SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934. FOR the quarter ended March 31, 1997
or
[ ] TRANSITIONAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NUMBER 0-27014
AFFILIATED COMMUNITY BANCORP, INC.
----------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3277217
------------------ ------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
716 Main Street, Waltham, Massachusetts 02254-9035
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(Address of principal executive offices) (Zip Code)
(617) 894-6810
---------------------------------
(Registrant's telephone number, including area code)
Indicated 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
--------- --------
At April 30, 1997 there were 5,171,666 shares of common stock, par
value $.01 per share, outstanding.
- ---------------------------------------
1
AFFILIATED COMMUNITY BANCORP, INC.
INDEX
Page No.
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PART I - FINANCIAL INFORMATION
Item 1.
- -------
Consolidated Statements of Financial Condition at March 31, 1997 and December 31, 1996 ............. 3
Consolidated Statements of Income for the Three Months Ended March 31, 1997 and 1996 ............... 4
Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 1997 and 1996.. 5
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1997 and 1996 ........... 6
Notes to Consolidated Financial Statements ......................................................... 7
Item 2.
- -------
Management's Discussion and Analysis of Financial Condition, including Liquidity and Capital
Resources, and Results of Operations for the Three Months Ended March 31, 1997 and 1996 ............ 9
PART II - OTHER INFORMATION
Item 1.
- -------
Legal Proceedings .................................................................................. 15
Item 2.
- -------
Changes in Securities .............................................................................. 15
Item 3.
- -------
Defaults Upon Senior Securities .................................................................... 15
Item 4.
- -------
Submission of Matters to a Vote of Security Holders ................................................ 15
Item 5.
- -------
Other Information .................................................................................. 15
Item 6.
- -------
Exhibits and Reports on Form 8-K ................................................................... 15
SIGNATURES ......................................................................................... 16
EXHIBITS:
Computation of Primary and Fully Diluted Earnings Per Share
for the Three Months Ended March 31, 1997 and March 31, 1996 ....................................... 17
Financial Data Schedule ............................................................................ 18
2
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
March 31, December 31,
1997 1996
--------------- --------------
(Unaudited)
ASSETS
Cash and due from banks $ 11,777 $ 11,331
Federal funds sold and overnight deposits 5,300 4,464
Investment securities - held to maturity (market value $181,161 and $173,372
at March 31, 1997 and December 31, 1996, respectively) 183,009 173,510
Investment securities - available for sale (amortized cost $158,605 and $160,395
at March 31, 1997 and December 31, 1996, respectively) 157,132 159,844
Loans receivable - net of allowance for possible loan losses of $7,962 and $7,759
at March 31, 1997 and December 31, 1996, respectively 660,036 645,797
Federal Home Loan Bank stock - at cost 14,638 14,638
Other real estate owned, net 10 133
Accrued interest receivable 7,536 7,124
Office properties and equipment, net 8,486 8,428
Deferred tax asset, net 3,798 3,405
Other assets 3,275 3,539
----------- ----------
Total assets $ 1,054,997 $1,032,213
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 665,146 $ 652,509
Federal Home Loan Bank advances 272,771 267,171
ESOP debt 1,305 1,394
Mortgagors' escrow payments 2,336 2,087
Securities sold under agreements to repurchase 3,343 727
Other 7,047 6,923
----------- ----------
Total liabilities 951,948 930,811
