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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-21175
EMERALD ISLE BANCORP, INC.
(Exact Name of Registrant as specified in its charter)
MASSACHUSETTS 04-3300934
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
730 HANCOCK STREET 02170-2722
QUINCY, MASSACHUSETTS (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 479-5001
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for 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 ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant, based on the closing sales price of the
registrant's Common Stock as quoted on the NASDAQ National Market System on
February 28, 1997 was approximately $42,460,300.
As of February 28, 1997 there were issued and outstanding 2,234,756 shares
of the registrant's Common Stock.
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DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL
MEETING OF STOCKHOLDERS TO BE HELD ON APRIL 28, 1997 ARE INCORPORATED BY
REFERENCE INTO PART III OF THIS FORM 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
Emerald Isle Bancorp, Inc. (the "Corporation") is a bank holding company
incorporated under the laws of the Commonwealth of Massachusetts in January of
1996, and is registered under the Bank Holding Company Act of 1956, as amended.
The Corporation is the holding company of The Hibernia Savings Bank (the "Bank")
and its subsidiaries and was organized at the direction of the Bank for the
purpose of becoming the Bank's holding company, pursuant to a Plan of
Reorganization and Acquisition dated February 15, 1996 and approved by
shareholders at the April 28, 1996 Annual Stockholders meeting. The
reorganization was consummated on October 1, 1996 and was treated as a pooling
of interests for accounting purposes. As of such date, the Bank became a
wholly-owned subsidiary of the Corporation and the Corporation issued 1,765,568
shares of its $1.00 par value per share common stock in exchange for all of the
outstanding shares of the Bank on a one for one basis. Currently, the
Corporation has no operations beyond its investment in the Bank.
The Bank is a Massachusetts chartered stock savings bank founded in 1912.
The Bank's deposit accounts are insured by the Federal Deposit Insurance
Corporation ("FDIC") Bank Insurance Fund to a maximum of $100,000 for each
depositor and by the Deposit Insurance Fund of Massachusetts ("DIF") for
deposits in excess of $100,000 per depositor. The Bank is also subject to
supervision and regulation by the Board of Governors of the Federal Reserve
System, The Federal Deposit Insurance Corporation and the Massachusetts Division
of Banks.
The Bank was incorporated in May, 1912 in Boston and 68 years later opened
our second location at 51 Commercial Street, Braintree, Massachusetts. The
Bank's third location opened in July, 1987 at 731 Hancock Street, Quincy,
Massachusetts. The Bank's headquarters was moved from Boston to 731 Hancock
Street, Quincy, Massachusetts in August, 1989. The Bank's fourth location at
1150 Washington Street, Weymouth, Massachusetts was opened in July of 1990. In
September of 1994, the Bank opened a training branch at the Quincy High School
at 52 Coddington Street, Quincy, Massachusetts. In July of 1994, the Bank's
fifth full service branch was opened at 274 Main Street, Hingham, Massachusetts.
The sixth full service branch was opened in December of 1995 at 397 Washington
Street, Stoughton, Massachusetts. Again in 1996, the Bank opened two more
locations, our seventh full service branch at 71 Main Street, Hingham,
Massachusetts and our eighth full service branch was opened in November of 1996
at 63 Franklin Street, Quincy, Massachusetts. The Bank has also received
approval from both the FDIC and Massachusetts Commissioner of Banks to open our
ninth location at 470 West Broadway, South Boston, Massachusetts, which is
expected to commence operations during the second quarter of 1997.
The Bank's subsidiaries include, Kildare Corporation, Meath Corporation,
which are inactive at this time, and a special purpose security corporation,
Limerick Securities whose sole purpose is to buy, hold and sell securities for
its own account. The securities corporation takes advantage of a lower
Massachusetts tax rate for a securities corporation (1.32%) versus a bank tax
rate of 12.13%. No operational or banking activities take place in this
subsidiary, which was incorporated in 1990.
The Corporation's principal business, conducted through the Bank, consists
of attracting deposits from the general public and investing these deposits,
together with funds generated by operations or borrowings from the Federal Home
Loan Bank of Boston, in residential mortgage loans, commercial real estate
loans, construction loans, multi-family residential mortgage loans, commercial
and small business
2
loans and other loans. During the past two to three years, the Bank has become
an active lender to the small business community within our primary market area.
This opportunity has resulted from the continued consolidation of the banking
industry in our primary market area. In addition, the Bank invests in securities
issued by the U.S. Government and agencies through mortgage-backed securities,
corporate debt securities and other investments permitted by federal and state
laws and regulations. The Bank's revenues are derived principally from interest
on its loan portfolio and interest and dividends on its various investments. The
Bank's primary sources of funds for these investments are deposits, principal
and interest payments on loans and mortgage-backed securities and borrowings
mainly from the Federal Home Loan Bank of Boston.
MARKET AREA AND COMPETITION
The Corporation, including subsidiaries, is a bank holding company offering
a number of financial services, loans and deposits primarily designed and
directed to meet the needs of the communities that we serve. The Corporation's
lending markets and deposit gatherings are primarily concentrated from Boston,
south to Marshfield. The Corporation's primary market area includes several
sections of Boston, including the Financial District, Back Bay, South End,
Beacon Hill, South Boston, Dorchester and parts of Roxbury and Mattapan and the
city of Quincy, plus the towns of Braintree, Weymouth, Hingham, Scituate,
Cohasset, Milton, Norwell, Hanover, Marshfield, Hull, Holbrook, Randolph,
Canton, Stoughton and Pembroke. The Corporation's headquarters and main office
are located at 730 and 731 Hancock Street, Quincy, Massachusetts, respectively,
an industrial, commercial and residential city located south of Boston with a
population of approximately 85,000.
The Corporation's market area in total has a number of financial
institutions, several of which are significantly larger and have greater
financial resources, and all of which are competitors of the Corporation. The
Corporation's market area includes competition from commercial banks, credit
unions, mortgage banking companies, mutual funds, insurance companies and other
financial institutions. Currently, the identity of our direct competition is
changing dramatically as a result of the continued consolidation of the banking
industry as a result of mergers and acquisitions. This industry consolidation
has made it possible for us to expand our franchise and offer more products and
services in our primary market area. The ability of the Corporation to remain
competitive in the future will depend on how successfully we can respond to the
rapidly evolving competitive, regulatory, technological and demographic changes
affecting our business.
LENDING ACTIVITIES
The Bank's lending activities have focused primarily on the origination and
purchases of residential, commercial real estate and commercial business loans
for inclusion in our loan portfolio. In addition, the Bank provides home equity
lines, second mortgages and secured and unsecured consumer loans. The Bank also
is active in the secondary market for our fixed rate loan products. The Bank,
over the past two or more years has expanded the lending department to include
commissioned loan originators and established a commercial lending department,
as previously discussed. As a result, 1,415 loans of all types were originated
in 1996 totaling $143 million as compared to 962 loans of all types totaling
$103.8 million in 1995 and 1,084 loans of all types totaling $70.1 million in
1994. As noted before, the consolidation of the banking industry has reduced the
number of community banks in our market area which has afforded us the
opportunity to substantially increase our loan origination volume. The growth in
our portfolio balances outstanding has been in adjustable rate loans since the
Bank sells most fixed rate loans originated into the
3
secondary market. Loan sales into the secondary market totaled 134 loans
totaling $18.3 million in 1996, compared to 126 loans totaling $12.9 million in
1995 and 66 loans totaling $6.8 million in 1994.
As discussed, the continued consolidation of the banking industry within our
market area, favorable economic conditions over the past two years and
improvement in the local real estate market has produced more lending
opportunities for the Bank. One area that benefited greatly from the foregoing
conditions was our commercial real estate department which originated or
purchased 79 loans totaling $68.3 million in 1996 compared to 47 loans totaling
$27.2 million in 1995 and 68 loans totaling $29.3 million in 1994.
The following table sets forth the composition of the Bank's loan portfolio
in dollar amounts and in percentages for the respective portfolios at the dates
indicated:
AT DECEMBER 31,
----------------------------------------------------------------------------------------------
1996 1995 1994 1993
---------------------- ---------------------- ---------------------- ----------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
(DOLLARS IN THOUSANDS) AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
- --------------------------- --------- ----------- --------- ----------- --------- ----------- --------- -----------
Mortgage loans on real
estate:
1-4 Family............... $ 136,049 51.14% $ 112,485 53.32% $ 83,589 50.38% $ 69,798 50.93%
Multifamily.............. 34,503 12.97% 34,633 16.42% 34,956 21.07% 23,914 17.45%
Commercial............... 70,857 26.63% 44,479 21.08% 36,522 22.01% 33,466 24.42%
--------- ----------- --------- ----------- --------- ----------- --------- -----------
Total mortgage loans... 241,409 90.74% 191,597 90.82% 155,067 93.46% 127,178 92.80%
Other loans:
Consumer................. 2,076 0.78% 1,768 0.84% 1,593 0.96% 3,916 2.86%
Equity lines of credit... 951 0.36% 747 0.35% 831 0.50% 464 0.34%
Commercial............... 21,614 8.12% 16,857 7.99% 8,423 5.08% 5,490 4.01%
--------- ----------- --------- ----------- --------- ----------- --------- -----------
Total other loans...... 24,641 9.26% 19,372 9.18% 10,847 6.54% 9,870 7.20%
--------- ----------- --------- ----------- --------- ----------- --------- -----------
Total loans............ $ 266,050 100.00% $ 210,969 100.00% $ 165,914 100.00% $ 137,048 100.00%
--------- ----------- --------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- ----------- --------- -----------
Less: Deferred loan fees
and unearned income.... 219 100 302 139
Less: Allowance for
loan losses.......... 2,623 2,542 2,241 2,481
--------- --------- --------- ---------
Loans, net............. $ 263,208 $ 208,327 $ 163,371 $ 134,428
--------- --------- --------- ---------
--------- --------- --------- ---------
1992
----------------------
PERCENT OF
(DOLLARS IN THOUSANDS) AMOUNT TOTAL
- --------------------------- --------- -----------
Mortgage loans on real
estate:
1-4 Family............... $ 70,005 51.37%
Multifamily.............. 29,833 21.89%
Commercial............... 33,388 24.50%
--------- -----------
Total mortgage loans... 133,226 97.77%
Other loans:
Consumer................. 2,609 1.91%
Equity lines of credit... 435 0.32%
Commercial............... -- 0.00%
--------- -----------
Total other loans...... 3,044 2.23%
--------- -----------
Total loans............ $ 136,270 100.00%
--------- -----------
--------- -----------
Less: Deferred loan fees
and unearned income.... 132
Less: Allowance for
loan losses.......... 3,056
---------
Loans, net............. $ 133,082
---------
---------
4
The following table sets forth the Bank's real estate loan originations and
loan purchases, sales and principal repayments for the years indicated:
YEARS ENDED DECEMBER 31,
----------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
- ----------------------------------------------------------------------------- ---------- ---------- ----------
Real estate loans (gross):
At beginning of year......................................................... $ 191,597 $ 155,067 $ 127,178
Real estate loans originated:
1-4 Family................................................................. 57,330 40,525 33,035
Multifamily................................................................ 14,507 4,966 11,408
Commercial................................................................. 40,879 20,750 17,881
---------- ---------- ----------
Total real estate loans originated:...................................... 112,716 66,241 62,324
Real estate loans purchased
1-4 Family................................................................. 2,534 20,215 --
Multifamily................................................................ 3,624 1,500 --
Commercial................................................................. 9,324 -- --
---------- ---------- ----------
Total real estate loans originated:...................................... 15,482 21,715 --
---------- ---------- ----------
Total real estate loans originated and purchased:........................ 128,198 87,956 62,324
Reductions due to principal repayments, foreclosures and charge-offs......... (60,071) (38,510) (27,670)
Sales of loans into secondary market......................................... (18,315) (12,916) (6,765)
---------- ---------- ----------
At end of year............................................................... $ 241,409 $ 191,597 $ 155,067
---------- ---------- ----------
---------- ---------- ----------
RESIDENTIAL FIRST MORTGAGES
The Bank offers various owner-occupied residential first mortgage loan
products, including, but not limited to one, three and five year adjustable rate
conforming, non-conforming mortgages, jumbo adjustable rate mortgage loans and
seven, ten, fifteen, twenty and thirty year fixed rate mortgage loans. In
addition, the Bank offers adjustable rate residential mortgage loans and
short-term notes on non-owner occupied residential properties. Residential
mortgage loans are defined as real estate loans secured by both owner-occupied
and non-owner occupied on one to four family homes and condominiums. The Bank's
policy is generally to lend up to 95% of the appraised value of the property
securing a single family residential loan and requires the loan to have private
mortgage insurance. The Bank may charge origination fees of up to 2% on one to
four family residential mortgage loans. During 1996, the Bank originated or
purchased 443 residential first mortgage loans totaling $59.9 million.
The Bank's one to four family residential mortgage loans are generally
underwritten according to Federal National Mortgage Association ("FNMA") or
Federal Home Loan Mortgage Corporation ("FHLMC") guidelines, although the Bank
may make loans in excess of the FNMA and FHLMC loan amount guidelines. At
December 31, 1996, the Bank had $31.6 million of loans which it sold but
continues to service for others.
RESIDENTIAL SECOND MORTGAGES
In addition to residential first mortgage loans, the Bank also makes term
residential second mortgage loans in amounts up to 70% of the appraised value of
the property in excess of the first mortgage balance
5
for terms not to exceed twenty years in amounts of $15,000 to $150,000. These
loans are written on an adjustable rate basis and reviewed every one to three
years and on a fixed basis up to fifteen years. In addition, the Bank originates
adjustable rate second mortgage loans in the form of Home Equity Credit Lines
for inclusion in its portfolio. Underwriting of residential second mortgage
loans is in accordance with the Bank's Loan Policy which is reviewed and
approved annually by the Board of Directors.
During the year ended December 31, 1996, the Bank originated approximately
$2.5 million of second mortgage loans. As of December 31, 1996, the Bank had
$4.4 million of residential second mortgage loans outstanding, which were
primarily home equity credit lines.
COMMERCIAL REAL ESTATE LOANS
The Bank's commercial real estate loan portfolio is comprised of two major
components, multi-family residential mortgage loans and commercial real estate
loans on office buildings, retail space, large apartment buildings and
industrial properties. The majority of the multi-family loans consist of
buildings having five to fifteen units. At December 31, 1996 the Bank had $34.5
million or 13.0% of the loan portfolio in multi-family loans and $70.9 million
or 26.6% in commercial real estate loans secured by office buildings and retail
space. Commercial real estate mortgage loans are generally written for an
initial note term of three to ten years and/or on an adjustable rate basis, and
amortized up to twenty-five years. Underwriting of commercial real estate
mortgage loans is in accordance with the Bank's Loan Policy which is reviewed
and approved annually by the Board of Directors.
During 1996, the Bank originated or purchased 79 commercial real estate
loans totaling $68.3 million with an average loan size of $864,000.
COMMERCIAL AND INDUSTRIAL BUSINESS LOANS
The Bank's commercial and industrial business loan portfolio totaled $21.6
million at December 31, 1996. During 1996, the Bank originated $10.6 million in
commercial business loans. Commercial and industrial business loans are defined
as small business loans, loans secured by business assets and secured by
owner-occupied business real estate loans.
Commercial and industrial business loans are generally written for an
initial note term of three to five years and/or on a variable rate basis.
Underwriting of commercial and industrial business loans is in accordance with
the Bank's Loan Policy which is reviewed and approved annually by the Board of
Directors.
CONSUMER LOANS
The Bank's consumer loan portfolio at December 31, 1996 totaled $3.0
million. Consumer loans consist primarily of personal consumer loans, both
secured and unsecured, education loans made under the Massachusetts Higher
Education Association Corporation Program, passbook and stock loans, home
improvement loans and personal lines of credit. Consumer loans are written over
various terms, but the average life of a personal loan is approximately two to
three years in length. The Bank within the past few months has established a new
consumer loan department and hired a consumer loan officer, allowing us to
expand our volume of consumer loan originations and improve the earnings
contributed from this area. Consumer loans are made in accordance with the
Bank's Loan Policy which is reviewed and approved annually by the Board of
Directors. For 1996, 798 consumer loans were originated totaling $4.6 million.
6
RISK
The Bank's asset quality has remained high throughout both fiscal years,
1996 and 1995. The Bank, like many companies, was adversely affected during the
early 1990s by local economic conditions. However, an aggressive management plan
to sell all real estate owned and resolve problem credits was put in place and
as of December 31, 1996, the Bank had no other real estate owned. In the first
quarter of 1996, the Bank recorded a special loan loss provision of $1.0 million
as a result of a loan to the Bennett Funding Group, Inc. This company committed
a well publicised fraud against its creditors. The Bank expects to record a
recovery on this loan in 1997 and 1998 based on the recent bankruptcy court
decision. In addition, the Bank's non-performing assets totaled $1,058,195 at
December 31, 1996, compared to $930,766 at December 31, 1995 and $1,677,628 at
December 31, 1994.
