<PAGE> 1
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended.........................................June 30, 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 August 4, 2000, there
were 18,068,127 issued and 11,568,445 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 June 30, 2000 and December 31, 1999 3
Consolidated Statements of Income for the Quarter and Six Month
Periods Ended June 30, 2000 and 1999 4
Consolidated Statements of Changes in Shareholders' Equity for the Six Month
Periods Ended June 30, 2000 and 1999 5
Consolidated Statements of Cash Flows for the Six Month
Periods Ended June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of Financial Condition and Results of
2 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>
June 30, December 31,
2000 1999
----------- ------------
<S> <C> <C>
Assets: (Unaudited)
Cash and due from banks $64,794 $54,677
Interest-bearing deposits - 3,499
Short-term investments available for sale 44 3,575
Mortgage loans held for sale 35,886 24,005
Investment securities
Securities available for sale (cost of $34,113
and $68,301, respectively), at market value 33,397 68,219
Mortgage-backed securities
Securities held to maturity (market value of $84,969
and $92,965, respectively), at cost 85,106 93,674
Securities available for sale (cost of $168,628
and $202,076, respectively), at market value 165,680 197,280
Loans receivable, net 1,413,946 1,361,430
Accrued interest receivable, net 8,824 9,499
FHLB stock, at cost 18,400 18,400
Premises and equipment, net 15,678 15,535
Intangible assets 32,927 33,048
Other assets, including net deferred taxes of $6,985
and $7,460, respectively 39,060 39,555
------------ ----------
Total assets $1,913,742 $1,922,396
============ ==========
Liabilities:
Deposits $1,488,496 $1,503,746
Notes payable and other borrowings:
Secured notes due to Federal Home Loan Bank of Pittsburgh 145,447 127,000
Securities sold under agreements to repurchase 65,000 100,000
Other borrowings 20,887 9,076
Advances from borrowers for taxes and insurance 12,245 9,326
Accrued interest payable, accrued expenses and other liabilities 28,319 20,883
------------ ----------
Total liabilities 1,760,394 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 11,568,320 outstanding at June 30, 2000
18,068,127 shares issued and 11,934,695 outstanding at December 31, 1999 1,807 1,807
Additional paid-in capital 137,279 136,966
Retained earnings 140,451 135,780
Unearned stock benefit plan compensation (7,551) (8,504)
Accumulated other comprehensive loss (2,381) (3,171)
Treasury stock, at cost; 6,499,807 and 6,133,432 shares, respectively (116,257) (110,513)
------------ ----------
Total shareholders' equity 153,348 152,365
------------ ----------
Total liabilities and shareholders' equity $1,913,742 $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 Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
----- ----- ----- -----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $28,366 $26,184 $55,722 $52,443
Interest and dividends on deposits and money
market investments 496 855 971 1,896
Interest on investment securities 530 2,485 1,495 3,862
Interest on mortgage-backed securities 4,477 6,559 9,327 14,489
---------- ---------- ---------- ----------
Total interest income 33,869 36,083 67,515 72,690
Interest expense:
Interest on deposits 12,227 13,552 24,575 27,336
Interest on notes payable and other borrowings 3,160 4,744 6,408 10,030
---------- ---------- ---------- ----------
Total interest expense 15,387 18,296 30,983 37,366
---------- ---------- ---------- ----------
Net interest income 18,482 17,787 36,532 35,324
Provision for loan losses 1,200 1,000 2,325 2,000
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 17,282 16,787 34,207 33,324
Noninterest income:
Deposit fees and related income 3,069 2,493 5,660 4,680
Servicing fees 189 1,051 420 1,945
Net gain on sale of mortgage loans 1,036 2,606 2,096 6,767
Other 1,158 1,572 2,179 2,222
---------- ---------- ---------- ----------
Total noninterest income 5,452 7,722 10,355 15,614
---------- ---------- ---------- ----------
Noninterest expense:
Compensation and employee benefits 8,732 9,198 17,441 18,816
Occupancy and office operations 2,687 2,688 5,411 5,505
Amortization of intangible assets 1,239 1,221 2,450 2,510
Other 4,900 5,201 9,440 10,183
---------- ---------- ---------- ----------
Total noninterest expense 17,558 18,308 34,742 37,014
---------- ---------- ---------- ----------
Income before income taxes 5,176 6,201 9,820 11,924
Income tax provision 1,371 1,798 2,602 3,458
---------- ---------- ---------- ----------
Net income $3,805 $4,403 $7,218 $8,466
========== ========== ========== ==========
Basic weighted average number of shares
outstanding 10,738,767 12,933,582 10,804,089 13,144,806
========== ========== ========== ==========
Basic earnings per share $0.35 $0.34 $0.67 $0.64
========== ========== ========== ==========
Diluted weighted average number of shares
outstanding 10,962,546 13,342,552 11,057,845 13,516,984
========== ========== ========== ==========
Diluted earnings per share $0.35 $0.33 $0.65 $0.63
========== ========== ========== ==========
</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 8,466
Other-unrealized loss on marketable
securities, net of $1,620 tax benefit
Total comprehensive income
Dividends (2,328)
