<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, 1996
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)
P.O. Box 2100
70 Valley Stream Parkway
Valley Forge, Pennsylvania 19482
-------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(610) 251-1600
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 5, 1996,
there were issued and outstanding 17,952,693 shares of the Registrant's Common
Stock.
1
<PAGE> 2
Commonwealth Bancorp, Inc. and Subsidiaries
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
No. No.
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<S> <C> <C>
PART I - CONSOLIDATED FINANCIAL INFORMATION
1 Consolidated Financial Statements
Consolidated Balance Sheets at June 30, 1996 and December 31, 1995 3
Consolidated Statements of Income for the Three and Six Month Periods Ended
June 30, 1996 and 1995 5
Consolidated Statements of Changes in Shareholders' Equity for the Six Month
Periods Ended June 30, 1996 and 1995 6
Consolidated Statements of Cash Flows for the Six Month Periods Ended
June 30, 1996 and 1995 7
Notes to Consolidated Financial Statements 9
2 Management's Discussion and Analysis of Financial Condition and Results of
Operations 12
PART II - OTHER INFORMATION
1 Legal Proceedings 22
2 Changes in Securities 22
3 Default Upon Senior Securities 22
4 Submission of Matters to a Vote of Security Holders 22
5 Other Information 22
6 Exhibits and Reports on Form 8-K 22
</TABLE>
2
<PAGE> 3
Commonwealth Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands)
Assets
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
--------------- --------------
(Unaudited)
<S> <C> <C>
Cash and due from banks $36,920 $31,994
Interest-bearing deposits 41,070 7,637
Short-term investments available for sale 5,095 10,546
Mortgage loans held for sale 25,662 26,001
Investment securities
Securities available for sale(cost of $60,553
and $46,364, respectively), at market value 60,520 46,896
Mortgage-backed securities
Securities held to maturity(market value of $254,603
and $254,352, respectively), at cost 256,356 251,330
Securities available for sale(cost of $487,716
and $208,464, respectively), at market value 485,349 212,023
Loans receivable, net 1,011,477 796,735
Accrued interest receivable 11,946 9,060
FHLB stock, at cost 14,255 8,912
Premises and equipment, net 24,362 20,687
Intangible assets 54,303 17,279
Mortgage servicing rights 7,558 6,855
Other assets, including net deferred taxes of $4,133 and
$1,579, respectively 14,189 9,745
--------------- --------------
Total assets $2,049,062 $1,455,700
=============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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Commonwealth Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands)
Liabilities and Shareholders' Equity
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
--------------- --------------
(Unaudited)
<S> <C> <C>
Liabilities:
Deposits $1,484,757 $1,076,549
Notes payable and other borrowings
Secured notes due to Federal Home Loan Bank
of Pittsburgh 109,000 120,614
Securities sold under agreements to repurchase 151,052 81,112
Other borrowings 0 1,554
Advances from borrowers for taxes and insurance 33,512 25,797
Accrued interest payable, accrued expenses and
other liabilities 43,220 13,038
--------------- --------------
Total liabilities 1,821,541 1,318,664
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 and 20,000,000
shares authorized; 17,952,693 and 8,628,884 issued
at June 30, 1996 and December 31, 1995, respectively 1,795 863
Additional paid in capital 132,891 36,686
Retained earnings 104,136 99,165
Unearned ESOP compensation (8,985) (1,449)
Unearned MRP compensation (756) (888)
Unrealized (loss) gain on marketable securities, net of tax (1,560) 2,659
--------------- --------------
Total shareholders' equity 227,521 137,036
--------------- --------------
Total liabilities and shareholders' equity $2,049,062 $1,455,700
=============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 5
Commonwealth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
(In Thousands, except Per Share Data)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $17,315 $13,661 $33,695 $26,657
Interest and dividends on deposits and money
market investments 787 409 1,388 797
Interest on investment securities 781 1,015 1,503 2,184
Interest on mortgage-backed securities 10,401 8,712 19,371 16,612
---------- ---------- ---------- ----------
Total interest income 29,284 23,797 55,957 46,250
Interest expense:
Interest on deposits 10,965 7,811 21,505 15,022
Interest on notes payable and other borrowings 4,175 4,211 7,925 7,442
---------- ---------- ---------- ----------
Total interest expense 15,140 12,022 29,430 22,464
---------- ---------- ---------- ----------
Net interest income 14,144 11,775 26,527 23,786
Provision for loan losses 100 50 100 76
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 14,044 11,725 26,427 23,710
Noninterest income:
Deposit fees and related income 1,134 937 2,206 1,833
Servicing fees 1,461 1,383 2,627 2,741
Net gain (loss) on sales of mortgage loans 126 (310) 998 (284)
Net (loss) gain on sales of foreclosed real estate (71) 433 (126) 398
Other 365 273 715 424
---------- ---------- ---------- ----------
Total noninterest income 3,015 2,716 6,420 5,112
---------- ---------- ---------- ----------
Noninterest expense:
Compensation and employee benefits 5,944 4,822 11,666 9,999
Occupancy and office operations 1,984 1,763 3,931 3,558
FDIC premium 648 495 1,261 990
Advertising and promotion 419 438 736 835
Amortization of intangible assets 564 282 1,137 584
Other 2,625 2,063 5,151 3,880
---------- ---------- ---------- ----------
Total noninterest expense 12,184 9,863 23,882 19,846
---------- ---------- ---------- ----------
Income before income taxes 4,875 4,578 8,965 8,976
Income tax provision 1,706 1,627 3,158 3,117
---------- ---------- ---------- ----------
Net income $3,169 $2,951 $5,807 $5,859
========== ========== ========== ==========
Weighted-average number of shares outstanding 9,695,017 N/A 8,862,186 N/A
========== ========== ========== ==========
Earnings per share (1) 0.33 N/A 0.66 N/A
========== ========== ========== ==========
</TABLE>
- ---------------------
(1) Per share information for the prior period is not comparable as the Company
did not complete its stock offering until June 14, 1996.
The accompanying notes are an integral part of the consolidated financial
statements.