DELINQUENT LOANS
As a matter of policy, the Bank does not accrue interest on loans past due
90 days or more. In addition, loans are placed on non-accrual status when, in
the judgment of management, the probability of collection of interest is deemed
unlikely. When a loan is placed in non-accrual status, i.e. non-performing
loans, previously accrued but unpaid interest is deducted from interest income.
As of December 31, 1996 the Bank had 6 loans delinquent 30 days or more totaling
$373,520.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Bank's allowance for possible loan losses is reviewed monthly for
adequacy and is established and maintained through the provision for possible
loan losses. Provisions and charges to the allowance for possible loan losses
are based on management's assessment of a number of items including the risk
characteristics of the Company's loan portfolio, collateral and trends on
delinquencies and charge-offs. Management believes it uses the best information
available to determine the adequacy of the allowance for possible loan losses,
actual losses may differ from current estimate and future adjustment may be
required as a result of changes in economic conditions.
7
The following table sets forth the Company's allowance for possible loan
losses at the dates indicated:
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994 1993 1992
- ----------------------------------------------------- ---------- ---------- ---------- ---------- ----------
Balance at beginning of period....................... $ 2,542 $ 2,241 $ 2,481 $ 3,056 $ 2,701
Provision for loan losses............................ 1,211 300 135 2,080 2,270
---------- ---------- ---------- ---------- ----------
Balance of allowance after provision................. 3,753 2,541 2,616 5,136 4,971
Loans charged-off:
1-4 Family......................................... 266 176 219 755 445
Multifamily........................................ -- 127 484 2,235 2,195
Commercial real estate............................. 1,015 25 380 424 111
Other loans........................................ 17 11 14 15 12
---------- ---------- ---------- ---------- ----------
Total loans charged-off.......................... 1,298 339 1,097 3,429 2,763
Recoveries of loans previously charged-off........... 168 340 722 774 848
---------- ---------- ---------- ---------- ----------
Balance of allowance at end of year.................. $ 2,623 $ 2,542 $ 2,241 $ 2,481 $ 3,056
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Amount of total loans at end of year................. 263,208 208,327 163,371 135,661 134,584
Average amount of loans outstanding.................. 231,255 188,479 148,814 136,227 140,582
Loans charged-off as a percentage of average loans
outstanding........................................ 0.73% 0.18% 0.74% 2.52% 1.97%
Allowance for loan losses as a percentage of total
loans at end of year............................... 1.00% 1.22% 1.37% 1.83% 2.27%
Allowance for loan losses as a percentage of
nonperforming loans................................ 247.9% 507.6% 145.1% 114.7% 88.8%
INVESTMENT ACTIVITIES
The Bank's investment portfolio is used as a source of income, an
asset/liability tool and a potential source of liquidity to fund loan growth or
deposit outflows. The portfolio consists primarily of corporate bonds,
mortgage-backed securities, U.S. Treasury obligations, federal agencies and some
common stock, consistent with the Bank's asset and liability management
activities.
At December 31, 1996, the investment portfolio including short term
investments, had a book value of $125,953,244 and a market value of
$123,963,144. Of the $125,953,244, $83,512,156 or 66.3% was designated as held
to maturity, $11,679,798 or 9.3% consisted of short term investments and the
remaining balance of $30,761,290 or 24.4% being available for sale. The
investment portfolio totaled 30.7% of the Bank's assets and provided 27.8% of
interest income. The Company's longer term strategy is to have investments total
approximately 25% of total assets.
8
The following table sets forth information regarding the amortized cost and
market value of the Bank's investment at the dates indicated:
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
(DOLLARS IN THOUSANDS) AMORTIZED COST FAIR VALUE AMORTIZED COST FAIR VALUE AMORTIZED COST FAIR VALUE
- -------------------------------------- --------------- ----------- --------------- ----------- --------------- -----------
SECURITIES AVAILABLE FOR SALE:
Government securities............... $ 24,958 $ 24,635 $ 39,947 $ 39,938 $ -- $ --
Corporate bonds..................... 6,104 6,106 -- -- 5,931 5,925
--------------- ----------- --------------- ----------- --------------- -----------
Total debt securities available
for sale........................ 31,062 30,741 39,947 39,938 5,931 5,925
Equities............................ 18 20 628 738
--------------- ----------- --------------- ----------- --------------- -----------
Total securities available for
sale............................ $ 31,080 $ 30,761 $ 40,575 $ 40,676 $ 5,931 $ 5,925
--------------- ----------- --------------- ----------- --------------- -----------
--------------- ----------- --------------- ----------- --------------- -----------
SECURITIES HELD TO MATURITY:
Government securities............... $ 22,000 $ 21,318 $ -- $ -- $ -- $ --
Mortgage backed securities.......... 61,512 60,204 77,566 76,708 100,253 92,848
--------------- ----------- --------------- ----------- --------------- -----------
Total securities held to
maturity........................ 83,512 81,522 77,566 76,708 100,253 92,848
--------------- ----------- --------------- ----------- --------------- -----------
Total investment securities....... $ 114,592 $ 112,283 $ 118,141 $ 117,384 $ 106,184 $ 98,773
--------------- ----------- --------------- ----------- --------------- -----------
--------------- ----------- --------------- ----------- --------------- -----------
SOURCES OF FUNDS
In general, the Bank's primary source of funds are deposits, borrowings,
principal payments on loans and investments and maturities of loans and
investments.
DEPOSITS
The Bank's deposit products include NOW accounts, demand (checking) deposit
accounts, money market deposit accounts, savings accounts and term certificates
of deposit accounts. Deposit flows can vary significantly and are influenced by
prevailing interest rates, economic conditions and pricing by the Bank's
competitors. Deposit rates are established by management on a regular basis
after reviewing cash flows, funding requirements, competitive factors and the
general trend of interest rates.
As of December 31, 1996, and 1995, deposits totaled $337,089,927 and
$282,787,249 respectively. The following table sets forth the distribution of
the Bank's average deposits during the years indicated along with weighted
average rate by deposit category:
1996 1995 1994
------------------------------------- ------------------------------------- ----------------------
PERCENT OF WEIGHTED PERCENT OF WEIGHTED PERCENT OF
AVERAGE TOTAL AVERAGE AVERAGE TOTAL AVERAGE AVERAGE TOTAL
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS
--------- ----------- ------------- --------- ----------- ------------- --------- -----------
Demand...................... $ 10,873 3.57% 0.00% $ 7,969 3.00% 0.00% $ 6,076 2.59%
NOW......................... 13,230 4.34% 1.50% 10,365 3.90% 1.50% 9,664 4.11%
Money market................ 35,842 11.77% 3.45% 27,459 10.32% 4.14% 5,498 2.34%
Regular savings............. 46,823 15.37% 2.93% 50,210 18.87% 2.82% 86,656 36.90%
Term certificates........... 197,853 64.95% 5.78% 170,020 63.91% 5.63% 126,968 54.06%
--------- ----------- --- --------- ----------- --- --------- -----------
Total Deposits............ $ 304,621 100.00% 4.68% $ 266,023 100.00% 4.62% $ 234,862 100.00%
--------- ----------- --- --------- ----------- --- --------- -----------
--------- ----------- --- --------- ----------- --- --------- -----------
WEIGHTED
AVERAGE
RATE
-------------
Demand...................... 0.00%
NOW......................... 1.49%
Money market................ 2.66%
Regular savings............. 2.89%
Term certificates........... 4.80%
---
Total Deposits............ 3.78%
---
---
9
BORROWINGS
Over the past few years, the Bank has borrowed funds principally from the
Federal Home Loan Bank of Boston ("FHLB") to fund asset growth. Also, aggressive
pricing by competition for retail deposits within our market area, dictate from
a cost standpoint, that we utilize borrowings as an alternative funding source
from time to time. At December 31, 1996, the Bank had $41.7 million outstanding
in FHLB advances.
EMPLOYEES
At December 31, 1996, the Company had 112 employees, of whom, 22 were
considered part-time. Management considers its relationship with its employees
to be good. The Company's employees are not represented by any collective
bargaining group.
The Company's employee benefits for full-time employees include Employee
Stock Ownership Plan ("ESOP"), a 401K Plan, a bonus plan and master medical,
dental, life and long-term disability insurance programs. The employee benefits
are considered by management to be competitive with those offered by other
financial institutions and major employers in the Company's market area.
COMPETITION
The Company faces extensive competition, both in originating loans and in
attracting deposits, from other savings banks as well as co-operative banks,
commercial banks, savings and loan associations, credit unions, and other
financial service businesses.
Competition for loans comes primarily from other savings banks, co-operative
banks, savings and loan associations, commercial banks, and mortgage banking
companies. The Company competes for loans principally on the basis of interest
rates and loan fees, types of loans originated, processing time, and the quality
of service provided to borrowers.
In attracting deposits, the Company's primary competitors are other thrift
institutions, commercial banks, mutual funds, and credit unions. The Company's
branches attract deposits from the communities in which they are located. The
Company's attraction and retention of deposits depends principally on the
quality of its service and its ability to provide investment opportunities that
satisfy the requirements of investors with respect to rate of return, liquidity,
risk, and other factors. The Company also competes for these deposits by
offering convenient locations and convenient business hours.
Management believes that providing quality financial services and products
in a personalized manner along with maintaining a community orientation have
long been characteristics of the Company which have resulted in customer
recognition and loyalty. The Company seeks to develop multiple relationships
with its customers through an experienced service staff and offers a wide range
of financial products and services to meet the demands of the Company's existing
market area and target customer base.
FEDERAL AND STATE TAXATION
GENERAL The Company and its subsidiaries report their income on a fiscal
year basis using the accrual method of accounting and are subject to federal
income taxation in the same manner as other corporations with some exceptions.
The fiscal year end for income tax purposes is October 31st of each year while
the Company's financial statements fiscal year is presented on a calendar year
basis. The following discussion of tax matters is intended only as a summary and
does not purport to be a comprehensive description of the tax rules applicable
to the Company.
10
In August of 1996, Congress passed the Small Business Job Protection Act of
1996. Included in this bill was the repeal of IRC Section 593, which allowed
thrift institutions special provisions in calculating bad debt deductions for
income tax purposes. The repeal is effective for tax years beginning after
December 31, 1995.
One effect of this legislative change is to suspend the Bank's bad debt
reserve for income tax purposes as of its base year (December 31, 1987). Any bad
debt reserve in excess of the base year amount is subject to recapture over a
six-year time period. The suspended (i.e. base year) amount is subject to
recapture upon the occurrence of certain events, such as a complete or partial
redemption of the Bank's stock or if the Bank ceases to qualify as a bank for
income tax purposes.
At December 31, 1996, the Bank's surplus includes approximately $1,410,054
of bad debt reserves, representing the base year amount, for which income taxes
have net been provided. Since the Bank does not intend to use the suspended bad
debt reserve for purposes other than to absorb the losses for which it was
established, deferred taxes in the amount of $593,304 have not been recorded
with respect to such reserve.
MASSACHUSETTS TAXATION Although the Company will file a consolidated
federal income tax return, savings institutions cannot file Massachusetts
combined returns. For 1996, savings institutions are taxed in Massachusetts at
the rate of 12.13% on their Massachusetts net income. In 1995, Massachusetts
enacted tax reform legislation applicable to banks that would reduce this rate,
over a period of time, to 10.50% in 1999. Massachusetts net income for savings
institutions is gross income from all sources, without exclusion, for the
taxable year, less the deductions, but not the credits, allowable under the
provisions of the Internal Revenue Code as in effect for the taxable years, and
taxes paid to other jurisdictions.
The Company has a Massachusetts subsidiary which is qualified to be taxed as
a security corporation for Massachusetts corporation excise tax purposes.
Accordingly, this entity is taxed in Massachusetts at a rate of up to 1.32% of
its gross income (including any intercompany dividends received from its bank
subsidiary).
SUPERVISION AND REGULATION
GENERAL As a bank holding company registered under the Bank Holding Company
Act of 1956, as amended (the "BHC Act"), the Company is subject to substantial
regulation and supervision by the Federal Reserve Board. As a state-chartered
bank, the Bank is subject to substantial regulation and supervision by the FDIC
and the Massachusetts Commissioner of Banks. Such activities are often intended
primarily for the protection of depositors or are aimed at carrying out broad
public policy goals that may not be directly related to the financial services
provided by the Company and the Bank. Federal and state banking and other laws
impose a number of requirements and restrictions on the business operations,
investments and other activities of depository institutions and their
affiliates.
GENERAL SUPERVISION AND REGULATION
The Company, as a bank holding company under the BHC Act, is registered with
the Federal Reserve Board and is regulated under the provisions of the BHC Act.
Under the BHC Act, the Company is prohibited, with certain exceptions, from
acquiring direct or indirect ownership or control of more than 5 percent of the
voting shares of any company which is not a bank and from engaging in any
business other than that of banking, managing or controlling banks or furnishing
services to, or acquiring premises for, its affiliated banks, except that the
Company may engage in and own voting shares of companies engaging in
11
certain activities determined by the Federal Reserve Board, by order or by
regulation, to be so closely related to banking or to managing or controlling
banks "as to be a proper incident thereto."
The Company is required by the BHC Act to file with the Federal Reserve
Board an annual report and such additional reports as the Federal Reserve Board
may require. The Federal Reserve Board also makes periodic inspections of the
Company and its subsidiaries. The BHC Act requires every bank holding company to
obtain the prior approval of the Federal Reserve Board before it may acquire
substantially all of the assets of any bank, or ownership or control of any
voting shares of any bank, if, after such acquisition, it would own or control,
directly or indirectly, more than 5 percent of the voting shares of such bank.
Because the Company is also a bank holding company under the Massachusetts
General Laws, the Massachusetts Commissioner of Banks has authority to require
certain reports from the Company from time to time and to examine the Company
and each of its subsidiaries. The Massachusetts Commissioner of Banks also has
enforcement powers designated to prevent banks from engaging in unfair methods
of competition or unfair or deceptive acts or practices involving consumer
transactions. In 1996, Massachusetts adopted legislations which allows
well-capitalized banks to be inspected by Massachusetts regulators once every 18
months in contrast to the current yearly examination. Prior approval of the
Massachusetts Board of Bank Incorporation is also required before the Company
may acquire any additional commercial banks located in Massachusetts or in those
states which permit acquisitions of banking institutions located in their states
by Massachusetts bank holding companies.
The location of nonbank subsidiaries of the Company is not restricted
geographically under the BHC Act. In 1989, after the passage of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 (the "FIRREA"), the
Federal Reserve Board amended its regulations under the BHC Act to permit bank
holding companies, as a nonbanking activity, to own and operate savings
associations without geographical restrictions. Furthermore, in 1994, the
Reigle-Neal Interstate Banking and Branch Act of 1994 (the "Interstate Banking
Act") was enacted. The Interstate Banking Act's provisions, among other things:
(i) permit bank holding companies, under certain circumstances, to acquire
control of banks in any state, subject to (a) specific maximum national and
state deposit concentration limits (b) any applicable state law provisions
requiring that the acquired bank has to have been in existence for a specified
period of up to 5 years (c) any applicable nondiscriminatory state provisions
that make an acquisition of a bank contingent upon a requirement to hold a
portion of such bank's assets available for call by state sponsored housing
entity; and (d) applicable anti-trust laws; (ii) authorize interstate mergers by
banks in different states, including branching through bank mergers, beginning
June 1, 1997, subject to the provisions noted in (i) and to any state laws that
"opt-in" as of an earlier date or "opt-out" of the provision entirely; (iii)
authorize states to enact legislation permitting interstate de novo branching;
and (iv) provide for parity of treatment for foreign bank branch activities.
In 1996, Massachusetts enacted legislation implementing the provisions of
the Interstate Banking Act. In the new legislation, Massachusetts authorized
immediate "opt-in" to interstate banking. Thus, the 1996 legislation
substantially facilitates the geographic expansion of banking in Massachusetts
and out-of-state banks. Unlike the Bank, national banks have used the power
available under a federal charter to move a bank's headquarters 30 miles or less
and by that means have accelerated the pace of interstate branching.
The 1996 legislation also allows out-of-state banks to establish and
maintain branches through a merger or consolidation with the purchase of assets
or stock of any Massachusetts bank or through de novo branch establishment or
purchase of assets or purchase of a branch without purchase of the bank which
12
owns the branch, in Massachusetts, provided that such out-of-state bank is
expressly authorized to do so by the laws of the state under which it is
organized. The 1996 legislation also allows Massachusetts banks to establish and
maintain branches through a merger or consolidation with or by the purchase of
the whole or any part of the assets or stock of any out-of-state bank of through
de novo branch establishment in any other state other than Massachusetts.
Finally, the 1996 legislation prohibits the establishment of bank holding
companies and acquisition of banks and bank holding companies by Massachusetts
and out-of-state bank holding companies if the Massachusetts bank to be acquired
has been in existence less than 3 years or if, after such acquisition, the bank
holding company would control 28% of the deposits in Massachusetts (until 1998,
when the deposit limitation is increased to 30%).
