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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 0-27014
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AFFILIATED COMMUNITY BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-3277217
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
716 MAIN STREET,
WALTHAM, MASSACHUSETTS 02254-9035
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 894-6810
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 $.01 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 on March 3,
1997, was approximately $125,620,135.
As of March 3, 1997 there were issued and outstanding 5,165,166 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 23, 1997 ARE INCORPORATED BY
REFERENCE INTO PART III OF THIS FORM 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
Affiliated Community Bancorp, Inc. ("Affiliated" or the "Company") was
incorporated as a Massachusetts business corporation on April 13, 1995 for the
purpose of effecting the affiliation (the "Affiliation") of Lexington Savings
Bank ("Lexington") with Main Street Community Bancorp, Inc. ("Main Street")
and Main Street's wholly-owned subsidiary, The Federal Savings Bank
("Federal"), pursuant to the Affiliation Agreement and Plan of Reorganization
dated March 14, 1995 between Lexington and Main Street. The Affiliation was
consummated on October 18, 1995 and was treated as a pooling of interests for
accounting purposes. As of such date, Lexington and Federal became wholly-
owned subsidiaries of Affiliated and Affiliated issued 5,290,700 shares of its
$.01 par value per share common stock. The operations of Affiliated consist of
those of its two bank subsidiaries, Lexington and Federal.
Main Street was a Massachusetts business corporation formed at the direction
of Federal on September 1, 1993. On December 28, 1993 (i) Federal converted
from a federally chartered mutual savings bank to a federally chartered stock
savings bank, (ii) Federal issued all of its outstanding capital stock to Main
Street, and (iii) Main Street consummated its initial public offering of
common stock, par value $.01 per share, by selling 2,907,200 shares to
Federal's Employee Stock Ownership Plan ("ESOP") and to certain of Federal's
eligible account holders who had subscribed for such shares (collectively, the
"Conversion").
As a result of the Conversion, Federal became a wholly-owned subsidiary of
Main Street. Main Street was merged into Affiliated and ceased operations on
October 18, 1995 as a part of the Affiliation.
Federal was founded as the Waltham Co-operative Savings Fund and Loan
Association in 1880, and by 1890 was known as the Waltham Co-operative Bank.
Federal acquired the Watch City Co-operative Bank by merger in 1935. In 1937,
Federal was granted a federal charter by the U.S. government as a mutual
savings association under the name Waltham Federal Savings and Loan
Association. In 1984, Federal amended its charter to the form of a federally
chartered mutual savings bank and changed its name to The Federal Savings
Bank. Federal's primary federal regulator is the Office of Thrift Supervision
of the Department of the Treasury ("OTS"). Federal's deposit accounts are
insured up to applicable limits by the Savings Association Insurance Fund
("SAIF"), which is administered by the Federal Deposit Insurance Corporation
("FDIC"). Federal has also been a member of the Federal Home Loan Bank
("FHLB") system since 1937.
Federal has two wholly-owned service corporation subsidiaries and two wholly
owned operating subsidiaries. Main Street Building Corporation ("MSBC") holds,
operates, manages and disposes of real estate acquired through foreclosure.
Main Street Investment Corporation ("MSIC") offered discount brokerage service
through an arrangement with Liberty Securities Corporation, an unaffiliated
broker-dealer ("Liberty") pursuant to which Liberty offered mutual funds,
annuity products and discount brokerage services at Federal's four banking
offices located in Waltham, North Waltham, Concord and Weston, under a
sublease arrangement with MSIC. MSIC is currently inactive. In February 1996,
the Federal formed TFSB Securities Corp I and TFSB Securities Corp II, the
operating subsidiaries, for the sole purpose of buying, holding, and selling
securities. These two corporations are subject to a lower Massachusetts tax
rate (1.32%) versus a bank tax rate of 11.72% for 1996. No "operational" or
"banking" activities took place in these subsidiaries.
Lexington was incorporated on March 11, 1871, and opened for business June
3, 1871. On May 1, 1976, Lexington opened its first branch office at 421
Lowell Street which was the first full-service banking facility in the
Countryside section of Lexington. In 1988, Lexington opened new offices for
lending at 57 Bedford Street in Lexington. In 1993, Lexington opened full-
service banking offices in the town of Bedford, and Brookhaven at Lexington, a
continuing care retirement community in Lexington and in September, 1994, an
office at Lexington High School. On December 23, 1993, Lexington acquired
Suburban National Corporation of Arlington which resulted in two offices in
Arlington as well as one office each in the town of Burlington and the city of
Woburn.
At the time of acquisition, Suburban had total assets of $37 million.
Subsequently, on January 31, 1996, Lexington closed its Woburn branch office
at the expiration of its lease and its Lexington High School branch in August
1996. At December 31, 1996, Lexington had seven banking offices, one of which
operated on a limited hours basis. Lexington is regulated by the Massachusetts
Commissioner of Banks. Lexington is a member of the FHLB system and its
deposits are insured by the FDIC under the Bank Insurance Fund ("BIF").
Lexington's subsidiaries include Lexington Financial Planning, Inc., which
was incorporated in 1988 for the purpose of offering financial planning
services to individuals and small businesses. Lexington also has three special
purpose security corporation subsidiaries whose sole purpose is to buy, hold
and sell securities on its own account. These corporations take advantage of a
lower Massachusetts tax rate for a securities subsidiary versus a bank. No
"operational" or "banking" activities take place in the subsidiaries. These
three subsidiaries, Lexington Securities Corporation, Mass. Ave. Securities
Corporation, and Minuteman Investment Corporation, were all organized in 1993.
On December 17, 1996, Affiliated signed a definitive agreement to provide
the initial capitalization for Middlesex Bank and Trust Company (in
organization) ("Middlesex"). Middlesex is a de novo bank that will be located
in the City of Newton, Massachusetts. The transaction is subject to the
necessary regulatory approvals. Newton, a major Middlesex County community,
has a population of approximately 82,000 with 29,000 households, and a $60,000
median household income. An estimated 3,500 businesses are located in the
city. There are no commercial banks currently headquartered in Newton.
Middlesex is anticipated to open for business in the second quarter of 1997.
Affiliated's principal business, conducted through Federal and Lexington,
consists of attracting deposits from the general public and investing those
deposits, together with funds generated by operations, in one- to four-family
residential mortgage loans, commercial real estate loans, construction loans,
multi-family residential mortgage loans and commercial and industrial loans,
and other loans. During the past three years, the Company has become an active
lender to the small business community within its market area. In addition,
the Company invests in securities issued by the U.S. government and agencies
thereof, mortgage-backed and other types of asset-backed securities, corporate
debt securities, and other investments permitted by federal laws and
regulations. The Company's revenues are derived principally from interest on
its loan portfolio and interest and dividends on its various investments. The
Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities and FHLB borrowings, mainly
from the Federal Home Loan Bank of Boston ("FHLBB"). Affiliated received
approval from the Commonwealth of Massachusetts for security corporation
status for the year ended December 31, 1995. In the financial information set
forth herein, all material inter-company accounts and transactions have been
eliminated in consolidation.
MARKET AREA AND COMPETITION
The Company is a community-oriented bank holding company offering a variety
of financial services to meet the needs of the communities it serves. The
Company's deposit gathering and lending markets are primarily concentrated in
the Middlesex county communities of Lexington and Waltham and surrounding
communities. The Company's primary market area includes suburban cities and
towns located west and north west of Boston. The Company's main office is
headquartered in the center of Waltham, an industrial, commercial and
residential city located approximately eight miles west of Boston with a
population of approximately 58,000.
The Company's market area has a high density of financial institutions,
several of which are significantly larger and have greater financial resources
than the Company, and all of which are competitors of the Company to varying
degrees. The Boston area provides intense competition from commercial banks,
credit unions, mortgage banking companies, mutual funds, insurance companies,
diversified finance companies and other savings institutions. Competition is
undergoing a significant change due to recent legislation, the increased
number of bank and savings institution mergers and acquisitions, changes in
the products and services that banks, savings institutions and other entities
can offer, and the involvement in nonbanking activities by bank holding
companies. The ability of the Company to remain competitive will depend on how
successfully it can respond to
2
the rapidly evolving competitive, regulatory, technological and demographic
changes affecting its operations. Competition in the Company's market area may
also increase as a result of the lifting of restrictions on the interstate
operations of financial institutions.
LENDING ACTIVITIES
The Company's lending activities have been traditionally focused on the
origination of first mortgage loans for the purchase, construction and
refinancing of residential properties in its market area. In addition, the
Company provides commercial real estate financing in its service area as well
as home equity loans. The Company is active in the secondary mortgage market.
Real estate loan originations during 1996 amounted to $194.9 million as
compared to $139.5 million in 1995 and $151.6 million in 1994. Due to their
pricing nature, adjustable rate loans originated were held in the loan
portfolio, whereas fixed rate loan originations at times are sold into the
secondary market. Loan sales into the secondary market amounted to $7.8
million in 1996 as compared to $14.7 million for 1995 and $24.6 million for
1994. The decrease in loan sales for 1996 reflects the continuing greater
demand for the Company's adjustable rate mortgage products versus traditional
fixed rate financing. Stable interest rates during 1996 benefited all areas of
loan originations.
Economic conditions have produced more opportunities for commercial real
estate loans and small business lending. In light of these opportunities and
the general banking industry trend toward commercial banking, the Company has
expanded its loan origination programs and staffing in the commercial lending
areas. The primary objective of this effort was to expand the commercial
lending activity in a controlled and focused manner. For 1996 the Company had
commercial real estate originations (including construction loans) of $73.1
million as compared to $41.1 million in 1995 and $56.0 million in 1994. Small
business and other loan originations amounted to $21.7 million, $13.7 million
and $8.3 million for the years ended December 31, 1996, 1995, 1994,
respectively.
The following table sets forth the composition of the Company's loan
portfolio in dollar amounts and in percentages of the respective portfolios at
the dates indicated:
AT DECEMBER 31,
----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ------------------ ------------------ ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
MORTGAGE LOANS ON REAL
ESTATE:
1-4 Family............. $428,308 65.35% $367,687 67.50% $324,168 68.00% $286,684 70.64% $292,171 74.10%
Multifamily............ 31,092 4.75% 27,833 5.11% 28,092 5.89% 27,601 6.80% 21,871 5.55%
Commercial............. 94,419 14.41% 72,896 13.39% 53,417 11.20% 44,840 11.05% 36,376 9.23%
Construction and land
development, net...... 46,344 7.07% 28,405 5.22% 28,797 6.04% 9,568 2.36% 8,736 2.21%
Premium on loans
acquired.............. 135 0.02% 180 0.03% 225 0.05% 270 0.07% -- -- %
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total mortgage loans... 600,298 91.60% 497,001 91.25% 434,699 91.18% 368,963 90.92% 359,154 91.09%
OTHER LOANS:
Consumer............... 3,545 0.54% 3,664 0.67% 3,612 0.76% 4,206 1.04% 2,045 0.52%
Equity lines of
credit................ 16,204 2.47% 15,387 2.82% 16,218 3.40% 16,721 4.12% 18,788 4.76%
Commercial............. 35,338 5.39% 28,636 5.26% 22,195 4.66% 15,923 3.92% 14,318 3.63%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total other loans...... 55,087 8.41% 47,687 8.75% 42,025 8.82% 36,850 9.08% 35,151 8.91%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total loans............ 655,385 100.00% 544,688 100.00% 476,724 100.00% 405,813 100.00% 394,305 100.00%
-------- ======= -------- ======= -------- ======= -------- ======= -------- =======
Less: Deferred loan
fees and unearned
income................ (1,829) (1,882) (2,150) (2,726) (2,094)
Less: Allowance for
loan losses........... (7,759) (7,127) (6,996) (6,603) (5,799)
-------- -------- -------- -------- --------
Loans, net............. $645,797 $535,679 $467,578 $396,484 $386,412
======== ======== ======== ======== ========
3
The following table sets forth the Company's real estate loan originations
and loan purchases, sales and principal repayments for the past three years:
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Real estate loans (gross):
At beginning of year............................ $497,001 $434,699 $368,963
Real estate loans originated:
One to four-family............................. 118,512 96,434 94,727
Multi-family................................... 3,217 2,020 927
Commercial..................................... 36,311 21,839 21,594
Construction and land development, net......... 36,833 19,216 34,394
-------- -------- --------
Total real estate loans originated........... 194,873 139,509 151,642
Real estate loans purchased:
One to four-family............................. -- -- --
Multi-family................................... -- -- --
Commercial..................................... -- -- --
-------- -------- --------
Total real estate loans purchased............ -- -- --
Total real estate loans originated and
purchased................................... 194,873 139,509 151,642
-------- -------- --------
Reductions due to principal repayments,
foreclosures and charge-offs................... (83,745) (62,538) (61,277)
Sales of loans into secondary market............ (7,831) (14,669) (24,629)
-------- -------- --------
At end of year.................................. $600,298 $497,001 $434,699
======== ======== ========
Residential Mortgage Lending. The Company's traditional lending emphasis is
on the origination of first mortgage loans secured by one to four-family
residences, including townhouse and condominium units. Typically, such
residences are detached single family homes that serve as the primary
residence of the owner. Loan originations are obtained from referrals from
local real estate agents, builders and members of the local communities in
which the Company has offices and, to a lesser extent, existing or past
customers.
At December 31, 1996, 71% of the Company's mortgage loans consisted of one
to four-family residential loans, of which 67% were adjustable rate mortgage
("ARM") loans. ARM loans are available with adjustment on a one, three, five,
six, seven, eight or ten year basis. The Company also periodically offers ARM
loans on which the interest rate for the first period may be less than the
fully indexed rate. The Company requires that the borrower qualify at the note
payment rate after the initial interest rate adjustment. The Company offers
ARM loans that adjust by a maximum of 3% periodically and have a lifetime cap
on increase of up to 6%. ARM loans are generally originated for a term up to
30 years. Generally, ARM loans pose credit risks different from the risks
inherent in fixed-rate loans, primarily because as interest rates rise, the
underlying payments of the borrower rise, thereby increasing the potential for
default. At the same time, marketability of the underlying property may be
adversely affected by the higher interest rate environment.
The Company also offers fixed-rate loans for terms of up to 30 years.
Interest rates charged on fixed-rate loans are competitively priced based on
market conditions and the cost of funds and depend upon the type of program
chosen.
The Company's policy is generally to lend up to 95% of the appraised value
of property securing a single-family residential loan. The Company requires
private mortgage insurance on the loan amount exceeding 80% of the appraised
value of the property. The Company currently charges origination fees of up to
2% on one- to four-family residential mortgage loans. Mortgage loans in the
Company's portfolio include due-on-sale clauses which provide the Company with
the contractual right to deem the loan immediately due and payable in the
event that the borrower transfers ownership of the property without the
Company's consent.
4
The Company'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
Company may occasionally make loans in excess of the FNMA or FHLMC loan amount
guidelines. At December 31, 1996, the Company had $101.0 million of loans
which it sold but continues to service for others and $5.6 million of
purchased loans serviced for the Company by other institutions.
The Company also originates multi-family residential mortgage loans. As of
December 31, 1996, $31.1 million, or 4.7%, of the Company's total loan
portfolio consisted of multi-family loans. The majority of the Company's
multi-family loans consist of five- to twelve-unit buildings. The underwriting
criteria, terms and risks of the Company's multi-family loans are similar to
those for its commercial real estate loans. See "Commercial Real Estate
Lending."
Commercial Real Estate Lending. At December 31, 1996, the Company's
commercial real estate loan portfolio totalled $94.4 million, or 14.4% of
total loans. The commercial real estate loan portfolio included loans secured
by office buildings, retail businesses, not-for-profit organizations, moderate
sized apartment buildings and industrial properties.
The Company currently originates fixed-rate and one year ARM loans secured
by commercial real estate at rates adjusting to a spread over the rate on U.S.
Treasury securities, prime or other indices. These loans generally are made in
amounts up to 75% of the appraised value of the property securing the loan. In
making such loans, the Company considers the nature of the property, the net
operating income generated by the real estate to support the debt service, the
financial resources and income level of the borrower, the borrower's
experience in owning or managing similar property, the marketability of the
property and the Company's lending experience with the borrower. The Company
generally obtains personal guarantees, accompanied by personal financial
statements, from the principals involved.
Loans secured by multi-family and commercial real estate properties involve
a greater degree of risk than one to four-family residential mortgage loans.
Such loans generally are substantially larger than one to four-family loans,
and repayments of these loans are often dependent on successful operation by
the management of the properties. Additionally, the commercial real estate
business is cyclical and subject to downturns, overbuilding and local economic
conditions.
Construction and Land Lending. The Company originates loans to finance the
construction of one- to four-family homes and loans for the acquisition and
development of land (either unimproved land or improved lots) to contractors
and individuals. Land development loans typically are short-term loans. At
December 31, 1996, the Company had $42.0 million of construction loans and
$4.3 million of land loans, which, on a combined basis, accounted for 7.1% of
the Company's total loans. Construction financing is generally considered to
involve a higher degree of risk of loss than long-term financing on improved,
occupied real estate. Risk of loss on a construction loan is dependent largely
upon the accuracy of the initial estimate of the property's value at
completion of construction or development and the estimated cost (including
interest) of construction. As a result, the Company follows a number of risk
management practices. Construction and land loans generally are made to
customers of the Company and developers and contractors with whom it has had
favorable lending experience. The Company typically requires an independent
appraisal of the property and a feasibility study of the project. Loan funds
are disbursed after an inspection based on percentage of completion of the
project.
Commercial and Industrial and Other Lending. At December 31, 1996, $55.1
million, or 8.4%, of the Company's total loan portfolio consisted of working
capital loans for small businesses, home equity loans and secured personal
loans. The majority of the small business or commercial classification loans
are secured by real estate utilized by the borrower in its operations. Such
loans are underwritten on the basis of the ability of the underlying business
to provide adequate cash flows to meet all debt requirements. As part of the
Company's community bank strategy in the past year, more emphasis has been
placed on small business lending. Due to consolidation of the banking industry
in the Company's market, many of these borrowers have found it
5
increasingly difficult to maintain a personal relationship with the resulting
larger bank. Such local business relationships can provide high quality loans
on the balance sheet and additional deposit funds to the Company. These loans
are made primarily to local customers based on historical performance and
creditworthiness of the borrowers.
The following table reflects the scheduled maturities for commercial
business loans and construction loans:
AT DECEMBER 31, 1996
--------------------------
ADJUSTABLE FIXED
RATE RATE TOTAL
---------- ------- -------
(IN THOUSANDS)
1 year or less...................................... $36,797 $ 8,277 $45,074
More than 1 year to 5 years......................... 16,114 11,350 27,464
More than 5 years................................... 3,994 5,150 9,144
------- ------- -------
Total............................................... $56,905 $24,777 $81,682
======= ======= =======
RISK ELEMENTS
Loan Concentration and Resolution of Problem Assets. The Company's asset
quality was adversely affected during the years from 1989 to 1992 by a decline
in real estate values and the economic recession. As a result, the Company's
management worked aggressively to resolve problem assets. Management
implemented a strategic plan for the orderly liquidation of the Company's real
estate owned portfolio. As of December 31, 1996, 1995 and 1994, non-performing
assets amounted to $5.0 million, $7.0 million, and $5.3 million, respectively.
As a percentage of total year end assets, these levels of non-performing
assets represent .49%, .80% and .67% at December 31, 1996, 1995 and 1994,
respectively.
Delinquent Loans. As a matter of policy, the Company does not accrue
interest on loans past due 90 days or more, unless the collateral held by the
Company is clearly sufficient, based on current appraisals, for full
satisfaction of both principal and interest. Loans are also placed on non-
accrual status when, in the judgment of management, the probability of
collection of interest is deemed to be insufficient to warrant further
accrual. When a loan is placed on non-accrual status, any previously accrued
but unpaid interest is deducted from interest income.
At December 31, 1996, 1995 and 1994, the delinquencies in the Company's
portfolio were as follows:
AT DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1996 1995 1994
--------------------------------- --------------------------------- ---------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
---------------- ---------------- ---------------- ---------------- ---------------- ----------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE OF BALANCE OF BALANCE OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
------ --------- ------ --------- ------ --------- ------ --------- ------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
Real Estate
Loans.......... 20 $1,850 21 $1,969 17 $1,423 24 $3,521 14 $1,652 12 $1,261
Other Loans..... 6 50 4 316 3 320 1 500 4 11 4 123
--- ------ --- ------ --- ------ --- ------ --- ------ --- ------
Total Loans..... 26 1,900 25 $2,285 20 $1,743 25 $4,021 18 $1,663 16 $1,384
--- ------ --- ------ --- ------ --- ------ --- ------ --- ------
Delinquent loans
to total
loans.......... -- 0.29% -- 0.35% -- 0.32% -- 0.74% -- 0.35% -- 0.29%
=== ====== === ====== === ====== === ====== === ====== === ======
6
Non-Accrual Loans, Troubled Debt Restructurings and Other Real Estate
Owned. The following table sets forth information regarding non-accrual loans,
troubled debt restructurings, and other real estate owned and other assets.
AT DECEMBER 31,
----------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------- -------
(DOLLARS IN THOUSANDS)
Non-accrual loans................... $4,886 $5,402 $ 978 $ 1,489 $ 2,488
Troubled debt restructurings,
accruing........................... -- 199 -- 4,638 5,900
------ ------ ------ ------- -------
Total non-performing loans........ 4,886 5,601 978 6,127 8,388
Other real estate owned............. 133 1,201 4,355 7,778 17,365
Other assets........................ -- 200 -- -- --
------ ------ ------ ------- -------
Total non-performing assets....... $5,019 $7,002 $5,333 $13,905 $25,753
====== ====== ====== ======= =======
Loans past due 90 days or more and
still accruing..................... $ 136 $ -- $ 748 $ 414 $ 411
====== ====== ====== ======= =======
Non-performing loans as a percent of
total loans........................ 0.75% 1.03% 0.25% 1.52% 2.14%
Non-performing assets as a percent
of total assets.................... 0.49% 0.80% 0.67% 2.01% 4.56%
Allowance for loan losses as a
percent of non-performing loans.... 158.80% 127.25% 715.34% 107.77% 69.13%
Allowance for loan losses as a
percent of total loans............. 1.19% 1.31% 1.47% 1.64% 1.48%
====== ====== ====== ======= =======
In the past when particular circumstances concerning a problem loan have
warranted such action, the Company has modified loan terms with borrowers
through troubled debt restructurings. Generally, troubled debt restructurings
entered into by the Company have involved either a reduction in interest rate,
an extension of the maturity date, a waiver of principal payments for a
certain period of time, or a combination of some or all of these actions.
Occasionally, restructurings in special situations have included a small
decrease of principal balance, which management believed was the best course
of action given the particular circumstances related to the debt.
Real estate acquired by the Company through foreclosure or by deed-in-lieu
of foreclosure is classified as foreclosed until sold. Until January 1, 1995,
loans secured by real estate substantively repossessed were classified as in-
substance foreclosures. On January 1, 1995 the Company adopted SFAS No. 114
and, as a result the Company reclassified $1.8 million of substantively
foreclosed real estate to loan status. These properties were initially
recorded by the Company at the lower of cost or estimated fair value at the
time the loan was foreclosed or deemed to be an in-substance foreclosure, less
expected selling expenses (the lower of which becomes the asset's "new"
carrying value or cost). The estimated fair value of these properties is based
on current appraisals which take into consideration, among other factors,
discounted cash flow analysis, current occupancy and lease rates. These
properties are reevaluated by the Company quarterly and carried at the lower
of the "new" cost or estimated fair value of the underlying collateral
adjusted for expected selling expenses. At December 31, 1996, the Company
estimated the fair values for all of its foreclosed properties and has written
down its real estate owned properties to levels which management believes were
justified on a fair market value basis. Generally, all costs incurred in
maintaining the property are expensed, and costs incurred for the improvement
or development of such property are capitalized, to the extent appropriate.
