) (8,157)
Increase in-
Advances from borrowers for taxes and insurance 13,007 10,789
Accrued interest payable, accrued expenses and other liabilities 13,909 21,341
----------- -----------
Net cash (used in) provided by operating activities ($4,220) $9,745
----------- -----------
(continued)
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
Commonwealth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Investing activities:
Proceeds from sale of investment securities $1,442 $ -
Proceeds from maturities of investment securities 30,000 10,000
Purchases of investment securities (20,000) (38,402)
Proceeds from sale of mortgage-backed securities - 41,770
Proceeds from call of mortgage-backed securities 30,000 -
Purchases of mortgage-backed securities (156,958) (164,692)
Principal collected on mortgage-backed securities 151,905 63,887
Principal collected on loans 228,090 108,470
Loans originated (221,821) (108,886)
Loans purchased (99,542) (75,258)
Sales of real estate acquired through foreclosure 645 887
Purchase of FHLB Stock (4,225) (3,016)
Purchases of premises and equipment (1,035) (1,850)
Proceeds from sales of assets 44 11,140
------------ ------------
Net cash used in investing activities (61,455) (155,950)
------------ ------------
Financing activities:
Net increase in deposits 26,243 27,465
Proceeds from notes payable and other borrowings 612,239 241,815
Repayment of notes payable and other borrowings (545,084) (114,297)
Net purchase of common stock (19,030) (18,504)
Cash dividends paid (2,421) (2,145)
------------ ------------
Net cash provided by financing activities 71,947 134,334
------------ ------------
Net increase (decrease) in cash and cash equivalents 6,272 (11,871)
Cash and cash equivalents at beginning of period 53,938 60,102
------------ ------------
Cash and cash equivalents at end of period $60,210 $48,231
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for-
Interest $33,828 $31,840
============ ============
Income taxes $2,800 $5,273
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE> 8
Commonwealth Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary for a fair presentation of Commonwealth
Bancorp, Inc.'s ("Commonwealth" or the "Company") financial condition as of
June 30, 1998 and the results of operations, changes in shareholders' equity,
and cash flows for the periods presented.
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, 1997. Certain items in the 1997 financial statements and footnotes have been
reclassified in order to conform with the 1998 financial statement and footnote
presentation.
The Company is a Pennsylvania corporation which is the holding
company for Commonwealth Bank ("Bank"). Headquartered in Norristown, PA,
Commonwealth Bank has offices located in Berks, Bucks, Chester, Delaware,
Lebanon, Lehigh, Montgomery, and Philadelphia Counties, Pennsylvania. ComNet
Mortgage Services ("ComNet'), a division of the Bank, has offices in
Pennsylvania, Connecticut, New Jersey, Rhode Island, and Virginia. ComNet
operates under the trade name of Homestead Mortgage in Maryland.
2. Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Commonwealth; Commonwealth Bank; CFSL Investment Corporation;
Commonwealth Investment Corporation of Delaware, Inc.; ComLife, Inc.; CS
Corporation; Firstcor, Ltd.; and QME, Inc. All material intercompany accounts
and transactions have been eliminated in consolidation.
3. Shareholders' Equity
On June 16, 1998, the Board of Directors declared a $0.08 per share
cash dividend for the quarter ended June 30, 1998, which was made payable to
shareholders of record at the close of business on June 26, 1998. This dividend
was paid on July 10, 1998. During the second quarter of 1998, the Company
purchased 0.8 million shares of treasury stock, at an average cost of $23.71 per
share, for an aggregate purchase of $19.3 million. On June 22, 1998, the Board
of Directors authorized the repurchase of up to 0.8 million shares, or
approximately 5 percent, of its outstanding common stock. This repurchase
program represents Commonwealth's fourth such program in the past two years. In
the previous three programs, a total of 2.6 million shares were repurchased at
an average price of $18.70 per share.
4. Future Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." The statement establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting.
8
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Commonwealth Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. A company may also implement the statement as of the beginning of any
fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998
and thereafter). SFAS No. 133 cannot be applied retroactively and must be
applied to derivative instruments and certain derivative instruments embedded in
hybrid contracts that were issued, acquired, or substantively modified after
December 31, 1997 (and, at the company's election, before January 1, 1998).
Commonwealth has not yet quantified the financial statement impacts of adopting
SFAS No. 133 and has not determined the timing of or method of the adoption of
SFAS No. 133. However, the Statement could increase volatility in earnings and
other comprehensive income.
SFAS No. 131 "Disclosures about Segments of an Enterprise and
Related Information" was issued in June 1997. This statement is effective for
fiscal years beginning after December 15, 1997, and need not be applied to
interim statements in the initial year of application. SFAS No. 131 introduces a
new model for segment reporting, called the "management approach." The
management approach is based on the way the chief operating decision maker
organizes segments within a company for making operating decisions and assessing
performance. Reportable segments are based on product and services, geography,
legal structure, management structure - any manner in which management
disaggregates a company. The management approach replaces the notion of industry
and geographic segments in current FASB standards. The Company intends to report
information on two segments as a result of the adoption of SFAS No. 131, the
Banking Operations and the Mortgage Operations.
5. Earnings Per Share
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 have been replaced by basic and
diluted EPS. Prior period results have been 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 previously reported 1997 EPS figures.
