<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, 1999
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 2, 1999, there
were 18,068,263 issued and 14,055,108 outstanding shares of the Registrant's
Common Stock.
1
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Commonwealth Bancorp, Inc. and Subsidiaries
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
No. No.
- -- ---
<S> <C>
PART I - CONSOLIDATED FINANCIAL INFORMATION
1 Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 1999 and December 31, 1998 3
Consolidated Statements of Income for the Quarter Ended March 31, 1999
and 1998 4
Consolidated Statements of Changes in Shareholders' Equity for the
Quarter Ended March 31, 1999 and 1998 5
Consolidated Statements of Cash Flows for the Quarter Ended March 31,
1999 and 1998 6
Notes to Consolidated Financial Statements 8
2 Management's Discussion and Analysis of Financial Condition and Results
of Operations 12
3 Quantitative and Qualitative Disclosures about Market Risk 24
PART II - OTHER INFORMATION
1 Legal Proceedings 25
2 Changes in Securities 25
3 Default Upon Senior Securities 25
4 Submission of Matters to a Vote of Security Holders 25
5 Other Information 26
6 Exhibits and Reports on Form 8-K 26
Signatures 27
</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,
1999 1998
------------------- -------------------
<S> <C> <C>
Assets:
Cash and due from banks $45,863 $58,028
Interest-bearing deposits 47,491 43,829
Short-term investments available for sale 9,915 4,820
Mortgage loans held for sale 59,282 120,642
Investment securities
Securities available for sale (cost of $174,091
and $34,407, respectively), at market value 174,017 34,515
Mortgage-backed securities
Securities held to maturity (market value of $118,389
and $133,735, respectively), at cost 116,532 132,105
Securities available for sale (cost of $306,253
and $388,349, respectively), at market value 308,553 392,036
Loans receivable, net 1,301,022 1,338,177
Accrued interest receivable, net 11,503 11,260
FHLB stock, at cost 18,400 18,400
Premises and equipment, net 17,004 16,887
Intangible assets 38,541 39,830
Mortgage servicing rights 8,133 9,969
Other assets, including net deferred taxes of $3,396
and $2,508, respectively 41,635 37,001
------------------- -------------------
Total assets $2,197,891 $2,257,499
=================== ===================
Liabilities:
Deposits $1,603,494 $1,605,299
Notes payable and other borrowings:
Secured notes due to Federal Home Loan Bank of Pittsburgh 203,000 240,500
Securities sold under agreements to repurchase 140,000 166,000
Other borrowings 8,460 -
Advances from borrowers for taxes and insurance 30,552 28,960
Accrued interest payable, accrued expenses and other liabilities 27,742 24,562
------------------- -------------------
Total liabilities 2,013,248 2,065,321
------------------- -------------------
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;
18,068,285 shares issued and 14,039,291 outstanding at March 31, 1999
18,054,315 shares issued and 14,721,408 outstanding at December 31, 1998 1,807 1,806
Additional paid-in capital 135,930 135,588
Retained earnings 126,785 123,917
Unearned stock benefit plan compensation (9,904) (10,666)
Unrealized gain on marketable securities, net 1,447 2,467
Treasury stock, at cost; 4,028,994 and 3,332,907 shares respectively (71,422) (60,934)
------------------- -------------------
Total shareholders' equity 184,643 192,178
------------------- -------------------
Total liabilities and shareholders' equity $2,197,891 $2,257,499
=================== ===================
</TABLE>
The accompanying notes are an integral part of these statements.
3
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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,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Interest income:
Interest on loans $26,259 $25,383
Interest and dividends on deposits and money
market investments 1,041 683
Interest on investment securities 1,377 743
Interest on mortgage-backed securities 7,930 12,270
------------- -------------
Total interest income 36,607 39,079
Interest expense:
Interest on deposits 13,784 14,944
Interest on notes payable and other borrowings 5,286 6,620
------------- -------------
Total interest expense 19,070 21,564
------------- -------------
Net interest income 17,537 17,515
Provision for loan losses 1,000 500
------------- -------------
Net interest income after provision for loan losses 16,537 17,015
Noninterest income:
Deposit fees and related income 2,187 2,051
Servicing fees 894 1,047
Net gain on sale of mortgage loans 4,161 2,092
Other 650 816
------------- -------------
Total noninterest income 7,892 6,006
------------- -------------
Noninterest expense:
Compensation and employee benefits 9,618 8,989
Occupancy and office operations 2,817 2,600
FDIC premium 190 193
Advertising and promotion 414 437
Amortization of intangible assets 1,289 1,417
Other 4,378 3,735
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Total noninterest expense 18,706 17,371
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Income before income taxes 5,723 5,650
Income tax provision 1,660 1,798
------------- -------------
Net income $4,063 $3,852
============= =============
Basic weighted average number of shares outstanding 13,358,378 14,983,836
============= =============
Basic earnings per share $0.30 $0.26
============= =============
Diluted weighted average number of shares outstanding 13,693,354 15,640,878
============= =============
Diluted earnings per share $0.30 $0.25
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
4
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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, 1997 16,247 $1,800 $133,541 $117,582
Comprehensive Income:
Net income 3,852
Other-unrealized loss on marketable
securities, net of $382 tax benefit
Total comprehensive Income
Dividends (1,229)
Release of ESOP shares 302
Amortization of unearned compensation
Exercise of stock options 17 2 105
Tax benefit on employee stock plans 329
-------------------------------------------------------------
Balance at March 31, 1998 16,264 $1,802 $134,277 $120,205
=============================================================
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
Exercise of stock options 14 1 114
Net purchase of Treasury stock (696)
Tax benefit on employee stock plans 55
=============================================================
Balance at March 31, 1999 14,039 $1,807 $135,930 $126,785
=============================================================
</TABLE>
Commonwealth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Stock Other
Benefit Plan Comprehensive Treasury
Compensation Income Stock Total
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 ($12,900) $3,512 ($28,683) $214,852
Comprehensive Income:
Net income 3,852
Other-unrealized loss on marketable
securities, net of $382 tax benefit (709) (709)
-------------
Total comprehensive Income 3,143
