<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended....................................September 30, 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 November 5, 1996,
there were issued and outstanding 17,953,361 shares of the Registrant's
Common Stock.
<PAGE>
Commonwealth Bancorp, Inc. and Subsidiaries
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
No. No.
- ---- ----
<C> <S> <C>
PART I - CONSOLIDATED FINANCIAL INFORMATION
1 Consolidated Financial Statements
Consolidated Balance Sheets at September 30, 1996 and
December 31, 1995 3
Consolidated Statements of Income for the Three and Nine
Month Periods Ended September 30, 1996 and 1995 5
Consolidated Statements of Changes in Shareholders' Equity
for the Nine Month Periods Ended September 30, 1996 and 1995 6
Consolidated Statements of Cash Flows for the Nine Month
Periods Ended September 30, 1996 and 1995 7
Notes to Consolidated Financial Statements 9
2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II - OTHER INFORMATION
1 Legal Proceedings 21
2 Changes in Securities 21
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>
Commonwealth Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands)
Assets
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
Cash and due from banks $ 49,981 $ 31,994
Interest-bearing deposits 3,042 7,637
Short-term investments available for sale 5,191 10,546
Mortgage loans held for sale 16,211 26,001
Investment securities
Securities available for sale(cost of $60,616
and $46,364, respectively), at market value 60,777 46,896
Mortgage-backed securities
Securities held to maturity(market value of $245,324
and $254,352, respectively), at cost 245,927 251,330
Securities available for sale(cost of $530,912
and $208,464, respectively), at market value 530,453 212,023
Loans receivable, net 1,044,772 796,735
Accrued interest receivable 12,547 9,060
FHLB stock, at cost 11,159 8,912
Premises and equipment, net 25,238 20,687
Intangible assets 52,850 17,279
Mortgage servicing rights 7,476 6,855
Other assets, including net deferred taxes of $3,396 and
$1,579, respectively 19,298 9,745
---------- ----------
Total assets $2,084,922 $1,455,700
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
3
<PAGE>
Commonwealth Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands)
Liabilities and Shareholders' Equity
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
Liabilities:
Deposits $1,466,387 $1,076,549
Notes payable and other borrowings
Secured notes due to Federal Home Loan Bank
of Pittsburgh 187,500 120,614
Securities sold under agreements to repurchase 151,701 81,112
Other borrowings 0 1,554
Advances from borrowers for taxes and insurance 15,250 25,797
Accrued interest payable, accrued expenses and
other liabilities 36,644 13,038
---------- ----------
Total liabilities 1,857,482 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; 17,953,361 and 8,628,884 issued
at September 30, 1996 and December 31, 1995, respectively 1,795 863
Additional paid-in capital 132,849 36,686
Retained earnings 102,445 99,165
Unearned ESOP compensation (8,755) (1,449)
Unearned MRP compensation (699) (888)
Unrealized (loss) gain on marketable securities, net of tax (195) 2,659
---------- ----------
Total shareholders' equity 227,440 137,036
---------- ----------
Total liabilities and shareholders' equity $2,084,922 $1,455,700
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
4
<PAGE>
Commonwealth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
(In Thousands, except Per Share Data)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
---------- ------- ---------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $20,208 $15,040 $53,903 $41,697
Interest and dividends on deposits and money
market investments 870 493 2,258 1,290
Interest on investment securities 991 781 2,494 2,965
Interest on mortgage-backed securities 12,707 8,870 32,078 25,482
---------- ------ ---------- ------
Total interest income 34,776 25,184 90,733 71,434
Interest expense:
Interest on deposits 13,759 10,006 35,264 25,028
Interest on notes payable and other borrowings 4,225 3,285 12,150 10,727
---------- ------ ---------- ------
Total interest expense 17,984 13,291 47,414 35,755
---------- ------ ---------- ------
Net interest income 16,792 11,893 43,319 35,679
Provision for loan losses 201 162 301 238
---------- ------ ---------- ------
Net interest income after provision for loan losses 16,591 11,731 43,018 35,441
Noninterest income:
Deposit fees and related income 1,461 1,014 3,667 2,847
Servicing fees 1,323 1,397 3,950 4,138
Net gain (loss) on sales of mortgage loans 487 109 1,485 (175)
