<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, 2000
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 November 2,
2000, there were 18,068,127 issued and 11,421,553 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.
--- ---
<C> <S> <C>
PART I - CONSOLIDATED FINANCIAL INFORMATION
1 Consolidated Financial Statements
Consolidated Balance Sheets at September 30, 2000 and December 31, 1999 3
Consolidated Statements of Income for the Quarter and Nine Month
Periods Ended September 30, 2000 and 1999 4
Consolidated Statements of Changes in Shareholders' Equity for the Nine Month
Periods Ended September 30, 2000 and 1999 5
Consolidated Statements of Cash Flows for the Nine Month
Periods Ended September 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 8
2 Management's Discussion and Analysis of Financial Condition and Results of
Operations 14
3 Quantitative and Qualitative Disclosures about Market Risk 27
PART II - OTHER INFORMATION
1 Legal Proceedings 28
2 Changes in Securities 28
3 Default Upon Senior Securities 28
4 Submission of Matters to a Vote of Security Holders 28
5 Other Information 28
6 Exhibits and Reports on Form 8-K 28
Signatures 29
</TABLE>
2
<PAGE> 3
Commonwealth Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------------- ---------------
<S> <C> <C>
Assets: (Unaudited)
Cash and due from banks $57,638 $54,677
Interest-bearing deposits - 3,499
Short-term investments available for sale 48 3,575
Mortgage loans held for sale 33,029 24,005
Investment securities
Securities available for sale (cost of $12,815
and $68,301, respectively), at market value 13,347 68,219
Mortgage-backed securities
Securities held to maturity (market value of $ -
and $92,965, respectively), at cost - 93,674
Securities available for sale (cost of $213,808
and $202,076, respectively), at market value 211,838 197,280
Loans receivable, net 1,414,833 1,361,430
Accrued interest receivable, net 9,150 9,499
FHLB stock, at cost 18,400 18,400
Premises and equipment, net 15,456 15,535
Intangible assets 31,688 33,048
Other assets, including net deferred taxes of $6,197
and $7,460, respectively 38,731 39,555
------------ -------------
Total assets $1,844,158 $1,922,396
============ =============
Liabilities:
Deposits $1,432,651 $1,503,746
Notes payable and other borrowings:
Secured notes due to Federal Home Loan Bank of Pittsburgh 173,256 127,000
Securities sold under agreements to repurchase 25,000 100,000
Other borrowings 18,974 9,076
Advances from borrowers for taxes and insurance 6,250 9,326
Accrued interest payable, accrued expenses and other liabilities 30,857 20,883
------------ -------------
Total liabilities 1,686,988 1,770,031
------------ -------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.10 par value; 5,000,000 shares
authorized; none issued - -
Common stock, $0.10 par value; 30,000,000 shares authorized;
18,068,127 shares issued and 11,495,653 outstanding at September 30, 2000
18,068,127 shares issued and 11,934,695 outstanding at December 31, 1999 1,807 1,807
Additional paid-in capital 137,402 136,966
Retained earnings 143,258 135,780
Unearned stock benefit plan compensation (7,073) (8,504)
Accumulated other comprehensive loss (918) (3,171)
Treasury stock, at cost; 6,572,474 and 6,133,432 shares, respectively (117,306) (110,513)
------------ -------------
Total shareholders' equity 157,170 152,365
------------ -------------
Total liabilities and shareholders' equity $1,844,158 $1,922,396
============ =============
</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 and per share amounts)
<TABLE>
<CAPTION>
For the Quarter For the Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
--------------- ------------- ------------ --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $29,149 $26,270 $84,871 $78,713
Interest and dividends on deposits and money
market investments 506 1,025 1,477 2,921
Interest on investment securities 262 1,616 1,757 5,478
Interest on mortgage-backed securities 4,191 5,719 13,518 20,208
--------------- ------------- ------------ ---------------
Total interest income 34,108 34,630 101,623 107,320
Interest expense:
Interest on deposits 12,206 12,911 36,781 40,247
Interest on notes payable and other borrowings 3,486 4,079 9,894 14,109
--------------- ------------- ------------ ---------------
Total interest expense 15,692 16,990 46,675 54,356
--------------- ------------- ------------ ---------------
Net interest income 18,416 17,640 54,948 52,964
Provision for loan losses 1,300 1,000 3,625 3,000
--------------- ------------- ------------ ---------------
Net interest income after
provision for loan losses 17,116 16,640 51,323 49,964
Noninterest income:
Deposit fees and related income 3,040 2,557 8,700 7,237
Servicing fees 181 873 601 2,818
Net gain on sale of mortgage loans 1,565 2,276 3,661 9,043
Net gain (loss) on sale of securities 45 (250) 45 (250)
Other 1,186 2,379 3,365 4,601
--------------- ------------- ------------ ---------------
Total noninterest income 6,017 7,835 16,372 23,449
--------------- ------------- ------------ ---------------
Noninterest expense:
Compensation and employee benefits 8,960 9,212 26,401 28,028
Occupancy and office operations 2,747 3,170 8,158 8,675
Amortization of intangible assets 1,239 1,156 3,689 3,666
Other 4,704 4,799 14,144 14,982
--------------- ------------- ------------ ---------------
Total noninterest expense 17,650 18,337 52,392 55,351
--------------- ------------- ------------ ---------------
Income before income taxes 5,483 6,138 15,303 18,062
Income tax provision 1,453 1,780 4,055 5,238
--------------- ------------- ------------ ---------------
Net income $4,030 $4,358 $11,248 $12,824
=============== ============= ============ ===============
Basic weighted average number of shares outstanding 10,739,425 11,485,514 10,782,377 12,585,631
=============== ============= ============ ===============
Basic earnings per share $0.38 $0.38 $1.04 $1.02
=============== ============= ============ ===============
Diluted weighted average number of shares outstanding 11,009,790 11,983,616 11,041,710 13,000,245
=============== ============= ============ ===============
Diluted earnings per share $0.37 $0.36 $1.02 $0.99
=============== ============= ============ ===============
</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>
Common Additional
Shares Common Paid-In Retained
Outstanding Stock Capital Earnings
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 14,721 $1,806 $135,588 $123,917
Comprehensive income:
Net income 12,824
Other-unrealized loss on marketable
securities, net of $2,280 tax benefit
Total comprehensive income
Dividends (3,344)
Release of ESOP shares 611
Amortization of unearned compensation
Stock issued pursuant to benefit plans 55 1 (75)
Purchase of treasury stock (2,830)
---------------------------------------------------
Balance at September 30, 1999 11,946 $1,807 $136,124 $133,397
===================================================
Balance at December 31, 1999 11,935 $1,807 $136,966 $135,780
Comprehensive income:
Net income 11,248
Other-unrealized gain on marketable
securities, net of $1,213 tax expense
Total comprehensive income
Dividends (3,592)
Release of ESOP shares 387