-------------
Dividends (1,229)
Release of ESOP shares 230 532
Amortization of unearned compensation 410 410
Exercise of stock options 107
Tax benefit on employee stock plans 329
-----------------------------------------------------------------------
Balance at March 31, 1998 ($12,260) $2,803 ($28,683) $218,144
=======================================================================
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
Exercise of stock options 115
Net purchase of Treasury stock (10,488) (10,488)
Tax benefit on employee stock plans 55
=======================================================================
Balance at March 31, 1999 ($9,904) $1,447 ($71,422) $184,643
=======================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
5
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Commonwealth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
For the Quarter
Ended March 31,
1999 1998
-------------- --------------
<S> <C> <C>
Operating activities:
Net income $4,063 $3,852
Adjustments to reconcile net income to net cash
provided by (used in) operating activities-
Proceeds from loans sold to others 236,323 122,797
Loans originated for sale (124,693) (122,228)
Purchases of loans held for sale (47,704) (58,277)
Principal collection on mortgage loans held for sale 248 167
Net gain on sale of mortgage loans (4,161) (2,092)
(Decrease) increase in net deferred loan fees (463) 305
Provision for loan losses and foreclosed real estate 1,037 524
Depreciation and amortization 869 843
Net amortization of other assets and liabilities 2,352 2,237
Interest reinvested on repurchase agreements (2,436) (3,088)
Changes in assets and liabilities-
(Increase) decrease in-
Accrued interest receivable, net (243) (523)
Deferred income taxes (339) (963)
Other assets (1,421) 1,946
Increase (decrease) in-
Advances from borrowers for taxes and insurance 1,592 5,507
Accrued interest payable, accrued expenses and other liabilities 3,180 34,586
-------------- --------------
Net cash provided by (used in) operating activities $68,204 ($14,407)
-------------- --------------
(continued)
</TABLE>
The accompanying notes are an integral part of these statements.
6
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Commonwealth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
For the Quarter
Ended March 31,
1999 1998
------------ ----------
<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 -
Proceeds from call of mortgage-backed securities - 30,000
Purchases of mortgage-backed securities - (113,704)
Principal collected on mortgage-backed securities 92,199 65,622
Principal collected on loans 107,725 114,240
Loans originated (59,946) (120,652)
Loans purchased (10,908) (48,896)
Sales of real estate acquired through foreclosure 345 368
Purchase of FHLB Stock - (725)
Purchases of premises and equipment (986) (417)
Proceeds from sales of assets - 44
------------ -------------
Net cash (used in) provided by investing activities (5,635) (74,120)
------------ -------------
Financing activities:
Net (decrease) increase in deposits (1,805) 26,460
Proceeds from notes payable and other borrowings 8,460 324,556
Repayment of notes payable and other borrowings (61,064) (269,491)
Net (purchase) issuance of common stock (10,373) 107
Cash dividends paid (1,195) (1,229)
------------ -------------
Net cash (used in) provided by financing activities (65,977) 80,403
------------ -------------
Net decrease in cash and cash equivalents (3,408) (8,124)
Cash and cash equivalents at beginning of period 106,677 53,938
------------ -------------
Cash and cash equivalents at end of period $103,269 $45,814
============ =============
Supplemental disclosures of cash flow information:
Cash paid during the quarter for-
Interest $14,601 $15,692
============ =============
Income taxes $ - $ -
============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
7
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Commonwealth Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary for a fair presentation of Commonwealth Bancorp,
Inc.'s ("Commonwealth" or the "Company") financial condition as of March 31,
1999 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, 1998. Certain items in the 1998 financial statements and footnotes have been
reclassified in order to conform with the 1999 financial statement and footnote
presentation.
The Company is a Pennsylvania corporation which is the holding company
for Commonwealth Bank ("Bank"). Headquartered in Norristown, PA, Commonwealth
Bank has offices located in Berks, Bucks, Chester, Delaware, Lebanon, Lehigh,
Montgomery, and Philadelphia Counties, Pennsylvania. ComNet Mortgage Services
("ComNet'), a division of the Bank, has offices in Pennsylvania, Maryland, New
Jersey, Rhode Island, and Virginia. ComNet also operates under the trade name of
Homestead Mortgage in Maryland.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Commonwealth; Commonwealth Bank; CFSL Investment Corporation; Commonwealth
Investment Corporation of Delaware, Inc.; ComLife, Inc.; CS Corporation;
Firstcor, Ltd.; and QME, Inc. All material intercompany accounts and
transactions have been eliminated in consolidation.
3. Shareholders' Equity
On March 16, 1999, the Board of Directors declared a $0.09 per share cash
dividend for the quarter ended March 31, 1999, which was made payable to
shareholders of record at the close of business on March 26, 1999. This
dividend was paid on April 9, 1999.
During the first quarter of 1999, the Company purchased 0.7 million
shares of its common stock at a purchase price of $10.5 million. There were no
purchases during the first quarter of 1998. The repurchased shares were held as
treasury stock at March 31, 1999 and are reserved for general corporate purposes
and/or issuance pursuant to the Company's stock option plans. At March 31, 1999,
shareholders' equity represented 8.4% of assets, compared to 8.5% at December
31, 1998.
4. Future Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The statement establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting.
8
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Commonwealth Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999.
A company may also implement the statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS No. 133 cannot be applied retroactively and must be applied to
derivative instruments and certain derivative instruments embedded in hybrid
contracts that were issued, acquired, or substantively modified after December
31, 1997 (and, at the company's election, before January 1, 1998). Commonwealth
has not yet determined the timing of the adoption of SFAS No. 133. The adoption
of SFAS No. 133 as of March 31, 1999 would not have a material impact on the
consolidated statements of income, however comprehensive income for the first
quarter of 1999 would have been reduced by approximately $0.8 million due to the
mark to market adjustment of interest rate swap agreements.