----------- ----------
Stockholders' Equity (Note 4):
Preferred stock, $0.01 Par Value; 2,000,000 shares authorized, none issued -- --
Common stock, $0.01 Par Value; 18,000,000 shares authorized; shares
issued 6,703,957 in 1997 and 6,683,957 in 1996 67 66
Additional paid-in capital 49,360 49,146
Retained earnings - restricted 59,694 57,518
Treasury stock at cost, 247,500 shares (3,402) (3,402)
Unearned compensation - ESOP (1,287) (1,394)
Unrealized gain (loss) on investment securities, net of tax effects (1,383) (532)
----------- ----------
Total stockholders' equity 103,049 101,402
----------- ----------
Total liabilities and stockholders' equity $ 1,054,997 $1,032,213
=========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
3
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share data)
Three Months Ended
March 31,
---------------------
1997 1996
------ -------
(Unaudited)
Interest and dividend income:
Interest and fees on loans $13,581 $11,322
Interest and dividend income on investment securities 5,934 5,267
Interest on federal funds sold and overnight deposits 45 71
------- -------
Total interest and dividend income 19,560 16,660
------- -------
Interest expense:
Interest on deposits 6,795 6,195
Interest on borrowed funds 4,088 3,120
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Total interest expense 10,883 9,315
------- -------
Net interest income 8,677 7,345
Provision for possible loan losses 200 135
------- -------
Net interest income after provision for possible loan losses 8,477 7,210
------- -------
Noninterest income:
Mortgage loan servicing fees 67 83
Customer service fees and other 361 320
Loss on sales of securities, net (2) -
Gain on sales of loans, net 1 29
------- -------
Total noninterest income 427 432
------- -------
Noninterest expenses:
Compensation and employee benefits 2,508 2,317
Occupancy and equipment 537 517
Data processing 234 209
Professional services 166 193
Federal Deposit Insurance premiums 65 193
Other real estate owned (income) expenses, net (22) 94
Marketing and promotion 156 127
Other 563 602
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Total noninterest expenses 4,207 4,252
------- -------
Income before provision for income taxes 4,697 3,390
Provision for income taxes 1,760 1,267
------- -------
Net Income $ 2,937 $ 2,123
======= =======
Earnings per share (Note 4):
Primary $ 0.45 $ 0.33
======= =======
Fully diluted $ 0.45 $ 0.33
======= =======
Weighted average shares outstanding:
Primary 6,571 6,499
======= =======
Fully diluted 6,571 6,505
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTE 4)
For the Three Months Ended March 31, 1997 and 1996
(In thousands, except per share data)
(Unaudited)
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, 1995 $66 $48,250 $ - $ 51,563 ($679) $ 90 $99,290
Net income - - - 2,123 - - 2,123
ESOP transactions - 27 - - 36 - 63
Issuance of common stock under
stock option plan - 106 - - - - 106
Purchase of treasury stock - - (4,081) - - - (4,081)
Cash dividends declared ($0.10
per share) - - - (618) - - (618)
Changes in net unrealized gain
(loss) on securitites available
for sale, net of tax effect - - - - - (689) (689)
------- ------- ------- ------- ------- ------ -------
Balance at March 31, 1996 $66 $48,383 ($4,081) $53,068 ($643) ($599) $96,194
======= ======= ======= ======= ======= ====== =======
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, 1996 $66 $49,146 ($3,402) $57,518 ($1,394) ($532) $101,402
Net income - - - 2,937 - - 2,937
ESOP transactions - 58 - 13 107 - 178
Purchase of treasury stock - - - - - - -
Issuance of common stock under
stock option plan 1 156 - - - - 157
Cash dividends declared ($0.12
per share) - - - (774) - - (774)
Changes in net unrealized gain
(loss) on securitites available
for sale, net of tax effect - - - - - (851) (851)
------- ------- ------- ------- ------- ------- -------
Balance at March 31, 1997 $67 $49,360 ($3,402) $59,694 ($1,287) ($1,383) $103,049
======= ======= ======== ======= ======== ======= ========
The accompanying notes are integral part of these consolidated financial
statements.
