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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[XANNUAL]REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[_TRANSITION]REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
716 MAIN STREET, 02254-9035
WALTHAM, MASSACHUSETTS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (781) 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 6,
1998, was approximately $235,632,612.
As of March 6, 1998 there were issued and outstanding 6,518,134 shares of
the registrant's Common Stock.
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DOCUMENTS INCORPORATED BY REFERENCE
NOT APPLICABLE.
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PART I
ITEM 1. BUSINESS
GENERAL
The business of Affiliated Community Bancorp, Inc. ("Affiliated" or the
"Company") is primarily conducted through its three wholly-owned subsidiaries,
Lexington Savings Bank ("Lexington"), a Massachusetts chartered stock savings
bank, The Federal Savings Bank ("Federal"), a federally chartered stock
savings bank, and Middlesex Bank & Trust Company ("Middlesex") a Massachusetts
chartered trust company, which are headquartered in Lexington, Massachusetts,
Waltham, Massachusetts, and Newton, Massachusetts, respectively. The
operations of Affiliated consist of those of its three bank subsidiaries,
Lexington, Federal and Middlesex.
Affiliated was incorporated as a Massachusetts business corporation on April
13, 1995 for the purpose of effecting the affiliation (the "Affiliation") of
Lexington with Main Street Community Bancorp, Inc. ("Main Street") and 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. 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.
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 three
wholly owned operating subsidiaries. Main Street Building Corporation ("MSBC")
holds, operates, manages and disposes of real estate acquired through
foreclosure. (MSBC was dissolved on January 8, 1998). 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, two operating subsidiaries, for the sole
purpose of buying, holding, and selling securities. TFSB Securities Corp III
was formed in July, 1997 for a similar purpose. These three corporations are
subject to a lower Massachusetts tax rate (1.32%) versus a bank tax rate of
11.32% for 1997. No "operational" or "banking" activities take 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
2
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. On October 27, 1997 Lexington opened a branch office at 171
Massachusetts Avenue in East Lexington. At December 31, 1997, Lexington had
eight 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 April 23, 1997 Affiliated declared a 25% stock split of its common stock
to be effected in the form of a stock dividend. This split was effective 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. Excluding information previously discussed in this
item, all share and per share numbers (except as noted otherwise) in this
report have been restated to reflect this split.
On December 17, 1996, Affiliated signed a definitive agreement to provide
the initial capitalization for Middlesex Bank & Trust Company located in the
City of Newton, Massachusetts. On May 20, 1997, Affiliated completed this
transaction by providing the initial capitalization for Middlesex. Middlesex
opened for business on June 2, 1997, at 232 Boylston Street, Newton. Middlesex
is the only commercial bank currently headquartered in Newton. Middlesex is a
member of the FHLB system and its deposits are insured by the FDIC under BIF.
On December 15, 1997, Affiliated and UST Corp. (NASDAQ: USTB) jointly
announced that they had signed an Affiliation Agreement and Plan of
Reorganization dated December 15, 1997 under which UST Corp. would acquire
Affiliated. This transaction is structured to qualify as a pooling of
interests for accounting purposes and as a tax-free exchange of 1.41 shares of
USTB common stock for each share of Affiliated common stock and is expected to
close in the second quarter of 1998. As part of this transaction, the stock
re-purchase program announced by Affiliated on October 16, 1997 was rescinded.
The acquisition by UST Corp. is subject to shareholder and regulatory
approval.
Affiliated's principal business, conducted through Federal, Lexington and
Middlesex, 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.
3
During the third quarter of 1997, the Company conducted a review of its
operations and systems to identify the impact of the so-called Year 2000 issue
on it. An assessment and a plan were developed to resolve the issue. The Year
2000 issue, which is common to most corporations and especially most banks,
concerns the inability of information systems, primarily computer hardware and
computer software programs, to properly recognize and process date-sensitive
information as the Year 2000 approaches. Since the Company's information
systems functions are either outsourced to service bureaus or processed in-
house using programs developed by third party vendors, the direct effort to
correct Year 2000 issues will largely be undertaken by third parties and will
therefore not be within the Company's direct control. The Company currently is
not aware of a situation where either a vendor will not be able to modify
their product or the Company will not be able to replace any affected system
in time to avoid material adverse effects on operations.
The Company's plan to resolve the Year 2000 issue was developed along the
five phase (awareness; assessment; renovation; validation and implementation)
project management process outlined in the Federal Financial Institutions
Examination Council (FFIEC) Year 2000 statement of May 5, 1997. The awareness
phase has been completed, a Year 2000 assessment was completed and monitoring
is ongoing. Renovation of third party systems that were identified as non-
compliant is being undertaken by those third parties and is scheduled to be
completed by December 31, 1998. Testing and implementation will occur during
1998 and into 1999.
The chief components of the Company's expense related to the Year 2000 issue
are currently believed to be the replacement of personal computer equipment
and the purchase or upgrade of third party software. External maintenance and
internal modification costs will be expensed as incurred; costs of new
hardware and software will be capitalized and amortized in accordance with the
Company's policies. While cost estimates have been prepared, final costs have
not been determined. The Company anticipates that, while such costs may impact
the Company's results of operations in one or more fiscal quarters, they will
not have a material adverse impact on the long term results of operations or
consolidated financial position of the Company.
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, the
so-called Year 2000 issue, changes in interest rates, and increased
competition and bank consolidations in the Company's market area.
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, Newton 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
4
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 and purchases during 1997 amounted to $187.8
million as compared to $194.9 million in 1996 and $139.5 million in 1995. 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 $25.8
million in 1997 as compared to $7.8 million for 1996 and $14.7 million for
1995. The increase in loan sales for 1997 reflects the increased demand for
the Company's fixed rate mortgage products versus adjustable rate financing.
Interest rate trends during 1997 benefited all areas of loan originations.
Favorable 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 over the
past three years has been to expand the commercial lending activity in a
controlled and focused manner. For 1997 the Company had commercial real estate
originations (including construction loans) of $45.1 million as compared to
$73.1 million in 1996 and $41.1 million in 1995. Small business and other loan
originations amounted to $19.2 million, $21.7 million and $13.7 million for
the years ended December 31, 1997, 1996, 1995, 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,
----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------ ------------------ ------------------ ------------------ ------------------
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............. $469,453 65.85% $428,308 65.35% $367,687 67.50% $324,168 68.00% $286,684 70.64%
Multifamily............ 29,047 4.07% 31,092 4.74% 27,833 5.11% 28,092 5.89% 27,601 6.80%
Commercial............. 108,183 15.17% 94,419 14.41% 72,896 13.39% 53,417 11.20% 44,840 11.05%
Construction and land
development, net...... 43,037 6.04% 46,344 7.07% 28,405 5.22% 28,797 6.04% 9,568 2.36%
Premium on loans
acquired.............. 131 0.02% 135 0.02% 180 0.03% 225 0.05% 270 0.07%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total mortgage loans... 649,851 91.15% 600,298 91.59% 497,001 91.25% 434,699 91.18% 368,963 90.92%
OTHER LOANS:
Consumer............... 3,074 0.43% 3,545 0.54% 3,664 0.67% 3,612 0.76% 4,206 1.04%
Equity lines of
credit................ 18,636 2.61% 16,204 2.48% 15,387 2.82% 16,218 3.40% 16,721 4.12%
Commercial............. 41,414 5.81% 35,338 5.39% 28,636 5.26% 22,195 4.66% 15,923 3.92%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total other loans...... 63,124 8.85% 55,087 8.41% 47,687 8.75% 42,025 8.82% 36,850 9.08%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total loans............ 712,975 100.00% 655,385 100.00% 544,688 100.00% 476,724 100.00% 405,813 100.00%
-------- ======= -------- ======= -------- ======= -------- ======= -------- =======
Less: Deferred loan
fees and unearned
income................ (1,273) (1,829) (1,882) (2,150) (2,726)
Less: Allowance for
loan losses........... (8,641) (7,759) (7,127) (6,996) (6,603)
-------- -------- -------- -------- --------
Loans, net............. $703,061 $645,797 $535,679 $467,578 $396,484
======== ======== ======== ======== ========
5
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,
-----------------------------
1997 1996 1995
--------- -------- --------
(IN THOUSANDS)
Real estate loans (gross):
At beginning of year........................... $ 600,298 $497,001 $434,699
Real estate loans originated:
One to four-family............................ 135,580 118,512 96,434
Multi-family.................................. 1,469 3,217 2,020
Commercial.................................... 15,099 36,311 21,839
Construction and land development, net........ 30,012 36,833 19,216
--------- -------- --------
Total real estate loans originated.......... 182,160 194,873 139,509
Real estate loans purchased:
One to four-family............................ 5,659 -- --
Multi-family.................................. -- -- --
Commercial.................................... -- -- --
--------- -------- --------
Total real estate loans purchased........... 5,659 -- --
--------- -------- --------
Total real estate loans originated and
purchased.................................. 187,819 194,873 139,509
Reductions due to principal repayments,
foreclosures and charge-offs.................. (112,433) (83,745) (62,538)
Sale of loans into secondary market............ (25,833) (7,831) (14,669)
--------- -------- --------
At end of year................................. $ 649,851 $600,298 $497,001
========= ======== ========
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, 1997, 72.2% of the Company's mortgage loans consisted of one
to four-family residential loans, of which 65.9% 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 increases 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 residential loans for terms of up to 30
years. Interest rates charged on fixed-rate loans are competitively priced
based on market conditions and the current cost of funds and depend upon the
type of loan product chosen by the borrower.
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.
6
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, 1997, the Company had $98.5 million of loans which
it sold but continues to service for others and $10.2 million of purchased
loans serviced for the Company by other institutions.