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 calculation,
as follows:
<TABLE>
<CAPTION>
For the Quarter Ended March 31,
-------------------------------
1999 1998
----- -----
<S> <C> <C>
Basic weighted average number of common shares outstanding 13,358,378 14,983,836
Effect of dilutive securities:
Stock options 308,500 548,253
Recognition Plan stock 26,476 108,789
---------- -------
Diluted weighted average number of common shares outstanding 13,693,354 15,640,878
========== ==========
</TABLE>
Diluted EPS is computed by dividing net income available to common
shareholders by the weighted average number of shares of common stock
outstanding during the period, adjusted for ESOP shares that have not been
committed to be released, and the effects of shares held by the Recognition
Plans. The effect of 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.
Basic EPS was $0.30 per share for the quarter ended March 31, 1999,
compared to $0.26 per share for the quarter ended March 31, 1998. Diluted EPS
was $0.30 per share for the quarter ended March 31, 1999, compared to $0.25 per
share for the quarter ended March 31, 1998.
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 quarter of 1999 and 1998.
9
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Commonwealth Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Segment Reporting
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," introduces a new model for segment reporting, called the
"management approach." The management approach is based on the way the chief
operating decision maker organizes segments within a company for making
operating decisions and assessing performance. Reportable segments are based on
product and services, geography, legal structure, management structure - any
manner in which management disaggregates a company. The Company's segment
reports follow:
<TABLE>
<CAPTION>
For the Quarter Ended March 31,
----------------------------------------------------------------------------------
1999 1998
------------------------------------- ---------------------------------------
Banking Mortgage Banking Mortgage
Operations Operations Consolidated Operations Operations Consolidated
------------------------------------- ---------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net interest income after
provision for loan losses $15,364 $1,173 $16,537 $15,703 $1,312 $17,015
Noninterest income:
Servicing fees, net (655) 1,549 894 (702) 1,749 1,047
Net gain on sale of mortgage loans (132) 4,293 4,161 (303) 2,395 2,092
Other 2,874 (37) 2,837 2,897 (30) 2,867
-------- -------- ---------- --------- -------- -----------
Total noninterest income 2,087 5,805 7,892 1,892 4,114 6,006
-------- -------- ---------- --------- -------- -----------
Noninterest expense:
Compensation and employee benefits 6,869 2,749 9,618 6,487 2,502 8,989
Other 7,412 1,676 9,088 6,939 1,443 8,382
-------- -------- ---------- --------- -------- -----------
Total noninterest expense 14,281 4,425 18,706 13,426 3,945 17,371
-------- -------- ---------- --------- -------- -----------
Income before income taxes 3,170 2,553 5,723 4,169 1,481 5,650
Income tax provision 767 893 1,660 1,279 519 1,798
-------- -------- ---------- --------- -------- -----------
Net income $ 2,403 $1,660 $ 4,063 $ 2,890 $ 962 $ 3,852
======== ======== ========== ========= ======== ===========
Total assets (period end) $2,102,524 $95,367 $2,197,891 $2,106,127 $151,372 $2,257,499
=========== ======== ========== ========== ======== ===========
</TABLE>
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Commonwealth Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Acquisitions and Divestitures
On March 31, 1998, Commonwealth Bank acquired certain assets and the
Annandale, Virginia office of Edmunds Financial Corporation d/b/a Service First
Mortgage. Under the terms of the transaction, this operation conducts business
under the ComNet Mortgage Services name.
On April 7, 1999, the Bank reached a definitive agreement with Harris
Savings Bank regarding the sale of Commonwealth's two branches in Lebanon
County, Pennsylvania. The transaction, which is subject to regulatory approval,
is expected to be completed in the summer of 1999. As of March 31, 1999, the two
branches had combined deposits of approximately $34 million. In addition to the
deposits, it is expected that approximately $10 million of consumer and
commercial loans will be transferred to Harris Savings Bank as part of the
transaction.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
When used in this Form 10-Q, or in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project", or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 and Section 27A of the Securities Act and Section 21E of the Exchange
Act. Such statements are subject to certain risks and uncertainties including
changes in economic conditions in the Company's market area, changes in policies
by regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area and competition that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made to
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
GENERAL. The Company is a Pennsylvania corporation which is the holding
company for the Bank. Commonwealth Bank is a federally chartered stock savings
bank, primarily regulated by the Office of Thrift Supervision ("OTS"). The Bank
conducts business from its executive offices in Norristown, Pennsylvania and, as
of March 31, 1999, 61 full-service offices located in southeast Pennsylvania.
ComNet Mortgage Services, a division of the Bank, also located in Norristown,
conducts business through loan origination offices located in Pennsylvania,
Maryland, New Jersey, Rhode Island, and Virginia, and also operates under the
trade name of Homestead Mortgage in Maryland. In addition, ComNet conducts
business through its wholesale network, which includes correspondents in 16
states.
YEAR 2000. As the year 2000 approaches, a critical business issue has
emerged regarding how existing application software programs and operating
systems can accommodate this date value. Many existing application software
products in the marketplace were designed to accommodate only two digit date
entries. Beginning in the year 2000, these systems and products will need to be
able to accept four digit entries to distinguish years beginning with 2000 from
prior years. As a result, computer systems and software used by many companies
may need to be upgraded to comply with such Year 2000 requirements.
In 1997, Commonwealth initiated an extensive review of operations that
could be impacted by Year 2000 non-compliant computer systems and
microprocessors. An inventory of over 175 computer systems, outside service
providers, security systems, HVAC systems and power systems was compiled and
reviewed for risk of non-compliance. The Company's core processing systems are
outsourced with outside service providers. Throughout 1998, Commonwealth worked
with these service providers to confirm that action plans are in place to ensure
Year 2000 compliance. Testing efforts were organized and completed to validate
compliance of core systems and the related key interfaces. Currently, management
believes all of Commonwealth's core systems being used to support daily business
operations are fully compliant.
Commonwealth continues to work with its technology partners and secondary
service providers to ensure that low impact business components are also fully
compliant. Action plans are in place to upgrade equipment and software systems
where necessary. Total expenditures for Year 2000 compliance are estimated to be
less than $0.3 million and are charged to expense as incurred.