Net (loss) gain on sales of foreclosed real estate (78) 462 (204) 860
Other 1,519 749 2,234 1,173
---------- ------ ---------- ------
Total noninterest income 4,712 3,731 11,132 8,843
---------- ------ ---------- ------
Noninterest expense:
Compensation and employee benefits 6,952 5,403 18,618 15,402
Occupancy and office operations 2,348 1,850 6,279 5,408
FDIC premium 7,455 567 8,716 1,557
Advertising and promotion 560 355 1,296 1,190
Amortization of intangible assets 1,723 467 2,860 1,051
Other 3,367 2,547 8,518 6,427
---------- ------ ---------- ------
Total noninterest expense 22,405 11,189 46,287 31,035
---------- ------ ---------- ------
(Loss) income before income taxes (1,102) 4,273 7,863 13,249
Income tax (benefit) provision (423) 1,531 2,735 4,648
---------- ------ ---------- ------
Net (loss) income ($679) $2,742 $5,128 $8,601
---------- ------ ---------- ------
---------- ------ ---------- ------
Weighted-average number of shares outstanding 17,124,366 N/A 11,603,803 N/A
---------- ------ ---------- ------
---------- ------ ---------- ------
Earnings per share (1) ($0.04) N/A $0.44 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
<PAGE>
Commonwealth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Unrealized
Common Additional Unearned Unearned Gain/(Loss)
Shares Common Paid-In Retained ESOP MRP On Marketable
Outstanding Stock Capital Earnings Compensation Compensation Securities, net Total
----------- ------ ---------- -------- ------------ ------------ --------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fiscal 1995
Balance at December 31, 1994 8,600 $860 $36,016 $89,737 ($2,005) ($1,184) ($6,519) $116,905
Net income 8,601 8,601
Dividends (1,369) (1,369)
Release of 43,645 ESOP shares 214 420 634
Amortization of unearned
compensation 222 222
Exercise of stock options 7 1 67 68
Decrease in unrealized loss on
marketable securities,
net of tax 7,892 7,892
------ ------ -------- -------- -------- -------- -------- --------
Balance at September 30, 1995 8,607 $861 $36,297 $96,969 ($1,585) ($962) $1,373 $132,953
------ ------ -------- -------- -------- -------- -------- --------
------ ------ -------- -------- -------- -------- -------- --------
Fiscal 1996
Balance at December 31, 1995 8,629 $863 $36,686 $99,165 ($1,449) ($888) $2,659 $137,036
Net income 5,128 5,128
Dividends (1,948) (1,948)
Release of 64,460 ESOP shares (c) 239 592 831
Amortization of unearned
compensation 189 189
Exercise of stock options 13 1 133 134
Decrease in unrealized gain on
marketable securities,
net of tax (2,854) (2,854)
Issuance and exchange of common
stock as a result of the
conversion/reorganization
(a) (b) 9,311 931 95,791 (7,898) 88,824
Assets consolidated from
Commonwealth Mutual Holding
Company 100 100
------ ------ -------- -------- -------- -------- -------- --------
Balance at September 30, 1996 17,953 $1,795 $132,849 $102,445 ($8,755) ($699) ($195) $227,440
------ ------ -------- -------- -------- -------- -------- --------
------ ------ -------- -------- -------- -------- -------- --------
</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; 52,468 post-conversion shares released during the six months ended
September 30, 1996.
The accompanying notes are an integral part
of the consolidated financial statements.
6
<PAGE>
Commonwealth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1996 1995
-------- --------
(Unaudited)
<S> <C> <C>
Operating activities:
Net income $5,128 $8,601
Adjustments to reconcile net income to net cash
provided by (used in) operating activities-
Proceeds from loans sold to others 217,864 208,246
Loans originated for sale (138,804) (89,682)
Purchases of loans held for sale (73,729) (131,652)
Principal collection on mortgage loans held for sale 3,721 1,835
Net (gain) loss on sales of mortgage loans (1,485) 175
Increase (decrease) in net deferred loan fees 396 (968)
Provision for loan losses and foreclosed real estate 561 621
Net loss (gain) on sales of assets 204 (1,406)
Depreciation and amortization 2,194 1,475
Net amortization of other assets and liabilities 4,855 2,573
Interest reinvested on repurchase agreements (5,318) (7,232)
Changes in assets and liabilities-
(Increase) Decrease in-
Accrued interest receivable, net (2,708) (2,222)
Deferred income taxes (282) 4,886
Other assets (7,587) (9,172)
(Decrease) Increase in-
Advances from borrowers for taxes and insurance (10,547) (5,155)
Accrued interest payable, accrued expenses and other liabilities 21,130 9,207
------- -------
Net cash provided by (used in) operating activities $15,593 ($9,870)
------- -------
</TABLE>
(continued)
The accompanying notes are an integral part
of the consolidated financial statements.