Release of ESOP shares 362
Amortization of unearned compensation
Stock issued pursuant to benefit plans 43 1 15
Purchase of treasury stock (1,400)
----------------------------------------------------------
Balance at June 30, 1999 13,364 $1,807 $135,965 $130,055
==========================================================
Balance at December 31, 1999 11,935 $1,807 $136,966 $135,780
Comprehensive income:
Net income 7,218
Other-unrealized gain on marketable
securities, net of $425 tax expense
Total comprehensive income
Dividends (2,401)
Release of ESOP shares 281
Amortization of unearned compensation
Stock issued pursuant to benefit plans 27 32 (146)
Purchase of treasury stock (394)
----------------------------------------------------------
Balance at June 30, 2000 11,568 $1,807 $137,279 $140,451
==========================================================
</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 8,466
Other-unrealized loss on marketable
securities, net of $1,620 tax benefit (3,008) (3,008)
--------
Total comprehensive income 5,458
--------
Dividends (2,328)
Release of ESOP shares 460 822
Amortization of unearned compensation 811 811
Stock issued pursuant to benefit plans 428 444
Purchase of treasury stock (23,085) (23,085)
--------------------------------------------------------
Balance at June 30, 1999 ($9,395) ($541) ($83,591) $174,300
========================================================
Balance at December 31, 1999 ($8,504) ($3,171) ($110,513) $152,365
Comprehensive income:
Net income 7,218
Other-unrealized gain on marketable
securities, net of $425 tax expense 790 790
--------
Total comprehensive income 8,008
--------
Dividends (2,401)
Release of ESOP shares 460 741
Amortization of unearned compensation 493 493
Stock issued pursuant to benefit plans 433 319
Purchase of treasury stock (6,177) (6,177)
--------------------------------------------------------
Balance at June 30, 2000 ($7,551) ($2,381) ($116,257) $153,348
========================================================
</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 Six Months
Ended June 30,
2000 1999
-------- ---------
<S> <C> <C>
Operating activities:
Net income $7,218 $8,466
Adjustments to reconcile net income to net cash
provided by (used in) operating activities-
Proceeds from loans sold to others 129,182 404,033
Loans originated for sale (93,415) (243,103)
Purchases of loans held for sale (47,800) (88,062)
Principal collection on mortgage loans held for sale 138 425
Net gain on sale of mortgage loans (2,096) (6,767)
Decrease in net deferred loan fees (184) (378)
Provision for loan losses and foreclosed real estate 2,325 2,068
Gain on sale of branches - (1,027)
Depreciation and amortization 1,581 1,770
Net amortization of other assets and liabilities 2,873 3,807
Interest reinvested on repurchase agreements (2,460) (5,205)
Changes in assets and liabilities-
Decrease (increase) in-
Accrued interest receivable, net 675 1,044
Deferred income taxes - (339)
Other assets (303) (3,982)
Increase in-
Advances from borrowers for taxes and insurance 2,919 3,408
Accrued interest payable, accrued expenses and other
liabilities 6,436 6,962
-------- ---------
Net cash provided by operating activities $7,089 $83,120
-------- ---------
</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 Six Months
Ended June 30,
2000 1999
----------- -----------
<S> <C> <C>
Investing activities:
Proceeds from sale of investment securities $ - $94,456
Proceeds from maturities of investment securities 35,000 5,000
Purchases of investment securities - (204,534)
Proceeds from sale of mortgage-backed securities - 5,470
Principal collected on mortgage-backed securities 42,016 155,270
Principal collected on loans 133,327 198,216
Loans originated (167,220) (151,243)
Loans purchased (18,924) (31,210)
Sales of real estate acquired through foreclosure 662 827
Purchases of premises and equipment (1,574) (2,120)
Sale of branches - (22,124)
Purchase of business (1,498) -
----------- ----------
Net cash provided by investing activities 21,789 48,008
----------- ----------
Financing activities:
Net decrease in deposits (15,250) (11,617)
Repayment of notes payable and other borrowings, net of
proceeds (2,282) (118,932)
Net purchase of common stock (5,858) (22,696)
Cash dividends paid (2,401) (2,328)
----------- ----------
Net cash used in financing activities (25,791) (155,573)
----------- ----------
Net increase (decrease) in cash and cash equivalents 3,087 (24,445)
Cash and cash equivalents at beginning of period 61,751 106,677
----------- ----------
Cash and cash equivalents at end of period $64,838 $82,232
=========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for-
Interest $24,919 $30,529
=========== ==========
Income taxes $2,750 $4,600
=========== ==========
</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 June 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 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
ten 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 June 30, 2000, shareholders' equity totaled $153 million, or 8.0% of
assets, compared to $152 million, or 7.9%, at December 31, 1999. The increase in
shareholders' equity during the first six months of 2000 was primarily due to an
increase in retained earnings offset, in part, by the repurchase of common
stock.