Additionally, Commonwealth has been proactive in assessing the Year 2000
readiness of our larger deposit and loan customers. An initial assessment has
been made of existing customers and ongoing monitoring processes are in place to
assess Commonwealth's exposure to customer non-compliance with Year 2000 in
order to minimize its impact. Presently, management is not aware of potential
non-compliance conditions which represent material exposure to the Company.
Processes are also in place to evaluate the Year 2000 readiness of new
customers.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
Although Commonwealth believes its Year 2000 program is adequate to
address the Year 2000 issue, there can be no assurance to that effect. The
Company will implement its existing Business Resumption Plan in the event of
non-compliance with Year 2000. Commonwealth is primarily dependent on its
suppliers of computer services to become Year 2000 compliant. Commonwealth is
monitoring its computer services provider, as well as its third party system
vendors, to ensure that the Company's systems continue to meet its internal
needs and those of its customers. As a result of Commonwealth's arrangement with
these vendors, the Company does not expect material expenditures to be incurred
to address the Year 2000 issue.
FINANCIAL CONDITION
GENERAL. Total assets were $2.2 billion at March 31, 1999, compared to
$2.3 billion at December 31, 1998. During the first quarter of 1999, decreases
in the Company's mortgage-backed securities, mortgage loans held for sale and
loans receivable were offset, in part, by an increase in investment securities.
Total liabilities were $2.0 billion at March 31, 1999, compared to $2.1 billion
at December 31, 1998. The decrease during the first quarter of 1999, was
primarily attributable to a decrease in notes payable and other borrowings.
Shareholders' equity as of March 31, 1999, equaled $185 million, compared to
$192 million at December 31, 1998. This $8 million, or 4%, decrease was
primarily the result of the $10.5 million purchase of 0.7 million shares of
treasury stock, offset, in part, by a $3 million, or 2%, increase in retained
earnings during the first quarter of 1999.
MORTGAGE LOANS HELD FOR SALE. Mortgage loans held for sale decreased by
$61 million, or 51%, from $121 million at December 31, 1998, to $59 million at
March 31, 1999. The decease was attributable to a decrease in loans originated
during the first quarter of 1999, primarily as a result of a reduction in loan
refinancing.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
INVESTMENT SECURITIES. Investment securities increased by $140 million,
or 404%, from $35 million at December 31, 1998, to $174 million at March 31,
1999. The increase was primarily attributable to the purchase of highly rated
short-term corporate bonds and a mortgage related mutual fund. These increases
were offset, in part, by the maturity of U.S. Treasury and U.S. Government
agency securities.
The increase in investment securities between December 31, 1998 and March
31, 1999, coupled with a decrease in mortgage-backed securities during the same
time period, was part of a strategy to increase the liquidity and shorten the
average life of the Company's combined investment and mortgage-backed securities
portfolios.
Investments in debt and equity securities at March 31, 1999 and December
31, 1998 were as follows:
<TABLE>
<CAPTION>
March 31, 1999
-------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Available for sale:
Corporate Bonds $ 141,528 $ 47 $ 107 $ 141,468
Mortgage Security Mutual Fund 30,153 - - 30,153
Equity Servicing Partnership 1,700 - - 1,700
Other Equity Investments 710 - 14 696
-------------------------------------------------------------------------
Total $ 174,091 $ 47 $ 121 $ 174,017
=========================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Available for sale:
Corporate Bonds $ 19,997 $ 143 $ - $ 20,140
U.S. Treasury and U.S.
Government agency securities 12,000 1 2 11,999
Equity Servicing Partnership 1,700 - - 1,700
Other Equity Investments 710 - 34 676
--------------------------------------------------------------------------
Total $ 34,407 $ 144 $ 36 $ 34,515
==========================================================================
</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 $99
million, or 19%, from $524 million at December 31, 1998, to $425 million at
March 31, 1999. The decrease in mortgage-backed securities during the first
quarter of 1999 was primarily related to repayments and prepayments.
The decrease in mortgage-backed securities between December 31, 1998 and
March 31, 1999, coupled with an increase in investment securities during the
same time period, was part of a strategy to increase the liquidity and shorten
the average life of the Company's combined investment and mortgage-backed
securities portfolios.
Mortgage-backed securities generally increase the quality of the
Company's assets by virtue of the insurance or guarantees related to the
securities, are more liquid than individual mortgage loans, and may be used to
collateralize borrowings or other obligations of the Company. At March 31, 1999
and December 31, 1998, $265 million, or 59%, and $310 million, or 59%,
respectively, of the Company's mortgage-backed securities were insured or
guaranteed by the Government National Mortgage Association ("GNMA"), the Federal
Home Loan Mortgage Corporation ("FHLMC"), or the Federal National Mortgage
Association ("FNMA"). As part of its investment policy, the Company also has the
ability to invest in private mortgage-backed securities. These non-federally
insured mortgage-backed securities, which are generally rated AA or better,
yield a higher rate of return and involve a higher risk of loss than comparable
mortgage-backed securities issued by the GNMA, FHLMC, or the FNMA, and serve to
further diversity the Company's mortgage-backed securities portfolio. At March
31, 1999 and December 31, 1998, $160 million, or 41%, and $215 million, or 41%,
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, 1999
-------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Held to maturity:
GNMA $ 45,482 $1,374 $ 89 $ 46,767
FHLMC 23,731 284 54 23,961
FNMA 43,577 396 54 43,919
Private 3,742 - - 3,742
-------------------------------------------------------------------------------------
Total $116,532 $2,054 $197 $118,389
=====================================================================================
Available for sale:
GNMA $ 12,010 $ 367 $ - $ 12,377
FHLMC 57,250 1,542 - 58,792
FNMA 60,275 313 192 60,396
CMO and REMIC 176,718 631 361 176,988
-------------------------------------------------------------------------------------
Total $306,253 $2,853 $553 $308,553
=====================================================================================
</TABLE>
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-----------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Held to maturity:
GNMA $ 50,856 $1,284 $ 108 $ 52,032
FHLMC 28,871 193 151 28,913
FNMA 48,345 443 31 48,757
Private 4,033 - - 4,033
-----------------------------------------------------------------------------------
Total $132,105 $1,920 $ 290 $133,735
===================================================================================
Available for sale:
GNMA $ 13,049 $ 475 $ - $ 13,524
FHLMC 65,987 1,927 17 67,897
FNMA 67,773 718 177 68,314
CMO and REMIC 241,540 972 211 242,301
-----------------------------------------------------------------------------------
Total $388,349 $4,092 $405 $392,036
===================================================================================
</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, decreased by $37 million, or
3%, during the first quarter of 1999, to $1.3 billion at March 31, 1999. The
decrease was primarily attributable to a decrease in residential mortgage loans,
offset, in part, by growth in consumer and commercial loans. The following table
depicts the composition of the Company's loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------------------------ -------------------------------
% of % of
Amount Total Amount Total
------ ------- ------ -------
(dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans - Residential (1) $ 912,676 69.58% $ 969,617 71.90%
Consumer loans:
Equity lines of credit 32,662 2.49 34,845 2.58
Second mortgages 136,294 10.39 126,360 9.37
Recreational vehicles 46,406 3.54 39,920 2.96
Other 41,007 3.13 38,781 2.88
----------- --------- ----------- ---------
Total consumer loans 256,369 19.55 239,906 17.79
Commercial loans:
Small Business
Administration Loans (2) 13,623 1.04 14,491 1.07
Commercial real estate 90,801 6.92 88,290 6.55
Business loans 38,185 2.91 36,221 2.69
----------- --------- ----------- ---------
Total commercial loans 142,609 10.87 139,002 10.31
----------- --------- ----------- ---------
Total loans receivable 1,311,654 100.00% 1,348,525 100.00%
----------- ========= ----------- =========
Less:
Net premium on loans purchased (2,790) (2,880)
Allowance for loan losses 9,943 9,589
Deferred loan fees 3,479 3,639
----------- -----------
Loans receivable, net $1,301,022 $1,338,177
=========== ===========
</TABLE>
- ---------------------
(1) At March 31, 1999 and December 31, 1998, $355 million, or 39%, and $404
million, or 42%, respectively, of the Company's residential mortgage
loans had adjustable interest rates.
(2) Consists entirely of loans (or securities backed by loans) which are
guaranteed by the U.S. Government, with the majority adjusting monthly or
quarterly. All such loans or securities were purchased by the Company.
Total mortgage loans originated and purchased for the quarter ended March
31, 1999, decreased by $105 million, or 36%, from $294 million for the quarter
ended March 31, 1998, to $190 million for the quarter ended March 31, 1999. The
$105 million decrease in mortgage originations was the result of decreases in
retail and wholesale residential mortgage originations. Closed loans relating to
Commonwealth's retail network totaled $138 million during the quarter ended
March 31, 1999, an decrease of 26% compared to $187 million for quarter ended
March 31, 1998. Commonwealth's Wholesale Lending Department originates loans
through a network of correspondent brokers in 16 states. All loans are
underwritten using the same criteria as those used for retail originations.
Closed loans relating to Commonwealth's wholesale network totaled $51 million
during the quarter ended March 31, 1999, an decrease of 52% compared to $107
million for the quarter ended March 31, 1998.
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
Consumer loans increased by $16 million, or 7%, from $240 million at
December 31, 1998, to $256 million at March 31, 1999. At March 31, 1999,
consumer loans represented 20% of the Company's loan portfolio and were
comprised of $33 million of equity lines of credit, $136 million of second
mortgage loans, $46 million of recreational vehicle loans, and $41 million of
other consumer loans. At December 31, 1998, consumer loans represented 18% of
total loans and were comprised of $35 million of equity lines of credit, $126
million of second mortgage loans, $40 million of recreational vehicle loans, and
$39 million of other consumer loans.
As of March 31, 1999, commercial loans totaled $143 million, or 11%, of
the Company's total loan portfolio, as compared to $139 million, or 10%, at
December 31, 1998. At March 31, 1999, commercial loans were comprised of $91
million of commercial real estate loans, $38 million of business loans, and $14
million of loans guaranteed by the Small Business Administration ("SBA"). At
December 31, 1998, commercial loans were comprised of $88 million of commercial
real estate loans, $36 million of business loans, and $14 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 increases in consumer and commercial loans during the first quarter
of 1999 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.
NONPERFORMING ASSETS. The Company's nonperforming assets, which primarily
consist of nonaccrual loans and real estate acquired through foreclosure,
increased by $0.2 million, or 2%, from $11.1 million at December 31, 1998, to
$11.3 million at March 31, 1999. At March 31, 1999, the Company's $11.3 million
of nonperforming assets amounted to 0.51% of total assets. At December 31, 1998,
the Company's $11.1 million of nonperforming assets amounted to 0.49% of total
assets. The following table sets forth information relating to the Company's
nonperforming assets at the dates indicated.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
(dollars in thousands)
<S> <C> <C>
Mortgage loans - Residential $ 5,727 $ 5,119
Consumer loans 1,528 1,598
Commercial loans 2,515 3,295
----- -------
Total nonperforming loans 9,770 10,012
Real estate owned, net 1,506 1,049
------- -------
Total nonperforming assets $11,276 $11,061
====== ======
Nonperforming loans to total loans held for
investment 0.74% 0.74%
==== ====
Total nonperforming assets to total assets 0.51% 0.49%
==== ====
</TABLE>
- -------------------
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
ALLOWANCE FOR LOAN LOSSES. The Company's allowance for loan losses
amounted to $9.9 million at March 31, 1999, compared to $9.6 million at December
31, 1998. It is management's policy to maintain an allowance for estimated loan
losses based upon an assessment of prior loss experience, the volume and type of
lending conducted by the Company, industry standards, past due loans, general
economic conditions, and other factors related to the collectability of the loan
portfolio. At March 31, 1999, the Company's allowance for loan losses amounted
to 102% of total nonperforming loans and 0.76% of total loans held for
investment, as compared to 96% of total nonperforming loans and 0.71% of total
loans held for investment at December 31, 1998. 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.