7
<PAGE>
Commonwealth Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(In Thousands)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1996 1995
-------- --------
(Unaudited)
<S> <C> <C>
Investing activities:
Proceeds from maturities of investment securities $18,749 $40,000
Purchases of investment securities (32,894) (11,028)
Purchases of mortgage-backed securities (412,676) (85,472)
Principal collected on mortgage-backed securities 95,632 39,364
Principal collected on loans 89,296 76,492
Loans originated (63,328) (65,562)
Loans purchased (152,440) (179,253)
Sales of real estate acquired through foreclosure 433 2,939
Purchase of FHLB Stock (5,343) (1,035)
Sale of FHLB Stock 3,096 0
Purchases of premises and equipment (3,718) (3,273)
Acquisition of branches 215,170 178,952
Other 5 926
------- -------
Net cash used in investing activities (248,018) (6,950)
------- -------
Financing activities:
Net increase in deposits 12,213 7,338
Proceeds from notes payable and other borrowings 362,162 281,794
Repayment of notes payable and other borrowings (220,923) (277,909)
Issuance of common stock 88,958 68
Cash dividends paid (1,948) (1,347)
------- -------
Net cash provided by financing activities 240,462 9,944
------- -------
Net increase (decrease) in cash and cash equivalents 8,037 (6,876)
Cash and cash equivalents at beginning of period 50,177 45,913
------- -------
Cash and cash equivalents at end of period $58,214 $39,037
------- -------
------- -------
Supplemental disclosures of cash flow information:
Cash paid during the year for-
Interest $35,185 $25,425
------- -------
------- -------
Income taxes $4,266 $4,832
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
8
<PAGE>
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
September 30, 1996 and the results of operations, changes in shareholders'
equity and cash flows for the periods presented. The financial data for
periods prior to June 14, 1996 is for Commonwealth Savings Bank ("Bank").
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 and
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 Bank's consolidated financial statements and footnotes thereto
included in the Bank's Annual Report on Form 10-K for the year ended December
31, 1995. Certain items in the 1995 financial statements have been
reclassified in order to conform with the 1996 financial statement
presentation.
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. Headquartered in Valley Forge, PA, Commonwealth Savings Bank has
offices located in Berks, Bucks, Chester, Delaware, Lebanon, Lehigh,
Montgomery, and Philadelphia Counties. ComNet Mortgage Services, a division
of the Bank, has branches in Pennsylvania, New Jersey and Rhode Island.
2. Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts
of Commonwealth; Commonwealth Savings Bank; Commonwealth Investment
Corporation; CFSL Investment Corporation; QME, Inc.; and Firstcor, Ltd. All
significant intercompany transactions and balances have been eliminated in
consolidation. ComNet Mortgage Services, Inc., formerly a wholly-owned
subsidiary of the Bank, was liquidated effective July 1, 1996, and is now a
division of Commonwealth Savings Bank.
3. Shareholders' Equity
--------------------
On September 24, 1996, the Board of Directors declared a $0.06 per share
cash dividend for the three months ended September 30, 1996, which was made
payable to shareholders of record at the close of business on October 4,
1996. This dividend was paid on October 18, 1996.
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 nine months ended September 30, 1996, the
Company recorded originated mortgage servicing rights of $2.3 million, net of
a $721,000 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
<PAGE>
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
-----------------
Legislation was enacted on September 30, 1996 to recapitalize the SAIF
with a one-time charge on SAIF-insured institutions of $0.657 for every $100
of assessable deposits, and an eventual merger of the SAIF and the BIF
administered by the FDIC. The Company's pro rata share of the special
assessment on SAIF assessable deposits held as of March 31, 1995 was $6.8
million, pre-tax. Since the law was enacted on September 30, 1996, the
special assessment was accrued in the quarter ending on that date.
The Company is a Pennsylvania corporation which is the holding company
for the Bank. The Company was 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 nine months ended September 30, 1996 were
($0.04) per share and $0.44 per share, respectively. Earnings per share were
computed by dividing net income for the three and nine months ended September
30, 1996 by the weighted average number of shares of common stock
outstanding during the period of 17,124,366 and 11,603,803 for the three and
nine months ended September 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 nine months ended September 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 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. This amount, which totaled $23.4 million,
is being amortized on a straight-line basis over approximately 13 years.
10
<PAGE>
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 September 30, 1996, 51 full service offices located in eastern
Pennsylvania. ComNet Mortgage Services, a division of the Bank, also
located in Malvern, conducts business through loan origination offices
located in Pennsylvania, New Jersey 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. This amount, which totaled $23.4 million, is being amortized on a
straight-line basis over approximately 13 years.
The deposits of the Bank are insured by the Savings Association Insurance
Fund ("SAIF") which is administered by the FDIC. The FDIC also administers
the Bank Insurance Fund ("BIF") which generally provides insurance for
commercial bank deposits. Each of the SAIF and the BIF are required by law
to attain and maintain a reserve ratio of 1.25% of insured deposits. As the
result of the BIF achieving a fully funded status, the FDIC promulgated a
regulation in November 1995, which reduced deposit premiums paid by
BIF-insured banks in the lowest risk category from 27 basis points to zero
(subject to an annual minimum of $2,000). On September 30, 1996,
legislation was enacted into law to recapitalize the SAIF through a one-time
special assessment on SAIF-insured deposits as of March 31, 1995. The
special assessment amounted to approximately $4.5 billion or approximately
$.65 for every $100 of assessable deposits. The Bank's assessment amounted
to $6.8 million ($4.5 million, net of income tax benefit). As a result of
the special assessment, it is anticipated that the Bank's deposit insurance
premiums will decrease from the current rate of $0.23 per $100 of deposits to
approximately $0.06 per $100 of deposits.
