<PAGE> 1
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended...............................March 31, 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 May 4, 2000,
there were 18,068,127 issued and 11,568,294 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 March 31, 2000 and December 31, 1999 3
Consolidated Statements of Income for the Quarter Ended
March 31, 2000 and 1999 4
Consolidated Statements of Changes in Shareholders' Equity for the Quarter Ended
March 31, 2000 and 1999 5
Consolidated Statements of Cash Flows for the Quarter Ended
March 31, 2000 and 1999 6
Notes to Consolidated Financial Statements 8
2 Management's Discussion and Analysis of Financial Condition and Results of
Operations 13
3 Quantitative and Qualitative Disclosures about Market Risk 25
PART II - OTHER INFORMATION
1 Legal Proceedings 26
2 Changes in Securities 26
3 Default Upon Senior Securities 26
4 Submission of Matters to a Vote of Security Holders 26
5 Other Information 27
6 Exhibits and Reports on Form 8-K 27
Signatures 28
</TABLE>
2
<PAGE> 3
Commonwealth Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------------- --------------
<S> <C> <C>
Assets: (Unaudited)
Cash and due from banks $60,537 $54,677
Interest-bearing deposits - 3,499
Short-term investments available for sale 61 3,575
Mortgage loans held for sale 16,475 24,005
Investment securities
Securities available for sale (cost of $68,798
and $68,301, respectively), at market value 68,393 68,219
Mortgage-backed securities
Securities held to maturity (market value of $88,671
and $92,965, respectively), at cost 89,219 93,674
Securities available for sale (cost of $184,174
and $202,076, respectively), at market value 178,667 197,280
Loans receivable, net 1,387,562 1,361,430
Accrued interest receivable, net 9,752 9,499
FHLB stock, at cost 18,400 18,400
Premises and equipment, net 16,024 15,535
Intangible assets 34,156 33,048
Other assets, including net deferred taxes of $7,821
and $7,460, respectively 37,995 39,555
-------------- --------------
Total assets $1,917,241 $1,922,396
============== ==============
Liabilities:
Deposits $1,514,239 $1,503,746
Notes payable and other borrowings:
Secured notes due to Federal Home Loan Bank of Pittsburgh 112,142 127,000
Securities sold under agreements to repurchase 90,000 100,000
Other borrowings 14,850 9,076
Advances from borrowers for taxes and insurance 9,695 9,326
Accrued interest payable, accrued expenses and other liabilities 27,644 20,883
-------------- --------------
Total liabilities 1,768,570 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 11,568,294 outstanding at March 31, 2000
18,068,127 shares issued and 11,934,695 outstanding at December 31, 1999 1,807 1,807
Additional paid-in capital 137,146 136,966
Retained earnings 137,845 135,780
Unearned stock benefit plan compensation (8,027) (8,504)
Accumulated other comprehensive loss (3,842) (3,171)
Treasury stock, at cost; 6,499,833 and 6,133,432 shares, respectively (116,258) (110,513)
-------------- --------------
Total shareholders' equity 148,671 152,365
-------------- --------------
Total liabilities and shareholders' equity $1,917,241 $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
Ended March 31,
----------------------------------
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
Interest income:
Interest on loans $27,356 $26,259
Interest and dividends on deposits and money
market investments 475 1,041
Interest on investment securities 965 1,377
Interest on mortgage-backed securities 4,850 7,930
----------- -----------
Total interest income 33,646 36,607
Interest expense:
Interest on deposits 12,348 13,784
Interest on notes payable and other borrowings 3,248 5,286
----------- -----------
Total interest expense 15,596 19,070
----------- -----------
Net interest income 18,050 17,537
Provision for loan losses 1,125 1,000
----------- -----------
Net interest income after provision for loan losses 16,925 16,537
Noninterest income:
Deposit fees and related income 2,591 2,187
Servicing fees 231 894
Net gain on sale of mortgage loans 1,060 4,161
Other 1,021 650
----------- -----------
Total noninterest income 4,903 7,892
----------- -----------
Noninterest expense:
Compensation and employee benefits 8,709 9,618
Occupancy and office operations 2,724 2,817
Amortization of intangible assets 1,211 1,289
Other 4,540 4,982
----------- -----------
Total noninterest expense 17,184 18,706
----------- -----------
Income before income taxes 4,644 5,723
Income tax provision 1,231 1,660
----------- -----------
Net income $3,413 $4,063
=========== ===========
Basic weighted average number of shares outstanding 10,869,410 13,358,378
=========== ===========
Basic earnings per share $0.31 $0.30
=========== ===========
Diluted weighted average number of shares outstanding 11,153,144 13,693,354
=========== ===========
Diluted earnings per share $0.31 $0.30
=========== ===========
</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)
<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 4,063
Other-unrealized loss on marketable
securities, net of $549 tax benefit
Total comprehensive income
Dividends (1,195)
Release of ESOP shares 173
Amortization of unearned compensation
Stock issued pursuant to benefit plans 18 1 169
Purchase of treasury stock (700)
--------------------------------------------------------
Balance at March 31, 1999 14,039 $1,807 $135,930 $126,785
========================================================