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,
------------------------------------------------
1999 1998
---- ----
(dollars in thousands)
<S> <C> <C>
Allowance at beginning of period $9,589 $ 9,024
Provision for loan losses 1,000 500
Charge-offs:
Mortgage loans (55) (2)
Consumer loans (406) (380)
Commercial loans (345) (154)
----- -----
Total charge-offs (806) (536)
Recoveries:
Mortgage loans 12 -
Consumer loans 57 16
Commercial loans 91 22
----- -----
Total recoveries 160 38
----- -----
Allowance at end of period $9,943 $9,026
===== =====
Allowance for loan losses to
total nonperforming loans
at end of period 101.77% 101.78%
====== ======
Allowance for loan losses to
total loans held for
investment at end of period 0.76% 0.68%
==== ====
</TABLE>
19
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
INTANGIBLE ASSETS. Intangible assets, which are comprised of the excess
of cost over net assets acquired ("Goodwill") and core deposit intangibles
("CDI"), were recorded in connection with the 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").
The following table details the components of intangible assets at the dates
indicated.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
(in thousands)
<S> <C> <C>
Goodwill (Berks Acquisition) $18,683 $19,141
CDI (Berks Acquisition) 7,779 8,260
Goodwill (Fidelity Federal) 9,989 10,257
CDI (Fidelity Federal) 2,090 2,172
--------- ---------
Total $38,541 $39,830
========= =========
</TABLE>
MORTGAGE SERVICING RIGHTS. At March 31, 1999, Commonwealth's mortgage
servicing portfolio was $2.3 billion, a decrease of 5% compared to $2.4 billion
at December 31, 1998. At March 31, 1999 and December 31, 1998, Commonwealth was
servicing $1.4 billion and $1.4 billion of third party loans, as well as $0.9
billion and $1.0 billion, respectively, of loans held by Commonwealth for
investment and sale. At March 31, 1999, capitalized mortgage servicing rights
relating to loans originated by Commonwealth totaled $7.1 million, compared to
$8.9 million at December 31, 1998. Purchased mortgage servicing rights totaled
$1.0 million at March 31, 1999, compared to $1.1 million at December 31, 1998.
The $1.8 million, or 18%, decrease in mortgage servicing rights was primarily
related to the sale of mortgage loans on a servicing released basis.
BORROWINGS. The Company's borrowings consist primarily of advances from
the FHLB and securities sold under agreements to repurchase. FHLB advances
decreased by $38 million, or 16%, to $203 million at March 31, 1999, from $241
million at December 31, 1998. Repurchase agreements decreased by $26 million, or
16%, to $140 million at March 31, 1999, from $166 million at December 31, 1998.
These decreases were offset, in part, by an $8 million increase in the Company's
commercial repurchase product, which was introduced during the first quarter of
1999. The Company's borrowings are used to fund lending and investment
activities, withdrawals from deposit accounts, and other disbursements which
occur in the normal course of business. Dependent upon the funding requirements
and interest rate risk considerations, these borrowings are hedged with
off-balance-sheet financial instruments.
ACCRUED INTEREST PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES ("OTHER
LIABILITIES"). Other liabilities increased by $3 million, or 13%, to $28 million
at March 31, 1999, from $25 million at December 31, 1998, primarily related to
an increase in accrued interest payable.
SHAREHOLDERS' EQUITY. At March 31, 1999, shareholders' equity equaled
$185 million, compared to $192 million at December 31, 1998. This $8 million, or
4%, decrease was primarily the result of the $10.5 million purchase of 0.7
million shares of treasury stock, offset, in part, by a $3 million, or 2%,
increase in retained earnings during the first quarter of 1999. The repurchased
shares were held as treasury stock and are reserved for general corporate
purposes and/or issuance pursuant to the Company's stock option plans. At March
31, 1999, shareholders' equity represented 8.4% of assets, compared to 8.5% at
December 31, 1998. The Bank's core and risk-based capital ratios were 6.3% and
12.5%, respectively, at March 31, 1999, compared to 5.9% and 11.6%,
respectively, at December 31, 1998.
20
<PAGE> 21
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, 1999:
<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>
Stockholders' equity,
and ratio to OTS
total assets 8.0% $ 176,060
------------
Intangible assets (38,541)
Unrealized gain on
marketable
securities, net of tax (1,455)
-----------
Tangible capital,
and ratio to OTS
adjusted total assets 6.3% $ 136,064 1.5% $32,211
------------- =========== ----------- ==========
Core capital,
and ratio to OTS
adjusted total assets 6.3% $ 136,064 3.0% $64,421 5.0% $107,369
------------- =========== ----------- ========== --------- ==========
Core capital,
and ratio to OTS
risk-weighted assets 11.6% $ 136,064 6.0% $ 70,220
------------- ----------- --------- ==========
Allowance for loan losses 9,943
-----------
Supplementary capital 9,943
-----------
Total risk-based capital,
and ratio to OTS
risk-weighted assets (1) 12.5% $ 146,007 8.0% $93,626 10.0% $117,033
------------- =========== ----------- ========== --------- ==========
OTS total assets $ 2,187,367
===========
OTS adjusted total assets $ 2,147,370
===========
OTS risk-weighted assets $ 1,170,326
===========
</TABLE>
- -------------------------
(1) Does not reflect the interest rate risk component to the risk-based capital
requirement, which is not yet effective.