The Company also originates multi-family residential mortgage loans. As of
December 31, 1997, $29.0 million, or 4.1%, 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, 1997, the Company's
commercial real estate loan portfolio totalled $108.2 million, or 15.2% 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 typically originates fixed-rate and one, three and five year
review 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, 1997, the Company had $40.6 million of construction loans and
$2.4 million of land loans, which, on a combined basis, accounted for 6.0% 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, 1997, $63.1
million, or 8.9%, of the Company's total loan portfolio consisted of loans to
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 recent years, 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 increasingly difficult
to maintain a personal relationship with the resulting larger bank. Such local
business relationships can provide high
7
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, 1997
--------------------------
ADJUSTABLE FIXED
RATE RATE TOTAL
---------- ------- -------
(IN THOUSANDS)
1 year or less...................................... $33,550 $14,913 $48,463
More than 1 year to 5 years......................... 16,651 8,703 25,354
More than 5 years................................... 6,551 4,083 10,634
------- ------- -------
Total............................................... $56,752 $27,699 $84,451
======= ======= =======
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, 1997, 1996 and 1995, non-performing
assets amounted to $4.5 million, $5.0 million, and $7.0 million, respectively.
As a percentage of total year end assets, these levels of non-performing
assets represent .39%, .49% and .80% at December 31, 1997, 1996 and 1995,
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, 1997, 1996 and 1995, the delinquencies in the Company's
portfolio were as follows:
AT DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------- --------------------------------- ---------------------------------
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.......... 8 $1,222 7 $642 20 $1,850 21 $1,969 17 $1,423 24 $3,521
Other Loans..... 9 21 1 1 6 50 4 316 3 320 1 500
--- ------ --- ---- --- ------ --- ------ --- ------ --- ------
Total Loans..... 17 $1,243 8 $643 26 $1,900 25 $2,285 20 $1,743 25 $4,021
--- ------ --- ---- --- ------ --- ------ --- ------ --- ------
Delinquent loans
to total
loans.......... -- 0.17% -- 0.09% -- 0.29% -- 0.35% -- 0.32% -- 0.74%
=== ====== === ==== === ====== === ====== === ====== === ======
The above table presents the total number of loans and the dollar amount of
loans past due 60 days or more for the past three years. Loans past due 90
days or more are included in the following table of non-performing assets as
non-accrual loans, unless noted otherwise in such table. Certain loans that
are less than 90 days past due, and in some cases loans not past due, are also
included as non-accrual loans. These loans represent situations where the
borrower had been 90 days or more past due within the past six months but at
year end are no longer past due 90 days or more, or other situations where
management believes that non-accrual classification is appropriate.
8
Non-Performing Assets. The following table sets forth information regarding
non-accrual loans, troubled debt restructurings, other real estate owned and
other assets.
AT DECEMBER 31,
---------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ -------
(DOLLARS IN THOUSANDS)
Non-accrual loans.................... $4,336 $4,886 $5,402 $ 978 $ 1,489
Troubled debt restructurings,
accruing............................ 162 -- 199 -- 4,638
------ ------ ------ ------ -------
Total non-performing loans......... 4,498 4,886 5,601 978 6,127
Other real estate owned.............. 1 133 1,201 4,355 7,778
Other assets......................... -- -- 200 -- --
------ ------ ------ ------ -------
Total non-performing assets........ $4,499 $5,019 $7,002 $5,333 $13,905
====== ====== ====== ====== =======
Loans past due 90 days or more and
still accruing...................... $ -- $ 136 $ -- $ 748 $ 414
====== ====== ====== ====== =======
Non-performing loans as a percent of
total loans......................... 0.63% 0.75% 1.03% 0.21% 1.52%
Non-performing assets as a percent of
total assets........................ 0.39% 0.49% 0.80% 0.67% 2.01%
Allowance for loan losses as a
percent of non-performing loans..... 192.11% 158.80% 127.25% 715.34% 107.77%
Allowance for loan losses as a
percent of total loans.............. 1.21% 1.19% 1.31% 1.47% 1.64%
====== ====== ====== ====== =======
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 Statement of
Financial Accounting Standards ("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, if any, 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, 1997, the Company estimated the fair value for its one foreclosed
property and has written down the property to a level which management
believes is 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.
9
The following table sets forth a summary of the Company's foreclosed real
estate owned at December 31, 1997 and 1996:
DECEMBER 31,
-----------
1997 1996
----- -----
(IN THOUSANDS)
Residential
One to four-family.................................... $ -- $ 123
Multi-family.......................................... -- --
Commercial.............................................. -- --
Land.................................................... 1 10
---- -----
$ 1 $ 133
==== =====
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 $8.6 million at
December 31, 1997 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.
10
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,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of
period..................... $ 7,759 $ 7,127 $ 6,996 $ 6,603 $ 5,799
Allowance acquired.......... -- -- -- -- 119
Provision for possible loan
losses..................... 1,000 605 325 550 1,099
-------- -------- -------- -------- --------
Balance of allowance after
provision.................. 8,759 7,732 7,321 7,153 7,017
Loans charged-off:
One to four-family........ -- 197 13 91 121
Multi-family.............. -- 113 -- -- 30
Commercial real estate.... 150 -- 84 2 166
Construction and land
development.............. 38 -- 20 -- --
Other loans............... 20 110 227 113 125
-------- -------- -------- -------- --------
Total loans charged-
off.................... 208 420 344 206 442
Recoveries of loans
previously charged-off..... 90 447 150 49 28
-------- -------- -------- -------- --------
Balance of allowance at end
of year.................... $ 8,641 $ 7,759 $ 7,127 $ 6,996 $ 6,603
======== ======== ======== ======== ========
Amount of total loans at end
of year.................... $711,702 $653,556 $542,806 $474,574 $403,087
Average amount of loans
outstanding................ $685,228 $591,178 $503,813 $429,435 $398,945
Loans charged-off as a
percentage of average loans
outstanding................ 0.03% 0.07% 0.07% 0.05% 0.11%
Allowance for loan losses as
a percentage of total loans
at end of year............. 1.21% 1.19% 1.31% 1.47% 1.64%
======== ======== ======== ======== ========
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,
-----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ----------------- ----------------- ----------------- -----------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
(DOLLARS IN THOUSANDS)
One to four-family...... $4,641 53.71% $4,344 55.99% $4,433 62.20% $4,350 62.18% $4,322 65.46%
Multi-family............ 380 4.40% 407 5.25% 423 5.94% 420 6.00% 420 6.36%
Commercial real estate.. 2,110 24.42% 1,910 24.62% 1,473 20.67% 1,441 20.60% 1,285 19.46%
Construction and land... 745 8.62% 453 5.84% 408 5.72% 591 8.45% 449 6.80%
Other loans............. 765 8.85% 645 8.30% 390 5.47% 194 2.77% 127 1.92%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total................... $8,641 100.00% $7,759 100.00% $7,127 100.00% $6,996 100.00% $6,603 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
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 preferred stocks.
At December 31, 1997, the investment portfolio had a amortized cost value of
$392.2 million and a market value of $395.3 million. Of the $392.2 million,
$172.6 million, or 44.0%, of the securities were designated as
11
held to maturity with the remaining $219.6 million, or 56.0%, being available
for sale (see table below). During 1997, the investment portfolio averaged
approximately 34.4% of total assets and provided 30.7% of total interest
income. The average life of the portfolio was approximately 2.4 years at
December 31, 1997.
Included in the securities available for sale is $16.4 million of FHLB stock
which the Company's three subsidiaries, Lexington, Federal and Middlesex are
required to hold as members of the FHLB system.
At December 31, 1997 and 1996, federal funds sold and overnight deposits
totalled $10.3 million and $4.5 million, respectively. These balances consist
mostly of overnight interest bearing deposits maintained at the FHLB.
Other than securities issued by the U.S. government or its agencies, as of
December 31, 1997 there were no securities of any one issuer that exceeded 10%
of the Company's stockholders' equity.
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:
1997 1996 1995
------------------ ------------------ ------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
SECURITIES AVAILABLE FOR
SALE:
Government securities.. $106,986 $107,180 $ 86,645 $ 85,882 $ 50,620 $ 50,885
Corporate bonds........ 1,012 1,015 2,034 2,038 4,591 4,591
Asset-backed
securities............ 14,861 14,999 4,473 4,324 5,801 5,701
Mortgage-backed
derivatives........... 10,947 11,034 7,585 7,596 8,229 8,261
Mortgage-backed
securities:
Balloons............... -- -- -- -- -- --
Fixed.................. 12,294 12,490 12,018 11,947 11,518 11,657
Variable............... 21,149 21,499 25,313 25,563 30,190 30,378
-------- -------- -------- -------- -------- --------
Total mortgage-backed
securities........... 33,443 33,989 37,331 37,510 41,708 42,035
-------- -------- -------- -------- -------- --------
Total debt securities
available for sale... 167,249 168,217 138,068 137,350 110,949 111,473
Federal Home Loan Bank
stock, at cost......... 16,426 16,426 14,638 14,638 10,355 10,355
Marketable equity
securities............. 35,884 36,629 22,327 22,494 3,343 3,363
-------- -------- -------- -------- -------- --------
Total equity
securities available
for sale............. 52,310 53,055 36,965 37,132 13,698 13,718
-------- -------- -------- -------- -------- --------
Total securities
available for sale... $219,559 $221,272 $175,033 $174,482 $124,647 $125,191
======== ======== ======== ======== ======== ========
SECURITIES HELD TO
MATURITY:
Government securities.. $ 52,687 $ 52,859 $ 39,304 $ 39,469 $ 22,408 $ 22,801
Corporate bonds........ 1,254 1,266 3,003 3,015 4,011 4,058
Asset-backed
securities............ 21,592 21,684 19,466 19,371 17,695 17,560
Mortgage-backed
derivatives........... 10,952 11,081 13,494 13,596 16,750 16,968
Mortgage-backed
securities:
Balloons............... 28,480 28,491 43,583 43,106 50,458 50,414
Fixed.................. 45,107 46,059 39,702 39,947 46,851 47,788
Variable............... 12,551 12,560 14,958 14,868 17,927 17,795
-------- -------- -------- -------- -------- --------
Total mortgage-backed
securities........... 86,138 87,110 98,243 97,921 115,236 115,997
-------- -------- -------- -------- -------- --------
Total securities held
to maturity........... $172,623 $174,000 $173,510 $173,372 $176,100 $177,384
======== ======== ======== ======== ======== ========
Total investment
securities............ $392,182 $395,272 $348,543 $347,854 $300,747 $302,575
======== ======== ======== ======== ======== ========
12
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, 1997. 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..... $1,003 5.48% $17,815 7.02% $128,344 7.05% $ 12,511 7.23% $ 159,673 7.05%
Corporate bonds
and asset backed
securities...... 1,012 5.98% 359 4.34% 621 5.64% 36,727 6.71% 38,719 6.65%
------ ---- ------- ---- -------- ---- -------- ---- ------------ --------
Total........... 2,015 5.73% 18,174 6.97% 128,965 7.04% 49,238 6.83% 198,392 6.97%
------ ---- ------- ---- -------- ---- -------- ---- ------------ --------
Mortgage-backed
securities...... 1,148 5.53% 26,302 6.38% 9,170 7.57% 82,961 6.82% 119,581 6.77%
Mortgage-backed
derivative
securities...... -- -- 1,554 6.22% 904 5.86% 19,441 6.42% 21,899 6.38%
------ ---- ------- ---- -------- ---- -------- ---- ------------ --------
Total mortgage-
backed and
derivatives.... 1,148 5.53% 27,856 6.37% 10,074 7.42% 102,402 6.74% 141,480 6.71%
------ ---- ------- ---- -------- ---- -------- ---- ------------ --------
Total........... $3,163 5.66% $46,030 6.60% $139,039 7.07% $151,640 6.77% $ 339,872 6.86%
====== ==== ======= ==== ======== ==== ======== ==== ============ ========
Mortgage-Backed and Related Securities. At December 31, 1997, the mortgage-
backed portfolio consisted of 1 year adjustable rate securities ($34.1
million), 5 and 7 year balloons ($28.5 million), 15 year fixed rate securities
($51.1 million) and 30 year fixed rate securities ($6.5 million). The
adjustable rate securities were predominantly collateralized by 30 year loans
with annual rate adjustments. The $28.5 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 1.8 years at December 31, 1997.