During the first six months of 2000, the Company purchased 0.4 million
shares of its common stock, representing purchases of $6 million. During the
first six months of 1999, the Company purchased 1.4 million shares of its common
stock, representing purchases of $23 million. The repurchased shares were held
as treasury stock at June 30, 2000, and are reserved for general corporate
purposes and/or issuance pursuant to the Company's stock option plans.
On June 20, 2000, the Board of Directors declared an $0.11 per share cash
dividend for the quarter ended June 30, 2000, which was made payable to
shareholders of record at the close of business on June 30, 2000. This dividend
was paid on July 14, 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 June 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 June 30,
-----------------------------------------
2000 1999
------------- --------------
<S> <C> <C>
Basic weighted average number of common shares outstanding 10,738,767 12,933,582
Effect of dilutive securities:
Stock options 209,382 351,377
Recognition Plan stock 14,397 57,593
------------- --------------
Diluted weighted average number of common shares outstanding 10,962,546 13,342,552
============= ==============
</TABLE>
Basic EPS was $0.35 per common share for the quarter ended June 30,
2000, compared to $0.34 per common share for the quarter ended June 30, 1999.
Diluted EPS was $0.35 per common share for the quarter ended June 30, 2000,
compared to $0.33 per common share for the quarter ended June 30, 1999.
9
<PAGE> 10
Commonwealth Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------------
2000 1999
------------ -------------
<S> <C> <C>
Basic weighted average number of common shares outstanding 10,804,089 13,144,806
Effect of dilutive securities:
Stock options 235,184 330,057
Recognition Plan stock 18,572 42,121
-------------- -------------
Diluted weighted average number of common shares outstanding 11,057,845 13,516,984
============== =============
</TABLE>
Basic EPS was $0.67 per common share for the six months ended June 30,
2000, compared to $0.64 per common share for the six months ended June 30, 1999.
Diluted EPS was $0.65 per common share for the six months ended June 30, 2000,
compared to $0.63 per common share for the six months ended June 30, 1999.
10
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Commonwealth Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. 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 June 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 $16,708 $574 $17,282 $15,728 $1,059 $16,787
Noninterest income:
Servicing fees (614) 803 189 (629) 1,680 1,051
Net gain on sale of mortgage loans (96) 1,132 1,036 (101) 2,707 2,606
Other 4,136 91 4,227 4,075 (10) 4,065
------------ -------- ---------- ---------- ------- ----------
Total noninterest income 3,426 2,026 5,452 3,345 4,377 7,722
------------ -------- ---------- ---------- ------- ----------
Noninterest expense:
Compensation and employee benefits 6,821 1,911 8,732 6,535 2,663 9,198
Other 7,716 1,110 8,826 7,692 1,418 9,110
------------ -------- ---------- ---------- ------- ----------
Total noninterest expense 14,537 3,021 17,558 14,227 4,081 18,308
------------ -------- ---------- ---------- ------- ----------
Income before income taxes 5,597 (421) 5,176 4,846 1,355 6,201
Income tax provision 1,518 (147) 1,371 1,323 475 1,798
------------ -------- ---------- ---------- ------- ----------
Net income $4,079 ($274) $3,805 $3,523 $880 $4,403
============ ======== ========== ========== ======= ==========
Total assets (period end) $1,864,134 $49,608 $1,913,742 $1,984,302 $92,762 $2,077,064
============ ======== ========== ========== ======= ==========
</TABLE>
11
<PAGE> 12
Commonwealth Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
For the Six Months Ended June 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 $33,139 $1,068 $34,207 $31,092 $2,232 $33,324
Noninterest income:
Servicing fees (1,218) 1,638 420 (1,284) 3,229 1,945
Net gain on sale of mortgage loans (235) 2,331 2,096 (233) 7,000 6,767
Other 7,536 303 7,839 6,949 (47) 6,902
--------- --------- -------- --------- ------- -------
Total noninterest income 6,083 4,272 10,355 5,432 10,182 15,614
--------- --------- -------- --------- ------- -------
Noninterest expense:
Compensation and employee benefits 13,695 3,746 17,441 13,404 5,412 18,816
Other 15,040 2,261 17,301 15,104 3,094 18,198
--------- --------- -------- --------- ------- -------
Total noninterest expense 28,735 6,007 34,742 28,508 8,506 37,014
--------- --------- -------- --------- ------- -------
Income before income taxes 10,487 (667) 9,820 8,016 3,908 11,924
Income tax provision 2,835 (233) 2,602 2,090 1,368 3,458
--------- --------- -------- --------- ------- -------
Net income $7,652 ($434) $7,218 $5,926 $2,540 $8,466
========= ========= ======== ========= ======= =======
Total assets (period end) $ 1,864,134 $49,608 $1 ,913,742 $1,984,302 $92,762 $2,077,064
=========== ========= =========== ========== ======= ==========
</TABLE>
12
<PAGE> 13
Commonwealth Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Acquisitions and Divestitures
On May 1, 2000, Commonwealth announced that its wholly-owned
subsidiary, Commonwealth Bank, had reached a definitive agreement with another