5
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Three Months Ended
March 31,
-------------------------
1997 1996
-------- --------
(Unaudited)
Cash flows from operating activities:
Net Income $ 2,937 $ 2,123
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for possible loan losses 200 135
Provision for losses on other real estate owned -- 60
Depreciation and amortization 203 182
Gain on sales of loans (1) (29)
Loss on sales of securities 2 --
Net gain on sales of other real estate owned (44) (11)
Net amortization of premiums and discounts on investment securities 90 181
(Benefit) provision for (prepaid) deferred income taxes (200) (216)
ESOP transactions 178 63
Increase in Federal Home Loan Bank stock -- (1,784)
Decrease in loans held for sale -- 704
Increase in accrued interest receivable (412) (534)
Other, net 869 (774)
-------- --------
Net cash provided by operating activities 3,822 100
-------- --------
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale 2,501 --
Proceeds from maturities of investment securities available for sale 4,700 11,500
Proceeds from maturities of investment securities held to maturity 5,419 56
Purchase of investment securities available for sale (8,409) (56,355)
Purchase of investment securities held to maturity (20,239) (6,000)
Principal payments received on investment securities available for sale 2,306 2,190
Principal payments received on investment securities held to maturity 5,318 6,618
Loan originations, net of repayments (14,610) (18,038)
Proceeds from sale of office properties and equipment -- --
Purchases of office properties and equipment (261) (163)
Capitalized costs associated with other real estate owned, net of payments received -- 1
Proceeds from sales of other real estate owned 339 243
-------- --------
Net cash used by investing activities (22,936) (59,948)
-------- --------
Cash flows from financing activities:
Net increase in deposits 12,637 14,911
Additions to Federal Home Loan Bank advances 5,600 48,080
Increase in mortgagors' escrow payments 249 93
Increase in repurchase agreements 2,616 --
Purchase of treasury stock -- (4,081)
Proceeds from issuance of common stock 157 106
ESOP transactions (89) (36)
Cash dividends paid on common stock (774) (618)
-------- --------
Net cash provided by financing activities 20,396 58,455
-------- --------
Net increase (decrease) in cash and cash equivalents 1,282 (1,393)
Cash and cash equivalents at beginning of period 15,795 18,162
-------- --------
Cash and cash equivalents at end of period $ 17,077 $ 16,769
======== ========
Supplemental disclosures of cash flow information:
Interest paid on deposits $ 6,627 $ 6,353
Interest paid on borrowed funds 4,087 3,213
Income taxes paid, net of refunds 364 1,406
Supplemental disclosures of non-cash transactions:
Transfers to foreclosed real estate 172 312
The accompanying notes are an integral part of the consolidated financial
statements
6
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
1) Basis of Presentation
The accompanying consolidated financial statements include the accounts
of Affiliated Community Bancorp, Inc. (the "Company" or "Affiliated") and
its two wholly-owned subsidiaries, Lexington Savings Bank ("Lexington"), a
Massachusetts chartered savings bank, and The Federal Savings Bank
("Federal"), a federally chartered savings bank, which are located in
Lexington, Massachusetts and Waltham, Massachusetts, respectively.
Affiliated Community Bancorp, Inc. was incorporated on April 13, 1995
for the purpose of effecting the affiliation (the "Affiliation") of
Lexington and Main Street Community Bancorp, Inc. ("Main Street") including
Main Street's wholly-owned subsidiary, 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. The
operations of Affiliated consist of those of its two bank subsidiaries,
Lexington and Federal. The information presented herein for 1997 and 1996
represents the financial condition and the results of the Company and its
wholly-owned bank subsidiaries on a consolidated basis.
Lexington is insured by the Bank Insurance Fund ("BIF") and Federal is
insured by the Savings Association Insurance Fund ("SAIF") of the Federal
Deposit Insurance Corporation ("FDIC").
Certain reclassifications have been made to the 1996 consolidated
financial statements to conform with the March 31, 1997 presentation. Such
reclassifications had no effect on previously reported consolidated net
income.
In the opinion of management, the unaudited consolidated financial
statements presented herein reflect all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation. Interim
results are not necessarily indicative of results to be expected for the
entire year.
2) Earnings and Dividends Declared Per Share
Primary earnings per share computations include common stock (excluding
treasury shares and 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.
3) Allowance for Possible Loan Losses
The following is a summary of the allowance for possible loan losses
for the three month periods ended March 31, 1997 and 1996:
Three Months Ended
---------------------------
March 31,
---------------------------
1997 1996
-------- --------
(In thousands)
Balance at beginning of period $7,759 $7,127
Provision for possible loan losses 200 135
Recoveries 43 54
------ ------
8,002 7,316
Loans charged-off 40 113
------ ------
Balance at end of period $7,962 $7,203
====== ======
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 determination or if
other circumstances change.