7
The following table sets forth a summary of the Company's foreclosed real
estate owned at December 31, 1996 and 1995:
DECEMBER 31,
---------------
1996 1995
---------------
(IN THOUSANDS)
Residential
One to four-family............................................ $ 123 $ 232
Multi-family.................................................. -- --
Commercial...................................................... -- 960
Land............................................................ 10 9
------ --------
$ 133 $ 1,201
====== ========
Allowance for Possible Loan Losses. The Company's allowance for possible
loan losses is established and maintained through a provision for possible
loan losses. Charges to the provision for possible loan losses are based on
management's evaluation of numerous factors, including the risk
characteristics of the Company's loan portfolio generally, the portfolio's
historical experience, the level of non-accruing loans, current economic
conditions, collateral values, and trends in loan delinquencies and charge-
offs. Although management believes it uses the best information available to
make determinations with respect to the Company's allowance for possible loan
losses, loan losses may ultimately vary significantly from current estimates
and future adjustments may be necessary if economic conditions differ
substantially from the assumed economic conditions used in making the initial
determinations or if other circumstances change. In addition, regulatory
agencies, as an integral part of the examination process, review the Company's
allowance and may require the Company to make additions to the allowance based
on their assessment, which may differ from management's assessment.
The Company's allowance for possible loan losses was $7.8 million at
December 31, 1996 and represented 1.2% of the total loans outstanding. While
management believes it has established an adequate allowance for possible loan
losses, future reviews of the Company's loan portfolio and/or changing
economic conditions could cause the Company to make increased provisions,
thereby negatively affecting the Company's financial condition and earnings.
The following table sets forth an analysis of the Company's allowance for
possible loan losses for the periods indicated:
AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of
period..................... $ 7,127 $ 6,996 $ 6,603 $ 5,799 $ 5,323
Allowance acquired.......... -- -- -- 119 --
Provision for possible loan
losses..................... 605 325 550 1,099 1,550
-------- -------- -------- -------- --------
Balance of allowance after
provision.................. 7,732 7,321 7,153 7,017 6,873
Loans charged-off:
One to four-family........ 197 13 91 121 379
Multi-family.............. 113 -- -- 30 151
Commercial real estate.... -- 84 2 166 564
Construction and land
development.............. -- 20 -- -- 67
Other loans............... 110 227 113 125 25
-------- -------- -------- -------- --------
Total loans charged-
off.................... 420 344 206 442 1,186
Recoveries of loans
previously charged-off..... 447 150 49 28 112
-------- -------- -------- -------- --------
Balance of allowance at end
of year.................... $ 7,759 $ 7,127 $ 6,996 $ 6,603 $ 5,799
======== ======== ======== ======== ========
Amount of total loans at end
of year.................... $653,556 $542,806 $474,574 $403,087 $392,211
Average amount of loans
outstanding................ $591,178 $503,813 $429,435 $398,945 $394,901
Loans charged-off as a
percentage of average loans
outstanding................ 0.07% 0.07% 0.05% 0.11% 0.30%
Allowance for loan losses as
a percentage of total loans
at end of year............. 1.19% 1.31% 1.47% 1.64% 1.48%
======== ======== ======== ======== ========
8
The following table sets forth the Company's allowance for possible loan
losses by category and the percentage of loans in each category to total loans
receivable at December 31. The portion of the allowance for possible loan
losses allocated to each category does not represent the total available for
future losses which may occur within the loan category since the total
allowance for possible loan losses is a valuation reserve applicable to the
entire loan portfolio.
AT DECEMBER 31,
-----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------- ----------------- ----------------- ----------------- -----------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
(DOLLARS IN THOUSANDS)
One to four-family...... $4,344 55.99% $4,433 62.20% $4,350 62.18% $4,322 65.46% $3,906 67.34%
Multi-family............ 407 5.25% 423 5.94% 420 6.00% 420 6.36% 313 5.40%
Commercial real estate.. 1,910 24.62% 1,473 20.67% 1,441 20.60% 1,285 19.46% 1,236 21.31%
Construction and land... 453 5.84% 408 5.72% 591 8.45% 449 6.80% 230 3.97%
Other loans............. 645 8.30% 390 5.47% 194 2.77% 127 1.92% 114 1.98%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total................... $7,759 100.00% $7,127 100.00% $6,996 100.00% $6,603 100.00% $5,799 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
INVESTMENT ACTIVITIES
General. The Company's investment portfolio is managed as a source of
interest income, an asset/liability management tool, and a potential source of
liquidity to fund loan growth or meet deposit outflow. As such, the Company
seeks to invest in a broad array of investments to maintain diversification
and provide yields superior to those of federal funds and other short-term
investments. The portfolio consists of corporate bonds, asset-backed
securities, U.S. Treasury obligations, federal agency obligations, mortgage-
backed securities, mortgage-backed derivatives and high quality preferred
stocks.
At December 31, 1996, the investment portfolio had a amortized cost value of
$348.5 million and a market value of $347.9 million. Of the $348.5 million,
$173.5 million, or 49.8%, of the securities were designated as held to
maturity with the remaining $175.0 million, or 50.2%, being available for sale
(see table below). During 1996, the investment portfolio averaged
approximately 36.1% of total assets and provided 31.8% of total interest
income. The average life of the portfolio was approximately 3.34 years at
December 31, 1996.
Included in the securities available for sale is $14.6 million of FHLB stock
which the Company's two subsidiaries, Lexington and Federal, are required to
hold as members of the FHLB system.
At December 31, 1996 and 1995, federal funds sold and overnight deposits
totalled $4.5 million and $4.1 million, respectively. These balances consist
mostly of overnight interest bearing deposits maintained at the FHLB.
9
The following table sets forth certain information regarding the amortized
cost and market values of the Company's investments by category at the dates
indicated:
1996 1995 1994
------------------ ------------------ ------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
Securities Available for
Sale:
Government securities.. $ 86,645 $ 85,882 $ 50,620 $ 50,885 $ 37,778 $ 36,545
Corporate bonds........ 2,034 2,038 4,591 4,591 9,667 9,433
Asset-backed
securities............ 4,473 4,324 5,801 5,701 4,730 4,669
Mortgage-backed
derivatives........... 7,585 7,596 8,229 8,261 5,255 5,220
Mortgage-backed
securities:
Balloons............... -- -- -- -- -- --
Fixed.................. 12,018 11,947 11,518 11,657 5,629 5,271
Variable............... 25,313 25,563 30,190 30,378 6,639 6,479
-------- -------- -------- -------- -------- --------
Total mortgage-backed
securities........... 37,331 37,510 41,708 42,035 12,268 11,750
-------- -------- -------- -------- -------- --------
Total debt securities
available for sale... 138,068 137,350 110,949 111,473 69,698 67,617
Federal Home Loan Bank
stock, at cost......... 14,638 14,638 10,355 10,355 9,806 9,806
Marketable equity
securities............. 22,327 22,494 3,343 3,363 1,279 1,289
-------- -------- -------- -------- -------- --------
Total equity
securities available
for sale............. 36,965 37,132 13,698 13,718 11,085 11,095
-------- -------- -------- -------- -------- --------
Total securities
available for sale... $175,033 $174,482 $124,647 $125,191 $ 80,783 $ 78,712
======== ======== ======== ======== ======== ========
Securities Held to
Maturity:
Government securities.. $ 39,304 $ 39,469 $ 22,408 $ 22,801 $ 24,921 $ 24,375
Corporate bonds........ 3,003 3,015 4,011 4,058 4,019 3,922
Asset-backed
securities............ 19,466 19,371 17,695 17,560 24,460 23,603
Mortgage-backed
derivatives........... 13,494 13,596 16,750 16,968 19,881 18,836
Mortgage-backed
securities:
Balloons............... 43,583 43,106 50,458 50,414 58,437 54,282
Fixed.................. 39,702 39,947 46,851 47,788 29,837 28,356
Variable............... 14,958 14,868 17,927 17,795 48,123 45,558
-------- -------- -------- -------- -------- --------
Total mortgage-backed
securities........... 98,243 97,921 115,236 115,997 136,397 128,196
-------- -------- -------- -------- -------- --------
Total securities held
to maturity........... $173,510 $173,372 $176,100 $177,384 $209,678 $198,932
======== ======== ======== ======== ======== ========
Total investment
securities............ $348,543 $347,854 $300,747 $302,575 $290,461 $277,644
======== ======== ======== ======== ======== ========
10
The table below sets forth certain information regarding the amortized cost,
weighted average yields and contractual maturities of the Company's debt
securities at December 31, 1996. Many of these securities have adjustable rate
features.
CONTRACTUAL MATURITIES
-------------------------------------------------------------------------------------------------------------
AFTER ONE THROUGH AFTER FIVE THROUGH
ONE YEAR OR LESS FIVE YEARS TEN YEARS AFTER TEN YEARS TOTAL DEBT SECURITIES
-------------------- -------------------- -------------------- -------------------- -------------------------
ANNUALIZED ANNUALIZED ANNUALIZED ANNUALIZED ANNUALIZED
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD COST YIELD COST YIELD
--------- ---------- --------- ---------- --------- ---------- --------- ---------- ------------ -----------
(DOLLARS IN THOUSANDS)
U.S. Treasury and
agency
obligations..... $ 5,403 4.78% $24,054 6.55% $ 85,984 7.08% $ 10,508 7.15% $ 125,949 6.88%
Corporate bonds
and asset backed
securities...... 4,054 6.51% 1,615 5.92% 1,533 5.98% 21,774 6.37% 28,976 6.34%
------- ---- ------- ---- -------- ---- -------- ---- ------------ --------
Total........... 9,457 5.52% 25,669 6.51% 87,517 7.06% 32,282 6.62% 154,925 6.78%
------- ---- ------- ---- -------- ---- -------- ---- ------------ --------
Mortgage-backed
securities...... 8,823 6.63% 33,732 6.10% 11,525 7.39% 81,494 6.80% 135,574 6.67%
Mortgage-backed
derivative
securities...... -- -- 2,127 6.15% 1,229 5.84% 17,723 6.38% 21,079 6.33%
------- ---- ------- ---- -------- ---- -------- ---- ------------ --------
Total mortgage-
backed and
derivatives.... 8,823 6.63% 35,859 6.11% 12,754 7.24% 99,217 6.73% 156,653 6.62%
------- ---- ------- ---- -------- ---- -------- ---- ------------ --------
Total........... $18,280 6.06% $61,528 6.28% $100,271 7.08% $131,499 6.70% $ 311,578 6.70%
======= ==== ======= ==== ======== ==== ======== ==== ============ ========
Mortgage-Backed and Related Securities. At December 31, 1996, the mortgage-
backed portfolio consisted of 1 year adjustable rate securities ($40.3
million), 5 and 7 year balloons ($43.8 million), 15 year fixed rate securities
($28.8 million) and 30 year fixed rate securities ($22.7 million). The
adjustable rate securities were predominantly collateralized by 30 year loans
with annual rate adjustments. The $43.6 million in balloon securities, which
had 4 to 5 year average lives when purchased and contractual maturity dates of
5 to 7 years, had a weighted average life of 2.1 years at December 31, 1996.
The weighted average lives for the 15 and 30 year securities were 3.9 and 5.7
years, respectively. The shorter average life on the 30 year securities versus
the 15 year securities resulted from significant seasoning in the 30 year
portfolio.
The mortgage-backed derivatives portfolio totalled $21.4 million, or 6.1% of
total investment securities, and consisted of planned amortization classes
(PAC's), targeted amortization classes (TAC's), sequential payment classes
(SEQ's), scheduled amortization classes (SCH's) and accretion directed classes
(AD's). The $21.4 million balance at year end had an average life of 2.0 years
with 35.3% in monthly adjusting securities and the remaining 64.7% in fixed
rate securities.
At December 31, 1996, the amortized cost value of mortgage-backed and
mortgage-backed derivative securities totalled $156.7 million, or 15.2% of
total assets, compared with $181.9 million, or 20.7% of total assets at
December 31, 1995. Of the $156.7 million total, $108.8 million were fixed rate
and $47.9 million were adjustable rate. At December 31, 1996, $111.8 million
were classified as held to maturity and the remaining $44.9 million were
classified as available for sale. At December 31, 1996, all of the Company's
mortgage-backed securities and mortgage-backed derivatives were rated "AAA" by
Standard & Poor's Corporation and/or directly or indirectly insured or
guaranteed by a federal government agency.
11
SOURCES OF FUNDS
General. Deposits, borrowings, principal payments on loans and investments,
and maturities of loans and investments constitute the primary sources of
funds for the Company.
Deposits. The Company's deposit products include regular passbook and
statement savings accounts, NOW accounts, demand (checking) accounts, money
market accounts and certificate of deposit accounts. The certificate accounts
consist of regular and retirement funds and are either fixed or variable in
nature. At December 31, 1996 and 1995, brokered certificates of deposits
amounted to $29.1 million and $10.9 million, respectively. As an alternative
to borrowed funds, in 1996 the Company obtained funds in the form of
Depository Trust Company certificates that had original maturities of one
year. At December 31, 1996, the balance of such deposits was $14.9 million and
is included in the total brokered certificates of deposits of $29.1 million.
Deposit rates are established by management committees which meet on a regular
basis to discuss cash flows, funding requirements, general trends in interest
rates and competitive factors.
As of December 31, 1996 and 1995, total deposits were $652.5 million and
$583.8 million, respectively. The following table sets forth the distribution
of the Company's average deposits during the years indicated and the weighted
average nominal interest rate on each category of deposits presented.
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
PERCENT OF AVERAGE PERCENT OF AVERAGE PERCENT OF AVERAGE
AVERAGE TOTAL NOMINAL AVERAGE TOTAL NOMINAL AVERAGE TOTAL NOMINAL
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
-------- ---------- -------- -------- ---------- -------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
Demand.................. $ 36,690 5.99% -- $ 29,058 5.24% -- $ 24,889 4.73% --
NOW..................... 48,522 7.92% 1.60% 46,736 8.43% 1.79% 48,583 9.24% 1.75%
Regular savings......... 121,987 19.90% 2.56% 125,139 22.56% 2.56% 137,947 26.23% 2.49%
Money market............ 64,696 10.55% 4.14% 65,441 11.80% 3.34% 83,468 15.87% 3.39%
Certificate accounts.... 341,098 55.64% 5.61% 288,354 51.97% 5.77% 230,952 43.93% 4.70%
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total deposits......... $612,993 100.00% 4.20% $554,728 100.00% 4.12% $525,839 100.00% 3.42%
======== ====== ==== ======== ====== ==== ======== ====== ====
At December 31, 1996, the Company had outstanding $72.4 million in deposit
accounts in amounts of $100,000 or more, maturing as follows:
(DOLLARS IN THOUSANDS)
Period to maturity:
Three months or less................................... $20,536
Over three through six months.......................... 17,441
Over six through 12 months............................. 21,293
Over 12 months......................................... 13,114
-------
Total................................................ $72,384
=======
Borrowings. In recent years, the Company borrowed funds from the FHLBB to
fund asset growth. Advances outstanding as of December 31, 1996 totalled
$267.2 million at a weighted average interest rate of 5.78% and a remaining
weighted average term of approximately 10 months. The average balance of
advances outstanding in 1996 was $245.8 million. All of the advances were
secured by the Company's blanket lien agreement with the FHLBB.
During 1996, the Company entered into repurchase agreements on a daily basis
with certain customers. The average balance for repurchase agreement funds was
$203,000 at an average rate of 4.76%. Repurchase agreements amounted to
$727,000 at December 31, 1996; there were none during 1995.
Federal's ESOP has long-term debt, amounting to $535,000 as of December 31,
1996, which represents the remaining balance of a $1.0 million loan originated
on December 28, 1993. This loan, from a third party lender,
12
had a term of seven years with twenty-eight equal quarterly payments at a rate
equal to the Federal Funds effective rate plus 2.60%. The loan permitted the
Federal ESOP to acquire 100,000 shares of Main Street's common stock at $10.00
per share in the conversion to stock form.
In 1996 the Lexington ESOP purchased 40,000 shares of the Company's common
stock at a cost of $22.75 per share. Funds utilized to purchase 37,748 of the
shares were provided by a loan from a third party lender in the amount of
$859,000. The terms of the loan provide for principal and interest payments to
be made on a quarterly basis over a four year period commencing on February
27, 1997. Interest is based on the 90 day LIBOR rate plus 225 basis points or
the lender's base rate at the election of the borrower.
The Company has established repurchase agreement lines of credit with
several primary securities dealers. With these lines of credit, the Company
has the ability to pledge securities as collateral and borrow funds to support
additional asset growth. These advances are generally short-term in nature and
the rates are competitively priced by the financial markets. As of December
31, 1996, there were no repurchase agreements outstanding with primary
securities dealers.
EMPLOYEES
At December 31, 1996, the Company had 203 employees, of whom 39 were
considered part-time. Management considers its relations 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 are provided through
the subsidiary banks and include, among other things, a pension plan, an ESOP,
a 401(k) plan, a profit sharing plan and 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.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and its subsidiaries report their income on a calendar
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,
including particularly additions to its reserve for bad debts discussed below.
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.
Bad Debt Reserves. 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. Thrift institutions now will be
viewed as commercial banks 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 a thrift institution's
bad debt reserve for income tax purposes as of its base year (December 31,
1987 for Federal and October 31, 1988 for Lexington). 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
thrift institution's stock or if the thrift institution ceases to qualify as a
thrift institution for income tax purposes.
At December 31, 1996, the Company's surplus includes approximately
$16,902,000 of bad debt reserves, representing the base year amount, for which
income taxes have not been provided. Since the Company 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 $7,034,000 have
not been recorded with respect to such reserve.
13
Massachusetts Taxation
Although the Company will file a consolidated federal income tax return,
savings institutions cannot file Massachusetts combined returns. In 1995
Massachusetts enacted tax reform legislation applicable to banks that would
gradually reduce the income tax rate, from 12.13% in 1995 to 10.50% in 1999.
For 1996, savings institutions are taxed in Massachusetts at a rate of 11.72%
on their Massachusetts net income. 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 year.
However, no deductions are allowed with respect to dividends received, losses
sustained in other taxable years, and taxes paid to other jurisdictions.
The Company is qualified to be taxed as a security corporation for
Massachusetts corporation excise tax purposes. Accordingly, the Company is
taxed in Massachusetts at a rate of up to 0.33% of its gross income (including
any intercompany dividends received from its bank subsidiaries).
REGULATION AND SUPERVISION
General
As both a bank holding company and a savings and loan holding company,
Affiliated is extensively regulated under both federal and state law.
Affiliated is subject to supervision and examination by the Federal Reserve
Board ("FRB") under the Bank Holding Company Act, and is obligated to file
with the Federal Reserve Board an annual report and such additional reports as
the Federal Reserve Board may require. In addition, as a bank holding company
under Massachusetts law, Affiliated is registered with the Massachusetts
Commissioner of Banks and files reports with the Massachusetts Commissioner of
Banks as may be required from time to time. Affiliated is required to file
annual, quarterly and other periodic reports with the Securities and Exchange
Commission.
Federal is subject to extensive regulation, examination and supervision by
the OTS, as its chartering agency, and the FDIC, as its deposit insurer.
Federal is a member of the FHLB system and its deposit accounts are insured up
to applicable limits by the FDIC under the SAIF. The OTS and the FDIC conduct
periodic examinations to test the Federal's compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors, not
stockholders. Any change in such regulation, whether by the OTS, the FDIC or
the U.S. Congress, could have an adverse impact on Federal's operations.
Under various regulations, among other requirements, Federal is limited as
to transactions with related parties, the amount of loans outstanding to any
one borrower, the amount of capital distributions, the amount of brokered
deposits it may carry and liquidity standards.
Lexington is a member of the FHLB system and its deposits are insured by the
FDIC under the BIF. Lexington's deposits in excess of $100,000 are also
insured under the Deposit Insurance Fund of Massachusetts. As a state
chartered bank, Lexington is subject to the regulations of the Massachusetts
Commissioner of Banks. Lexington is generally examined once each year by
either the FDIC or the Massachusetts Commissioner of Banks.
Lexington is subject to similar regulations as Federal, relating to
limitation on the amount of loans to any one borrower, loans to and
transactions with related parties, and capital distributions, and changes in
regulation also could have an adverse impact on its operations.
14
Capital Requirements
The Home Owners Loan Act requires savings institutions, such as Federal, to
meet a qualified thrift lender ("QTL") test. Under the QTL test, as modified
by the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), a savings association is required to maintain at least 65% of its
portfolio assets (total assets less (i) specified liquid assets up to 20% of
total assets, (ii) intangibles, including goodwill, and (iii) the value of
property used to conduct the association's business) in certain qualified
thrift investments (primarily residential mortgages and related investments,
including certain mortgage-backed securities) on a monthly basis in 9 out of
every 12 months. As of December 31, 1996, Federal maintained 70.38% of its
portfolio assets in qualified thrift investments and, therefore, met the QTL
test.
Federal is subject to OTS capital regulations which require such savings
institutions to meet three capital standards: (1) tangible capital equal to at
least 1.5% of adjusted total assets; (2) leverage (or "core") capital equal to
at least 3% of adjusted total assets; and (3) risk-based capital equal to at
least 8% of risk-weighted assets.
Under OTS regulations effective January 1, 1994, a savings institution with
interest rate risk ("IRR") exposure (as defined below) above 2% must deduct an
IRR component (as defined below) when calculating total capital for purposes
of determining whether it meets OTS risk-based capital requirements.
Presently, the OTS has delayed implementation of this requirement. Generally,
IRR exposure is measured by the decline in the net portfolio value of an
institution that would result from a 200 basis points increase or decrease in
market interest rates (whichever results in lower net portfolio value),
divided by the estimated economic value of its assets, as determined under OTS
guidelines. The IRR component is an amount equal to one-half of the difference
between the institution's IRR and 0.02, multiplied by the estimated economic
value of its assets.
Under the OTS rules, generally, a savings institution is "well capitalized"
if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-
based capital ratio of 6% or greater, and a leverage ratio of 5% or greater. A
savings institution that is not well capitalized but has a total risk-based
capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or
greater, and a leverage ratio of 4% or greater is considered "adequately
capitalized." A savings institution that has a total risk-based capital ratio
of less than 8%, a Tier 1 risk-based capital ratio of less than 4%, or a
leverage ratio that is less than 4%, is considered to be undercapitalized. A
savings institution that has a total risk-based capital ratio less than 6%, a
Tier 1 risk-based capital ratio of less than 3% or a leverage ratio that is
less than 3%, is considered to be "significantly undercapitalized" and a
savings institution that has a tangible equity to total assets ratio equal to
or less than 2% is deemed to be "critically undercapitalized." An
institution's classification under the prompt corrective action framework of
FDICIA can have a significant effect on its ability to engage in other
activities, such as accepting brokered deposits or making capital
distributions.
At December 31, 1996, Federal exceeded each of its capital requirements, in
each case on a fully phased-in basis, and is deemed to be "well capitalized."
See "Management's Discussion and Analysis--Liquidity and Capital Resources."