Basic EPS is calculated by dividing net income available to common
shareholders by the weighted average number of common shares outstanding during
the period, adjusted for Employee Stock Ownership Plan ("ESOP") shares that have
not been committed to be released, and the effects of shares held by the
Recognition Plans. Options, warrants, and other potentially dilutive securities
and treasury shares are excluded from the basic calculation, as follows:
<TABLE>
<CAPTION>
For the Quarter Ended June 30,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Basic weighted average number of common shares outstanding 14,661,101 15,631,154
Effect of diluted securities:
Stock options 622,891 341,122
Recognition Plan stock 143,525 96,251
------- --------
Diluted weighted average number of common shares outstanding 15,427,517 16,068,527
========== ==========
</TABLE>
9
<PAGE> 10
Commonwealth Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
1998 1997
----- -----
<S> <C> <C>
Basic weighted average number of common shares outstanding 14,821,577 15,873,064
Effect of diluted securities:
Stock options 585,778 350,591
Recognition Plan stock 126,253 87,545
------- --------
Diluted weighted average number of common shares outstanding 15,533,608 16,311,200
========== ==========
</TABLE>
Diluted EPS is computed by dividing net income available to common
shareholders by the weighted average number of shares of common stock
outstanding during the period, adjusted for ESOP shares that have not been
committed to be released, and the effects of shares held by the Recognition
Plans. The effect of diluted securities, such as stock options and Recognition
Plan stock, are considered common stock equivalents and are included in the
computation of the number of outstanding shares using the treasury stock method.
Common shares outstanding exclude treasury shares.
Basic EPS was $0.10 for the quarter ended June 30, 1998, compared to
$0.24 per share for the quarter ended June 30, 1997. Diluted EPS was $0.10 for
the quarter ended June 30, 1998, compared to $0.23 per share for the quarter
ended June 30, 1997.
Basic EPS was $0.36 for the six months ended June 30, 1998, compared
to $0.53 per share for the six months ended June 30, 1997. Diluted EPS was $0.34
for the six months ended June 30, 1998, compared to $0.51 per share for the
six months ended June 30, 1997.
10
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Commonwealth Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income" was issued in July
1997. The Company adopted SFAS No. 130 on January 1, 1998, as required. SFAS No.
130 established 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. Such components of total
comprehensive income for the Company are net income and unrealized gains on
marketable securities, net of tax, as follows:
<TABLE>
<CAPTION>
For the Quarter Ended June 30,
------------------------------
1998 1997
----- -----
(in thousands)
<S> <C> <C>
Net income $1,469 $3,680
Unrealized (loss) gain on marketable securities, net of tax (453) 3,430
-------- --------
Comprehensive income $1,016 $7,110
====== ======
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
1998 1997
----- -----
(in thousands)
<S> <C> <C>
Net income $5,321 $8,350
Unrealized loss on marketable securities, net of tax (1,162) (620)
-------- --------
Comprehensive income $4,159 $ 7,730
====== =======
</TABLE>
7. Acquisitions
On March 31, 1998, Commonwealth Bank acquired selected assets of
Edmunds Financial Corporation d/b/a Service First Mortgage, a mortgage company
headquartered in Annandale, Virginia. Among the assets acquired from Service
First Mortgage was its production branch located in Annandale, Virginia. Under
the terms of the transaction, the group will operate under the ComNet Mortgage
Services name.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
When used in this Form 10-Q, or in future filings by the Company
with the Securities and Exchange Commission, in the Company's press releases or
other public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project", or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties
including changes in economic conditions in the Company's market area, changes
in policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Company's market area and competition that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made to
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
GENERAL. The Company is a Pennsylvania corporation which is the
holding company for the Bank. Commonwealth Bank is a federally chartered stock
savings bank, primarily regulated by the Office of Thrift Supervision ("OTS").
The Bank conducts business from its executive offices in Norristown,
Pennsylvania and, as of June 30, 1998, 58 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, New Jersey, Rhode Island, and Virginia,
and operates under the trade name of Homestead Mortgage in Maryland. ComNet also
conducts business through its wholesale network, which includes correspondents
in 29 states.
On March 31, 1998, Commonwealth Bank acquired selected assets of
Edmunds Financial Corporation d/b/a Service First Mortgage, a mortgage company
headquartered in Annandale, Virginia. Among the assets acquired from Service
First Mortgage was its production branch located in Annandale, Virginia. Under
the terms of the transaction, the group will operate under the ComNet Mortgage
Services name.
YEAR 2000. Commonwealth is primarily dependent on its suppliers of
computer services to become Year 2000 compliant. Commonwealth is monitoring its
computer services provider, as well as its third party system vendors, to ensure
that the Company's systems continue to meet its internal needs and those of its
customers. As a result of Commonwealth's arrangement with these vendors, the
Company does not expect material expenditures to be incurred to address the Year
2000 issue.