The Bank, whose deposits are insured by the FDIC, and the subsidiaries of
the Bank are subject to a number of regulatory restrictions, including certain
restrictions upon: (i) extensions of credit to the Company and the Company's
nonbanking affiliates (collectively with the Company, the "Affiliates"); (ii)
the purchase of assets from Affiliates; (iii) the issuance of a guarantee or
acceptance of a letter of credit on behalf of Affiliates; and (iv) investments
in stock or other securities issued by Affiliates or acceptance thereof as
collateral for an extension of credit. In addition, all transactions among the
Company and its direct and indirect subsidiaries must be made on an arm's length
basis and valued on fair market terms. The Bank pays deposit insurance premiums
to the FDIC and the DIF of Massachusetts.
Federal Reserve Board Policy requires bank holding companies to serve as a
source of strength to their subsidiary banks by standing ready to use available
resources to provide adequate capital funds to subsidiary banks during periods
of financial stress or adversity. A bank holding company also can be liable
under certain provisions of the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") for the capital deficiencies of an
undercapitalized bank subsidiary. In the event of a bank holding company's
bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, the trustee will be
deemed to have assumed and is required to cure immediately any deficit under any
commitment by the debtor to any of the federal banking agencies to maintain the
capital of an insured depository institution, and any or all of the Subsidiary
Bank or Subsidiary Banks, and, in addition, its investment in its other
Subsidiary Bank or Subsidiary Banks would be at risk.
The Company and the Bank are also subject to certain restrictions with
respect to engaging in the issue, flotation, underwriting, public sale or
distribution of certain types of securities. In addition, under both, Section
106 of the 1970 Amendments to the BHC Act and regulations which have been issued
by the Federal Reserve Board, the Company and the Bank are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit, lease or sale of any property or the furnishing of any service. Various
consumer loans and regulations also affect the operations of the Bank.
The Bank, which is chartered under Massachusetts law, is subject to federal
requirements to maintain cash reserves against deposits, and to state mandated
restrictions upon the nature and amount of loans which may be made by the Bank
(including restrictions upon loans to "insiders" of the Company and the Bank as
well as to restrictions relating to dividends, investments, branching and other
bank activities).
FDICIA prescribes the supervisory and regulatory actions that will be taken
against undercapitalized insured depository institutions for the purposes of
promptly resolving problems at such institutions or at the least possible
long-term loss to the FDIC. Five categories of depository institutions have been
established by FDICIA in accordance with their capital levels: "well
capitalized", "adequately capitalized", "undercapitalized", "significantly
undercapitalized", and "critically undercapitalized." The federal banking
13
agencies have adopted uniform regulations to implement the prompt regulatory
action provisions of FDICIA.
Under the uniform regulations, a well capitalized institution has a minimum
Tier 1 capital-to-total risk-based assets ratio of 6 percent, a minimum total
capital-to-total risk-based ratio of 10 percent and a minimum leverage ratio of
5 percent and is not subject to any written agreement, order or capital
directive. An adequately capitalized institution meets all of its minimum
capital requirements under the existing capital adequacy guidelines. An
undercapitalized institution is one that fails to meet any one of the three
minimum capital requirements. A significantly undercapitalized institution has a
Tier 1 capital-to-total risk-based assets ratio of less than 3 percent, a Tier 1
leverage ratio of less than 3 percent or a total capital-to-total risk-based
assets ratio of less than 6 percent. A critically undercapitalized institution
has a Tier 1 leverage ratio of 2 percent of less. An institution whose capital
ratios meet the criteria for a well capitalized institution may be classified as
an adequately capitalized institution due to qualitative and/or quantitative
factors other than capital adequacy. An adequately capitalized institution or
undercapitalized institution, may under certain circumstances, be required to
comply with supervisory action as if it were in the next lower category.
An undercapitalized institution is required to submit a capital restoration
plan for acceptance by the appropriate federal banking agency and will be
subject to close monitoring of both its condition and compliance with, and
progress made pursuant to, its capital restoration plan. The capital restoration
plan will be accepted only if (i) it specifies the steps that will be taken to
become adequately capitalized and the activities in which the institution will
engage (ii) it is based upon realistic assumptions and it is likely the
activities will succeed in restoring the institution's capital (iii) it does not
appreciably increase the institution's risk exposure and (iv) each holding
company that controls the institution provides appropriate assurances of
performance and guaranties that the institution will comply with the plan until
the institution is adequately capitalized on an average basis for each of four
consecutive quarters. Liability under the guaranty is the lesser of (i) five
percent of the institution's total assets at the time it became undercapitalized
and (ii) the amount necessary to bring the institution into compliance with all
applicable capital standards as of the time the institution fails to comply with
the plan. An institution that fails to submit an acceptable plan may be placed
into conservatorship or receivership unless its capital restoration plan is
accepted. An undercapitalized institution will also be subject to restrictions
on asset growth, acquisitions, branching, new activities, capital distributions
and the payment of management fees.
FDICIA requires the appropriate regulatory agencies to take one or more
specific actions against significantly undercapitalized institutions and
undercapitalized institutions that fail to submit acceptable capital restoration
plans, which actions include but are not limited to: (i) requiring the
institution to sell shares or other obligations to raise capital; (ii) limiting
deposit interest rates; (iii) requiring the election of a new board of directors
and/or dismissing senior executive officers and directors who held such
positions for more than 180 days before the institution became undercapitalized;
(iv) prohibiting receipt of deposits from correspondent banks; (v) requiring
divestiture or liquidation of one or more subsidiaries; and (vi) requiring the
parent company to divest the institution if such divestiture will improve the
institution's financial condition and future prospects. In addition, an insured
institution that receives a less-than-satisfactory rating for asset quality,
management, earnings or liquidity may be deemed by its appropriate federal
banking regulator to be engaging in an unsafe or unsound practice for purposes
of issuing an order to cease and desist or to take certain affirmative actions.
If the unsafe or unsound practice is likely to weaken the institution, cause
insolvency or substantial dissipation or assets or earnings or otherwise
seriously prejudice the interest of depositors or the FDIC, a receiver or
conservator could be appointed.
14
Finally, subject to certain exceptions, FDICIA requires critically
undercapitalized institutions to be placed into receivership or conservatorship
within 90 days after becoming critically undercapitalized.
The Federal Reserve Board has indicated that it will consult with each
federal banking agency regulating the bank subsidiaries of a holding company to
monitor required supervisory actions, and based upon an assessment of these
developments, will take appropriate action at the holding company level.
Under FDICIA, federal bank regulators are also required to see that changes
are made in the operations and/or management of a bank or bank holding company
if the financial institution is deemed to be "undercapitalized." Under FDICIA, a
depository institution that is "adequately capitalized" but not "well
capitalized" is generally prohibited from accepting brokered deposits and
offering interest rates on deposits higher than the prevailing rates in its
market. In addition, "pass through" insurance coverage may not be available for
certain employee benefit accounts.
Additional regulations adopted pursuant to FDICIA include (i) real estate
lending standards for depository institutions, which provide guidelines
concerning loan-to-value ratios for various types of real estate loans; (ii)
rules requiring depository institutions to develop and implement internal
procedures to evaluate and control credit and settlement exposure to their
correspondent banks; (iii) rules implementing the FDICIA provisions prohibiting,
with certain exceptions, insured state banks from making equity investments or
engaging in activities of the types and amounts not permissible for national
banks; and (iv) rules and guidelines for enhanced financial reporting and audit
requirements. Rules currently proposed for adoption pursuant to FDICIA include
(i) revisions to the risk-based capital guidelines regarding interest rate risk,
concentrations of credit risk and the risk posed by "nontraditional activities";
and (ii) rules addressing various "safety and soundness" standards.
ITEM 2. PROPERTIES
The Company's headquarters is located at 730 Hancock Street, Quincy,
Massachusetts. The Bank has branches located at 101 Federal Street, Boston,
Massachusetts, 51 Commercial Street, Braintree, Massachusetts, 1150 Washington
Street, Weymouth, Massachusetts, 274 Main Street, Hingham Massachusetts, 71 Main
Street, Hingham, Massachusetts, 397 Washington Street, Stoughton, Massachusetts,
63 Franklin Street, Quincy, Massachusetts and an educational facility in Quincy
High School located at 52 Coddington Street, Quincy, Massachusetts. The Bank's
main office is at 731 Hancock Street, Quincy, Massachusetts. The Bank's
headquarters in Quincy, the Boston facility, and Stoughton facility are leased
premises. The Braintree, Weymouth, Hingham and Franklin Street, Quincy
facilities, as well as the building at 730 Hancock Street are owned by the Bank.
The Bank also has three Loan Centers, located at 51 Commercial Street,
Braintree, Massachusetts, 731 Hancock Street, Quincy, Massachusetts and 730
Hancock Street, Quincy, Massachusetts.
15
The following table sets forth the location of the Bank's offices, as well
as certain information relating to offices at December 31, 1996:
CURRENT
YEAR SQUARE OWNED/ TERM
ACQUIRED FEET LEASED EXPIRES RENEWAL/OPTIONS
----------- --------- --------- ----------- -------------------------------
BRANCH................................. 1989 2,060 Leased 1999 2/five year terms
101 Federal St.
Boston, MA
BRANCH................................. 1995 2,200 Leased 2005 3/five year terms
397 Washington St.
Stoughton, MA
BRANCH................................. 1993 360 Leased 1997 1 year renewable agreement
Quincy High School
52 Coddington St.
Quincy, MA
MAIN OFFICE............................ 1986 10,100 Leased 2002 3/five year terms
731 Hancock St.
Quincy, MA
BRANCH................................. 1979 4,970 Owned
51 Commercial St.
Braintree, MA
BRANCH................................. 1991 1,800 Owned
1150 Washington St.
Weymouth, MA
BRANCH................................. 1995 2,100 Owned
274 Main Street
Hingham, MA
BRANCH................................. 1996 2,200 Owned
71 Main Street
Hingham, MA
BRANCH................................. 1996 3,050 Owned
63 Franklin St.
Quincy, MA
EXECUTIVE OFFICES...................... 1994 6,000 Owned
730 Hancock Street
Quincy, MA
16
ITEM 3. LEGAL PROCEEDINGS
The Company and the Bank are defendants in legal actions in the normal
course of business. In the opinion of the Company's management the resolution of
these matters is not expected to have a material adverse effect on the
consolidated financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded over the counter on the NASDAQ National
Market System under the symbol "EIRE." The stock is listed in The Wall Street
Journal as "EmeraldBcp" and in local papers as "EmeraldBcp".
The stock of Emerald Isle commenced trading on October 1, 1996.
STOCK PRICE CASH
---------------- DIVIDENDS
QUARTER ENDED HIGH LOW PAID (1)
- -------------------------------------------------- ------ ------ -----------
December 31, 1996................................. $ 20 $ 115/2 $ 0.06
September 30, 1996................................ 315/4 14 0.06
June 30, 1996..................................... 115/2 14 0.05
March 31, 1996.................................... 116/2 15 0.05
December 31, 1995................................. $ 118/4 $ 315/4 $ 0.05
September 30, 1995................................ 117/8 114/2 0.05
June 30, 1995..................................... 314/4 112/2 0.04
March 31, 1995.................................... 113/2 110/8 0.04
- ------------------------
(1) Split adjusted
As of February 28, 1997, the Company had 436 stockholders of record and
2,234,756 shares of its common stock outstanding. The total number of shares
stockholders hold in "street" name through various brokerage firms was
1,305,337. The shares of common stock outstanding at February 28, 1997 takes
into consideration the five for four stock split declared in December of 1996
and payable February 3, 1997.
In considering the declaration of future dividends, the Company's Board of
Directors will consider a number of factors including the capital requirements
of the Company, regulatory limitations, the Company's results of operations and
financial condition, tax considerations and general economic conditions. While
it is currently the Board's intention to continue to favorably consider future
dividend declarations, no assurances can be given that dividends will continue
to be paid or will continue to be paid at the existing level.
17
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table represents selected consolidated financial data of the
Company for the five years ended December 31, 1996. The selected consolidated
financial data set forth below does not purport to be complete and should be
read in conjunction with, and is qualified in its entirety by, the more detailed
information, including the Consolidated Financial Statements and Notes thereto,
included elsewhere herein.
SELECTED HISTORICAL FINANCIAL DATA
AT DECEMBER 31 1996 1995 1994 1993 1992
- ------------------------------------------- ------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Balance Sheet Data:
Total assets............................... $ 409,639 $ 346,865 $ 286,429 $ 249,827 $ 229,792
Loans, net................................. 263,208 208,327 163,371 135,661 134,584
Securities................................. 128,624 125,300 111,582 105,735 80,449
Deposits................................... 337,090 282,787 256,340 221,950 205,921
Borrowings................................. 41,668 38,968 9,000 8,530 8,531
Stockholders' equity....................... 27,936 22,825 19,786 17,312 13,954
Book value per share....................... $ 12.64 $ 11.92 $ 10.94 $ 10.34 $ 8.71
FOR THE YEAR ENDED DECEMBER 31 1996 1995 1994 1993 1992
- ------------------------------------------- ------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Operating Data:
Interest and dividend income............... $ 28,783 $ 23,949 $ 18,728 $ 18,157 $ 18,805
Interest expense........................... 16,737 13,720 9,498 8,950 10,569
------------ ------------ ------------ ------------ ------------
Net interest income........................ 12,046 10,229 9,230 9,207 8,236
Add
Noninterest income......................... 804 579 549 719 364
Gain (loss) on sale of loans............... -- (52) (1) 20 320
Less
Provision for possible loan losses......... 1,211 300 135 2,080 2,270
Noninterest expenses....................... 7,656 6,552 6,209 5,680 4,835
------------ ------------ ------------ ------------ ------------
Pretax core earnings....................... 3,983 3,904 3,434 2,186 1,815
Net gain(loss) on sale of securities....... (39) 91 193 3,952 2,188
Gain on sale of loan servicing............. -- 764 -- -- --
Loss on sale of fixed assets............... -- (50) -- -- --
Net loss on sale of other real estate
owned.................................... (38) (43) (170) (666) (511)
Real estate owned expense.................. 80 301 387 1,194 1,643
------------ ------------ ------------ ------------ ------------
Income before income taxes................. 3,826 4,365 3,070 4,278 1,849
Provision for income taxes................. 1,445 1,646 1,002 1,198 265
------------ ------------ ------------ ------------ ------------
Net income................................. $ 2,381 $ 2,719 $ 2,068 $ 3,080 $ 1,584
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Earnings per share......................... $ 1.14 $ 1.41 $ 1.13 $ 1.71 $ 0.97
Weighted average number of common shares
and common equivalents................... 2,091,669 1,931,621 1,835,948 1,796,364 1,633,262
Dividends declared per share............... $ 0.22 $ 0.18 $ -- $ -- $ --
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company commenced operations as the holding company of The Hibernia
Savings Bank on October 1, 1996. Accordingly, under pooling of interests
accounting, the information presented herein for 1996 and 1995 represents the
financial condition and results of operations of the Company and its wholly
owned Bank and subsidiaries on a consolidated basis.
The Company's results of operations are dependent primarily on net interest
income, which is the difference between (i) the interest income earned on loans
and investment securities and (ii) the cost of funds, which consists of the
interest paid on deposits and borrowings. Net interest income can be adversely
affected by changes in interest rates, interest rate caps in effect on
adjustable rate loans in the portfolio, and loan and mortgage-backed security
prepayments.
The Company's net income is also affected by non-interest income, such as
service charges and fees and gains or losses on asset sales, and operating
expenses, which consist primarily of compensation and benefits, occupancy
expenses, real estate owned operations, other general and administrative
expenses. The earnings of the Company are also significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, government policies and actions of regulatory authorities.
The Bank has retail banking facilities in Boston, Braintree, Quincy,
Weymouth, Hingham and Stoughton and considers its primary market area to be
these six communities and the surrounding cities and towns south of Boston. In
addition, the Bank maintains Loan Centers in Braintree and Quincy. The Bank is
primarily engaged in the lending business with an emphasis on attracting retail
deposits through its branch network. The Bank's ultimate success is very
dependent on the conditions of both the local economy and the local real estate
market.
ASSET/LIABILITY MANAGEMENT
The Company's Asset/Liability Committee ("ALCO"), under the authority of the
Board of Directors, has established guidelines within which management operates
to meet liquidity needs. These liquidity needs are defined by the needs of the
depositors and borrowers of the Company. The Company's primary source of funds
is its deposit base. Management uses the investment portfolio and borrowing
capabilities to manage the liquidity position and interest rate risk position,
in its efforts to maximize interest income within the ALCO's guidelines.
The ALCO consists of members of the senior management. Meetings are held on
a monthly basis and topics of discussion include, but are not limited to, levels
and direction of interest rates, deposit flows, loan demand, investment
portfolio and borrowed funds positions, interest rate sensitivity or "gap"
position and other variables which impact the Company's interest rate
sensitivity position.
INTEREST RATE SENSITIVITY ANALYSIS
The matching of assets and liabilities are analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is considered to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets anticipated, based upon certain assumptions, to mature
or reprice within a specific time period. A gap is considered positive when the
amount of interest rate sensitive assets
19
maturing or repricing within a period exceeds the amount of interest rate
sensitive liabilities maturing or repricing within that period; a gap is
considered negative when the converse occurs. During a decreasing interest rate
environment, a negative gap would tend to result in an increase in net interest
income while a positive gap would tend to adversely affect net interest income.