financial institution regarding the sale of Commonwealth's two branches in
Lehigh County, Pennsylvania. The transaction is expected to be completed in the
third quarter of 2000. As of June 30, 2000, the two branches had combined
deposits of approximately $9 million. In addition to the deposits, it is
expected that approximately $4 million of consumer loans will be transferred as
part of the transaction.
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 June 30, 2000, 62 full-service branches located in southeast Pennsylvania.
ComNet Mortgage Services, a division of the Bank, also located in Norristown,
conducts business through ten 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 13
states.
FINANCIAL CONDITION
GENERAL. Total assets were $1.9 billion at both June 30, 2000 and December
31, 1999. During the first six 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 $1.8 billion at both June 30, 2000 and December 31, 1999.
During the first six 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 $153 million as
of June 30, 2000, compared to $152 million at December 31, 1999. This increase
was primarily the result of a $5 million increase in retained earnings, a $1
million decrease in unearned stock benefit plan compensation and a $1 million
decrease in accumulated other comprehensive loss offset, in part, by the $6
million purchase of 0.4 million shares of treasury stock. The increase in
retained earnings was primarily related to earnings offset, in part, by cash
dividends, during the first six months of 2000.
MORTGAGE LOANS HELD FOR SALE. Mortgage loans held for sale increased by
$12 million, or 49%, from $24 million at December 31, 1999, to $36 million at
June 30, 2000. The increase was attributable to an increase in mortgage
origination volumes during the latter part of the second 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 $35 million, or
51%, from $68 million at December 31, 1999, to $33 million at June 30, 2000. The
decrease was primarily attributable to the maturity of highly rated short-term
corporate bonds.
Investments in debt and equity securities at June 30, 2000 and December
31, 1999 were as follows:
<TABLE>
<CAPTION>
June 30, 2000
---------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Available for sale:
Mortgage Related Mutual Fund $21,363 $ - $380 $20,983
Equity Investment - Mortgage
Servicing Partnership 1,700 - - 1,700
Other Equity Investments 11,050 114 450 10,714
---------------------------------------------------------------------------
Total $34,113 $114 $830 $33,397
============================================================================
</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 $40
million, or 14%, from $291 million at December 31, 1999, to $251 million at June
30, 2000. The decrease in mortgage-backed securities during the first six months
of 2000 was primarily related to repayments and prepayments.
At June 30, 2000 and December 31, 1999, $171 million, or 68%, 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 June
30, 2000 and December 31, 1999, $80 million, or 32%, 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>
June 30, 2000
----------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Held to maturity:
GNMA $32,809 $291 $ 17 $ 33,083
FHLMC 15,920 275 71 16,124
FNMA 33,580 159 774 32,965
Private 2,797 - - 2,797
----------------------------------------------------------------------------
Total $85,106 $725 $ 862 $ 84,969
============================================================================
Available for sale:
GNMA $ 9,115 $135 $ 191 $ 9,059
FHLMC 30,043 466 143 30,366
FNMA 39,377 - 760 38,617
CMO and REMIC 90,093 1 2,456 87,638
----------------------------------------------------------------------------
Total $168,628 $602 $3,550 $165,680
============================================================================
</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 six months of 2000, to $1.4 billion at June 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>
June 30, December 31,
2000 1999
------------------------------------ ---------------------------------
% of % of
Amount Total Amount Total
------ ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans - Residential (1) $ 851,576 59.73% $ 860,750 62.70%
Consumer loans:
Second mortgages 223,412 15.67 184,844 13.47
Equity lines of credit 28,430 2.00 30,496 2.22
Recreational vehicles 56,763 3.98 60,998 4.44
Other 49,155 3.45 45,448 3.31
--------- ------ --------- -------
Total consumer loans 357,760 25.10 321,786 23.44
Commercial loans:
Business loans 141,462 9.92 113,178 8.24
Commercial real estate 65,804 4.62 66,158 4.82
Small Business Administration (2) 9,058 0.63 10,971 0.80
--------- ------ --------- -------
Total commercial loans 216,324 15.17 190,307 13.86
--------- ------ --------- -------
Total loans receivable 1,425,660 100.00% 1,372,843 100.00%
--------- ======= --------- =======
Less:
Net premium on loans purchased (2,061) (2,443)
Allowance for loan losses 10,581 10,478
Deferred loan fees 3,194 3,378
---------- ----------
Loans receivable, net $1,413,946 $1,361,430
========== ==========
</TABLE>
---------------------------------------
(1) At June 30, 2000 and December 31, 1999, $341 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.