The weighted average lives for the 15 and 30 year securities were 3.6 and 3.3
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 $22.0 million, or 5.6% 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 $22.0 million balance at year end had an average life of 1.3 years
with 49% in monthly adjusting securities and the remaining 51% in fixed rate
securities.
At December 31, 1997, the amortized cost value of mortgage-backed and
mortgage-backed derivative securities totalled $141.5 million, or 12.3% of
total assets, compared with $156.7 million, or 15.2% of total assets at
December 31, 1996. Of the $141.5 million total, $96.8 million were fixed rate
and $44.7 million were adjustable rate. At December 31, 1997, $97.1 million
were classified as held to maturity and the remaining $44.4 million were
classified as available for sale. At December 31, 1997, 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.
At December 31, 1997, one of the Company's mortgage-backed derivative
securities, representing 1.2% of the total mortgage-backed and derivatives
portfolio, was classified as "high risk" under Federal Financial Institutions
Examination Council guidelines. All securities carry interest rate risk which
affects their market value such that as market yields increase, the value of
the Company's securities declines and vice versa. Additionally, mortgage-
backed securities carry prepayment risk where expected yields may not be
achieved due to an inability to re-invest the proceeds from prepayment at
comparable yields. Moreover, such mortgage-backed securities may not benefit
from price appreciation during periods of declining rates to the same extent
as the remainder of the portfolio.
13
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, 1997 and 1996, brokered certificates of deposits
amounted to $57.1 million and $30.1 million, respectively. As an alternative
to borrowed funds, in 1996 and 1997 the Company obtained funds in the form of
Depository Trust Company certificates that had original maturities of one year
or less. At December 31, 1997 and 1996, the balance of such deposits was $36.4
and $14.9 million, respectively and is included in the total brokered
certificates of deposits for both periods. 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, 1997 and 1996, total deposits were $729.1 million and
$652.5 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.
1997 1996 1995
-------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE PERCENT AVERAGE
AVERAGE OF TOTAL NOMINAL AVERAGE OF TOTAL NOMINAL AVERAGE OF TOTAL NOMINAL
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Demand.................. $ 44,256 6.52% -- $ 36,690 5.99% -- $ 29,058 5.24% --
NOW..................... 53,101 7.83% 1.46% 48,522 7.92% 1.60% 46,736 8.43% 1.79%
Regular savings......... 122,167 18.01% 2.55% 121,987 19.90% 2.56% 125,139 22.56% 2.56%
Money market............ 70,310 10.36% 3.46% 64,696 10.55% 4.14% 65,441 11.80% 3.34%
Certificate accounts.... 388,586 57.28% 5.71% 341,098 55.64% 5.61% 288,354 51.97% 5.77%
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total deposits......... $678,420 100.00% 4.21% $612,993 100.00% 4.20% $554,728 100.00% 4.12%
======== ====== ==== ======== ====== ==== ======== ====== ====
At December 31, 1997, the Company had outstanding $111.6 million in
certificate accounts in amounts of $100,000 or more, maturing as follows:
(DOLLARS IN THOUSANDS)
Period to maturity:
Three months or less................................... $ 34,906
Over three through six months.......................... 12,112
Over six through 12 months............................. 45,876
Over 12 months......................................... 18,734
--------
Total................................................ $111,628
========
Borrowings. In the ordinary course of business, the Company has borrowed
funds from the FHLBB to fund asset growth. Advances outstanding as of December
31, 1997 totalled $297.4 million at a weighted average interest rate of 5.88%
and a remaining weighted average term of approximately 10 months. The average
balance of advances outstanding in 1997 was $290.4 million. All of the
advances were secured by the Company's blanket lien agreement with the FHLBB.
During 1997, the Company entered into repurchase agreements on a daily basis
with certain customers. The average balance for repurchase agreement funds was
$3.2 million at an average rate of 4.82%. Repurchase agreements amounted to
$3.8 million at December 31, 1997.
Federal's ESOP has long-term debt, amounting to $393,000 as of December 31,
1997, which represents the remaining balance of a $1.0 million loan originated
on December 28, 1993. This loan, from a third party lender, had a term of
seven years with twenty-eight equal quarterly payments at a rate equal to the
Federal Funds
14
effective rate plus 2.60%. The loan permitted the Federal ESOP to acquire
125,000 shares of Main Street's common stock at $8.00 per share in the
conversion to stock form (share data restated for May 30, 1997 stock split).
In 1996 the Lexington ESOP purchased 50,000 shares of the Company's common
stock at a cost of $18.20 per share. Funds utilized to purchase 47,185 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 principal balance
at December 31, 1997 was $644,000. (Share data restated for May 30, 1997 stock
split).
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, 1997, there were no repurchase agreements outstanding with primary
securities dealers.
EMPLOYEES
At December 31, 1997, the Company had 239 employees, of whom 54 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.
Lexington and Federal employee benefits for full-time employees 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.
Middlesex employee benefit plans include some, but not all of the above
benefits. 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 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, 1997, the Company's surplus includes approximately $16.9
million 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 $7.2 million
have not been recorded with respect to such reserve.
Massachusetts Taxation
Although the Company will file a consolidated federal income tax return,
savings institutions cannot file Massachusetts combined returns. 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 1997, savings
15
institutions in Massachusetts were taxed at a rate of 11.32% 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 examined by either the FDIC or the
Massachusetts Commissioner of Banks on a rotating basis.
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.
Middlesex is a member of the FHLB system and its deposits are insured by the
FDIC under the BIF. As a state chartered bank, it is subject to the same
regulators, basic regulations, and examinations as Lexington.
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
16
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, 1997, Federal maintained 82.06% 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, 1997, 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, 1997, 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."
Middlesex is subject to the same regulations as Lexington and its risk-based
capital and Tier 1 leverage ratios significantly exceed the regulatory
minimum.
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 group. The supervisory
subgroup to which an institution is assigned is based on a supervisory
evaluation
17
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 three bank subsidiaries are insured by different FDIC funds,
Lexington and Middlesex 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 $.19 per share.
The FDIC sets BIF and SAIF insurance premium rates for all banks. Federal,
Lexington and Middlesex 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 Middlesex, and 6.480
basis points for SAIF banks such as Federal.
Federal Home Loan Bank System
Federal, Lexington and Middlesex 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, Lexington and Middlesex were in compliance with this requirement with
a combined investment in FHLB stock at December 31, 1997 of $16.4 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 $993,000, $817,000 and
$824,000, for the years ended December 31, 1997, 1996 and 1995, 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.
18
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. Federal, Lexington and Middlesex 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.
MARKET RISK
As a financial institution, the Company's chief market risk is interest rate
risk. The Company has no material exposure to foreign currency or commodity
prices. Its exposure to equity prices is limited to marketable equity
securities contained within its available for sale investment portfolio. The
Company does not have a trading portfolio.
Interest rate risk is the sensitivity of income to variations in interest
rates over defined time horizons. The primary goal of interest rate risk
management is to control this risk within limits and guidelines approved by
the Company's Asset/Liability Committee (ALCO). These limits and guidelines
reflect the Company's tolerance for interest rate risk.
The Company attempts to control interest rate risk by identifying exposures,
quantifying them, and identifying their impact on income. The Company
quantifies its interest rate risk exposures using simulation models as well as
simpler gap analyses. The Company manages its interest rate exposures using a
combination of on-balance sheet instruments, consisting principally of fixed
and variable rate securities, deposit pricing and FHLB borrowings.
As of December 31, 1997, the Company has no outstanding exposure to off-
balance sheet interest rate instruments such as swaps, forwards or futures.
However, it has had limited exposure to such instruments in the past in order
to hedge its interest rate risk position and may do so in the future.
ITEM 2. PROPERTIES
The Company conducts its business at 716 Main Street, Waltham,
Massachusetts, a building owned by a subsidiary bank.
During 1997, Lexington conducted its business through its main office, seven
branch offices and a lending center. During 1997, Lexington also opened a new
branch office at 171 Massachusetts Avenue, Lexington. Lexington's main office
and five of these branches have an automated teller machine (ATM). Four of
these branches have drive-through facilities. Management believes that
Lexington's facilities are adequate for the conduct of its business.