Amortization of unearned compensation
Stock issued pursuant to benefit plans 31 49 (178)
Purchase of treasury stock (470)
---------------------------------------------------
Balance at September 30, 2000 11,496 $1,807 $137,402 $143,258
===================================================
<CAPTION>
Accumulated
Stock Other
Benefit Plan Comprehensive Treasury
Compensation Income (Loss) Stock Total
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 ($10,666) $2,467 ($60,934) $192,178
Comprehensive income:
Net income 12,824
Other-unrealized loss on marketable
securities, net of $2,280 tax benefit (4,234) (4,234)
---------
Total comprehensive income 8,590
---------
Dividends (3,344)
Release of ESOP shares 690 1,301
Amortization of unearned compensation 1,090 1,090
Stock issued pursuant to benefit plans 655 581
Purchase of treasury stock (50,103) (50,103)
---------------------------------------------------------------
Balance at September 30, 1999 ($8,886) ($1,767) ($110,382) $150,293
===============================================================
Balance at December 31, 1999 ($8,504) ($3,171) ($110,513) $152,365
Comprehensive income:
Net income 11,248
Other-unrealized gain on marketable
securities, net of $1,213 tax expense 2,253 2,253
---------
Total comprehensive income 13,501
---------
Dividends (3,592)
Release of ESOP shares 690 1,077
Amortization of unearned compensation 741 741
Stock issued pursuant to benefit plans 482 353
Purchase of treasury stock (7,275) (7,275)
---------------------------------------------------------------
Balance at September 30, 2000 ($7,073) ($918) ($117,306) $157,170
===============================================================
</TABLE>
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 Nine Months
Ended September 30,
2000 1999
------------ -------------
(Unaudited)
<S> <C> <C>
Operating activities:
Net income $11,248 $12,824
Adjustments to reconcile net income to net cash
provided by (used in) operating activities-
Proceeds from loans sold to others 227,213 545,972
Loans originated for sale (157,603) (322,813)
Purchases of loans held for sale (77,805) (121,975)
Principal collection on mortgage loans held for sale 220 598
Net gain on sale of mortgage loans (3,661) (9,043)
Decrease in net deferred loan fees (247) (393)
Provision for loan losses and foreclosed real estate 3,567 3,110
(Gain) loss on sale of securities (45) 250
Gain on sale of branches - (1,027)
Depreciation and amortization 2,456 2,570
Net amortization of other assets and liabilities 4,521 5,034
Gain on sale of mortgage servicing rights - (1,646)
Interest reinvested on repurchase agreements (3,440) (4,903)
Changes in assets and liabilities-
Decrease (increase) in-
Accrued interest receivable, net 349 1,094
Deferred income taxes - (339)
Other assets (1,700) (3,633)
(Decrease) increase in-
Advances from borrowers for taxes and insurance (3,076) (13,508)
Accrued interest payable, accrued expenses and other liabilities 8,974 7,471
------------ ------------
Net cash provided by operating activities $10,971 $99,643
------------ ------------
</TABLE>
(continued)
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 Nine Months
Ended September 30,
2000 1999
-------------- ------------
(Unaudited)
<S> <C> <C>
Investing activities:
Proceeds from sale of investment securities $21,114 $187,062
Proceeds from maturities of investment securities 35,000 5,000
Purchases of investment securities - (219,588)
Proceeds from sale of mortgage-backed securities 21,883 5,470
Principal collected on mortgage-backed securities 60,462 194,740
Principal collected on loans 206,661 273,417
Loans originated (235,066) (228,771)
Loans purchased (25,633) (47,868)
Sales of real estate acquired through foreclosure 1,309 1,444
Purchases of premises and equipment (2,253) (2,262)
Sale of branches - (22,134)
Net proceeds from sale of mortgage servicing rights - 3,984
Purchase of business (1,498) -
----------- ------------
Net cash provided by investing activities 81,979 150,494
----------- ------------
Financing activities:
Net decrease in deposits (71,095) (55,148)
Repayment of notes payable and other borrowings, net of proceeds (15,406) (163,105)
Net purchase of common stock (6,922) (49,577)
Cash dividends paid (3,592) (3,344)
----------- ------------
Net cash used in financing activities (97,015) (271,174)
----------- ------------
Net decrease in cash and cash equivalents (4,065) (21,037)
Cash and cash equivalents at beginning of period 61,751 106,677
----------- ------------
Cash and cash equivalents at end of period $57,686 $85,640
=========== ============
Supplemental disclosures of cash flow information:
Cash paid during the year for-
Interest $38,896 $45,210
=========== ============
Income taxes $4,500 $6,350
=========== ============
</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 the financial condition
of Commonwealth Bancorp, Inc. ("Commonwealth" or the "Company") and Subsidiaries
at September 30, 2000, 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, 1999.
The Company is a Pennsylvania corporation which is the holding company
for Commonwealth Bank ("Bank"). Headquartered in Norristown, Pennsylvania,
Commonwealth Bank conducts business through 60 full-service offices located in
Berks, Bucks, Chester, Delaware, Montgomery, and Philadelphia Counties,
Pennsylvania, as well as through ComNet Mortgage Services ("ComNet"). ComNet, a
division of the Bank, conducts business through loan origination offices located
in Pennsylvania, Maryland and New Jersey. ComNet also originates loans through a
network of correspondents, primarily in the eastern United States.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Commonwealth; CFSL Investment Corporation; ComLife, Inc.; Commonwealth Bank;
Commonwealth Investment Corporation of Delaware, Inc.; CS Corporation; Firstcor,
Ltd.; Tyler Wealth Counselors, Inc.; and QME, Inc. All material intercompany
accounts and transactions have been eliminated in consolidation.
3. Shareholders' Equity
At September 30, 2000, shareholders' equity totaled $157 million, or 8.5%
of assets, compared to $152 million, or 7.9%, at December 31, 1999. This
increase was primarily the result of a $7 million increase in retained earnings,
a $2 million decrease in accumulated other comprehensive loss and a $1 million
decrease in unearned stock benefit plan compensation during the first nine
months of 2000 offset, in part, by the $7 million purchase of treasury stock.
During the first nine months of 2000, the Company purchased 0.5 million
shares of its common stock, representing purchases of $7 million. During the
first nine months of 1999, the Company purchased 2.8 million shares of its
common stock, representing purchases of $50 million. The repurchased shares were
held as treasury stock at September 30, 2000, and are reserved for general
corporate purposes and/or issuance pursuant to the Company's stock option plans.
On September 12, 2000, the Board of Directors declared an $0.11 per share
cash dividend for the quarter ended September 30, 2000, which was made payable
to shareholders of record at the close of business on September 29, 2000. This
dividend was paid on October 13, 2000.