5
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Commonwealth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Common Additional
Shares Common Paid-In Retained
Outstanding Stock Capital Earnings
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1995
Balance at December 31, 1994 8,600 $860 $36,016 $89,737
Net income 5,859
Dividends (912)
Release of 27,875 ESOP shares 103
Amortization of unearned compensation
Exercise of stock options 41
Decrease in unrealized loss on marketable
securities, net of tax
------------------------------------------
Balance at June 30, 1995 8,600 $860 $36,160 $94,684
==========================================
Fiscal 1996
Balance at December 31, 1995 8,629 $863 $36,686 $99,165
Net income 5,807
Dividends (936)
Release of 38,226 ESOP shares (c) 183
Amortization of unearned compensation
Exercise of stock options 13 1 131
Decrease in unrealized gain on marketable
securities, net of tax
Issuance and exchange of common stock as a result
of the conversion/reorganization (a) (b) 9,311 931 95,891
Assets consolidated from Commonwealth Mutual
Holding Company 100
------------------------------------------
Balance at June 30, 1996 17,953 $1,795 $132,891 $104,136
==========================================
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Unearned Unearned Gain/(Loss)
ESOP MRP On Marketable
Compensation Compensation Securities Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1995
Balance at December 31, 1994 ($2,005) ($1,184) ($6,519) $116,905
Net income 5,859
Dividends (912)
Release of 27,875 ESOP shares 283 386
Amortization of unearned compensation 148 148
Exercise of stock options 41
Decrease in unrealized loss on marketable
securities, net of tax 6,212 6,212
----------------------------------------------------
Balance at June 30, 1995 ($1,722) ($1,036) ($307) $128,639
====================================================
Fiscal 1996
Balance at December 31, 1995 ($1,449) ($888) $2,659 $137,036
Net income 5,807
Dividends (936)
Release of 38,226 ESOP shares (c) 362 545
Amortization of unearned compensation 132 132
Exercise of stock options 132
Decrease in unrealized gain on marketable
securities, net of tax (4,219) (4,219)
Issuance and exchange of common stock as a result
of the conversion/reorganization (a) (b) (7,898) 88,924
Assets consolidated from Commonwealth Mutual
Holding Company 100
----------------------------------------------------
Balance at June 30, 1996 ($8,985) ($756) ($1,560) $227,521
====================================================
</TABLE>
- -------------------------------
(a) Includes 3,889,598 Public Bank Shares outstanding at June 14, 1996,
converted into 8,080,538 Exchange Shares based on the 2.0775 exchange
ratio; 9,872,155 shares sold in the subscription and community
offering; and the cancellation of 4,752,000 shares previously held by
Commonwealth Mutual Holding Company.
(b) 8% of the 9,872,155 conversion stock purchased by the ESOP.
(c) 11,344 pre conversion shares released during the quarter ended March 31,
1996; 26,882 post conversion shares released during the quarter ended
June 30, 1996.
The accompanying notes are an integral part of the consolidated financial
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,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
Operating activities:
Net income $5,807 $5,859
Adjustments to reconcile net income to net cash
(used in) provided by operating activities-
Proceeds from loans sold to others 156,473 82,843
Loans originated for sale (106,646) (45,343)
Purchases of loans held for sale (51,674) (54,558)
Principal collection on mortgage loans held for sale 1,178 153
Net gain (loss) on sales of mortgage loans (998) 284
Increase (decrease) in net deferred loan fees 366 (745)
Provision for loan losses and foreclosed real estate 206 402
Net loss (gain) on sales of assets 118 (381)
Depreciation and amortization 1,273 1,288
Net amortization of other assets and liabilities 2,461 1,513
Interest reinvested on repurchase agreements (3,543) (5,294)
Changes in assets and liabilities-
(Increase) Decrease in-
Accrued interest receivable, net (2,107) (881)
Deferred income taxes (282) 3,981
Other assets (2,394) (5,571)
Increase in-
Advances from borrowers for taxes and insurance 7,715 8,525
Accrued interest payable, accrued expenses and other liabilities 27,706 4,105
------------ ------------
Net cash provided by (used in) operating activities $35,659 ($3,820)
------------ ------------
</TABLE>
(continued)
The accompanying notes are an integral part of the consolidated financial
statements.
7
<PAGE> 8
Commonwealth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(In Thousands)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
Investing activities:
Proceeds from maturities of investment securities $18,749 $25,000
Purchases of investment securities (32,894) (1,000)
Purchases of mortgage-backed securities (348,747) (85,472)
Principal collected on mortgage-backed securities 64,469 15,376
Principal collected on loans 64,089 39,232
Loans originated (39,255) (27,027)
Loans purchased (116,802) (51,293)
Sales of real estate acquired through foreclosure 433 1,486
Purchase of FHLB Stock (5,343) (1,035)
Purchases of premises and equipment (1,917) (1,758)
Acquisition of branch 215,440 0
Other 9 (309)
------------ ------------
Net cash used in investing activities (181,769) (86,800)
------------ ------------
Financing activities:
Net increase (decrease) in deposits 30,583 (227)
Proceeds from notes payable and other borrowings 242,815 124,593
Repayment of notes payable and other borrowings (182,500) (51,536)
Issuance of common stock 89,056 0
Cash dividends paid (936) (865)
------------ ------------
Net cash provided by financing activities 179,018 71,965
------------ ------------
Net increase (decrease) in cash and cash equivalents 32,908 (18,655)
Cash and cash equivalents at beginning of period 50,177 45,913
------------ ------------
Cash and cash equivalents at end of period $83,085 $27,258
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for-
Interest $20,821 $17,384
============ ============
Income taxes $3,008 $3,332
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
8
<PAGE> 9
Commonwealth Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary for a fair presentation of Commonwealth Bancorp,
Inc.'s ("Commonwealth" or the "Company") financial condition as of June 30,
1996 and the results of operations, changes in shareholders' equity and cash
flows for the periods presented. The financial data for prior periods is for
Commonwealth Savings Bank ("Bank"). The accompanying unaudited consolidated
financial statements were prepared in accordance with the instructions for Form
10-Q. For further information, refer to the Bank's consolidated financial
statements and footnotes thereto included in the Annual Report on Form 10-K for
the year ended December 31, 1995.