FINANCIAL CONDITION
GENERAL. Total assets increased by $99.7 million, or 4%, from $2.3
billion at December 31, 1997, to $2.4 billion at June 30, 1998. The increase was
primarily the result of increases in loans receivable and mortgage loans held
for sale. These increases were offset, in part, by a decrease in mortgage-backed
securities and investment securities. Total liabilities increased by $114.7
million, or 6%, from $2.1 billion at December 31, 1997, to $2.2 billion at June
30, 1998. This increase was the result of increases in notes payable and other
borrowings, deposits, accrued interest payable, accrued expenses and other
liabilities, and advances from borrowers for taxes and insurance. Shareholders'
equity as of June 30, 1998, equaled $199.8 million, compared to $214.9 million
at December 31, 1997. This $15.1 million, or 7%, decrease was primarily the
result of the $19.3 million purchase of $0.8 million shares of treasury stock,
offset, in part, by a $2.9 million, or 2%, increase in earnings retention during
the first six months of 1998.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
CASH, INTEREST-BEARING DEPOSITS, AND SHORT-TERM INVESTMENTS ("CASH
AND CASH EQUIVALENTS"). Cash and cash equivalents increased by $6.3 million, or
12%, from $53.9 million at December 31, 1997, to $60.2 million at June 30, 1998.
MORTGAGE LOANS HELD FOR SALE. Mortgage loans held for sale increased
by $36.4 million, or 97%, from $37.6 million at December 31, 1997, to $74.0
million at June 30, 1998. The increase was primarily attributable to an increase
in loans originated during June 1998.
INVESTMENT SECURITIES. Investment securities decreased by $13.4
million, or 26%, from $51.3 million at December 31, 1997 to $37.9 million at
June 30, 1998. The decrease was primarily attributable to the maturity of U.S.
Treasury and U.S. Government agency securities, the recording of a valuation
adjustment relating to a mortgage servicing partnership equity investment, and
the sale of an equity investment. These decreases were offset, in part, by the
purchase of corporate bonds. Investments in debt and equity securities at June
30, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
June 30, 1998
---------------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Available for sale:
Corporate Bonds $ 19,998 $ 153 $ - $20,151
U.S. Treasury and U.S.
Government agency securities 9,995 24 - 10,019
Mortgage Security Mutual Fund 2,448 - 25 2,423
Mortgage Servicing Partnership 2,500 - - 2,500
Other Equity Investments 2,500 300 - 2,800
---------------------------------------------------------------------------------
Total $ 37,441 $ 477 $ 25 $ 37,893
=================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 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 $ 39,980 $ 61 $ - $ 40,041
Mortgage Security Mutual Fund 2,373 31 - 2,404
Mortgage Servicing Partnership 4,819 - - 4,819
Other Equity Investments 3,256 806 - 4,062
---------------------------------------------------------------------------------
Total $ 50,428 $ 898 $ - $ 51,326
=================================================================================
</TABLE>
Investment securities classified as held to maturity are carried at
amortized cost and are adjusted for amortization of premiums and accretion of
discounts over the life of the related security pursuant to the level-yield
method. Investment securities classified as available for sale are reported at
fair value, with unrealized gains and losses, net of tax, excluded from earnings
and reported as a separate component of shareholders' equity. There were no
investment securities classified as held to maturity at June 30, 1998 and
December 31, 1997.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities decreased by
$26.3 million, or 4%, from $735.3 million at December 31, 1997 to $709.0 million
at June 30, 1998. The decrease in mortgage-backed securities during the first
six months of 1998 was related to repayments and prepayments and the $30 million
call of mortgage-backed securities during the first quarter of 1998. The
decrease was offset, in part, by a strategy to enhance the Company's net
interest income through the purchase of mortgage-backed securities funded
through Federal Home Loan Bank ("FHLB") advances.
Mortgage-backed securities generally increase the quality of the
Company's assets by virtue of the insurance or guarantees related to the
securities, are more liquid than individual mortgage loans, and may be used to
collateralize borrowings or other obligations of the Company. At June 30, 1998
and December 31, 1997, $406.8 million, or 57%, and $479.4 million, or 65%,
respectively, of the Company's mortgage-backed securities were insured or
guaranteed by the Government National Mortgage Association ("GNMA"), the Federal
Home Loan Mortgage Corporation ("FHLMC"), or the Federal National Mortgage
Association ("FNMA"). As part of its investment policy, the Company also has the
ability to invest in private mortgage-backed securities. These non-federally
insured mortgage-backed securities, which are generally rated AA or better,
yield a higher rate of return and involve a higher risk of loss than comparable
mortgage-backed securities issued by the GNMA, FHLMC, or the FNMA, and serve to
further diversity the Company's mortgage-backed securities portfolio. At June
30, 1998 and December 31, 1997, $302.2 million, or 43%, and $255.9 million, or
35%, respectively, of the Company's mortgage-backed securities were private
mortgage-backed securities. The following table sets forth the Company's
mortgage-backed securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30, 1998
--------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Held to maturity:
GNMA $ 62,971 $2,085 $ - $ 65,056
FHLMC 35,994 360 20 36,334
FNMA 60,568 482 28 61,022
Private 4,637 - - 4,637
--------------------------------------------------------------------------------------
Total $164,170 $2,927 $ 48 $167,049
======================================================================================
Available for sale:
GNMA $ 15,113 $ 526 $ - $ 15,639
FHLMC 82,866 1,785 24 84,627
FNMA 83,100 801 331 83,570
CMO and REMIC 360,590 1,283 877 360,996