On October 23, 1996, the Company signed a letter of intent to sell its
headquarters building. This sale is expected to close in the first quarter
of 1997 resulting in an estimated after-tax gain of approximately $1million.
The Bank will be relocating its headquarters from the Great Valley Corporate
Center in Chester County to downtown Norristown, PA, which is the County seat
of Montgomery County. The move is anticipated to result in annual cost
savings for the Company (exclusive of certain costs associated with the
relocation which will be expensed in the first quarter of 1997) and provide
increased business opportunities by centering its operations in the county
seat of an economically strong and diverse county.
11
<PAGE>
FINANCIAL CONDITION
- -------------------
GENERAL. Total assets increased by $629.2 million, or 43.2%, from
$1.456 billion at December 31, 1995 to $2.085 billion at September 30, 1996,
due to increases in cash and due from banks, investment securities,
mortgage-backed securities, loans receivable, and intangible assets. Total
liabilities increased by $538.9 million, or 40.9%, from $1.319 billion at
December 31, 1995 to $1.857 billion at September 30, 1996. This increase was
primarily comprised of increases in deposits, secured notes due to the FHLB
of Pittsburgh, securities sold under agreements to repurchase, and other
liabilities. Shareholders' equity as of September 30, 1996, equaled $227.4
million, compared to $137.0 million at December 31, 1995. This $90.4 million
increase was primarily the result of the $88.8 million of net proceeds
received in the offering in connection with the Conversion and
Reorganization, net income of $5.1 million for the nine months ended
September 30, 1996, along with a $2.9 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 $8.0 million, or
16.0%, for the nine months ended September 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.
INVESTMENT SECURITIES. Investment securities increased by $13.9
million, or 29.6%, for the nine months ended September 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>
September 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 $58,438 $175 $ 0 $58,613
Mortgage security mutual fund 2,178 0 14 2,164
--------------------------------------------------
$60,616 $175 $14 $60,777
--------------------------------------------------
--------------------------------------------------
</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>
12
<PAGE>
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
$313.0 million, or 67.6%, for the nine months ended September 30, 1996 due to
a $317.0 million net increase in the balance of mortgage-backed securities
and a $4.0 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 nine months of 1996 through the
investment of excess cash generated by its secondary stock offering in June
and the Meridian Branch Acquisition. At September 30, 1996 and December 31,
1995, $472.3 million, or 60.8%, 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 $223.6 million to $297.5 million at September 30, 1996,
from $73.9 million at December 31, 1995. The Company's CMOs and REMICs
represent 38.3% of the Company's mortgage-backed securities at September 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>
September 30, 1996
---------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Held to maturity:
GNMA $ 91,993 $1,225 $ 353 $ 92,865
FHLMC 57,386 372 167 57,591
FNMA 89,995 294 1,974 88,315
Private 6,372 0 0 6,372
Other 181 0 0 181
---------------------------------------------------
$245,927 $1,891 $2,494 $245,324
---------------------------------------------------
---------------------------------------------------
Available for sale:
GNMA $ 21,445 $1,517 $ 357 $ 22,605
FHLMC 121,110 2,348 327 123,131
CMO and REMIC 300,819 210 3,513 297,516
FNMA 87,538 378 715 87,201
---------------------------------------------------
$530,912 $4,453 $4,912 $530,453
---------------------------------------------------
---------------------------------------------------
</TABLE>
13
<PAGE>
<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.
14
<PAGE>
LOANS RECEIVABLE, NET. Loans receivable, net, increased by $248.0
million, or 31.1%, for the nine months ended September 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>
September 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) $ 794,749 75.42% $655,152 81.09%
Commercial real estate 41,462 3.94 9,386 1.16
---------- ------ -------- ------
Total mortgage loans 836,211 79.36 664,538 82.25
Consumer loans:
Equity lines of credit 50,347 4.78 44,432 5.50
Second mortgage 75,332 7.15 48,653 6.02
Other 43,126 4.09 18,009 2.23
---------- ------ -------- ------
Total consumer loans 168,805 16.02 111,094 13.75
Commercial loans:
SBA variable rate loans(2) 26,011 2.47 29,472 3.65
Small business loans 22,621 2.15 2,801 0.35
---------- ------ -------- ------
Total commercial loans 48,632 4.62 32,273 4.00
---------- ------ -------- ------
Total loans receivable 1,053,648 100.00% 807,905 100.00%
---------- ------ -------- ------
---------- ------ -------- ------
Less:
(Premium)/Discount on loans purchased (4,072) 1,004
Allowance for loan losses 10,082 7,485
Deferred loan fees 2,866 2,681
---------- --------
Loans receivable, net $1,044,772 $796,735
---------- --------
---------- --------
</TABLE>
- ----------
(1) At September 30, 1996 and December 31, 1995, $482.1 million, or 60.7%,
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 increased $6.4 million,
or 1.8%, to $371.3 million for the nine month period ended September 30,
1996, compared to $364.9 million for the nine month period ended September
30, 1995. 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 $300.0 million and $194.0 million, respectively, during the nine
months ended September 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 commercial loans in conjunction with its acquisition of the
Meridian branches. As of September 30, 1996, commercial loans (other than
SBA loans) totaled $64.1 million, or 6.1%, of the Company's total loan
portfolio compared to $12.2 million, or 1.5%, at December 31, 1995. At
September 30, 1996, commercial loans were comprised of $22.6 million of small
business loans and $41.5 million of commercial real estate loans. At
December 31, 1995 commercial loans were comprised
15
<PAGE>
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 $1.3 million, or 17.0%, for the nine months ended
September 30, 1996. At September 30, 1996, the Company's $8.6 million of
non-performing assets amounted to 0.41% of total assets and consisted of
$7.0 million of non-accrual loans, $4.6 million of which were single-family
residential loans, $1.4 million of real estate owned and a net deposit of
$188,000 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 $2.6 million, or 34.7%, to $10.1 million at September 30, 1996,
from $7.5 million at December 31, 1995. The $2.6 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 September 30, 1996, the Company's allowance for loan
losses amounted to 143.39% of total non-performing loans and 0.96% 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 the association acquired, ("Goodwill") and core
deposit intangibles ("CDI") increased by $35.6 million, or 205.86%, between
periods, primarily due to the Meridian branch purchase. The following table
details the components of intangible assets at the dates indicated.