The Company is a Pennsylvania corporation which is the holding company
for the Bank. On June 14, 1996, the Bank completed its reorganization to the
holding company form of ownership as a wholly owned subsidiary of the Company.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Commonwealth; Commonwealth Savings Bank; ComNet Mortgage Services, Inc.
("ComNet"); CFSL Investment Corporation; QME, Inc.; and Firstcor, Ltd. All
significant intercompany transactions and balances have been eliminated in
consolidation. ComNet Mortgage Services, Inc. was liquidated effective July 1,
1996, and is now a division of Commonwealth Savings Bank.
3. Shareholders' Equity
On May 28, 1996, the Board of Directors declared a $0.125 per share cash
dividend for the three months ended June 30, 1996, which was made payable to
shareholders of record at the close of business on June 12, 1996. This
dividend was paid on June 26, 1996. Commonwealth Mutual Holding Company, which
owned 4,752,000 shares, or 55.0%, of the Bank's outstanding common stock,
waived its right to receive the dividend, thereby reducing the dividend paid to
$468,000.
4. New Accounting Pronouncements
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights". The
Company, through ComNet, acquires mortgage servicing rights through both the
purchase and origination of mortgage loans which are sold or securitized,
generally with servicing retained. SFAS No. 122 requires the Company to
allocate the total cost of the mortgage loans to the mortgage servicing rights
and the loans (without mortgage servicing rights) based on their relative fair
values. For the six months ended June 30, 1996, the Company recorded
originated mortgage servicing rights of $1,674,000, net of a $528,000 valuation
allowance.
On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which establishes financial accounting and reporting
standards for stock-based employee compensation plans. The statement
encourages all entities to adopt a new method of accounting to measure
compensation cost of all employee stock
9
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Commonwealth Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
compensation plans based on the estimated fair value of the award at the date
it is granted. Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting. Disclosure is required for the effects on reported results of the
fair value of options granted as it they had been used to measure compensation
cost. Management of the Company has adopted the pro forma method of
disclosure as described above.
5. Other Information
The Company's deposits are insured by the FDIC through the Savings
Association Insurance Fund ("SAIF") and the Company pays the annual insurance
fees of 23 basis points on insured deposits, the lowest rate currently
permitted. The FDIC insures commercial banks and certain savings banks through
the Bank Insurance Fund ("BIF"), which recently lowered their insurance rates
to 0 basis points on insured deposits as the commercial banks have reached the
required capitalization level of $1.25 for each $100 of insured deposits. This
disparity in SAIF and BIF insurance premiums places SAIF insured institutions
at a significant competitive disadvantage.
Legislation has been proposed which would, among other things,
recapitalize the SAIF with a one-time charge on SAIF-insured institutions of at
least approximately $0.85 for every $100 of assessable deposits, and an
eventual merger of the SAIF and the BIF administered by the FDIC. The Company
currently is unable to predict the likelihood of legislation effecting theses
changes, although a consensus among regulators, legislators and bankers appears
to be developing in this regard. If an assessment of $0.85 per $100 of
assessable deposits was effected based on deposits as of March 31, 1995, as
proposed, the Company's pro rata share would amount to approximately $7.14
million.
The Company is a Pennsylvania corporation which is the holding company for
the Bank. The Company was recently organized by the Bank for the purpose of
acquiring all of the capital stock of the Bank in connection with the
conversion of Commonwealth Mutual Holding Company, the former parent mutual
holding company of the Bank, and the reorganization of the Bank to the stock
holding company form, which was completed on June 14, 1996 (the "Conversion and
Reorganization"). In the Conversion and Reorganization, 9,872,155 shares of
common stock of the Company were sold in a subscription and community offering
at $10.00 per share. In addition, 8,080,538 shares of Common Stock of the
Company were issued in exchange for shares of stock of the Bank previously
held by public stockholders at an exchange ration of 2.0775 shares for each
share of Bank common stock, resulting in 17,952,693 shares of common stock of
the Company outstanding.
6. Earnings Per Share
Earnings for the three and six months ended June 30, 1996 were $.33 per
share and $.66 per share, respectively. Earnings per share were computed by
dividing net income for the three and six months ended June 30, 1996 by the
weighted average number of shares of common stock outstanding during the period
of 9,695,017 and 8,862,186 for the three and six months ended June 30, 1996,
respectively. ESOP shares that have not been committed to be released are not
considered outstanding for the computation of earnings per share in accordance
with Statement of Position 93-6, "Employer's Accounting for Employee Stock
Ownership Plans" ("SOP 93-6"). Shares granted but not yet issued under the
Company's stock option plans are considered common stock equivalents for
earnings per share calculations. Earnings per share information is not
comparable for the three and six months ended June 30, 1995 as the Company did
not complete its stock offering until June 14, 1996.
7. Acquisition of Meridian Branches
On June 28, 1996, the Company completed the acquisition of eleven former
branch offices of Meridian Bank located in Berks County (ten offices) and
Lebanon County (one office), Pennsylvania from CoreStates Bank, which were
divested in connection with the merger of Meridian Bank and CoreStates Bank
(the "Branch Acquisition"). In connection
10
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Commonwealth Bancorp, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
with this transaction, the Company assumed approximately $378 million of
deposits and acquired approximately $120 million of single-family residential,
commercial and consumer loans, and acquired approximately $3 million of real
property. In the Branch Acquisition, the Company received approximately $215
million of cash, net of a deposit premium of approximately $40 million.
The Company assigned a portion of the cost of the acquisition to the value
of the core deposit intangible asset acquired of $14.7 million, which is being
amortized on an accelerated basis over approximately 10 years. The excess of
the cost over the identifiable assets acquired less liabilities assumed was
recorded as goodwill, which amounted to $23.4 million, and which is being
amortized on a straight-line basis over approximately 13 years.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL. The Company is a Pennsylvania corporation which is the holding
company for the Bank. Commonwealth Savings Bank is a Federally chartered,
stock savings bank, regulated by the Office of Thrift Supervision. The Bank
conducts business from its executive offices in Malvern, Pennsylvania and, as
of June 30, 1996, 51 full service offices located in eastern Pennsylvania.