--------------------------------------------------------------------------------------
Total $541,669 $4,395 $1,232 $544,832
======================================================================================
</TABLE>
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Held to maturity:
GNMA $ 74,677 $2,251 $ 174 $ 76,754
FHLMC 43,256 485 - 43,741
FNMA 72,970 506 233 73,243
Private 5,310 - - 5,310
------------------------------------------------------------------------------------
Total $196,213 $3,242 $ 407 $199,048
====================================================================================
Available for sale:
GNMA $ 16,572 $ 560 $ 16 $ 17,116
FHLMC 98,092 2,682 26 100,748
FNMA 81,531 865 388 82,008
CMO and REMIC 338,378 1,589 761 339,206
------------------------------------------------------------------------------------
Total $534,573 $5,696 $1,191 $539,078
====================================================================================
</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. Loans receivable, net of reserves and unamortized
discounts and unaccreted premiums, increased by $92.0 million, or 7%, during the
first six months of 1998 to $1.4 billion at June 30, 1998. The following table
depicts the composition of the Company's loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------------------------- -------------------------
% of % of
Amount Total Amount Total
------ ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans - Residential (1) $1,017,159 74.65% $ 958,542 75.51%
Consumer loans:
Equity lines of credit 37,354 2.74 41,592 3.28
Second mortgage 116,798 8.57 98,934 7.79
Recreational vehicles 30,993 2.27 22,182 1.75
Other 35,376 2.60 32,085 2.53
---------- ------ --------- ------
Total consumer loans 220,521 16.18 194,793 15.35
Commercial loans:
Small Business Loans (2) 16,562 1.22 20,016 1.58
Commercial real estate 78,393 5.75 71,508 5.63
Business loans 29,953 2.20 24,456 1.93
---------- ------ --------- ------
Total commercial loans 124,908 9.17 115,980 9.14
---------- ------ --------- ------
Total loans receivable 1,362,588 100.00% 1,269,315 100.00%
---------- ======= --------- =======
Less:
Net premium on loans purchased (2,963) (3,559)
Allowance for loan losses 9,484 9,024
Deferred loan fees 3,179 3,009
---------- ----------
Loans receivable, net $1,352,888 $1,260,841
========== ==========
</TABLE>
- -------------------------------
(1) At June 30, 1998 and December 31, 1997, $516.6 million, or 51%, and
$613.6 million, or 64%, 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 U.S. Government, with the majority adjusting
monthly or quarterly. All such loans or securities were purchased by
the Company.
Total mortgage loans originated and purchased for the six months
ended June 30, 1998, increased by $294.5 million, or 109%, from $270.2 million
for the six months ended June 30, 1997 to $564.7 million for the six months
ended June 30, 1998. The $294.5 million increase in mortgage originations was
the result of increases in retail and wholesale residential mortgage
originations. Closed loans relating to Commonwealth's retail network totaled
$363.4 million during the six months ended June 30, 1998, an increase of 104%
compared to $178.1 million for the six months ended June 30, 1997.
Commonwealth's Wholesale Lending 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. Closed loans relating to
Commonwealth's wholesale network totaled $201.3 million during the six months
ended June 30, 1998, an increase of 119% compared to $92.1 million for the six
months ended June 30, 1997.
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
Consumer loans increased by $25.7 million, or 13%, from $194.8
million at December 31, 1997, to $220.5 million at June 30, 1998. At June 30,
1998, consumer loans represented 16% of the Company's loan portfolio and were
comprised of $37.4 million of equity lines of credit, $116.8 million of second
mortgage loans, $31.0 million of recreational vehicle loans, and $35.4 million
of other consumer loans. At December 31, 1997, consumer loans represented 15% of
total loans and were comprised of $41.6 million of equity lines of credit, $98.9
million of second mortgage loans, $22.2 million of recreational vehicle loans,
and $32.1 million of other consumer loans.
As of June 30, 1998, commercial loans, exclusive of loans guaranteed
by the Small Business Administration ("SBA"), totaled $108.3 million, or 8%, of
the Company's total loan portfolio, as compared to $96.0 million, or 8%, at
December 31, 1997. At June 30, 1998, commercial loans (other than SBA loans)
were comprised of $78.4 million of commercial real estate loans and $30.0
million of business loans. At December 31, 1997, commercial loans (other than
SBA loans) were comprised of $71.5 million of commercial real estate loans and
$24.5 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.
NONPERFORMING ASSETS. The Company's nonperforming assets, which
principally consist of nonaccrual loans and real estate acquired through
foreclosure, increased by $0.1 million, or 2%, from $9.6 million at December 31,
1997, to $9.7 million at June 30, 1998. At June 30, 1998, the Company's $9.7
million of nonperforming assets amounted to 0.41% of total assets. At December
31, 1997, the Company's $9.6 million of nonperforming assets amounted to 0.42%
of total assets. The following table sets forth information relating to the
Company's nonperforming assets at the dates indicated.
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
(dollars in thousands)
<S> <C> <C>
Mortgage loans - Residential $4,773 $5,269
Consumer loans 1,814 1,324
Commercial loans (1) 2,047 2,345
----- -----
Total nonperforming loans 8,634 8,938
Real estate owned, net 1,078 626
----- ------
Total nonperforming assets (1) $9,712 $9,564
===== =====
Nonperforming loans to total loans held for
investment (1) 0.63% 0.70%
==== ====
Total nonperforming assets to total assets (1) 0.41% 0.42%
==== ====
</TABLE>
- -------------
(1) Does not include nonperforming commercial loans which are fully guaranteed
as to principal and interest by the U.S. Government, which amounted to $0.5
million and $1.1 million at June 30, 1998 and December 31, 1997, respectively.