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
(In Thousands)
<S> <C> <C>
Goodwill (Meridian) $23,198 $ --
CDI (Meridian) 13,969 --
Goodwill (Fidelity Federal) 12,665 13,456
CDI (Fidelity Federal) 2,914 3,162
Goodwill (First Family) 104 661
------- -------
Total $52,850 $17,279
------- -------
------- -------
</TABLE>
MORTGAGE SERVICING RIGHTS. At September 30, 1996, ComNet's total
servicing portfolio was $2.067 billion, compared to $1.874 billion at
December 31, 1995, representing an increase of $192.6 million, or 10.3% .
At September 30, 1996 and December 31, 1995, ComNet was servicing $1.341
billion and $1.293 billion, respectively, of third party loans, as well as
$726.0 million and $581.3 million, respectively, of loans held by the Company
for investment and sale.
16
<PAGE>
At September 30, 1996 and December 31, 1995, capitalized excess servicing
fees, net of amortization, totaled $3.7 million and $3.8 million,
respectively. At the same dates, purchased mortgage servicing rights, net of
amortization, totaled $2.3 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 $1.5 million at September 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 increased by $66.9 million, or
55.5% to $187.5 million at September 30, 1996 from $120.6 million at December
31, 1995. Repurchase agreements increased by $70.6 million, or 87.0%, to
$151.7 million at September 30, 1996 from $81.1 million at December 31,
1995. 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 September 30, 1996.
<TABLE>
<CAPTION>
September 30,1996
-----------------
(Dollars In Thousands)
<S> <C>
Total shareholders' equity or GAAP capital $ 181,787
Add: Unrealized loss on marketable securities,
net of tax 179
Less: Intangible Assets (52,850)
----------
Actual regulatory capital 129,116
Plus: OTS tier 2 capital (1) 7,897
----------
Total OTS risk-based capital $ 137,013
----------
----------
OTS adjusted total assets $1,991,579
----------
----------
OTS total risk-weighted assets $1,007,114
----------
----------
OTS tangible capital ratio 6.5%
Minimum requirement 1.5%
---
---
OTS core capital 6.5%
Minimum requirement 3.0% to 5.0%(2)
-----------
-----------
OTS risk-based capital 13.6%
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.
(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 September 30,
1996, the Bank had not been advised of any additional requirements
in this regard.