In a rising interest rate environment, an institution with a positive gap would
generally expect an increase in net interest income, whereas an institution with
a negative gap would generally be expected to experience the opposite result.
The following "gap table" sets forth maturity and repricing information
concerning the Company's interest sensitive assets and liabilities as of
December 31, 1996. The assumptions utilized to place the assets and liabilities
in the appropriate time frames are standard methods used within the banking
industry. Fixed rate, fixed term investment securities are assigned to the time
frames in which they are scheduled to mature. Adjustable rate investment
securities have been placed in the time frames in which they are scheduled to
reprice. Similarly, adjustable rate mortgage-backed securities and loans have
been allocated among the various periods in which they reprice. Deposit
maturities for NOW accounts, money market accounts and passbook savings are
assigned to time frames based on the actual experience of the Bank. Variable
rate certificates of deposits and borrowings were allocated according to the
applicable adjustment dates. Fixed rate certificates and borrowings were
allocated to the time frames in which they mature. The assumptions utilized for
this exercise are believed to be accurate and meaningful, but may not ultimately
reflect the actual prepayments, withdrawals or repricing experienced by the
Company.
The Company's interest sensitive assets were $393.9 million and the interest
sensitive liabilities were $365.8 million as of December 31, 1996. At that date,
the one year cumulative net interest rate sensitivity gap was ($29.4) million or
(6.06%) of assets.
1-180 181-364 1-2 2-3 3-5 5-10 OVER 10
INTEREST RATE SENSITIVITY PERIOD DAYS DAYS YEARS YEARS YEARS YEARS YEARS
- -------------------------------------------- --------- --------- --------- --------- --------- --------- -----------
DOLLARS IN THOUSANDS
Earning assets:
Fixed rate mortgages........................ $ 201 $ 347 $ 87 $ 488 $ 786 $ 3,517 $ 15,999
Variable rate mortgages..................... 84,255 34,472 17,306 19,805 34,499 7,368 21,636
Commercial loans............................ 15,645 336 375 535 2,755 556 998
Consumer loans.............................. 1,679 154 133 280 517 13 250
Investments................................. 28,428 8,669 17,338 11,073 15,764 5,000 42,670
--------- --------- --------- --------- --------- --------- -----------
Total earning assets........................ 130,208 43,978 35,239 32,181 54,321 16,454 81,553
Interest-bearing liabilities:
NOW deposits and Money Market Accounts...... 10,790 10,791 21,591 -- -- 11,461 --
Passbook and escrow deposits................ 7,121 7,121 14,242 105 247 20,307 --
Time deposits............................... 96,712 55,471 44,576 11,729 9,451 2,378 --
Borrowed funds.............................. 11,000 -- 20,000 3,000 7,668 -- --
--------- --------- --------- --------- --------- --------- -----------
Total interest-bearing liabilities.......... 125,623 73,383 100,409 14,834 17,366 34,146 --
--------- --------- --------- --------- --------- --------- -----------
Interest rate sensitivity gap............... $ 4,585 $ (29,405) $ (65,170) $ 17,347 $ 36,955 $ (17,692) $ 81,553
--------- --------- --------- --------- --------- --------- -----------
Cumulative Gap.............................. $ -- $ (24,820) $ (89,990) $ (72,643) $ (35,688) $ (53,380) $ 28,173
--------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- -----------
INTEREST RATE SENSITIVITY PERIOD TOTAL
- -------------------------------------------- ---------
Earning assets:
Fixed rate mortgages........................ $ 21,425
Variable rate mortgages..................... 219,341
Commercial loans............................ 21,200
Consumer loans.............................. 3,026
Investments................................. 128,942
---------
Total earning assets........................ 393,934
Interest-bearing liabilities:
NOW deposits and Money Market Accounts...... 54,633
Passbook and escrow deposits................ 49,143
Time deposits............................... 220,317
Borrowed funds.............................. 41,668
---------
Total interest-bearing liabilities.......... 365,761
---------
Interest rate sensitivity gap............... $ 28,173
---------
Cumulative Gap.............................. $ --
---------
---------
ANALYSIS OF FINANCIAL CONDITION
Total assets of the Bank increased by $62,773,552 or 18.1% to $409,638,765
at December 31, 1996 from $346,865,213 as of December 31, 1996. The growth in
assets was primarily due to the increase achieved in the Bank's loans
outstanding.
20
The securities portfolio, which includes securities held to maturity,
securities available for sale and short-term investments, increased by
$3,323,674 or 12.3% and totaled $128,623,944 or 31.4% of total assets at
December 31, 1996 compared to $125,300,270 or 36.1% of total assets at December
31, 1995. The Bank utilizes its securities portfolio as a source of liquidity to
fund loans and meet short-term cash needs. At December 31, 1996 the Bank's
investment portfolio included Federal Home Loan Mortgage Corporation (FHLMC)
Participation Certificates classified as held to maturity. The FHLMC
Participation Certificates owned are predominantly short-term with maturities in
the four to six year range. The cash flow received from these obligations is
used primarily to fund the growth in commercial business loans and the growth in
residential and commercial mortgage loans. By maturity, the investment portfolio
can, at December 31, 1996, be broken down into three major components. The first
component, securities held to maturity, consists primarily of Federal Home
Mortgage Corporation Participation Certificates and totaled $83,512,156 or 64.9%
of total securities, all of which mature within six years. These obligations,
although being held to maturity, can be used as collateral for short-term
borrowings up to approximately 80% of their market value if required. The second
component consists of callable FHLB and FHLMC Bonds and Notes and Common Stock,
which totaled $30,761,290 or 23.9% of total securities and which are designated
as available for sale. The third component is short-term investments and FHLB
stock, totaling $14,350,498 or 11.2% of total securities. With the exception of
securities designated as available for sale, the Bank's intention is to hold all
investment securities to maturity, and accordingly, investments are carried at
cost, adjusted for amortization of premiums and accretion of discounts.
Loans continue to be the primary earning asset of the Bank and represent
64.3% of total assets. As of December 31, 1996, 91.9% of total loans outstanding
or $241,191,011 were secured by residential and commercial real estate, and of
this amount, $136,049,414 or 56.4% were secured by residential properties.
During 1996, our efforts to originate residential and commercial real estate
loans and commercial business loans produced substantial growth in our asset
size. In 1996, the Bank originated $128,198,000 in residential and commercial
real estate mortgage loans, of which only $18,315,000 were sold into the
secondary market. In addition, the Bank originated $10,600,000 in business loans
and $4,600,000 in consumer loans. As a result, net loans for 1996 increased by
$54,881,466 or 26.3% to $263,208,189 at December 31, 1996 from $208,326,723 at
December 31, 1995.
The provision for possible loan losses totaled was $1,211,333 in 1996 as
compared to $300,000 in 1995 and $135,000 in 1994. The increase in the loan loss
provision for 1996 was due to a one time special loan loss provision of $1.0
million associated with Bennett Funding Group, Inc. For 1996, the Bank had net
charge offs of $1,129,924 compared to net recoveries of $711 in 1995 and net
charge offs of $374,595 in 1994. As of December 31, 1996, the Bank's allowance
for possible loan losses totaled $2,623,406 as compared to $2,541,997 at
December 31, 1995.
Continued uncertainty exists as to the ultimate realization in full of
certain of the Bank's loans due to the current conditions of the Massachusetts
economy. Based upon management's assessment of the quality of loan production,
and the current condition of the Massachusetts economy, management believes that
the allowance for loan losses as of December 31, 1996 is adequate to absorb the
current estimation of future losses in the loan portfolio. However, any
deterioration in future periods could result in the Bank experiencing increased
levels of nonperforming loans and charge-offs, and additional provisions for
loan losses may be required.
Other real estate owned decreased by $430,000 to $0 at December 31, 1996
from $430,000 at December 31, 1995. Other real estate owned consists of assets
that were acquired by foreclosure, or assets that were acquired by the
acceptance of a deed in lieu of foreclosure during the year. Other real estate
21
owned is carried on the Bank's books at the lower of the preforeclosure loan
balance or the fair value less cost to sell.
During 1996, deposits increased by $54,302,678 or 19.2% to $337,089,927 at
December 31, 1996 from $282,787,249 at December 31, 1995. The growth in deposits
during 1996 was primarily in term certificates of deposits which increased by
$39,398,992. The remainder of our deposit growth was in retail deposits which
increased by $14,903,686 during 1996. Money market deposits increased by
$3,991,624 or 11.8% to $37,811,552 in 1996 from $33,819,928 in 1995. In
addition, NOW and demand deposits increased by $9,178,665 or 41.7% to
$31,190,026 in 1996 from $22,011,361 in 1995. Other savings for the year
increased by $1,733,397 to $47,771,658.
The Bank uses borrowed funds, primarily advances from the Federal Home Loan
Bank as an alternative funding source for immediate lending or investment
opportunities or as a means of controlling its cost of funds. The Bank pays down
borrowings in accordance with the respective contracted borrowing agreements and
as cash flow warrants.
RESULTS OF OPERATIONS--COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 1996 AND
1995
Net interest margins were negatively impacted by the overall increase in our
cost of funds in 1996 which increased by 7 basis points to 4.62% in 1996
compared to 4.55% in 1995. However, net income was positively impacted by the
increase in the Bank's loan portfolio which increased by $54,881,466 or 26.3% to
$263,208,189 at year end 1996 compared to $208,326,723 in 1995. Total earning
assets increased by $58,172,155 or 17.4% to $393,934,033 at December 31, 1996.
As a result, net interest income increased by $1,816,606 or 17.8% to $12,045,839
for 1996 compared to $10,229,233 for 1995.
Noninterest income was comprised of fees on checking and savings related
services, gains and losses on sales of securities, loans, other real estate
owned, and miscellaneous other items. Noninterest income totaled $727,532 in
1996 compared to $1,288,714 in 1995. The net decrease in noninterest income came
primarily from gains from the sale of loan servicing which totaled $763,806 in
1995 as compared to no gains in 1996. Customer service fees also increased to
$752,609 in 1996 from $463,518 in 1995.
Noninterest expenses in 1996 increased by $883,802 or 12.9% to $7,736,300
compared to total noninterest expenses of $6,852,498 in 1995. Much of this
increase can be attributed to the costs associated with the opening of two
additional branches in 1996, along with the two branch locations opened in 1995.
In May 1996, we opened our eighth branch at 71 Main Street in Hingham. We opened
our ninth branch on November 23, 1996 at 63 Franklin Street, Quincy.
Consequently, salaries and employee benefits increased by $796,011 or 23.3% to
$4,212,519 in 1996 from $3,416,508 in 1995. Occupancy and equipment expenses
increased by $337,577 or 33.5% to $1,346,111 in 1996 from $1,008,534 in 1995.
This increase was partially offset by a reduction in OREO expenses which
declined by $220,902 or 73.4% from $300,796 in 1995. In total, noninterest
expenses as a percentage of average assets declined to 2.07% in 1996 from 2.21%
in 1995.
The Bank's effective tax rate was 37.8% in 1996, which is less than the
combined federal and state statutory rate, due to rehabilitation and low income
housing credits and various other differences in recognition of income as
allowed under the Internal Revenue Code.
For the year ended December 31, 1996, the Bank's net income was $2,380,869
or $1.14 per share, based on 2,091,669 weighted average shares and common stock
equivalents outstanding compared to net income of $2,719,235 or $1.41 per share,
based on 1,931,621 weighted average shares and common stock
22
equivalents outstanding for the year ended December 31, 1995. Finally, as a
result of 1996 earnings of $2,380,869 and the issuance of additional capital
stock through the various purchase plans and the two private placements, the
Bank experienced an increase of $5,111,711 in stockholders' equity to
$27,936,387 at December 31, 1996 from $22,824,616 at December 31, 1995. Over
this period, the Bank's leverage capital ratio increased to 6.8% at December 31,
1996 from 6.6% at December 31, 1995.
AVERAGE BALANCE SHEET AND YIELD ANALYSIS
The following table sets forth the components of the Bank's average
balances, net interest and fee income, interest rate spread and net interest
margin for the years indicated.
1996 1995 1994
----------------------------------- ----------------------------------- ---------
AVERAGE INCOME/ AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE YIELD/ RATE BALANCE EXPENSE YIELD/ RATE BALANCE
--------- ----------- ----- --------- ----------- ----- ---------
ASSETS
Investment securities:
Bonds and obligations.............. $ 46,315 $ 3,481 7.52% $ 10,158 $ 796 7.84% $ 271
Mortgage-backed securities........... 74,298 4,010 5.40% 93,438 5,088 5.45% 102,492
Other securities................... 6,904 346 5.01% 3,206 228 7.11% 1,812
--------- ----------- ----- --------- ----------- ----- ---------
Total investment securities........ 127,517 7,837 6.15% 106,802 6,112 5.72% 104,575
Loans................................ 231,255 20,771 8.98% 188,479 17,472 9.27% 148,814
Other interest-bearing deposits...... 3,336 175 5.22% 6,126 354 5.78% 2,117
Federal funds sold................... 0 0 0.00% 207 11 5.31% 621
--------- ----------- ----- --------- ----------- ----- ---------
Total earning assets............... 362,108 28,783 7.95% 301,614 23,949 7.94% 256,127
Allowance for possible loan losses... (2,413) (2,341) (2,357)
Cash and due from banks.............. 3,479 2,586 2,263
Other assets......................... 10,610 8,898 8,490
--------- --------- ---------
Total assets......................... $ 373,784 $ 310,757 $ 264,523
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
NOW accounts....................... $ 13,230 $ 199 1.50% $ 10,365 $ 155 1.50% $ 9,664
Savings Accounts..................... 46,823 1,372 2.93% 50,210 1,415 2.82% 86,656
Money market accounts.............. 35,842 1,235 3.45% 27,459 1136 4.14% 5,498
Term certificates.................. 197,853 11,437 5.78% 170,020 9,578 5.63% 126,968
--------- ----------- ----- --------- ----------- ----- ---------
Total deposits....................... 293,748 14,243 4.85% 258,054 12,284 4.76% 228,786
Borrowed funds....................... 43,253 2,494 5.77% 22,395 1436 6.41% 10,168
--------- ----------- ----- --------- ----------- ----- ---------
Total interest-bearing
liabilities...................... 337,001 16,737 4.97% 280,449 13,720 4.89% 238,954
Demand deposit accounts.............. 10,873 7,969 6,076
Other liabilities.................... 602 439 660
Stockholders' equity................. 25,308 21,900 18,833
--------- --------- ---------
Total liabilities and stockholders'
equity........................... $ 373,784 $ 310,757 $ 264,523
--------- --------- ---------
--------- --------- ---------
Net interest income.................. 12,046 10,229
----------- -----------
----------- -----------
Interest rate spread................. 2.98% 3.05%
----- -----
----- -----
Net interest margin.................. 3.33% 3.39%
----- -----
----- -----
Cost of funds to average earning
assets............................. 4.62% 4.55%
Average earning assets to Average
total assets....................... 96.88% 97.06%
INCOME/
EXPENSE YIELD/ RATE
----------- -----
ASSETS
Investment securities:
Bonds and obligations.............. $ 21 7.75%
Mortgage-backed securities........... 5,169 5.04%
Other securities................... 150 8.28%
----------- -----
Total investment securities........ 5,340 5.11%
Loans................................ 13,296 8.93%
Other interest-bearing deposits...... 73 3.45%
Federal funds sold................... 19 3.06%
----------- -----
Total earning assets............... 18,728 7.31%
Allowance for possible loan losses...
Cash and due from banks..............
Other assets.........................
Total assets.........................
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
NOW accounts....................... $ 144 1.49%
Savings Accounts..................... 2,507 2.89%
Money market accounts.............. 146 2.66%
Term certificates.................. 6,090 4.80%
----------- -----
Total deposits....................... 8,887 3.88%
Borrowed funds....................... 611 6.01%
----------- -----
Total interest-bearing
liabilities...................... 9,498 3.97%
Demand deposit accounts..............
Other liabilities....................
Stockholders' equity.................
Total liabilities and stockholders'
equity...........................
Net interest income.................. 9,230
-----------
-----------
Interest rate spread................. 3.34%
-----
-----
Net interest margin.................. 3.60%
-----
-----
Cost of funds to average earning
assets............................. 3.71%
Average earning assets to Average
total assets....................... 96.83%
23
RATE/VOLUME ANALYSIS
The following table shows changes in the Bank's net interest income
attributable to the change in interest rates and the change in the volume of
interest-bearing assets and liabilities. Amounts attributed to the change in
rates are based upon the change in rate multiplied by the prior year's volume.
Amounts attributed to the change in volume are based upon the change in volume
multiplied by the prior year's rate. The combined effect of changes in both
volume and rate, which cannot be separately identified, has been allocated
proportionately.