ComNet, also located in Malvern, conducts business through loan origination
offices located in Pennsylvania, New Jersey, Connecticut, and Rhode Island.
ComNet also conducts business through its wholesale network, which includes
correspondents in 29 states.
The Company's acquisition of four branches and the related deposits of
Fidelity Federal Savings and Loan Association ("Fidelity Federal") was
completed on July 29, 1995. The branches had deposits totaling $197.4 million
at the time of closing, and a premium of 8.52% of the deposit base was paid by
Commonwealth. The premium was comprised of $3.3 million of core deposit
intangible and $13.8 million of goodwill.
On June 14, 1996, the Company completed its stock offering in connection
with the conversion of Commonwealth Mutual Holding Company, the former parent
mutual holding company of the Bank, and the reorganization of the Bank to the
stock holding company form. In the offering, 9,872,155 shares of common stock
of the Company were sold in a subscription and community offering at $10.00 per
share. In addition, 8,080,538 shares of Common Stock of the Company were
issued in exchange for shares of stock of the Bank previously held by public
stockholders at an exchange ratio of 2.0775 shares for each share of Bank
common stock, resulting in 17,952,693 shares of common stock of the Company
outstanding.
On June 28, 1996, the Company completed the acquisition of eleven former
branch offices of Meridian Bank located in Berks County (ten offices) and
Lebanon County (one office), Pennsylvania from CoreStates Bank, which were
divested in connection with the merger of Meridian Bank and CoreStates Bank
(the "Branch Acquisition"). In connection with this transaction, the Company
assumed approximately $378 million of deposits and acquired approximately $120
million of single-family residential, commercial and consumer loans, and
acquired approximately $3 million of real property. In the Branch Acquisition,
the Company received approximately $215 million of cash, net of a deposit
premium of approximately $40 million.
The Company assigned a portion of the cost of the acquisition to the value
of the core deposit intangible asset acquired of $14.7 million, which is being
amortized on an accelerated basis over approximately 10 years. The excess of
the cost over the identifiable assets acquired less liabilities assumed was
recorded as goodwill, which amounted to $23.4 million, and which is being
amortized on a straight-line basis over approximately 13 years.
FINANCIAL CONDITION
GENERAL. Total assets increased by $593.4 million, or 40.8%, from $1.456
billion at December 31, 1995 to $2.049 billion at June 30, 1996, due to
increases in interest-bearing deposits, investment securities, mortgage-backed
securities, loans receivable, and intangible assets. Total liabilities
increased by $502.9 million, or 38.1%, from $1.319 billion at December 31, 1995
to $1.822 billion at June 30, 1996. This increase was primarily comprised of
increases in deposits, securities sold under agreements to repurchase, and
other liabilities. Shareholders' equity as of June 30, 1996, equaled $227.5
million, compared to $137.0 million at December 31, 1995. This $90.5 million
increase was primarily the result of the $88.9 million of net proceeds received
in the offering in connection with the Conversion and Reorganization , net
income of $5.8 million for the six months ended June 30, 1996, along with a
$4.2 million decrease in the Company's unrealized gain on marketable
securities, net of tax effects.
CASH, INTEREST-BEARING DEPOSITS AND SHORT-TERM INVESTMENTS. ("CASH AND
CASH EQUIVALENTS") Cash and cash equivalents increased by $32.9 million, or
65.6%, for the six months ended June 30, 1996, primarily due to the cash
received by the Company from investors in its second step stock offering and
from the Meridian Branch Acquisition..
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
INVESTMENT SECURITIES. Investment securities increased by $13.6 million,
or 29.1%, for the six months ended June 30, 1996, primarily as a result of the
purchase of U.S. Treasury and government agency securities, which further
diversify the Company's earning assets.
<TABLE>
<CAPTION>
June 30, 1996
-------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury and government
agency securities $ 58,411 $ 126 $ 140 $ 58,397
Mortgage security mutual fund 2,142 0 19 2,123
-------------------------------------------------------------------
$ 60,553 $ 126 $ 159 $ 60,520
===================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury and government
agency securities $ 38,789 $ 474 $ 0 $ 39,263
Corporate bonds 5,498 7 22 5,483
Mortgage security mutual fund 2,077 73 0 2,150
-------------------------------------------------------------------
$ 46,364 $ 554 $ 22 $ 46,896
===================================================================
</TABLE>
Investment securities classified as held to maturity are carried at
amortized cost and are adjusted for amortization of premiums and accretion of
discounts over the life of the related security pursuant to the level-yield
method. Investment securities that are available for sale are reported at fair
value, with unrealized gains and losses excluded from earnings and reported as
a separate component of shareholders' equity.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities increased by $278.4
million, or 60.1%, for the six months ended June 30, 1996 due to a $284.3
million net increase in the balance of mortgage-backed securities and a $5.9
million decrease in the unrealized gain on available for sale mortgage-backed
securities. The Company increased its holdings of mortgage backed securities
during the first six months of 1996 in anticipation of its second step stock
offering and the Meridian Branch Acquisition. Management of the Company chose
to borrow short term funds (See "Borrowing" below) to enable it to selectively
invest the expected proceeds over a period of time, rather than in a bulk
purchase. At June 30, 1996 and December 31, 1995, $492.6 million, or 66.4%,
and $381.9 million, or 82.4%, respectively, of the Company's mortgage-backed
securities were issued or guaranteed by the GNMA, the FHLMC or the FNMA. The
Company's investment in AAA rated CMOs and REMICs increased $168.4 million to
$242.3 million at June 30, 1996, from $73.9 million at December 31, 1995. The
Company's CMOs and REMICs represent 32.7% of the Company's mortgage-backed
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
securities at June 30, 1996, compared to 16.0% at December 31, 1995.