Under FDIC regulatory capital requirements, Lexington is required to
maintain 8% of its risk weighted assets in capital. Lexington is also subject
to capital maintenance standards which require banks to maintain a minimum 3%
Tier 1 leverage ratio for the most highly-rated banks, with all other banks
required to meet a minimum leverage ratio that is at least 1% to 2% above the
minimum of 3%. At December 31, 1996, Lexington's risk-based capital and Tier 1
leverage ratios significantly exceeded the regulatory minimums. See
"Management's Discussion and Analysis--Liquidity and Capital Resources."
Insurance of Deposit Accounts
The FDIC has established a risk-based assessment system for insured
depository institutions that takes into account the risks attributable to
different categories and concentrations of assets and liabilities, the likely
amounts of any loss, and the revenue needs of the insurance fund. Under the
system, the FDIC assigns an institution to one of three capital categories
based on the institution's financial position, consisting of (1) well
capitalized, (2) adequately capitalized or (3) undercapitalized, and one of
three supervisory subcategories within each capital
15
group. The supervisory subgroup to which an institution is assigned is based
on a supervisory evaluation provided to the FDIC by the institution's primary
federal regulator and information which the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance funds. An institution's assessment rate depends on the capital
category and supervisory category to which it is assigned.
Affiliated's two bank subsidiaries are insured by different FDIC funds,
Lexington by the BIF and Federal by the SAIF.
During 1996, Lexington was subject to a zero basis point assessment rate and
thus to the minimum assessment of $2,000 per year which was the assessment for
highly rated and well capitalized banks under BIF requirements.
During the first nine months of 1996, best-rated SAIF insured banks, such as
Federal, were subject to an assessment rate of 23 basis points (0.23%) on
their SAIF assessable deposits. As a result of the enactment of the Economic
Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) on September
30, 1996, the FDIC was required to impose a special one-time assessment on the
SAIF insured deposits of each depository institution in an amount sufficient
to recapitalize the SAIF to 125 basis points (1.25%) of total insured
deposits. The FDIC determined that a special assessment of 65.7 basis points
on their SAIF assessable deposits as of March 31, 1995 was required. The
resulting one time pre-tax charge to Federal, and thus Affiliated, was
$2,121,000.
Under the terms of opinion D-47 issued by the Financial Accounting Standards
Board's ("FASB's") Emerging Issues Task Force on November 15, 1995, this
charge must be reported as an expense in the quarter in which the legislation
was enacted and could not be reported as an extraordinary item. Under the
provisions of EGRPRA, it was a tax deductible expense. The net after tax
impact on Affiliated's net income for the third quarter of 1996 was $1,236,000
or $.23 per share.
The FDIC has set BIF and SAIF insurance premium rates for 1997. Both Federal
and Lexington are currently subject to a zero basis point assessment rate
which is the assessment for highly rated and well capitalized banks under both
BIF and SAIF requirements.
Under the terms of EGRPRA, the FDIC was also required to impose additional
assessments on BIF and SAIF banks sufficient to pay the interest due on
Financing Corporation (FICO) bonds issued in the 1980's to finance payment of
losses in the savings and loan industry. Under the law, the FICO assessment to
BIF banks will be one-fifth the assessment to SAIF banks for the period
January 1, 1997 to December 31, 1999. The FDIC has set this assessment at
1.296 basis points for BIF banks such as Lexington and 6.480 basis points for
SAIF banks such as Federal.
Federal Home Loan Bank System
Federal and Lexington are members of the FHLB system, which consists of 12
regional FHLBs. The FHLB provides a central credit facility primarily for
member institutions. As a member of the FHLB, a bank is required to acquire
and hold shares of capital stock in the FHLB in an amount at least equal to 1%
of the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20th of its advances
(borrowings) from the FHLB, whichever is greater. Federal and Lexington were
in compliance with this requirement with a combined investment in FHLB stock
at December 31, 1996 of $14.6 million. FHLB advances must be secured by
specified types of collateral and are generally obtained for the purpose of
providing funds for residential home financing. Dividends received on FHLB
stock amounted to $817,000, $824,000 and $526,000, for the years ended
December 31, 1996, 1995 and 1994, respectively.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLB's imposing a higher rate of interest
on advances to their members.
16
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts. Both Federal and Lexington are in compliance with these
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements
imposed by the OTS. Because required reserves must be maintained in the form
of either vault cash, a non-interest-bearing account at a Federal Reserve Bank
or a pass-through account as defined by the Federal Reserve Board, the effect
of this reserve requirement is to reduce a bank's interest-earning assets.
FHLB System members are also authorized to borrow from the Federal Reserve
"discount window," but Federal Reserve Board regulations require institutions
to exhaust all FHLB sources before borrowing from a Federal Reserve Bank.
ITEM 2. PROPERTIES
The Company conducts its business at 716 Main Street, Waltham,
Massachusetts, a building owned by a subsidiary bank.
During 1996, Lexington conducted its business through its main office, six
branch offices and a lending center. Lexington's main office and four of these
branches have an automated teller machine (ATM). Each of these four branches
have drive-through facilities. Management believes that Lexington's
facilities, after the events described below, are adequate for the conduct of
its business.
Lexington closed its Woburn branch on the expiration of its lease on January
31, 1996 and its deposits were transferred to the Burlington branch. The
Lexington High School classroom branch closed in the Summer of 1996 and its
deposits, which were not material, were transferred to the Lexington main
office.
17
The following table sets forth certain information concerning Lexington's
facilities at December 31, 1996:
NET BOOK
OWNED DATE DATE VALUE AT
OR PURCHASED OR LEASE DECEMBER 31,
LOCATION DESCRIPTION LEASED LEASED EXPIRES 1996
-------- -------------- ------ ------------ ------- --------------
(IN THOUSANDS)
1776 Massachusetts
Avenue Main Office Owned 1895-site -- $ 307
Lexington, Massachusetts
(ATM) 1904-bldg.
421 Lowell Street Branch Owned 1976 -- $ 144
Lexington, Massachusetts
(ATM, drive-through)
1010 Waltham Street Branch Leased 1993 1997 --
Lexington, Massachusetts
Brookhaven Retirement
Complex
(Limited hours)
57 Bedford Street Lending Center Leased 1988 1998 $ 16
Lexington, Massachusetts
287 Great Road Branch Leased 1993 2003(1) $ 101
Bedford, Massachusetts
(ATM, drive-through)
856 Massachusetts Avenue Branch Owned 1962 -- $1,003
Arlington, Massachusetts
(ATM, drive-through)
141 Massachusetts Avenue Branch Leased 1986 2001 $ 21
Arlington, Massachusetts
36 Cambridge Street Branch Owned 1986 -- $ 199
Burlington,
Massachusetts
(ATM, drive-through)
- --------
(1) Lease provides for option to extend for two additional five-year periods to
2013.
18
Federal conducted its business through its main office and three branch
offices. Federal's main office has two ATMs and each branch office has one
ATM. Federal's main office and its branch office in Concord, Massachusetts
also have drive-through facilities. Management believes Federal's existing
facilities are adequate for the conduct of its business.
The following table sets forth certain information concerning Federal's
facilities at December 31, 1996:
NET BOOK
OWNED DATE DATE VALUE AT
OR PURCHASED OR LEASE DECEMBER 31,
LOCATION DESCRIPTION LEASED LEASED EXPIRES 1996
-------- ----------- ------ ------------ ------- --------------
(IN THOUSANDS)
716 Main Street Main Office Owned 1938-site -- $4,441
Waltham, Massachusetts 1981-bldg.
(Two ATMs, drive-
through)
202 Sudbury Road Branch Owned 1972 -- $ 150
Concord, Massachusetts
(ATM, drive-through)
415 Boston Post Road Branch Leased 1974 1999(1) $ 96
Weston, Massachusetts
(ATM)
1090 Lexington Street Branch Leased 1975 1999 $ 63
North Waltham,
Massachusetts
(ATM)
- --------
(1) Lease provides for an option to extend for an additional five years to
2004.
ITEM 3. LEGAL PROCEEDINGS
The Company's bank subsidiaries are involved in various legal proceedings
incidental to their business, none of which is believed by management to be
material to the results of operations or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
19
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 under the symbol "AFCB." The stock is listed in The Wall Street Journal
as "AfflCmntyBcp" and in local papers generally as "AffCom."
The stock of the Company commenced trading on October 19, 1995. The range of
high, low and quarter-end closing prices and dividends paid for 1995 and 1996
are as follows:
QUARTER ENDING HIGH LOW CLOSING DIVIDEND PAID
- -------------- ------ ------ ------- -------------
December 31, 1995........................... $17.75 $16.13 $17.38 $0.12
March 31, 1996.............................. 18.00 16.00 17.63 0.12
June 30, 1996............................... 17.88 16.00 17.38 0.12
September 30, 1996.......................... 22.50 16.38 20.38 0.12
December 31, 1996........................... 23.38 20.00 21.38 0.15
As of December 31, 1996, the Company had 985 stockholders of record and
5,149,666 shares of Common Stock outstanding. The stockholders of record total
does not reflect the number of persons or entities who hold their Common Stock
in nominee or "street" name through various brokerage firms.
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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--General."
On November 27, 1996, the Lexington ESOP, an employee benefit plan
established by Lexington in 1986, purchased 40,000 shares of the Company's
common stock from the Company at the then current market price of $22.75 per
share, for an aggregate consideration of $910,000. During 1996, stock options
for 50,466 shares of common stock were exercised by employees and/or directors
at prices ranging from $5.25 per share to $16.94 per share, for an aggregate
consideration of $396,000. During the period from the date of the Affiliation
through December 31, 1995, stock options for 6,000 shares of common stock were
exercised by employees and/or directors at prices ranging from $6.25 per share
to $10.00 per share, for an aggregate consideration of $48,750.
20
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.
AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994 1993 1992
---------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA
Total assets.............. $1,032,213 $878,480 $793,596 $692,860 $564,289
Investments (1)........... 352,456 305,416 290,306 249,343 128,848
Loans, Gross (including
held for sale)........... 653,556 543,877 474,574 408,721 398,277
Deposits.................. 652,509 583,832 532,270 524,883 481,350
Borrowed funds............ 269,292 187,514 161,021 62,964 20,000
Equity capital (2)........ 101,402 99,290 93,286 89,443 58,358
Non-performing assets..... 5,019 7,002 5,333 13,905 25,753
Allowance for possible
loan losses.............. 7,759 7,127 6,996 6,603 5,799
SELECTED OPERATING DATA
Net Interest income....... $ 31,277 $ 27,772 $ 24,479 $ 21,208 $ 18,556
Less provision for loan
losses................... 605 325 550 1,099 1,550
---------- -------- -------- -------- --------
Net interest income after
provision for loan
losses................... 30,672 27,447 23,929 20,109 17,006
Noninterest income........ 1,638 1,693 1,348 1,691 1,970
---------- -------- -------- -------- --------
Other real estate owned
expenses (income), net... 129 (107) (124) 758 3,162
SAIF recapitalization
charge................... 2,121 -- -- -- --
Merger expenses........... -- 1,989 -- -- --
Other noninterest
expenses................. 16,716 16,352 15,569 12,831 11,440
---------- -------- -------- -------- --------
Total noninterest
expenses................. 18,966 18,234 15,445 13,589 14,602
Income before income taxes
and cumulative effect of
a change in accounting
principle................ 13,344 10,906 9,832 8,211 4,374
Provision for income
taxes.................... 4,821 5,199 2,806 2,789 1,231
---------- -------- -------- -------- --------
Income before cumulative
effect of a change in
accounting principle..... 8,523 5,707 7,026 5,422 3,143
Cumulative effect of a
change in accounting
principle................ -- -- -- -- 569
---------- -------- -------- -------- --------
Net income................ $ 8,523 $ 5,707 $ 7,026 $ 5,422 $ 3,712
========== ======== ======== ======== ========
SAIF recapitalization, net
of taxes................. $ 1,236 -- -- -- --
Merger expenses, net of
taxes.................... -- $ 1,889 -- -- --
Change in SFAS No. 109 tax
valuation reserve........ -- (20) $ (1,075) $ (500) --
Cumulative effect of a
change in accounting
principle................ -- -- -- -- $ (569)
---------- -------- -------- -------- --------
Results excluding SAIF
recapitalization, merger
expenses, change in SFAS
No. 109 tax valuation
reserve and cumulative
effect of a change in
accounting principle..... $ 9,759 $ 7,576 $ 5,951 $ 4,922 $ 3,143
========== ======== ======== ======== ========
PER SHARE DATA (3)
Book value end of year.... $ 20.05 $ 18.99 $ 17.92 $ 17.25 --
Net income................ $ 1.64 $ 1.07 $ 1.32 $ 1.04 --
Cash dividends declared
(4)...................... $ 0.51 $ 0.32 $ 0.35 -- --
Results excluding SAIF
recapitalization, merger
expenses, change in SFAS
No. 109 tax valuation
reserve and cumulative
effect of a change in
accounting principle..... $ 1.87 $ 1.42 $ 1.12 $ 0.94 --
SELECTED RATIOS (5)
Return on average assets.. 1.01% 0.92% 0.82% 0.82% 0.57%
Return on average equity.. 9.96% 7.83% 6.50% 8.00% 5.50%
Year-end equity to assets
(2)...................... 9.82% 11.30% 11.75% 12.91% 10.34%
Interest rate spread...... 2.72% 2.80% 3.04% 3.42% 3.34%
Net interest margin....... 3.33% 3.46% 3.54% 3.74% 3.68%
Efficiency ratio excluding
other real estate owned
expenses, net............ 50.8% 55.5% 60.3% 56.0% 55.7%
ASSET QUALITY RATIOS
Year end non-performing
assets to total assets
......................... 0.49% 0.80% 0.67% 2.01% 4.56%
Non-performing loans to
total loans.............. 0.75% 1.03% 0.25% 1.52% 2.14%
Allowance for possible
loan losses to non-
performing loans......... 158.80% 127.25% 715.34% 107.77% 69.13%
21
- --------
(1) Includes investments, mortgage backed and derivative securities, federal
funds sold and interest bearing deposits in banks.
(2) On December 28, 1993, Federal converted from a federally chartered mutual
savings bank to a federally chartered stock savings bank (the
"Conversion"). The Conversion and a concurrent subscription stock offering
by Main Street resulted in net proceeds of approximately $27.3 million
being added to equity capital.
(3) Not applicable for 1992 due to the Conversion in December 1993.
(4) Dividends declared per share for the years ended December 31, 1995 and
1994 represent the combined historical dividends declared by Lexington and
Main Street determined by dividing the sum of the total dividends declared
by Lexington and Main Street by the sum of the outstanding shares of
common stock of Lexington and Main Street to which the dividends declared
apply. There are no historical dividends for Main Street prior to 1994 due
to the Conversion in December 1993.
(5) Based on results excluding SAIF recapitalization charge net of taxes,
merger expenses net of taxes, change in SFAS No. 109 tax valuation reserve
and cumulative effect of a change in accounting principle.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company commenced operations as the holding company of Federal and
Lexington on October 18, 1995. Accordingly, under pooling of interests
accounting, the information presented herein for 1995 and 1994 represents the
financial condition and results of operations of the Company and its wholly
owned bank 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, federal deposit insurance premiums including recapitalization of the
SAIF fund in 1996, real estate owned operations, other general and
administrative expenses and, in 1995, merger expenses in connection with the
Affiliation. 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.
This Form 10-K contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual events could differ materially from
those anticipated in the forward-looking statements. Important factors that
might cause such a difference include general economic conditions,
particularly the real estate market, in the Company's primary market area,
potential increases in the Company's non-performing assets (as well as
increases in the allowance for possible loan losses that might be necessary),
concentrations of loans in a particular geographic area or with certain large
borrowers, changes in government regulation and supervision, including
increased deposit insurance premiums or capital or reserve requirements,
changes in interest rates and increased competition in the Company's market
area.
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
22
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 Board of Directors and management.
Meetings are held on a quarterly 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 and the amount of interest-bearing
liabilities anticipated, based upon certain assumptions, to mature or reprice
within that time period. A gap is considered positive when the amount of
interest rate sensitive assets 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, derivatives and loans have been placed in the time frames in which
they reprice. Fixed rate mortgage-backed securities, derivatives and loans
have been allocated among the various periods based upon median primary
security dealer prepayment assumptions provided by a nationally recognized
investment information service as of December 31, 1996. Deposit decay rates
suggested by regulatory agencies were used to withdraw core deposits,
inclusive of savings, NOW and money market accounts, from the various time
frames. Variable rate certificates of deposits and borrowings were repriced
according to the applicable adjustment dates. Fixed rate certificates and
borrowings were allocated to the time frames in which they mature. The Company
believes that the assumptions utilized are accurate and meaningful, but they
may not ultimately reflect the actual prepayments, withdrawals or repricings
experienced by the Company.
23
AT DECEMBER 31, 1996
----------------------------------------------------------------------------------------
3 MONTHS MORE THAN MORE THAN MORE THAN
LESS THAN TO ONE ONE YEAR TO THREE YEARS TO FIVE YEARS TO MORE THAN
3 MONTHS YEAR THREE YEARS FIVE YEARS TEN YEARS TEN YEARS TOTAL
--------- --------- ----------- -------------- ------------- --------- ----------
(DOLLARS IN THOUSANDS)
Interest sensitive
assets:
Federal funds sold and
interest bearing
deposits.............. $ 4,464 $ -- $ -- $ -- $ -- $ -- $ 4,464
Investment securities.. 37,804 24,147 27,327 10,888 85,716 5,495 191,377
Mortgage-backed
securities and
derivatives........... 25,879 58,282 46,139 16,958 7,924 1,433 156,615
Adjustable rate loans.. 114,624 140,413 80,957 59,973 43,334 -- 439,301
Fixed rate loans....... 8,675 26,503 55,671 50,463 56,576 16,367 214,255
-------- --------- --------- -------- -------- -------- ----------
Total interest
sensitive assets..... $191,446 $ 249,345 $ 210,094 $138,282 $193,550 $ 23,295 $1,006,012
======== ========= ========= ======== ======== ======== ==========
Interest sensitive
liabilities:
Regular savings
accounts.............. $ 5,217 $ 14,984 $ 31,899 $ 20,796 $ 26,395 $ 23,448 $ 122,739
NOW accounts........... 4,749 12,930 18,100 4,843 6,500 4,225 51,347
Money market accounts.. 13,133 31,616 11,392 5,424 4,157 770 66,492
Certificate accounts... 96,898 182,388 65,770 18,253 7,063 2 370,374
FHLB and other
borrowings............ 121,951 68,800 74,041 6,587 -- -- 271,379
-------- --------- --------- -------- -------- -------- ----------
Total interest
sensitive
liabilities.......... $241,948 $ 310,718 $ 201,202 $ 55,903 $ 44,115 $ 28,445 $ 882,331
======== ========= ========= ======== ======== ======== ==========
Net interest rate
sensitivity gap........ $(50,502) $ (61,373) $ 8,892 $ 82,379 $149,435 $ (5,150) $ 123,681
======== ========= ========= ======== ======== ======== ==========
Cumulative net interest
rate sensitivity gap... $(50,502) $(111,875) $(102,983) $(20,604) $128,831 $123,681
======== ========= ========= ======== ======== ========
Net interest rate
sensitivity gap as a
percentage of total
assets................. (4.89)% (5.95)% 0.86 % 7.98 % 14.48% (0.50)%
======== ========= ========= ======== ======== ========
Cumulative net interest
rate sensitivity gap as
a percentage of total
assets................. (4.89)% (10.84)% (9.98)% (2.00)% 12.48% 11.98 %
======== ========= ========= ======== ======== ========
The $123.7 million gap between interest sensitive assets and interest
sensitive liabilities is balanced by noninterest rate sensitive items,
principally by $101.4 million of stockholders' equity and $41.6 million in
demand deposit accounts.
In addition, of the $191.4 million of investment securities, $155.8 million
possess call features which have the potential to significantly shorten the
investment holding period.
COMPARISON OF FINANCIAL CONDITION AND OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 1996 AND DECEMBER 31, 1995
Changes in Financial Condition. Total assets of the Company at December 31,
1996 amounted to $1.032 billion, compared to $878.5 million at the end of
1995, reflecting an increase of $153.5 million, or 17.5%. The growth in assets
was driven by an increase in net loans receivable of $110.1 million, or 20.6%
and an increase in investments of $47.0 million, or 15.4%. During 1996 the
Company continued to expand its residential portfolio as well as its small
business, commercial real estate and construction lending. Total real estate
loan originations amounted to $194.9 million in 1996 as compared to $139.5
million in 1995.
The increases in earning assets were partially funded by deposits which
amounted to $652.5 million at December 31, 1996, compared to $583.8 million at
the end of 1995, an increase of $68.7 million or 11.8%. Additional funding was
provided by FHLB borrowings which increased to $267.2 million at the end of
1996, an increase of $80.3 million, or 43.0% from December 31, 1995.
24
During 1996 core deposits increased by $16.8 million or 6.3%, and term
certificates increased to $370.4 million at December 31, 1996, compared to
$318.5 million at the end of 1995, an increase of $51.9 million or 16.3%.
Other liabilities at December 31, 1996 amounted to $6.9 million, an increase
of $983,000 or 16.5%, compared to December 31, 1995.
Non-performing assets, which consist of impaired loans, non-accrual loans,
restructured loans, foreclosures, and other assets were $5.0 million at
December 31, 1996 compared to $7.0 million at December 31, 1995, a decrease of
$2.0 million. The Company's ratio of non-performing assets to total assets at
December 31, 1996 remained below 1%, at 0.49% versus 0.80% at the end of 1995.
As of December 31, 1996, the Company had $133,000 of other real estate owned
versus $1.2 million on December 31, 1995. During 1996, the Company had minimal
activity in new foreclosures.
The total amount of loans delinquent 30 days or more at December 31, 1996
was $8.1 million, compared to $8.7 million at the end of 1995. As of December
31, 1996, there were twenty-five loans with an aggregate principal balance of
$2.3 million which were delinquent 90 days or more, as compared to twenty-five
loans with an aggregate principal balance of $4.0 million at the end of 1995.
The Company's stockholders' equity increased by $2.1 million or 2.1% in
1996, resulting from net income of $8.5 million, option transactions of
$438,000 and ESOP transactions of $356,000 offset by a stock buy back of $4.1
million. Cash dividends paid by the Company which amount to $2.6 million or
$0.51 per share, were declared and charged to retained earnings during 1996
and unearned compensation--ESOP was charged $910,000 for purchase of 40,000
shares of the Company's treasury stock. Due to changes in the interest rate
environment during 1996, the Company's stockholders' equity reflected an
unrealized loss on securities available-for-sale and held-to-maturity, net of
related tax, of $532,000, compared to an unrealized gain of $90,000 at
December 31, 1995, a reduction in equity of $622,000.
General Operating Results. Net income was $8.5 million or $1.64 per share in
1996 compared to $5.7 million or $1.07 per share in 1995, an increase of $2.8
million or 49.1%. Net income for 1996 is after pre-tax charge of $2.1 million
($1.2 million after tax or $.23 per share) for recapitalization of the SAIF.
Excluding the cost of SAIF recapitalization, Affiliated would have reported
fully diluted net income for 1996 of $9.8 million or $1.87 per share.
Excluding merger costs, Affiliated would have reported 1995 net income of
$7,596,000 or $1.42 per share. The 1996 pre-SAIF fully diluted earnings per
share figure of $1.87 represents a 32% increase when compared to the
comparable 1995 pre-merger expense earnings per share of $1.42. The growth in
earnings per share also reflects the effect of the 238,000 share (4.5%) stock
buy back program announced in January, 1996 and completed in February, 1996.