21
<PAGE> 22
Commonwealth Bancorp, Inc. and Subsidiaries
Average Balance Report
<TABLE>
<CAPTION>
Quarter Ended March 31,
----------------------------------------- ----------------------------------------
1999 1998
----------------------------------------- ----------------------------------------
Average Average
Average Yield / Average Yield /
Balance Interest Cost(e) Balance Interest Cost(e)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(a):
Mortgage loans $1,016,902 $18,032 7.19% $1,014,119 $18,454 7.38%
Consumer loans 244,086 5,371 8.92% 197,095 4,478 9.21%
Commercial loans 136,875 2,856 8.46% 116,509 2,451 8.53%
------------- ----------- ------------ ------------ ----------- -----------
Total loans receivable 1,397,863 26,259 7.62% 1,327,723 25,383 7.75%
------------- ----------- ------------ ------------ ----------- -----------
Mortgage-backed securities 482,705 7,930 6.66% 725,184 12,270 6.86%
Investment securities 107,351 1,377 5.20% 51,458 743 5.86%
Other earning assets(b) 69,210 1,041 6.10% 28,136 683 9.84%
------------- ----------- ------------ ------------ ----------- -----------
Total interest-earning assets 2,057,129 36,607 7.22% 2,132,501 39,079 7.43%
----------- ------------ ----------- -----------
Non- interest-earning assets 156,572 158,096
------------- ------------
Total assets $2,213,701 $2,290,597
============= ============
Interest-bearing liabilities
Deposits:
Demand deposits(c) $709,020 4,157 2.38% $599,635 3,625 2.45%
Savings deposits 227,565 1,250 2.23% 229,450 1,261 2.23%
Certificates of deposit 659,578 8,377 5.15% 739,384 10,058 5.52%
------------- ----------- ------------ ------------ ----------- -----------
Total deposits 1,596,163 13,784 3.50% 1,568,469 14,944 3.86%
------------- ----------- ------------ ------------ ----------- -----------
Notes payable and other borrowings
FHLB Advances 222,139 2,870 5.24% 236,054 3,505 6.02%
Repurchase agreements 150,267 2,385 6.44% 223,356 3,115 5.66%
Other borrowings 2,389 31 5.26% 0 0 0.00%
------------- ----------- ------------ ------------ ----------- -----------
Total borrowings 374,795 5,286 5.72% 459,410 6,620 5.84%
------------- ----------- ------------ ------------ ----------- -----------
Total interest-bearing liabilities (d) 1,970,958 19,070 3.92% 2,027,879 21,564 4.31%
----------- ------------ ----------- -----------
Non- interest-bearing liabilities 53,182 46,276
------------- ------------
Total liabilities 2,024,140 2,074,155
Shareholders' equity 189,561 216,442
------------- ------------
Total liabilities and equity $2,213,701 $2,290,597
============= ============
Net interest-earning assets $86,171 $104,622
============= ============
Net interest income/
interest rate spread $17,537 3.30% $17,515 3.12%
=========== ============ =========== ===========
Net interest margin 3.46% 3.33%
============ ===========
Ratio of average interest-
earning assets to average
interest-bearing liabilities 104.37% 105.16%
============ ===========
</TABLE>
Commonwealth Bancorp, Inc. and Subsidiaries
Average Balance Report
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
---------------------------------------- -------------------------------------
1998 1997
---------------------------------------- -------------------------------------
Average Average
Average Yield / Average Yield /
Balance Interest Cost(e) Balance Interest Cost(e)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(a):
Mortgage loans $1,066,998 $76,714 7.19% $934,539 $69,504 7.44%
Consumer loans 219,076 19,735 9.01% 177,872 15,982 8.99%
Commercial loans 121,697 10,378 8.53% 104,522 8,699 8.32%
------------ ----------- ----------- ------------ ----------- ----------
Total loans receivable 1,407,771 106,827 7.59% 1,216,933 94,185 7.74%
------------ ----------- ----------- ------------ ----------- ----------
Mortgage-backed securities 683,522 46,360 6.78% 791,245 54,887 6.94%
Investment securities 42,525 2,313 5.44% 64,742 4,031 6.23%
Other earning assets(b) 26,023 2,604 10.01% 23,521 2,140 9.10%
------------ ----------- ----------- ------------ ----------- ----------
Total interest-earning assets 2,159,841 158,104 7.32% 2,096,441 155,243 7.41%
----------- ----------- ----------- ----------
Non- interest-earning assets 156,845 145,222
------------ ------------
Total assets $2,316,686 $2,241,663
============ ============
Interest-bearing liabilities
Deposits:
Demand deposits(c) $631,088 15,203 2.41% $550,236 13,616 2.47%
Savings deposits 227,618 5,070 2.23% 245,813 5,494 2.24%
Certificates of deposit 707,858 38,673 5.46% 722,278 39,450 5.46%
------------ ----------- ----------- ------------ ----------- ----------
Total deposits 1,566,564 58,946 3.76% 1,518,327 58,560 3.86%
------------ ----------- ----------- ------------ ----------- ----------
Notes payable and other borrowings
FHLB Advances 285,615 16,127 5.65% 211,107 11,980 5.67%
Repurchase agreements 205,018 12,381 6.04% 242,794 14,315 5.90%
Other borrowings 0 0 0.00% 0 0 0.00%
------------ ----------- ----------- ------------ ----------- ----------
Total borrowings 490,633 28,508 5.81% 453,901 26,295 5.79%
------------ ----------- ----------- ------------ ----------- ----------
Total interest-bearing liabilities (d) 2,057,197 87,454 4.25% 1,972,228 84,855 4.30%
----------- ----------- ----------- ----------
Non- interest-bearing liabilities 56,762 52,792
------------ ------------
Total liabilities 2,113,959 2,025,020
Shareholders' equity 202,727 216,643
------------ ------------
Total liabilities and equity $2,316,686 $2,241,663
============ ============
Net interest-earning assets $102,644 $124,213
============ ============
Net interest income/
interest rate spread $70,650 3.07% $70,388 3.11%
=========== =========== =========== ==========
Net interest margin 3.27% 3.36%
=========== ==========
Ratio of average interest-
earning assets to average
interest-bearing liabilities 104.99% 106.30%
=========== ==========
</TABLE>
(a) The average balance of loans receivable includes nonperforming loans,
interest on which is recognized on a cash basis, and mortgage loans held for
sale.
(b) Includes FHLB stock, money market accounts, FHLB deposits and
interest-earning bank deposits.
(c) Includes checking and money market accounts.
(d) Includes interest expense associated with interest rate swaps and interest
rate caps.
(e) Annualized
22
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
COMPARISON OF RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1999 AND
1998.