19
The following table sets forth certain information concerning Lexington's
facilities at December 31, 1997:
NET BOOK
OWNED DATE DATE VALUE AT
OR PURCHASED OR LEASE DECEMBER 31,
LOCATION DESCRIPTION LEASED LEASED EXPIRES 1997
-------- -------------- ------ ------------ ------- --------------
(IN THOUSANDS)
1776 Massachusetts
Avenue Main Office Owned 1895-site -- $ 288
Lexington, Massachusetts
(ATM) 1904-bldg.
421 Lowell Street Branch Owned 1976 -- $ 146
Lexington, Massachusetts
(ATM, drive-through)
171 Massachusetts Avenue Branch Leased 1997 2000(2) $ 75
Lexington, Massachusetts
(ATM)
1010 Waltham Street Branch Leased 1993 1999 --
Lexington, Massachusetts
Brookhaven Retirement
Complex
(Limited hours)
57 Bedford Street Lending Center Leased 1988 2003 $ 14
Lexington, Massachusetts
287 Great Road Branch Leased 1993 2003(1) $ 94
Bedford, Massachusetts
(ATM, drive-through)
856 Massachusetts Avenue Branch Owned 1962 -- $ 967
Arlington, Massachusetts
(ATM, drive-through)
141 Massachusetts Avenue Branch Leased 1986 2001 $ 16
Arlington, Massachusetts
36 Cambridge Street Branch Owned 1986 -- $ 243
Burlington,
Massachusetts
(ATM, drive-through)
- --------
(1) Lease provides for option to extend for two additional five-year periods to
2013.
(2) Lease provides for option to extend for three additional five-year periods
to 2015.
20
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, 1997:
NET BOOK
OWNED DATE DATE VALUE AT
OR PURCHASED OR LEASE DECEMBER 31,
LOCATION DESCRIPTION LEASED LEASED EXPIRES 1997
-------- ----------- ------ ------------ ------- --------------
(IN THOUSANDS)
716 Main Street Main Office Owned 1938-site -- $4,493
Waltham, Massachusetts 1981-bldg.
(Two ATMs, drive-
through)
202 Sudbury Road Branch Owned 1972 -- $ 156
Concord, Massachusetts
(ATM, drive-through)
415 Boston Post Road Branch Leased 1974 1999(1) $ 87
Weston, Massachusetts
(ATM)
1090 Lexington Street Branch Leased 1975 1999 $ 38
North Waltham,
Massachusetts
(ATM)
- --------
(1) Lease provides for an option to extend for an additional five years to
2004.
During 1997, Middlesex conducted its business through its main office which
provides a drive-through facility and one ATM. The following table sets forth
certain information concerning Middlesex's facility at December 31, 1997.
NET BOOK
OWNED DATE DATE VALUE AT
OR PURCHASED OR LEASE DECEMBER 31,
LOCATION DESCRIPTION LEASED LEASED EXPIRES 1997
-------- ----------- ------ ------------ ------- --------------
(IN THOUSANDS)
232 Boylston Street Main Office Leased 1997 1999 $ 92
Newton, Massachusetts
(ATM, drive-through)
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.
21
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 1996 and 1997,
restated for the May 30, 1997 stock split, are as follows:
QUARTER ENDING HIGH LOW CLOSING DIVIDEND PAID
- -------------- ------ ------ ------- -------------
March 31, 1996.............................. $14.40 $12.80 $14.10 $0.10
June 30, 1996............................... 14.30 12.80 13.90 0.10
September 30, 1996.......................... 18.00 13.10 16.30 0.10
December 31, 1996........................... 18.70 16.00 17.10 0.12
March 31, 1997.............................. 22.20 16.90 19.00 0.12
June 30, 1997............................... 25.00 18.80 23.50 0.12
September 30, 1997.......................... 30.25 23.25 28.00 0.12
December 31, 1997........................... 38.625 25.875 37.75 0.15
As of December 31, 1997, the Company had 961 stockholders of record and
6,503,646 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." The Affiliation Agreement and Plan of Reorganization
dated December 15, 1997 between Affiliated and UST Corp. provides that
Affiliated cannot exceed the dividend rate paid in the fourth quarter of 1997.
22
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table represents selected consolidated financial data of the
Company for the five years ended December 31, 1997. 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,
----------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- -------- -------- --------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA
Total assets............ $1,155,048 $1,032,213 $878,480 $793,596 $692,860
Investments (1)......... 404,239 352,456 305,416 290,306 249,343
Loans, gross (including
held for sale)......... 715,657 653,556 543,877 474,574 408,721
Deposits................ 729,096 652,509 583,832 532,270 524,883
Borrowed funds.......... 302,199 269,292 187,514 161,021 62,964
Equity capital (2)...... 113,053 101,402 99,290 93,286 89,443
Non-performing assets... 4,499 5,019 7,002 5,333 13,905
Allowance for possible
loan losses............ 8,641 7,759 7,127 6,996 6,603
SELECTED OPERATING DATA
Net interest income..... $ 35,499 $ 31,277 $ 27,772 $ 24,479 $ 21,208
Less provision for loan
losses................. 1,000 605 325 550 1,099
---------- ---------- -------- -------- --------
Net interest income
after provision for
loan losses............ 34,499 30,672 27,447 23,929 20,109
Noninterest income...... 2,298 1,638 1,693 1,348 1,691
---------- ---------- -------- -------- --------
Other real estate owned
expenses (income),
net.................... (183) 129 (107) (124) 758
SAIF recapitalization
charge................. -- 2,121 -- -- --
Merger expenses......... -- -- 1,989 -- --
Other noninterest
expenses............... 18,109 16,716 16,352 15,569 12,831
---------- ---------- -------- -------- --------
Total noninterest
expenses............... 17,926 18,966 18,234 15,445 13,589
Income before income
taxes.................. 18,871 13,344 10,906 9,832 8,211
Provision for income
taxes.................. 7,015 4,821 5,199 2,806 2,789
---------- ---------- -------- -------- --------
Net income.............. $ 11,856 $ 8,523 $ 5,707 $ 7,026 $ 5,422
========== ========== ======== ======== ========
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)
---------- ---------- -------- -------- --------
Results excluding SAIF
recapitalization,
merger expenses, and
change in SFAS No.109
tax valuation reserve.. $ 11,856 $ 9,759 $ 7,576 $ 5,951 $ 4,922
========== ========== ======== ======== ========
PER SHARE DATA
Book value end of year.. $ 17.61 $ 16.04 $ 15.19 $ 14.34 $ 13.80
Net income (diluted).... $ 1.78 $ 1.32 $ 0.86 $ 1.06 $ 0.83
Cash dividends declared
(3).................... $ 0.51 $ 0.41 $ 0.26 $ 0.28 --
Results excluding SAIF
recapitalization,
merger expenses, and
change in SFAS No. 109
tax valuation
reserve................ $ 1.78 $ 1.51 $ 1.14 $ 0.90 $ 0.75
SELECTED RATIOS
Return on average
assets................. 1.09% 0.88% 0.69% 0.97% 0.91%
Return on average
equity................. 11.14% 8.70% 5.90% 7.68% 8.82%
Equity to assets ratio.. 9.79% 9.82% 11.30% 11.75% 12.91%
Dividend payout ratio
(3).................... 28.65% 31.06% 30.23% 26.42% --
Interest rate spread.... 2.75% 2.72% 2.80% 3.04% 3.42%
Net interest margin..... 3.35% 3.33% 3.46% 3.54% 3.74%
Efficiency ratio
excluding other real
estate owned expenses,
net.................... 47.9% 57.2% 62.3% 60.3% 56.0%
ASSET QUALITY RATIOS
Year-end non-performing
assets to total assets
....................... 0.39% 0.49% 0.80% 0.67% 2.01%
Non-performing loans to
total loans............ 0.63% 0.75% 1.03% 0.21% 1.52%
Allowance for possible
loan losses to non-
performing loans....... 192.11% 158.80% 127.25% 715.34% 107.77%
23
- --------
(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) 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.
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 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, the
so-called Year 2000 issue, changes in interest rates, and increased
competition and bank consolidations in the Company's market area.
On December 15, 1997, Affiliated and UST Corp. (NASDAQ:USTB) jointly
announced that they had signed an Affiliation Agreement and Plan of
Reorganization under which UST Corp. would acquire Affiliated. This
transaction is structured to qualify as a pooling of interests for accounting
purposes and as a tax-free exchange of 1.41 shares of USTB common stock for
each share of Affiliated common stock and is expected to close in the second
quarter of 1998. As part of this transaction, the stock re-purchase program
announced by Affiliated on October 16, 1997 was rescinded. The acquisition by
UST Corp is subject to shareholder and regulatory approval.
24
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 and manage interest rate risk. These
liquidity needs are defined by the needs of the depositors and borrowers of
the Company. The Company's primary source of funds is its deposit base.
Management uses the investment portfolio and borrowing capabilities to manage
the liquidity position and interest rate risk position, in its efforts to
maximize interest income within the ALCO's guidelines.
The ALCO consists of members of the 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 table represents management's anticipated cash flows and
repricings of Affiliated's December 31, 1997 consolidated balance sheet based
upon assumptions derived from historical experience, the current interest rate
and economic outlook, standardized mortgage prepayment models and various
other data input sources. Management monitors these assumptions on a
continuous basis and revises them when necessary. Management believes that
these assumptions are accurate but understands that actual cash flows and
repricings will be determined by changes in interest rates and customer
behavior which may vary from these projections.