Balance at December 31, 1999 11,935 $1,807 $136,966 $135,780
Comprehensive income:
Net income 3,413
Other-unrealized loss on marketable
securities, net of $362 tax benefit
Total comprehensive income
Dividends (1,200)
Release of ESOP shares 163
Amortization of unearned compensation
Stock issued pursuant to benefit plans 27 17 (148)
Purchase of treasury stock (394)
--------------------------------------------------------
Balance at March 31, 2000 11,568 $1,807 $137,146 $137,845
========================================================
</TABLE>
<TABLE>
<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 4,063
Other-unrealized loss on marketable
securities, net of $549 tax benefit (1,020) (1,020)
-----------
Total comprehensive income 3,043
-----------
Dividends (1,195)
Release of ESOP shares 230 403
Amortization of unearned compensation 532 532
Stock issued pursuant to benefit plans 61 231
Purchase of treasury stock (10,549) (10,549)
-----------------------------------------------------------
Balance at March 31, 1999 ($9,904) $1,447 ($71,422) $184,643
===========================================================
Balance at December 31, 1999 ($8,504) ($3,171) ($110,513) $152,365
Comprehensive income:
Net income 3,413
Other-unrealized loss on marketable
securities, net of $362 tax benefit (671) (671)
-----------
Total comprehensive income 2,742
-----------
Dividends (1,200)
Release of ESOP shares 230 393
Amortization of unearned compensation 247 247
Stock issued pursuant to benefit plans 430 299
Purchase of treasury stock (6,175) (6,175)
-----------------------------------------------------------
Balance at March 31, 2000 ($8,027) ($3,842) ($116,258) $148,671
===========================================================
</TABLE>
5
<PAGE> 6
Commonwealth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
For the Quarter Ended
March 31,
2000 1999
--------- ---------
<S> <C> <C>
Operating activities:
Net income $3,413 $4,063
Adjustments to reconcile net income to net cash
provided by (used in) operating activities-
Proceeds from loans sold to others 58,006 236,323
Loans originated for sale (33,350) (124,693)
Purchases of loans held for sale (16,953) (47,704)
Principal collection on mortgage loans held for sale 68 248
Net gain on sale of mortgage loans (1,060) (4,161)
Decrease in net deferred loan fees (94) (463)
Provision for loan losses and foreclosed real estate 1,125 1,037
Depreciation and amortization 784 869
Net amortization of other assets and liabilities 1,355 2,352
Interest reinvested on repurchase agreements (1,436) (2,436)
Changes in assets and liabilities-
(Increase) decrease in-
Accrued interest receivable, net (253) (243)
Deferred income taxes - (339)
Other assets 1,611 (1,421)
Increase in-
Advances from borrowers for taxes and insurance 369 1,592
Accrued interest payable, accrued expenses and
other liabilities 5,761 3,180
--------- ---------
Net cash provided by operating activities $19,346 $68,204
--------- ---------
(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 Quarter Ended
March 31,
2000 1999
----------- -----------
<S> <C> <C>
Investing activities:
Proceeds from sale of investment securities $ - $7,000
Proceeds from maturities of investment securities - 5,000
Purchases of investment securities - (151,534)
Proceeds from sale of mortgage-backed securities - 5,470
Principal collected on mortgage-backed securities 22,356 92,199
Principal collected on loans 67,641 107,725
Loans originated (84,578) (59,946)
Loans purchased (9,300) (10,908)
Sales of real estate acquired through foreclosure 223 345
Purchases of premises and equipment (1,122) (986)
Purchase of business (1,488) -
----------- -----------
Net cash used in investing activities (6,268) (5,635)
----------- -----------
Financing activities:
Net increase (decrease) in deposits 10,493 (1,805)
Repayment of notes payable and other borrowings, net of proceeds (17,648) (52,604)
Net purchase of common stock (5,876) (10,373)
Cash dividends paid (1,200) (1,195)
----------- -----------
Net cash used in financing activities (14,231) (65,977)
----------- -----------
Net decrease in cash and cash equivalents (1,153) (3,408)
Cash and cash equivalents at beginning of period 61,751 106,677
----------- -----------
Cash and cash equivalents at end of period $60,598 $103,269
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for-
Interest $12,145 $14,601
=========== ===========
Income taxes $ - $ -
=========== ===========
</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") as of
March 31, 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 62 full-service
offices located in Berks, Bucks, Chester, Delaware, Lehigh, Montgomery, and
Philadelphia Counties, Pennsylvania, as well as through ComNet Mortgage Services
("ComNet") and Homestead Mortgage. ComNet, a division of the Bank, conducts
business through nine loan origination offices located in Pennsylvania,
Maryland, New Jersey, and Virginia. ComNet also originates loans through a
network of correspondents, primarily in the eastern United States. 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; 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 March 31, 2000, shareholders' equity totaled $149 million, or
7.8% of assets, compared to $152 million, or 7.9%, at December 31, 1999. The
decrease in shareholders' equity during the first quarter of 2000 was primarily
due to the repurchase of common stock offset, in part, by an increase in
retained earnings.