8
<PAGE> 9
Commonwealth Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. In June 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS No. 133," which delayed the
effective date of SFAS No. 133 until fiscal years beginning after June 15, 2000.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which amended SFAS No.
133. The adoption of SFAS No. 133, as amended by SFAS No. 138, as of September
30, 2000 would not have had a material impact on the consolidated statements of
income or comprehensive income.
5. Earnings Per Share
Basic earnings per share ("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 EPS
calculation.
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 dilutive securities, such as stock options and Recognition
Plan stock, are considered common stock equivalents and are included in the
computation of the number of outstanding shares using the treasury stock method.
Common shares outstanding exclude treasury shares.
<TABLE>
<CAPTION>
For the Quarter Ended September 30,
-----------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Basic weighted average number of common shares outstanding 10,739,425 11,485,514
Effect of dilutive securities:
Stock options 225,715 410,858
Recognition Plan stock 44,650 87,244
----------- ------------
Diluted weighted average number of common shares outstanding 11,009,790 11,983,616
=========== ============
</TABLE>
Basic EPS was $0.38 per common share for both the quarter ended
September 30, 2000 and September 30, 1999. Diluted EPS was $0.37 per common
share for the quarter ended September 30, 2000, compared to $0.36 per common
share for the quarter ended September 30, 1999.
9
<PAGE> 10
Commonwealth Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
2000 1999
----------- ------------
<S> <C> <C>
Basic weighted average number of common shares outstanding 10,782,377 12,585,631
Effect of dilutive securities:
Stock options 232,006 357,286
Recognition Plan stock 27,327 57,328
----------- ------------
Diluted weighted average number of common shares outstanding 11,041,710 13,000,245
=========== ============
</TABLE>
Basic EPS was $1.04 per common share for the nine months ended
September 30, 2000, compared to $1.02 per common share for the nine months ended
September 30, 1999. Diluted EPS was $1.02 per common share for the nine months
ended September 30, 2000, compared to $0.99 per common share for the nine months
ended September 30, 1999.
6. Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," established standards
for the reporting and display of comprehensive income and its components in a
full set of general purpose financial statements. The main objective of the
statement is to report a measure of all changes in equity that result from
transactions and other economic events of the period other than transactions
with owners. Currently, such non-owner changes in equity include only unrealized
gains or losses on marketable securities, net of tax. A summary of the
reclassification adjustment for realized gains or losses on marketable
securities, net of tax, follows:
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
2000 1999
------- ------
(in thousands)
<S> <C> <C>
Unrealized gain (loss) on marketable securities,
net of tax, arising during period $2,282 $(4,396)
Less: reclassification adjustment for gains
(losses) included in net income 29 (162)
------ --------
Net unrealized gain (loss) on marketable securities,
net of tax $2,253 $(4,234)
====== ========
</TABLE>
10
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Commonwealth Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Segment Reporting
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," introduces a new model for segment reporting, called the
"management approach." The management approach is based on the way the chief
operating decision maker organizes segments within a company for making
operating decisions and assessing performance. Reportable segments are based on
product and services, geography, legal structure, management structure - any
manner in which management disaggregates a company. The Company's segment
reports follow:
<TABLE>
<CAPTION>
For the Quarter Ended September 30,
-----------------------------------------------------------------------------
2000 1999
--------------------------------------- ------------------------------------
Community Mortgage Community Mortgage
Banking Banking Total Banking Banking Total
--------------------------------------- ------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net interest income after
provision for loan losses $16,581 $ 535 $17,116 $15,595 $1,045 $16,640
Noninterest income:
Servicing fees (491) 672 181 (607) 1,480 873
Net gain on sale of mortgage loans (82) 1,647 1,565 (168) 2,444 2,276
Other 3,973 298 4,271 2,993 1,693 4,686
----------- ------- ---------- ----------- -------- ----------
Total noninterest income 3,400 2,617 6,017 2,218 5,617 7,835
----------- ------- ---------- ----------- -------- ----------
Noninterest expense:
Compensation and employee benefits 7,080 1,880 8,960 6,744 2,468 9,212
Other 7,423 1,267 8,690 7,509 1,616 9,125
----------- ------- ---------- ----------- -------- ----------
Total noninterest expense 14,503 3,147 17,650 14,253 4,084 18,337
----------- ------- ---------- ----------- -------- ----------
Income before income taxes 5,478 5 5,483 3,560 2,578 6,138
Income tax provision 1,451 2 1,453 878 902 1,780
----------- ------- ---------- ----------- -------- ----------
Net income $ 4,027 $ 3 $ 4,030 $ 2,682 $1,676 $ 4,358
=========== ======= ========== =========== ======== ==========
Total assets (period end) $1,802,351 $41,807 $1,844,158 $1,891,743 $50,909 $1,942,652
=========== ========= ========== =========== ======== ==========
</TABLE>
11
<PAGE> 12
Commonwealth Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
-------------------------------------------------------------------------------
2000 1999
----------------------------------------- ------------------------------------
Community Mortgage Community Mortgage
Banking Banking Total Banking Banking Total
----------------------------------------- ------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net interest income after
provision for loan losses $49,720 $1,603 $51,323 $46,687 $3,277 $49,964
Noninterest income:
Servicing fees (1,709) 2,310 601 (1,891) 4,709 2,818
Net gain on sale of mortgage loans (317) 3,978 3,661 (401) 9,444 9,043
Other 11,509 601 12,110 9,942 1,646 11,588
---------- ------- --------- ---------- ------- ----------
Total noninterest income 9,483 6,889 16,372 7,650 15,799 23,449
---------- ------- --------- ---------- ------- ----------
Noninterest expense:
Compensation and employee benefits 20,775 5,626 26,401 20,148 7,880 28,028
Other 22,463 3,528 25,991 22,613 4,710 27,323
---------- ------- ---------- ---------- ------- ----------
Total noninterest expense 43,238 9,154 52,392 42,761 12,590 55,351
---------- ------- ---------- ---------- ------- ----------
Income before income taxes 15,965 (662) 15,303 11,576 6,486 18,062
Income tax provision 4,286 (231) 4,055 2,968 2,270 5,238
---------- ------- ---------- ---------- ------- ----------
Net income $11,679 $ (431) $11,248 $ 8,608 $4,216 $12,824
========== ======= ========== ========== ======= ==========
Total assets (period end) $1,802,351 $41,807 $1,844,158 $1,891,743 $50,909 $1,942,652
========== ======= ========== ========== ======= ==========
</TABLE>
12
<PAGE> 13
Commonwealth Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Acquisitions and Divestitures
On September 8, 2000, Commonwealth Bank completed the sale of two
branches in Lehigh County, Pennsylvania to another financial institution. As of
September 8, 2000, the two branches had $13 million of combined deposits and $4
million of consumer loans. The deposits, loans and certain other assets were
essentially sold at book value.