25
AT DECEMBER 31, 1997
-----------------------------------------------------------
MORE THAN MORE THAN
LESS THAN SIX MONTHS TO ONE YEAR TO MORE THAN
SIX MONTHS ONE YEAR FIVE YEARS FIVE YEARS TOTAL
---------- ------------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
Assets:
Federal funds sold and
interest bearing
deposits.............. $ 10,344 $ -- $ -- $ -- $ 10,344
Investment securities.. 140,785 59,901 140,514 52,695 393,895
Mortgage loans......... 184,865 111,303 254,525 97,885 648,578
Commercial loans....... 41,414 -- -- -- 41,414
Home equity loans...... 18,636 -- -- -- 18,636
Consumer loans......... 958 487 1,629 -- 3,074
Other assets........... 4,402 -- -- 34,705 39,107
-------- -------- -------- -------- ----------
Total Assets........... $401,404 $171,691 $396,668 $185,285 $1,155,048
======== ======== ======== ======== ==========
Liabilities &
Stockholders' Equity:
Savings accounts....... $ 10,278 $ 9,405 $ 66,816 $ 34,422 $ 120,921
NOW/DDA accounts....... 9,258 8,471 60,163 31,009 108,901
Money market accounts.. 13,385 10,915 47,306 965 72,571
Time deposits.......... 170,072 137,051 117,238 2,342 426,703
Borrowed funds......... 174,560 64,000 65,982 -- 304,542
Other liabilities...... -- -- -- 8,357 8,357
Stockholders' equity... -- -- -- 113,053 113,053
-------- -------- -------- -------- ----------
Total Liabilities &
Stockholders' Equity... $377,553 $229,842 $357,505 $190,148 $1,155,048
======== ======== ======== ======== ==========
Period GAP............. 23,851 (58,151) 39,163 (4,863)
Cumulative GAP......... 23,851 (34,300) 4,863 --
Period GAP as a
percentage of total
assets................ 2.06% (5.03)% 3.39% (0.42)%
Cumulative GAP as a
percentage of total
assets................ 2.06% (2.97)% 0.42% --
The following list outlines some of the significant assumptions utilized for
the above analysis:
. Fixed rate assets are displayed using contractual maturity.
. Adjustable rate assets are displayed using repricing dates.
. Assets with prepayment options (fixed and adjustable) are modeled
utilizing an industry standard financial modeling system to project
asset cash flows based upon current interest rates.
. Loans held for sale are classified as "Less than Six Months" and
included in other assets.
. Fixed rate deposits and borrowings are displayed using repricing dates.
. Deposits that do not possess contractual maturity dates or are not
directly linked to an interest rate index are modeled utilizing
deposit decay rates provided by one of the federal banking
regulatory agencies. These categories include Savings accounts,
NOW/DDA accounts and money market accounts. Although DDA accounts do
not pay interest, management believes that DDA cash flows are
impacted by changes in interest rates. When comparing the decay
rates to internal management analysis of its deposit cash flows, it
was determined that the decay rates represent faster cash flow
patterns than those displayed by past customer practice. However, to
be conservative, the regulatory decay rates are utilized for this
presentation.
INTEREST RATE RISK
As a financial institution, the Company's chief market risk is interest rate
risk.
Interest rate risk is the sensitivity of income to variations in interest
rates over defined time horizons. The primary goal of interest rate risk
management is to control this risk within limits and guidelines approved by
the Company's ALCO. These limits and guidelines reflect the Company's
tolerance for interest rate risk.
The Company attempts to control interest rate risk by identifying exposures,
quantifying them, and identifying their impact on income. The Company
quantifies its interest rate risk exposures using simulation
26
models as well as simpler gap analyses. The Company manages its interest rate
exposures using a combination of on-balance sheet instruments, consisting
principally of fixed and variable rate securities, deposit mix and pricing and
FHLB borrowings.
Interest rate gap analysis provides a static view of the maturity and
repricing characteristics of the Company's balance sheet positions. The
Company's internal guidelines on interest rate risk specify that the
cumulative one year gap should be less than 10% of assets. As of December 31,
1997, the gap was approximately 3% of assets.
The Company uses simulation analysis to measure the exposure of net interest
income to changes in interest rates over a two-year time horizon. Simulation
analysis involves projecting future interest income and expenses from the
Company's assets and liabilities under various rate scenarios.
The Company's internal guidelines on interest rate risk specify that if
interest rates were to shift immediately up or down 200 basis points,
estimated net interest income for each of the next twelve and twenty-four
months should decline by less than 12%. As of December 31, 1997, the Company's
estimated exposure as a percentage of estimated net interest income for the
next twelve and twenty four month periods, respectively, are as follows:
a. 200 basis point increase in rates: -5%; -3%
b. 200 basis point decrease in rates: +1%; -1%
Based on the scenarios above, there would be a slow down in the rate of
growth of retained earnings in the scenarios which display decreases in net
interest income and an increase in the rate of growth of retained earnings in
the scenarios displaying an increase in net interest income. For each 1.0%
change in net interest income, there is an estimated corresponding change of
$235,000 in the rate of growth in retained earnings. The $235,000 represents
the estimated, after-tax impact of a 1% change in net interest income based
upon current levels of net interest income.
COMPARISON OF FINANCIAL CONDITION AND OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND DECEMBER 31, 1996
Changes in Financial Condition. Total assets of the Company at December 31,
1997 amounted to $1.155 billion, compared to $1.032 billion at the end of
1996, reflecting an increase of $123 million, or 11.9%. The growth in assets
was driven by an increase in net loans receivable of $57.3 million, or 8.9%
and an increase in investments of $45.9 million, or 13.2%. During 1997 the
Company continued to expand its residential portfolio as well as its small
business and commercial real estate lending. Total real estate loan
originations, including loans purchased, amounted to $187.8 million in 1997 as
compared to $194.9 million in 1996.
The increases in earning assets were mainly funded by deposits which
amounted to $729.1 million at December 31, 1997, compared to $652.5 million at
the end of 1996, an increase of $76.6 million or 11.7%. Additional funding was
provided by FHLB borrowings which increased to $297.4 million at the end of
1997, an increase of $30.2 million, or 11.3% from December 31, 1996.
During 1997 core deposits increased by $20.3 million or 7.2% and amounted to
$302.4 million at December 31, 1997. Term certificates increased to $426.7
million at December 31, 1997, compared to $370.4 million at the end of 1996,
an increase of $56.3 million or 15.2%. Securities sold under agreements to
repurchase amounted to $3.8 million at December 31, 1997, versus $727,000 at
the end of 1996. Other liabilities at December 31, 1997 amounted to $8.4
million, an increase of $1.4 million or 20.7%, compared to December 31, 1996.
Non-performing assets, which consist of impaired loans, non-accrual loans,
restructured loans and foreclosures, were $4.5 million at December 31, 1997
compared to $5.0 million at December 31, 1996, a decrease of $500,000. The
Company's ratio of non-performing assets to total assets at December 31, 1997
remained below 1%, at 0.39% versus 0.49% at the end of 1996.
27
As of December 31, 1997, the Company had $1,000 of other real estate owned
versus $133,000 on December 31, 1996. During 1997, the Company had minimal
activity in new foreclosures.
The total amount of loans delinquent 30 days or more at December 31, 1997
was $7.5 million, compared to $8.1 million at the end of 1996. As of December
31, 1997, there were eight loans with an aggregate principal
balance of $643,000 which were delinquent 90 days or more, as compared to
twenty-five loans with an aggregate principal balance of $2.3 million at the
end of 1996.
The Company's stockholders' equity increased by $11.7 million or 11.5% in
1997, resulting from net income of $11.9 million, option transactions of
$540,000, ESOP transactions of $786,000 and a tax benefit from stock options
exercised of $315,000. Cash dividends paid by the Company which amount to $3.3
million or $0.51 per share, were declared and charged to retained earnings
during 1997. Due to changes in the interest rate environment during 1997, the
Company's stockholders' equity at December 31, 1997 reflected an unrealized
gain on securities available-for-sale and held-to-maturity, net of related
tax, of $919,000, compared to an unrealized loss of $532,000 at December 31,
1996, an increase in equity of $1.5 million.
General Operating Results. Net income for 1997 totaled $11.9 million versus
net income of $8.5 million for 1996, a 39% increase. The year ago results were
negatively impacted by a charge for re-capitalization of the Savings
Association Insurance Fund (SAIF) of the FDIC. Excluding the cost of the 1996
SAIF re-capitalization, Affiliated's 1997 net income would have been 21%
higher than the 1996 net income.
In accordance with SFAS 128, changes in the reporting of earnings per share
are effective this period. Earnings per share are now calculated in two ways,
basic and diluted. Prior year earnings per share figures have been restated
accordingly. Basic EPS for 1997 was $1.86, 20% higher than the pre-SAIF basic
EPS of $1.55 for 1996. Diluted EPS for 1997 was $1.78, 18% higher than the
pre-SAIF diluted EPS of $1.51 for 1996. The increased in diluted earnings per
share was partially reduced by the impact of the increase in Affiliated's
stock price from 1996 to 1997 on the common stock equivalents used to
calculate diluted earnings per share.
The current year results benefited from a higher level of net interest
income and noninterest income combined with a moderate increase in normal
operating expenses. As a result of increased levels of interest earning
assets, net interest income rose by $4.2 million or 13.5% in the twelve month
period of 1997 versus the same period of 1996. Noninterest expense, excluding
the SAIF recapitalization cost of $2.1 million, increased by $1.1 million or
6.4% in 1997 compared to 1996.