During the first quarter of 2000, the Company purchased 0.4 million
shares of its common stock, representing purchases of $6 million. During the
first quarter of 1999, the Company purchased 0.7 million shares of its common
stock, representing purchases of $11 million. The repurchased shares were held
as treasury stock at March 31, 2000, and are reserved for general corporate
purposes and/or issuance pursuant to the Company's stock option plans.
On March 14, 2000, the Board of Directors declared an $0.11 per
share cash dividend for the quarter ended March 31, 2000, which was made payable
to shareholders of record at the close of business on March 24, 2000. This
dividend was paid on April 7, 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. The adoption of SFAS No. 133 as of March
31, 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 March 31,
-------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Basic weighted average number of common shares outstanding 10,869,410 13,358,378
Effect of dilutive securities:
Stock options 260,986 308,500
Recognition Plan stock 22,748 26,476
---------- ----------
Diluted weighted average number of common shares outstanding 11,153,144 13,693,354
========== ==========
</TABLE>
Basic EPS was $0.31 per common share for the quarter ended March 31,
2000, compared to $0.30 per common share for the quarter ended March 31, 1999.
Diluted EPS was $0.31 per common share for the quarter ended March 31, 2000,
compared to $0.30 per common share for the quarter ended March 31, 1999.
9
<PAGE> 10
Commonwealth Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income,"
on January 1, 1998, as required. SFAS No. 130 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. There were no reclassification
adjustments for realized gains or losses on marketable securities, net of tax,
during the first quarters of 2000 and 1999.
10
<PAGE> 11
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 March 31,
-------------------------------------------------
2000
-------------------------------------------------
Community Mortgage
Banking Banking Total
-------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Net interest income after
Provision for loan losses $ 16,431 $ 494 $ 16,925
Noninterest income:
Servicing fees (604) 835 231
Net gain on sale of mortgage loans (139) 1,199 1,060
Other 3,400 212 3,612
----------- ----------- -----------
Total noninterest income 2,657 2,246 4,903
----------- ----------- -----------
Noninterest expense:
Compensation and employee benefits 6,874 1,835 8,709
Other 7,324 1,151 8,475
----------- ----------- -----------
Total noninterest expense 14,198 2,986 17,184
----------- ----------- -----------
Income before income taxes 4,890 (246) 4,644
Income tax provision 1,317 (86) 1,231
----------- ----------- -----------
Net income $ 3,573 $ (160) $ 3,413
=========== =========== ===========
Total assets (period end) $ 1,883,602 $ 33,639 $ 1,917,241
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
For the Quarter Ended March 31,
---------------------------------------------------
1999
---------------------------------------------------
Community Mortgage
Banking Banking Total
---------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Net interest income after
Provision for loan losses $ 15,364 $ 1,173 $ 16,537
Noninterest income:
Servicing fees (655) 1,549 894
Net gain on sale of mortgage loans (132) 4,293 4,161
Other 2,874 (37) 2,837
----------- ----------- -----------
Total noninterest income 2,087 5,805 7,892
----------- ----------- -----------
Noninterest expense:
Compensation and employee benefits 6,869 2,749 9,618
Other 7,412 1,676 9,088
----------- ----------- -----------
Total noninterest expense 14,281 4,425 18,706
----------- ----------- -----------
Income before income taxes 3,170 2,553 5,723
Income tax provision 767 893 1,660
----------- ----------- -----------
Net income $ 2,403 $ 1,660 $ 4,063
=========== =========== ===========
Total assets (period end) $ 2,102,524 $ 95,367 $ 2,197,891
=========== =========== ===========
</TABLE>
11
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Commonwealth Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Acquisitions and Divestitures
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.
On May 1, 2000, Commonwealth announced that its wholly-owned
subsidiary, Commonwealth Bank, has reached a definitive agreement with another
financial institution regarding the sale of Commonwealth's two branches in
Lehigh County, Pennsylvania. The transaction, which is subject to regulatory
approval, is expected to be completed in the summer of 2000. As of March 31,
2000, the two branches had combined deposits of approximately $14 million. In
addition to the deposits, it is expected that approximately $4 million of
consumer loans will be transferred as part of the transaction.
12
<PAGE> 13
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 March 31, 2000, 62 full-service branches located in southeast Pennsylvania.