1996 VS 1995 1995 VS 1994
------------------------------- -------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
------------------------------- -------------------------------
YEAR ENDED DECEMBER 31, VOLUME RATE TOTAL VOLUME RATE TOTAL
- -------------------------------------------------------- --------- --------- --------- --------- --------- ---------
Interest income
Loans................................................... $ 3,904 $ (605) $ 3,299 $ 3,610 $ 566 $ 4,176
Investments............................................. 1,050 484 1,534 314 731 1,045
--------- --------- --------- --------- --------- ---------
Total interest income................................... 4,953 (120) 4,833 3,924 1,297 5,221
--------- --------- --------- --------- --------- ---------
Interest Expense
Deposits................................................ 1,715 244 1,959 1,265 2,132 3,397
Borrowed funds.......................................... 1,270 (212) 1,058 759 66 825
--------- --------- --------- --------- --------- ---------
Total interest expense.................................. 2,985 32 3,017 2,024 2,198 4,222
--------- --------- --------- --------- --------- ---------
Net interest income..................................... $ 1,968 $ (152) $ 1,816 $ 1,900 $ (901) $ 999
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
The earnings of the Bank depend primarily upon the difference between
interest and dividend income earned on its loan and investment portfolios and
the interest expense paid on its deposits and borrowings. Total interest income
increased by $4,833,862 or 20.2% from $23,949,001 for the year ended December
31, 1995 to $28,782,863 for the year ended December 31, 1996. Total interest
expense increased by $3,017,256 or 22.0% from $13,719,768 for the year ended
December 31, 1995 to $16,737,024 for the year ended December 31, 1996. For the
year ended December 31, 1996, the Bank's net interest income totaled $12,045,839
representing an increase of $1,816,606 or 17.8% compared to $10,229,233 for the
year ended December 31, 1995.
The gross yield on average earning assets was 8.0% for 1996 compared to 7.9%
in 1995. Interest expense as a percentage of average interest-bearing
liabilities in 1996 was 5.0% compared to 4.9% in 1995. This resulted in a net
interest spread of 3.0% in 1996 and 3.0% in 1995. Interest expense as a
percentage of average earning assets in 1996 was 4.6% compared to 4.6% in 1995.
This resulted in a net interest margin of 3.3% in 1996 and 3.4% in 1995.
RESULTS OF OPERATIONS--COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1995 AND
1994
Net interest margins were negatively impacted by the overall increase in
interest rates in 1995. However, net income was positively impacted by the
increase in the Bank's loan portfolio resulting in increased net interest
income. In addition, pretax core earnings were positively impacted by the
substantial decline in net charge-offs and the resultant reduction in loan loss
provisions.
For 1995, noninterest income was comprised of fees on checking and savings
related services, gains and losses on sales of securities, loans and other real
estate owned, and miscellaneous other items.
24
Noninterest income totaled $1,288,714 in 1995 compared to $570,926 in 1994. The
net increase in noninterest income was primarily from gains from the sale of
loan servicing which totaled $763,806 in 1995 as compared to no gains in 1994.
We also experienced an increase in customer service fees to $463,518 in 1995
from $413,058 in 1994.
Noninterest expenses in 1995 increased by $256,427 or 3.9% to $6,852,498
compared to total noninterest expenses of $6,596,071 in 1994. Much of this
increase can be attributed to the costs associated with the opening of two
additional branches in 1995 and the expansion of our lending staff which was
necessary in order to accommodate the growth in loans outstanding achieved. On
July 17, 1995, we opened a branch at 274 Main Street in Hingham. We opened our
seventh branch on December 21, 1995 at 397 Washington Street, Stoughton.
Consequently, salaries and employee benefits increased by $359,379 or 11.8% to
$3,416,508 in 1995 from $3,057,129 in 1994. Occupancy and equipment expenses
increased by $124,895 or 14.1% to $1,008,534 in 1995 from $883,639 in 1994. This
increase was partially offset by a reduction in OREO expenses which declined by
$86,262 or 22.3% from $387,058 in 1994 and a reduction in FDIC insurance expense
which declined by $290,279 or 46.6% from $623,431 in 1994 to $333,152 in 1995.
In total, noninterest expenses as a percentage of average assets declined to
2.2% in 1995 from 2.5% in 1994.
The Bank's effective tax rate was 37.7% in 1995, which is less than the
combined federal and state statutory rate, due to rehabilitation and low income
housing credits and various other differences in recognition of income as
allowed under the Internal Revenue Code.
The Bank, in 1995, recorded pretax core earnings of $3,904,144 as compared
to core earnings of $3,433,615 in 1994 and $2,186,435 in 1993. For the year
ended December 31, 1995, the Bank's net income was $2,719,235 or $1.41 per
share, based on 1,931,621 weighted average shares and common stock equivalents
outstanding compared to net income of $2,067,626 or $1.13 per share, based on
1,835,948 weighted average shares and common stock equivalents outstanding for
the year ended December 31, 1994. Finally, as a result of 1995 earnings of
$2,719,235 and the issuance of additional capital stock, the Bank experienced an
increase of $3,038,519 in stockholders' equity to $22,824,616 at December 31,
1995 from $19,786,097 at December 31, 1994. Over this period, the Bank's
leverage capital ratio declined to 6.6% from 6.9% as a result of asset growth
LIQUIDITY AND CAPITAL RESOURCES
The Bank attempts to maximize interest-earning assets while maintaining
sufficient funds on hand to meet loan commitments, cash disbursements and
possible deposit outflows. The Bank obtains funds for investment and other
banking purposes principally from deposits, borrowings, loan repayments and
through sales of loans, loan participations and securities available for sale,
and maturities of investment securities. While loan payments and maturing
investment securities are a relatively stable source of funds, deposit flows are
greatly influenced by general interest rates, economic conditions and
competitive factors. Borrowings may also be used to offset reductions in other
sources of funds such as deposits. The Bank may borrow up to 30% of its total
assets but not more than 20 times its capital stock holdings in the FHLB for any
sound business purpose for which the Bank has legal authority. Borrowings
authorized totaled $53,414,000 at December 31, 1996.
25
IMPACT OF INFLATION AND CHANGING PRICES
Virtually all of the assets and liabilities of a financial institution,
unlike those of other companies, are monetary in nature. Consequently, changes
in the levels of interest rates have a greater impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily fluctuate in the same direction or in the same
magnitude as prices of goods and services.
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles requiring
the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
CAPITAL AND REGULATORY MATTERS
The Bank's regulators have classified and defined bank capital into the
following components: (1) Tier I capital, which includes tangible stockholders'
equity for common stock and certain perpetual preferred stock, and (2) Tier II
capital, which includes a portion of the allowance for possible loan losses,
certain qualifying long-term debt and preferred stock which does not qualify for
Tier I capital. In addition, they have implemented risk-based capital guidelines
that require a bank to maintain certain minimum capital as a percent of such
bank's assets and certain off-balance sheet items adjusted for predefined credit
risk factors (risk-adjusted assets). As of December 31, 1996, the Bank's Tier I
and combined Tier I and Tier II capital ratios were 11.0% and 12.0%,
respectively.
In addition to the risk-based guidelines discussed above, the Bank's
regulators require that the Bank maintain a minimum leverage ratio (Tier I
capital as a percent of tangible assets) of 4.0%. As of December 31, 1996, the
Bank had a leverage capital ratio of 6.9%.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required to be furnished pursuant to this item is contained
in the Consolidated Financial Statements and the Notes to Consolidated Financial
Statements that follow this page.
26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
EMERALD ISLE BANCORP, INC.
To the Board of Directors and Stockholders of Emerald Isle Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Emerald Isle
Bancorp, Inc. (the "Company") as of December 31, 1996 and 1995, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Emerald Isle Bancorp, Inc. as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
January 16, 1997
27
EMERALD ISLE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
-------------- --------------
Assets:
Cash and cash equivalents......................................................... $ 5,521,299 $ 3,213,259
Short-term investments............................................................ 11,679,798 4,860,000
Securities (Notes 1 and 3):
Available for sale............................................................ 30,761,290 40,676,183
Held to maturity--market value $81,522,056 and $76,708,209.................... 83,512,156 77,565,687
Federal Home Loan Bank stock.................................................. 2,670,700 2,198,400
Loans, net of allowance for possible loan losses of $2,623,406
and $2,541,997 (Note 4)....................................................... 263,208,189 208,326,723
Banking premises and equipment, net (Note 5)...................................... 7,711,423 5,574,956
Accrued interest receivable....................................................... 2,501,071 2,128,536
Other real estate owned........................................................... 0 430,000
Other assets (Note 8)............................................................. 2,072,839 1,891,469
-------------- --------------
Total assets...................................................................... $ 409,638,765 $ 346,865,213
-------------- --------------
-------------- --------------
Liabilities and Stockholders' Equity:
Deposits (Note 6)................................................................. $ 337,089,927 $ 282,787,249
Federal Home Loan Bank advances (Note 7).......................................... 41,668,000 38,968,000
Mortgagors' escrow payments....................................................... 1,371,878 1,094,397
Income taxes payable (Note 8)..................................................... 643,901 364,444
Other liabilities................................................................. 928,672 826,507
-------------- --------------
Total liabilities................................................................. $ 381,702,378 $ 324,040,597
-------------- --------------
Commitments and Contingencies (Notes 9 and 10)
Stockholders' equity (Notes 2, 11, 12 and 13):
Serial preferred stock, $1.00 par value--
Authorized--1,000,000 shares
Issued--None -- --
Common stock, $1.00 par value--...................................................
Authorized--5,000,000 shares
Issued and outstanding--2,210,888 shares and 1,915,539 shares, respectively... 2,210,888 1,915,539
Additional paid-in capital........................................................ 11,586,709 8,441,862
Retained earnings................................................................. 14,329,844 12,406,361
Less: Net unrealized gains (losses) on securities available for sale, net of
tax............................................................................. (191,054) 60,854
-------------- --------------
Total stockholders' equity........................................................ 27,936,387 22,824,616
-------------- --------------
Total liabilities and stockholders' equity........................................ $ 409,638,765 $ 346,865,213
-------------- --------------
-------------- --------------
The accompanying notes are an integral part of these consolidated financial
statements.
28
EMERALD ISLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ------------ ------------
Interest and Dividend Income:
Interest on loans..................................................... $ 20,770,693 $ 17,471,506 $ 13,295,968
Interest and dividends on securities.................................. 7,622,640 6,112,429 5,339,665
Interest on short-term investments.................................... 389,530 365,066 92,464
------------ ------------ ------------
Total interest and dividend income.................................... 28,782,863 23,949,001 18,728,097
------------ ------------ ------------
Interest Expense:
Interest on deposits.................................................. 14,243,150 12,284,438 8,892,241
Interest on borrowed funds (Note 7)................................... 2,493,874 1,435,330 605,754
------------ ------------ ------------
Total interest expense................................................ 16,737,024 13,719,768 9,497,995
------------ ------------ ------------
Net interest income................................................... 12,045,839 10,229,233 9,230,102
Provision for possible loan losses (Note 4)........................... 1,211,333 300,000 135,000
------------ ------------ ------------
Net interest income, after provision for possible loan losses......... 10,834,506 9,929,233 9,095,102
------------ ------------ ------------
Noninterest Income:
Customer service fees................................................. 752,609 463,518 413,058
Gain (loss) on sale of securities, net................................ (39,005) 90,993 193,577
Gain on sale of loan servicing (Note 4)............................... -- 763,806 --
Loss on sale of fixed assets.......................................... -- (49,826) --
Gain (loss) on sales of loans, net.................................... 193 (52,611) (1,395)
Loss on sale of other real estate owned............................... (38,195) (42,872) (170,177)
Other income.......................................................... 51,930 115,706 135,863
------------ ------------ ------------
Total noninterest income.............................................. 727,532 1,288,714 570,926
------------ ------------ ------------
Noninterest Expense:
Salaries and employee benefits (Note 12).............................. 4,212,519 3,416,508 3,057,129
Occupancy and equipment expenses (Notes 5 and 9)...................... 1,346,111 1,008,534 883,639
Data processing expenses.............................................. 233,439 230,624 217,367
Other real estate owned expenses...................................... 79,894 300,796 387,058
Other general and administrative expenses............................. 1,864,337 1,896,036 2,050,878
------------ ------------ ------------
Total noninterest expense............................................. 7,736,300 6,852,498 6,596,071
------------ ------------ ------------
Income before provision for income taxes.............................. 3,825,738 4,365,449 3,069,957
Provision for income taxes (Note 8)................................... 1,444,869 1,646,214 1,002,331
------------ ------------ ------------
Net income............................................................ 2,380,869 2,719,235 2,067,626
------------ ------------ ------------
------------ ------------ ------------
Earnings per share (Note 1)........................................... $ 1.14 $ 1.41 $ 1.13
------------ ------------ ------------
------------ ------------ ------------
Weighted average number of common shares (Note 1)..................... 2,091,669 1,931,621 1,835,948
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
29
EMERALD ISLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NET
UNREALIZED
GAIN (LOSS)
ON
ADDITIONAL SECURITIES
COMMON PAID-IN RETAINED AVAILABLE
STOCK CAPITAL EARNINGS FOR SALE TOTAL
----------- ------------ ------------ ------------ ------------
Balance at December 31, 1993................... $ 1,674,816 $ 7,682,560 $ 7,954,760 $ -- $ 17,312,136
Cumulative effect of adopting SFAS No. 115, net
of tax (Note 1).............................. -- -- -- 35,387 35,387
Net income..................................... -- -- 2,067,626 -- 2,067,626
Proceeds from issuance of stock through stock
purchase plan (Note 11)...................... 38,355 246,279 -- -- 284,634
Proceeds from exercise of stock options (Note
13).......................................... 95,250 31,750 -- -- 127,000
Change in net unrealized loss on securities
available for sale, net of tax............... -- -- -- (40,686) (40,686)
----------- ------------ ------------ ------------ ------------
Balance at December 31, 1994................... 1,808,421 7,960,589 10,022,386 (5,299) 19,786,097
Net income..................................... -- -- 2,719,235 -- 2,719,235
Proceeds from issuance of stock through stock
purchase plan (Note 11)...................... 54,050 435,291 -- -- 489,341
Proceeds from issuance of stock through the
dividend reinvestment and optional cash
payment plan (Note 11)....................... 1,568 20,064 -- -- 21,632
Proceeds from exercise of stock options (Note
13).......................................... 51,500 25,918 -- -- 77,418
Dividends paid................................. -- -- (335,260) -- (335,260)
Change in net unrealized gain on securities
available for sale, net of tax............... -- -- -- 66,153 66,153
----------- ------------ ------------ ------------ ------------
Balance at December 31, 1995................... 1,915,539 8,441,862 12,406,361 60,854 22,824,616
Net income..................................... -- -- 2,380,869 -- 2,380,869
Proceeds from sale of stock in private
placements (Note 11)......................... 200,000 2,739,716 -- -- 2,939,716
Proceeds from issuance of stock through stock
purchase plan (Note 11)...................... 23,641 311,026 -- -- 334,667
Proceeds from issuance of stock through the
dividend reinvestment and optional cash
payment plan (Note 11)....................... 11,138 152,175 -- -- 163,313
Proceeds from exercise of stock options (Note
13).......................................... 1,500 1,000 -- -- 2,500
Dividends paid................................. -- -- (457,386) -- (457,386)
Change in net unrealized gain (loss) on
securities available for sale, net of tax.... -- -- -- (251,908) (251,908)
Common stock dividend declared (Note 1)........ 59,070 (59,070) -- -- --
----------- ------------ ------------ ------------ ------------
Balance at December 31, 1996................... $ 2,210,888 $ 11,586,709 $ 14,329,844 $ (191,054) $ 27,936,387
----------- ------------ ------------ ------------ ------------
----------- ------------ ------------ ------------ ------------
30
EMERALD ISLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
----------- ----------- -----------
Cash Flows from Operating Activities:
Net income............................................................... $ 2,380,869 $ 2,719,235 $ 2,067,626
Adjustments to reconcile net income to net cash provided by operating
activities--
Depreciation and amortization............................................ 679,297 507,489 430,161
Amortization of premiums................................................. 320,226 503,928 1,024,484
Provision for possible loan losses....................................... 1,211,333 300,000 135,000
Gain (Loss) on sale of assets, net....................................... 77,200 (709,490) (22,005)
Increase (decrease) in deferred loan fees................................ 124,611 (196,407) 152,718
Provision (benefit) for deferred taxes................................... (17,364) (138,293) (52,154)
Proceeds from sale of mortgage loans..................................... 19,124,091 15,848,472 6,845,787
Loans originated for resale.............................................. (19,123,898) (15,901,083) (6,847,182)
(Increase) decrease in accrued interest receivable....................... (372,535) (643,459) (1,762)
(Increase) decrease in other assets...................................... (845,078) (814,359) 8,380
Increase (decrease) in accrued expenses and other liabilities............ 398,987 982,578 (731,838)
----------- ----------- -----------
Total adjustments........................................................ 1,576,870 (260,624) 941,589
----------- ----------- -----------
Net cash provided by operating activities................................ 3,957,739 2,458,611 3,009,215
----------- ----------- -----------
Cash Flows from Investing Activities:
Loans purchased.......................................................... (15,732,541) (22,604,223) --
Net (increase) decrease in loans......................................... (40,631,980) (22,451,874) (29,728,001)
Proceeds from sales of other real estate owned........................... 538,916 779,791 1,522,320
Sales (purchases) of short-term investments, net......................... (6,819,798) (1,270,000) (1,645,000)
Proceeds from the sale of fixed assets................................... -- 49,193 --
Purchases of securities held to maturity................................. (21,507,856) -- (35,734,168)
Proceeds from maturities of securities held to maturity.................. 15,561,387 12,894,834 18,463,098
Purchases of securities available for sale............................... (18,166,256) (76,818,369) (15,932,605)
Proceeds from sale of securities available for sale...................... 27,661,223 51,168,978 28,165,654
Purchases of premises and equipment...................................... (2,815,763) (1,443,227) (1,189,520)
----------- ----------- -----------
Net cash used in investing activities.................................... (61,912,668) (59,694,897) (36,078,222)
----------- ----------- -----------
Cash Flows from Financing Activities:
Increase in deposits, net................................................ 54,580,159 26,447,457 34,389,711
FHLB advances, net....................................................... 2,700,000 29,968,000 470,000
Proceeds from issuance of stock.......................................... 3,440,196 588,391 411,634
Dividends paid........................................................... (457,386) (335,260)
----------- ----------- -----------
Net cash provided by financing activities................................ 60,262,969 56,668,588 35,271,345
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents..................... 2,308,040 (567,698) 2,202,338
Cash and cash equivalents, beginning of year............................. 3,213,259 3,780,957 1,578,619
----------- ----------- -----------
Cash and cash equivalents, end of year................................... $ 5,521,299 $ 3,213,259 $ 3,780,957
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................................ $16,724,138 $13,721,425 $ 9,500,101
Income taxes paid........................................................ 1,192,500 1,581,579 2,475,996
----------- ----------- -----------
----------- ----------- -----------
Supplemental Schedule of Noncash Investing and Financing Activities:
Transfers of loans to other real estate owned............................ $ 70,000 $ 1,323,945 $ 1,731,400
----------- ----------- -----------
----------- ----------- -----------
Transfer of held to maturity securities to available for sale............ -- $ 9,250,187 --
----------- ----------- -----------
----------- ----------- -----------
Common stock dividend declared (Note 1).................................. $ 59,070 $ 21,424 $ 26,721
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Emerald Isle Bancorp, Inc. (the "Company") and its wholly owned subsidiary, The
Hibernia Savings Bank (the "Bank"). All significant intercompany balances and
transactions have been eliminated in consolidation.