In January of 2000, the Company completed the acquisition of certain
business interests of the Tyler Group ("Tyler"). Tyler offers financial planning
and investment advisory services to individuals and small businesses in
Southeast Pennsylvania. Its products and services will be marketed to
Commonwealth customers through Tyler Wealth Counselors, Inc., a newly formed
subsidiary of Commonwealth Bank.
During the third quarter of 1999, Commonwealth Bank exited substantially
all of the third party mortgage servicing business, and sold its existing $1.0
billion Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National
Mortgage Association ("FNMA") mortgage servicing portfolio to National City
Mortgage Co. The pre-tax gain resulting from the sale totaled $1.6 million in
the third quarter of 1999.
On June 28, 1999, Commonwealth Bank completed the sale of two branches in
Lebanon County, Pennsylvania to another financial institution, resulting in a
pre-tax gain of $1.0 million in the second quarter of 1999. As of June 28, 1999,
the two branches had $37 million of combined deposits and $11 million of
consumer and commercial loans.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS. When used in this Form 10-Q, 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 and Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. 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
financial products 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 September 30, 2000, 60 full-service branches 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, Maryland and New Jersey. ComNet also conducts business through its
wholesale network, which includes correspondents in 13 states.
FINANCIAL CONDITION
GENERAL. Total assets were $1.8 billion at September 30, 2000, compared
to $1.9 billion at December 31, 1999. During the first nine months of 2000,
decreases in the Company's mortgage-backed securities and investment securities
were offset, in part, by increases in loans receivable and mortgage loans held
for sale. Total liabilities were $1.7 billion at September 30, 2000, compared to
$1.8 billion at December 31, 1999. During the first nine months of 2000,
decreases in deposits and notes payable and other borrowings were offset, in
part, by increases in accrued interest payable, accrued expenses and other
liabilities. Shareholders' equity was $157 million as of September 30, 2000,
compared to $152 million at December 31, 1999. This increase was primarily the
result of a $7 million increase in retained earnings, a $2 million decrease in
accumulated other comprehensive loss and a $1 million decrease in unearned stock
benefit plan compensation offset, in part, by the $7 million purchase of 0.5
million shares of treasury stock. The increase in retained earnings was
primarily related to earnings offset, in part, by cash dividends, during the
first nine months of 2000.
MORTGAGE LOANS HELD FOR SALE. Mortgage loans held for sale increased by
$9 million, or 38%, from $24 million at December 31, 1999, to $33 million at
September 30, 2000. The increase was attributable to an increase in the
origination of mortgage loans held for sale during the latter part of the third
quarter of 2000, compared to the latter part of the fourth quarter of 1999.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
INVESTMENT SECURITIES. Investment securities decreased by $55 million, or
80%, from $68 million at December 31, 1999, to $13 million at September 30,
2000. The decrease was primarily attributable to the maturity of highly rated
short-term corporate bonds and the sale of a mortgage related mutual fund.
Investments in debt and equity securities at September 30, 2000 and
December 31, 1999 were as follows:
<TABLE>
<CAPTION>
September 30, 2000
-----------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-----------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Available for sale:
Equity Investment - Mortgage
Servicing Partnership $ 1,700 $ 698 $ - $ 2,398
Other Equity Investments 11,115 384 550 10,949
-----------------------------------------------------------------------------------------
Total $12,815 $1,082 $550 $13,347
=========================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-----------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Available for sale:
Corporate Bonds $34,996 $ - $ 71 $34,925
Mortgage Related Mutual Fund 20,751 - 272 20,479
Equity Investment - Mortgage
Servicing Partnership 1,700 - - 1,700
Other Equity Investments 10,854 394 133 11,115
-----------------------------------------------------------------------------------------
Total $68,301 $394 $476 $68,219
=========================================================================================
</TABLE>
All investment securities are classified as available for sale and are reported
at fair value, with unrealized gains and losses, net of tax, excluded from
earnings and reported as a separate component of shareholders' equity.
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities decreased by $79
million, or 27%, from $291 million at December 31, 1999, to $212 million at
September 30, 2000. In addition to repayments and prepayments, the Company's
mortgage-backed securities portfolio decreased during the first nine months of
2000 as a result of the $22 million sale of mortgage-backed securities during
the third quarter of 2000.
During the third quarter of 2000, Commonwealth reclassified certain
mortgage-backed securities from the held to maturity category to the available
for sale category. This reclassification resulted in the entire portfolio being
classified as available for sale and a $0.2 million increase in shareholders'
equity. The categorization of Commonwealth's entire portfolio as available for
sale will facilitate Commonwealth's strategy to continue to reduce its mortgage
related assets.
At September 30, 2000 and December 31, 1999, $137 million, or 65%, and
$199 million, or 68%, respectively, of the Company's mortgage-backed securities
were insured or guaranteed by the Government National Mortgage Association
("GNMA"), the FHLMC, or the FNMA. As part of its investment policy, the Company
also has the ability to invest in private mortgage-backed securities. These
non-federally insured mortgage-backed securities, which are generally rated AA
or better, yield a higher rate of return and involve a higher risk of loss than
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, 2000 and December 31, 1999, $75 million, or 35%, and
$92 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, 2000
-------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Available for sale:
GNMA $ 35,006 $ 512 $ 101 $ 35,417
FHLMC 30,289 391 23 30,657
FNMA 62,243 164 875 61,532
CMO and REMIC 83,618 1 2,039 81,580
Private 2,652 - - 2,652
-------------------------------------------------------------------------
Total $213,808 $1,068 $3,038 $211,838
=========================================================================
</TABLE>
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-CONTINUED
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-----------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Held to maturity:
GNMA $ 36,136 $365 $ 115 $ 36,386
FHLMC 17,693 54 75 17,672
FNMA 36,836 169 1,107 35,898
Private 3,009 - - 3,009
-------------------------------------------------------------------------------------------
Total $ 93,674 $588 $1,297 $ 92,965
===========================================================================================
Available for sale:
GNMA $ 9,832 $161 $ 287 $ 9,706
FHLMC 41,995 544 216 42,323
FNMA 44,834 2 675 44,161
CMO and REMIC 105,415 135 4,460 101,090
-------------------------------------------------------------------------------------------
Total $202,076 $842 $5,638 $197,280
===========================================================================================
</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.
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
LOANS RECEIVABLE. Loans receivable, net of reserves, deferred loan fees,
and unamortized premiums and unaccreted discounts, increased by $53 million, or
4%, during the first nine months of 2000, to $1.4 billion at September 30, 2000.
The increase was primarily attributable to growth in consumer and commercial
loans offset, in part, by a decrease in residential mortgage loans. The
following table depicts the composition of the Company's loan portfolio at the
dates indicated.