The current year results benefited from a higher level of net interest income
with only a modest increase in normal operating expenses. As a result of
increased levels of interest earning assets, net interest income rose by $3.5
million or 12.6% in the twelve month period of 1996 versus the same period of
1995. Noninterest expense, excluding the SAIF recapitalization and the 1995
merger costs, increased by $600,000 or 3.7% in 1996 compared to 1995. A
significant portion of this $600,000 expense increase resulted from net costs
of $129,000 for other real estate owned expenses for the twelve months of
1996, versus a net gain of $107,000 for the comparable period of 1995.
As a result of the enactment of the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 ("EGRPRA") on September 30, 1996, the FDIC was required
to impose a special one-time assessment on the SAIF-insured deposits of each
depository institution in an amount sufficient to recapitalize the SAIF to
1.25% of total insured deposits. The FDIC determined that a special assessment
of 0.657% of the SAIF-assessable deposits as of March 31, 1995 was required.
The resulting one time charge to Federal, and thus Affiliated, was $2.1
million as noted above.
Under the terms of opinion D-47 issued by the FASB's Emerging Issues Task
Force on November 15, 1995, this charge must be reported as an expense in the
quarter in which the legislation was enacted and cannot be reported as an
extraordinary item. Under the provisions of EGRPRA, it is a tax deductible
expense.
25
Analysis of Net Interest Income
Net interest income represents the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
Net interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on them.
Average Balance Sheet. The following table sets forth information relating
to the Company for the three years ended December 31, 1996. It includes (i)
the average balance sheet for the period, based on daily average balances;
(ii) the total amount of interest paid or earned on the various categories of
interest-earning assets and interest-bearing liabilities; and (iii) the
resulting weighted average yields and costs. Such yields and costs are derived
by dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods shown except where noted otherwise. In addition,
the table reflects the Company's interest rate spreads and net yields. The
average balance of loans receivable includes loans on which the Company has
discontinued accruing interest. The yields and costs include fees which are
considered "adjustments to yield."
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1996 1995 1994
-------------------------- -------------------------- --------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- -------- ------- -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning assets:
Loans.................. $591,178 $48,661 8.23% $503,813 $41,924 8.32% $429,435 $33,150 7.72%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Investments:
Investments and
mortgage-backed
securities held-to-
maturity.............. 176,953 11,521 6.51 203,075 12,888 6.35 169,959 9,137 5.38
Investments and
mortgage-backed
securities available-
for-sale.............. 153,101 10,077 6.58 77,610 4,886 6.30 71,405 4,089 5.73
Federal Home Loan Bank
stock................. 12,754 817 6.41 9,853 824 8.36 7,696 526 6.83
Federal funds sold..... 5,825 265 4.55 7,756 474 6.11 13,441 469 3.49
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total investments..... 348,633 22,680 6.51 298,294 19,072 6.39 262,501 14,221 5.42
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning
assets............... 939,811 71,341 7.59 802,107 60,996 7.60 691,936 47,371 6.85
-------- ------- ---- -------- ------- ---- -------- ------- ----
Noninterest-earning
assets................ 32,752 31,557 39,062
Allowance for possible
loan losses........... (7,291) (7,112) (6,845)
-------- -------- --------
Total assets........... $965,272 $826,552 $724,153
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing
liabilities:
Regular savings, NOW
and money market
accounts.............. $235,205 $ 6,119 2.60% $237,316 $ 6,230 2.63% $269,998 $ 6,949 2.57%
Certificate accounts... 341,098 19,656 5.76 288,354 16,648 5.77 230,952 10,813 4.68
Borrowed funds......... 246,007 14,289 5.81 166,817 10,346 6.20 100,034 5,130 5.13
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities........... 822,310 40,064 4.87 692,487 33,224 4.80 600,984 22,892 3.81
-------- ------- ---- -------- ------- ---- -------- ------- ----
Noninterest-bearing
liabilities:
Demand deposits........ 36,690 29,058 24,889
Other.................. 8,299 8,302 6,760
-------- -------- --------
Total liabilities...... 867,299 729,847 632,633
-------- -------- --------
Stockholders' equity.... 97,973 96,705 91,520
-------- -------- --------
Total liabilities and
stockholders' equity.. $965,272 $826,552 $724,153
======== ======== ========
Net interest income..... $31,277 $27,772 $24,479
======= ======= =======
Interest rate spread.... 2.72% 2.80% 3.04%
==== ==== ====
Net yield on earning
assets................. 3.33% 3.46% 3.54%
==== ==== ====
26
Interest Income. Interest income increased from $61.0 million in 1995 to
$71.3 million in 1996, an increase of $10.3 million or 16.9%. The higher level
in 1996 is chiefly due to an increased volume of loans and investment
securities designated as available for sale which contributed $12.1 million.
The increase in loan volume resulted from continued growth in real estate and
small business loans. Investment securities available for sale increased
during the year as a result of additional purchases of government securities
and high quality preferred stocks. The yield on average earning assets was
relatively level from 1995 to 1996. Average loans outstanding for the year
amounted to $591.2 million and produced an average yield of 8.23%, as compared
to a 1995 average volume of $503.8 million with an average yield of 8.32%. The
average balance of all investment categories amounted to $348.6 million in
1996 with an average yield of 6.51% compared to $298.3 million and 6.39%,
respectively, in the comparable period of 1995.
Interest Expense. Interest expense in 1996 amounted to $40.1 million, up
$6.9 million or 20.8% from $33.2 million in 1995. The significant factors
contributing to this increase were higher volumes in certificate accounts and
FHLBB advances. Average deposit rates increased from 4.35% in 1995 to 4.47% in
1996. Average interest bearing deposits increased to $576.3 million in 1996,
up $50.6 million or 9.6% from the 1995 level. Average certificates increased
by $52.7 million or 18.3% in 1996 from the comparable 1995 period. The Company
had average borrowings, principally from the FHLBB, of $246.0 million in 1996
compared to $166.8 million for 1995. The average rate paid on borrowings
decreased from 6.20% in 1995 to 5.81% in 1996.
Rate/Volume Analysis. The table below illustrates the extent to which
changes in interest rates and changes in the volumes of interest-earning
assets and interest-bearing liabilities affected the components of the
Company's interest income and interest expense during the periods indicated.
For each interest-related asset and liability category, information is
provided with respect to (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate), (ii) changes attributable to
changes in interest rates (changes in rate multiplied by prior volume), and
(iii) the net change. The changes attributable to the combined impact of both
volume and rates have been allocated proportionately to the change due to
volume and the change due to rates.
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1996 COMPARED WITH 1995 1995 COMPARED WITH 1994
------------------------ ------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN: DUE TO CHANGE IN:
------------------------ ------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Interest income:
Loans...................... $ 7,186 $(449) $ 6,737 $6,050 $2,724 $ 8,774
Investments:
Investment and mortgage-
backed securities held-
to-maturity.............. (1,712) 345 (1,367) 1,947 1,804 3,751
Investment and mortgage-
backed securities
available-for-sale....... 4,956 235 5,191 372 425 797
Federal Home Loan Bank
stock.................... (34) 27 (7) 166 132 298
Federal funds sold........ (103) (106) (209) (6) 11 5
------- ----- ------- ------ ------ -------
Total interest income..... 10,293 52 10,345 8,529 5,096 13,625
------- ----- ------- ------ ------ -------
Interest expense:
Regular savings, NOW and
money market accounts..... (55) (56) (111) (861) 142 (719)
Certificate accounts....... 3,039 (31) 3,008 3,011 2,824 5,835
------- ----- ------- ------ ------ -------
Total deposits............ 2,984 (87) 2,897 2,150 2,966 5,116
Borrowed funds............. 4,552 (609) 3,943 3,971 1,245 5,216
------- ----- ------- ------ ------ -------
Total interest expense.... 7,536 (696) 6,840 6,121 4,211 10,332
------- ----- ------- ------ ------ -------
Change in net interest
income..................... $ 2,757 $ 748 $ 3,505 $2,408 $ 885 $ 3,293
======= ===== ======= ====== ====== =======
27
The increase in 1996 net interest income was primarily attributed to volume
increases in loans and investment and mortgage-backed securities designated as
available for sale. Volume increases in certificates of deposits and borrowed
funds tended to offset the favorable benefit of volume increases in earning
assets. The increase in 1995 net interest income was primarily attributed to a
volume and a rate increase in loans and investments held to maturity as seen
in the table. During 1995 net interest income was adversely impacted by
increased volume of certificates and borrowings as well as higher rates on
both categories.
Provision for Possible Loan Losses. The provision for possible loan losses
was $605,000 in 1996 versus $325,000 in 1995, an 86.2% increase. The increased
provision is a reflection of the continued growth in the Company's loan
portfolio. At December 31, 1996 the Company's allowance for possible loan
losses amounted to $7.8 million which represented 159% of non-performing loans
at year-end. The provision and the level of the allowance are evaluated on a
regular basis by management and are based upon management's periodic review of
the collectibility of the loans in light of historical experience, known and
inherent risks in the nature and volume of the loan portfolio, adverse
situations that may affect the borrower's ability to repay, estimated value of
any underlying collateral and prevailing economic conditions. The allowance is
a forward-looking estimate and ultimate losses may vary from current estimates
and future additions to the allowance may be necessary. As adjustments become
necessary, they are reported in the results of operations for the periods in
which they become known. Loan losses are charged against the allowance when
management believes the collectibility of the loan balance is unlikely.
Management believes that the December 31, 1996 level of the allowance is
adequate to provide for known and reasonably anticipated loan losses inherent
in the portfolio at that date.
Noninterest Income. For 1996, total noninterest income amounted to
$1,638,000 down $55,000 or 3.2% from 1995. Customer service fees and other
fees were down $20,000 or 1.5% in 1996 from the same period in 1995 due to
decreases in penalties on early withdrawals, commissions, and certain prior
period loan fee income. Loan servicing fees amounted to $309,000 this period,
compared to $324,000 reported in 1995. The Company had a net gain on sales of
loans of $76,000 in 1996, compared to a net gain of $16,000 in the same period
of 1995. Sales of investments produced gains of $33,000 in 1995, compared to a
loss of $47,000 during 1996.
Noninterest Expense. Total noninterest expenses increased by $732,000 or
4.0% in 1996 to $19.0 million, compared to $18.2 million in 1995. The
significant components of the change in expenses included a $2.1 million
increase in Federal's federal deposit insurance premiums for recapitalization
of the SAIF as previously mentioned, which on a comparative basis, is
substantially offset by the Company's 1995 merger costs of $2.0 million. Other
components include a $260,000 decrease in Lexington's BIF federal deposit
insurance premiums, a $467,000 or 5.4% increase in compensation and benefits,
a $92,000 or 4.6% increase in occupancy and equipment costs, a decrease in
professional services of $84,000 or 10.7%, an increase in other real estate
owned expense of $236,000 and a $76,000 or 15.3% increase in marketing and
promotion costs.
The increase in compensation and benefits costs resulted from staff
additions, normal salary increases, and increased costs associated with the
Company's 401(k), ESOP and profit sharing and incentive compensation plans.
Occupancy expenses increased due to higher rental costs, maintenance of
facilities, and depreciation expense. Professional fees declined as a result
of costs savings in the areas of legal and accounting services. Other real
estate owned expense was $129,000 in 1996, versus a net credit of $107,000 in
1995. The 1995 credit reflects an increased level of gains on sales of
foreclosed property in that year.
Provision for Income Taxes. The provision for income taxes was $4.8 million
in 1996 compared to $5.2 million for the corresponding period in 1995. The
combined effective tax rate for 1996 was 36.1% versus 47.7% for the same
period in 1995. The lower effective rate in 1996 reflects a lower state tax
rate applicable to certain subsidiaries of the Company's bank subsidiaries and
an increase in dividend income from preferred stocks. The 1995 tax rate
reflects merger costs, which are mostly non-deductible for income tax
purposes. At December 31, 1996, the net deferred income tax asset amounted to
$3.4 million. The primary sources of recovery of the deferred income tax asset
are taxes paid, which are available for carry back, from 1995, 1994, and 1993,
and the expectation that the deductible temporary differences will reverse
during periods when the Company generates taxable income.
28
The Small Business Job Protection Act of 1996 repealed Section 593 of the
Internal Revenue Code relating to the method used by thrift institutions to
calculate bad debt deduction for federal income tax purposes. While both bank
subsidiaries of Affiliated were covered by this Section, it has been
determined that its repeal has no material impact on their financial results
and thus those of Affiliated.
COMPARISON OF FINANCIAL CONDITION AND OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 1995 AND DECEMBER 31, 1994
Changes in Financial Condition. Total assets of the Company at December 31,
1995 amounted to $878.5 million, compared to $793.6 million at the end of
1994, reflecting an increase of $84.9 million, or 10.7%. The growth in assets
was driven by an increase in net loans receivable of $68.1 million, or 14.6%
and an increase in investments of $15.1 million, or 5.2%. During 1995 the
Company continued to expand its residential portfolio as well as its small
business, commercial real estate and construction lending. Total real estate
loan originations amounted to $139.5 million in 1995 as compared to $151.6
million in 1994.
The increases in earning assets were mainly funded by deposits which
amounted to $583.8 million at December 31, 1995, compared to $532.3 million at
the end of 1994, an increase of $51.5 million or 9.7%. Additional funding was
provided by FHLBB borrowings which increased to $186.8 million at the end of
1995, an increase of $26.6 million, or 16.6% from December 31, 1994.
During 1995 the deposit mix shifted from savings and money market accounts
to higher cost term certificates which increased to $318.5 million at December
31, 1995, compared to $247.0 million at the end of 1994, an increase of $71.5
million or 28.9%. Other liabilities at December 31, 1995 amounted to $5.9
million, an increase of $738,000 or 14.2%, compared to December 31, 1994.
Non-performing assets, which consist of impaired loans, non-accrual loans,
restructured loans, foreclosures and other assets were $7.0 million at
December 31, 1995 compared to $5.3 million at December 31, 1994, an increase
of $1.7 million. The Company's ratio of non-performing assets to total assets
at December 31, 1995 remained below 1%, at .80% versus .67% at the end of
1994.
As of December 31, 1995, the Company had $1.2 million of other real estate
owned versus $4.4 million on December 31, 1994. During 1995, the Company sold
foreclosed properties with a carrying value of $2.9 million. New foreclosures
totalled $1.1 million in 1995. In addition, on January 1, 1995, upon the
adoption of SFAS No. 114, the Company reclassified $1.8 million of
substantially foreclosed real estate to loan status.
The total amount of loans delinquent 30 days or more at December 31, 1995
was $8.7 million, compared to $4.1 million at the end of 1994. As of December
31, 1995, there were twenty-five loans with an aggregate principal balance of
$4.0 million which were delinquent 90 days or more, as compared to sixteen
loans with an aggregate principal balance of $1.4 million at the end of 1994.
Part of this increase was due to the SFAS No. 114 reclassification outlined
above.
The Company's stockholders' equity increased by $6.0 million or 6.5% in
1995, resulting from net income of $5.7 million, option transactions of
$108,000 and ESOP transactions of $228,000. Cash dividends paid by the Company
and its predecessors amounting to $1.7 million or $0.32 per share, were
declared and charged to retained earnings during 1995. Due to changes in the
interest rate environment during 1995, the Company's stockholders' equity
reflected an unrealized gain on securities available-for-sale and held-to-
maturity, net of related tax, of $90,000, compared to an unrealized loss of
$1.5 million at December 31, 1994, an increase in equity of $1.6 million.
General Operating Results. Net income was $5.7 million or $1.07 per share in
1995 compared to $7.0 million or $1.32 per share in 1994, a decrease of $1.3
million or 18.6%. Two items of a nonrecurring nature had an adverse impact on
the 1994 to 1995 comparison. First, the Company incurred one time merger
expenses associated with the Affiliation. These costs, which are largely non-
deductible for federal income tax purposes,
29
amounted to an after tax net of $1.9 million. Secondly, in 1994 the Company
benefitted from $1.1 million of income tax credits under SFAS No. 109, as a
result of the reduction of the deferred income tax valuation reserve, compared
to a $20,000 benefit in 1995. Somewhat offsetting these two unfavorable
factors for the 1995 versus 1994 comparison was the loss on sale of
investments of $420,000 in 1994, as compared to a gain of $33,000 in 1995. In
addition to these nonrecurring factors, the Company benefited from an increase
in net interest income of $3.3 million in 1995 as compared to 1994. This was
primarily the result of higher loan volume, combined with favorable interest
rates. Income was also enhanced by a decrease in the level of provision for
possible loan losses, from $550,000 in 1994 to $325,000 in 1995. Finally, a
repricing of deposit insurance assessments contributed to a reduction in this
category of expense from $1.3 million in 1994 to $1.0 million in 1995. These
factors were partially offset by increases in most other categories of non-
interest expense.
Interest Income. Interest income increased from $47.4 million in 1994 to
$61.0 million in 1995, an increase of $13.6 million or 28.7%. This increase
partly resulted from an increased level and yield of loans which contributed
$8.8 million. The increase in interest income from higher loan levels was
enhanced by a $4.9 million increase in investment interest income. The higher
level of interest income contributed by the loan portfolio was primarily the
result of significant increases in loans outstanding which contributed $6.1
million to the increase. This increase in loan volume resulted from higher
levels of lending in residential and commercial loan products. Improving
residential yields and a higher concentration of commercial real estate and
small business loans resulted in the loan yield increasing to 8.32% in 1995
from 7.72% in 1994. The effect of the higher loan yield increased loan
interest income by $2.7 million.
Interest Expense. Interest expense in 1995 amounted to $33.2 million, an
increase of $10.3 million or 45.0% from $22.9 million in 1994. The
contributing factors to this increase were greater volume in higher yielding
term certificates and higher levels of borrowed funds. The average rate paid
on deposits increased from 3.55% in 1994 to 4.35% in 1995. Average deposit
volume also increased from $501.0 million in 1994 to $525.7 million in 1995,
up $24.7 million or 4.9%. Average term certificates increased $57.4 million or
24.9% from the 1994 level. Average FHLBB borrowings increased to $166.8
million in 1995 compared to $100.0 million in 1994, an increase of $66.8
million.
Provision for Possible Loan Losses. The provision for possible loan losses
was $325,000 in 1995 versus $550,000 in 1994, a 40.9% decrease. There were
loan charge-offs of $344,000 in 1995, compared to $206,000 in 1994. At
December 31, 1995 the Company's allowance for possible loan losses amounted to
$7.1 million which represented 140.1% of non-performing loans at year-end.
Noninterest Income. Noninterest income in 1995 amounted to $1.7 million, an
increase of $400,000 or 30.8% from $1.3 million in 1994. This increase was
mainly due to a modest gain on sale of securities of $33,000 in 1995, compared
to a $420,000 loss in 1994. Customer service fees declined from $1.4 million
in 1994 to $1.3 million in 1995, a decrease of $100,000 or 7.1%. This decrease
was mostly a result of competitive pressure on checking and NOW account fees.
Noninterest Expense. Noninterest expenses increased by $2.8 million or 18.0%
in 1995 to $18.2 million. Included in the 1995 total was $2.0 million for
investment banking, legal, accounting and other costs related to the
Affiliation. Other significant components of the change in expenses include a
$657,000 or 8.3% increase in compensation and benefits, a $222,000 or 12.5%
increase in occupancy and equipment costs, a decrease in data processing and
professional services of $41,000 or 2.5%, a $245,000 or 19.6% decrease in
federal deposit insurance premiums, a decrease in gains from other real estate
owned sales of $71,000 or 16.4%, a $47,000 or 10.5% increase in marketing
costs, and a $143,000 or 5.6% increase in other noninterest expense.
The increase in compensation and benefits costs was caused by normal factors
including the Company's costs related to the ESOP, 401(k) and retirement
plans. In addition, salary costs increased due to an increase in staff, mainly
to augment loan production efforts, normal salary increases, and costs
associated with the Company's medical insurance program and payroll taxes. The
Company's contribution to the pension plans increased by $148,000 in 1995.
Occupancy expenses increased as a result of higher rental costs, maintenance
of
30
facilities, and depreciation costs and cost associated with the closing of
Lexington's Woburn office. Professional fees other than those related to the
Affiliation declined as a result of cost savings in the areas of consulting,
legal, and accounting expenses. The decrease in federal deposit insurance
premiums for the period was mainly due to premium restructuring of the BIF.
The decrease in other real estate owned income, net to $107,000 in 1995 is the
direct result of lower foreclosure activity and less property available for
sale. Other noninterest expenses were up primarily because of increases in
postage and office supplies, and write-offs of $116,000 on the Company's
mandated investment in the Massachusetts Thrift Institutions Fund for Economic
Development.
Because the Affiliation was consummated in the fourth quarter of 1995, the
Company did not recognize significant cost savings from the Affiliation during
1995. As previously disclosed, the Company expects that the Affiliation will
result in cost savings through consolidation economies in future years,
although the actual amount of savings realized will depend on management's
success in eliminating duplicative expenses and on market factors beyond
management's control.
Income Tax Expense. Income tax expense was $5.2 million for 1995, compared
to $2.8 million in 1994. Pre-tax income was $10.9 million for 1995 compared to
$9.8 million in 1994, an increase of $1.1 million or 11.2%. Income tax expense
was offset by a reduction in the deferred income tax asset valuation reserve
of $1.1 million in 1994. At December 31, 1995, the net deferred income tax
asset amounted to $3.1 million. The primary sources of recovery of the
deferred income tax asset are taxes paid, which are available for carry back,
from 1995, 1994, and 1993, and the expectation that the deductible temporary
differences will reverse during periods when the Company generates taxable
income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are dividends from subsidiaries,
and maturities, repayments and interest on investments. The Company may use
its liquidity to pay cash dividends to stockholders, fund operating expenses
and pay taxes. On January 16, 1997 the Company declared a regular quarterly
dividend of $0.15 per share payable on February 14, 1997 to stockholders of
record on January 30, 1997. This dividend represents a 25% increase over the
$0.12 per share paid a year ago.
The primary sources of funds for the Company's bank subsidiaries are
deposits, FHLB borrowings, principal and interest payments on loans, mortgage-
backed and mortgaged-backed derivative securities, and maturities of
investment securities. While maturities and scheduled amortization of loans
and investment securities are predictable sources of funds, deposit inflows
and mortgage prepayments are greatly influenced by economic conditions,
interest rate levels, and regulatory changes. The earning asset growth of
$156.7 million for the year ended December 31, 1996 was funded by a net gain
in deposits of $68.7 million, primarily from core deposits, term certificates,
and net advances from the FHLB amounting to $80.3 million.
The Company's bank subsidiaries, as members of the FHLB, have overnight
lines of credit of approximately $23.5 million and an overall borrowing
capacity of approximately $604.0 million from the FHLB. At December 31, 1996
outstanding borrowings were $267.2 million under these facilities. Any
borrowings must be collateralized by a combination of investment securities
and certain first mortgage loans. In addition, the subsidiaries have the
ability to enter into repurchase agreements, with an aggregate credit line of
$150.0 million, with various brokers.
At December 31, 1996, the Company had outstanding commitments of $37.7
million to originate loans and advance funds. In addition there were
outstanding unused lines of credit and letters of credit amounting to $44.3
million at December 31, 1996. As of that date, the Company had no commitments
to sell loans. The Company believes that it will have sufficient funds
available to meet all of its commitments as a result of the liquidity inherent
in its balance sheet, combined with its available borrowing capacity through
the FHLB.