Emerald Isle Bancorp, Inc. was organized at the direction of the Bank and
pursuant to a Plan of Reorganization and Acquisition between the Company and the
Bank dated February 15, 1996 and approved by stockholders at the annual meeting
held on April 29, 1996 and consummated on October 1, 1996. The transaction has
been recorded using the pooling of interest method of accounting.
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, cash items in the process of collection and amounts due from banks.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of income and expenses during the reporting
periods. Operating results in the future could vary from the amounts derived
from management's estimates and assumptions.
SECURITIES
Securities purchased are classified as held to maturity when it is
management's intent and ability to hold them to maturity. Such securities,
including mortgage and asset-backed securities, are carried at cost, adjusted
for amortization of premium and accretion of discount, as computed by the
effective yield method. Securities not classified as held to maturity are
classified as available for sale and are reported at fair value, with unrealized
gains or losses, net of the estimated tax effects, classified as a separate
component of stockholders' equity. The Company does not have any securities
classified as trading.
When securities are sold, the adjusted cost of the specific security sold is
used to compute gains or losses on the sale.
LOANS, DISCOUNTS AND RESERVES
Loans, as reported, have been reduced by unadvanced loan proceeds, unearned
discounts, deferred fees and the allowance for possible loan losses.
Interest on loans is not accrued when principal or interest is 90 days or
more past due or, in the opinion of management, the collectibility of the
principal or interest becomes doubtful.
The Company adopted SFAS No. 114, Accounting by Creditors for Impairment of
a Loan and SFAS No. 118, Accounting by Creditors for Impairment of a Loan,
Income Recognition and Disclosures, as of
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
January 1, 1995. SFAS No. 114 requires that certain impaired loans be measured
based on the present value of expected future cash flows discounted at the loans
original effective interest rate. The Company defines impaired loans as all
classified loans in nonaccrual status and reviews on a continuous basis all
loans in order to identify possible impaired loans. As a practical expedient,
impairment may be measured based on the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent. When the
measure of the impaired loan is less than the recorded investment in the loan,
the impairment is recorded through a valuation allowance. The Company had
previously measured the allowance for credit losses using methods similar to
those prescribed in SFAS No. 114. As a result of adopting these statements, no
additional allowance for loan losses was required as of January 1, 1995.
The adequacy of the allowance for possible loan losses is evaluated on a
regular basis by management. Factors considered in evaluating the adequacy of
the allowance include previous loss experience, current economic conditions and
their effect on borrowers, and the performance of individual loans in relation
to contract terms. The provision for possible loan losses charged to operations
is based upon management's judgment of the amount necessary to maintain the
allowance at a level adequate to absorb possible future losses. The allowance is
an estimate, and ultimate losses may vary from current estimates. Loan losses
are charged against the allowance when management believes the collectibility of
principal is unlikely.
BANKING PREMISES AND EQUIPMENT
Land is carried at original cost. Buildings, leasehold improvements and
equipment are stated at cost, less accumulated depreciation and amortization,
computed primarily on the straight-line basis over the estimated useful lives of
the assets or terms of leases, if shorter. The cost of maintenance and repairs
is charged to operations as incurred. The Company periodically evaluates long
lived assets for impairment on the basis of whether these assets are recoverable
from projected undiscounted net cash flows of the related assets.
OTHER REAL ESTATE OWNED
Real estate acquired by foreclosure is initially recorded at the lower of
cost (principal balance of the former mortgage loan plus costs of obtaining
title and possession), or estimated fair value less estimated costs to sell.
During the holding period, foreclosed real estate is periodically appraised, and
the carrying value is adjusted, if necessary, if the estimated fair value is
less than the carrying value.
Expenses and revenues related to holding foreclosed assets are reported in
the results of operations as incurred.
INCOME TAXES
The Company records income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are
computed based on the difference between the financial statement and income tax
bases of assets and liabilities using the enacted marginal tax rate. Deferred
income tax expense or credits are based on the changes in the asset or liability
from period to
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
period. As changes in tax laws or rates are enacted deferred tax assets and
liabilities are adjusted through the provision for income taxes.
EARNINGS PER SHARE
Earnings per share are computed based on the weighted average number of
common shares and common stock equivalents outstanding during the year using the
treasury stock method.
On December 18, 1996 the Board of Directors declared a stock dividend of
twenty five percent (25%) effective February 3, 1997. On January 18, 1995, the
Board of Directors declared a 3 for 2 stock split with an effective date of
February 1, 1995. Prior years' consolidated financial statements have been
adjusted to reflect the stock dividend and the stock split.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATION OF CREDIT
RISK
In the normal course of business, to meet the financing needs of its
customers, the Company is a party to financial instruments with off-balance
sheet risk. As discussed in Note 9, these financial instruments include firm
commitments to grant loans that involve, to varying degrees, elements of credit
and interest rate risk in excess of the amounts recognized in the consolidated
balance sheets. The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
grant loans is represented by the contractual amount of these instruments. The
Company uses the same credit policies in making such commitments as it does for
on-balance sheet instruments.
Commitments to grant loans are binding agreements to lend to a customer as
long as there is no violation of any condition in the contract. The Company has
established internal lending limits applicable to a single borrower or a related
group of borrowers to minimize risk and control exposure by obligor, industry,
loan type and other credit concentrations. The Company has not experienced any
significant losses on open commitments.
RECLASSIFICATIONS
Certain amounts in the prior years' consolidated financial statements have
been reclassified to be consistent with the current year's presentation.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
fair values of financial instruments as disclosed herein:
CASH AND CASH EQUIVALENTS--The carrying amounts of cash and short-term
investments approximate their fair value.
HELD TO MATURITY AND AVAILABLE FOR SALE SECURITIES--Fair values for
securities are based on quoted market prices.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FEDERAL HOME LOAN BANK STOCK--Fair value is equal to carrying value since
the stock is redeemable at cost.
LOANS--For variable rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying values.
Fair values for certain mortgage loans (for example, one-to-four family
residential), credit card loans, and other consumer loans are based on quoted
market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. Fair values for
commercial real estate and commercial loans are estimated using discounted cash
flow analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality.
DEPOSIT LIABILITIES--The fair values disclosed for demand deposits and
variable rate savings accounts are, by definition, equal to the amount payable
on demand at the reporting date (that is, their carrying amounts). Fair values
for fixed rate deposits are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on similar deposits over
their remaining terms.
SHORT-TERM BORROWINGS--The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings maturing
within 90 days approximate their fair values. Fair values of other short-term
borrowings are estimated using discounted cash flow analyses based on the Bank's
current incremental borrowing rates for similar types of borrowing arrangements.
LONG-TERM BORROWINGS--The fair values of the Bank's long-term debt are
estimated using discounted cash flow analyses based on the Bank's current
incremental borrowing rates for similar types of borrowing arrangements.
ACCRUED INTEREST--The carrying amounts of accrued interest approximate their
fair values.
OFF-BALANCE SHEET INSTRUMENTS--Fair values for off-balance sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing.
MORTGAGE SERVICING
In May 1995, the FASB issued SFAS No. 122, Accounting for Mortgage Servicing
Rights, which is to become effective for fiscal years beginning after December
15, 1995 with earlier adoption permitted. SFAS No. 122 requires that a mortgage
banking enterprise recognize as separate assets, rights to service mortgage
loans for others regardless of the manner in which the servicing rights are
acquired. In addition, capitalized mortgage servicing rights are required to be
assessed for impairment based on the fair value of those rights. Management
elected to adopt the provisions as of October 1, 1995 and retroactively applied
the provisions of this statement to January 1, 1995. Such adoption did not have
a significant impact on the Company's reported results of operations or
financial condition.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT PRONOUNCEMENTS
In 1996, the FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation", which encourages, but does not require, Company to record
compensation cost for stock based employee compensation plans at fair value. The
Company has chosen to account for such plans using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25. Accordingly,
compensation costs for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of grant over the
exercise price of the stock.
In 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", which
superseded SFAS No. 122 without changing its major provisions, and SFAS No. 127
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125", which become effective for transactions occurring after December 31, 1996.
Under these new statements, transfers of financial assets in which the
Company surrenders control over those financial assets shall be accounted for as
a sale to the extent that consideration other than beneficial interests in the
transferred assets is received in exchange. Each time the Company undertakes an
obligation to service financial assets it shall recognize either a servicing
asset or a servicing liability for the contract, unless it securitizes the
assets, retains all of the resulting securities, and classifies them as debt
securities held-to maturity. The implementation of these statements is not
expected to have a material effect on the Company's results of operations or
financial condition.
(2) CAPITAL
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory-and possibly additional discretionary-actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that the
Company meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Federal
Deposit Insurance Corporation (FDIC) categorized the Bank as adequately
capitalized under the regulatory framework for prompt corrective action. To be
categorized as adequately capitalized the Bank must maintain minimum total risk-
based, Tier I risk-based, and Tier I leverage ratios as set forth in the table.
There are no conditions or events since that notification that management
believes have changed the institution's category.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) CAPITAL (CONTINUED)
The Bank's actual capital amounts and ratios are also presented in the
table.
FOR CAPITAL ADEQUACY TO BE WELL CAPITALIZED
ACTUAL PURPOSES UNDER PCA PROVISIONS
-------------------- ----------------------- -----------------------
AS OF DECEMBER 31, 1996:
Total Capital (to Risk Weighted Assets)... $ 30,751 11.99% > $ 20,522 >8.0% > $ 25,653 >10.0%
Tier 1 Capital (to Risk Weighted
Assets)................................. $ 28,127 10.97% > $ 10,261 >4.0% > $ 15,392 >6.0%
Tier 1 Capital (to Average Assets)........ $ 28,127 7.52% > $ 14,951 >4.0% > $ 18,689 >5.0%
AS OF DECEMBER 31, 1995:
Total Capital (to Risk Weighted Assets)... $ 25,319 12.69% > $ 15,959 >8.0% > $ 19,486 >10.0%
Tier 1 Capital (to Risk Weighted
Assets)................................. $ 22,825 11.44% > $ 7,980 >4.0% > $ 11,969 >6.0%
Tier 1 Capital (to Average Assets)........ $ 22,825 7.34% > $ 12,430 >4.0% > $ 15,538 >5.0%
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SECURITIES
The amortized cost and estimated market values of securities are as follows:
DECEMBER 31, 1996
GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ----------- --------- ----------
Securities held to maturity--Mortgage-backed
securities.................................. $83,512,156 $ 4,152 1,994,252 81,522,056
---------- ----------- --------- ----------
---------- ----------- --------- ----------
Securities available for sale--US Treasury and
Agency bonds and notes...................... $31,079,712 $ 3,903 $ 322,325 $30,761,290
---------- ----------- --------- ----------
---------- ----------- --------- ----------
DECEMBER 31, 1995
GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ----------- --------- ----------
Securities held to maturity--Mortgage-backed
securities.................................. $77,565,687 $ -- $ 857,478 $76,708,209
---------- ----------- --------- ----------
---------- ----------- --------- ----------
Securities available for sale--US Treasury and
agency bonds and notes...................... $40,574,759 $ 101,424 -- $40,676,183
---------- ----------- --------- ----------
---------- ----------- --------- ----------
The amortized cost and market value of debt securities at December 31, 1996,
by contractual maturity, is shown below. Actual maturities may differ from
contractual maturities because issuers have the right to prepay obligations with
or without call or prepayment penalties. Certain securities classified as
available for sale have call provisions. The call dates on all these securities
are within one year, as such they are classified in the one year or less
category in 1996 rather than the contractual maturity date.
SECURITIES HELD TO MATURITY:
ESTIMATED
AMORTIZED MARKET PERCENT
COST VALUE OF TOTAL
---------- ---------- ---------
December 31, 1996--
Due in one year or less.................................... $4,114,046 $4,098,548 4.93%
Due after one year through five years...................... 57,398,576 56,105,709 68.73%
Due after five years through ten years..................... -- -- --
Due after ten years........................................ 21,999,534 $21,317,799 26.34%
---------- ---------- ---------
$83,512,156 $81,522,056 100.00%
---------- ---------- ---------
---------- ---------- ---------
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SECURITIES (CONTINUED)
SECURITIES AVAILABLE FOR SALE:
ESTIMATED
AMORTIZED MARKET PERCENT
COST VALUE OF TOTAL
---------- ---------- ---------
December 31, 1996--
Due in one year or less.................................... $8,061,409 $8,063,039 25.94%
Due after one year through five years...................... -- -- 0.00%
Due after five years through ten years..................... 5,000,000 4,961,515 16.09%
Due after ten years........................................ 18,018,303 17,736,736 57.97%
---------- ---------- ---------
$31,079,712 $30,761,290 100.00%
---------- ---------- ---------
---------- ---------- ---------
Proceeds from the maturity and sales of investments during 1996, 1995 and
1994 were $43,222,610, $64,063,812 and $46,628,752, respectively. Gross gains of
$126,520, $363,017 and $215,126 and gross losses of $163,653, $272,024 and
$21,549, respectively, were realized on the sales.
At December 31, 1996, the Company had no investments in obligations of
states, counties or municipalities which exceeded 10% of stockholders' equity.
In December of 1995, the Company transferred and sold approximately
$9,250,000 of formerly held to maturity securities which resulted in a
corresponding net loss of approximately $171,000. The transfer was made pursuant
to the issuance of "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities" which allowed a one-time
reassessment of the appropriateness of the classification of all securities
without calling into question the Company's classification of its other
securities.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) LOANS
A summary of the balances of loans follows:
1996 1995
-------------- --------------
Mortgage loans on real estate--
Residential, owner-occupied, one to four family and condos....................... $ 125,528,517 $ 101,817,810
Residential, nonowner-occupied, one to four family and condos.................... 10,520,897 10,667,757
Multi family units five or more.................................................. 34,502,602 34,632,581
Retail/mixed-use properties...................................................... 33,473,707 30,311,277
Office/industrial space.......................................................... 33,328,090 10,638,889
Other loans...................................................................... 4,055,467 3,528,515
-------------- --------------
241,409,276 191,596,829
Less -- Deferred fees and income................................................. 218,265 93,654
-------------- --------------
Total mortgage loans on real estate.............................................. 241,191,011 191,503,175
Commercial loans................................................................. 21,614,758 16,857,492
-------------- --------------
Other loans, personal installment................................................ 2,076,088 1,767,627
Personal lines of credit......................................................... 950,741 746,746
-------------- --------------
3,026,829 2,514,373
Less -- Unearned discount........................................................ 1,003 6,320
-------------- --------------
Total other loans................................................................ 3,025,826 2,508,053
-------------- --------------
Total loans...................................................................... 265,831,595 210,868,720
Less -- Allowance for possible loan losses....................................... 2,623,406 2,541,997
-------------- --------------
Loans, net....................................................................... $ 263,208,189 $ 208,326,723
-------------- --------------
-------------- --------------
An analysis of the allowance for possible loan losses follows:
1996 1995 1994
------------- ------------ -------------
Balance at beginning of year.......................................... $ 2,541,997 $ 2,241,286 2,480,881
Provision for possible loan losses.................................... 1,211,333 300,000 135,000
Recoveries............................................................ 167,582 340,390 722,440
------------- ------------ -------------
3,920,912 2,881,676 3,338,321
Loans charged off..................................................... (1,297,506) (339,679) (1,097,035)
------------- ------------ -------------
Balance at end of year................................................ $ 2,623,406 $ 2,541,997 $ 2,241,286
------------- ------------ -------------
------------- ------------ -------------
In addition to the loan portfolio noted above, the Company services
approximately $31,563,119 of loans sold without recourse to investors in the
secondary mortgage market and other financial institutions. During the second
quarter of 1995 the Company sold its servicing rights on certain residential
mortgage loans with a gross outstanding balance of $69,113,347. From this sale
the Company received gross proceeds of $898,473 and recorded a related pretax
gain of $763,806.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) LOANS (CONTINUED)
The Company operates primarily in the Greater Boston area, and the
performance of its loan portfolio is dependent, to a large degree, on the
condition of the local real estate market. Uncertainty exists as to the ultimate
realization in full of certain loans, and other real estate owned as a result of
current economic conditions in the New England region. Based on management's
assessment of the condition of the Massachusetts real estate market at year end
and prevailing economic conditions, management believes that the allowance for
loan losses as of December 31, 1996 is adequate to absorb the current estimate
of future losses in the loan portfolio. However, economic deterioration in
future periods could result in the Company experiencing increased levels of
nonperforming assets and charge-offs, additional provisions for loan losses and
reduction in net interest income.