ComNet Mortgage Services, a division of the Bank, also located in Norristown,
conducts business through nine loan origination offices. In addition to ComNet's
offices located in Pennsylvania, Maryland, New Jersey, and Virginia, ComNet also
operates under the trade name of Homestead Mortgage in Maryland and conducts
business through its wholesale network, which includes correspondents in 18
states.
FINANCIAL CONDITION
GENERAL. Total assets were $1.9 billion at both March 31, 2000 and
December 31, 1999. During the first quarter of 2000, decreases in the Company's
mortgage-backed securities and mortgage loans held for sale were offset, in
part, by an increase in loans receivable. Total liabilities were $1.8 billion at
both March 31, 2000 and at December 31, 1999. During the first quarter of 2000,
a decrease in notes payable and other borrowings was offset, in part, by
increases in deposits and accrued interest payable, accrued expenses and other
liabilities. Shareholders' equity was $149 million as of March 31, 2000,
compared to $152 million at December 31, 1999. This $4 million decrease was
primarily the result of the $6 million purchase of 0.4 million shares of
treasury stock offset, in part, by a $2 million increase in retained earnings.
The increase in retained earnings was primarily related to earnings offset, in
part, by cash dividends, during the first quarter of 2000.
MORTGAGE LOANS HELD FOR SALE. Mortgage loans held for sale decreased by
$8 million, or 31%, from $24 million at December 31, 1999, to $16 million at
March 31, 2000. The decrease was attributable to a decrease in mortgage
origination volumes resulting from higher interest rates during the first
quarter of 2000.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
INVESTMENT SECURITIES. Investment securities were $68 million at both March 31,
2000 and December 31, 1999.
Investments in debt and equity securities at March 31, 2000 and December 31,
1999 were as follows:
<TABLE>
<CAPTION>
March 31, 2000
-----------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-----------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Available for sale:
Corporate Bonds $35,000 $ - $ 6 $34,994
Mortgage Related Mutual Fund 21,048 - 316 20,732
Equity Investment - Mortgage
Servicing Partnership 1,700 - - 1,700
Other Equity Investments 11,050 182 265 10,967
-----------------------------------------------------
Total $68,798 $ 182 $ 587 $68,393
=====================================================
</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.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities decreased by $23
million, or 8%, from $291 million at December 31, 1999, to $268 million at March
31, 2000. The decrease in mortgage-backed securities during the first quarter of
2000 was primarily related to repayments and prepayments.
At March 31, 2000 and December 31, 1999, $184 million, or 69%, 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 March
31, 2000 and December 31, 1999, $84 million, or 31%, 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>
March 31, 2000
----------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Held to maturity:
GNMA $34,292 $406 $ 2 $ 34,696
FHLMC 16,763 160 87 16,836
FNMA 35,265 178 1,203 34,240
Private 2,899 - - 2,899
----------------------------------------------------------------------------------------
Total $89,219 $744 $1,292 $ 88,671
========================================================================================
Available for sale:
GNMA $ 9,506 $ 16 $ 230 $ 9,292
FHLMC 35,267 422 224 35,465
FNMA 42,400 3 812 41,591
CMO and REMIC 97,001 9 4,691 92,319
----------------------------------------------------------------------------------------
Total $184,174 $450 $5,957 $178,667
========================================================================================
</TABLE>
15
<PAGE> 16
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.
16
<PAGE> 17
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 $26
million, or 2%, during the first quarter of 2000, to $1.4 billion at March 31,
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>
March 31, December 31,
2000 1999
---------------------------- -------------------------
% of % of
Amount Total Amount Total
------ ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans - Residential (1) $ 862,582 61.65% $ 860,750 62.70%
Consumer loans:
Second mortgages 201,915 14.43 184,844 13.47
Equity lines of credit 29,165 2.09 30,496 2.22
Recreational vehicles 59,329 4.24 60,998 4.44
Other 46,985 3.36 45,448 3.31
---------- ------ ---------- ------
Total consumer loans 337,394 24.12 321,786 23.44
Commercial loans:
Business loans 123,546 8.83 113,178 8.24
Commercial real estate 65,589 4.69 66,158 4.82
Small Business Administration (2) 9,969 0.71 10,971 0.80
---------- ------ ---------- ------
Total commercial loans 199,104 14.23 190,307 13.86
---------- ------ ---------- ------
Total loans receivable 1,399,080 100.00% 1,372,843 100.00%
---------- ====== ---------- ======
Less:
Net premium on loans purchased (2,202) (2,443)
Allowance for loan losses 10,436 10,478
Deferred loan fees 3,284 3,378
---------- ----------
Loans receivable, net $1,387,562 $1,361,430
========== ==========
</TABLE>
- --------------------
(1) At March 31, 2000 and December 31, 1999, $344 million, or 40%, and
$332 million, or 39%, 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.