31
The Company and its subsidiaries are subject to certain capital standards
prescribed by regulations. The following tables show the regulatory capital
ratios as they compare to the minimum guidelines at December 31, 1996:
AFFILIATED
THE FEDERAL LEXINGTON COMMUNITY MINIMUM
SAVINGS BANK SAVINGS BANK BANCORP, INC. REQUIREMENTS
------------ ------------ ------------- ------------
Risk-based ratios:
Tier 1 capital........... 18.01% 14.10% 17.83% 4.00%
Total capital............ 19.26 15.01 19.08 8.00
Tangible capital........... 9.26 N/A N/A 1.50
Core capital............... 9.47 N/A N/A 3.00
Tier 1 leverage capital.... N/A 8.37 9.98 3.00
IMPACT OF INFLATION AND CHANGING PRICES
Unlike most industrial companies, nearly all the assets and liabilities of
the Company are monetary in nature. As a result, interest rates have a greater
impact on the Company's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
In March 1995, the FASB issued SFAS No. 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of," which is
effective for fiscal years beginning after December 15, 1995. SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The statement also requires that certain long-lived assets and
identifiable intangibles to be disposed of be reported at the lower of the
carrying amount or fair value less cost to sell. The new statement did not
have a significant impact on results of operations or financial condition at
adoption.
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. SFAS No. 122 requires entities that engage in
mortgage banking activities to recognize as separate assets rights to service
mortgage loans for others acquired through either the purchase or origination
of mortgage loans and sale or securitization of those loans with servicing
retained. In addition, capitalized mortgage servicing rights are required to
be assessed for impairment based on the fair value of those rights. The new
statement did not have a significant impact on the Company's reported results
of operations or financial condition at adoption.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" which establishes financial accounting and reporting standards
for stock-based employee compensation plans, and for transactions in which an
entity issues its equity instruments to acquire goods or services from
nonemployees. The Company adopted SFAS No. 123 effective January 1, 1996. SFAS
No. 123 encourages, but does not require companies to record compensation cost
for stock-based employee compensation plans at fair value. The Company has
chosen to continue to account for its stock-based employee compensation using
the intrinsic value method in accordance with the Accounting Principles Board
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees" and related
interpretations and will report the pro forma disclosures required by SFAS No.
123.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which is
generally effective for transfers and servicing of financial assets and
extinguishments of liabilities, as defined, after December 31, 1996. SFAS No.
125 requires an entity to recognize upon a transfer the financial and
servicing assets it controls and the liabilities it has incurred, derecognize
financial assets when control has been surrendered, and derecognize
liabilities when extinguished.
32
SFAS No. 125 supersedes SFAS No. 122. For servicing contracts in existence
before January 1, 1997, previously recognized servicing rights and "excess
servicing" receivables that do not exceed contractually specified servicing
fees are combined, net of any previously recognized servicing obligations, as
a servicing asset or liability, with previously recognized servicing
receivables that exceed contractually specified servicing fees being
reclassified as interest-only strips receivable. The Company's management
anticipates that the adoption of this statement will not have a material
impact on its financial condition or results of operations.
In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share", which is
to become effective for fiscal years ending after December 15, 1997. SFAS No.
128 establishes standards for computing and presenting earnings per share and
will require a restatement of prior years' earnings per share. The Company's
management anticipates that the application of the new statement will not have
a significant impact on the Company's reported results when adopted.
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (1)
PAGE
-----
Independent Auditors' Reports............................................ 35-37
Consolidated Statements of Financial Condition as of December 31, 1996
and 1995................................................................ 38
Consolidated Statements of Income for the years ended December 31, 1996,
1995 and 1994........................................................... 39
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994........................................ 40
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994..................................................... 41
Notes to Consolidated Financial Statements............................... 42
- --------
(1) All schedules have been omitted because they are not required, not
applicable or are included in Notes to Consolidated Financial Statements.
34
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Affiliated Community Bancorp,
Inc.:
We have audited the accompanying consolidated statements of financial
condition of Affiliated Community Bancorp, Inc. and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. We
did not audit the financial statements of The Federal Savings Bank, a bank
acquired during 1995 in a transaction accounted for as a pooling of interests,
as of and for the years ended December 31, 1995 and 1994, as discussed in Note
2. Such statements are included in the consolidated financial statements of
Affiliated Community Bancorp, Inc. and reflect total assets of 52 percent as
of December 31, 1995 and total interest income of 53 percent and 52 percent in
1995 and 1994, respectively, of the related consolidated totals. These
statements were audited by other auditors whose report has been furnished to
us and our opinion on the consolidated financial statements of Affiliated
Community Bancorp, Inc. and subsidiaries as of December 31, 1995 and for the
two years in the period ended December 31, 1995, insofar as it relates to
amounts included for The Federal Savings Bank, is based solely upon the report
of the other auditors.
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 were 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 and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of Affiliated Community Bancorp, Inc. and
subsidiaries as of December 31, 1996 and 1995 and the 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 15, 1997
35
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Federal Savings Bank:
We have audited the consolidated statements of financial condition of The
Federal Savings Bank and subsidiaries as of December 31, 1994 and 1995, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the years in the two-year period ended December 31, 1995.
These consolidated financial statements, which are not presented separately
herein, are the responsibility of the Bank's management. Our responsibility is
to express an opinion on these consolidated 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 financial position of The
Federal Savings Bank and subsidiaries as of December 31, 1994 and 1995 and the
results of their operations and their cash flows for each of the years in the
two-year period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in notes 1 and 3 to the consolidated financial statements
referred to above, the Company changed its method of accounting for investment
securities in 1994.
KPMG Peat Marwick LLP
Boston, Massachusetts
January 15, 1996
36
INDEPENDENT AUDITORS' REPORT
The Board of Directors Main Street Community Bancorp, Inc.:
We have audited the consolidated statement of financial condition of Main
Street Community Bancorp, Inc. and subsidiary as of December 31, 1994, and the
related consolidated statements of income, stockholders' equity, and cash
flows for the year then ended. These consolidated financial statements, which
are not presented separately herein, are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 financial position of Main
Street Community Bancorp, Inc. and subsidiary as of December 31, 1994, and the
results of their operations and their cash flows for the year ended December
31, 1994, in conformity with generally accepted accounting principles.
As discussed in notes 1 and 3 to the consolidated financial statements
referred to above, the Company changed its method of accounting for investment
securities in 1994.
KPMG Peat Marwick LLP
Boston, Massachusetts January 20, 1995
37
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
--------------------
1996 1995
---------- --------
ASSETS
Cash and due from banks................................. $ 11,331 $ 14,037
Federal funds sold and overnight deposits............... 4,464 4,125
Investment securities--held to maturity (market value
$173,372 and $177,384 at December 31, 1996 and 1995,
respectively) (notes 3 and 8).......................... 173,510 176,100
Investment securities--available for sale (amortized
cost $160,395 and $114,292 at December 31, 1996 and
1995, respectively) (notes 3 and 8).................... 159,844 114,836
Loans held for sale..................................... -- 1,071
Loans receivable, net of allowance for possible loan
losses of $7,759 and $7,127 at December 31, 1996 and
1995, respectively (notes 4 and 11).................... 645,797 535,679
Federal Home Loan Bank stock, at cost (note 3).......... 14,638 10,355
Other real estate owned, net (note 5)................... 133 1,201
Accrued interest receivable............................. 7,124 5,873
Office properties and equipment, net (note 6)........... 8,428 8,446
Deferred tax asset, net (note 10)....................... 3,405 3,096
Other assets............................................ 3,539 3,661
---------- --------
Total assets........................................ $1,032,213 $878,480
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 7)..................................... $ 652,509 $583,832
Federal Home Loan Bank advances (note 8).............. 267,171 186,835
ESOP debt (note 14)................................... 1,394 679
Mortgagors' escrow payments........................... 2,087 1,904
Securities sold under agreements to repurchase (note
9)................................................... 727 --
Other (note 14)....................................... 6,923 5,940
---------- --------
Total liabilities................................... 930,811 779,190
---------- --------
Commitments and contingencies (notes 4, 11, and 12)
Stockholders' equity (notes 13 and 14):
Preferred stock, $.01 par value; 2,000,000 shares
authorized, none issued.............................. -- --
Common stock, $.01 par value; 18,000,000 shares
authorized; shares issued 5,347,166 in 1996 and
5,296,700 in 1995.................................... 53 53
Additional paid-in capital............................ 49,159 48,263
Retained earnings--restricted (notes 2 and 13)........ 57,518 51,563
Treasury stock at cost, 198,000 shares at December 31,
1996................................................. (3,402) --
Unearned compensation--ESOP (note 14)................. (1,394) (679)
Net unrealized gain (loss) on investment securities,
net of tax effects (notes 3 and 10).................. (532) 90
---------- --------
Total stockholders' equity.......................... 101,402 99,290
---------- --------
Total liabilities and stockholders' equity.......... $1,032,213 $878,480
========== ========
The accompanying notes are an integral part of these consolidated financial
statements.
38
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994
------- ------- -------
Interest and dividend income:
Interest and fees on loans....................... $48,661 $41,924 $33,150
Interest and dividend income on investment
securities...................................... 22,415 18,598 13,752
Interest on federal funds sold and overnight
deposits........................................ 265 474 469
------- ------- -------
Total interest and dividend income............. 71,341 60,996 47,371
------- ------- -------
Interest expense:
Interest on deposits (note 7).................... 25,775 22,878 17,762
Interest on borrowed funds....................... 14,289 10,346 5,130
------- ------- -------
Total interest expense......................... 40,064 33,224 22,892
------- ------- -------
Net interest income................................ 31,277 27,772 24,479
Provision for possible loan losses (note 4)........ 605 325 550
------- ------- -------
Net interest income after provision for possible
loan losses....................................... 30,672 27,447 23,929
------- ------- -------
Noninterest income:
Mortgage loan servicing fees..................... 309 324 293
Customer service fees and other.................. 1,300 1,320 1,383
Gain (loss) on sales of securities, net.......... (47) 33 (420)
Gain on sales of loans, net...................... 76 16 92
------- ------- -------
Total noninterest income....................... 1,638 1,693 1,348
------- ------- -------
Noninterest expenses:
Compensation and employee benefits (notes 14 and
15)............................................. 9,054 8,587 7,930
Occupancy and equipment (notes 6 and 12)......... 2,086 1,994 1,772
Data processing.................................. 835 792 809
Professional services............................ 702 786 810
Federal Deposit Insurance premiums (notes 1 and
7).............................................. 2,860 1,006 1,251
Other real estate owned expenses (income), net
(note 5)........................................ 129 (107) (124)
Marketing and promotion.......................... 572 496 449
Merger expenses (note 2)......................... -- 1,989 --
Other............................................ 2,728 2,691 2,548
------- ------- -------
Total noninterest expenses..................... 18,966 18,234 15,445
------- ------- -------
Income before provision for income taxes........... 13,344 10,906 9,832
Provision for income taxes (note 10)............... 4,821 5,199 2,806
------- ------- -------
Net income..................................... $ 8,523 $ 5,707 $ 7,026
======= ======= =======
Earnings per share:
Primary.......................................... $ 1.65 $ 1.07 $ 1.32
======= ======= =======
Fully diluted.................................... $ 1.64 $ 1.07 $ 1.32
======= ======= =======
Weighted average shares outstanding:
Primary.......................................... 5,169 5,327 5,303
======= ======= =======
Fully diluted.................................... 5,208 5,346 5,306
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
39
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NET UNREALIZED
ADDITIONAL UNEARNED GAIN (LOSS) ON
COMMON PAID-IN TREASURY RETAINED COMPENSATION- INVESTMENT
STOCK CAPITAL STOCK EARNINGS ESOP SECURITIES TOTAL
------ ---------- -------- -------- ------------- -------------- --------
Balance at December 31,
1993................... $ 53 $47,935 $ -- $42,341 $ (964) $ 78 $ 89,443
Net income............. -- -- -- 7,026 -- -- 7,026
ESOP transactions...... -- 63 -- -- 143 -- 206
Issuance of common
stock under stock
option plan........... -- 71 -- -- -- -- 71
Cash dividends declared
($.35 per share)...... -- -- -- (1,839) -- -- (1,839)
Change in net
unrealized gain (loss)
on securities
available for sale,
net of tax effect..... -- -- -- -- -- (1,621) (1,621)
---- ------- ------- ------- ------- ------- --------
Balance at December 31,
1994................... 53 48,069 -- 47,528 (821) (1,543) 93,286
Net income............. -- -- -- 5,707 -- -- 5,707
ESOP transactions...... -- 86 -- -- 142 -- 228
Issuance of common
stock under stock
option plan........... -- 108 -- -- -- -- 108
Cash dividends declared
($.32 per share)...... -- -- -- (1,672) -- -- (1,672)
Changes in net
unrealized gain (loss)
on securities
available for sale,
net of tax effect..... -- -- -- -- -- 1,633 1,633
---- ------- ------- ------- ------- ------- --------
Balance at December 31,
1995................... 53 48,263 -- 51,563 (679) 90 99,290
Net income............. -- -- -- 8,523 -- -- 8,523
Common stock acquired
by ESOP............... -- 231 679 -- (910) -- --
ESOP transactions...... -- 127 -- 34 195 -- 356
Issuance of common
stock under stock
option plan........... -- 396 -- -- -- -- 396
Purchase of treasury
stock................. -- -- (4,081) -- -- -- (4,081)
Tax benefit from stock
options exercised..... -- 142 -- -- -- -- 142
Cash dividends declared
($.51 per share)...... -- -- -- (2,602) -- -- (2,602)
Change in net
unrealized gain (loss)
on securities
available for sale,
net of tax effect..... -- -- -- -- -- (622) (622)
---- ------- ------- ------- ------- ------- --------
Balance at December 31,
1996................... $ 53 $49,159 $(3,402) $57,518 $(1,394) $ (532) $101,402
==== ======= ======= ======= ======= ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
40
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
--------- -------- ---------
Cash flows from operating activities:
Net income.................................... $ 8,523 $ 5,707 $ 7,026
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses............ 605 325 550
Provision for losses on other real estate
owned........................................ 220 220 233
Depreciation and amortization................. 771 644 601
Gain on sales of loans........................ (76) (16) (92)
(Gain) loss on sales of securities............ 47 (33) 420
Net gain on sales of other real estate owned.. (285) (361) (432)
Net amortization of premiums on investment
securities................................... 696 620 1,158
(Benefit) provision for (prepaid) deferred
income taxes................................. 86 751 (1,135)
ESOP transactions............................. 392 228 206
Increase in Federal Home Loan Bank stock...... (4,283) (549) (3,690)
(Increase) decrease in loans held for sale.... 1,071 (1,071) 5,726
Increase in accrued interest receivable....... (1,251) (1,014) (898)
Other, net.................................... 715 (242) (1,559)
--------- -------- ---------
Net cash provided by operating activities.... 7,231 5,209 8,114
Cash flows from investing activities:
Proceeds from sales of investment securities
available for sale........................... 1,104 4,423 25,511
Proceeds from maturities of investment
securities available for sale................ 30,510 21,040 13,522
Proceeds from maturities of investment
securities held to maturity.................. 10,974 15,503 606
Purchases of investment securities available
for sale..................................... (85,953) (45,172) (41,874)
Purchases of investment securities held to
maturity..................................... (34,162) (37,587) (117,254)
Principal payments received on investment
securities available for sale................ 8,642 3,136 7,856
Principal payments received on investment
securities held to maturity.................. 27,464 28,353 30,564
Loan originations, net of repayments.......... (112,482) (67,016) (71,943)
Proceeds from sale of office properties and
equipment.................................... -- 201 3
Purchases of office properties and equipment.. (753) (1,466) (1,177)
Capitalized costs associated with other real
estate owned net of payments received........ (108) (92) (524)
Proceeds from sales of other real estate
owned........................................ 815 1,938 4,950
--------- -------- ---------
Net cash used by investing activities........ (153,949) (76,739) (149,760)
Cash flows from financing activities:
Net increase in deposits...................... 68,677 51,562 6,799
Additions to Federal Home Loan Bank advances.. 80,336 26,635 98,200
Increase in mortgagors' escrow payments....... 183 87 246
Increase in securities sold under agreements
to repurchase................................ 727 -- --
Proceeds from issuance of common stock........ 396 108 71
Unfilled conversion stock subscription
orders....................................... -- -- (8,478)
Purchase of treasury stock.................... (4,081) -- --
Proceeds from issuance of long-term debt...... 859 -- --
Purchase of common stock by ESOP.............. (910) -- --
Proceeds from sale of treasury stock.......... 910 -- --
ESOP transactions............................. (144) (142) (143)
Cash dividends paid on common stock........... (2,602) (2,203) (1,665)
--------- -------- ---------
Net cash provided by financing activities.... 144,351 76,047 95,030
Net increase (decrease) in cash and cash
equivalents................................... (2,367) 4,517 (46,616)
Cash and cash equivalents at beginning of
year.......................................... 18,162 13,645 60,261
--------- -------- ---------
Cash and cash equivalents at end of year....... $ 15,795 $ 18,162 $ 13,645
========= ======== =========
Supplemental disclosures of cash flow
information:
Interest paid on deposits..................... $ 25,742 $ 25,373 $ 18,399
Interest paid on borrowed funds............... 14,859 10,115 4,655
Income taxes paid, net of refunds............. 5,525 4,437 3,547
Supplemental disclosures of non-cash
transactions:
Transfers to (from) foreclosed real estate.... 1,006 (622) 1,993
Loans granted on sale of foreclosed real
estate....................................... 1,497 827 1,189
Investment securities transferred to available
for sale..................................... -- 24,788 35,063
Investment securities transferred from
available for sale to held to maturity, net
of unrealized depreciation................... -- -- 14,393
Securitization of loans to mortgage backed
investments available for sale............... 2,326 -- 5,753
The accompanying notes are an integral part of these consolidated financial
statements.
41
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and consolidation
The accompanying consolidated financial statements include the accounts of
Affiliated Community Bancorp, Inc., a Massachusetts corporation (the "Company"
or "Affiliated"), and its two wholly owned direct subsidiaries, Lexington
Savings Bank ("Lexington"), a Massachusetts chartered savings bank, and The
Federal Savings Bank, a federally chartered savings bank ("Federal"), which
are located in Lexington, Massachusetts and Waltham, Massachusetts,
respectively. Lexington, as a state chartered savings bank, is insured by the
Bank Insurance Fund ("BIF") and Federal, as a federally chartered savings
institution, is insured by the Savings Association Insurance Fund ("SAIF") of
the Federal Deposit Insurance Corporation.
Federal converted from a federally chartered mutual savings bank to a
federally chartered stock savings bank on December 28, 1993. As part of the
conversion, Main Street Community Bancorp, Inc. ("Main Street") was formed,
acquired all of Federal's conversion stock and issued its common stock in a
subscription offering. As a part of the affiliation of Federal and Lexington,
Main Street was merged into Affiliated on October 18, 1995. See Note 2 for
details of the affiliation.
Lexington has four wholly owned subsidiaries, Lexington Financial Planning,
Inc. ("LFP"), Lexington Securities Corporation, Mass. Ave. Securities
Corporation and Minuteman Investment Corporation. LFP provides financial
planning services to individuals within the Bank's market area. The other
subsidiaries were established in December 1993 for the purpose of buying,
holding and selling investment securities. Federal has four wholly owned
subsidiaries, Main Street Building Corporation ("MSBC"), Main Street
Investment Corporation ("MSIC"), TFSB Securities Corp I and TFSB Securities
Corp II. MSBC holds, operates, manages and disposes of real estate owned
acquired through foreclosure. MSIC was established in June 1994 as a service
corporation to offer discount brokerage services. TFSB Securities Corp I and
TFSB Securities Corp II were established in February 1996 for the purpose of
buying, holding and selling investment securities. All material intercompany
accounts and transactions have been eliminated in consolidation.
The Company and its subsidiaries provide a full range of banking services to
individual and corporate customers, are subject to competition from other
financial institutions, are subject to regulations of certain federal and
state agencies, and undergo periodic examinations by those regulatory
authorities.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the balance sheets and
income and expenses during the reporting periods. Actual results could differ
from those estimates.
Material estimates that are particularly susceptible to change relate to the
determination of the allowance for possible loan losses and the valuation of
real estate acquired in connection with foreclosures or in satisfaction of
loans.
Cash equivalents
Cash equivalents include federal funds sold with maturities of one day,
Federal Home Loan Bank overnight deposits and interest-bearing deposits in
banks which mature within 30 days.
42
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Investment securities
Debt securities that management has the positive intent and ability to hold
to maturity be classified as "held to maturity" and reflected at amortized
cost. Investments that are purchased and held principally for the purpose of
selling in the near term are classified as "trading securities" and are
reflected on the balance sheet at fair value, with unrealized gains and losses
included in earnings. Investments not classified as either of the above are
classified as "available for sale" and are reflected on the balance sheet at
fair value, with unrealized gains and losses excluded from earnings and
reported as a separate component of stockholders' equity, net of tax.
In the fourth quarter of 1995, concurrent with the adoption of its
implementation guide on SFAS No. 115, the Financial Accounting Standards Board
("FASB") allowed a one time reassessment of the SFAS No. 115 classifications
of all securities currently held. Any reclassifications are accounted for at
fair value in accordance with SFAS No. 115, and any reclassifications from the
held-to-maturity portfolio that result from this one time reassessment do not
call into question the intent of the Company to hold other debt securities to
maturity in the future. The Company used the opportunity under this one time
reassessment to reclassify securities from held-to-maturity to the available-
for-sale portfolio with an amortized cost of approximately $24,788,000. In
connection with this reclassification, net unrealized gains of $142,000 were
recorded in available-for-sale securities and in stockholders' equity (on a
net-of-tax basis).
Federal Home Loan Bank stock is reflected at cost. Premiums and discounts
are amortized and accreted over the term of the securities on the interest
method or a method that approximates the interest method over the terms of the
investments.
If a decline in fair value below the amortized cost basis of an investment
security is judged to be other than temporary, the cost basis of the
investment is written down to fair value as a new cost basis and the amount of
the write down is included in earnings. Gains and losses on the sale of
investment securities are recognized at the time of the sale using the
specific identification method.
Loans
The Company grants mortgage, commercial and consumer loans to customers that
are primarily located in the eastern Massachusetts area. The ability of
borrowers to honor their contracts is primarily dependent on the real estate
and construction economic sectors and the general economy.
Loans are stated at the amount of unpaid principal increased by the
unamortized premium on loans purchased and reduced by unadvanced loan funds,
net deferred loan fees and the allowance for possible loan losses. Premiums
paid on loans acquired are amortized as an adjustment of the related loan
yields by a method which approximates the interest method. Loan origination
and commitment fees and certain direct loan origination costs, applicable to
mortgage, commercial and construction loans, are deferred and amortized to
interest income over the contractual lives of the loans by the interest method
or taken into income at the time the loans are sold.
Interest on loans is recognized on a simple-interest basis and is generally
not accrued for loans which are ninety days or more past due. Interest income
previously accrued on such loans is reversed against current period earnings.
43
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Loans held for sale are carried at the lower of aggregate cost or market
value. No adjustments for unrealized losses were required for 1996, 1995 and
1994.
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," on January 1, 1995. Under these
accounting standards, loans are considered impaired when it is probable that
the Company will not be able to collect principal, interest and fees according
to the contractual terms of the loan agreement. Management considers the
paying status, net worth and earnings potential of a borrower, and the value
and cash flow of the collateral as factors to determine if a loan will be paid
in accordance with its contractual terms. Management does not set any minimum
delay of payments as a factor in reviewing for impaired classification. The
amount judged to be impaired is the difference between the present value of
the expected cash flows using as a discount rate the original contractual
effective interest rate and the recorded investment of the loan. If
foreclosure on a collateralized loan is probable, impairment is measured based
on the fair value of the collateral compared to the recorded investment. If
appropriate, a valuation reserve is established to recognize the difference
between the recorded investment and the present value. Impaired loans are
charged off when management believes that the collectibility of the loan's
principal is remote. The Company considers nonaccrual loans, except for
smaller balance homogenous residential and consumer loans, and troubled debt
restructures to be impaired under SFAS No. 114, as amended. All impaired loans
are classified as nonaccrual. The adoption of this new standard on January 1,
1995 did not have an impact on the Company's allowance for possible loan
losses.