At December 31, 1996, real estate mortgage loans were pledged to secure
Federal Home Loan Bank advances, as further discussed in Note 7.
As of December 31, 1996 and 1995, the Company's impaired loans and related
valuation allowance (which is included in the allowance for loan losses)
calculated under SFAS No. 114 were as follows:
1996 1995
------------------------- -----------------------
IMPAIRED VALUATION IMPAIRED VALUATION
LOANS ALLOWANCE LOANS ALLOWANCE
------------ ----------- ---------- -----------
Valuation allowance required..................................... $ -- $ -- $ -- $ --
No valuation allowance required.................................. $ 1,058,195 $ -- 500,766 --
------------ ----- ---------- -----
Total impaired loans............................................. $ 1,058,195 $ -- $ 500,766 $ --
------------ ----- ---------- -----
------------ ----- ---------- -----
The recorded investment in impaired loans for which no allowance is needed
is net of previous direct charge-offs and applications of cash interest payments
against the loan balances as of December 31, 1996 and 1995 of $1,129,660 and
$110,608, respectively. The average recorded investment in impaired loans for
the years ended December 31, 1996 and 1995 was $745,000 and $760,750,
respectively. Interest payments received on impaired loans are recorded as
interest income unless collection of the remaining recorded investment is
doubtful at which time payments received are recorded as a reduction in
principal.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation and amortization of
banking premises and equipment and their estimated useful lives follows:
ESTIMATED
1996 1995 USEFUL LIVES
------------ ------------ -------------
Land and building...................................................... $ 3,175,911 $ 1,727,200 25 years
Leasehold improvements................................................. 4,638,130 4,170,918 10-25 years
Furniture and equipment................................................ 4,436,382 3,433,923 2-10 years
------------ ------------
12,147,805 9,332,041
Less--Accumulated depreciation and amortization........................ 4,436,382 3,757,085
------------ ------------
$ 7,711,423 $ 5,574,956
------------ ------------
------------ ------------
Total depreciation and amortization for the years ended December 31, 1996,
1995 and 1994 amounted to $679,297, $507,489, and $430,161, respectively.
(6) DEPOSITS
A summary of deposit balances, by type, is as follows:
1996 1995
-------------- --------------
NOW and demand deposits...................................... $ 31,190,026 $ 22,011,361
Money market deposits........................................ 37,811,552 33,819,928
Other savings................................................ 47,771,658 46,038,261
-------------- --------------
Total non-certificate accounts......................... 116,773,236 101,869,550
Term certificate accounts.................................... 220,316,691 180,917,699
-------------- --------------
Total deposits......................................... $ 337,089,927 $ 282,787,249
-------------- --------------
-------------- --------------
The aggregate amounts of term certificates of deposits of $100,000 or more
at December 31, 1996 and 1995 are $52,254,548 and $63,802,166, respectively.
A summary of term certificate accounts by maturity as of December 31, 1996
and 1995 is as follows:
1996 1995
------------------------------- -------------------------------
WEIGHTED WEIGHTED
AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
-------------- --------------- -------------- ---------------
Within one year..................................... $ 152,182,788 5.54% $ 111,842,814 5.68%
One to three years.................................. 56,304,921 5.94% 51,986,914 5.85%
Over three years.................................... 11,828,982 6.62% 17,087,971 6.67%
-------------- --- -------------- ---
$ 220,316,691 5.83% $ 180,917,699 5.17%
-------------- --- -------------- ---
-------------- --- -------------- ---
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) FEDERAL HOME LOAN BANK ADVANCES (FHLB)
Federal Home Loan Bank advances consist of the following at December 31,
1996 and 1995:
MATURITY DATE INTEREST RATE 1996 1995
- --------------------------------------------------------------------- --------------- ------------- -------------
January 2, 1996...................................................... 5.85 3,000,000
January 16, 1996..................................................... 6.60 4,300,000
February 16, 1996.................................................... 5.80 5,000,000
July 12, 1996........................................................ 5.73 4,000,000
February 20, 1997.................................................... 4.99 8,000,000
April 21, 1997....................................................... 5.39 3,000,000
January 28, 1998..................................................... 5.48 3,000,000
September 30, 1998................................................... 6.09 2,000,000
October 13, 1998..................................................... 5.90 5,000,000 5,000,000
November 23, 1998.................................................... 5.76 10,000,000 10,000,000
September 13, 1999................................................... 6.54 3,000,000
October 10, 2000..................................................... 6.09 7,668,000
------------- -------------
Total advances....................................................... $ 41,668,000 $ 38,968,000
------------- -------------
------------- -------------
Information on the amounts outstanding and interest rates of borrowings for
each of the three years in the period ended December 31, 1996, 1995 and 1994 is
as follows:
(IN THOUSANDS)
1996 1995 1994
--------- --------- ---------
Balance outstanding at end of year............................................ $ 41,668 $ 38,968 $ 9,000
Average daily balance outstanding............................................. 43,253 22,395 10,021
Maximum balance outstanding at any month end.................................. 53,216 38,971 17,828
Weighted average interest rate for the year................................... 5.75% 6.43% 5.60%
Weighted average interest rate at end of year................................. 5.79% 6.06% 6.64%
The interest rates charged on advances maturing in 1996 and 1995 are
primarily fixed but also include floating rate advances indexed to prime. The
FHLB advances are collateralized by a pledge of the Company's portfolio of
unencumbered securities and mortgages and by a lien on the Company's holdings of
FHLB stock. The Company may borrow up to 30% of its total assets but not more
than 20 times its capital stock holdings in the FHLB for any sound business
purpose for which the Company has legal authority. Borrowings authorized totaled
$53,414,000 at December 31, 1996.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) FEDERAL HOME LOAN BANK ADVANCES (FHLB) (CONTINUED)
The outstanding balance and weighted average interest rate at December 31,
1996 and 1995 of maturities are listed below:
1996 1995
------------------------------ ------------------------------
WEIGHTED WEIGHTED
AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
------------- --------------- ------------- ---------------
(IN (IN
THOUSANDS) THOUSANDS)
Due in one year or less............................... $ 11,000 5.10% $ 16,300 6.00%
Due from on year to two years......................... 20,000 5.79% -- --
Due from two years to five............................ 10,668 6.22% 22,668 5.90%
------------- --- ------------- ---
$ 41,668 5.70% $ 38,968 5.95%
------------- --- ------------- ---
------------- --- ------------- ---
(8) INCOME TAXES
Allocation of federal and state income taxes between current and deferred
portions is as follows:
1996 1995 1994
------------ ------------ ------------
Current tax provision --
Federal............................................................... $ 1,241,612 $ 1,371,186 $ 822,048
State................................................................. 220,621 413,321 232,437
------------ ------------ ------------
1,462,233 1,784,507 1,054,485
------------ ------------ ------------
Deferred tax provision (benefit) --
Federal............................................................... 1,121 (108,533) (38,446)
State................................................................. (18,485) (29,760) (13,708)
------------ ------------ ------------
(17,364) (138,293) (52,154)
------------ ------------ ------------
$ 1,444,869 $ 1,646,214 $ 1,002,331
------------ ------------ ------------
------------ ------------ ------------
The reasons for the differences between the effective tax rate and the
corporate statutory federal income tax rate are summarized as follows:
1996 1995 1994
--------- --------- ---------
Statutory rate.......................................................................... 34.0% 34.0% 34.0%
Increase (decrease) resulting from--
State taxes, net of federal tax benefit............................................... 3.5 6.0 5.9
Reduction in valuation allowance...................................................... -- -- (7.0)
Rehabilitation and low income housing tax credit...................................... (1.0) (0.9) (1.2)
Dividend received deduction........................................................... (0.3) (0.4) (0.1)
Other................................................................................. 1.6 (1.0) 1.1
--- --- ---
Effective tax rate...................................................................... 37.8% 37.7% 32.7%
--- --- ---
--- --- ---
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) INCOME TAXES (CONTINUED)
As of December 31, 1996 and 1995, the consolidated balance sheets include
net deferred tax assets of $401,017 and $383,653, respectively. The tax-affected
components of the prepaid income taxes at December 31, 1996 and 1995 are as
follows:
1995 1996
---------- ----------
Loan allowances....................................................... $ 260,502 $ 182,711
Loan fees............................................................. (22,565) 8,314
State taxes, net of federal benefit................................... 66,753 83,109
Other, net............................................................ 96,327 109,519
---------- ----------
Total deferred tax assets....................................... 401,017 383,653
---------- ----------
---------- ----------
(9) COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company presently occupies the premises at 731 Hancock Street, Quincy,
Massachusetts, under a lease expiring in 2002, with three, five-year renewal
options, and the premises at 101 Federal Street, Boston, Massachusetts, under a
lease expiring in 1999, with two, five-year renewal options. In 1995 the Company
executed a lease on the location of its newest branch office at 397 Washington
Street, Stoughton, Massachusetts which expires in 2005 with three, five-year
renewal options. In 1996 the Company executed a lease on the location for its
newest branch office expected to open in April 1997 at 470 West Broadway, South
Boston, Massachusetts, which expires in 2016, with two ten year renewals. Future
minimum rental commitments under these leases are as follows:
1997.............................................................. $ 361,446
1998.............................................................. 427,423
1999.............................................................. 428,660
2000.............................................................. 428,660
2001.............................................................. 430,667
Thereafter........................................................ 10,831,447
----------
$12,908,314
----------
----------
Net rental expenses for the years ended December 31, 1996, 1995 and 1994
were $258,325, $211,665, and $176,549, respectively.
LOAN AND SECURITY COMMITMENTS
In the normal course of business, there are outstanding commitments that are
not reflected in the accompanying consolidated financial statements. Firm
commitments to grant loans amounted to $20,083,073 and $15,367,512 at December
31, 1996 and 1995, respectively. Also, amounts committed under existing lines of
credit totaled $6,616,602 at December 31, 1996.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT AND TERMINATION AGREEMENTS
The Company has entered into a five year Employment Agreement with its Chief
Executive Officer providing for specified minimum annual compensation and the
continuation of benefits currently received. The contract is automatically
extended for an additional year on the anniversary date of the contract. In
addition, the Company has entered into a Special Termination Agreement with its
Chief Executive Officer which provides for a lump-sum severance payment within a
three year period following a change in control, as defined in the agreement.
(10) LITIGATION
The Company and the Bank are defendants in various legal actions. In the
opinion of management and the Company's legal counsel, the resolution of these
matters is not expected to have a material effect on the consolidated financial
position or results of operations of the Company.
(11) STOCKHOLDERS' EQUITY
The Company may not declare or pay cash dividends on its shares of common
stock if the effect thereof would cause its stockholders' equity to be reduced
below applicable capital maintenance requirements or if such declaration and
payments would otherwise violate regulatory requirements (see Note 2).
The Company maintains a Stock Purchase Plan, the purpose of which is to
provide an additional source of capital. Under the terms of the plan, 375,000
shares of authorized common stock are available for purchase of which 145,036
shares remain unissued. The purchase price will be the closing bid price of the
common stock on the business day prior to the purchase. In 1996, 23,641 shares
of common stock were purchased by eligible plan participants under the plan for
total proceeds to the Company of $334,667.
In 1996, the Company began an Automatic Dividend Reinvestment and Common
Stock Purchase Plan for the benefit of all eligible stockholders of record on
November 1, 1995. The plan permits eligible stockholders to have their dividends
reinvested automatically into additional newly issued shares of common stock of
the Company as the dividends are paid. In addition, the plan allows optional
cash payments to be made which permits stockholders to purchase additional
shares on a monthly basis. In 1996, 11,138 shares of common stock were purchased
by eligible stockholders under the plan for total proceeds to the Company of
$163,313.
In 1996, the Company completed two private placements of newly issued common
stock at then market prices. The first one was completed on May 17, 1996 and the
second was completed September 24, 1996 raising $2,939,716, net of expenses, of
new capital.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) EMPLOYEE BENEFIT PLANS
During 1989, the Board of Directors voted to establish an Employee Stock
Ownership Plan (ESOP), which is a qualified stock bonus plan under Internal
Revenue Code Section 401(a). Employees reaching the age of 21 and having
completed 1,000 hours of service in one consecutive twelve-month period
automatically become participants in the ESOP. Participants become fully vested
upon completion of three years of service. During 1996, 1995 and 1994, the ESOP
purchased 14,428, 20,948 and 20,961 shares, respectively, of the Company's
common stock at an aggregate purchase price of $227,241, $241,480 and $195,636
respectively, in the open market.
In 1996, 1995 and 1994, the Company made contributions to the ESOP totaling
$227,241, $183,800 and $200,914, respectively, which are included in salaries
and employee benefits expense. Dividends on unallocated shares of the Company's
stock held by the ESOP are accumulated within the plan.
The Company also maintains a Non-Qualified Executive Retirement Plan which
is an unfunded non-qualified plan which provides deferred compensation to a
select group of management whose retirement benefits in the employer's tax
qualified retirement plans are restricted by statute. During 1996, 1995 and 1994
the Company expensed $29,915, $30,944, and $41,748 respectively, related to this
plan.
In 1992, the Company adopted a Profit Sharing Plan as defined in the
Internal Revenue Code Section 401(k). Employees reaching the age of 21 and
having completed 1,000 hours of service in one consecutive twelve-month period
are eligible to participate in the plan. In 1996, 1995 and 1994, the Company
matched employees' voluntary contributions on a dollar-for-dollar basis up to an
additional 3% of total compensation. The plan is administered by the Savings
Bank Employees Retirement Association. For the plan years ended December 31,
1996, 1995 and 1994 the Company made contributions of $68,549, $49,444 and
$43,394, respectively, to the plan.
The Company maintains a Short-term Incentive Bonus Plan (the Plan) whereby
certain employees are eligible to receive a bonus if the Company meets or
exceeds certain base standards of profitability, and certain strategic goals are
achieved. The structure of the Plan is reviewed on an annual basis by the Board
of Directors of the Company. The Company expensed $265,000 in 1996, $185,504 in
1995, and $124,125 in 1994 related to this plan.
(13) STOCK-BASED COMPENSATION PLANS
The Company has three stock option plans, the 1986 Stock Option Plan ("The
1986 Plan"), the 1989 Stock Option Plan ("The 1989 Plan") and the 1995 Premium
Incentive Stock Option Plan ("The 1995 Plan"). In addition, the Company has a
1989 Employee Stock Purchase Plan ("The 1989 Stock Purchase Plan") under which
employees are able purchase Company stock at 100% of the fair market value of
the stock at that date of purchase. The Company accounts for these plans under
APB Opinion No. 25, under which no compensation cost has been recognized.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) STOCK-BASED COMPENSATION PLANS (CONTINUED)
Had compensation cost for these plans been determined consistent with FASB
Statement No. 123, the Company's net income and earnings per share would have
been reduced to the following pro forma amounts (000's):
1996 1995
------------ ------------
Net Income As Reported........................................................... $ 2,380,869 $ 2,719,235
Pro Forma............................................................. $ 2,333,794 $ 2,683,999
Primary EPS As Reported........................................................... $ 1.14 $ 1.41
Pro Forma............................................................. $ 1.12 $ 1.39
Because the Statement 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years. Also,
since there is no discount provided to employees under the 1989 Stock Purchase
Plan, there is no pro forma impact of this plan under Statement 123.
The Company may sell up to 375,000 shares of stock to its full- time
employees under the 1989 Stock Purchase Plan. The Company has sold 202,625
shares through December 31, 1996. The weighted average fair value of shares sold
in 1996 and 1995 was $14.15 and $11.31, respectively.