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
Residential mortgage loans totaled $863 million at March 31, 2000, an
increase of $2 million, compared to $861 million at December 31, 1999. At March
31, 2000, residential mortgage loans represented 62% of the Company's loan
portfolio, compared to 63% at December 31, 1999.
Total mortgage loans originated and purchased for the quarter ended
March 31, 2000 totaled $78 million, compared to $190 million for the quarter
ended March 31, 1999. The $112 million decrease in mortgage originations was
primarily due to higher market interest rates. Originations relating to
Commonwealth's retail network totaled $54 million during the quarter ended March
31, 2000, compared to $138 million for the quarter ended March 31, 1999.
Commonwealth's Wholesale Lending Department originates loans through a network
of correspondent brokers in 18 states. All loans are underwritten using the same
criteria as those used for retail originations. Originations relating to
Commonwealth's wholesale network totaled $23 million during the quarter ended
March 31, 2000, compared to $51 million for the quarter ended March 31, 1999.
Consumer loans increased by $16 million, or 5%, from $322 million at
December 31, 1999, to $337 million at March 31, 2000. At March 31, 2000,
consumer loans represented 24% of the Company's loan portfolio and were
comprised of $202 million of second mortgage loans, $29 million of equity lines
of credit, $59 million of recreational vehicle loans, and $47 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 $9 million, or 5%, from $190 million at
December 31, 1999, to $199 million at March 31, 2000. At March 31, 2000,
commercial loans represented 14% of the Company's loan portfolio and were
comprised of $124 million of business loans, $66 million of commercial real
estate loans, and $10 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 quarter 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.
18
<PAGE> 19
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 $0.1 million from $10.4 million at December 31, 1999, to $10.5
million at March 31, 2000. At March 31, 2000, nonperforming assets represented
0.55% 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>
March 31, 2000 December 31, 1999
-------------- -----------------
(dollars in thousands)
<S> <C> <C>
Mortgage loans - Residential $ 3,941 $ 4,044
Consumer loans 2,442 2,355
Commercial loans 1,278 1,380
------- ------
Total nonperforming loans 7,661 7,779
Investment securities 1,700 1,700
Real estate owned and
other acquired assets, net 1,168 923
------- ------
Total nonperforming assets $10,529 $10,402
======= ======
Nonperforming loans to total loans held
for investment 0.55% 0.57%
==== ====
Total nonperforming assets to total assets 0.55% 0.54%
==== ====
</TABLE>
- --------------
ALLOWANCE FOR LOAN LOSSES. The Company's allowance for loan losses
amounted to $10.4 million at March 31, 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 March 31, 2000, the Company's allowance for loan losses amounted
to 136% of total nonperforming loans and 0.75% of total loans held for
investment, as compared to 135% of total nonperforming loans and 0.76% of total
loans held for investment at December 31, 1999. 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.
19
<PAGE> 20
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 Quarter Ended March 31,
-------------------------------
2000 1999
----- ----
(dollars in thousands)
<S> <C> <C>
Allowance at beginning of period $10,478 $9,589
Provision for loan losses 1,125 1,000
Charge-offs:
Mortgage loans (16) (55)
Consumer loans (1,171) (406)
Commercial loans (18) (345)
-------- --------
Total charge-offs (1,205) (806)
Recoveries:
Mortgage loans - 12
Consumer loans 30 57
Commercial loans 8 91
-------- --------
Total recoveries 38 160
-------- --------
Allowance at end of period $10,436 $9,943
======== ========
Allowance for loan losses to
total nonperforming loans
at end of period 136.22% 101.77%
======== ========
Allowance for loan losses to
total loans held for
investment at end of period 0.75% 0.76%
==== ====
- --------------
</TABLE>
20
<PAGE> 21
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 "Tyler Acquisition"), the acquisition of twelve former Meridian
branches in 1996 (the "Berks Acquisition"), and the acquisition of four former
Fidelity Federal branches in 1995 (the "Fidelity Federal Acquisition"). 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 (Berks Acquisition) and
CDI (Berks Acquisition), respectively. The following table details the
components of intangible assets at the dates indicated.
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
(in thousands)
<S> <C> <C>
Goodwill (Berks Acquisition) $15,588 $16,010
CDI (Berks Acquisition) 5,626 6,009
Goodwill (Fidelity Federal) 8,919 9,187
CDI (Fidelity Federal) 1,759 1,842
Goodwill (Tyler) 2,264 -
------- -------
Total $34,156 $33,048
======= =======
</TABLE>
DEPOSITS. Deposits increased by $10 million to $1.514 billion at
March 31, 2000, compared to $1.504 billion at December 31, 1999. The increase
was primarily related to an increase in demand and money market deposits offset,
in part, by a decrease in certificates of deposit.