SFAS No. 114 also revises the definition of In-Substance Foreclosures
("ISF"). Under the new definition, ISF classification applies only to loans
for which collateral is in the physical possession of the creditor. Upon
adoption of SFAS No. 114, $1,816,000 of ISF was reclassified to loans.
Allowance for possible loan losses
The allowance for possible loan losses is established through a provision
for possible loan losses charged to earnings and is maintained at a level
considered adequate by management to provide for potential loan losses.
The provision and the level of the allowance are evaluated on a regular
basis by management and are based upon management's periodic review of the
collectibility of the loans in light of historical experience, known and
inherent risks in the nature and volume of the loan portfolio, adverse
situations that may affect the borrower's ability to repay, estimated value of
any underlying collateral, and prevailing economic conditions.
The allowance is an estimate, and ultimate losses may vary from current
estimates and future additions to the allowance may be necessary. As
adjustments become necessary, they are reported in the results of operations
for the periods in which they become known. Loan losses are charged against
the allowance when management believes the collectibility of the loan balance
is unlikely.
Loan Servicing
The Company adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights"
effective January 1, 1996. SFAS No. 122 requires entities that engage in
mortgage banking activities to recognize as separate assets rights to service
mortgage loans for others acquired through either the purchase or origination
of mortgage loans and sale or securitization of those loans with servicing
retained.
The cost of mortgage servicing rights is amortized in proportion to, and
over the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights. Fair
values are estimated using discounted cash flows based on a current market
interest rate. For purposes of measuring impairment, the rights are stratified
based on the following predominant risk characteristics of the
44
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
underlying loans; interest rates, type of interest and loan maturity dates.
The amount of impairment recognized is the amount by which the capitalized
mortgage servicing rights for a stratum exceed their fair value.
When participating interests in loans sold have an average contractual
interest rate, adjusted for normal servicing fees, that differs from the
agreed yield to the purchaser, gains or losses are recognized equal to the
present value of such differential over the estimated remaining life of such
loans. The resulting "excess servicing receivable" or "deferred servicing
revenue" is amortized over the estimated life using a method approximating the
interest method.
The excess servicing receivables are periodically evaluated in relation to
estimated future servicing revenues, taking into consideration changes in
interest rates, current prepayment rates, and expected future cash flows. The
Bank evaluates the carrying value of the excess servicing receivables by
estimating the future servicing income of the excess servicing receivables
based on management's best estimate of remaining loan lives and discounted at
the original discount rate.
Mortgage servicing rights of $31,000 were capitalized and amortization of
the mortgage servicing rights was $3,000 in 1996. No adjustment was required
in 1996 to write down the capitalized asset to fair value.
Other real estate owned
Real estate acquired in settlement of loans is held for sale and is carried
at the lower of cost or fair value less estimated costs to sell. Troubled
loans are transferred to foreclosed property upon completion of formal
foreclosure proceedings.
Real estate properties acquired through foreclosure are initially recorded
at fair value at the date of foreclosure, with any reduction in value charged
to the allowance for possible loan losses at the time of transfer. Costs
relating to development and improvement of property are capitalized, whereas
costs relating to holding property are expensed.
Valuations are periodically performed by management, and a valuation
allowance is established through a charge to earnings if the carrying value of
a property exceeds its fair value less estimated costs to sell.
Office premises and equipment
Land is carried at cost. Buildings and equipment are carried at cost, less
accumulated depreciation computed on the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are carried at
cost, less accumulated amortization computed on the straight-line method over
the shorter of the lease or the estimated lives of the assets. It is general
practice to charge the cost of maintenance and repairs to earnings when
incurred; major expenditures for improvements are capitalized and depreciated.
Intangible assets
Goodwill attributable to the acquisition of Suburban National Corporation in
1993 is being amortized over ten years by the straight-line method. The
Company reviews goodwill quarterly to assess realizability. Any impairments
deemed permanent are recognized in current operating results. Based on the
most recent analysis, the Company believes that no material impairment of
goodwill existed at December 31, 1996 or December 31, 1995.
Income taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 requires that deferred tax assets
and liabilities be reflected at currently enacted income tax rates applicable
to the period in which the deferred tax assets or liabilities are expected to
be realized or
45
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
settled. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities will be adjusted accordingly through the provision for income
taxes.
For regulatory capital purposes, the recognition of deferred tax assets,
when realization of such is dependent on an institution's future taxable
income, is limited to the amount that can be realized within one year or 10%
of capital, whichever is less.
Retirement plans
The compensation cost of an employee's pension benefit is recognized on the
net periodic pension cost method over the employee's approximate service
period. The aggregate cost method is utilized for funding purposes.
Earnings and dividends declared per share
Primary earnings per share computations include common stock (excluding
unallocated ESOP shares) and dilutive common stock equivalents attributable to
outstanding stock options. Fully diluted earnings per share computations
reflect the higher market price of the Company's common stock at period end,
if applicable, and the assumed further dilution applicable to outstanding
stock options.
Dividends declared per share for the years ended December 31, 1995 and 1994
represent the combined historical dividends declared by Lexington and Main
Street determined by dividing the sum of the total dividends declared by
Lexington and Main Street by the sum of the outstanding shares of common stock
of Lexington and Main Street to which the dividends declared apply.
Recent Accounting Pronouncements
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", which is
generally effective for transfers and servicing of financial assets and
extinguishments of liabilities, as defined, after December 31, 1996. SFAS No.
125, as amended, requires an entity to recognize upon a transfer the financial
and servicing assets it controls and the liabilities it has incurred,
derecognize financial assets when control has been surrendered, and
derecognize liabilities when extinguished. SFAS No. 125 supercedes SFAS No.
122. For servicing contracts in existence before January 1, 1997, previously
recognized servicing rights and "excess servicing" receivables that do not
exceed contractually specified servicing fees are combined, net of any
previously recognized servicing obligations, as a servicing asset or liability
with previously recognized servicing receivables that exceed contractually
specified servicing fees being reclassified as interest-only strips
receivable. The Company's management anticipates that the adoption of this
statement will not have a material impact on its financial condition or
results of operations.
Reclassifications
Certain reclassificiations have been made to the 1994 and 1995 consolidated
financial statements to conform with the 1996 presentation. Such
reclassifications have no effect on previously reported consolidated net
income.
2. AFFILIATION
Effective at the close of business on October 18, 1995, Affiliated acquired
by merger all of the outstanding stock of two savings banks, Federal and
Lexington, in a merger-of-equals transaction consummating the affiliation of
Lexington and Federal (the "Affiliation").
Main Street, Federal's former holding company, was a business corporation
formed at the direction of Federal under the laws of the Commonwealth of
Massachusetts on September 1, 1993. On December 28, 1993 (i) Federal converted
from a federally chartered mutual savings bank to a federally chartered stock
savings bank, (ii) Federal issued all of its outstanding capital stock to Main
Street, and (iii) Main Street consummated its initial public offering of
common stock, par value $.01 per share by selling 2,907,200 shares at a price
of $10.00 per share, to Federal's Employee Stock Ownership Plan ("Federal
ESOP") and to certain of Federal's eligible account holders who had subscribed
for such shares (collectively, the "Conversion").
46
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As a result of the Conversion, Federal became a wholly owned subsidiary of
Main Street. Main Street ceased operations on October 18, 1995 as a
consequence of the Affiliation.
Lexington and Main Street entered into an Affiliation Agreement and Plan of
Reorganization dated as of March 14, 1995 (the "Affiliation Agreement"). The
Affiliation Agreement provided for, among other things, (a) the formation by
Lexington of a temporary bank holding company, LEXB Holding, Inc., (b) the
acquisition by LEXB Holding, Inc. of all of the outstanding stock of
Lexington, (c) the merger of LEXB Holding, Inc. with and into Affiliated and
(d) the merger of Main Street with and into Affiliated. The Affiliation was
subject to approval by the stockholders of Main Street and Lexington and
approval of state and federal bank regulatory agencies. At a Special Meeting
of Main Street stockholders on August 22, 1995, the stockholders of Main
Street approved the Affiliation Agreement and related transactions. At a
Special Meeting of Lexington stockholders on September 14, 1995, the
stockholders of Lexington approved the Affiliation Agreement and related
transactions. The final remaining bank regulatory approval of the Affiliation
was obtained on October 17, 1995.
The transaction was accounted for as a pooling of interests under which the
shareholders of Main Street, holding 2,907,200 shares received 2,907,200
shares of Affiliated common stock, and the shareholders of Lexington, holding
2,383,500 shares, received 2,383,500 shares of Affiliated common stock.
The following table summarizes the separate results of operations and
financial condition of Lexington and Main Street as of and for the nine months
ended September 30, 1995 (unaudited).
LEXINGTON MAIN STREET
----------- ------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net interest income................................ $ 9,483 $ 11,076
Net income......................................... $ 2,482 $ 3,090
Earnings per share:
Primary.......................................... $ 1.01 $ 1.08
Fully diluted.................................... $ 1.01 $ 1.08
Total assets....................................... $ 404,717 $ 432,393
Deposits........................................... $ 256,511 $ 317,826
Stockholders' equity............................... $ 38,936 $ 59,790
The following table summarizes the separate results of operations and
financial condition of Lexington and Main Street as of and for the year ended
December 31, 1994.
LEXINGTON MAIN STREET
----------- ------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net interest income................................ $ 11,762 $ 12,551
Net income (1)..................................... $ 3,007 $ 4,019
Earnings per share: (1)
Primary.......................................... $ 1.22 $ 1.41
Fully diluted.................................... $ 1.22 $ 1.41
Total assets....................................... $ 393,659 $ 399,937
Deposits........................................... $ 227,400 $ 304,870
Stockholders' equity............................... $ 36,301 $ 56,985
- --------
(1) Results for Main Street include tax benefits resulting from the change in
SFAS No. 109 tax valuation reserve of $1,075,000 or $.38 per share for the
year ended December 31, 1994.
As a result of the pooling, the financial statements of Lexington, Federal
and Main Street have been combined as if Affiliated had been in existence for
the periods reported on.
47
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. INVESTMENT SECURITIES
The amortized cost and fair value of investment securities at December 31,
1996 and 1995, with gross unrealized gains and losses, are as follows:
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------------------- ----------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------- ---------- ---------- -------- --------- ---------- ---------- --------
(IN THOUSANDS) (IN THOUSANDS)
Securities available for
sale:
Government securities.. $ 86,645 $ 86 $ (849) $ 85,882 $ 50,620 $ 341 $ (76) $ 50,885
Corporate bonds........ 2,034 5 (1) 2,038 4,591 18 (18) 4,591
Asset-backed
securities............ 4,473 12 (161) 4,324 5,801 -- (100) 5,701
Mortgage-backed
securities:
Balloons............... -- -- -- -- -- -- -- --
Fixed.................. 12,018 47 (118) 11,947 11,518 139 -- 11,657
Variable............... 25,313 389 (139) 25,563 30,190 322 (134) 30,378
-------- ------ ------- -------- -------- ------ ------- --------
Total mortgage-backed
securities........... 37,331 436 (257) 37,510 41,708 461 (134) 42,035
-------- ------ ------- -------- -------- ------ ------- --------
Mortgage-backed
derivatives........... 7,585 11 -- 7,596 8,229 32 -- 8,261
Marketable equity
securities............ 22,327 368 (201) 22,494 3,343 37 (17) 3,363
-------- ------ ------- -------- -------- ------ ------- --------
Total securities
available for sale... $160,395 $ 918 $(1,469) $159,844 $114,292 $ 889 $ (345) $114,836
======== ====== ======= ======== ======== ====== ======= ========
Securities held to
maturity:
Government securities.. $ 39,304 $ 232 $ (67) $ 39,469 $ 22,408 $ 415 $ (22) $ 22,801
Corporate bonds........ 3,003 12 -- 3,015 4,011 47 -- 4,058
Asset-backed
securities............ 19,466 100 (195) 19,371 17,695 72 (207) 17,560
Mortgage-backed
securities:
Balloons............... 43,583 49 (526) 43,106 50,458 239 (283) 50,414
Fixed.................. 39,702 402 (157) 39,947 46,851 965 (28) 47,788
Variable............... 14,958 59 (149) 14,868 17,927 56 (188) 17,795
-------- ------ ------- -------- -------- ------ ------- --------
Total mortgage-backed
securities........... 98,243 510 (832) 97,921 115,236 1,260 (499) 115,997
-------- ------ ------- -------- -------- ------ ------- --------
Mortgage-backed
derivatives........... 13,494 174 (72) 13,596 16,750 218 -- 16,968
-------- ------ ------- -------- -------- ------ ------- --------
Total securities held
to maturity.......... $173,510 $1,028 $(1,166) $173,372 $176,100 $2,012 $ (728) $177,384
======== ====== ======= ======== ======== ====== ======= ========
Federal Home Loan Bank
stock, at cost........ 14,638 -- -- 14,638 10,355 -- -- 10,355
-------- ------ ------- -------- -------- ------ ------- --------
Total investment
securities........... $348,543 $1,946 $(2,635) $347,854 $300,747 $2,901 $(1,073) $302,575
======== ====== ======= ======== ======== ====== ======= ========
At December 31, 1996 and 1995, the Company has pledged certain investment
securities with an amortized cost of $70,434,000 and $55,176,000,
respectively, and a fair value of $69,885,000 and $55,135,000, respectively,
as collateral against its Federal Home Loan Bank advances, securities sold
under agreements to repurchase and the treasury, tax and loan account.
The proceeds from sales of investment securities available for sale and
related gains and losses for the years ended December 31, 1996, 1995 and 1994,
are as follows:
DECEMBER 31,
-----------------------
1996 1995 1994
------ ------ -------
(IN THOUSANDS)
Proceeds from sales of investment securities...... $1,104 $4,423 $25,511
====== ====== =======
Realized gains on sales of investment securities.. $ -- $ 70 $ 10
====== ====== =======
Realized losses on sales of investment
securities....................................... $ (47) $ (37) $ (430)
====== ====== =======
48
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The amortized cost and fair value of debt securities by contractual maturity
at December 31, 1996 and 1995 is as follows:
DECEMBER 31, 1996
------------------------------------------------------------------------------------------------------------
GOVERNMENT CORPORATE ASSET-BACKED MORTGAGE-BACKED MORTGAGE-BACKED
SECURITIES SECURITIES SECURITIES SECURITIES DERIVATIVES TOTAL
----------------- ---------------- ----------------- ------------------ ----------------- ------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE COST VALUE COST VALUE
--------- ------- --------- ------ --------- ------- --------- -------- --------- ------- --------- --------
(IN THOUSANDS)
Available for
sale:
Within 1 year... $ 1,506 $ 1,504 $1,005 $1,004 $ -- $ -- $ -- $ -- $ -- $ -- $ 2,511 $ 2,508
1 to 5 years.... 14,333 14,243 1,029 1,034 -- -- -- -- -- -- 15,362 15,277
5 to 10 years... 60,298 59,887 -- -- -- -- -- -- -- -- 60,298 59,887
Over 10 years... 10,508 10,248 -- -- 4,473 4,324 37,331 37,510 7,585 7,596 59,897 59,678
------- ------- ------ ------ ------- ------- -------- -------- ------- ------- -------- --------
$86,645 $85,882 $2,034 $2,038 $ 4,473 $ 4,324 $ 37,331 $ 37,510 $ 7,585 $ 7,596 $138,068 $137,350
======= ======= ====== ====== ======= ======= ======== ======== ======= ======= ======== ========
DECEMBER 31, 1995
------------------------------------------------------------------------------------------------------------
GOVERNMENT CORPORATE ASSET-BACKED MORTGAGE-BACKED MORTGAGE-BACKED
SECURITIES SECURITIES SECURITIES SECURITIES DERIVATIVES TOTAL
----------------- ---------------- ----------------- ------------------ ----------------- ------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE COST VALUE COST VALUE
--------- ------- --------- ------ --------- ------- --------- -------- --------- ------- --------- --------
(IN THOUSANDS)
Available for
sale:
Within 1 year... $20,049 $20,263 $2,501 $2,485 $ -- $ -- $ -- $ -- $ 52 $ 52 $ 22,602 $ 22,800
1 to 5 years.... 10,072 10,015 2,090 2,106 -- -- -- -- -- -- 12,162 12,121
5 to 10 years... 20,499 20,607 -- -- -- -- -- -- -- -- 20,499 20,607
Over 10 years... -- -- -- -- 5,801 5,701 41,708 42,035 8,177 8,209 55,686 55,945
------- ------- ------ ------ ------- ------- -------- -------- ------- ------- -------- --------
$50,620 $50,885 $4,591 $4,591 $ 5,801 $ 5,701 $ 41,708 $ 42,035 $ 8,229 $ 8,261 $110,949 $111,473
======= ======= ====== ====== ======= ======= ======== ======== ======= ======= ======== ========
DECEMBER 31, 1996
------------------------------------------------------------------------------------------------------------
GOVERNMENT CORPORATE ASSET-BACKED MORTGAGE-BACKED MORTGAGE-BACKED
SECURITIES SECURITIES SECURITIES SECURITIES DERIVATIVES TOTAL
----------------- ---------------- ----------------- ------------------ ----------------- ------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE COST VALUE COST VALUE
--------- ------- --------- ------ --------- ------- --------- -------- --------- ------- --------- --------
(IN THOUSANDS)
Held to maturity:
Within 1 year... $ 3,897 $ 3,895 $3,003 $3,015 $ 45 $ 45 $ 8,823 $ 8,828 $ -- $ -- $ 15,768 $ 15,783
1 to 5 years.... 9,721 9,817 -- -- 586 586 33,732 33,239 2,127 2,114 46,166 45,756
5 to 10 years... 25,686 25,757 -- -- 1,533 1,517 11,525 11,765 1,229 1,216 39,973 40,255
Over 10 years... -- -- -- -- 17,302 17,223 44,163 44,089 10,138 10,266 71,603 71,578
------- ------- ------ ------ ------- ------- -------- -------- ------- ------- -------- --------
$39,304 $39,469 $3,003 $3,015 $19,466 $19,371 $ 98,243 $ 97,921 $13,494 $13,596 $173,510 $173,372
======= ======= ====== ====== ======= ======= ======== ======== ======= ======= ======== ========
DECEMBER 31, 1995
------------------------------------------------------------------------------------------------------------
GOVERNMENT CORPORATE ASSET-BACKED MORTGAGE-BACKED MORTGAGE-BACKED
SECURITIES SECURITIES SECURITIES SECURITIES DERIVATIVES TOTAL
----------------- ---------------- ----------------- ------------------ ----------------- ------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE COST VALUE COST VALUE
--------- ------- --------- ------ --------- ------- --------- -------- --------- ------- --------- --------
(IN THOUSANDS)
Held to maturity:
Within 1 year... $ -- $ -- $1,001 $1,001 $ -- $ $ 457 $ 462 $ -- $ -- $ 1,458 $ 1,463
1 to 5 years.... 11,608 11,814 3,010 3,057 1,562 1,555 48,274 48,248 3,044 3,021 67,498 67,695
5 to 10 years... 10,800 10,987 -- -- -- -- 9,682 9,772 456 454 20,938 21,213
Over 10 years... -- -- -- -- 16,133 16,005 56,823 57,515 13,250 13,493 86,206 87,013
------- ------- ------ ------ ------- ------- -------- -------- ------- ------- -------- --------
$22,408 $22,801 $4,011 $4,058 $17,695 $17,560 $115,236 $115,997 $16,750 $16,968 $176,100 $177,384
======= ======= ====== ====== ======= ======= ======== ======== ======= ======= ======== ========
49
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Mortgage-backed securities and mortgage-backed derivatives are shown at
their final contractual maturity dates, but actual maturities may differ as
borrowers have the right to prepay obligations without incurring prepayment
penalties.
At December 31, 1996, the mortgage-backed portfolio consisted of 1 year
adjustable rate securities ($40.3 million), 5 and 7 year balloons ($43.6
million), 15 year fixed rate securities ($28.8 million) and 30 year fixed rate
securities ($22.8 million). The adjustable rate securities were predominantly
30 year loans with annual rate adjustments. The $43.6 million in balloon
securities, which had 4 to 5 year average lives when purchased and contractual
maturity dates of 5 to 7 years, had a weighted average life of 2.1 years at
December 31, 1996. The weighted average lives for the 15 and 30 year
securities were 3.9 and 5.7 years, respectively.
The mortgage-backed derivatives portfolio totalled $21.4 million, or 6.1% of
total investment securities, and consisted of planned amortization classes
(PAC's), targeted amortization classes (TAC's), sequential payment classes
(SEQ's), scheduled amortization classes (SCH's) and accretion directed classes
(AD's). The $21.4 million balance at year end had an average life of 2.0 years
with 35.3% in monthly adjusting securities and the remaining 64.7% in fixed
rate securities.
4. LOANS
The following is a comparative summary of loan balances:
DECEMBER 31,
------------------
1996 1995
-------- --------
(IN THOUSANDS)
Mortgage loans on real estate:
1-4 family............................................. $428,308 $367,687
Multifamily............................................ 31,092 27,833
Commercial............................................. 94,419 72,896
Construction and land development, net................. 46,344 28,405
Premium on loans acquired.............................. 135 180
-------- --------
600,298 497,001
-------- --------
Other loans:
Consumer............................................... 3,545 3,664
Equity lines of credit................................. 16,204 15,387
Commercial............................................. 35,338 28,636
-------- --------
55,087 47,687
-------- --------
Less: Deferred loan fees and unearned income........... (1,829) (1,882)
-------- --------
Total loans............................................ 653,556 542,806
Less: Allowance for possible loan losses............... (7,759) (7,127)
-------- --------
Loans, net............................................. $645,797 $535,679
======== ========
50
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information regarding nonaccrual and
restructured loans:
AT DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Nonaccrual loans................................... $ 4,886 $ 5,402 $ 978
======== ======== ======
Restructured loans................................. $ -- $ 199 $ 205
======== ======== ======
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Income in accordance with original terms........... $ 543 $ 552 $ 219
Income recognized.................................. 300 314 174
-------- -------- ------
Foregone interest income during year............... $ 243 $ 238 $ 45
======== ======== ======
For the year ended December 31, 1996, the average recorded investment in
impaired loans was $3,753,000 and the income recognized related to impaired
loans was $213,000. At December 31, 1996, the Company classified $3,798,000 of
its loans as impaired. Of the $3,798,000, $3,691,000 has been measured under
the fair value of collateral method and $107,000 has been measured under the
present value of the expected cash flows method. A portion of these impaired
loans, $3,555,000, has a related valuation reserve of $667,000. In addition,
$243,000 of impaired loans did not, in the opinion of management, require a
related valuation reserve.
For the year ended December 31, 1995 the average recorded investment in
impaired loans was $2,900,000 and the income recognized related to impaired
loans was $208,000. At December 31, 1995, the Company classified $2,693,000 of
its loans as impaired. Of the $2,693,000, $2,494,000 has been measured under
the fair value of collateral method and $199,000 has been measured under the
present value of the expected cash flows method. A portion of these impaired
loans, $2,007,000, has a related valuation reserve of $624,000. In addition,
$686,000 of impaired loans did not, in the opinion of management, require a
related valuation reserve.