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------------------------- --------------------------
% of % of
Amount Total Amount Total
------ ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans - Residential
Fixed rate $499,401 35.00% $528,383 38.49%
Adjustable rate 324,662 22.75 332,367 24.21
--------- ----- ------- -----
Total mortgage loans 824,063 57.75 860,750 62.70
Consumer loans:
Second mortgages 239,394 16.78 184,844 13.47
Equity lines of credit 28,002 1.96 30,496 2.22
Recreational vehicles 54,190 3.80 60,998 4.44
Other 48,813 3.42 45,448 3.31
--------- ----- ------- -----
Total consumer loans 370,399 25.96 321,786 23.44
Commercial loans:
Business loans 150,527 10.55 113,178 8.24
Commercial real estate 73,606 5.16 66,158 4.82
Small Business Administration (1) 8,312 0.58 10,971 0.80
--------- ----- ------ ----
Total commercial loans 232,445 16.29 190,307 13.86
--------- ----- ------- -----
Total loans receivable 1,426,907 100.00% 1,372,843 100.00%
--------- ======= --------- =======
Less:
Net premium on loans purchased (1,942) (2,443)
Allowance for loan losses 10,885 10,478
Deferred loan fees 3,131 3,378
---------- ----------
Loans receivable, net $1,414,833 $1,361,430
========== ==========
</TABLE>
-----------------------------------------------
(1) Consists entirely of loans (or securities backed by loans) which are
guaranteed by the U.S. Government.
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
Residential mortgage loans totaled $824 million at September 30, 2000, a
decrease of $37 million, or 4%, compared to $861 million at December 31, 1999.
At September 30, 2000, residential mortgage loans represented 58% of the
Company's loan portfolio, compared to 63% at December 31, 1999.
Total mortgage loans originated and purchased for the nine months ended
September 30, 2000 totaled $292 million, compared to $513 million for the nine
months ended September 30, 1999. The $221 million, or 43%, decrease in mortgage
originations was primarily due to higher market interest rates. Originations
relating to Commonwealth's retail network totaled $201 million during the nine
months ended September 30, 2000, compared to $374 million for the nine months
ended September 30, 1999. Commonwealth's Wholesale Lending Department originates
loans through a network of correspondent brokers in 13 states. All loans are
underwritten using the same criteria as those used for retail originations.
Originations relating to Commonwealth's wholesale network totaled $91 million
during the nine months ended September 30, 2000, compared to $139 million for
the nine months ended September 30, 1999.
Consumer loans increased by $49 million, or 15%, from $322 million at
December 31, 1999, to $370 million at September 30, 2000. At September 30, 2000,
consumer loans represented 26% of the Company's loan portfolio and were
comprised of $239 million of second mortgage loans, $28 million of equity lines
of credit, $54 million of recreational vehicle loans, and $49 million of other
consumer loans. At December 31, 1999, consumer loans represented 23% of total
loans and were comprised of $185 million of second mortgage loans, $30 million
of equity lines of credit, $61 million of recreational vehicle loans, and $45
million of other consumer loans. Consumer loans are generally considered to have
a greater risk than residential mortgage loans because the risk of borrower
default is greater. In addition, certain consumer loans are unsecured or involve
collateral which is more likely to decline in value than single-family
residences.
Commercial loans increased by $42 million, or 22%, from $190 million at
December 31, 1999, to $232 million at September 30, 2000. At September 30, 2000,
commercial loans represented 16% of the Company's loan portfolio and were
comprised of $151 million of business loans, $74 million of commercial real
estate loans, and $8 million of loans guaranteed by the Small Business
Administration ("SBA"). At December 31, 1999, commercial loans represented 14%
of total loans and were comprised of $113 million of business loans, $66 million
of commercial real estate loans, and $11 million of SBA 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.
The increase in the consumer and commercial loan portfolios and the
decrease in the mortgage loan portfolio, as a percentage of the Company's total
loan portfolio, during the first nine months of 2000 were in line with the
Company's strategy to shift its business mix from that of a traditional thrift
institution to one more representative of a community bank.
19
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
NONPERFORMING ASSETS. The Company's nonperforming assets, which primarily
consist of nonaccrual loans, an investment in a mortgage servicing partnership,
and real estate and other assets acquired through foreclosure, increased by $0.5
million from $10.4 million at December 31, 1999, to $10.9 million at September
30, 2000. At September 30, 2000, nonperforming assets represented 0.59% of total
assets, compared to 0.54% of total assets at December 31, 1999. The following
table sets forth information relating to the Company's nonperforming assets at
the dates indicated.
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
(dollars in thousands)
<S> <C> <C>
Mortgage loans - Residential $ 3,707 $ 4,044
Consumer loans 2,761 2,355
Commercial loans 1,572 1,380
----- ------
Total nonperforming loans 8,040 7,779
Investment securities 1,700 1,700
Real estate owned and
other acquired assets, net 1,127 923
----- ------
Total nonperforming assets $10,867 $10,402
======= ======
Nonperforming loans to total loans held
for investment 0.56% 0.57%
==== ====
Total nonperforming assets to total assets 0.59% 0.54%
==== ====
</TABLE>
-------------------------
ALLOWANCE FOR LOAN LOSSES. The Company's allowance for loan losses
amounted to $10.9 million at September 30, 2000 compared to $10.5 million at
December 31, 1999. It is management's policy to maintain an allowance for
estimated loan losses based upon probable inherent losses which have occurred as
of the date of the financial statements. In determining the allowance for loan
losses, management assesses prior loss experience, the volume and type of
lending conducted by the Company, industry standards, past due loans, general
economic conditions, and other factors related to the collectability of the loan
portfolio. At both September 30, 2000 and December 31, 1999, the Company's
allowance for loan losses amounted to 135% of total nonperforming loans and
0.76% of total loans held for investment. 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.
Over the past several years, Commonwealth has diversified its lending
efforts and increased its emphasis on providing its customers with consumer and
commercial loans. As a result of the increased risk inherent in these loan
products, management will continually evaluate its loan portfolio and record
additional loan loss reserves as deemed necessary.
20
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
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,
---------------------------------------
2000 1999
------ ------
(dollars in thousands)
<S> <C> <C>
Allowance at beginning of period $10,478 $ 9,589
Provision for loan losses 3,625 3,000
Charge-offs:
Mortgage loans (99) (302)
Consumer loans (3,104) (1,475)
Commercial loans (194) (945)
------- -------
Total charge-offs (3,397) (2,722)
Recoveries:
Mortgage loans 1 26
Consumer loans 125 136
Commercial loans 53 121
------- -------
Total recoveries 179 283
------- -------
Allowance at end of period $10,885 $10,150
======= =======
Allowance for loan losses to total
nonperforming loans at end of
period 135.38% 135.89%
====== ======
Allowance for loan losses to
total loans held for
investment at end of period 0.76% 0.76%
==== ====
</TABLE>
--------------------------------
21
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
INTANGIBLE ASSETS. Intangible assets are comprised of the excess of cost
over net assets acquired ("Goodwill") and core deposit intangibles ("CDI"). The
Company's intangible assets were recorded in connection with the acquisition of
certain business interests of Tyler Consulting, Inc. during the first quarter of
2000, the acquisition of twelve former Meridian branches in 1996, and the
acquisition of four former Fidelity Federal branches in 1995. On June 28,1999,
Commonwealth sold two of the former Meridian branches, which resulted in a $1.4
million and $0.6 million reduction in Goodwill and CDI, respectively.