7
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 new accounting standards, loans are considered impaired
when it is probable that the Company will not be able to collect all
amounts due 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. All impaired
loans are classified as nonaccrual.
For the three months ended March 31, 1997 and 1996, the average
recorded investment in impaired loans was $3,567,000 and $2,838,000
respectively, and the income recognized on related impaired loans was
$56,000 and $14,000, respectively. At March 31, 1997 and December 31, 1996,
the Company classified $3,570,000 and $3,798,000, respectively, of its
loans as impaired. Of the $3,570,000 in impaired loans at March 31, 1997,
$3,465,000 has been measured under the fair value of collateral method and
$105,000 has been measured under the present value of the expected cash
flows method. At March 31, 1997 impaired loans totaling $3,224,000, had a
related valuation reserve of $676,000. Of the $3,798,000 in impaired loans
at December 31, 1996, $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. At December 31, 1996, impaired loans
totaling $3,555,000 had a related valuation reserve of $667,000.
4) Subsequent Event
On April 23, 1997 the Board of Directors of the Company approved a 25%
stock split, to be effected in the form of a stock dividend, payable on May
30, 1997. All common stock share and per share information, except for
shares authorized has been retroactively restated to reflect this stock
split for all periods presented.
5) Impact of New Accounting Standards
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
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 adoption of this
statement did 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. The more significant changes are the replacement of primary earnings
per share (EPS) with basic EPS. Basic EPS is computed by dividing reported
earnings available to common stockholders by weighted average shares
outstanding. No dilution for any potentially dilutive securities is
included. Fully diluted EPS, now called diluted EPS, is still required. 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.
If SFAS No. 128 were in effect, basic EPS for the first quarter of 1997
would have been $0.46 versus $0.34 for the first quarter of 1996, which
reflects the effect of the 25% stock split.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1997
General
- -------
The Company is a holding company that conducts substantially all its
activities through its bank subsidiaries. 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 securities and loans in the
portfolio, and loan and mortgage-backed security prepayments.
The Company's net income is also affected by noninterest 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 and
equipment expenses, federal deposit insurance premiums, real estate owned
operations and other general administrative expenses. The earnings of the
Company are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government policies
and actions of regulatory authorities.
This Form 10-Q 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. The Company's actual results could differ
materially from those set forth 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.
Changes in Financial Condition from December 31, 1996
- -----------------------------------------------------
Total assets at March 31, 1997 amounted to $1.055 billion as compared to
$1.032 billion at December 31, 1996, reflecting an increase of $22.8 million or
2.2%. The increase in the Company's assets is primarily attributed to growth in
loans and additional purchases of investment securities designated as held to
maturity.
Investments: Investment securities designated as held to maturity amounted
-----------
to $183.0 million at March 31, 1997 versus $173.5 million at December 31, 1996.
The increase of $9.5 million for the current year represents additional
purchases of fifteen year mortgage-backed certificates with an average life of 5
years. During the current three month period of 1997, sales of investment
securities available for sale amounted to $2.5 million and resulted in a net
loss of $2,000 for the first quarter of 1997. There were no sales during the
comparable 1996 period.
The carrying value of investment securities at March 31, 1997 is presented
in the following table:
Available Held to
for Sale Maturity
--------- --------
(In thousands)
Government securities $84,949 $46,269
Corporate bonds 1,025 3,001
Mortgage-backed and asset-backed securities 42,549 120,602
Mortgage-backed derivatives 6,693 13,137
Marketable equity securities 21,916 -
-------- --------
$157,132 $183,009
======== ========
The mortgage-backed derivatives portfolio 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 balance at March 31, 1997 had an average life of 2.2 years
with 33% in monthly adjusting securities and the remaining 67% in fixed rate
securities.