17
<PAGE>
Commonwealth Bancorp, Inc. and Subsidiaries
Average Balance Report
<TABLE>
<CAPTION>
Quarter Ended September 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 $ 510,583 $10,199 7.92% $ 753,563 $14,262 7.53%
Commerical 7,799 175 8.90% 42,099 785 7.42%
Consumer loans 105,815 2,605 9.77% 165,670 3,569 8.57%
Commerical business loans 32,904 662 7.98% 46,467 906 7.76%
---------- ------- ------ ---------- ------- ------
Total loans 657,101 13,641 8.24% 1,007,799 19,522 7.71%
---------- ------- ------ ---------- ------- ------
Loans held for sale 68,831 1,399 8.06% 36,062 686 7.57%
Mortgage-backed securities 499,773 8,870 7.04% 739,056 12,707 6.84%
Investment securities 48,399 781 6.40% 71,835 991 5.49%
Other earning assets(b) 23,528 493 8.31% 39,851 870 8.69%
---------- ------- ------ ---------- ------- ------
Total interest-earning assets 1,297,632 25,184 7.70% 1,894,603 34,776 7.30%
---------- ------- ------ ---------- ------- ------
Non-interest-earning assets 85,438 155,662
---------- ----------
Total assets $1,383,070 $2,050,265
---------- ----------
---------- ----------
Interest-bearing liabilities
Deposits:
Demand deposits(c) $ 406,842 2,810 2.74% $ 522,157 3,138 2.39%
Passbook savings 144,456 759 2.08% 290,101 1,593 2.10%
Certificates of deposit 465,646 6,437 5.48% 682,668 9,028 5.26%
---------- ------- ------ ---------- ------- ------
Total deposits 1,016,944 10,006 3.90% 1,494,926 13,759 3.66%
---------- ------- ------ ---------- ------- ------
Notes payable and other borrowings
Repos 140,277 2,224 6.29% 155,466 2,321 5.94%
FHLB Advances 65,951 1,019 6.13% 135,043 1,904 5.61%
Other Borrwings 1,810 42 9.21% 0 0 0.00%
---------- ------- ------ ---------- ------- ------
Total borrowings 208,038 3,285 6.26% 290,509 4,225 5.79%
---------- ------- ------ ---------- ------- ------
Total interest-bearing liabilities(d) 1,224,982 13,291 4.30% 1,785,435 17,984 4.01%
------ ------
Non-interest-bearing liabilities 28,897 36,854
---------- ----------
Total liabilities 1,253,879 1,822,289
Shareholders' Equity 129,191 227,976
---------- ----------
Total liabilities and equity $1,383,070 $2,050,265
---------- ----------
---------- ----------
Net interest-earning assets $ 72,650 $ 109,168
---------- ----------
---------- ----------
Net interest income/interest rate spread $11,893 3.40% $16,792 3.29%
------- ------ ------- ------
------- ------ ------- ------
Net interest margin 3.64% 3.53%
------ ------
------ ------
Ratio of average interest-earning
assets to average interest-bearing
liabilities 105.93 106.11
------ ------
------ ------
</TABLE>
<TABLE>
<CAPTION>
Year To Date Ended September 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 $ 475,507 $29,253 8.23% $ 694,396 $39,278 7.56%
Commerical 6,465 435 9.00% 22,974 1,339 7.79%
Consumer loans 104,072 7,606 9.77% 131,600 8,914 9.05%
Commerical business loans 34,303 2,024 7.89% 36,071 2,059 7.62%
---------- ------- ------ ---------- ------- ------
Total loans 620,347 39,318 8.47% 885,041 51,590 7.79%
---------- ------- ------ ---------- ------- ------
Loans held for sale 38,947 2,379 8.17% 42,302 2,313 7.30%
Mortgage-backed securities 471,817 25,482 7.22% 616,906 32,078 6.95%
Investment securities 63,832 2,965 6.21% 61,679 2,494 5.40%
Other earning assets(b) 27,950 1,290 6.17% 34,358 2,258 8.78%
---------- ------- ------ ---------- ------- ------
Total interest-earning assets 1,222,893 71,434 7.81% 1,640,286 90,733 7.39%
---------- ------- ------ ---------- ------- ------
Non-interest-earning assets 68,752 118,249
---------- ----------
Total assets $1,291,645 $1,758,535
---------- ----------
---------- ----------
Interest-bearing liabilities
Deposits:
Demand deposits(c) $ 396,932 8,267 2.78% $ 465,719 9,008 2.58%
Passbook savings 133,711 2,053 2.05% 230,757 3,591 2.08%
Certificates of deposit 381,919 14,708 5.15% 578,053 22,665 5.24%
---------- ------- ------ ---------- ------- ------
Total deposits 912,562 25,028 3.67% 1,274,529 35,264 3.70%
---------- ------- ------ ---------- ------- ------
Notes payable and other borrowings
Repos 161,059 7,603 6.31% 153,940 6,899 5.99%
FHLB Advances 65,513 2,993 6.11% 122,360 5,194 5.67%
Other Borrwings 1,940 131 9.03% 899 57 8.47%
---------- ------- ------ ---------- ------- ------
Total borrowings 228,512 10,727 6.28% 277,199 12,150 5.85%
---------- ------- ------ ---------- ------- ------
Total interest-bearing liabilities(d) 1,141,074 35,755 4.19% 1,551,728 47,414 4.08%
------ ------
Non-interest-bearing liabilities 26,921 32,897
---------- ----------
Total liabilities 1,167,995 1,584,625
Shareholders' Equity 123,650 173,910
---------- ----------
Total liabilities and equity $1,291,645 $1,758,535
---------- ----------
---------- ----------
Net interest-earning assets $ 81,819 $ 88,558
---------- ----------
---------- ----------
Net interest income/interest rate spread $35,679 3.62% $43,319 3.31%
------- ------ ------- ------
------- ------ ------- ------
Net interest margin 3.90% 3.53%
------ ------
------ ------
Ratio of average interest-earning
assets to average interest-bearing
liabilities 107.17 105.71
------ ------
------ ------
</TABLE>
- ---------
(a) The average 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
18
<PAGE>
COMPARISON OF RESULTS OF OPERATION FOR THE THREE AND NINE MONTH PERIODS ENDED
- -----------------------------------------------------------------------------
SEPTEMBER 30, 1996 AND 1995.