Mortgage-backed securities generally increase the quality of the Company's
assets by virtue of the insurance or guarantees that may back them, are more
liquid than individual mortgage loans, and may be used to collateralize
borrowings or other obligations of the Company. The following table sets forth
the Company's mortgage-backed securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30, 1996
--------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Held to maturity:
GNMA $ 94,668 $ 854 $ 609 $ 94,913
FHLMC 61,424 274 409 61,289
FNMA 93,439 238 2,101 91,576
Private 6,639 0 0 6,639
Other 186 0 0 186
--------------------------------------------------------------------
$ 256,356 $ 1,366 $ 3,119 $ 254,603
====================================================================
Available for sale:
GNMA $ 22,625 $ 1,618 $ 383 $ 23,860
FHLMC 126,261 2,720 247 128,734
CMO and REMIC 248,464 26 6,166 242,324
FNMA 90,366 460 395 90,431
--------------------------------------------------------------------
$ 487,716 $ 4,824 $ 7,191 $ 485,349
====================================================================
</TABLE>
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Held to maturity:
GNMA $ 92,651 $ 3,092 $ 266 $ 95,477
FHLMC 72,141 521 219 72,443
FNMA 79,055 381 487 78,949
Private 7,236 0 0 7,236
Other 247 0 0 247
-------------------------------------------------------------------
$ 251,330 $ 3,994 $ 972 $ 254,352
===================================================================
Available for sale:
GNMA $ 25,144 $ 2,085 $ 354 $ 26,875
FHLMC 62,782 2,940 43 65,679
CMO and REMIC 75,362 38 1,468 73,932
FNMA 45,176 562 201 45,537
-------------------------------------------------------------------
$ 208,464 $ 5,625 $ 2,066 $ 212,023
===================================================================
</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 that are available for sale are reported at
fair value, with unrealized gains and losses excluded from earnings and
reported as a separate component of shareholders' equity.
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
LOANS RECEIVABLE, NET. Loans receivable, net, increased by $214.7
million, or 27.0%, for the six months ended June 30, 1996 due to the $120.3
million loan portfolio acquired from Meridian Bank, the Company's continued
emphasis on building its adjustable rate mortgage, as well as its consumer and
commercial loan portfolios, and the closing of $32.2 million of bulk loan
purchases during the period. The following table depicts the composition of
the Company's loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------------ ------------------
% of % of
Amount Total Amount Total
------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
Single-family residential(1) $759,238 74.46% $655,152 81.09%
Commercial real estate 43,930 4.31 9,386 1.16
--------- ------- --------- -------
Total mortgage loans 803,168 78.77 664,538 82.25
Consumer loans:
Equity lines of credit 51,141 5.02 44,432 5.50
Second mortgage 75,797 7.43 48,653 6.02
Other 40,033 3.93 18,009 2.23
--------- --------- ---------- -------
Total consumer loans 166,971 16.38 111,094 13.75
Commercial loans:
SBA variable rate loans(2) 27,026 2.65 29,472 3.65
Small business loans 22,414 2.20 2,801 0.35
---------- ------- ----------- -------
Total commercial loans 49,440 4.85 32,273 4.00
---------- ------- --------- -------
Total loans receivable 1,019,579 100.00% 807,905 100.00%
---------- ======= ------- =======
Less:
Discount/(Premium) on loans purchased (4,716) 1,004
Allowance for loan losses 9,948 7,485
Deferred loan fees 2,870 2,681
----------- -----------
Loans receivable, net $1,011,477 $796,735
========== ========
</TABLE>
- -----------------------
(1) At June 30, 1996 and December 31, 1995, $445.0 million, or 58.6%, and
$382.2 million, or 58.3%, respectively, of the Company's single-family
residential loans had adjustable interest rates.
(2) Consists entirely of loans which are guaranteed by the SBA (with the
majority adjusting monthly or quarterly).
Total loans originated and purchased by ComNet for the six month period
ended June 30, 1996 were $257.3 million, compared to $155.9 million for the six
month period ended June 30, 1995. This increase of $101.4 million, or 65.0%,
was primarily attributable to interest rate decreases during 1995 and early
1996 which caused the retail and wholesale loan closing volumes to increase
during the first six months of 1996. ComNet's Wholesale Lending Department
originates loans through a network of correspondent brokers in 29 states. All
loans are underwritten under the same criteria as those used for retail
originations. The registered applications and closed loans through the
wholesale network totaled $236.8 million and $136.3 million, respectively,
during the six months ended June 30, 1996.
During 1994, the company expanded its lending capacity to include the
origination of small business commercial loans in order to diversify its loan
portfolio. In addition, on June 28, 1996, the Company acquired $44.0 million
of Meridian Bank's commercial loans in conjunction with its acquisition of the
Meridian branches. As of June 30, 1996, commercial loans (other than SBA
loans) totaled $66.3 million, or 6.5%, of the Company's total loan portfolio
compared to $12.2 million, or 1.5%, at December 31, 1995. At June 30, 1996,
commercial loans were comprised of $22.4 million of small business
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
loans and $43.9 million of commercial real estate loans. At December 31, 1995
commercial loans were comprised of $2.8 million of small business loans and
$9.4 million of commercial real estate loans. Commercial business loans are
generally considered to have a greater risk than single-family residential
mortgage loans because the risk of borrower default is greater and their
collateral is more likely to decline in value and may be more difficult to
liquidate than single-family residences.
NON-PERFORMING ASSETS. The Company's non-performing assets, which primarily
consist of non-accrual loans and real estate acquired through foreclosure
increased by $761,000, or 10.3%, for the six months ended June 30, 1996. At
June 30, 1996, the Company's $8.1 million of non-performing assets amounted to
0.40% of total assets and consisted of $7.0 million of non-accrual loans, $5.3
million of which were single-family residential loans, $708,000 of real estate
owned and a $420,000 deposit (net of a $130,000 reserve) with Nationar, which
is a New York state correspondent bank currently in bankruptcy liquidation.
Commonwealth Savings Bank maintained this deposit with Nationar as a
compensating balance in conjunction with its original Employee Stock Ownership
Plan ("ESOP") loan. At December 31, 1995, the Company's $7.4 million of
non-performing assets represented 0.51% of total assets.