Loans: Gross loans outstanding at March 31, 1997 amounted to $668.0 million
-----
versus $653.6 million at December 31, 1996. The increase of $14.4 million or
2.2% was primarily attributed to growth in residential real estate loans and
commercial real estate loans. The gross balances of loans outstanding at March
31, 1997 and December 31, 1996 are shown in the following table:
9
March 31, December 31,
1997 1996
--------- ------------
(In thousands)
Real estate:
1-4 family $ 439,068 $428,308
Commercial and construction 174,308 171,990
Commercial 35,503 35,338
Equity lines of credit and other 20,904 19,749
Less: net deferred loan fees (1,785) (1,829)
--------- --------
$ 667,998 $653,556
========= ========
At March 31, 1997 loans delinquent 60 days or more amounted to $4.8 million
and represented 0.7% of total loans outstanding. The comparable amounts at
December 31, 1996 were $4.2 million or 0.6%.
The following table sets forth information regarding non-accrual loans,
troubled debt restructurings, other real estate owned and other assets:
March 31, December 31,
1997 1996
--------- ------------
(Dollars in thousands)
Non-accrual loans $4,675 $4,886
Troubled debt restructurings, accruing 185 --
------ ------
Total non-performing loans 4,860 4,886
Other real estate owned, net 10 133
------ ------
Total non-performing assets $4,870 $5,019
====== ======
Loans past due 90 days or more and
still accruing $ -- $ 136
====== ======
Non-performing loans as a percent of
total loans .73% .75%
Non-performing assets as a percent of
total assets .46% .49%
Allowance for possible loan losses as
a percent of non-performing loans 163.83% 158.80%
Allowance for possible loan losses as
a percent of total loans 1.19% 1.19%
====== ======
Liabilities: The Company's deposit products include 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.
The following table summarizes the Company's deposit liabilities at March
31, 1997 and December 31, 1996:
March 31, December 31,
1997 1996
--------- ------------
(In thousands)
Demand $ 40,081 $ 41,557
NOW 50,296 51,347
Regular savings 123,351 122,739
Money market 67,858 66,492
-------- --------
Total non-certificate accounts 281,586 282,135
-------- --------
Certificates less than $100,000 301,848 297,990
Certificates of $100,000 and over 81,712 72,384
-------- --------
Total certificate accounts 383,560 370,374
-------- --------
Total deposits $665,146 $652,509
======== ========
10
At March 31, 1997 and December 31, 1996, brokered certificates of deposits
amounted to $26.3 million and $29.1 million, respectively. Brokered certificates
of deposits include $14.9 million in Depository Trust Company ("DTC")
certificates at March 31, 1997 and December 31, 1996.
Borrowings from the Federal Home Loan Bank ("FHLB") amounted to $272.8
million at March 31, 1997 versus $267.2 million at December 31, 1996 as a result
of continued leveraging of the Company's strong capital position. The additional
borrowings funded loans and mortgage-backed certificates that were added to the
balance sheet.
During the first quarter of 1996, the Company instituted and completed a
stock repurchase program under which 238,000 shares or 4.5% of its common stock
was purchased in open market transactions. At March 31, 1997 total shares
outstanding, excluding 198,000 shares of treasury stock, were 5,165,166 compared
to 5,149,166 at December 31, 1996, prior to the effect of the stock split.
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 April 17, 1997 the Company declared a regular quarterly dividend of
$0.15 per share (prior to the effect of the stock split) payable on May 16, 1997
to stockholders of record on April 30, 1997. This first quarter dividend
represented a 25% increase over the $0.12 per share (prior to the effect of the
stock split) 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 $22.1 million
for the three month period ended March 31, 1997 was funded by a net gain in
deposits of $12.6 million, primarily from term certificates, and additional
advances from the FHLB amounting to $5.6 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 $614.8 million from the FHLB. At March 31, 1997 outstanding
borrowings were $272.8 million under these facilities. Any borrowings must be
collateralized by a combination of investment securities and certain first
mortgage loans. The subsidiaries have the ability to enter into repurchase
agreements, with an aggregate credit line of $150 million, with various brokers.
At March 31, 1997, the Company had outstanding commitments of $57.4 million
to originate loans and advance funds. 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.
On April 23, 1997 the Company announced a 25% stock split of its common
stock to be effected in the form of a stock dividend. This split will be payable
on May 30, 1997 in the form of one additional share for each four shares of
common stock outstanding held by stockholders of record as of the close of
business on May 15, 1997.