28
ANALYSIS OF NET INTEREST INCOME
Average Balance Sheet. The following table sets forth information relating
to the Company for the three years ended December 31, 1997. 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,
----------------------------------------------------------------------------------
1997 1996 1995
---------------------------- -------------------------- --------------------------
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.................. $ 685,228 $56,479 8.24% $591,178 $48,661 8.23% $503,813 $41,924 8.32%
---------- ------- ---- -------- ------- ---- -------- ------- ----
Investments:
Investments and
mortgage-backed
securities held-to-
maturity.............. 184,112 12,384 6.73 176,953 11,521 6.51 203,075 12,888 6.35
Investments and
mortgage-backed
securities available-
for-sale.............. 170,259 11,417 6.71 153,101 10,077 6.58 77,610 4,886 6.30
Federal Home Loan Bank
stock................. 15,323 993 6.48 12,754 817 6.41 9,853 824 8.36
Federal funds sold..... 5,235 238 4.55 5,825 265 4.55 7,756 474 6.11
---------- ------- ---- -------- ------- ---- -------- ------- ----
Total investments..... 374,929 25,032 6.68 348,633 22,680 6.51 298,294 19,072 6.39
---------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning
assets............... 1,060,157 81,511 7.69 939,811 71,341 7.59 802,107 60,996 7.60
---------- ------- ---- -------- ------- ---- -------- ------- ----
Noninterest-earning
assets................ 36,725 32,752 31,557
Allowance for possible
loan losses........... (8,169) (7,291) (7,112)
---------- -------- --------
Total assets........... $1,088,713 $965,272 $826,552
========== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing
liabilities:
Regular savings, NOW
and money market
accounts.............. $ 245,578 $ 6,332 2.58% $235,205 $ 6,119 2.60% $237,316 $ 6,230 2.63%
Certificate accounts... 388,586 22,201 5.71 341,098 19,656 5.76 288,354 16,648 5.77
Borrowed funds......... 296,521 17,479 5.89 246,007 14,289 5.81 166,817 10,346 6.20
---------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities........... 930,685 46,012 4.94 822,310 40,064 4.87 692,487 33,224 4.80
---------- ------- ---- -------- ------- ---- -------- ------- ----
Noninterest-bearing
liabilities:
Demand deposits........ 44,256 36,690 29,058
Other.................. 7,330 8,299 8,302
---------- -------- --------
Total liabilitites..... 982,271 867,299 729,847
---------- -------- --------
Stockholders' equity.... 106,442 97,973 96,705
---------- -------- --------
Total liabilities and
stockholders' equity.. $1,088,713 $965,272 $826,552
========== ======== ========
Net interest income..... $35,499 $31,277 $27,772
======= ======= =======
Interest rate spread.... 2.75% 2.72% 2.80%
==== ==== ====
Net yield on earning
assets................. 3.35% 3.33% 3.46%
==== ==== ====
29
Interest Income. Interest income increased from $71.3 million in 1996 to
$81.5 million in 1997, an increase of $10.2 million or 14.3%. The higher level
in 1997 was primarily due to an increased volume of loans and investment
securities designated as available for sale. The increase in loan volume
resulted from continued growth in residential and commercial loans. Investment
securities available for sale increased during the year as a result of
additional purchases of government securities and preferred stocks. The yield
on average earning assets increased by ten basis points in 1997 to 7.69%.
Average loans outstanding for the year amounted to $685.2 million and produced
an average yield of 8.24%, as compared to a 1996 average volume of $591.2
million with an average yield of 8.23%. The average balance of all investment
categories amounted to $374.9 million in 1997 with an average yield of 6.68%
compared to $348.6 million and 6.51%, respectively, in the comparable period
of 1996.
Interest Expense. Interest expense in 1997 amounted to $46.0 million, up
$5.9 million or 14.8% from $40.1 million in 1996. The significant factors
contributing to this increase were higher volumes in certificate accounts and
borrowings. Average deposit rates increased from 4.47% in 1996 to 4.50% in
1997. Average interest bearing deposits increased to $634.2 million in 1997,
up $57.9 million or 10.0% from the 1996 level. Average certificates increased
by $47.5 million or 13.9% in 1997 from the comparable 1996 period. The Company
had average borrowings, principally from the FHLBB, of $296.5 million in 1997
with a related expense of $17.5 million, compared to $246.0 million and $14.3
million, respectively, for 1996. The average rate paid on borrowings increased
from 5.81% in 1996 to 5.89% in 1997.
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 total 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,
------------------------------------------------------------
1997 COMPARED WITH 1996 1996 COMPARED WITH 1995
----------------------------- -----------------------------
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.................. $ 7,752 $ 66 $ 7,818 $ 7,186 $ (449) $ 6,737
Investments:
Investment and
mortgage-backed
securities held-to-
maturity............. 475 388 863 (1,712) 345 (1,367)
Investment and
mortgage-backed
securities available-
for-sale............. 1,148 192 1,340 4,956 235 5,191
Federal Home Loan Bank
stock................ 166 10 176 (34) 27 (7)
Federal funds sold.... (27) -- (27) (103) (106) (209)
-------- ------ -------- -------- ------- --------
Total interest
income............... 9,514 656 10,170 10,293 52 10,345
-------- ------ -------- -------- ------- --------
Interest expense:
Regular savings, NOW
and money market
accounts.............. 267 (53) 214 (55) (56) (111)
Certificate accounts... 2,711 (167) 2,544 3,039 (31) 3,008
-------- ------ -------- -------- ------- --------
Total deposits........ 2,978 (220) 2,758 2,984 (87) 2,897
Borrowed funds......... 2,975 215 3,190 4,552 (609) 3,943
-------- ------ -------- -------- ------- --------
Total interest
expense.............. 5,953 (5) 5,948 7,536 (696) 6,840
-------- ------ -------- -------- ------- --------
Change in net interest
income................. $ 3,561 $ 661 $ 4,222 $ 2,757 $ 748 $ 3,505
======== ====== ======== ======== ======= ========
30
The increase in 1997 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
Provision for Possible Loan Losses. The provision for possible loan losses
was $1.0 million in 1997 versus $605,000 in 1996, a 65.3% increase. The
increased provision for 1997 is attributed to growth in commercial real estate
loans and small business loans which have been assigned greater risk factors
based upon the Company's past charge off experience during periods of adverse
economic conditions. At December 31, 1997 the Company's allowance for possible
loan losses amounted to $8.6 million which represented 192% 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, 1997 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 1997, total noninterest income amounted to $2.3
million, an increase of $660,000 or 40.3% from $1.6 million in 1996. Customer
service fees and other income increased by $142,000 or 10.9% in 1997 from the
same period in 1996 due to increases in checking account fees, and an increase
in cash surrender value of life insurance policies. Loan servicing fees, which
amounted to $259,000 this year compared to $309,000 in 1996, reflect a
reduction in the volume of loans serviced. The Company had gains on sales of
fixed rate residential mortgage loans in the secondary market of $347,000 in
1997, compared to gains of $76,000 in the same period of 1996. Sales of
investments, primarily preferred stocks and other equities, produced gains of
$250,000 in 1997, compared to a loss of $47,000 during the 1996 period.
Noninterest Expense. Total noninterest expense decreased by $1.0 million or
5.5% in 1997 to $17.9 million, compared to $19.0 million in the corresponding
period of 1996. The significant components of the change in expense included a
$2.1 million decrease for the SAIF recapitalization as previously mentioned, a
$1.5 million or 15.9% increase in compensation and benefits, a decrease in
professional services of $221,000 or 31.5%, a $474,000 or 64.1% decrease in
normal federal deposit insurance premiums, an increase in data processing
costs of $227,000 or 27.2%, and an increase in marketing costs of $175,000 or
30.6%. The Company benefited from a decrease in OREO expense of $312,000 and a
decrease in other expenses of $39,000. Costs for 1997 reflect the start up and
first six months of operations of Middlesex.
The increase in compensation and benefits costs resulted from staff
additions, normal salary increases, and increased costs associated with
incentive compensation plans, medical insurance, 401(k) and ESOP plans at the
subsidiary banks. Compensation costs also reflect additional staffing for
Middlesex. A significant portion of the increase in ESOP costs related to the
year to year increase in the market value of the Company's stock price used
for fair value adjustment to compensation expense. Professional fees declined
as a result of a recovery of prior period legal costs. The decrease in federal
deposit insurance premiums for 1997 reflects the new rate restructuring of the
FDIC. Data processing costs increased due to new technology enhancements and
expanded banking facilities. OREO income of $183,000 for 1997 reflected gains
on sales of foreclosed property, deferred income recognized, and recoveries of
carrying cost. This compared to a net OREO expense of $129,000 in the same
period of 1996 as a result of foreclosure activity during such period.
Marketing costs increased as a result of aggressive promotional efforts for
new banking services and facilities.
Provision for Income Taxes. The provision for income taxes was $7.0 million
in 1997 compared to $4.8 million for the corresponding period in 1996. The
combined effective tax rate for 1997 was 37.2% versus 36.1% for the same
period in 1996. The higher effective rate in 1997 reflects an increase in the
federal tax rate as a result of the growth in the Company's level of pretax
income. At December 31, 1997, the net deferred income tax asset amounted to
$2.7 million. The primary sources of recovery of the deferred income tax asset
are taxes
31
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.
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 at the time 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, 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.
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 including
tax benefit 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 $0.41 per share, were declared and charged to retained
earnings during 1996 and unearned compensation--ESOP was charged $910,000 for
purchase of 50,000 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 $1.32 per share in
1996 compared to $5.7 million or $0.86 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 $.19 per share) for recapitalization of the SAIF.
Excluding the cost of SAIF recapitalization, Affiliated would have reported
net income for 1996 of $9.8 million or $1.51 diluted
32
earnings per share. Excluding merger costs, Affiliated would have reported
1995 net income of $7,596,000 or $1.14 per share. The 1996 pre-SAIF diluted
earnings per share figure of $1.51 represents a 32% increase when compared to
the comparable 1995 pre-merger expense earnings per share of $1.14. The growth
in earnings per share also reflects the effect of the 297,500 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.
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 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.
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
33
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.
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 15, 1998 the Company declared a regular quarterly
dividend of $0.15 per share payable on February 13, 1998 to stockholders of
record on January 29, 1998. 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
$113.9 million for the year ended December 31, 1997 was primarily funded by a
net gain in core deposits of $20.3 million, term certificates of $56.3
million, and additional advances from the FHLB and repurchase agreements
amounting to $33.3 million.
34
The Company's bank subsidiaries, as members of the FHLB, have overnight
lines of credit of approximately $25.0 million and an overall borrowing
capacity of approximately $653.2 million from the FHLB. At December 31, 1997
outstanding borrowings were $297.4 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 million, with various brokers.
At December 31, 1997, the Company had outstanding commitments of $113.7
million to originate loans and advance funds. As of that date, the Company had
commitments to sell loans of $4.0 million. 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 declared a 25% stock split of its common
stock to be effected in the form of a stock dividend. This split was effective
on May 30, 1997 in the form of one additional share for each four shares of
common stock held by stockholders of record as of the close of business on May
15, 1997. Per share numbers in this report have been restated to reflect this
split.
On May 20, 1997, Affiliated completed the transaction entered into on
December 17, 1996 by providing the initial capitalization for Middlesex Bank &
Trust Company located in Newton, Massachusetts. Middlesex opened for business
on June 2, 1997.