Intangible assets decreased by $1.4 million to $31.7 million at September
30, 2000, compared to $33.0 million at December 31, 1999. The decrease was
related to the amortization of intangible assets during the nine months ended
September 30, 2000 offset, in part, by the acquisition of certain business
interests of Tyler Consulting, Inc. during the first quarter of 2000.
DEPOSITS. Deposits decreased by $71 million to $1.433 billion, at
September 30, 2000, compared to $1.504 billion at December 31, 1999. The
decrease was primarily related to a decrease in certificates of deposit and
money market deposits offset, in part, by an increase in demand deposits.
BORROWINGS. The Company's borrowings consist primarily of securities sold
under agreements to repurchase and advances from the Federal Home Loan Bank
("FHLB"). Repurchase agreements decreased by $75 million, or 75%, to $25 million
at September 30, 2000, from $100 million at December 31, 1999. This decrease was
offset, in part, by a $46 million, or 36%, increase in FHLB advances and a $10
million, or 110%, increase in the Company's commercial repurchase product. 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.
ACCRUED INTEREST PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES ("OTHER
LIABILITIES"). Other liabilities increased by $10 million, or 48%, to $31
million at September 30, 2000, from $21 million at December 31, 1999. The
increase was primarily related to an increase in accrued interest payable.
SHAREHOLDERS' EQUITY. At September 30, 2000, shareholders' equity equaled
$157 million, compared to $152 million at December 31, 1999. This increase was
primarily the result of the $7 million increase in retained earnings during the
first nine months of 2000, a $2 million decrease in accumulated other
comprehensive loss and a $1 million decrease in unearned stock benefit plan
compensation offset, in part, by the $7 million purchase of 0.5 million shares
of treasury stock. The $7 million increase in retained earnings was the result
of earnings of $11 million offset, in part, by cash dividends of $4 million
during the first nine months of 2000. The repurchased shares were held as
treasury stock as of September 30, 2000, and are reserved for general corporate
purposes and/or issuance pursuant to the Company's stock option plans. At
September 30, 2000, shareholders' equity represented 8.5% of assets, compared to
7.9% at December 31, 1999. The Bank's core and risk-based capital ratios were
6.9% and 11.2%, respectively, at September 30, 2000, compared to 6.4% and 11.3%,
respectively, at December 31, 1999.
22
<PAGE> 23
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, 2000:
<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)
Shareholders' equity,
and ratio to OTS
total assets 8.5% $ 156,210
-----------
Intangible assets (31,688)
Unrealized loss on
available for sale
securities, net of tax 1,167
----------
Tangible capital,
and ratio to OTS
adjusted total assets 6.9% $ 125,689 1.5% $27,216
----------- ========== ------- =======
Core capital,
and ratio to OTS
adjusted total assets 6.9% $ 125,689 4.0% $72,577 5.0% $ 90,721
----------- ========== ------- ======= ----- ========
Core capital,
and ratio to OTS
risk-weighted assets 10.3% $ 125,689 6.0% $ 73,239
----------- ---------- ----- ========
Allowance for loan losses 10,885
----------
Supplementary capital 10,885
----------
Total risk-based capital,
and ratio to OTS
risk-weighted assets (1) 11.2% $ 136,574 8.0% $97,652 10.0% $122,065
----------- ========== -------- ======= ----- ========
OTS total assets $1,844,942
==========
OTS adjusted total assets $1,814,421
==========
OTS risk-weighted assets $1,220,651
==========
</TABLE>
-------------------
(1) Does not reflect the interest rate risk component to the risk-based
capital requirement, which is not yet effective.
23
<PAGE> 24
Commonwealth Bancorp, Inc. and Subsidiaries
Average Balance Sheets
<TABLE>
<CAPTION>
Quarter Ended September 30,
--------------------------------------------------------------------
2000 1999
------------------------------- ----------------------------------
Average Average
(dollars in thousands) Average Yield / Average Yield /
Balance Interest Cost Balance Interest Cost
----------- --------- -------- ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Loans receivable:
Mortgage loans $867,018 $15,908 7.30% $907,437 $16,350 7.15%
Consumer loans 361,219 8,393 9.24% 287,957 6,376 8.78%
Commercial loans 217,800 4,976 9.09% 166,830 3,623 8.62%
----------- --------- -------- ------------ -------- -------
Total loans receivable 1,446,037 29,277 8.05% 1,362,224 26,349 7.67%
----------- --------- -------- ------------ -------- -------
Mortgage-backed securities 240,354 4,191 6.94% 341,917 5,719 6.64%
Investment securities 19,038 320 6.69% 125,004 1,638 5.20%
Other earning assets 18,444 506 10.91% 56,352 1,025 7.22%
----------- --------- -------- ------------ -------- -------
Total interest-earning assets 1,723,873 34,294 7.91% 1,885,497 34,731 7.31%
--------- -------- -------- -------
Noninterest-earning assets 147,079 158,417
----------- ------------
Total assets $1,870,952 $2,043,914
=========== ============
Deposits:
Demand deposits $730,607 4,339 2.36% $739,211 4,316 2.32%
Savings deposits 221,308 1,229 2.21% 226,939 1,266 2.21%
Certificates of deposit 504,436 6,638 5.24% 580,739 7,329 5.01%
----------- --------- -------- ------------ -------- -------
Total deposits 1,456,351 12,206 3.33% 1,546,889 12,911 3.31%
----------- --------- -------- ------------ -------- -------
Notes payable and other borrowings:
FHLB Advances 143,884 2,300 6.36% 137,870 1,880 5.41%
Repurchase agreements 64,457 991 6.12% 136,087 2,103 6.13%
Other borrowings 16,444 195 4.72% 8,910 96 4.27%
----------- --------- -------- ------------ -------- -------
Total borrowings 224,785 3,486 6.17% 282,867 4,079 5.72%
----------- --------- -------- ------------ -------- -------
Total interest-bearing liabilities 1,681,136 $15,692 3.71% 1,829,756 $16,990 3.68%
--------- -------- -------- -------
Noninterest-bearing liabilities 35,988 54,724
----------- ------------
Total liabilities 1,717,124 1,884,480
Shareholders' equity 153,828 159,434
----------- ------------
Total liabilities and equity $1,870,952 $2,043,914
=========== ============
Yield on interest earning assets 7.91% 7.31%
Cost of supporting funds 3.62% 3.58%
Net interest margin:
Taxable equivalent basis $18,602 4.29% $17,741 3.73%
Without taxable equivalent adjs. $18,416 4.25% $17,640 3.71%
<CAPTION>