GENERAL. Net income was $4.1 million, or $0.30 per common share on a
diluted basis, in the first quarter of 1999, compared to $3.9 million, or $0.25
per common share, in the first quarter of 1998.
NET INTEREST INCOME. Net interest income was $17.5 million for both the
first quarter of 1999 and the first quarter of 1998. Total interest income
decreased $2.5 million, or 6%, to $36.6 million during the first quarter of
1999, primarily as a result of a $4.3 million, or 35%, decrease in interest on
mortgage-backed securities. Total interest expense decreased $2.5 million, or
12%, to $19.1 million during the first quarter of 1999 as a result of decreases
of $1.2 million, or 8%, in interest of deposits and $1.3 million, or 20%, in
interest on notes payable and other borrowings.
Average interest-earning assets totaled $2.1 billion for both the first
quarter of 1999 and the first quarter of 1998. Compared to the first quarter of
1998, average mortgage loans increased less than 1% to $1,017 million, average
consumer loans increased 24% to $244 million, and average commercial loans
increased 17% to $137 million in the first quarter of 1999. Average loans
represented 88% of average deposits in the first quarter of 1999, compared to
85% in the first quarter of 1998.
The net interest margin was 3.46% in the first quarter of 1999, compared
to 3.33% in the first quarter of 1998. The increase was primarily attributable
to a 0.39% decrease in the cost of interest-bearing liabilities, offset, in
part, by a 0.21% reduction in the yield on interest-earning assets. The decrease
in the cost of interest-bearing liabilities was primarily related to a reduction
in the average cost of certificates of deposit. Also contributing to the
decrease in the cost of interest-bearing liabilities was an increase in lower
costing demand and money market deposits, and a decrease in higher costing
certificates. The reduction in the yield on interest-earning assets was, in
large part, due to generally lower market interest rates.
PROVISION FOR LOAN LOSSES. Provision for loan losses totaled $1.0 million
in the first quarter of 1999, compared to $0.5 million in the first quarter of
1998. The increase was primarily attributable to an increase in the consumer and
commercial loan portfolios. At March 31, 1999, the allowance for loan losses
totaled $9.9 million, or 0.76%, of loans, compared to $9.6 million, or 0.71%, at
December 31, 1998.
NONINTEREST INCOME. Noninterest income totaled $7.9 million in the first
quarter of 1999, compared to $6.0 million in the first quarter of 1998. The
increase reflected a $2.1 million increase in the net gain on sale of mortgage
loans, primarily attributable to an increase in loans sold on a servicing
released basis.
NONINTEREST EXPENSE. Noninterest expense was $18.7 million in the first
quarter of 1999, compared to $17.4 million in the first quarter of 1998. The
increase was primarily attributable to an increase in mortgage banking expenses
and higher expenses relating to the accelerated vesting of certain stock benefit
plans due to retirements. The opening of three supermarket branch offices and
two traditional branch offices also contributed to the increase in noninterest
expense in the first quarter of 1999.
PROVISION FOR INCOME TAXES. Provision for income taxes was $1.7 million,
or 29% of income before income taxes in the first quarter of 1999, compared to
$1.8 million, or 32%, in the first quarter of 1998. The decrease in the tax rate
in the first quarter of 1999 was primarily attributable to historic and low
income housing tax credits.
23
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
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, 1999, the Company's income simulation model
indicates net interest income would decrease by 0.30% over a two year period if
interest rates increased by 200 basis points. The model projects that net
interest income would decrease by 10.49% 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 net interest income variability reflects the Company's interest
rate sensitivity position and does not include the change in earnings related to
an increase or decrease in amortization of servicing intangible assets that may
be caused by different levels of prepayments when rates rise or fall. The market
value of portfolio equity is significantly impacted by the estimated effect of
prepayments on the value of single family loans, mortgage-backed securities and
servicing as rates change. Further, this analysis is based on the Company's
assets, liabilities, mortgage servicing rights, and off-balance-sheet
instruments at March 31, 1999, and does not contemplate any actions the Company
might undertake in response to changes in market interest rates.
24
<PAGE> 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings to which the Company or
any of its subsidiaries is a party, or to which any of their
property is subject, other than proceedings routine to the
business of the Company and its subsidiaries.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
(a) An annual meeting of stockholders of the Company was held
on April 20, 1999 ("Annual Meeting").
(b) Not applicable.
(c) There were 14,383,343 shares of common stock of the Company
eligible to be voted at the Annual Meeting and 10,826,140
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.
FOR WITHHELD
--- --------
Joseph E. Colen, Jr. 10,448,315 377,825
Michael T. Kennedy 10,444,017 382,122
2. Proposal to adopt the Director's Stock Retainer Plan.
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
9,662,460 885,688 118,316 159,675
3. Proposal to ratify the appointment of Arthur Andersen LLP
as the Company's independent auditors for the year ending
December 31, 1999.
FOR AGAINST ABSTAIN
--- ------- -------
10,652,446 123,470 50,223
The proposals were adopted by the stockholders of the Company.
(d) Not applicable
25
<PAGE> 26
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 22, 1999, the Company filed a Current Report on Form
8-K to report under Item 5, its earnings for the fourth quarter of 1998. On
January 29, 1999, the Company filed a Current Report on Form 8-K to report under
Item 5, its commencement of the stock repurchase program. On March 19, 1999, the
Company filed a Current Report on Form 8-K to report under Item 5, the
completion of its previously announced stock repurchase program and its declared
cash dividend. On April 8, 1999, 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 Harris Savings Bank regarding the sale of
Commonwealth's two branches in Lebanon County, Pennsylvania. On April 22, 1999,
the Company filed a Current Report on Form 8-K to report under Item 5, its
earnings for the first quarter of 1999.
26
<PAGE> 27
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 7, 1999 /s/ Charles H. Meacham
----------------------
Charles H. Meacham
Chairman and Chief Executive Officer
(Principal Executive Officer)
DATE: May 7, 1999 /s/ Charles M. Johnston
-----------------------
Charles M. Johnston
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
27
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