- ----------------------------
GENERAL. Net income decreased by $3.4 million, or 124.8%, to a $679,000 net
loss for the third quarter of 1996, compared to net income of $2.7 million
for the third quarter of 1995, primarily due to a substantial increase in the
Company's non-interest expense (including the $6.8 million SAIF special
assessment), which was partially offset by increases in net interest income,
non-interest income and a lower income tax provision associated with the
decrease in net income before taxes. For the nine months ended September 30,
1996, net income decreased by $3.5 million, or 40.4%, to $5.1 million,
compared to $8.6 million during the same period in 1995. The decrease in net
income was due to a substantial increase in non-interest expense, which was
partially offset by increases in net interest income, non-interest income and
a lower tax provision associated with the reduction in net income before
taxes.
NET INTEREST INCOME. Net interest income increased by $4.9 million, or
41.2%, to $16.8 million for the three months ended September 30, 1996,
compared to $11.9 million for the same period in 1995. The Company's
interest income increased by $9.6 million, or 38.1%, to $34.8 million for the
three months ended September 30, 1996, from $25.2 million in the third
quarter of 1995. The increase in interest income was primarily attributable
to a $597 million increase between quarters in average interest-earning
assets. This $597 million increase was primarily attributable to the
Meridian and Fidelity Federal branch acquisitions, the growth of supermarket
branch deposits, and increased capital. Funds received in these transactions
in excess of loans purchased were primarily invested in mortgage-backed
securities, which served to reduce the overall yield on earning assets.
Partially offsetting this volume-generated increase in interest income in the
period was an adjustment to the loan premium on purchased loans of $300,000
to reflect conversion related run-off of certain commercial loans purchased
from Meridian. Interest expense increased by $4.7 million between quarters,
as average interest-bearing liabilities grew by $560 million. The increased
balances were primarily the result of the acquisitions mentioned above and
the deposit growth in supermarket branches. This volume-generated increase
in interest expense was partially offset by a 29 basis point decrease in the
rate paid on interest-bearing liabilities, primarily related to the lower
rates on the deposits acquired from Meridian.
For the nine months ended September 30, 1996, net interest income totaled
$43.3 million, an increase of $7.6 million, or 21.4%, compared to the first
nine months of 1995. Interest income for the first nine months of 1996, as
compared to the same period in 1995, increased by $19.3 million, or 27.0%.
The increase in interest income was primarily attributable to a $417 million
increase in average interest- earning assets compared to the 1995 period.
This $417 million increase was primarily attributable to the Meridian and
Fidelity Federal branch acquisitions, the growth of supermarket branch
deposits and increased capital. Funds received in these transactions in
excess of loans purchased were primarily invested in mortgage-backed
securities, which served to reduce the overall yield on earning assets.
Offsetting the increase in interest income of $19.3 million was an increase
in interest expense of $11.7 million, or 32.6%, between periods. The
increase in interest expense during the first nine months of 1996, compared
to 1995, was caused by higher balances of average interest-bearing
liabilities, primarily related to the Meridian and Fidelity Federal branch
acquisitions and deposit growth related to the expansion of the Company's
supermarket branch network. Partially offsetting this increase in interest
expense was an 11 basis point decline in the weighted average rates paid on
interest-bearing liabilities during the nine months ended September 30, 1996,
compared to the prior period.
NONINTEREST INCOME. For the three and nine month periods ended September
30, 1996, the Company recorded noninterest income of $4.7 million and $11.1
million, respectively, as compared to $3.7 million and $8.8 million,
respectively, for the same periods in 1995. The $981,000, or 26.3%, increase
between quarters and the $2.3 million, or 25.9%, increase between the nine
month periods ended September 30, 1996 and 1995, respectively, were primarily
attributable to the Company's January 1, 1996 implementation of SFAS No. 122,
"Accounting for Mortgage Servicing Rights". The capitalization of mortgage
servicing rights in the third quarter of 1996 and for the nine month period
ended September 30, 1996, resulted in additional gains on the sales of
mortgage loans of $465,000 and $1.7 million, respectively. Deposit fee
income increased between periods, primarily due to the acquisition of the
Fidelity Federal and Meridian Bank branches, in July of 1995 and June of
1996, respectively. Other noninterest income increased primarily due to a
favorable litigation settlement and 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. The foregoing increases in
noninterest income more than offset a decrease in gains from
19
<PAGE>
the sale of nonperforming real estate during the three and nine months ended
September 30, 1996, as compared to the same periods in 1995.