On October 16, 1997, Affiliated announced an open market stock repurchase
plan amounting to a maximum of 300,000 shares.
On December 15, 1997, Affiliated and UST Corp. jointly announced that they
had signed an Affiliation Agreement and Plan of Reorganization under which UST
Corp. would acquire Affiliated. This transaction is expected to close in the
second quarter of 1998 and is structured to qualify as a pooling of interests
for accounting purposes and as a tax-free exchange of 1.41 shares of UST Corp.
common stock for each share of Affiliated common stock. The stock repurchase
plan announced October 16, 1997 was rescinded as part of this transaction.
The Company's bank subsidiaries are subject to certain capital standards
prescribed by regulations. While the regulations are the same for Affiliated,
Lexington, and Middlesex, the method of ratio calculation differs slightly for
banks regulated by the Office of Thrift Supervision such as Federal. The
following tables show the subsidiaries regulatory capital ratios as they
compare to the minimum guidelines at December 31, 1997. The high capital
ratios of Middlesex reflect its status as a start-up bank.
MIDDLESEX AFFILIATED
THE FEDERAL LEXINGTON BANK & TRUST COMMUNITY MINIMUM
SAVINGS BANK SAVINGS BANK CO. BANCORP, INC. REQUIREMENTS
------------ ------------ ------------ ------------- ------------
Risk-based ratios:
Tier 1 capital........ 17.99% 14.04% 69.80% 17.40% 4.00%
Total capital......... 19.22 15.05 70.16 18.65 8.00
Tangible capital........ 9.00 N/A N/A N/A 1.50
Core capital............ 9.00 N/A N/A N/A 3.00
Tier 1 leverage capi-
tal.................... N/A 8.58 42.05 9.79 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.
35
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board ("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. Servicing
assets and liabilities are subsequently amortized in proportion to and over
the period of estimated net servicing income or loss and are assessed for
impairment based on their fair values. The adoption of this statement did not
have a material impact on the Company's financial condition or results of
operations.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share", which
became effective for interim and annual periods 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 issued
(excluding treasury shares and unallocated ESOP shares). No dilution for any
potentially dilutive securities is included. Fully diluted EPS, now called
diluted EPS, is still required. All prior period EPS data presented will be
restated. The adoption of this statement did not have a significant impact on
the Company's reported results.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which is to become effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 established standards for reporting and
display of comprehensive income and its components. Comprehensive income is
the total of net income and all other nonowner changes in equity. The
Company's management anticipates that the application of this statement will
not have a significant impact on the Company's reported results when adopted.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information regarding market risk is set forth above under "Business--Market
Risk" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Interest Rate Risk".
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (1)
PAGE
----
Independent Auditors' Reports............................................. 38
Consolidated Statements of Financial Condition as of December 31, 1997 and
1996..................................................................... 40
Consolidated Statements of Income for the years ended December 31, 1997,
1996 and 1995............................................................ 41
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996
and 1995................................................................. 42
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995...................................................... 43
Notes to Consolidated Financial Statements................................ 44
- --------
(1) All schedules have been omitted because they are not required, not
applicable or are included in Notes to Consolidated Financial Statements.
37
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, 1997 and 1996, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. 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,
for the year ended December 31, 1995, as discussed in Note 2. Such statements
are included in the consolidated financial statements of Affiliated Community
Bancorp, Inc. and reflect total interest income of 53 percent in 1995 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. for the year 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 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 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
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Affiliated Community
Bancorp, Inc. and subsidiaries as of December 31, 1997 and 1996 and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
January 14, 1998
38
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Federal Savings Bank:
We have audited the consolidated statement of financial condition of The
Federal Savings Bank and subsidiaries as of December 31, 1995, 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 Bank's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit 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 audit provides 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, 1995 and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
January 15, 1996
39
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
----------------------
1997 1996
---------- ----------
ASSETS
Cash and due from banks................................ $ 16,911 $ 11,331
Federal funds sold and overnight deposits.............. 10,344 4,464
Investment securities--held to maturity (fair value
$174,000 and $173,372 at
December 31, 1997 and 1996, respectively) (notes 3 and
8).................................................... 172,623 173,510
Investment securities--available for sale (amortized
cost $203,133 and $160,395
at December 31, 1997 and 1996, respectively) (notes 3
and 8)................................................ 204,846 159,844
Loans held for sale.................................... 3,955 --
Loans receivable, net of allowance for possible loan
losses of $8,641 and $7,759
at December 31, 1997 and 1996, respectively (notes 4
and 11)............................................... 703,061 645,797
Federal Home Loan Bank stock, at cost (note 3)......... 16,426 14,638
Other real estate owned (note 5)....................... 1 133
Accrued interest receivable............................ 8,727 7,124
Office properties and equipment, net (note 6).......... 8,747 8,428
Deferred tax asset, net (note 10)...................... 2,671 3,405
Other assets (note 14)................................. 6,736 3,539
---------- ----------
Total assets......................................... $1,155,048 $1,032,213
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 7)..................................... $ 729,096 $ 652,509
Federal Home Loan Bank advances (note 8).............. 297,358 267,171
ESOP debt (note 14)................................... 1,037 1,394
Mortgagors' escrow payments........................... 2,343 2,087
Securities sold under agreements to repurchase (note
9)................................................... 3,804 727
Other (note 14)....................................... 8,357 6,923
---------- ----------
Total liabilities.................................... 1,041,995 930,811
---------- ----------
Commitments and contingencies (notes 4, 11, and 12)
Stockholders' equity (notes 13 and 14):
Preferred stock, $.01 par value; 2,000,000 shares au-
thorized, none issued................................ -- --
Common stock, $.01 par value; 18,000,000 shares autho-
rized; shares issued 6,751,146 in 1997 and 6,683,958
in 1996.............................................. 67 66
Additional paid-in capital ........................... 50,360 49,146
Retained earnings--restricted (notes 2 and 13)........ 66,128 57,518
Treasury stock at cost, 247,500 shares................ (3,402) (3,402)
Unearned compensation--ESOP (note 14)................. (1,019) (1,394)
Net unrealized gain (loss) on investment securities,
net of tax effects
(notes 3 and 10)..................................... 919 (532)
---------- ----------
Total stockholders' equity........................... 113,053 101,402
---------- ----------
Total liabilities and stockholders' equity........... $1,155,048 $1,032,213
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
40
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996 1995
-------- ------- -------
Interest and dividend income:
Interest and fees on loans...................... $ 56,479 $48,661 $41,924
Interest and dividend income on investment
securities..................................... 24,794 22,415 18,598
Interest on federal funds sold and overnight
deposits....................................... 238 265 474
-------- ------- -------
Total interest and dividend income............ 81,511 71,341 60,996
-------- ------- -------
Interest expense:
Interest on deposits (note 7)................... 28,533 25,775 22,878
Interest on borrowed funds...................... 17,479 14,289 10,346
-------- ------- -------
Total interest expense........................ 46,012 40,064 33,224
-------- ------- -------
Net interest income............................... 35,499 31,277 27,772
Provision for possible loan losses (note 4)....... 1,000 605 325
-------- ------- -------
Net interest income after provision for possible
loan losses...................................... 34,499 30,672 27,447
-------- ------- -------
Noninterest income:
Mortgage loan servicing fees.................... 259 309 324
Customer service fees and other................. 1,442 1,300 1,320
Gain (loss) on sales of securities, net......... 250 (47) 33
Gain on sales of loans, net..................... 347 76 16
-------- ------- -------
Total noninterest income...................... 2,298 1,638 1,693
-------- ------- -------
Noninterest expenses:
Compensation and employee benefits (notes 14 and
15)............................................ 10,726 9,252 8,770
Occupancy and equipment (notes 6 and 12)........ 2,337 2,086 1,994
Data processing................................. 1,062 835 792
Professional services........................... 481 702 786
Federal Deposit Insurance premiums (notes 1 and
7)............................................. 265 2,860 1,006
Other real estate owned expenses (income), net
(note 5)....................................... (183) 129 (107)
Marketing and promotion......................... 747 572 496
Merger expenses (note 2)........................ -- -- 1,989
Other........................................... 2,491 2,530 2,508
-------- ------- -------
Total noninterest expenses.................... 17,926 18,966 18,234
-------- ------- -------
Income before provision for income taxes.......... 18,871 13,344 10,906
Provision for income taxes (note 10).............. 7,015 4,821 5,199
-------- ------- -------
Net income.................................... $ 11,856 $ 8,523 $ 5,707
======== ======= =======
Earnings per share (note 1):
Basic........................................... $ 1.86 $ 1.35 $ .88
======== ======= =======
Diluted......................................... $ 1.78 $ 1.32 $ .86
======== ======= =======
Weighted average shares outstanding:
Basic........................................... 6,369 6,299 6,519
======== ======= =======
Diluted......................................... 6,659 6,461 6,659
======== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
41
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(RESTATED FOR MAY 30, 1997 STOCK SPLIT)
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,
1994................... $ 66 $48,056 $ -- $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
($.26 per share)...... -- -- -- (1,672) -- -- (1,672)
Change in net
unrealized gain (loss)
on securities
available for sale,
net of tax effect..... -- -- -- -- -- 1,633 1,633
---- ------- ------- ------- ------- -------- --------
Balance at December 31,
1995................... 66 48,250 -- 51,563 (679) 90 99,290
Net income............. -- -- -- 8,523 -- -- 8,523
Common stock acquired
by ESOP............... -- 231 679 -- (910) -- --
ESOP transactions...... -- 127 -- 34 195 -- 356
Issuance of common
stock under stock
option plan........... -- 396 -- -- -- -- 396
Purchase of treasury
stock................. -- -- (4,081) -- -- -- (4,081)
Tax benefit from stock
options exercised..... -- 142 -- -- -- -- 142
Cash dividends declared
($.41 per share)...... -- -- -- (2,602) -- -- (2,602)
Changes in net
unrealized gain (loss)
on securities
available for sale,
net of
tax effect............ -- -- -- -- -- (622) (622)
---- ------- ------- ------- ------- -------- --------
Balance at December 31,
1996 66 49,146 (3,402) 57,518 (1,394) (532) 101,402
Net income............. -- -- -- 11,856 -- -- 11,856
ESOP transactions...... -- 360 -- 51 375 -- 786
Issuance of common
stock under stock