On December 18, 1996 Affiliated announced that it had entered into a
definitive agreement to provide the initial capitalization for Middlesex Bank
and Trust Company (in organization), a de novo bank that will be located in
Newton, MA. This transaction is subject to final regulatory approvals. Middlesex
is expected to open for business in the second quarter of 1997. There can be no
assurance that regulatory or business factors will not delay such opening, or
that, if opened, Middlesex's operations will be successful.
The Company's bank subsidiaries are subject to certain capital standards
prescribed by regulations. The following tables show the subsidiaries'
regulatory capital ratios as they compare to the minimum guidelines at March 31,
1997:
Affiliated
The Federal Lexington Community Minimum
Savings Bank Savings Bank Bancorp, Inc. Requirements
------------ ------------ ------------- ------------
Risk-based ratios:
Tier 1 capital ....................... 18.89% 14.12% 18.29% 4.00%
Total capital......................... 20.15 15.06 19.54 8.00
Tangible capital........................... 9.24 N/A N/A 1.50
Core capital............................... 9.24 N/A N/A 3.00
Tier 1 leverage capital.................... 9.36 8.35 9.92 3.00
11
Comparison of Results of Operations for the Three Months Ended March 31, 1997
- -----------------------------------------------------------------------------
and 1996
- --------
General Operating Results. Net income for the three months ended March 31,
1997 was $2.9 million or $.45 per share, compared to net income of $2.1 million
or $.33 per share in the corresponding quarter of 1996, an increase of $814,000
or 38.3%. The earnings increase was attributed to a higher level of net interest
income achieved with no increase in overall operating expenses.
The following table sets forth average balances and net interest income
components relating to the Company for the three months ended March 31, 1997 and
1996. It includes (i) the average balance sheet for the period, based on daily
average balances; (ii) the total amount of interest earned or paid 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 on earning assets. 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."
Three Months Ended March 31,
-----------------------------------------------------------------------------------
1997 1996
------------------------------------------------------------------------------------
(Dollars in thousands)
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
Assets
Interest-earning assets:
Loans $ 659,003 $ 13,581 8.24% $550,533 $ 11,322 8.23%
----------- --------- ---- -------- -------- -----
Investments:
Investment and mortgage-backed
securities held-to-maturity 182,416 3,040 6.67% 175,957 2,861 6.50%
Investment and mortgage-backed
securities available for sale 160,956 2,663 6.62% 136,383 2,234 6.55%
Federal Home Loan Bank stock 14,638 231 6.31% 10,980 172 6.27%
Federal funds sold and overnight
deposits 4,488 45 4.01% 6,145 71 4.62%
----------- --------- ---- -------- -------- -----
Total investments 362,498 5,979 6.60% 329,465 5,338 6.48%
----------- --------- ---- -------- -------- -----
Total interest-earning assets 1,021,501 19,560 7.66% 879,998 16,660 7.57%
----------- --------- ---- -------- -------- -----
Noninterest earning assets 33,175 32,403
Allowance for possible loan losses (7,823) (7,178)
----------- --------
Total assets $ 1,046,853 $905,223
=========== ========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Regular savings, NOW and money
market accounts $ 236,363 $ 1,496 2.53% $232,223 $ 1,487 2.56%
Certificate accounts 377,513 5,299 5.61% 320,934 4,708 5.87%
Borrowings 284,239 4,088 5.75% 213,163 3,120 5.85%
----------- --------- ---- -------- -------- -----
Total interest-bearing liabilities 898,115 10,883 4.85% 766,320 9,315 4.86%
----------- --------- ---- -------- -------- -----
Noninterest-bearing liabilities:
Demand deposits 39,469 31,679
Other 7,119 9,648
----------- --------
Total liabilities 944,703 807,647
----------- --------
Stockholders' equity 102,150 97,576
----------- --------
Total liabilities and
stockholders' equity $ 1,046,853 $ 905,223
=========== =========
Net interest income $ 8,677 $ 7,345
======== ========
Interest rate spread 2.81% 2.71%
===== =====
Net yield on earning assets 3.40% 3.34%
===== =====
Interest Income. Total interest and dividend income increased from $16.7
million in the first quarter of 1996 to $19.6 million in the same period of
1997, an increase of 17.4%. The additional income is due mostly to the higher
volume of loans and investments. The yield on average earning assets increased
from 7.57% in the first quarter of 1996 to 7.66% in the same period of 1997 due
to a higher yield on the Company's investment portfolio and an increase in loans
as a percentage of earning assets. Average loans outstanding in the current
quarter amounted to $659.0 million and produced an average yield of 8.24%, as
compared to a 1996 average volume of $550.5 million with an average yield of
8.23%. The average balance of all investment categories amounted to $362.5
million in the first quarter of 1997 with an average yield of 6.60% compared to
$329.5 million and 6.48%, respectively, in the comparable quarter of 1996.