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
Residential mortgage loans totaled $852 million at June 30, 2000, a
decrease of $9 million, or 1%, compared to $861 million at December 31, 1999. At
June 30, 2000, residential mortgage loans represented 60% of the Company's loan
portfolio, compared to 63% at December 31, 1999.
Total mortgage loans originated and purchased for the six months ended
June 30, 2000 totaled $187 million, compared to $369 million for the six months
ended June 30, 1999. The $182 million, or 49%, decrease in mortgage originations
was primarily due to higher market interest rates. Originations relating to
Commonwealth's retail network totaled $128 million during the six months ended
June 30, 2000, compared to $272 million for the six months ended June 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 $59 million during the six months ended
June 30, 2000, compared to $97 million for the six months ended June 30, 1999.
Consumer loans increased by $36 million, or 11%, from $322 million at
December 31, 1999, to $358 million at June 30, 2000. At June 30, 2000, consumer
loans represented 25% of the Company's loan portfolio and were comprised of $223
million of second mortgage loans, $28 million of equity lines of credit, $57
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 $26 million, or 14%, from $190 million at
December 31, 1999, to $216 million at June 30, 2000. At June 30, 2000,
commercial loans represented 15% of the Company's loan portfolio and were
comprised of $141 million of business loans, $66 million of commercial real
estate loans, and $9 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 six 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, decreased by $0.6
million from $10.4 million at December 31, 1999, to $9.8 million at June 30,
2000. At June 30, 2000, nonperforming assets represented 0.51% 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>
June 30, 2000 December 31,1999
------------- ----------------
(dollars in thousands)
<S> <C> <C>
Mortgage loans - Residential $3,187 $ 4,044
Consumer loans 1,868 2,355
Commercial loans 1,534 1,380
----- -----
Total nonperforming loans 6,589 7,779
Investment securities 1,700 1,700
Real estate owned and
other acquired assets, net 1,491 923
----- -----
Total nonperforming assets $9,780 $10,402
====== ======
Nonperforming loans to total loans held
for investment 0.46% 0.57%
====== ======
Total nonperforming assets to total assets 0.51% 0.54%
====== ======
</TABLE>
----------------------------------
ALLOWANCE FOR LOAN LOSSES. The Company's allowance for loan losses
amounted to $10.6 million at June 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 June 30, 2000, the Company's allowance for loan losses amounted to
161% of total nonperforming loans and 0.74% 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.
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 Six Months Ended June 30,
---------------------------------
2000 1999
----- -----
(dollars in thousands)
<S> <C> <C>
Allowance at beginning of period $10,478 $9,589
Provision for loan losses 2,325 2,000
Charge-offs:
Mortgage loans (99) (175)
Consumer loans (2,196) (933)
Commercial loans (18) (745)
------- -------
Total charge-offs (2,313) (1,853)
Recoveries:
Mortgage loans 1 26
Consumer loans 77 103
Commercial loans 13 99
----- ----
Total recoveries 91 228
----- ----
Allowance at end of period $10,581 $9,964
======= ======
Allowance for loan losses to
total nonperforming loans
at end of period 160.60% 144.97%
======= ======
Allowance for loan losses to
total loans held for investment
at end of period 0.74% 0.75%
======= ======
</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 $0.1 million to $32.9 million at June 30,
2000, compared to $33.0 million at December 31, 1999. The decrease was related
to the amortization of intangible assets during the six months ended June 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 $15 million to $1.488 billion, at June
30, 2000, compared to $1.504 billion at December 31, 1999. The decrease was
primarily related to a decrease in certificates of deposit offset, in part, by
an increase in demand and money market 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 $35 million, or 35%, to $65 million
at June 30, 2000, from $100 million at December 31, 1999. This decrease was
offset, in part, by an $18 million, or 15%, increase in FHLB advances and a $12
million, or 130%, 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 36%, to $28 million
at June 30, 2000, from $21 million at December 31, 1999. The increase was
primarily related to an increase in accrued interest payable.