ALLOWANCE FOR LOAN LOSSES. The Company's allowance for loan losses increased
$2.4 million, or 32.0%, to $9.9 million at June 30, 1996, from $7.5 million at
December 31, 1995. The $2.4 million increase in the allowance for loan losses
resulted from the acquisition of the Meridian loans. The allowance was based
upon the Company's review of the Meridian Loans, which were rated and assigned
reserves based upon the Company's normal and customary internal credit rating
standards. The allowance for loan losses is maintained at a level which
management of the Company believes is appropriate after examining the perceived
risks inherent in the Company's loan portfolio. At June 30, 1996, the
Company's allowance for loan losses amounted to 142.2% of total non-performing
loans and 0.98% of total loans held for investment, as compared to 120.9% of
total non-performing loans and 0.93% of total loans held for investment at
December 31, 1995.
INTANGIBLE ASSETS. Intangible assets, which are comprised of the excess of
cost over net assets of association acquired, ("Goodwill") and core deposit
intangibles ("CDI") increased by $37.0 million, or 214.3%, between periods,
primarily due to the Meridian branch purchase. The following table details the
components of intangible assets at the dates indicated.
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
(In Thousands)
<S> <C> <C>
Goodwill (Meridian) $23,394 $ -
CDI (Meridian) 14,739 -
Goodwill (Fidelity Federal) 12,922 13,456
CDI (Fidelity Federal) 2,997 3,162
Goodwill (First Family) 251 661
------- -------
Total $54,303 $17,279
======= =======
</TABLE>
MORTGAGE SERVICING RIGHTS. At June 30, 1996, ComNet's total servicing
portfolio was $1.967 billion, compared to $1.874 billion at December 31, 1995,
representing an increase of $93 million, or 5.0%. At June 30, 1996 and
December 31, 1995, ComNet was servicing $1.347 billion and $1.293 billion,
respectively, of third party loans, as well as $619.7 million and $581.3
million, respectively, of loans held by the Company for investment and sale.
At June 30, 1996 and December 31, 1995, capitalized excess servicing fees, net
of amortization, totaled $3.7 million and $3.8 million,
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
respectively. At the same dates, purchased mortgage servicing rights, net of
amortization, totaled $2.7 million and $3.0 million, respectively. Originated
mortgage servicing rights, which have arisen due to the January 1, 1996
adoption of SFAS 122 (see "New Accounting Pronouncements" in the Notes to
Consolidated Financial Statements), net of the valuation allowance, totaled
$1.1 million at June 30, 1996.
BORROWINGS. The Company's borrowings are primarily comprised of advances
from the Federal Home Loan Bank of Pittsburgh ("FHLB") and securities sold
under agreements to repurchase. FHLB advances decreased by $11.6 million, or
9.6%, to $109.0 million at June 30, 1996 from $120.6 million at December 31,
1995. Repurchase agreements increased by $69.9 million, or 86.2%, to $151.1
million at June 30, 1996 from $81.1 million at December 31, 1995, as management
initiated the investment of anticipated proceeds from the second step
conversion (See "Mortgage-Backed Securities" above). The Company's borrowings
are generally 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 swaps and
caps.
REGULATORY CAPITAL REQUIREMENTS
The following table sets forth the Bank's compliance with applicable
regulatory capital requirements at June 30, 1996.
<TABLE>
<CAPTION>
June 30,1996
------------
(Dollars In Thousands)
<S> <C>
Total shareholders' equity or GAAP capital $ 182,344
Add: Unrealized loss on marketable securities, net of tax 1,511
Less: Intangible Assets (54,303)
---------
Actual regulatory capital 129,552
Plus: OTS tier 2 capital (1) 7,576
---------
Total OTS risk-based capital $ 137,128
============
OTS adjusted total assets $ 1,960,618
============
OTS total risk-weighted assets $ 977,944
============
OTS tangible capital ratio 6.6%
Minimum requirement 1.5%
====
OTS core capital 6.6%
Minimum requirement 3.0% to 5.0% (2)
============
OTS risk-based capital 14.0%
Minimum requirement 8.0%
======
</TABLE>
- -----------------------
(1) For the Bank, tier 2 capital consists entirely of the allowance for loan
losses, which is limited to 1.25% of total risk-weighted assets and excludes
the $2.4 million allowance for loan losses established in connection with the
acquisition of the Meridian Loans, as detailed under regulations of the OTS.
(2) The OTS has indicated that the most highly rated institutions which meet
certain criteria will be required to maintain a ratio of 3%, and all other
institutions will be required to maintain an additional cushion of 100 to 200
basis points. As of June 30, 1996, the Bank had not been advised of any
additional requirements in this regard.