BORROWINGS. The Company's borrowings consist primarily of advances
from the Federal Home Loan Bank ("FHLB") and securities sold under agreements to
repurchase. FHLB advances decreased by $15 million, or 12%, to $112 million at
March 31, 2000, from $127 million at December 31, 1999. Repurchase agreements
decreased by $10 million, or 10%, to $90 million at March 31, 2000, from $100
million at December 31, 1999. These decreases were offset, in part, by a $6
million 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 $7 million, or 32%, to $28
million at March 31, 2000, from $21 million at December 31, 1999. The increase
was primarily related to an increase in accrued interest payable.
SHAREHOLDERS' EQUITY. At March 31, 2000, shareholders' equity
equaled $149 million, compared to $152 million at December 31, 1999. This $4
million decrease was primarily the result of the $6 million purchase of 0.4
million shares of treasury stock offset, in part, by a $2 million increase in
retained earnings during the first quarter of 2000. The $2 million increase in
retained earnings was the result of earnings of $3 million offset, in part, by
cash dividends of $1 million during the first quarter of 2000. The repurchased
shares were held as treasury stock as of March 31, 2000, and are reserved for
general corporate purposes and/or issuance pursuant to the Company's stock
option plans. At March 31, 2000, shareholders' equity represented 7.8% of
assets, compared to 7.9% at December 31, 1999. The Bank's core and risk-based
capital ratios were 6.1% and 10.5%, respectively, at March 31, 2000, compared to
6.4% and 11.3%, respectively, at December 31, 1999.
21
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
REGULATORY CAPITAL REQUIREMENTS.
The following table sets forth the Bank's compliance with applicable regulatory
capital requirements at March 31, 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 7.5% $ 144,478
------------
Intangible assets (34,156)
Unrealized loss on
available for sale
securities, net of tax 3,962
---------
Tangible capital,
and ratio to OTS
adjusted total assets 6.1% $ 114,284 1.5% $28,314
------------ ========== --------- =======
Core capital,
and ratio to OTS
adjusted total assets 6.1% $ 114,284 3.0% $56,629 5.0% $ 94,381
------------ ========== --------- ======= ---- ========
Core capital,
and ratio to OTS
risk-weighted assets 9.6% $ 114,284 6.0% $ 71,360
------------ ---------- ---- ========
Allowance for loan losses 10,436
----------
Supplementary capital 10,436
----------
Total risk-based capital,
and ratio to OTS
risk-weighted assets (1) 10.5% $ 124,720 8.0% $95,146 10.0% $118,933
------------ ========== --------- ======= ----- ========
OTS total assets $1,917,820
==========
OTS adjusted total assets $1,887,626
==========
OTS risk-weighted assets $1,189,328
==========
</TABLE>
- --------------------
(1) Does not reflect the interest rate risk component to the risk-based capital
requirement, which is not yet effective.
22
<PAGE> 23
Commonwealth Bancorp, Inc. and Subsidiaries
Average Balance Sheet
<TABLE>
<CAPTION>
Quarter Ended March 31,
----------------------------------------- ---------------------------------------
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 $875,480 $15,896 7.30% $1,016,902 $18,032 7.19%
Consumer loans 326,625 7,286 8.97% 244,086 5,371 8.92%
Commercial loans 193,734 4,234 8.79% 136,875 2,862 8.48%
----------- -------- ------ ----------- ------- ------
Total loans receivable 1,395,839 27,416 7.90% 1,397,863 26,265 7.62%
----------- -------- ------ ----------- ------- ------
Mortgage-backed securities 281,145 4,850 6.94% 482,705 7,930 6.66%
Investment securities 68,455 1,043 6.13% 107,351 1,377 5.20%
Other earning assets 18,287 475 10.45% 69,210 1,041 6.10%
----------- -------- ------ ----------- ------- ------
Total interest-earning assets 1,763,726 33,784 7.70% 2,057,129 36,613 7.22%
-------- ------ ------- ------
Noninterest-earning assets 144,852 156,572
----------- -----------
Total assets $1,908,578 $2,213,701
=========== ===========
Deposits:
Demand deposits $730,040 4,320 2.38% $709,020 4,157 2.38%
Savings deposits 222,151 1,225 2.22% 227,565 1,250 2.23%
Certificates of deposit 551,746 6,803 4.96% 659,578 8,377 5.15%
----------- -------- ------ ----------- ------- ------
Total deposits 1,503,937 12,348 3.30% 1,596,163 13,784 3.50%
----------- -------- ------ ----------- ------- ------
Notes payable and other borrowings:
FHLB Advances 118,205 1,697 5.77% 222,139 2,870 5.24%
Repurchase agreements 96,374 1,437 6.00% 150,267 2,385 6.44%
Other borrowings 9,087 114 5.05% 2,389 31 5.26%
----------- -------- ------ ----------- ------- ------
Total borrowings 223,666 3,248 5.84% 374,795 5,286 5.72%
----------- -------- ------ ----------- ------- ------
Total interest-bearing liabilities 1,727,603 $15,596 3.63% 1,970,958 $19,070 3.92%
-------- ------ ------- ------