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 $9.5 million at June 30, 1998, compared to $9.0 million at December
31, 1997. It is management's policy to maintain an allowance for estimated loan
losses based upon an assessment of prior loss experience, the volume and type of
lending conducted by the Company, industry standards, past due loans, general
economic conditions, and other factors related to the collectability of the loan
portfolio. At June 30, 1998, the Company's allowance for loan losses amounted to
110% of total nonperforming loans and 0.70% of total loans held for investment,
as compared to 101% of total nonperforming loans and 0.71% of total loans held
for investment at December 31, 1997. 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 Six Months Ended June 30,
----------------------------------------------------------------
1998 1997
---- ----
(dollars in thousands)
<S> <C> <C>
Allowance at beginning of period $9,024 $ 9,971
Provision for loan losses 1,500 600
Charge-offs:
Mortgage loans - Residential ( 177) ( 253)
Consumer loans ( 772) ( 461)
Commercial loans ( 158) (181)
------ -------
Total charge-offs ( 1,107) (895)
Recoveries:
Mortgage loans - Residential - 114
Consumer loans 36 12
Commercial loans 31 13
------ -------
Total recoveries 67 139
------ ------
Allowance at end of period $9,484 $9,815
===== =====
Allowance for loan losses to
total nonperforming loans at
end of period 109.84% 94.24%
====== =====
Allowance for loan losses to
total loans held for investment
at end of period 0.70% 0.82%
==== ====
</TABLE>
- ---------------
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
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 Berks Acquisition in
1996 and the Fidelity Federal Acquisition in 1995. The following table details
the components of intangible assets at the dates indicated.
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
(in thousands)
<S> <C> <C>
Goodwill (Berks Acquisition) $20,057 $20,973
CDI (Berks Acquisition) 9,223 10,442
Goodwill (Fidelity Federal) 10,792 11,327
CDI (Fidelity Federal) 2,337 2,502
------- -------
Total $42,409 $45,244
======= =======
</TABLE>
MORTGAGE SERVICING RIGHTS. At June 30, 1998, Commonwealth's
servicing portfolio was $2.4 billion, an increase of 8% compared to $2.2 billion
at December 31, 1997. At June 30, 1998 and December 31, 1997, Commonwealth was
servicing $1.4 billion and $1.3 billion of third party loans, as well as $1.0
billion and $0.9 billion, respectively, of loans held by Commonwealth for
investment and sale. The following table details the components of mortgage
servicing rights at the dates indicated.
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
(in thousands)
<S> <C> <C>
Purchased Mortgage Servicing Rights $1,319 $1,559
Capitalized Excess Servicing Fees 3,019 3,215
Originated Mortgage Servicing Rights 5,499 3,265
------ ------
Total $9,837 $8,039
====== ======
</TABLE>
DEPOSITS. Deposits increased by $26.2 million, or 2%, to $1.6
billion at June 30, 1998, primarily related to increases in business and
supermarket deposits, as well as increases in principal and interest escrows
established pursuant to loan servicing agreements. These increases were offset,
in part, by a decrease in traditional branch deposits.
BORROWINGS. The Company's borrowings consist principally of advances
from the FHLB and securities sold under agreements to repurchase. FHLB advances
increased by $95.0 million, or 45%, to $308.0 million at June 30, 1998, from
$213.0 million at December 31, 1997. Repurchase agreements decreased by $33.4
million, or 14%, to $212.7 million at June 30, 1998, from $246.1 million at
December 31, 1997. 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.
ACCRUED INTEREST PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
("OTHER LIABILITIES"). Other liabilities increased by $13.9 million, or 78%, to
$31.7 million at June 30, 1998, from $17.7 million at December 31, 1997,
primarily related to an increase in accrued interest payable.
19
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
REGULATORY CAPITAL REQUIREMENTS.
The following table sets forth the Bank's compliance with applicable regulatory
capital requirements at June 30, 1998:
<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>
(dollars in thousands)
Stockholders' equity,
and ratio to OTS
total assets 7.8% $ 183,126
----------
Intangible assets (42,409)
Unrealized gain on
marketable
securities, net of tax (2,142)
---------
Tangible capital,
and ratio to OTS
adjusted total assets 6.0% $ 138,575 1.5% $34,554
---------- ========= ----- =======
Core capital,
and ratio to OTS
adjusted total assets 6.0% $ 138,575 4.0%(2) $92,143 5.0% $115,179
---------- ========= ----- ======= ------ ========
Core capital,
and ratio to OTS
risk-weighted assets 11.3% $ 138,575 6.0% $ 73,540
---------- --------- ------ ========
Allowance for loan losses 9,484
---------
Supplementary capital 9,484
---------
Total risk-based capital,
and ratio to OTS
risk-weighted assets (1) 12.1% $ 148,059 8.0% $98,053 10.0% $122,566
---------- ======== ----- ======= ------- ========
OTS total assets $2,348,131
==========
OTS adjusted total assets $2,303,580
==========
OTS risk-weighted assets $1,225,664
==========
</TABLE>
- -----------------
(1) Does not reflect the interest rate risk component to the risk-based capital
requirement, the effective date of which has been postponed.
(2) Reflects the proposed increase from 3%.