The Company may grant options for up to 150,000 shares under the 1986 Plan,
65,625 shares under the 1989 Plan and 87,500 shares under the 1995 Plan. The
Company has granted options on 120,000 shares, 52,500 and 36,750 shares,
respectively, through December 31, 1996. Under these Plans the option exercise
price equals the stock's market price on date of grant. Under each of these
plans, the options vest after two years and all expire after ten years.
A summary of the status of the Company's three stock option plans at
December 31, 1996 and 1995 and changes during the years then ended is presented
in the table and narrative below:
1996 1995
----------------------- ------------------------
WEIGHTED AVG WEIGHTED AVG
SHARES EX. PRICE SHARES EX. PRICE
--------- ------------ --------- -------------
Balance, beginning of year..................................... 105,438 $ 9.50 109,125 $ 4.61
Granted........................................................ 16,388 $ 15.25 52,500 $ 11.74
Exercised...................................................... (1,875) ($ 1.34) (51,500) ($ 1.50)
Canceled....................................................... (16,388) ($ 11.80) (4,687) ($ 9.40)
--------- ------------ --------- ------
Balance, end of year........................................... 103,563 $ 9.72 105,438 $ 9.50
--------- ------------ --------- ------
--------- ------------ --------- ------
Exercisable, end of year....................................... 39,050 $ 7.33 32,600 $ 6.58
--------- ------------ --------- ------
--------- ------------ --------- ------
Weighted average fair value of options granted................. $ 3.01 $ 2.80
------------ ------
------------ ------
26,125 of the 103,563 options outstanding at December 31, 1996 have exercise
prices between $1.34 and $7.06, with a weighted average exercise price of $6.27
and a weighted average remaining contractual life of approximately 6.1 years.
All of these options are exercisable. The remaining 77,438 options have exercise
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) STOCK-BASED COMPENSATION PLANS (CONTINUED)
prices between $8.80 and $13.20, with a weighted average exercise price of
$10.88 and a weighted average remaining contractual life of approximately 8.1
years. 24,940 of these options are exercisable; their weighted average exercise
price is $8.80.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995:
1986 PLAN 1989 PLAN 1995 PLAN
---------------------- ---------------------- --------------------
1996 1995 1996 1995 1996 1995
----- --------- ----- --------- --------- ---------
Risk Free Interest Rate............................ n/a 7.39% n/a 6.78% 6.68% 5.87%
Expected Dividend Yield............................ n/a 2.04% n/a 1.85% 1.57% 1.45%
Expected Lives..................................... n/a 3 years n/a 3 years 3 years 3 years
Expected Volatility................................ n/a 19.32% n/a 19.32% 19.32% 19.32%
(14) RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has granted loans to
officers and directors and their affiliates amounting to $1,080,219 at December
31, 1996. All such transactions are on substantially the same terms as those
prevailing at the same time for individuals not affiliated with the Company and
such loans do not involve more than the normal risk of collectibility. During
the year ended December 31, 1996, total principal additions were $0, and total
principal payments were $8,055. At December 31, 1995, outstanding loans to
officers and directors and their affiliates amounted to $1,088,274. For 1995,
total principal additions were $192,900, and total principal payments were
$1,195,276.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments were as
follows:
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------ ------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------------- -------------- -------------- --------------
Financial assets:
Cash and due from banks, interest-bearing
deposits with banks, and federal funds
sold......................................... $ 5,521,299 $ 5,521,299 $ 3,213,259 $ 3,213,259
Short-term investments......................... 11,679,798 11,679,798 4,860,000 4,860,000
Securities held to maturity.................... 83,512,156 81,522,056 77,565,687 76,708,209
Securities available for sale.................. 30,761,290 30,761,290 40,676,183 40,676,183
Federal Home Loan Bank stock................... 2,670,700 2,670,700 2,198,400 2,198,400
Loans receivable............................... 263,208,189 263,010,900 208,326,723 207,283,591
Accrued interest receivable.................... 2,501,071 2,501,071 2,128,536 2,128,536
Financial liabilities:
Deposit liabilities............................ $ 337,089,927 $ 337,665,927 $ 282,787,249 $ 283,363,249
Federal Home Loan Bank advances................ 41,668,000 43,494,916 38,968,000 40,794,916
OFF-BALANCE-SHEET COMMITMENTS:
A summary of the notional amounts of the Company's financial instruments
with off-balance sheet risk at December 31, 1996 and 1995 follows:
1996 1995
-------------------------- --------------------------
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
------------- ----- ------------- -----
Commitments to grant loans.......................................... $ 20,083,000 $ 0 $ 15,368,000 $ 0
Existing lines of credit............................................ 6,161,602 0 4,582,000 0
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(16) PARENT COMPANY FINANCIAL STATEMENTS
Condensed financial information relative to the Company's balance sheets at
December 31, 1996 and the related statement of income and cash flows for the
year ended December 31, 1996 are presented below
BALANCE SHEET
DECEMBER 31, 1996
- -------------------------------------------------------------------------------------------------- --------------
(IN THOUSANDS)
Assets
Cash............................................................................................ $ 26
Investments in subsidiary....................................................................... 27,916
Other assets.................................................................................... 113
-------
Total assets.................................................................................... $ 28,055
-------
-------
Liabilities and Stockholders' Equity
Other liabilities............................................................................... $ 119
Total liabilities............................................................................... 119
Stockholders' equity.............................................................................. 27,936
-------
Total liabilities and stockholders' equity...................................................... $ 28,055
-------
-------
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
- -------------------------------------------------------------------------------------------------- ---------------
(IN THOUSANDS)
Income:
Dividend received from subsidiary bank.......................................................... $ 150
Other income.................................................................................... --
------
Total income.................................................................................... 150
------
Expenses
Other expenses.................................................................................. 6
------
Total expenses.................................................................................. 6
------
Income before income taxes and equity in undistributed income of subsidiary....................... 144
Equity in undistributed income of subsidiary...................................................... 676
------
Net income........................................................................................ $ 820
------
------
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(16) PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF CASH FLOW
YEAR ENDED 1996
- -------------------------------------------------------------------------------------------------- ---------------
(IN THOUSANDS)
Cash flows from operating activities:
Net income........................................................................................ $ 820
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH PROVIDED FROM OPERATING ACTIVITIES:
Amortization...................................................................................... 6
equity in income of subsidiary.................................................................... (676)
------
TOTAL ADJUSTMENTS................................................................................. (670)
------
NET CASH PROVIDED FROM OPERATING ACTIVITIES....................................................... 150
------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid.................................................................................... (124)
------
NET CASH PROVIDED FROM (USED IN) FINANCING STATEMENTS............................................. 26
------
NEW INCREASE IN CASH AND CASH EQUIVALENTS......................................................... 26
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR............................................ 0
------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR.................................................. $ 26
------
------
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(17) QUARTERLY DATA (UNAUDITED)
Summaries of consolidated operating results on a quarterly basis for the
years ended December 31, 1996 and 1995 are as follows:
FOURTH THIRD SECOND FIRST
1996 QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------- ------------ ------------ ------------ ------------
Interest and dividend income............................. $ 7,686,306 $ 7,436,787 $ 6,874,120 $ 6,785,650
Interest expense......................................... 4,410,702 4,386,072 3,990,378 3,949,872
------------ ------------ ------------ ------------
Net interest income...................................... 3,275,604 3,050,715 2,883,742 2,835,778
Provision for possible loan losses....................... 75,000 50,000 66,333 1,020,000
------------ ------------ ------------ ------------
Net interest income after provision for possible loan
losses................................................. 3,200,604 3,000,715 2,817,409 1,815,778
Gain (loss) on sale of loans............................. (12,908) 2,900 159 10,042
Noninterest income....................................... 298,807 165,903 154,540 185,289
Noninterest expense...................................... 2,085,741 1,926,677 1,817,473 1,826,515
------------ ------------ ------------ ------------
Core earnings............................................ 1,400,762 1,242,841 1,154,635 184,594
Net gain (loss) on sale of securities.................... (72,129) (20,156) (921) 54,201
Gain on sale of loan servicing........................... -- -- -- --
Net gain (loss) on sale of OREO.......................... (25,247) -- -- (12,948)
Gain (loss) on sale of fixed assets...................... -- -- -- --
OREO write-downs and expense............................. 1,036 30,538 21,609 26,711
Provision for income taxes............................... 470,747 464,937 431,522 77,663
------------ ------------ ------------ ------------
Net income............................................... $ 831,603 $ 727,210 $ 700,583 $ 121,473
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Earnings per common share................................ $ 0.40 $ 0.35 $ 0.33 $ 0.06
FOURTH THIRD SECOND FIRST
1995 QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------- ------------ ------------ ------------ ------------
Interest and dividend income............................. $ 6,683,659 $ 6,073,597 $ 5,780,344 $ 5,411,401
Interest expense......................................... 3,892,744 3,569,358 3,368,318 2,889,348
------------ ------------ ------------ ------------
Net interest income...................................... 2,790,915 2,504,239 2,412,026 2,522,053
Provision for possible loan losses....................... -- 48,334 100,000 151,666
------------ ------------ ------------ ------------
Net interest income after
provision for possible loan losses....................... 2,790,915 2,455,905 2,312,026 2,370,387
Gain (loss) on sale of loans............................. 2,760 (179) (55,192) 0
Noninterest income....................................... 144,153 122,497 159,270 153,304
Noninterest expense...................................... 1,694,394 1,585,292 1,680,390 1,591,626
------------ ------------ ------------ ------------
Core earnings............................................ 1,243,434 992,931 735,714 932,065
Net gain (loss) on sale of securities.................... (219,664) 191,395 (13,750) 133,012
Gain on sale of loan servicing........................... 0 0 763,806 0
Net gain (loss) on sale of OREO.......................... 87,198 0 (119,965) (10,105)
Gain (loss) on sale of fixed assets...................... (54,574) 0 0 4,748
OREO write-downs and expense............................. 105,325 48,367 66,920 80,184
Provision for income taxes............................... 390,998 427,181 486,221 341,814
------------ ------------ ------------ ------------
Net income............................................... $ 560,071 $ 708,778 $ 812,664 $ 637,722
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Earnings per common share................................ 0.28 0.37 0.42 0.34
53
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item with respect to the directors and
executive officers of the Company will appear under the headings "Election of
Directors," "Beneficial Ownership of Common Stock" and "Executive Officers" in
the Company's definitive Proxy Statement for the 1997 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission not later
than 120 days after the close of the Company's fiscal year (the "Proxy
Statement"), and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will appear in the Proxy Statement
under the heading "Executive Compensation" and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will appear in the Proxy Statement
under the heading "Beneficial Ownership of Common Stock" and is incorporated
herein by reference.
ITEM 13. TRANSACTIONS WITH CERTAIN RELATED PERSONS
The information required by this item will appear in the Proxy Statement
under the heading "Executive Compensation-Transactions with Certain Related
Persons" and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) INDEX OF FINANCIAL STATEMENTS. The following financial statements
appear in response to Item 8 of this Report:
Independent Auditors' Reports
Consolidated Statements of Financial Condition as of December 31, 1996 and
1995
Consolidated Statements of Income for the years ended December 31, 1996,
1995 and 1994
Consolidated Statements of Stockholders' Equity for the years ended December
31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994 Notes to Consolidated Financial Statements
(a)(2) INDEX OF FINANCIAL STATEMENT SCHEDULES. All financial statement
schedules have been omitted because they are not required, nor applicable or are
included in Notes to Consolidated to Financial Statements.
54
(a)(3) Exhibits required by Item 601 of Regulation S-K are attached hereto.
For a list of such exhibits, refer to the Exhibit Index immediately preceding
the exhibits.
(b) REPORTS ON FORM 8-K. The Company filed a report on Form 8-K with the
Securities and Exchange Commission on October 7, 1996 reporting the consummation
of the formation of the holding company.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EMERALD ISLE BANCORP, INC.
By: /s/ MARK A. OSBORNE
-----------------------------------------
Mark A. Osborne
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Date: March 19, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ MARK A. OSBORNE Chairman of the Board,
- ------------------------------ President and Chief March 19, 1997
Mark A. Osborne Executive Officer
/s/ GERARD F. LINSKEY Treasurer
- ------------------------------ March 19, 1997
Gerard F. Linskey
/s/ PETER L. MAGUIRE Director
- ------------------------------ March 19, 1997
Peter L. Maguire
/s/ JOHN V. MURPHY Director
- ------------------------------ March 19, 1997
John V. Murphy
/s/ THOMAS P. MOORE Director
- ------------------------------ March 19, 1997
Thomas P. Moore
/s/ RICHARD P. QUINCY Director
- ------------------------------ March 19, 1997
Richard P. Quincy
/s/ MICHAEL T. PUTZIGER Director
- ------------------------------ March 19, 1997
Michael T. Putziger
/s/ DOUGLAS C. PURDY Director
- ------------------------------ March 19, 1997
Douglas C. Purdy
56
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- ------------------------------------------------------------------------------------------
(2) Plan of Reorganization and Acquisition by and between the Registrant and The Hibernia
Savings Bank, dated February 15,1 996 (incorporated by reference to Exhibit No. 99.4 to
the Registrant's registration statement on Form 8-A, filed August 9, 1996).
(3)(a)(1) Articles of Organization of Registrant, filed January 10, 1996 (incorporated by reference
to Exhibit No. 99.1 to the Registrant's registration statement on Form 8-A, filed August
9, 1996).
(3)(b)(1) By-laws of the Registrant (incorporated by reference to Exhibit 99.2 to the Registrant's
registration statement on Form 8-A, filed August 9, 1996).
(3)(b)(2) First Amendment to By-Laws of the Registrant, effective September 18,1996.
(3)(b)(3) Second Amendment to By-Laws of the Registrant, effective September 18,1996.
(4) Common Stock Certificate of the Registrant (incorporated by reference to Exhibit No. 99.1
to the Registrant's registration statement on Form S-8, filed November 4, 1996 (File No.
33-15441)).
(10)(a)(1) 1986 Stock Option Plan (incorporated by reference to Exhibit No. 99.1 to the Registrant's
registration statement on Form S-8, filed November 4, 1996 (File No. 33-15441)).
(10)(a)(2) Form of Incentive Stock Option Agreement, used in connection with the 1986 Stock Option
Plan (incorporated by reference to Exhibit No. 4.2 to the Registrant's registration
statement on From S-8, filed November 4, 1996 (File No. 33-15441))
(10)(a)(3) 1989 Stock Option Plan (incorporated by reference to Exhibit No. 99.2 to the Registrant's
registration statement on Form S-8, filed November 4, 1996 (File No. 33-15441)).
(10)(a)(4) Form of Incentive Stock Option Agreement, used in connection with the 1989 Stock Option
Plan (incorporated by reference to Exhibit No. 4.3 to the Registrant's registration
statement on Form S-8, filed November 4, 1996 (File No. 33-15441))
(10)(a)(5) 1995 Premium Incentive Stock Option Plan (incorporated by reference to Exhibit No. 99.3 to
the Registrant's registration statement on Form S-8, filed November 4, 1996 (File No.
33-15441)).
(10)(a)(6) Form of Incentive Stock Option Agreement, used in connection with the 1995 Stock Option
Plan (incorporated by reference to Exhibit No. 4.4 to the Registrant's registration
statement on Form S-8, filed November 4, 1996 (File No. 33-15441))
(10)(a)(7) 1989 Stock Purchase Plan for Directors, Officers, Employees and Certain Plans
(incorporated by reference to Exhibit No. 99.4 to the Registrant's registration statement
on Form S-8, filed November 4, 1996 (File No. 33-15441)).
57
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- ------------------------------------------------------------------------------------------
(10)(a)(8) Emerald Isle Bancorp, Inc. Automatic Dividend Reinvestment and Common Stock Purchase Plan
(incorporated by reference to the Registrant's registration statement on Form S-3, filed
December 30, 1996 (File No. 33-18949)).
(10)(a)(9) Non-Qualified Executive Retirement Plan.
(10)(a)(10) Trust Agreement.
(10)(b)(1) Employment Agreement.
(10)(b)(2) Special Termination Agreement.
(10)(b)(3) Amendment to Special Termination Agreement dated January 2, 1991
(10)(c)(1) Lease, dated as of November 10,1986 between The Hibernia Savings Bank and Ethel V. Slawsby
with respect to the premises located at 731 Hancock Street, Quincy, Massachusetts.
(10)(c)(2) Lease, dated as of December 22,1988 between The Hibernia Savings Bank and Franklin Federal
Partners with respect to the premises located at 75-101 Federal Street, Boston,
Massachusetts.
(10)(c)(3) Lease, dated as of July 31,1995 between The Hibernia Savings Bank and Stoughton Plaza
Realty Trust with respect to the premises located at 397 Washington Street, Stoughton,
Massachusetts.
(10)(c)(4) Lease, dated as of August 2,1996 between The Hibernia Savings Bank and Superior Realty Co.
with respect to the premises located at 470 West Broadway, South Boston, Massachusetts.
(13) 1997 Annual Report to Stockholders (furnished for the information of the Commission and
not deemed filed with the Commission).
(21) Subsidiaries of the Registrant.
(23) Consent of Arthur Andersen LLP
(27) Financial Data Schedule.
58