18
<PAGE> 19
Commonwealth Bancorp, Inc. and Subsidiaries
Average Balance Report
<TABLE>
<CAPTION>
Quarter Ended June 30,
----------------------------------- -----------------------------------
1995 1996
----------------------------------- -----------------------------------
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:
Single-family residential $465,028 $9,742 8.40% $682,395 $12,770 7.53%
Commerical 6,892 155 9.02% 16,303 324 7.99%
Consumer loans 104,150 2,554 9.84% 118,540 2,744 9.31%
Commerical business loans 33,544 668 7.99% 30,135 615 8.21%
------ --- ----- ------ --- -----
Total loans 609,614 13,119 8.63% 847,373 16,453 7.81%
------- ------ ----- ------- ------ -----
Loans held for sale 25,039 542 8.68% 50,872 862 6.82%
Mortgage-backed securities 490,729 8,712 7.12% 598,940 10,401 6.98%
Investment securities 65,601 1,015 6.21% 48,283 781 6.51%
Other earning assets(b) 19,742 409 8.31% 43,062 787 7.35%
------ --- ----- ------ --- -----
Total interest-earning assets 1,210,725 23,797 7.88% 1,588,530 29,284 7.41%
--------- ------ ----- --------- ------ -----
Non- interest-earning assets 72,857 104,051
------ ------ --- -----
Total assets $1,283,582 $1,692,581
========== ==========
Interest-bearing liabilities
Deposits:
Demand deposits(c) $389,405 2,741 2.82% $439,976 2,918 2.67%
Passbook savings 126,535 639 2.03% 236,291 1,166 2.10%
Certificates of deposit 346,939 4,431 5.12% 533,740 6,881 5.19%
------- ----- ----- ------- ----- -----
Total deposits 862,879 7,811 3.63% 1,210,007 10,965 3.64%
------- ----- ----- --------- ----- -----
Notes payable and other
borrowings
Repos 193,246 3,042 6.31% 164,074 2,370 5.81%
FHLB Adv. 72,861 1,125 6.19% 126,404 1,781 5.67%
Other Borrwings 1,941 44 9.09% 1,255 24 7.69%
----- -- ----- ----- -- -----
Total borrowings 268,048 4,211 6.30% 291,733 4,175 5.76%
------- ----- ----- ------- ----- -----
Total interest-bearing
liabilities(d) 1,130,927 12,022 4.26% 1,501,740 15,140 4.05%
Non- interest-bearing liabilities 28,249 34,512
------- -------
Total liabilities 1,159,176 1,536,252
Shareholders' Equity 124,406 156,329
------- -------
Total liabilities and equity $1,283,582 $1,692,581
========== ==========
Net interest-earning assets $79,798 $86,790
======= =======
Net interest income/
interest rate spread $11,775 3.62% $14,144 3.36%
======= ===== ======= =====
Net interest margin 3.90% 3.58%
===== =====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 107.06 105.78
====== ======
</TABLE>
<TABLE>
<CAPTION>
Year To Date Ended June 30,
-------------------------------- ---------------------------------
1995 1996
-------------------------------- ---------------------------------
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:
Single-family residential $457,678 $19,054 8.40% $664,487 $25,017 7.57%
Commerical 5,786 260 9.06% 13,306 554 8.37%
Consumer loans 103,187 5,001 9.77% 114,338 5,345 9.40%
Commerical business loans 35,014 1,362 7.84% 30,793 1,152 7.52%
------ ----- ----- ------ ----- -----
Total loans 601,665 25,677 8.61% 822,924 32,068 7.84%
------- ------ ----- ------- ------ -----
Loans held for sale 23,758 980 8.32% 45,457 1,627 7.20%
Mortgage-backed securities 457,607 16,612 7.32% 555,160 19,371 7.02%
Investment securities 71,676 2,184 6.14% 46,340 1,503 6.52%
Other earning assets(b) 18,942 797 8.48% 41,788 1,388 6.68%
------ --- ----- ------ ----- -----
Total interest-earning assets 1,173,648 46,250 7.95% 1,511,669 55,957 7.44%
--------- ------ ----- --------- ------ -----
Non- interest-earning assets 71,526 99,333
------ ------
Total assets $1,245,174 $1,611,002
========== ==========
Interest-bearing liabilities
Deposits:
Demand deposits(c) $391,853 5,457 2.81% $437,223 5,871 2.70%
Passbook savings 128,293 1,294 2.03% 200,759 1,998 2.00%
Certificates of deposit 339,361 8,271 4.91% 525,136 13,636 5.22%
------- ----- ----- ------- ------ -----
Total deposits 859,507 15,022 3.52% 1,163,118 21,505 3.72%
------- ------ ----- --------- ------ -----
Notes payable and other
borrowings
Repos 171,622 5,379 6.32% 152,531 4,579 6.04%
FHLB Adv. 65,290 1,974 6.10% 115,948 3,290 5.71%
Other Borrwings 2,005 89 8.95% 1,809 56 6.23%
----- -- ----- ----- -- -----
Total borrowings 238,917 7,442 6.28% 270,288 7,925 5.90%
------- ----- ----- ------- ----- -----
Total interest-bearing
liabilities(d) 1,098,424 22,464 4.12% 1,433,406 29,430 4.13%
Non- interest-bearing liabilities 25,916 31,015
------ ------
Total liabilities 1,124,340 1,464,421
Shareholders' Equity 120,834 146,581
------- -------
Total liabilities and equity $1,245,174 $1,611,002
========== ==========
Net interest-earning assets $75,224 $78,263
======= =======
Net interest income/
interest rate spread $23,786 3.82% $26,527 3.31%
======= ===== ======= =====
Net interest margin 4.09% 3.53%
===== =====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 106.85 105.46
====== ======
</TABLE>
(a) The avarage balance of loans receivable includes non-performing loans,
interest on which is recognized on a cash basis.
(b) Includes FHLB stock, money market accounts, FHLB deposits and interest
earning Bank deposits.
(c) Includes checking and money market accounts.
(d) Includes interest expense associated with interest rate swaps and interest
rate caps.
(e) Annualized
19
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
COMPARISON OF RESULTS OF OPERATION FOR THE THREE AND SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1995.
GENERAL. Net income increased by $218,000, or 7.4%, to $3.2 million for the
second quarter of 1996, compared to $3.0 million for the second quarter of
1995, primarily due to increases in the Company's net interest income and
noninterest income, which were partially offset by an increase in noninterest
expense. For the six months ended June 30, 1996, net income decreased by
$52,000, or 0.9%, to $5.8 million, compared to the same period in 1995. The
slight decrease in net income was primarily due to an increase in noninterest
expense, which was partially offset by increases in net interest income and
noninterest income.
NET INTEREST INCOME. Net interest income increased by $2.4 million, or 20.1%,
to $14.1 million for the three months ended June 30, 1996, compared to $11.8
million for the same period in 1995. The Company's interest income increased
by $5.5 million, or 23.1%, to $29.3 million for the three months ended June 30,
1996, from $23.8 million in the second quarter of 1995. The increase in
interest income was primarily attributable to a $378 million increase between
quarters in average interest-earning assets, principally single-family
residential mortgage loans and mortgage-backed securities. Partially
offsetting this increase was a 47 basis point decrease in the yield earned on
those assets, resulting from the declining interest rate environment
experienced during 1995 and early 1996. Interest expense increased by $3.1
million between quarters, as average interest-bearing liabilities grew by $371
million. The increased balances were primarily the result of deposits assumed
during the Fidelity Federal acquisition and the growth of supermarket branch
deposits. This volume-generated increase in interest expense was partially
offset by a 21 basis point drop in the rate paid on interest-bearing
liabilities, related to the above mentioned falling interest rate environment.