The Company's lending activities are conducted principally in Massachusetts
and include single-family and multifamily residential loans, commercial real
estate loans, small business loans, home equity loans and loans on deposits.
In addition, the Company grants loans for the construction of residential
homes, multifamily properties, commercial real estate properties and for land
development. The ability and willingness of the single-family residential and
other borrowers to honor their repayment commitments is generally dependent on
the level of overall economic activity within the borrowers' geographic areas
and real estate values. The ability and willingness of commercial real estate,
multifamily and construction loan borrowers to honor their repayment
commitments is generally dependent on the health of the real estate sector in
the borrowers' geographic areas and the general economy.
Pursuant to OTS regulations, Federal is limited in the amount of loans to
one borrower to 15% of unimpaired capital and surplus. At December 31, 1996
and 1995, Federal had approximately $4,248,000 and $3,970,000, respectively,
of outstanding loans to a single borrower secured by commercial and
construction properties.
Lexington, as a state chartered savings bank, is subject to a 20% of capital
limitation with regard to outstanding loans to any one borrower.
51
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information regarding loans sold and serviced
for others by the Company:
DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Loans serviced for others........................ $101,060 $111,980 $110,826
======== ======== ========
The Company sold certain convertible mortgage loans to investors pursuant to
agreements which provide the investor with the right to require the Company to
repurchase the loan should the buyer's conversion option be exercised. The
balance of these convertible loans at December 31, 1996 and 1995 amounted to
$467,000 and $473,000, respectively.
In the ordinary course of business, the Company makes loans to its executive
officers, directors and their affiliated companies at substantially the same
terms as loans made to nonrelated borrowers. An analysis of related party
loans, individually over $60,000, for the years ended December 31, 1996 and
1995 is as follows:
YEARS ENDED
DECEMBER 31,
---------------
1996 1995
------- ------
(IN THOUSANDS)
Balance at beginning of year................................ $ 8,634 $8,116
New loans................................................. 562 999
Payments.................................................. (1,074) (481)
Other..................................................... (5,609) --
------- ------
Balance at end of year...................................... $ 2,513 $8,634
======= ======
The other reduction for 1996 represents loans to an individual who is no
longer a related party due to his resignation from the Board of Directors of a
subsidiary bank. The Company leases office space from a realty trust of which
the former director holds an ownership interest. Rent and other expenses under
the lease amounted to $166,000 for each of 1996, 1995 and 1994, respectively.
An analysis of the allowance for possible loan losses follows:
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Balance at beginning of year..................... $ 7,127 $ 6,996 $ 6,603
Provision for possible loan losses............... 605 325 550
Recoveries....................................... 447 150 49
------- -------- -------
8,179 7,471 7,202
Loans charged-off................................ (420) (344) (206)
------- -------- -------
Balance at end of year........................... $ 7,759 $ 7,127 $ 6,996
======= ======== =======
52
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. OTHER REAL ESTATE OWNED
The components of other real estate owned are as follows:
DECEMBER 31,
---------------
1996 1995
---------------
(IN THOUSANDS)
Residential:
1-4 family................................................ $ 123 $ 232
Multifamily............................................... -- --
Commercial real estate...................................... -- 960
Land........................................................ 10 9
------ --------
133 1,201
Less: Accumulated income from in-substance foreclosures..... -- --
------ --------
Total................................................... $ 133 $ 1,201
====== ========
The following is a summary of other real estate owned income (expenses),
net:
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Net gain on sales.............................. $ 285 $ 361 $ 432
Provision for loss............................. (220) (220) (233)
Net holding costs.............................. (194) (34) (75)
-------- -------- --------
$ (129) $ 107 $ 124
======== ======== ========
6. OFFICE PROPERTIES AND EQUIPMENT, NET
Office properties and equipment at cost less accumulated depreciation and
amortization consisted of the following:
DECEMBER 31,
----------------
1996 1995
------- -------
(IN THOUSANDS)
Land....................................................... $ 1,621 $ 1,621
Office buildings and improvements.......................... 6,682 6,186
Leasehold improvements..................................... 430 382
Construction in process.................................... -- 292
Furniture, fixtures and equipment.......................... 3,468 3,158
------- -------
12,201 11,639
Accumulated depreciation and amortization.................. (3,773) (3,193)
------- -------
$ 8,428 $ 8,446
======= =======
Depreciation expense for the three years ended December 31, 1996, 1995 and
1994 amounted to $771,000, $644,000 and $601,000, respectively, and is
included in occupancy and equipment expenses.
53
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. DEPOSITS
Deposits are summarized as follows:
DECEMBER 31,
-----------------
1996 1995
-------- --------
(IN THOUSANDS)
Demand.................................................... $ 41,557 $ 33,680
NOW....................................................... 51,347 50,487
Regular savings........................................... 122,739 119,995
Money market.............................................. 66,492 61,219
-------- --------
Total non-certificate accounts.......................... $282,135 $265,381
======== ========
Certificates of less than $100,000........................ 297,990 276,512
Certificates of $100,000 and over......................... 72,384 41,939
-------- --------
Total certificate accounts.............................. 370,374 318,451
-------- --------
Total deposits.......................................... $652,509 $583,832
======== ========
Contractual maturities of term deposits at December 31, 1996 and 1995 were
as follows:
1996 1995
------------------ ------------------
WEIGHTED WEIGHTED
AMOUNT AVG. RATE AMOUNT AVG. RATE
-------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
Within one year........................ $267,177 5.51% $193,564 5.83%
One to two years....................... 47,416 5.93% 62,487 5.93%
Two to three years..................... 22,513 6.11% 26,424 6.06%
Three to four years.................... 11,241 6.52% 11,160 6.28%
Four to five years..................... 9,163 6.59% 10,727 6.62%
Over five years........................ 12,864 6.68% 14,089 6.72%
-------- --------
$370,374 5.70% $318,451 5.95%
======== ==== ======== ====
Certificates of deposit obtained through brokers amounted to approximately
$30,086,000 at December 31, 1996 and $10,892,000 at December 31, 1995. The
terms of the $30,086,000 of certificates of deposit at December 31, 1996
provide for rates ranging between 5.15% and 7.00%, a weighted average rate of
5.87%, and maturities extending through February, 2003.
Effective September 30, 1996 the FDIC imposed a special one-time assessment
on the SAIF-insured deposits of each depository institution in an amount
sufficient to recapitalize the SAIF to 1.25% of total insured deposits. The
FDIC determined that a special assessment of 0.657% of the SAIF assessable
deposits as of March 31, 1995 was required. This one-time charge based on the
SAIF assessable deposits as of March 31, 1995 amounted to approximately
$2,121,000 and is included in Federal Deposit Insurance premiums in the
accompanying consolidated statements of income for the year ended December 31,
1996.
Interest expense on deposits consisted of the following:
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Regular savings.................................. $ 3,121 $ 3,206 $ 3,400
NOW and money market accounts.................... 3,458 3,025 3,518
Certificate accounts............................. 19,196 16,647 10,844
-------- -------- --------
$ 25,775 $ 22,878 $ 17,762
======== ======== ========
54
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. FEDERAL HOME LOAN BANK ADVANCES
A summary of Federal Home Loan Bank of Boston ("FHLBB") advances by maturity
is as follows:
DECEMBER 31,
-------------------------------------
1996 1995
------------------ ------------------
WEIGHTED WEIGHTED
AMOUNT AVG. RATE AMOUNT AVG. RATE
-------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
Within 1 year.......................... $177,300 5.64% $136,500 5.98%
Over 1 year to 2 years................. 70,041 6.04 31,800 5.96
Over 2 years to 3 years................ 14,000 6.04 4,800 5.94
Over 3 years........................... 4,500 6.69 12,000 6.14
-------- --------
$265,841 5.78% $185,100 5.98%
======== ==== ======== ====
The advances require interest to be paid monthly, with principal due upon
maturity. In addition to the above borrowings, the Company had $1,330,000 and
$1,735,000 outstanding under its overnight lines of credit with the FHLBB at
December 31, 1996 and 1995, respectively.
The Company has available overnight lines of credit totaling $23.5 million
with the FHLBB at an interest rate that adjusts daily. The Company's total
borrowing capacity from the FHLBB was approximately $604 million at December
31, 1996. Total borrowings from the FHLBB are limited to 20 times the value of
the FHLBB Capital Stock owned by the Company. All borrowings from the FHLBB
are secured by a blanket lien on certain qualified collateral, defined
principally as 90% of the fair value of U.S. Government and federal agency
obligations and 75% of the carrying value of first mortgage loans on 1-4
family, owner-occupied residential property. The Company may be subject to a
substantial penalty upon prepayment of FHLBB advances.
9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Information concerning securities sold under agreements to repurchase is
summarized as follows:
1996
----------------------
(DOLLARS IN THOUSANDS)
Average balance during the year..................... $ 203
Average interest rate during the year............... 4.76%
Maximum month-end balance during the year........... $1,119
Agency securities underlying the agreements at year
end:
Carrying value.................................... $1,109
Estimated fair value.............................. $1,109
There were no repurchase agreements outstanding during the year ended
December 31, 1995.
55
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES
Allocation of federal and state income taxes between current and deferred
portions, calculated using the liability method in 1996, 1995 and 1994 is as
follows:
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995 1994
---------------- --------
(IN THOUSANDS)
Current tax provision:
Federal......................................... $ 4,097 $ 3,464 $ 3,103
State........................................... 638 984 838
------- ------- --------
4,735 4,448 3,941
------- ------- --------
Deferred (prepaid) provision:
Federal......................................... 35 555 (67)
State........................................... 51 216 7
Change in valuation reserve..................... -- (20) (1,075)
------- ------- --------
86 751 (1,135)
------- ------- --------
$ 4,821 $ 5,199 $ 2,806
======= ======= ========
The reasons for the differences between the statutory federal income tax
rates and the effective tax rates are summarized as follows:
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
Statutory rates.................................. 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit........ 3.4 7.3 5.1
Merger expenses................................ -- 6.2 --
Change in valuation reserve.................... -- (.2) (10.9)
Dividends received deduction................... (1.7) -- (.1)
Other, net..................................... .4 .4 .4
------- ------- --------
Effective tax rates.......................... 36.1% 47.7% 28.5%
======= ======= ========
At December 31, 1996 and 1995, the tax effects of items that give rise to
deferred taxes are as follows:
1996 1995
------- -------
(IN THOUSANDS)
Allowance for possible loan losses......................... $ 2,737 $ 2,433
Accrued expenses........................................... 231 315
Deferred loan fees......................................... 24 207
Employee benefit plans..................................... 565 664
Depreciable property....................................... (505) (477)
Investments................................................ 334 43
Valuation reserve.......................................... (46) (46)
Other...................................................... 65 (43)
------- -------
Net deferred tax asset................................. $ 3,405 $ 3,096
======= =======
56
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's gross deferred tax asset was $3,956,000 and $3,662,000, at
December 31, 1996 and 1995, respectively. Gross deferred tax liabilities were
$551,000 and $566,000 at December 31, 1996 and 1995, respectively.
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. Thrift institutions now will be viewed as commercial
banks 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 Company's bad debt
reserve for income tax purposes as of its base year, December 31, 1987 for
Federal and October 31, 1988 for Lexington. 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 Company's
stock or if the Company ceases to qualify as a bank for income tax purposes.
At December 31, 1996, the Company's surplus includes approximately
$16,902,000 of bad debt reserves, representing the base year amount, for which
income taxes have not been provided. Since the Company 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 $7,034,000 have
not been recorded with respect to such reserve.
11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATION OF
CREDIT RISK
The Company is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to originate loans, lines of credit and
letters of credit, and commitments to sell loans. The instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated statement of financial condition. The
contractual amounts of those instruments reflect the extent of the Company's
involvement in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments, and lines and
letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments.
Financial instruments with off-balance sheet risk consisted of the
following:
DECEMBER 31,
---------------
1996 1995
------- -------
(IN THOUSANDS)
Financial instruments whose contract amounts represent
credit risk:
Commitments to originate loans and advance funds........ $37,723 $43,243
Unused lines of credit.................................. 41,953 35,665
Letters of credit....................................... 2,350 1,422
Fixed and variable rate loan origination commitments approximated
$11,240,000 and $4,653,000, respectively, at December 31, 1996 and $5,988,000
and $18,481,000, respectively, at December 31, 1995.
Commitments to originate loans and letters of credit are agreements to lend
to a customer provided there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some of the
commitments are expected to
57
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
deemed necessary by the Company upon the extension of credit is based on
management's credit evaluation of the borrower.
Commitments to sell mortgage loans are contracts that the Company enters
into for the purpose of reducing the market risk associated with originating
loans for sale. In order to fulfill a commitment, the Company typically first
exchanges current production of loans for cash through the Federal Home Loan
Mortgage Corporation or the Federal National Mortgage Association, which loans
are then delivered to national securities firms at a future date at prices or
yields specified by the contracts. Risks may arise from the inability of the
Company to originate loans to fulfill the contracts. In this case, the Company
would usually substitute loans it may hold in portfolio or purchase securities
in the open market to deliver against the contract or settle the contract for
cash.
At December 31, 1996, the remaining commitments to deliver loans pursuant to
master commitments with secondary mortgage market investors amounted to
approximately $9,154,000. Failure to fulfill delivery requirements of
commitments may result in payment of certain fees to investors. Individual
commitments to sell loans require the Company to make delivery at a specific
future date of a specified amount, at a specified price or yield. Loans are
generally sold without recourse and, accordingly, risks arise principally from
movements in interest rates.
12. COMMITMENTS AND CONTINGENCIES
Severance and special termination agreements
The Company has entered into Severance Agreements with its President and the
President of Federal, that provide for a specified level of compensation for
periods of eighteen and twelve months, respectively in the event of their
severance. However, employment may be terminated under such agreements for
cause, as defined, without incurring any continuing obligations. The Company
also has entered into Special Termination Agreements with certain senior
executives. The Agreements generally provide for certain lump sum severance
payments following termination within a three-year period following a "change
in control" as defined in the Agreements.
Operating lease commitments
Pursuant to the terms of noncancelable lease agreements in effect at
December 31, 1996 pertaining to office properties and equipment, future
minimum lease payments are as follows:
FUTURE MINIMUM
YEARS ENDING DECEMBER 31, LEASE PAYMENTS
------------------------- --------------
(IN THOUSANDS)
1997..................................................... $431
1998..................................................... 265
1999..................................................... 146
2000..................................................... 86
2001..................................................... 79
Thereafter............................................... 103
Two of the lease agreements contain options to extend for a period up to ten
years. The cost of such extensions is not included above. Total rent expense
for the years ended December 31, 1996, 1995 and 1994 amounted to $476,000,
$540,000 and $515,000, respectively, and is included in occupancy and
equipment expenses.
58
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In the ordinary course of business, the Company is involved in litigation.
Management, after reviewing current litigation and discussing the same with
legal counsel, is of the opinion that resolution of these claims will not have
a material effect on the Company's consolidated financial position, annual
results of operations, or liquidity.
On December 18, 1996, Affiliated Community Bancorp, Inc. announced that it
had signed a definitive agreement to provide the initial capitalization for
Middlesex Bank and Trust Company (in organization), ("Middlesex"). Middlesex
is a de novo bank that will be located in City of Newton, Massachusetts and
the transaction is subject to the necessary regulatory approvals.
13. STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
The Company and its primary Bank subsidiaries are 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 Company's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and its primary bank subsidiaries must
meet specific capital guidelines that involve quantitative measures of their
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company's and its primary bank
subsidiaries' 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 and its primary bank subsidiaries to maintain minimum
amounts and ratios set forth in the table below of total and Tier 1 capital to
risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of December 31, 1996, that the Company and its primary subsidiary
banks meet all capital adequacy requirements to which they are subject.
As of December 31, 1996, the most recent notification from the Company's two
banking subsidiaries' primary regulators categorized them as well capitalized
under their regulatory framework for prompt corrective action. To be
categorized as well capitalized the Company and its primary banking
subsidiaries must maintain minimum total risk-based, Tier 1 risk-based, Tier 1
leverage and tangible capital ratios as set forth in the table. There are no
conditions or events since these notifications that management believes have
changed the category classifications.
59
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company and its primary bank subsidiaries' actual capital amounts and
ratios are also presented in the table.
MINIMUM FOR MINIMUM FOR
CAPITAL ADEQUACY WELL CAPITALIZED
ACTUAL PURPOSES STATUS
-------------- ----------------- ----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- --------- ------- -------- -------
(DOLLARS IN THOUSANDS)
As of December 31, 1996:
Total Capital (to Risk
Weighted Assets):
Affiliated consolidated.. $108,373 19.08% $ 45,428 8.00% N/A
Federal.................. 52,910 19.26% 21,977 8.00% 27,471 10.00%
Lexington................ 43,748 15.01% 23,310 8.00% 29,138 10.00%
Tier 1 Capital (to Risk
Weighted Assets):
Affiliated consolidated.. $101,267 17.83% $ 22,714 4.00% N/A
Federal.................. 49,475 18.01% 10,988 4.00% 16,482 6.00%
Lexington................ 41,099 14.10% 11,655 4.00% 17,483 6.00%
Tier 1 Capital (to Average
Assets):
Affiliated consolidated.. $101,267 9.98% $ 30,433 3.00% N/A
Federal.................. 49,475 9.47% 15,680 3.00% 26,133 5.00%
Lexington................ 41,099 8.37% 14,733 3.00% 24,555 5.00%
Tangible Capital (to
Adjusted Assets)
Federal.................. $ 49,475 9.26% $ 8,012 1.50% N/A
As of December 31, 1995:
Total Capital (to Risk
Weighted Assets):
Affiliated consolidated.. $104,229 22.60% $ 36,901 8.00% N/A
Federal.................. 49,773 21.90% 18,185 8.00% 22,731 10.00%
Lexington................ 40,407 17.19% 18,659 8.00% 23,324 10.00%
Tier 1 Capital (to Risk
Weighted Assets):
Affiliated consolidated.. $ 98,438 21.34% $ 18,451 4.00% N/A
Federal.................. 46,932 20.65% 9,093 4.00% 13,639 6.00%
Lexington................ 38,128 16.22% 9,329 4.00% 13,994 6.00%
Tier 1 Capital (to Average
Assets):
Affiliated consolidated.. $ 98,438 11.47% $ 25,780 3.00% N/A
Federal.................. 46,932 10.54% 13,364 3.00% 22,274 5.00%
Lexington................ 38,128 9.23% 12,392 3.00% 20,654 5.00%
Tangible Capital (to
Adjusted Assets)
Federal.................. $ 46,932 10.31% $ 6,825 1.50% N/A
The ability of Lexington and Federal to pay dividends to the Company is
limited to the extent necessary for the banks to comply with regulatory
capital guidelines.
At the time of Lexington's conversion from mutual to stock form in 1986,
Lexington established a liquidation account in the amount of $11,581,000 for
the benefit of eligible account holders. The liquidation account is reduced
annually to the extent that eligible account holders reduce their qualifying
deposits. At December 31, 1996, the liquidation account had a balance of
approximately $3,709,000. In the event of a complete liquidation of Lexington,
eligible account holders could be entitled to receive a distribution from the
liquidation account to the extent that funds are available.
60
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At the time of Federal's conversion from mutual to stock form in 1993,
Federal established a liquidation account for the benefit of eligible account
holders in an amount equal to the retained earnings of the bank as of the date
of its latest balance sheet date contained in the final Prospectus used in
connection with the conversion. In the event of a complete liquidation of
Federal, eligible depositors who continue to maintain accounts at Federal
would be entitled to receive a distribution from the liquidation account. The
total amount of the liquidation account may be decreased if the balances of
eligible depositors decrease on the annual determination dates. At December
31, 1996, Federal's liquidation account approximated $13,300,000.
14. EMPLOYEE BENEFITS
The Company through its two wholly-owned subsidiary banks, Lexington and
Federal, provide the following benefit programs.
Pension Plan--Lexington
Lexington provides basic and supplemental pension benefits for eligible
employees through the Savings Bank Employees Retirement Association ("SBERA")
Pension Plan (the "Retirement Plan"). Each employee reaching the age of 21 and
having completed at least 1,000 hours of service in a twelve-month period,
beginning with such employee's date of employment, automatically becomes a
participant in the Retirement Plan. Participants are 100% vested after 3 years
of service or at age 62, if earlier. Lexington's funding policy is to
contribute annually the maximum amount that can be deducted for federal income
tax purposes. Contributions made under the plan totaled approximately $383,000
for 1996 and $61,000 for 1995. No contributions were made in 1994.
Net periodic pension cost for the plan years ended October 31, 1996, 1995
and 1994 consisted of the following:
1996 1995 1994
----- ----- ----
(IN THOUSANDS)
Service cost-benefits earned during year................. $ 298 $ 206 $165
Interest cost on projected benefits...................... 220 162 122
Actual return on plan assets............................. (295) (273) (77)
Net amortization and deferral............................ (4) (4) (4)
Amortization of net loss................................. 153 155 (16)
----- ----- ----
$ 372 $ 246 $190
===== ===== ====
Total Lexington pension expense for the years ended December 31, 1996, 1995
and 1994 amounted to $312,000, $313,000 and $258,000, respectively, and is
included in compensation and employee benefits expense.
According to the Plan's actuary, the funded status of the plan is as follows
at October 31, 1996, and 1995:
1996 1995
------- -------
(IN THOUSANDS)
Plan assets at fair value................................. $ 2,637 $ 1,952
Projected benefit obligation.............................. (3,386) (3,142)
------- -------
Excess of projected benefit obligation over plan assets... (749) (1,190)
Unrecognized net obligation at transition................. (75) (79)
Unrecognized net (gain) loss.............................. (39) 390
------- -------
Pension liability included on balance sheet............... $ (863) $ (879)
======= =======
61
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The accumulated benefit obligation (substantially all vested) at October 31,
1996 and 1995, amounted to $1,956,000 and $1,689,000, respectively, which was
less than the fair value of plan assets at those dates.
For the plan years ended October 31, 1996, 1995 and 1994, actuarial
assumptions include an assumed discount rate on benefit obligations of 7.50%,
7.00% and 8.00%, respectively, and an expected long-term rate of return on
plan assets of 8.00%, 8.00% and 7.00%, respectively. An annual salary increase
of 6% was utilized for all years.
Beginning in 1995, Lexington offered a Supplemental Employees Retirement
Plan ("SERP") to certain key executives. The SERP plan is funded through life
insurance policies with the policy benefits accruing to Lexington and
executives. The SERP provides for yearly retirement benefits based on the
return on certain insurance policies purchased by Lexington in excess of the
yield on an alternative investment of an equal amount deemed the opportunity
cost as outlined in the SERP plan, if any. Upon retirement, the annual
earnings in excess of the opportunity cost, if any, are paid to the executives
each year in addition to the benefit accrued to the retirement date, if any.
The cash surrender value of the policies was approximately $1,710,000 and
$1,693,000 as of December 31, 1996 and 1995, respectively, and is included in
other assets in the accompanying consolidated balance sheets. Total income
recognized on the SERP plan for the years ended December 31, 1996 and 1995 was
approximately $17,000 and $3,000, respectively. No expenses were incurred
under the SERP plan for 1996 and 1995.