Interest Expense. Interest expense in the first quarter of 1997 amounted to
$10.9 million, up $1.6 million or 16.8% from $9.3 million in the same quarter
of 1996. The main contributing factors to this increase were higher volumes in
certificates of deposits and borrowed funds. The average rate paid on total
interest bearing deposits decreased fractionally from 4.86% in the first quarter
of 1996 to 4.85% in the comparable period of 1997. Average interest bearing
deposit volume increased from $553.2 million in the 1996 period to $613.9
million in the first quarter of 1997, up $60.7 million or 11.0%. Average
certificates increased $56.6 million or 17.6% in 1997 from the comparable 1996
quarter. The Company had average borrowings of $284.2 million for the three
months ended to March 31, 1997, with a related interest expense of $4.1 million,
compared to $213.2 million and $3.1 million, respectively, for the first quarter
of 1996. The average rate paid on borrowings decreased from 5.85% to 5.75%.
The following table 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 period. 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) change 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.
Three Months Ended March 31,
----------------------------
1997 Compared with 1996
-----------------------
Increase (Decrease)
Due to Change in:
-----------------
Average Average
Volume Rate Total
------ ------- -----
(In thousands)
Interest Income:
Loans $2,235 $ 24 $2,259
Investments:
Investment and mortgage-backed
securities held-to-maturity 107 72 179
Investment and mortgage-backed
securities available-for-sale 406 23 429
Federal Home Loan Bank stock 58 1 59
Federal funds sold (17) (9) (26)
------ ----- ------
Total interest income 2,789 111 2,900
------ ----- ------
Interest Expense:
Regular savings, NOW and money
market accounts 26 (17) 9
Certificate accounts 783 (192) 591
------ ----- ------
Total deposits 809 (209) 600
Borrowed funds 1,021 (53) 968
------ ----- ------
Total interest expense 1,830 (262) 1,568
------ ----- ------
Change in net interest income $ 959 $ 373 $1,332
====== ===== ======
The increase in 1997 first quarter net interest income was primarily
attributed to volume increases in loans and in investment and mortgage-backed
securities designated as available for sale. Volume increases in certificates of
deposits and borrowed funds partially offset the favorable benefit of volume
increase in earning assets. Additionally, the Company benefited from favorable
rate variances on certificates and borrowed funds during the first quarter of
1997.
Provision for Possible Loan Losses. The provision for possible loan losses
for the first quarter of 1997 amounted to $200,000 versus $135,000 for the first
quarter of 1996. At March 31, 1997, the Company's allowance for possible loan
losses amounted to $8.0 million which represented 164% of non-performing loans
at that date. 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. Although
no assurance can be given, management believes that the March 31, 1997 level of
the allowance was adequate to provide for known and reasonably anticipated loan
losses inherent in the portfolio at that date.