For the six months ended June 30, 1996, net interest income totaled $26.5
million, an increase of $2.7 million, or 11.5%, compared to the first six
months of 1995. Interest income for the first half of 1996 compared to the
same period in 1995 increased by $9.7 million, or 21.0%. The increase in
interest income was primarily attributable to a $338 million increase in
average interest-earning assets compared to the 1995 period. This $338 million
increase in assets consisted mainly of single-family residential mortgage loans
and mortgage-backed securities of $207 million and $98 million, respectively,
which primarily resulted from the investment of funds acquired from the
Fidelity Federal branch purchase. Partially offsetting the volume-generated
increase in interest income was a 51 basis point decline in the Company's
return on interest-earning assets, as market rates decreased during 1995 and
early 1996. Offsetting the increase in interest income of $9.7 million was an
increase in interest expense of $7.0 million, or 31.0%, between periods. The
increase in interest expense during the first six months of 1996, compared to
1995, was caused by a combination of higher balances of average
interest-bearing liabilities, primarily certificates of deposit assumed as a
result of the Fidelity Federal acquisition, along with an increase in rates
paid on those deposits. For the three and six month periods ended June 30,
1996, the Company's net interest margin was 3.58% and 3.53%, respectively, as
compared to 3.90% and 4.09%, respectively, for the same periods in 1995.
NONINTEREST INCOME. For the three and six month periods ended June 30, 1996,
the Company recorded noninterest income of $3.0 million and $6.4 million,
respectively, as compared to $2.7 million and $5.1 million, respectively, for
the same periods in 1995. The $299,000, or 11.0%, increase between quarters
and the $1.3 million, or 25.6%, increase between the six month periods ended
June 30, 1996 and 1995 was primarily attributable to the Company's January 1,
1996 implementation of Statement of Financial Accounting Standard ("SFAS") No.
122, "Accounting for Mortgage Servicing Rights". The capitalization of
mortgage servicing rights in the second quarter of 1996 and for the six month
period ended June 30, 1996, resulted in additional gains on the sales of
mortgage loans of $660,000 and $1.2 million, respectively. Also, deposit fee
income increased between periods, primarily due to the acquisition of the four
Fidelity Federal branches in July of 1995, and other fee income increased as a
result of increased sales of mutual funds and annuities offered to our
customers through an agreement with a third party licensed marketer of these
services. Offsetting the increased net gain on the sales of mortgage loans and
fee income were substantial gains from the sale of nonperforming real estate
during the first six months of 1995, which were not repeated in 1996.
NONINTEREST EXPENSE. Noninterest expense totaled $12.2 million and $23.9
million for the three and six month periods ended June 30, 1996, respectively,
representing an increase of $2.3 million, or 23.5%, and $4.0 million, or 20.3%,
from the
20
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
prior comparable periods, respectively. The increases in compensation and
employee benefits, occupancy, FDIC insurance, the amortization of intangible
assets, and other operating expenses were primarily attributable to the
acquisition of the four Fidelity Federal branches, the increased cost
associated with the growth of the supermarket branch network, a new traditional
branch office opened in Royersford, Pennsylvania in January of 1996, and the
expansion of the Company's small business lending capability.
21
<PAGE> 22
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.
In August 1995, Commonwealth Savings Bank (the "Bank")
commenced litigation against the United States in the U.S. Court of
Federal Claims (the "Claims Court") seeking to recover the value of
its supervisory goodwill. The suit alleges that the treatment of
such goodwill mandated by the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA") constitutes a breach of
contract between the Bank and the United States and an unlawful
taking of property by the United States without just compensation or
due process in violation of the U.S. Constitution. The suit emanates
from the Bank's acquisition of First Family Federal Savings and Loan
Association of Lansdale, Pennsylvania in 1982 pursuant to which
government agreed to the use of the purchase method of accounting
under generally accepted accounting principles and the recording of
approximately $61 million of goodwill as an asset resulting from the
voluntary supervisory merger (there was no financial assistance from
the Federal Savings and Loan Insurance Corporation). Since the
enactment of FIRREA numerous suits have been filed on behalf of
thrift institutions and their holding companies alleging similar
theories for breach of contract.
In the past several years, the Claims Court, the United States
Court of Appeals for the Federal Circuit, and the United States
Supreme Court have handed down decisions relating to the liability
portion of the breach of contract claims brought by three other
thrift institutions. On July 1, 1996, the United States Supreme
Court ruled in the consolidated cases (United States v. Winstar
Corporation) and determined that when Congress adopted the accounting
changes to supervisory goodwill specified in FIRREA, the government
became responsible for any breaches to its original agreements with
the institutions regarding the accounting rules. The Supreme Court's
decision in the Winstar case was based upon the specific facts of
each of the three consolidated cases and, accordingly, the Claims
Court may determine that the Bank's claims involve sufficiently
different facts and/or legal issues as to render the Winstar case
inapplicable to the litigation and thereby result in a different
conclusion from that of the Winstar case. Moreover, the damages
portion of the claims presented by the Winstar plaintiff thrift
institutions remains to be litigated and could take several years to
resolve. There can be no assurance that the Bank will prevail in its
action and that if it does prevail that the Claims Court will find
that the Bank is entitled to any substantial amount of damages.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
a) Not applicable.
b) On April 16, 1996, the Company filed a Current Report on Form 8-K
to report under Item 5, the execution of an agreement on April 5,
1996 to acquire eleven branch offices from CoreStates Bank being
divested in connection with CoreStates acquisition of Meridian
Bank.
22
<PAGE> 23
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 8, 1996 /s/ Charles H. Meacham
-----------------------------------------
Charles H. Meacham
Chairman and Chief Executive Officer
(Principal Executive Officer)
DATE: August 8, 1996 /s/ Patrick J. Ward
-----------------------------------------
Patrick J. Ward
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
23
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