Pension Plan--Federal
Under the Federal plan all eligible officers and employees are included in a
noncontributory defined benefit pension plan provided by Federal as a
participating employer in the Financial Institutions Retirement Fund (the
"Fund"), a multi-employer plan. The Fund does not segregate its assets or
liabilities by participating employer. Contributions are based on the
individual employer's experience. According to the Fund's administrators, as
of June 30, 1996, the date of the latest actuarial valuation, the market value
of the Fund's net assets exceeded the actuarial present value of accumulated
vested and nonvested benefits in the aggregate, using an assumed investment
rate of return of 7.5%. There is no liability for past service cost.
Pension expense for Federal for the years ended December 31, 1996, 1995 and
1994 was $123,000, $208,000 and $115,000, respectively, and is included in
compensation and employee benefits. Pension expense consists of Federal's
annual contributions to the Fund.
Incentive Compensation and Senior Management Incentive Plans
Federal adopted an Incentive Compensation Program in 1989 to provide an
incentive and reward to key staff and other significant contributors to
motivate and recognize them for individual and group performance. Compensation
under this plan is based on achievement of several performance objectives
established annually by the Federal Board of Directors.
Lexington adopted a Senior Management Incentive Plan ("SMIP") effective
January 1, 1994 to provide a financial incentive to executives whose job
performance has a measurable impact on the achievement of long-term business
objectives. Compensation under this plan, which is in lieu of profit sharing,
is based on achievement of several performance objectives established annually
by the Lexington Board of Directors.
Affiliated adopted a SMIP effective October 18, 1995 to provide a financial
incentive to executives whose job performance has a mesurable impact on the
achievement of long-term business objectives. Compensation under this plan is
based on achievement of several performance objectives established by the
Affiliated Compensation Committee.
62
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
No individual obtained compensation from more than one of these plans. Total
expenses under these plans amounted to $468,000, $332,000 and $297,000 for
1996, 1995 and 1994, respectively, and is included in compensation and
employee benefits and other expenses.
Profit Sharing Plans
Each profitable year, Lexington allocates for annual distribution 3.5% of
its operational earnings, as defined, for profit sharing to employees who have
at least three months of employment with Lexington. Employees share in the
allocated profits on the basis of annual salary, length of service, attendance
and meritorious service. Participants in the AFCB or Lexington SMIP do not
participate in the Lexington Profit Sharing Plan and their pro-rata share is
subtracted from the total profit sharing pool. Total profit sharing expense
(excluding SMIP) amounted to $317,000, $110,000 and $156,000 for 1996, 1995
and 1994, respectively, and is included in compensation and employee benefits.
The 1996 expense amount includes approximately $60,000 that relates to 1995
performance.
In 1993, Federal established a qualified, tax-exempt profit sharing plan
(the "Savings Plan") that is qualified under Section 401(k) of the Internal
Revenue Code. All employees who have reached the age of 20, who have completed
one year of employment and have been credited with 1,000 or more hours of
service in a 12-month period are eligible to participate. Under the Savings
Plan, participants are permitted to make salary reduction contributions equal
to a percentage of annual salary up to 15% subject to Internal Revenue Service
("IRS") maximums. Federal matches 50% of the participant's contribution up to
4% of the employee's salary. All matching contributions by Federal are 50%
vested after two years of employment and 100% vested after three years of
employment.
In addition, in order to provide an incentive for performance, Federal may
make discretionary year end profit sharing contributions to eligible 401(k)
participants based on Federal's profitability, payable within IRS regulations.
The participants had the choice of receiving up to 50% of the discretionary
contributions in cash; the remaining funds are contributed to 401(k) accounts.
Total contributions to the plan, for both matching and discretionary
contributions, including cash payments, were $113,000, $106,000, and $96,000
for the years ended December 31, 1996, 1995 and 1994, respectively, and are
included in compensation and employee benefits.
Employees' Stock Ownership Plan--Lexington
In 1986, Lexington established an Employees' Stock Ownership Plan (the
"Lexington ESOP") for eligible employees whereby benefits are payable upon
retirement, disability, death or separation from service with the Bank. On
December 19, 1986, Lexington issued 60,000 shares of common stock with a fair
market value of $570,000 to the Lexington ESOP. The funds used to purchase the
shares were borrowed by the Lexington ESOP from a third-party lender, less
Lexington's initial contribution of $20,000. The loan was fully paid in 1993.
In November 1996 the Lexington ESOP purchased from the Company at the then
current market price an additional 40,000 shares of the Company's stock of
which 37,748 shares were financed by a $859,000 loan from a third party
lender. The note, which is secured by the unreleased shares, bears interest at
the 90-day LIBOR rate plus 225 basis points and is paid quarterly, both
principal and interest. Annually, the borrower has the option to choose either
the above specified rate of interest or a rate equal to the base rate of the
lending bank. The rate in effect at December 31, 1996 was 7.813%. Total
compensation expense applicable to the Lexington ESOP amounted to $99,000 for
1996. There was no compensation expense or allocation of shares for the years
ended December 31, 1995 and 1994. In 1996, 2,252 shares were released and
allocated to eligible employees. Under the Lexington ESOP, shares are released
annually and allocated to particpants at October 31 of each year. There were
no shares committed to be released as of December 31, 1996. Dividends on
allocated and unreleased ESOP shares are credited to the accounts of the
participants.
63
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Employees' Stock Ownership Plan--Federal
In 1993 Federal established an Employees' Stock Ownership Plan (the "Federal
ESOP") in which all employees who have reached the age of 20 and who have
completed 1,000 hours of service in a 12-month period beginning with such
employee's date of employment may participate. Participants become 50% vested
after two years and 100% vested after three years of service. The Federal ESOP
purchased $1,000,000 (100,000 shares) of the common stock of Main Street in
the Conversion. The Company recognized $360,000, $298,000 and $272,000 in
related compensation expense for the years ended December 31, 1996, 1995 and
1994, respectively. A portion of the shares are released annually by the
lender from collateral and allocated to employees; 14,286 shares were released
for allocation in each of the past three years. There were no shares committed
to be released as of December 31, 1996. Dividends on both allocated and
unreleased shares, net of certain administrative expenses, are paid to the
ESOP participants.
The outstanding balance of funds borrowed by the Federal ESOP that were used
to purchase Main Street stock in the subscription offering amounted to
$535,000 and $679,000 at December 31, 1996 and 1995, respectively. Principal
and interest payments are due in equal quarterly installments at an interest
rate equal to the Federal funds effective rate plus 2.60%. The index rate in
effect at December 31, 1996 was 8.01%. The loan is due in 2000 and is secured
by 53,571 and 67,857 shares of Company common stock at December 31, 1996 and
1995, respectively.
15. STOCK BASED COMPENSATION PLANS
Lexington had adopted stock option and stock appreciation rights plans for
the benefit of its directors, officers and employees. Lexington reserved
230,000 and 115,000 shares of its common stock, respectively, for issuance
pursuant to options granted under the 1986 Stock Option and Stock Appreciation
Rights Plan and the 1994 Stock Option Plan.
In 1993, Main Street, Federal's then parent, adopted a stock option plan for
the benefit of its directors, officers and other employees, and reserved
290,720 shares of its common stock issued in the Conversion for grants under
the Plan.
As of October 18, 1995, the effective date of the Affiliation, the existing
Lexington Option Plans and the Main Street Option Plan were terminated except
as to the administration of outstanding options, and no further options can be
granted under these plans. Immediately prior to the effective date, 175,720
shares of common stock would have been available for future option grants
under these plans.
In lieu of future option grants under the Lexington and Main Street plans,
Affiliated adopted the Affiliated Community Bancorp, Inc. 1995 Stock Option
Plan (the "Plan") as a replacement, pursuant to which options for 175,720
shares of Affiliated common stock could be granted. Both incentive and non-
qualified stock options may be granted under this Plan. Options are generally
granted at fair market value of the related stock at the grant date and expire
ten years from such date. The Company had granted options on 130,000 shares
through December 31, 1996. Effective January 16, 1997, the Company's Board of
Directors amended and restated the Plan, subject to stockholder approval, to
add an additional 250,000 shares.
64
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company accounts for stock-based employee compensation plans in
accordance with APB No. 25 under which compensation cost 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 amount an employee must pay to acquire the
stock. Had compensation cost for the stock-based employee compensation plans
been determined based on the fair value at the date of grant in accordance
with SFAS No. 123, the Company's net income and earnings would have been
reduced to the following pro-forma amounts.
1996 1995
----------- -----------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net Income:
As reported........................................ $ 8,523 $ 5,707
Pro forma.......................................... $ 8,409 $ 5,643
Primary EPS:
As reported........................................ $ 1.65 $ 1.07
Pro forma.......................................... $ 1.63 $ 1.06
Fully Diluted EPS:
As reported........................................ $ 1.64 $ 1.07
Pro forma.......................................... $ 1.61 $ 1.06
Because the SFAS No. 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.
In making the pro-forma calculations set forth above, the option exercise
price equals the stock's market price on the date of the grant. Non-qualified
options vest ratably over periods ranging from two to three years after the
date of the grant, except that options to directors are immediately vested in
full.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1996 and 1995:
Risk free interest rates of 6.59% to 6.69% (1996) and 5.77% to 6.81% (1995)
Expected dividends of 2.8% per annum
Expected lives of 7.0 years
Expected volatility of 23%
The combined activity for options granted under the plans is as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1996 1995
----------------------- -----------------------
NUMBER OF WEIGHTED NUMBER OF WEIGHTED
SHARES AVERAGE PRICE SHARES AVERAGE PRICE
--------- ------------- --------- -------------
Outstanding at beginning of
year....................... 394,500 $10.85 353,500 $ 9.98
Granted..................... 106,000 $16.94 51,000 $16.42
Forfeited................... (1,834) $10.00 -- --
Exercised................... (50,466) $ 7.85 (10,000) $ 8.80
------- ------ ------- ------
Outstanding at end of year.. 448,200 $12.63 394,500 $10.85
======= ====== ======= ======
Options exercisable at end of
year......................... 351,534 $11.45 306,667 $ 9.88
======= ====== ======= ======
Weighted average fair value of
options granted.............. $ 4.60 $ 5.11
====== ======
65
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995
------------ ------------
Detail of exercises during the year:
Exercised--at $ 5.25............................. 1,500 --
--at $ 6.25.................................. 32,300 5,500
--at $ 8.50.................................. 3,000 --
--at $10.00.................................. 9,666 3,000
--at $15.75.................................. 3,000 1,500
--at $16.9375................................ 1,000 --
------------ ------------
Total...................................... 50,466 10,000
============ ============
The following table summarizes information about stock options outstanding
at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 12/31/96 LIFE PRICE AT 12/31/96 PRICE
- ------------------------ ----------- ----------- -------- ----------- --------
$ 5.25................... 16,000 4 years $ 5.25 16,000 $ 5.25
6.25................... 55,200 3 years $ 6.25 55,200 $ 6.25
8.50................... 33,000 6 years $ 8.50 33,000 $ 8.50
10.00................... 106,000 7 years $10.00 106,000 $10.00
13.375.................. 3,000 7 years $13.38 3,000 $13.38
14.125.................. 9,000 8 years $14.13 9,000 $14.13
15.375 to 15.75......... 79,000 7 years $15.63 76,334 $15.64
16.625 to 17.375........ 147,000 9 years $16.94 53,000 $16.90
------- -------
448,200 351,534
======= =======
16. FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company discloses fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. Certain financial instruments and all nonfinancial
instruments are excluded from this disclosure. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
fair values of its financial instruments.
Cash and Due From Banks, Federal Funds Sold and Overnight Deposits
The carrying amounts reported in the balance sheet are a reasonable estimate
of fair value due to the short maturity of those investments.
Investment and Mortgage-backed Securities and Derivatives
Fair values are based on quoted market prices, where available. If quoted
market prices are not available, fair values are based on quoted market prices
of comparable instruments (see note 3).
66
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Loans Held-for-Sale
For loans held-for-sale, fair value is based on prevailing market conditions
and commitments from institutional investors to purchase such loans.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial real estate,
residential mortgage and consumer. Each loan category is further segmented
into fixed and adjustable rate interest terms and by classified and
nonclassified categories. The fair value of non-classified loans (other than
those subject to short term, periodic rate adjustment to current offered
rates, which are valued at the carrying amount) is estimated by discounting
scheduled cash flows at the interest rate at which similar loans would have
been made by the Company to borrowers with similar credit ratings and for
similar loan products. Scheduled maturities used were contractual maturities
for such loans except for residential loans where expected maturities took
into account estimated prepayment speeds supplied by secondary market sources.
Fair value for classified loans is based on estimated cash flows discounted
using a rate commensurate with the risk associated with the related loans.
Assumptions regarding credit risk, cash flows and discount rates are
judgmentally determined using available market information.
FHLB Stock
The carrying amount reported in the balance sheet approximates fair value.
If redeemed, the Company will receive an amount equal to the par value of the
stock.
Deposits
The fair value of non-certificate deposits (demand, NOW, money market and
regular savings accounts) is the amount payable on demand at the balance sheet
date. The estimated fair value of certificate accounts is based on the
discounted value of contractual future cash flows. The discount rate is based
on rates offered by the Company for deposits of similar remaining maturities.
Borrowed Funds
Fair values for FHLB advances and ESOP debt are estimated using a discounted
cash flow technique that applies interest rates currently being offered on
advances to a schedule of aggregated expected monthly maturities.
Escrow Deposits and Securities Sold Under Agreements to Repurchase
The carrying amounts of escrow deposits and securities sold under agreements
to repurchase at the balance sheet dates approximates fair value.
Commitments to Extend Credit and Letters of Credit
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of
the agreements and the present creditworthiness of the counterparties. The
fair value of letters of credit is based on fees currently charged for similar
agreements.
67
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The carrying and estimated fair values of the Company's financial
instruments at December 31, 1996 and 1995 are as follows:
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
Financial assets:
Cash and due from banks.............. $ 11,331 $ 11,331 $ 14,037 $ 14,037
Federal funds sold and overnight
deposits............................ 4,464 4,464 4,125 4,125
Investment securities................ 333,354 333,216 290,936 292,220
Loans held for sale.................. -- -- 1,071 1,071
Loans, net........................... 645,797 646,783 535,679 544,830
Federal Home Loan Bank stock......... 14,638 14,638 10,355 10,355
Financial liabilities:
Non-certificate deposits............. 282,135 282,135 265,381 265,381
Certificates of deposits............. 370,374 370,507 318,451 319,699
Borrowed funds....................... 268,565 268,888 187,514 188,200
Escrow deposits...................... 2,087 2,087 1,904 1,904
Securities sold under agreements to
repurchase.......................... 727 727 -- --
Off-balance sheet instruments (see note
11):
Commitments to extend credit......... 285 285 395 395
LIMITATIONS
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for some of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, cash flows, current economic conditions, risk
characteristics, and other factors. These estimates are subjective in nature
and involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions and market
conditions could significantly affect the estimates. Further, the income tax
ramifications related to the realization of the unrealized gains and losses
can have a significant effect on the fair value estimates and have not been
considered.
68
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. PARENT COMPANY FINANCIAL STATEMENTS
The Affiliated Community Bancorp, Inc. condensed balance sheets as of
December 31, 1996 and 1995 are as follows:
1996 1995
-------- -------
(IN THOUSANDS)
ASSETS
Cash and cash equivalents........................ $ 10,160 $12,969
Investment securities............................ 740 --
Other assets..................................... 35 481
Investment in bank subsidiaries:
The Federal Savings Bank....................... 49,006 46,925
Lexington Savings Bank......................... 41,609 38,986
-------- -------
Total Assets................................. $101,550 $99,361
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses................................. $ 148 $ 71
Stockholders' equity............................. 101,402 99,290
-------- -------
Total liabilities and stockholders' equity... $101,550 $99,361
======== =======
The condensed income statements for the years ended December 31, 1996, 1995
and 1994 are as follows:
1996 1995 1994
-------- ------- ------
(IN THOUSANDS)
Dividends from bank subsidiaries................. $ 2,817 $ 2,029 $1,839
Interest income.................................. 486 546 518
Other............................................ 10 -- 32
-------- ------- ------
Total income................................... 3,313 2,575 2,389
Expenses......................................... 679 1,502 151
-------- ------- ------
Income before equity in undistributed earnings
of bank subsidiaries and income taxes......... 2,634 1,073 2,238
-------- ------- ------
Equity in undistributed earnings of bank
subsidiaries:
The Federal Savings Bank....................... 2,217 3,225 3,060
Lexington Savings Bank......................... 3,617 1,390 1,866
-------- ------- ------
Income before provision for income taxes...... 8,468 5,688 7,164
Provision (benefit) for income taxes............. (55) (19) 138
-------- ------- ------
Net income................................... $ 8,523 $ 5,707 $7,026
======== ======= ======
69
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The condensed statements of cash flows for Affiliated Community Bancorp,
Inc. are presented below for the years ended December 31, 1996, 1995 and 1994:
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
Net Income...................................... $ 8,523 $ 5,707 $ 7,026
Adjustments to reconcile net income to net cash
provided by operations:
Undistributed earnings of bank subsidiaries... (5,834) (4,615) (4,926)
Decrease (increase) in other assets........... 446 (21) (223)
(Decrease) increase in accrued expenses....... 404 (14) (207)
------- ------- -------
Net cash provided by operating activities..... 3,539 1,057 1,670
Investment transactions:
Purchase of securities........................ (740) -- --
Financing transactions:
Proceeds from issuance of common stock........ 396 108 71
Dividends paid................................ (2,602) (2,203) (1,665)
Increase in treasury stock.................... (3,402) -- --
------- ------- -------
Net (decrease) increase in cash............... (2,809) (1,038) 76
Cash and cash equivalents at beginning of year.. 12,969 14,007 13,931
------- ------- -------
Cash and cash equivalents at end of year........ $10,160 $12,969 $14,007
======= ======= =======
Cash paid for taxes............................. $ 4,237 $ 1,360 $ 1,986
======= ======= =======
18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of consolidated operating results on a quarterly basis for the
years ended December 31, 1996 and 1995 is as follows:
1996
---------------------------------------------------------
FOURTH QUARTER THIRD QUARTER SECOND QUARTER FIRST QUARTER
-------------- ------------- -------------- -------------
(DOLLARS IN THOUSANDS)
Interest and dividend
income................. $18,938 $18,280 $17,463 $16,660
Interest expense........ 10,687 10,301 9,761 9,315
------- ------- ------- -------
Net interest
income............. 8,251 7,979 7,702 7,345
Provision for loan
losses................. 200 135 135 135
------- ------- ------- -------
Net interest income,
after provision...... 8,051 7,844 7,567 7,210
Other income............ 379 404 423 432
Operating expenses (1).. 4,176 6,367 4,171 4,252
------- ------- ------- -------
Income before income
taxes.................. 4,254 1,881 3,819 3,390
Provision for income
taxes.................. 1,555 579 1,420 1,267
------- ------- ------- -------
Net income (1).......... $ 2,699 $ 1,302 $ 2,399 $ 2,123
======= ======= ======= =======
Earnings per share (1).. $ .52 $ .24 $ .47 $ .41
======= ======= ======= =======
70
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
1995
---------------------------------------------------------
FOURTH QUARTER THIRD QUARTER SECOND QUARTER FIRST QUARTER
-------------- ------------- -------------- -------------
(DOLLARS IN THOUSANDS)
Interest and dividend
income................. $16,015 $15,443 $15,187 $14,351
Interest expense........ 8,914 8,483 8,266 7,561
------- ------- ------- -------
Net interest
income............. 7,101 6,960 6,921 6,790
Provision for loan
losses................. 25 100 100 100
------- ------- ------- -------
Net interest income,
after provision...... 7,076 6,860 6,821 6,690
Other income............ 420 454 436 383
Operating expenses (2).. 6,029 4,086 3,946 4,173
------- ------- ------- -------
Income before income
taxes.................. 1,467 3,228 3,311 2,900
Provision for income
taxes.................. 1,332 1,335 1,347 1,185
------- ------- ------- -------
Net income (2).......... $ 135 $ 1,893 $ 1,964 $ 1,715
======= ======= ======= =======
Earnings per share (2).. $ .03 $ .35 $ .37 $ .32
======= ======= ======= =======
- --------
(1) Third quarter of 1996 included pre-tax charge of $2,121,000 or $.23 per
share (after tax effect) for recapitalization of the Savings Association
Insurance Fund (SAIF) of the FDIC.
(2) Fourth quarter of 1995 included pretax merger costs of $1,989,000 or $.35
per share (after tax effect).
71
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
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, not applicable or
are included in Notes to Consolidated to Financial Statements.
(b) Reports on Form 8-K. None.
72
(c) Exhibits.
EXHIBIT NO. DESCRIPTION
----------- -----------
*2.1 Affiliation Agreement and Plan of Reorganization dated as of March
14, 1995, as amended, by and between Main Street Community
Bancorp, Inc. ("MSCB") and Lexington Savings Bank ("LEXB").
*2.2 LEXB Holding Plan dated as of April 13, 1995 by and between
Lexington Holding, Inc. and LEXB.
*2.3 LEXB Merger Plan dated as of June 20, 1995 by and between
Lexington Holding, Inc. and Affiliated.
*2.4 MSCB Merger Plan dated as of June 20, 1995 by and between MSCB and
Affiliated.
***2.5 Stock Subscription Agreement dated December 17, 1996 between
Affiliated and Middlesex Bank & Trust Company (in organization).
**3.1 Restated Articles of Organization of Affiliated.
**3.2 By-laws of Affiliated.
**4.1 Specimen of Affiliated Common Stock certificate.
**10.1 Severance Agreement between Affiliated and Timothy J. Hansberry.
**10.2 Special Termination Agreement between Affiliated and Timothy J.
Hansberry.
**10.3 Special Termination Agreement between Affiliated and John G.
Fallon.
**10.4 Special Termination Agreement between LEXB and William J. Gaddis,
Jr., dated September 28, 1993.
**10.5 Severance Agreement between TFSB and James E. McCobb, Jr.
**10.6 Special Termination Agreement between TFSB and James E. McCobb,
Jr.
**10.7 Special Termination Agreement between Affiliated and Quentin J.
Greeley.
**10.8 Special Termination Agreement between TFSB and Richard E. Green.
10.9 Affiliated Community Bancorp, Inc. 1995 Stock Option Plan, as
amended and restated as of January 16, 1997 (incorporated by
reference to Exhibit A to the Company's definitive Proxy Statement
for the 1997 Annual Meeting of Stockholders).
**21.1 Subsidiaries of the Registrant.
***23.1 Consents of Auditors.
***27.1 Final Data Schedule.
- --------
* Incorporated by reference to the Company's Form S-4 Registration Statement
filed on June 22, 1995 (No. 33-93784).
** Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
*** Filed herewith.
73
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.
Affiliated Community Bancorp, Inc.
/s/ Timothy J. Hansberry
Dated: March 20, 1997 By: _________________________________
TIMOTHY J. HANSBERRY
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
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.
/s/ Timothy J. Hansberry President, Chief March 20, 1997
- ------------------------------------- Executive Officer
TIMOTHY J. HANSBERRY and Director
/s/ John G. Fallon Executive Vice March 20, 1997
- ------------------------------------- President and Chief
JOHN G. FALLON Financial Officer
/s/ Fred C. Bailey Director March 20, 1997
- -------------------------------------
FRED C. BAILEY
/s/ Kendrick G. Bushnell Director March 20, 1997
- -------------------------------------
KENDRICK G. BUSHNELL
/s/ Jack E. Chappell Director March 20, 1997
- -------------------------------------
JACK E. CHAPPELL
/s/ Edward S. Heald Director March 20, 1997
- -------------------------------------
EDWARD S. HEALD
/s/ James E. McCobb, Jr. Director March 20, 1997
- -------------------------------------
JAMES E. MCCOBB, JR.
74