SHAREHOLDERS' EQUITY. At June 30, 2000, shareholders' equity equaled $153
million, compared to $152 million at December 31, 1999. This increase was
primarily the result of the $5 million increase in retained earnings during the
first six months of 2000, a $1 million decrease in unearned stock benefit plan
compensation and a $1 million decrease in accumulated other comprehensive loss
offset, in part, by the $6 million purchase of 0.4 million shares of treasury
stock. The $5 million increase in retained earnings was the result of earnings
of $7 million offset, in part, by cash dividends of $2 million during the first
six months of 2000. The repurchased shares were held as treasury stock as of
June 30, 2000, and are reserved for general corporate purposes and/or issuance
pursuant to the Company's stock option plans. At June 30, 2000, shareholders'
equity represented 8.0% of assets, compared to 7.9% at December 31, 1999. The
Bank's core and risk-based capital ratios were 6.4% and 10.7%, respectively, at
June 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 June 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
--------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Shareholders' equity,
and ratio to OTS
total assets 7.9% $ 150,339
---------
Intangible assets (32,927)
Unrealized loss on
available for sale
securities, net of tax 2,456
----------
Tangible capital,
and ratio to OTS
adjusted total assets 6.4% $ 119,868 1.5% $28,264
--------- ========== ------- =======
Core capital,
and ratio to OTS
adjusted total assets 6.4% $ 119,868 3.0% $56,529 5.0% $ 94,215
--------- ========== ------- ======== ---- ========
Core capital,
and ratio to OTS
risk-weighted assets 9.8% $ 119,868 6.0% $ 73,287
--------- ---------- ------- ========
Allowance for loan losses 10,581
----------
Supplementary capital 10,581
----------
Total risk-based capital,
and ratio to OTS
risk-weighted assets (1) 10.7% $ 130,449 8.0% $97,716 10.0% $122,145
--------- ========== ------- ======= ----- ========
OTS total assets $1,914,769
==========
OTS adjusted total assets $1,884,298
==========
OTS risk-weighted assets $1,221,448
==========
</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 June 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 $876,246 $16,049 7.37% $945,495 $17,026 7.22%
Consumer loans 344,857 7,861 9.17% 269,979 6,005 8.92%
Commercial loans 202,822 4,514 8.95% 148,777 3,192 8.61%
---------- -------- -------- --------- ------- -------
Total loans receivable 1,423,925 28,424 8.03% 1,364,251 26,223 7.71%
---------- -------- -------- --------- ------- -------
Mortgage-backed securities 259,483 4,477 6.94% 397,050 6,559 6.63%
Investment securities 38,169 587 6.19% 198,395 2,485 5.02%
Other earning assets 17,989 496 11.09% 50,956 855 6.73%
---------- -------- -------- --------- ------- -------
Total interest-earning assets 1,739,566 33,984 7.86% 2,010,652 36,122 7.21%
Noninterest-earning assets 148,982 -------- -------- 150,588 ------- -------
---------- ---------
Total assets $1,888,548 $2,161,240
========== ==========
Deposits:
Demand deposits $745,777 4,379 2.36% $742,316 4,251 2.30%
Savings deposits 225,194 1,238 2.21% 232,759 1,284 2.21%
Certificates of deposit 523,616 6,610 5.08% 631,912 8,017 5.09%
---------- -------- -------- --------- ------- -------
Total deposits 1,494,587 12,227 3.29% 1,606,987 13,552 3.38%
---------- -------- -------- --------- ------- -------
Notes payable and other borrowings:
FHLB Advances 128,473 1,949 6.10% 179,648 2,338 5.22%
Repurchase agreements 69,121 1,024 5.96% 140,000 2,322 6.65%
Other borrowings 14,942 187 5.03% 8,070 84 4.18%
---------- -------- -------- --------- ------- -------
Total borrowings 212,536 3,160 5.98% 327,718 4,744 5.81%
---------- -------- -------- --------- ------- -------
Total interest-bearing liabilities 1,707,123 $15,387 3.63% 1,934,705 $18,296 3.79%
Noninterest-bearing liabilities 31,420 -------- -------- 42,765 ------- -------
---------- ---------
Total liabilities 1,738,543 1,977,470
Shareholders' equity 150,005 183,770
---------- ---------
Total liabilities and equity $1,888,548 $2,161,240
========== ==========
Yield on interest earning assets 7.86% 7.21%
Cost of supporting funds 3.56% 3.65%
Net interest margin:
Taxable equivalent basis $18,597 4.30% $17,826 3.56%
Without taxable equivalent adjs. $18,482 4.27% $17,787 3.55%
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 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 $875,863 $31,945 7.33% $981,001 $35,058 7.21%
Consumer loans 335,757 15,147 9.07% 257,104 11,376 8.92%
Commercial loans 198,375 8,748 8.87% 142,857 6,054 8.55%
--------- -------- ------- --------- ------- -------
Total loans receivable 1,409,995 55,840 7.96% 1,380,962 52,488 7.66%
--------- -------- ------- --------- ------- -------
Mortgage-backed securities 270,314 9,327 6.94% 439,641 14,489 6.65%
Investment securities 53,312 1,630 6.15% 153,124 3,862 5.09%
Other earning assets 18,145 971 10.76% 60,032 1,896 6.37%
--------- -------- ------- --------- ------- -------
Total interest-earning assets 1,751,766 67,768 7.78% 2,033,759 72,735 7.21%
Noninterest-earning assets 146,729 -------- ------- 153,565 ------- -------
--------- ---------
Total assets $1,898,495 $2,187,324
========== ==========
Deposits:
Demand deposits $737,763 8,699 2.37% $725,767 8,408 2.34%
Savings deposits 223,672 2,463 2.21% 230,177 2,534 2.22%
Certificates of deposit 537,681 13,413 5.02% 645,669 16,394 5.12%
--------- -------- ------- --------- ------- -------
Total deposits 1,499,116 24,575 3.30% 1,601,613 27,336 3.44%
--------- -------- ------- --------- ------- -------
Notes payable and other borrowings:
FHLB Advances 123,314 3,646 5.95% 200,776 5,208 5.23%
Repurchase agreements 82,747 2,461 5.98% 145,105 4,707 6.54%
Other borrowings 12,015 301 5.04% 5,245 115 4.42%
--------- -------- ------- --------- ------- -------
Total borrowings 218,076 6,408 5.91% 351,126 10,030 5.76%
--------- -------- ------- --------- ------- -------
Total interest-bearing liabilities 1,717,192 $30,983 3.63% 1,952,739 $37,366 3.86%
Noninterest-bearing liabilities 30,515 -------- ------- 47,935 ------- -------
--------- ---------
Total liabilities 1,747,707 2,000,674
Shareholders' equity 150,788 186,650
--------- ---------
Total liabilities and equity $1,898,495 $2,187,324
========== ==========
Yield on interest earning assets 7.78% 7.21%
Cost of supporting funds 3.56% 3.70%
Net interest margin:
Taxable equivalent basis $36,785 4.22% $35,369 3.51%
Without taxable equivalent adjs. $36,532 4.19% $35,324 3.50%
</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 inco 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 SIX MONTHS ENDED JUNE
30, 2000 AND 1999.
GENERAL. Net income was $3.8 million, or $0.35 per common share on a
diluted basis, for the second quarter of 2000, compared to net income of $4.4
million, or $0.33 per common share on a diluted basis, for the second quarter of
1999. The second quarter 1999 financial results reflected 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 $4.0 million, or $0.30 per share on a diluted basis, for the quarter ended
June 30, 1999.
For the six months ended June 30, 2000, net income was $7.2 million, or
$0.65 per common share on a diluted basis, compared to net income of $8.5
million, or $0.63 per common share on a diluted basis, for the six months ended
June 30, 1999. Exclusive of the above items which affected the second quarter
1999 financial results, net income would have been $8.1 million, or $0.60 per
share on a diluted basis, for the six months ended June 30, 1999.
On a business segment basis, net income from Community Banking,
exclusive of the above items, increased from $3.1 million, or $0.23 per common
share, in the second quarter of 1999, to $4.1 million, or $0.37 per common
share, in the second quarter of 2000. Net income from Mortgage Banking decreased
from $0.9 million, or $0.07 per common share, in the second quarter of 1999, to
a loss of $0.3 million, or $0.02 per common share, in the second quarter of
2000.
Net income from Community Banking, exclusive of the above items,
increased from $5.5 million, or $0.41 per common share, for the six months ended
June 30, 1999, to $7.7 million, or $0.69 per common share, for the six months
ended June 30, 2000. Net income from Mortgage Banking decreased from $2.5
million, or $0.19 per common share, for the six months ended June 30, 1999, to a
loss of $0.4 million, or $0.04 per common share, for the six months ended June
30, 2000.