13
Noninterest Income. For the first quarter of 1997, total noninterest income
amounted to $427,000, a slight decrease of $5,000 or 1.2% from $432,000 in the
first quarter of 1996. Customer service and other fees increased by $41,000 or
12.8% in the first quarter from the same period in 1996, as a result of
increased penalty charges and higher volumes in demand and money market
accounts. Loan servicing fees amounted to $67,000 this quarter, compared to
$83,000 in the first quarter of 1996 reflecting amortization of servicing rights
on loans originated and sold and a reduction in the volume of loans serviced for
investors. The Company had gains on loan sales of $29,000 in the first quarter
of 1996, as compared to a modest gain of $1,000 in the same quarter of 1997.
Noninterest Expenses. Total noninterest expenses decreased by $45,000 or
1.1% in the first quarter of 1997 to $4.2 million, compared to $4.3 million in
the corresponding quarter of 1996. The significant components of the change in
expenses include a $191,000 or 8.2% increase in compensation and benefits, a
$128,000 decrease in federal deposit insurance premiums, a decrease in OREO
expense of $116,000, and a $39,000 or 6.5% decrease in other expense.
The increase in compensation and benefits costs was caused by staff
additions, normal salary increases, payroll taxes, and increased costs
associated with the Company's 401(k), ESOP and profit sharing plans. The
decrease in federal deposit insurance premiums for the first quarter reflects
the recently reduced rate structure of the FDIC. OREO expenses, which are
volatile and unrelated to the Company's core business, decreased as a result of
gains on property sales and lower carrying costs. Other expense declined as a
result of a one-time recovery of $75,000 representing prior period costs
associated with charged-off loans.
Provision for Income Taxes. The provision for income taxes was $1.8 million
for the first quarter of 1997, compared to $1.3 million for the corresponding
quarter in 1996. The combined effective tax rate for the three months ended
March 31, 1997 was 37.5% versus 37.4% for the same period in 1996. At March 31,
1997, the net deferred income tax asset amounted to $3.8 million. The primary
sources of recovery of the deferred income tax asset are taxes paid, which are
available for carry back, from 1996, 1995, and 1994, and the expectation that
the deductible temporary differences will reverse during periods when the
Company generates taxable income.
14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
The Company and its subsidiaries are not involved in any pending
legal proceedings other than those arising in the ordinary course of
the Company's business. Management believes that the resolution of
these matters will not materially affect the Company's business or
the consolidated financial condition of the Company.
Item 2. Changes in Securities.
----------------------
Not applicable.
Item 3. Defaults Upon Senior Securities.
--------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
The Company's Annual Meeting of Stockholders was held on April 23,
1997. On the record date for the meeting, there were 5,165,166 shares
of Common Stock outstanding, of which approximately 4,445,331 shares
were represented at the meeting by proxy or in person. At the
meeting, the following matters were voted upon and approved:
a. Election of Directors of the Company
Votes For Votes Withheld
--------- --------------
Jack E. Chappell 4,402,989 42,342
Fred C. Bailey 4,402,989 42,342
b. Approval of the amendment and restatement of the Company's
1995 Stock Option Plan
Broker
Votes For Votes Against Abstentions Non-Votes
--------- ------------- ----------- ---------
3,868,461 424,020 48,033 104,817
The above number of shares are prior to the effect of the
stock split referred to in Item 5.
Item 5. Other Information.
------------------
At a meeting of the Board of Directors held on April 17, 1997, the
payment of a cash dividend was declared, providing for payment of
$0.15 per share (prior to the effect of the stock split) on May 16,
1997 to holders of record on April 30, 1997.
On April 23, 1997 the Company announced a 25% stock split on the
common stock of the Company to be effected in the form of a stock
dividend. This split will be payable on May 30, 1997 in the form of
one additional share for each four shares of common stock outstanding
held by stockholders of record as of the close of business on May 15,
1997.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
a. Exhibits: 11.0 -- Computation of per share earnings.
27.0 -- Financial Data Schedule.
b. Reports on Form 8-K: None.
15
Signatures
----------
Pursuant to the requirements 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.
----------------------------------------
(Registrant)
Date: May 13, 1997 By /s/ Timothy J. Hansberry
----------------------------------------
Timothy J. Hansberry
President and Chief Executive Officer
By /s/ John G. Fallon
----------------------------------------
John G. Fallon
Executive Vice President and
Chief Financial Officer
16