Nine Months Ended September 30,
-------------------------------------------------------------------------
2000 1999
--------------------------------- ------------------------------------
Average Average
(dollars in thousands) Average Yield / Average Yield /
Balance Interest Cost Balance Interest Cost
------------ --------- -------- ----------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Loans receivable:
Mortgage loans $872,893 $47,853 7.32% $956,210 $51,408 7.19%
Consumer loans 344,306 23,540 9.13% 267,501 17,752 8.87%
Commercial loans 204,897 13,724 8.95% 150,937 9,680 8.57%
------------ --------- -------- ----------- --------- -------
Total loans receivable 1,422,096 85,117 7.99% 1,374,648 78,840 7.67%
------------ --------- -------- ----------- --------- -------
Mortgage-backed securities 260,254 13,518 6.94% 408,242 20,208 6.62%
Investment securities 41,804 1,950 6.23% 143,648 5,500 5.12%
Other earning assets 18,859 1,477 10.46% 58,792 2,921 6.64%
------------ --------- -------- ----------- --------- -------
Total interest-earning assets 1,743,013 102,062 7.82% 1,985,330 107,469 7.24%
--------- -------- --------- -------
Noninterest-earning assets 147,115 154,725
------------ -----------
Total assets $1,890,128 $2,140,055
============ ===========
Deposits:
Demand deposits $735,383 13,038 2.37% $730,267 12,724 2.33%
Savings deposits 222,878 3,692 2.21% 229,086 3,800 2.22%
Certificates of deposit 526,518 20,051 5.09% 623,788 23,723 5.08%
------------ --------- -------- ----------- --------- -------
Total deposits 1,484,779 36,781 3.31% 1,583,141 40,247 3.40%
------------ --------- -------- ----------- --------- -------
Notes payable and other borrowings:
FHLB Advances 130,221 5,946 6.10% 179,577 7,088 5.28%
Repurchase agreements 76,606 3,452 6.02% 142,066 6,810 6.41%
Other borrowings 13,502 496 4.91% 6,480 211 4.35%
------------ --------- -------- ----------- --------- -------
Total borrowings 220,329 9,894 6.00% 328,123 14,109 5.75%
------------ --------- -------- ----------- --------- -------
Total interest-bearing liabilities 1,705,108 $46,675 3.66% 1,911,264 $54,356 3.80%
--------- -------- --------- -------
Noninterest-bearing liabilities 33,210 51,312
------------ -----------
Total liabilities 1,738,318 1,962,576
Shareholders' equity 151,810 177,479
------------ -----------
Total liabilities and equity $1,890,128 $2,140,055
============ ===========
Yield on interest earning assets 7.82% 7.24%
Cost of supporting funds 3.58% 3.66%
Net interest margin:
Taxable equivalent basis $55,387 4.24% $53,113 3.58%
Without taxable equivalent adjs. $54,948 4.21% $52,964 3.57%
</TABLE>
Note: Interest and yields were calculated on a taxable equivalent basis,
using a 35% tax rate and the actual number of days in the periods.
Loan fees, as well as nonaccrual loans and their related income effect,
have been included in the calculation of average interest yields/rates.
24
<PAGE> 25
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, 2000 AND 1999.
GENERAL. Net income was $4.0 million, or $0.37 per common share on
a diluted basis, for the third quarter of 2000, compared to net income of $4.4
million, or $0.36 per common share on a diluted basis, for the third quarter
of 1999. The third quarter 1999 financial results reflected a $1.2 million
(after-tax) net gain on the sale of mortgage servicing rights. This gain was
offset, in part, by a $0.4 million (after-tax) charge primarily relating to
computer hardware and software upgrades and a $0.2 million (after-tax) loss on
the sale of securities. Exclusive of these items, net income would have been
$3.8 million, or $0.32 per share on a diluted basis, for the quarter ended
September 30, 1999.
For the nine months ended September 30, 2000, net income was $11.2
million, or $1.02 per common share on a diluted basis, compared to net income
of $12.8 million, or $0.99 per common share on a diluted basis, for the nine
months ended September 30, 1999. In addition to the above factors affecting
the third quarter 1999 results, net income for the nine months of 1999
included a $0.7 million (after-tax) gain on the sale of two branches in
Lebanon County, Pennsylvania. This gain was offset, in part, by a $0.3 million
(after-tax) charge relating to certain assets acquired in the 1996 acquisition
of 12 branches in Lebanon and Berks Counties, Pennsylvania. Exclusive of these
items, net income would have been $11.9 million, or $0.91 per share on a
diluted basis, for the nine months ended September 30, 1999.
On a business segment basis, net income from Community Banking,
exclusive of the above items, increased from $3.3 million, or $0.27 per common
share, in the third quarter of 1999, to $4.0 million, or $0.37 per common
share, in the third quarter of 2000. Exclusive of the $1.2 million (after-tax)
net gain on the sale of mortgage servicing rights, net income from Mortgage
Banking decreased from $0.5 million, or $0.04 per common share, in the third
quarter of 1999, to essentially breakeven in the third quarter of 2000.
Net income from Community Banking, exclusive of the above items,
increased from $8.8 million, or $0.68 per common share, for the nine months
ended September 30, 1999, to $11.7 million, or $1.06 per common share, for the
nine months ended September 30, 2000. Net income from Mortgage Banking,
exclusive of the $1.2 million (after-tax) net gain on the sale of mortgage
servicing rights, decreased from $3.0 million, or $0.23 per common share, for
the nine months ended September 30, 1999, to a loss of $0.4 million, or $0.04
per common share, for the nine months ended September 30, 2000.
NET INTEREST INCOME. Net interest income was $18.4 million in the
third quarter of 2000, compared to $17.6 million in the third quarter of 1999.
For the nine months ended September 30, 2000, net interest income was $54.9
million, versus $53.0 million for the comparable period in 1999. These
increases were primarily attributable to a higher net interest margin, which
was partially offset by a decrease in average interest earning assets.
Average interest-earning assets totaled $1.7 billion for both the
third quarter and nine months ended September 30, 2000. This compared to $1.9
billion and $2.0 billion for the third quarter and nine months ended September
30, 1999, respectively. The decreases in interest-earning assets were due
primarily to decreases in the Company's mortgage-backed securities, investment
securities and mortgage loans offset, in part, by increases in consumer and
commercial loans.