Noninterest-bearing liabilities 29,405 53,182
----------- -----------
Total liabilities 1,757,008 2,024,140
Shareholders' equity 151,570 189,561
----------- -----------
Total liabilities and equity $1,908,578 $2,213,701
=========== ===========
Yield on interest earning assets 7.70% 7.22%
Cost of supporting funds 3.55% 3.76%
Net interest margin:
Taxable equivalent basis $18,188 4.15% $17,543 3.46%
Without taxable equivalent adjs. $18,050 4.12% $17,537 3.46%
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------ ------------------------------------
1999 1998
------------------------------------ ------------------------------------
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 $936,997 $67,300 7.18% $1,066,998 $76,714 7.19%
Consumer loans 277,545 24,674 8.89% 219,076 19,735 9.01%
Commercial loans 158,356 13,602 8.59% 121,697 10,378 8.53%
---------- -------- ------ ----------- -------- ------
Total loans receivable 1,372,898 105,576 7.69% 1,407,771 106,827 7.59%
---------- -------- ------ ----------- -------- ------
Mortgage-backed securities 383,149 25,467 6.65% 683,522 46,360 6.78%
Investment securities 123,513 6,357 5.15% 42,525 2,313 5.44%
Other earning assets 53,450 3,633 6.80% 26,023 2,604 10.01%
---------- -------- ------ ----------- -------- ------
Total interest-earning assets 1,933,010 141,033 7.30% 2,159,841 158,104 7.32%
-------- ------ -------- ------
Noninterest-earning assets 151,669 156,845
---------- -----------
Total assets $2,084,679 $2,316,686
========== ===========
Deposits:
Demand deposits $728,991 17,078 2.34% $631,088 15,203 2.41%
Savings deposits 227,423 5,046 2.22% 227,618 5,070 2.23%
Certificates of deposit 609,574 30,865 5.06% 707,858 38,673 5.46%
---------- -------- ------ ----------- -------- ------
Total deposits 1,565,988 52,989 3.38% 1,566,564 58,946 3.76%
---------- -------- ------ ----------- -------- ------
Notes payable and other borrowings:
FHLB Advances 159,930 8,495 5.31% 285,615 16,127 5.65%
Repurchase agreements 132,657 8,377 6.31% 205,018 12,381 6.04%
Other borrowings 6,868 298 4.34% - - -
---------- -------- ------ ----------- -------- ------
Total borrowings 299,455 17,170 5.73% 490,633 28,508 5.81%
---------- -------- ------ ----------- -------- ------
Total interest-bearing liabilities 1,865,443 $70,159 3.76% 2,057,197 $87,454 4.25%
-------- ------ -------- ------
Noninterest-bearing liabilities 48,440 56,762
---------- -----------
Total liabilities 1,913,883 2,113,959
Shareholders' equity 170,796 202,727
---------- -----------
Total liabilities and equity $2,084,679 $2,316,686
========== ===========
Yield on interest earning assets 7.30% 7.32%
Cost of supporting funds 3.63% 4.05%
Net interest margin:
Taxable equivalent basis $70,874 3.67% $70,650 3.27%
Without taxable equivalent adjs. $70,613 3.65% $70,650 3.27%
</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.
23
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
COMPARISON OF RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2000 AND
1999.
GENERAL. Net income was $3.4 million, or $0.31 per common share on a
diluted basis, for the first quarter of 2000. This compared to net income of
$4.1 million, or $0.30 per common share on a diluted basis, for the first
quarter of 1999. On a business segment basis, net income from Community Banking
increased by 49% from $2.4 million in the first quarter of 1999, to $3.6 million
in the first quarter of 2000. Net income from Mortgage Banking decreased from
$1.7 million in the first quarter of 1999, to a loss of $0.2 million in the
first quarter of 2000.
NET INTEREST INCOME. Net interest income was $18.1 million in the
first quarter of 2000, compared to $17.5 million in the first quarter of 1999.
The increase was 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 $1.9 billion for the quarter
ended March 31, 2000, compared to $2.2 billion for quarter ended March 31, 1999.
The decrease in interest-earning assets was due primarily to a decrease in the
Company's mortgage-backed securities portfolio.
The net interest margin on a fully taxable equivalent basis was
4.15% in the first quarter of 2000, compared to 3.46% in the first quarter of
1999. The increase was primarily attributable to a 0.48% 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. Also contributing to the increase in net
interest margin was a 0.29% decrease in the cost of interest-bearing
liabilities. The decrease in the cost of interest-bearing liabilities was
primarily related to a reduction in the average cost of certificates of deposit,
which decreased from 5.15% in the first quarter of 1999 to 4.96% in the first
quarter of 2000. Also contributing to the decrease in the cost of
interest-bearing liabilities was a favorable change in funding mix, involving an
increase in lower costing demand and money market deposits, and a decrease in
higher costing certificates and wholesale borrowings.