20
<PAGE> 21
Commonwealth Bancorp, Inc. and Subsidiaries
Average Balance Report
<TABLE>
<CAPTION>
Quarter Ended June 30,
------------------------------------------- ------------------------------------------
1998 1997
------------------------------------------- ------------------------------------------
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 $984,516 $17,896 7.29% $851,782 $16,026 7.55%
Consumer loans 213,658 4,549 8.54% 173,205 3,908 9.05%
Commercial real estate loans 77,641 1,730 8.94% 44,522 977 8.80%
Business loans 43,688 730 6.70% 58,594 1,116 7.64%
----------- -------- ------- ----------- -------- -------
Total loans receivable 1,319,503 24,905 7.57% 1,128,103 22,027 7.83%
----------- -------- ------- ----------- -------- -------
Mortgage loans held for sale 96,225 1,622 6.76% 56,466 1,022 7.26%
Mortgage-backed securities 748,221 12,750 6.83% 815,991 14,246 7.00%
Investment securities 47,164 609 5.18% 80,634 1,234 6.14%
Other earning assets(b) 38,653 775 8.04% 26,785 589 8.82%
----------- -------- ------- ----------- -------- -------
Total interest-earning assets 2,249,766 40,661 7.25% 2,107,979 39,118 7.44%
-------- ------- -------- -------
Non- interest-earning assets 155,594 148,569
----------- -----------
Total assets $2,405,360 $2,256,548
=========== ===========
Interest-bearing liabilities
Deposits:
Demand deposits(c) $621,500 3,717 2.40% $548,707 3,377 2.47%
Savings deposits 230,850 1,282 2.23% 254,639 1,397 2.20%
Certificates of deposit 724,883 9,950 5.51% 720,300 9,737 5.42%
----------- -------- ------- ----------- -------- -------
Total deposits 1,577,233 14,949 3.80% 1,523,646 14,511 3.82%
----------- -------- ------- ----------- -------- -------
Notes payable and other borrowings
Repurchase agreements 215,374 3,226 6.01% 246,681 3,634 5.91%
FHLB Advances 340,835 4,791 5.64% 216,429 3,059 5.67%
Other borrowings 0 0 0.00% 0 0 0.00%
----------- -------- ------- ----------- -------- -------
Total borrowings 556,209 8,017 5.78% 463,110 6,693 5.80%
----------- -------- ------- ----------- -------- -------
Total interest-bearing liabilities (d) 2,133,442 22,966 4.32% 1,986,756 21,204 4.28%
-------- ------- -------- -------
Non- interest-bearing liabilities 61,304 55,943
----------- -----------
Total liabilities 2,194,746 2,042,699
Shareholders' equity 210,614 213,849
----------- -----------
Total liabilities and equity $2,405,360 $2,256,548
=========== ===========
Net interest-earning assets $116,324 $121,223
=========== ===========
Net interest income/
interest rate spread $17,695 2.93% $17,914 3.16%
======== ======= ======== =======
Net interest margin 3.15% 3.41%
======= =======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 105.45% 106.10%
======= =======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------------ -------------------------------------------
1998 1997
------------------------------------------ -------------------------------------------
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 $965,292 $34,935 7.30% $844,977 $31,905 7.61%
Consumer loans 206,055 9,027 8.83% 171,156 7,595 8.95%
Commercial real estate loans 76,009 3,362 8.92% 41,310 1,818 8.87%
Business loans 42,923 1,549 7.28% 59,584 2,260 7.65%
----------- -------- ------- ----------- -------- -------
Total loans receivable 1,290,279 48,873 7.64% 1,117,027 43,578 7.87%
----------- -------- ------- ----------- -------- -------
Mortgage loans held for sale 82,322 3,037 7.44% 42,195 1,526 7.29%
Mortgage-backed securities 736,765 25,020 6.85% 805,416 28,067 7.03%
Investment securities 49,299 1,352 5.53% 71,961 2,248 6.30%
Other earning assets(b) 33,423 1,458 8.80% 28,929 1,154 8.04%
----------- -------- ------- ----------- -------- -------
Total interest-earning assets 2,192,088 79,740 7.34% 2,065,528 76,573 7.48%
-------- ------- -------- -------
Non- interest-earning assets 156,198 144,432
----------- -----------
Total assets $2,348,286 $2,209,960
=========== ===========
Interest-bearing liabilities
Deposits:
Demand deposits(c) $610,639 7,342 2.42% $535,903 6,532 2.46%
Savings deposits 230,154 2,543 2.23% 257,525 2,816 2.21%
Certificates of deposit 732,093 20,008 5.51% 717,186 19,078 5.36%
----------- -------- ------- ----------- -------- -------
Total deposits 1,572,886 29,893 3.83% 1,510,614 28,426 3.79%
----------- -------- ------- ----------- -------- -------
Notes payable and other borrowings
Repurchase agreements 225,657 6,731 6.02% 231,604 6,805 5.93%
FHLB Advances 282,420 7,906 5.65% 200,862 5,580 5.60%
Other borrowings 0 0 0.00% 0 0 0.00%
----------- -------- ------- ----------- -------- -------
Total borrowings 508,077 14,637 5.81% 432,466 12,385 5.78%
----------- -------- ------- ----------- -------- -------
Total interest-bearing liabilities (d) 2,080,963 44,530 4.32% 1,943,080 40,811 4.24%
-------- ------- -------- -------
Non- interest-bearing liabilities 53,814 48,156
----------- -----------
Total liabilities 2,134,777 1,991,236
Shareholders' equity 213,509 218,724
----------- -----------
Total liabilities and equity $2,348,286 $2,209,960
=========== ===========
Net interest-earning assets $111,125 $122,448
=========== ===========
Net interest income/
interest rate spread $35,210 3.02% $35,762 3.24%
======== ======= ======== =======
Net interest margin 3.24% 3.49%
======= =======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 105.34% 106.30%
======= =======
</TABLE>
(a) The average balance of loans receivable includes nonperforming loans,
interest on which is recognized on a cash basis.