The net interest margin on a fully taxable equivalent basis was
4.29% in the third quarter of 2000, compared to 3.73% in the third quarter of
1999. The increase was primarily attributable to a 0.60% increase in the yield
on interest-earning assets, which was primarily attributable to higher market
interest rates and a favorable change in investment mix, involving an increase
in higher yielding consumer and commercial loans, and a decrease in lower
yielding mortgage loans and securities.
25
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
For the nine months ended September 30, 2000, the net interest
margin on a fully taxable equivalent basis was 4.24%, versus 3.58% in the
comparable 1999 period. The increase was primarily attributable to a 0.58%
increase in the yield on interest-earning assets, which was primarily
attributable to the same factors responsible for the increase in the third
quarter of 2000. Also contributing to the increase in net interest margin for
the first nine months of 2000 was a 0.12% decrease in the cost of
interest-bearing liabilities relative to the comparable period in 1999. The
decrease in the cost of interest-bearing liabilities was primarily related to
a decrease in higher costing certificates and wholesale borrowings.
PROVISION FOR LOAN LOSSES. Provision for loan losses totaled $1.3
million and $3.6 million in the third quarter and nine months ended September
30, 2000, respectively. The provision for loan losses totaled $1.0 million and
$3.0 million in the third quarter and nine months ended September 30, 1999,
respectively. At September 30, 2000, the allowance for loan losses totaled
$10.9 million, or 0.76% of loans, compared to $10.5 million, or 0.76% of
loans, at December 31, 1999.
NONINTEREST INCOME. Noninterest income totaled $6.0 million in the
third quarter of 2000, compared to $7.8 million in the third quarter of 1999.
The decrease primarily reflected a $1.6 million net gain on sale of mortgage
servicing rights during the third quarter of 1999, and a $0.7 million decrease
in the net gain on sale of mortgage loans. The latter was primarily
attributable to a decrease in mortgage originations due to generally higher
market interest rates. Also during the third quarter of 2000, servicing fees
decreased by $0.7 million relating to the sale of mortgage servicing rights
during the third quarter of 1999. The above decreases were partially offset by
a $0.5 million increase in deposit fees and related income, a $0.4 million
increase in Tyler Wealth Counselors' revenue, and a $0.3 million increase in
the net gain on sale of securities. The increase in deposit fees was primarily
attributable to an increase in transaction accounts and the increase in Tyler
Wealth Counselors' revenue was related to the acquisition of certain business
interests of Tyler Consulting, Inc. during the first quarter of 2000.
Noninterest income was $16.4 million for the first nine months of
2000, compared to $23.4 million for the same 1999 period. In addition to the
factors relating to the third quarter, the decrease was also attributable to a
$1.0 million gain on the sale of two branches in Lebanon County, Pennsylvania,
during the second quarter of 1999.
NONINTEREST EXPENSE. Noninterest expense was $17.7 million in the
third quarter of 2000, compared to $18.3 million in the third quarter of 1999.
The decrease was primarily attributable to a $0.6 million charge during the
third quarter of 1999, primarily relating to computer hardware and software
upgrades, and a decrease in mortgage banking expenses.
Noninterest expense was $52.4 million for the nine months ended
September 30, 2000, compared to $55.4 million for the same period in 1999. The
decrease was primarily attributable to the same factors responsible for the
decrease in the third quarter of 2000. Also contributing to the decrease was a
$0.5 million nonrecurring charge in the second quarter of 1999 relating to
certain assets acquired in the 1996 acquisition of 12 branches in Lebanon and
Berks Counties, Pennsylvania, as well as lower expenses relating to certain
stock benefit plans.
PROVISION FOR INCOME TAXES. Provision for income taxes was $1.5
million, or 26.5% of income before income taxes in the third quarter of 2000,
compared to $1.8 million, or 29%, in the third quarter of 1999. For the first
nine months of 2000, provision for income taxes was $4.1 million, or 26.5% of
income before income taxes, compared to $5.2 million, or 29%, in the first
nine months of 1999. The decrease in the effective tax rate in the third
quarter and first nine months of 2000, relative to the comparable periods in
1999, was primarily attributable to lower pre-tax income, which resulted in a
higher relative percentage of tax-advantaged income to total income.
26
<PAGE> 27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Commonwealth utilizes simulation models to analyze the estimated
effects on net interest income under multiple interest rate scenarios,
including increases and decreases in interest rates amounting to 100, 200, and
300 basis points. Each scenario is modeled for a change in net interest income
over a two year period. Similar simulation models are prepared to analyze the
Company's net asset value, which is the present value of the cash flows
generated by the Company's assets minus the present value of the cash flows
generated by the Company's liabilities, plus or minus the net cash flows
produced by off-balance sheet contracts. At September 30, 2000, the Company's
income simulation model indicates net interest income would decrease by 2.54%
over a two year period if interest rates increased by 200 basis points. The
model projects that net interest income would decrease by 1.75% over a two
year period if rates decreased by 200 basis points. The anticipated changes in
the level of net interest income and net asset value over the various
scenarios were within limits approved by the Company's Board of Directors.
Management believes that the assumptions utilized to evaluate the
vulnerability of the Company's operations to changes in interest rates
approximate actual experience and considers them to be reasonable. However,
the interest rate sensitivity of the Company's assets and liabilities could
vary substantially if different assumptions were used or actual experience
differs from the historical experience on which they are based.
Since there are limitations inherent in any methodology used to
estimate the exposure to changes in market interest rates, this analysis is
not intended to be a forecast of the actual effect of a change in market
interest rates on the Company. The market value of portfolio equity is
significantly impacted by the estimated effect of prepayments on the value of
loans and mortgage-backed securities. Further, this analysis is based on the
Company's assets, liabilities, and off-balance-sheet instruments at September
30, 2000, and does not contemplate any actions the Company might undertake in
response to changes in market interest rates.
27
<PAGE> 28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings, other than as previously
reported in the Company's Form 10-Q for the quarter ended March 31,
2000 or the Company's 1999 Annual Report on Form 10-K, 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) Exhibit
(27) Financial Data Schedule
b) Reports on Form 8-K
On July 20, 2000, the Company filed a Current Report on Form
8-K to report under Item 5, its earnings for the second quarter of
2000. On September 14, 2000, the Company filed a Current Report on
Form 8-K to report under Item 5, that its wholly-owned subsidiary,
Commonwealth Bank, completed the sale of two branches in Lehigh
County, Pennsylvania to another financial institution and its
declared cash dividend.
28
<PAGE> 29
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, 2000 /s/ Charles H. Meacham
-------------------------------------
Charles H. Meacham
Chairman and Chief Executive
Officer
(Principal Executive Officer)
DATE: November 7, 2000 /s/ Charles M. Johnston
-------------------------------------
Charles M. Johnston
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
29