PROVISION FOR LOAN LOSSES. Provision for loan losses totaled $1.1
million in the first quarter of 2000, compared to $1.0 million in the first
quarter of 1999. At March 31, 2000, the allowance for loan losses totaled $10.4
million, or 0.75% of loans, compared to $9.9 million, or 0.76%, at March 31,
1999, and $10.5 million, or 0.76%, at December 31, 1999.
NONINTEREST INCOME. Noninterest income totaled $4.9 million in the
first quarter of 2000, compared to $7.9 million in the first quarter of 1999.
The decrease reflected a $3.1 million decrease in the net gain on sale of
mortgage loans, primarily attributable to a decrease in mortgage originations
due to generally higher market interest rates. Also during the first 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 $0.4 million increase in deposit fees and related income,
primarily relating to an increase in transaction accounts and revenue relating
to the acquisition of certain business interests of Tyler Consulting, Inc.
during the first quarter of 2000.
NONINTEREST EXPENSE. Noninterest expense was $17.2 million in the
first quarter of 2000, compared to $18.7 million in the first quarter of 1999.
The decrease was primarily attributable to a decrease in mortgage banking
expenses and lower expenses relating to certain stock benefit plans.
PROVISION FOR INCOME TAXES. Provision for income taxes was $1.2
million, or 26.5% of income before income taxes in the first quarter of 2000,
compared to $1.7 million, or 29%, in the first quarter of 1999. The decrease in
the effective tax rate in the first quarter of 2000 was primarily attributable
to lower pre-tax income, which resulted in a higher relative percentage of
tax-advantaged income to total income.
24
<PAGE> 25
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 March 31, 2000, the Company's income simulation model
indicates net interest income would decrease by 5.24% over a two year period if
interest rates increased by 200 basis points. The model projects that net
interest income would decrease by 0.09% 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 March 31, 2000, and
does not contemplate any actions the Company might undertake in response to
changes in market interest rates.
25
<PAGE> 26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings, other than as described
below or included in 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.
During the first quarter of 2000, FiServ, the Company's item
processing provider, brought an arbitration action against the
Company. This arbitration action claimed that the Company is liable
to FiServ for liquidated damages related to the termination of an
Item Processing and Asset Transfer Agreement. Management believes
that the outcome of this arbitration action will not result in a
material impact to the consolidated financial statements.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
(a) An annual meeting of stockholders of the Company was held on
April 18, 2000 ("Annual Meeting").
(b) Not applicable.
(c) There were 11,639,560 shares of common stock of the Company
eligible to be voted at the Annual Meeting and 8,433,243 shares
were represented at the meeting by the holders thereof, which
constituted a quorum. The items voted upon at the Annual
Meeting and the vote for each proposal were as follows:
1. Election of directors for a three-year term.
<TABLE>
<CAPTION>
FOR WITHHELD
----------- --------
<S> <C> <C>
Charles H. Meacham 7,817,316 615,926
Harry P. Mirabile 8,021,263 411,979
Joanne Harmelin 8,022,636 410,606
</TABLE>
2. Proposal to adopt the 2000 Incentive Stock Option Plan.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--------- --------- -------
<S> <C> <C>
7,173,471 1,134,935 124,835
</TABLE>
3. Proposal to ratify the appointment of Arthur Andersen LLP as the
Company's independent auditors for the year ending December
31, 2000.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--------- ------- -------
<S> <C> <C>
8,262,653 123,115 47,473
</TABLE>
The proposals were adopted by the stockholders of the Company.
26
<PAGE> 27
(d) Not applicable
PART II - OTHER INFORMATION-CONTINUED
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
a) Not applicable
b) On January 20, 2000, the Company filed a Current Report on Form
8-K to report under Item 5, its earnings for the fourth quarter of
1999. On February 1, 2000, the Company filed a Current Report on
Form 8-K to report under Item 5, the acquisition of certain business
interests of the Tyler Group. On March 8, 2000, the Company filed a
Current Report on Form 8-K to report under Item 5, the completion of
its previously announced stock repurchase program. On March 15,
2000, the Company filed a Current Report on Form 8-K to report under
Item 5, its declared cash dividend. On April 19, 2000, the Company
filed a Current Report on Form 8-K to report under Item 5, its
earnings for the first quarter of 2000.
27
<PAGE> 28
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: May 5, 2000 /s/ Charles H. Meacham
-----------------------
Charles H. Meacham
Chairman and Chief Executive Officer
(Principal Executive Officer)
DATE: May 5, 2000 /s/ Charles M. Johnston
------------------------
Charles M. Johnston
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
28
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 60,537
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 61
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 263,535
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<ALLOWANCE> 10,436
<TOTAL-ASSETS> 1,917,241
<DEPOSITS> 1,523,934
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0
0
<COMMON> 14,668
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