NONINTEREST EXPENSE. Noninterest expense, exclusive of the $6.8 million SAIF
special assessment, totaled $15.6 million and $39.5 million for the three and
nine month periods ended September 30, 1996, representing an increase of $4.4
million, or 39.2%, and $8.4 million, or 27.1%, from the prior comparable
periods, respectively. The increases in compensation and employee benefits,
occupancy, advertising, amortization of intangible assets and other operating
expenses were primarily attributable to the acquisition of the Fidelity
Federal and Meridian Bank branches, the increased cost associated with the
growth of the supermarket branch network and the expansion of the Company's
business lending capability. Third quarter 1996 expenses also include
approximately $750,000 of nonrecurring expenses associated with the
conversion of the Meridian branches and customers to Commonwealth's systems.
20
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
There are no material legal proceedings, other than as
described below, 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 the 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. The Goodwill balance
associated with the First Family acquisition at the point of
FIRREA enactment in 1989 was $48.4 million.
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.
On October 31, 1996, Commonwealth Savings Bank filed a
complaint against CoreStates Financial Corp. in the Court of
Common Pleas for Chester County, Pennsylvania for damages
related to Commonwealth's acquisition on June 28, 1996 of
eleven branch offices from CoreStates, which were divested by
CoreStates in connection with the merger of CoreStates Bank
and Meridian Bank. The compliant alleges, among other things,
that CoreStates breached the branch sales agreement and that
Commonwealth's relationships with its new customers were
damaged as a result of negligence and errors committed by
CoreStates and its affiliates in connection with the
conversion of the former Meridian Bank customers to
Commonwealth's banking system and the reissuance of bank cards
for use at Commonwealth's automated teller machines. The
complaint alleges damages incurred by Commonwealth of
approximately $5.2 million from the additional run-off of
deposits from former Meridian customers and other losses and
expenses.
Item 2. Changes in Securities
---------------------
Not applicable.
21
<PAGE>
PART II - OTHER INFORMATION-CONTINUED
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 July 9, 1996 ("Annual Meeting").
(b) Not applicable.
(c) There were 17,952,693 shares of Common Stock of
the Company eligible to be voted at the Annual Meeting and
9,977,062 shares were represented at the meeting by the
holders thereof, which constituted a quorum. The items
voted upon at the Annual Meeting and the vote for each
proposal were as follows:
1. Election of directors for a three-year term.
<TABLE>
<CAPTION>
FOR WITHHELD
--- --------
<S> <C> <C>
Joseph E. Colen, Jr. 9,911,683 65,379
Richard J. Conner 9,883,275 93,787
Matthew T. Welde 9,898,487 78,575
</TABLE>
2. Proposal to ratify the appointment of Arthur Andersen
LLP as the Company's independent auditors for the year ending
December 31, 1996.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
9,875,580 61,694 39,788
</TABLE>
The proposals were adopted by the stockholders of the Company.
There were no broker non-votes at the meeting.
(d) Not applicable
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
a) Not applicable.
b) On July 11, 1996, the Company filed a Current Report
on Form 8-K to report under Item 5, the completion on June 28,
1996 of its acquisition of eleven branch offices of Meridian Bank
divested in connection with CoreStates Bank's acquisition of
Meridian Bank.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMMONWEALTH BANCORP, INC.
DATE: November 8, 1996 /s/ Charles H. Meacham
----------------------------------------
Charles H. Meacham
Chairman and Chief Executive Officer
(Principal Executive Officer)
DATE: November 8, 1996 /s/ Patrick J. Ward
----------------------------------------
Patrick J. Ward
Senior Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 49,981
<INT-BEARING-DEPOSITS> 3,042
<FED-FUNDS-SOLD> 5,191
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 607,441
<INVESTMENTS-CARRYING> 245,927
<INVESTMENTS-MARKET> 245,324
<LOANS> 1,054,854
<ALLOWANCE> 10,082
<TOTAL-ASSETS> 2,084,922
<DEPOSITS> 1,481,637
<SHORT-TERM> 0
<LIABILITIES-OTHER> 36,644
<LONG-TERM> 339,201
0
0
<COMMON> 125,190
<OTHER-SE> 102,250
<TOTAL-LIABILITIES-AND-EQUITY> 2,084,922
<INTEREST-LOAN> 53,903
<INTEREST-INVEST> 4,752
<INTEREST-OTHER> 32,078
<INTEREST-TOTAL> 90,733
<INTEREST-DEPOSIT> 35,264
<INTEREST-EXPENSE> 47,414
<INTEREST-INCOME-NET> 43,319
<LOAN-LOSSES> 301
<SECURITIES-GAINS> 1,485
<EXPENSE-OTHER> 46,287
<INCOME-PRETAX> 7,863
<INCOME-PRE-EXTRAORDINARY> 7,863
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,128
<EPS-PRIMARY> .44
<EPS-DILUTED> .44
<YIELD-ACTUAL> 7.39
<LOANS-NON> 7,030
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,511
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,777
<CHARGE-OFFS> 561
<RECOVERIES> 120
<ALLOWANCE-CLOSE> 10,270
<ALLOWANCE-DOMESTIC> 10,270
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