NET INTEREST INCOME. Net interest income was $18.5 million in the second
quarter of 2000, compared to $17.8 million in the second quarter of 1999. For
the six months ended June 30, 2000, net interest income was $36.5 million,
versus $35.3 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 and $1.8 billion for
the second quarter and six months ended June 30, 2000, respectively. This
compared to $2.0 billion for both the second quarter and six months ended June
30, 1999. The decreases in interest-earning assets were due primarily to
decreases in the Company's mortgage-backed securities and investment securities
offset, in part, by increases in consumer and commercial loans.
The net interest margin on a fully taxable equivalent basis was 4.30% in
the second quarter of 2000, compared to 3.56% in the second quarter of 1999. The
increase was primarily attributable to a 0.65% 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 0.16% decrease in the cost of interest-bearing
liabilities. The decrease in the cost of interest-bearing liabilities was
primarily related to 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.
25
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
For the six months ended June 30, 2000, the net interest margin on a
fully taxable equivalent basis was 4.22%, versus 3.51% in the comparable 1999
period. The increase was primarily attributable to a 0.57% increase in the yield
on interest-earning assets, which was primarily attributable to the same factors
responsible for the increase in the second quarter of 2000. Also contributing to
the increase in net interest margin was a 0.23% decrease in the cost of
interest-bearing liabilities. The decrease in the cost of interest-bearing
liabilities was primarily related to the same factors responsible for the
decrease in the second quarter of 2000.
PROVISION FOR LOAN LOSSES. Provision for loan losses totaled $1.2 million
and $2.3 million in the second quarter and six months ended June 30, 2000,
respectively. The provision for loan losses totaled $1.0 million and $2.0
million in the second quarter and six months ended June 30, 1999, respectively.
At June 30, 2000, the allowance for loan losses totaled $10.6 million, or 0.74%
of loans, compared to $10.0 million, or 0.75%, at June 30, 1999, and $10.5
million, or 0.76% of loans, at December 31, 1999.
NONINTEREST INCOME. Noninterest income totaled $5.5 million in the second
quarter of 2000, compared to $7.7 million in the second quarter of 1999. The
decrease reflected a $1.6 million decrease in the net gain on sale of mortgage
loans, which was primarily attributable to a decrease in mortgage originations
due to generally higher market interest rates. Also during the second quarter of
2000, servicing fees decreased by $0.9 million relating to the sale of mortgage
servicing rights during the third quarter of 1999. Also contributing to the
decrease was a $1.0 million gain on the sale of two branches in Lebanon County,
Pennsylvania, during the second quarter of 1999. The above decreases were
partially offset by a $0.6 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 income was $10.4 million for the first six months of 2000,
compared to $15.6 million for the same 1999 period. The decrease was primarily
attributable to the same factors responsible for the decrease in the second
quarter of 2000.
NONINTEREST EXPENSE. Noninterest expense was $17.6 million in the second
quarter of 2000, compared to $18.3 million in the second quarter of 1999. The
decrease was primarily attributable to a decrease in mortgage banking expenses
and 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.
Noninterest expense was $34.7 million for the six months ended June 30,
2000, compared to $37.0 million for the same period in 1999. The decrease was
primarily attributable to the same factors responsible for the decrease in the
second quarter of 2000, as well as lower expenses relating to certain stock
benefit plans.
PROVISION FOR INCOME TAXES. Provision for income taxes was $1.4 million,
or 26.5% of income before income taxes in the second quarter of 2000, compared
to $1.8 million, or 29%, in the second quarter of 1999. For the first six months
of 2000, provision for income taxes was $2.6 million, or 26.5% of income before
income taxes, compared to $3.5 million, or 29%, in the first six months of 1999.
The decrease in the effective tax rate in the second quarter and first six
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 June 30, 2000, the Company's income simulation model
indicates net interest income would decrease by 1.90% over a two year period if
interest rates increased by 200 basis points. The model projects that net
interest income would decrease by 1.65% 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 June 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
---------------------------------------------------
The Company held its Annual Meeting of Stockholders on April 18, 2000.
The results of the vote on matters submitted to stockholders at the
meeting were previously reported in the Company's Form 10-Q for the
quarter ended March 31, 2000.
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
a) Exhibit
(27) Financial Data Schedule
b) 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. On May
2, 2000, the Company filed a Current Report on Form 8-K to report under
Item 5, 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. On June 21, 2000, the Company filed a Current Report on
Form 8-K to report under Item 5, the commencement of the stock
repurchase program and its declared cash dividend. 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.
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: August 7, 2000 /s/ Charles H. Meacham
--------------------------------------
Charles H. Meacham
Chairman and Chief Executive Officer
(Principal Executive Officer)
DATE: August 7, 2000 /s/ Charles M. Johnston
--------------------------------------
Charles M. Johnston
Senior Vice President and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
29