(b) Includes FHLB stock, money market accounts, FHLB deposits and
interest-earning bank deposits.
(c) Includes checking and money market accounts.
(d) Includes interest expense associated with interest rate swaps and interest
rate caps.
(e) Annualized
21
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
COMPARISON OF RESULTS OF OPERATIONS FOR THE QUARTER AND SIX MONTHS ENDED
JUNE 30, 1998 AND 1997.
GENERAL. Net income was $1.5 million, or $0.10 per common share on a
diluted basis, in the second quarter of 1998, compared to $3.7 million, or $0.23
per common share, in the second quarter of 1997. A number of items, several of
which were nonrecurring in nature, affected the second quarter of 1998 financial
results and/or the comparability of such results with the second quarter of
1997, including:
- A $1.9 million (after-tax) downward valuation adjustment in the
second quarter of 1998 relating to an equity investment in a
mortgage servicing partnership;
- A $0.5 million (after-tax) one-time charge in the second quarter
of 1998 relating to a policy change in accounting for compensation
expense, including commissions on mortgage originations;
- A $0.5 million (after-tax) net gain on sale of securities in the
second quarter of 1998, compared to a $0.1 million (after-tax)
net loss in the second quarter of 1997;
- A $0.3 million (after-tax) reversal of the Bank's pension
liability during the second quarter of 1997; and
- A $0.3 million (after-tax) reversal of a liability relating
to a contract with the Company's data processing provider during
the second quarter of 1997.
For the six months ended June 30, 1998, net income was $5.3 million,
or $0.34 per common share on a diluted basis, compared to $8.4 million, or $0.51
per common share, for the six months ended June 30, 1997. In addition to the
factors affecting the comparison of second quarter results, the decrease in net
income for the six months of 1998, compared to the first six months of 1997, was
also attributable to a $1.0 million (after-tax) nonrecurring net gain in the
first quarter of 1997 relating to the sale of the Company's previous
headquarters building and a branch property; a $0.4 million (after-tax) reversal
of a deferred tax liability in the first quarter of 1998; and a $0.1 million
(after-tax) refund of prior year FDIC premiums received in the first quarter of
1997.
NET INTEREST INCOME. Net interest income was $17.7 million in the
second quarter of 1998, a decrease of 1% compared to $17.9 million in the second
quarter of 1997. For the first six months of 1998, net interest income decreased
by 2%, to $35.2 million, versus $35.8 million for the comparable period in 1997.
The decreases were primarily attributable to a lower net interest margin,
offset, in part, by an increase in average interest-earning assets.
Average interest-earning assets totaled $2.2 billion for both the
second quarter and six months ended June 30, 1998. This compared to $2.1 billion
for both the second quarter and six months ended June 30, 1997. The increases in
interest-earning assets were due primarily to increases in the Company's loan
portfolio. Compared to the second quarter of 1997, average mortgage loans
increased 16% to $984.5 million, average consumer loans increased 23% to $213.7
million, and average commercial loans increased 18% to $121.3 million in the
second quarter of 1998. Average loans represented 84% of average deposits in the
second quarter of 1998, compared to 74% in the second quarter of 1997. Relative
to the first six months of 1997, average mortgage loans increased 14% to $965.3
million, average consumer loans increased 20% to $206.1 million, and average
commercial loans increased 18% to $118.9 million for the six months of 1998.
Average loans represented 82% of average deposits for the first six months of
1998, compared to 74% for the first six months of 1997.
The net interest margin was 3.15% in the second quarter of 1998,
compared to 3.41% in the second quarter of 1997. The decrease was primarily
attributable to a 0.19% reduction in the yield on interest-earning assets and a
0.04% increase in the cost of interest-bearing liabilities.
For the six months ended June 30, 1998, the net interest margin was
3.24%, versus 3.49% in the comparable 1997 period. The decrease was primarily
attributable to a 0.14% reduction in the yield on interest-earning assets and a
0.08% increase in the cost of interest-bearing liabilities. The decrease in the
yield on interest-earning assets for the second quarter and first six months of
1998, relative to the comparable periods in 1997, was primarily attributable to
lower market interest rates. The increase in the cost of interest-bearing
liabilities for the second quarter and first six months of 1998, relative to the
comparable periods in 1997, was primarily attributable to competitive pressures
on the cost of certificates of deposit.
22
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
PROVISION FOR LOAN LOSSES. Provision for loan losses totaled $1.0
million and $1.5 million in the second quarter and six months ended June 30,
1998, respectively. The provision for loan losses totaled $0.3 million and $0.6
million in the second quarter and six months ended June 30, 1997, respectively.
At June 30, 1998, the allowance for credit losses totaled $9.5 million, or 0.70%
of loans, compared to $9.8 million, or 0.82%, at June 30, 1997, and $9.0
million, or 0.71%, at December 31, 1997.
NONINTEREST INCOME. Noninterest income totaled $7.4 million in the
second quarter of 1998, compared to $4.0 million in the second quarter of 1997.
The increase reflected a $1.8 million increase in the net gain on sale of
mortgage loans and a $0.9 million increase in the net gain on the sale of
securities. The increase in the net gain on sale of mortgage loans was
attributable to sharply higher mortgage origination volume, which totaled $270.5
million in the second quarter of 1998, versus $172.0 million in the second
quarter of 1997. Also contributing to the increase in noninterest income in the
second quarter of 1998 was a $0.5 million increase in deposit fees and a $0.3
million increase in other noninterest income. The increase in deposit fees was
primarily attributable to growth in supermarket banking, expansion of
Commonwealth's commercial banking activities, and increased ATM fees. The
increase in other noninterest income was primarily attributable to earnings from
an investment in an insurance product.
Noninterest income was $13.4 million for the first six months of
1998, compared to $9.3 million for the same 1997 period. The increase reflected
a $3.2 million increase in the net gain on sale of mortgage loans and a $1.0
million increase in deposit fees. The increase in the net gain on sale of
mortgage loans was attributable to sharply higher mortgage origination volume,
which totaled $564.7 million for the first six months of 1998, versus $270.2
million for the first six months of 1997. The increase in deposit fees was
primarily attributable to the same factors responsible for the increase in the
second quarter of 1998. Also contributing to the increase in noninterest income
for the first six months of 1998 was a $0.9 million increase in the net gain on
the sale of securities, earnings of $0.4 million from an investment in an
insurance product, and a $0.4 million reversal of a deferred tax liability.
These increases were partially offset by the effect of a $1.5 million net gain
on the sale of the Company's previous headquarters building and the sale of a
branch property in the first half of 1997, and a $0.3 million decrease in
servicing fees in the first half of 1998.
NONINTEREST EXPENSE. Noninterest expense was $21.8 million in the
second quarter of 1998, compared to $16.1 million in the second quarter of 1997.
The increase was primarily attributable to a $2.7 million valuation adjustment
in the second quarter of 1998 relating to an equity investment in a mortgage
servicing partnership which is experiencing significant prepayments in its
mortgage servicing portfolio. Also reflected in the increase in noninterest
expense in the second quarter of 1998 was a $0.8 million one-time charge related
to a policy change in accounting for compensation expense, including commissions
on mortgage originations given the substantial increase in volumes. The increase
in noninterest expense was also due to the $0.4 million reversal of the Bank's
pension liability, and the $0.4 million reversal of a liability relating to a
contract with the Company's data processing provider during the second quarter
of 1997. In addition to the above items, the increase was attributable to higher
commission expenses relating to growth in mortgage originations, as well as an
increase in expenses relating to supermarket banking, commercial banking, and
certain benefit plans.
Noninterest expense was $39.2 million for the six months ended June
30, 1998, compared to $31.8 million for the same period in 1997. The increase
was primarily attributable to the same factors responsible for the increase in
the second quarter of 1998, as well as a $0.2 million refund of prior year FDIC
premiums received in the first quarter of 1997. Partially offsetting these
increases was a $0.3 million decrease in the amortization of intangible assets.
PROVISION FOR INCOME TAXES. Provision for income taxes was $0.8
million, or 34% of income before income taxes in the second quarter of 1998,
compared to $1.8 million, or 33%, in the second quarter of 1997. For the first
six months of 1998, provision for income taxes was $2.6 million, or 32% of
income before income taxes, compared to $4.3 million, or 34%, in the first six
months of 1997. The decrease in the income tax rate for the first six months of
1998 was primarily attributable to low income housing tax credits and the
reversal of a deferred tax valuation allowance.
23
<PAGE> 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
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
The Company held its Annual Meeting of Stockholders on April 21,
1998. The results of the vote on matters submitted to stockholders at the
meeting were previously reported in the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
a) Not applicable.
b) On April 3, 1998, the Company filed a Current Report on Form 8-K
to report under Item 5, the repurchase of up to 0.8 million shares, or
approximately 5%, of the outstanding common stock of the Company. On April 6,
1998, the Company filed a Current Report on Form 8-K to report under Item 5, the
acquisition of selected assets of Edmunds Financial Corporation d/b/a Service
First Mortgage, a mortgage company headquartered in Annandale, Virginia. On
April 22, 1998, the Company filed a Current Report on Form 8-K to report under
Item 5, its earnings for the first quarter of 1998. On June 11, 1998, the
Company filed a Current Report on Form 8-K to report under Item 5, its
completion of the stock repurchase program. On June 23, 1998, the Company filed
a Current Report on Form 8-K to report under Item 5, its commencement of the
stock repurchase program and its declared cash dividend. On July 22, 1998, the
Company filed a Current Report on Form 8-K to report under Item 5, its earnings
for the second quarter of 1998.
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: August 4, 1998 /s/ Charles H. Meacham
----------------------
Charles H. Meacham
Chairman and Chief Executive Officer
(Principal Executive Officer)
DATE: August 4, 1998 /s/ Charles M. Johnston
-----------------------
Charles M. Johnston
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
25
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