option plan........... 1 539 -- -- -- -- 540
Tax benefit from stock
options exercised..... -- 315 -- -- -- -- 315
Cash dividends declared
($.51 per share)...... -- -- -- (3,297) -- -- (3,297)
Change in net
unrealized gain (loss)
on securities
available for sale,
net of tax effect..... -- -- -- -- -- 1,451 1,451
---- ------- ------- ------- ------- -------- --------
Balance at December 31,
1997................... $ 67 $50,360 $(3,402) $66,128 $(1,019) $ 919 $113,053
==== ======= ======= ======= ======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
42
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
--------- --------- --------
Cash flows from operating activities:
Net income.................................... $ 11,856 $ 8,523 $ 5,707
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses............ 1,000 605 325
Provision for losses on other real estate
owned........................................ -- 220 220
Depreciation and amortization................. 907 771 644
Gain on sales of loans........................ (347) (76) (16)
(Gain) loss on sales of securities............ (250) 47 (33)
Net gain on sales of other real estate owned.. (44) (285) (361)
Net amortization of premiums on investment
securities................................... 214 696 620
(Benefit) provision for (prepaid) deferred
income taxes................................. (138) 86 751
ESOP transactions............................. 786 392 228
Increase in Federal Home Loan Bank stock...... (1,788) (4,283) (549)
Originations of loans held for sale........... (29,441) (7,755) (16,354)
Proceeds from sales of loans originated for
resale....................................... 25,833 7,831 14,669
Increase in accrued interest receivable....... (1,603) (1,251) (1,014)
Other, net.................................... (388) 715 (242)
--------- --------- --------
Net cash provided by operating activities.... 6,597 6,236 4,595
Cash flows from investing activities:
Proceeds from sales of investment securities
available for sale........................... 27,637 1,104 4,423
Proceeds from maturities of investment
securities available for sale................ 25,820 30,510 21,040
Proceeds from maturities of investment
securities held to maturity.................. 45,278 10,974 15,503
Purchases of investment securities available
for sale..................................... (109,146) (85,953) (45,172)
Purchases of investment securities held to
maturity..................................... (74,848) (34,162) (37,587)
Principal payments received on investment
securities available for sale................ 11,536 8,642 3,136
Principal payments received on investment
securities held to maturity.................. 30,547 27,464 28,353
Purchase of loans............................. (5,659) -- --
Loan originations, net of repayments.......... (52,417) (111,487) (66,402)
Proceeds from sale of office properties and
equipment.................................... -- -- 201
Purchases of office properties and equipment.. (1,226) (753) (1,466)
Capitalized costs associated with other real
estate owned net of payments received........ -- (108) (92)
Proceeds from sales of other real estate
owned........................................ 348 815 1,938
--------- --------- --------
Net cash used by investing activities........ (102,130) (152,954) (76,125)
Cash flows from financing activities:
Net increase in deposits...................... 76,587 68,677 51,562
Additions to Federal Home Loan Bank advances.. 30,187 80,336 26,635
Increase in mortgagors' escrow payments....... 256 183 87
Increase in securities sold under agreements
to repurchase................................ 3,077 727 --
Proceeds from issuance of common stock........ 540 396 108
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............................. (357) (144) (142)
Cash dividends paid on common stock........... (3,297) (2,602) (2,203)
--------- --------- --------
Net cash provided by financing activities.... 106,993 144,351 76,047
Net increase (decrease) in cash and cash
equivalents................................... 11,460 (2,367) 4,517
Cash and cash equivalents at beginning of
year.......................................... 15,795 18,162 13,645
--------- --------- --------
Cash and cash equivalents at end of year....... $ 27,255 $ 15,795 $ 18,162
========= ========= ========
Supplemental disclosures of cash flow
information:
Interest paid on deposits..................... $ 28,122 $ 25,742 $ 25,373
Interest paid on borrowed funds............... 17,908 14,859 10,115
Income taxes paid, net of refunds............. 7,068 5,525 4,437
Supplemental disclosures of non-cash
transactions:
Transfers to (from) foreclosed real estate.... 172 1,006 (622)
Loans granted on sale of foreclosed real
estate....................................... 162 1,497 827
Investment securities transferred to available
for sale..................................... -- -- 24,788
Securitization of loans to mortgage backed
investments available for sale............... -- 2,326 --
The accompanying notes are an integral part of these consolidated financial
statements.
43
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
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 three wholly owned direct subsidiaries, Lexington
Savings Bank ("Lexington"), a Massachusetts chartered savings bank, The
Federal Savings Bank, a federally chartered savings bank ("Federal"), and
Middlesex Bank & Trust Company ("Middlesex") which are located in Lexington,
Massachusetts, Waltham, Massachusetts, and Newton, Massachusetts,
respectively. Lexington and Middlesex, as state chartered banks, are 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 five wholly owned
subsidiaries, Main Street Building Corporation ("MSBC"), Main Street
Investment Corporation ("MSIC"), TFSB Securities Corp I, TFSB Securities Corp
II and TFSB Securities Corp III. MSBC holds, operates, manages and disposes of
real estate owned acquired through foreclosure. It was dissolved on January 8,
1998. 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. TFSB Securities Corp III was formed in July
1997 for a similar purpose. Middlesex, which opened for business on June 2,
1997, has one office and no subsidiaries. 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.
On April 23, 1997 Affiliated declared a 25% stock split of its common stock
to be effected in the form of a stock dividend. This split was effective 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. All share and per share numbers (except as noted
otherwise) in this report have been restated to reflect this split.
44
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Investment securities
Debt securities that management has the positive intent and ability to hold
to maturity are 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 Statement of Financial Accounting Standard ("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 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.
Loans held for sale are carried at the lower of aggregate cost or market
value. No adjustments for unrealized losses were required for 1997, 1996 and
1995.
45
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 amount capitalized is based on the allocation of the total cost
of the mortgage loans to the mortgage servicing rights and the loans without
the mortgage servicing rights based on their relative fair values. In
addition, capitalized mortgage servicing rights are required to be assessed
for impairment based on the fair value of those rights.
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. Each time the Company undertakes an obligation to service financial
assets it shall recognize either a servicing asset or a servicing liability
for that contract, unless it securitizes the assets, retains the resulting
securities and classifies them as debt securities held-to-maturity.
The cost of mortgage servicing rights are 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
46
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
measuring impairment, the rights are stratified based on the following
predominant risk characteristics of the 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.
Mortgage servicing rights of $107,000 and $31,000 were capitalized and
amortization of the mortgage servicing rights was $10,000 and $3,000 in 1997
and 1996, respectively. No adjustment was required in 1997 and 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. Subsequent writedowns
of the carrying value of the foreclosed assets are charged to expense 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. Generally, the
Bank charges 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, which amounted to $570,000 at December 31, 1997, is being amortized over
ten years by the straight-line method.
Organizational costs attributable to establishment of Middlesex Bank & Trust
Company in 1997 are being amortized over five years by the straight line
method. At December 31, 1997 the remaining balance of organizational costs to
be amortized amounted to $490,000.The Company reviews its intangible assets,
including goodwill, for events or changes in circumstances that may indicate
that the carrying amount of the assets may not be recoverable.
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." This standard requires that long-lived assets and certain identifiable
intangibles to be held, be reviewed for impairment whenever management becomes
aware of events or changes in circumstances indicating that the carrying
amount of an asset may not be recoverable. An impairment loss based on the
fair value of the asset is recognized if the expected cash flows from the use
and eventual disposition of the asset are less than the carrying amount of the
asset. No impairment losses were required in 1997 or 1996. Adoption of this
standard did not have a material impact on the Company or its results of
operations.
Income taxes
Deferred tax assets and liabilities are 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 settled. As changes in tax laws
orrates are enacted, deferred tax assets and liabilities will be adjusted
accordingly through the provision for income taxes.
47
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
The Company adopted SFAS No. 128 "Earnings Per Share (EPS)" effective for
annual periods ending after December 15, 1997. In accordance with SFAS No. 128
earnings per share are calculated in two ways:
--Basic earnings per share is computed by dividing reported net income by
the weighted average number of common stock shares outstanding during the
year.
--Diluted earnings per share is computed by dividing net income by the
weighted average number of common stock shares outstanding during the
year, plus the common stock equivalents of stock options calculated using
the average share price during the reporting period.
Prior year earnings per share amounts have been restated accordingly. The
effect of this accounting change on previously reported EPS data was as
follows:
1996 1995
----- -----
Per Share Amounts:
Primary EPS as reported.................................... $1.32 $0.86
Effect of SFAS No. 128..................................... 0.03 0.02
----- -----
Basic EPS as restated...................................... $1.35 $0.88
===== =====
Fully diluted EPS as reported.............................. $1.31 $0.86
Effect of SFAS No. 128..................................... 0.01 --
----- -----
Diluted EPS as restated.................................... $1.32 $0.86
===== =====
Dividends declared per share for the year ended December 31, 1995 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 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which is to become effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 established standards for reporting and
display of comprehensive income and its components. Comprehensive income is
the total of net income and all other nonowner changes in
equity.Reclassification of financial statements of earlier periods presented
for comparative purposes is required.
Reclassifications
Certain reclassificiations have been made to the 1995 and 1996 consolidated
financial statements to conform with the 1997 presentation. Such
reclassifications have no effect on previously reported consolidated net
income.
48
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. AFFILIATION
Effective 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"). (Share and per share data
does not reflect the May 30, 1997 stock split.)
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.
(Shares do not reflect May 30, 1997 stock split.)
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:
Basic (1)........................................ $ 1.04 $ 1.09
Diluted (1)...................................... $ 1.01 $ 1.08
Total assets....................................... $ 404,717 $ 432,393
Deposits........................................... $ 256,511 $ 317,826
Stockholders' equity............................... $ 38,936 $ 59,790
- --------
(1) Not adjusted for May 30, 1997 stock split.
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.
49
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,
1997 and 1996, with gross unrealized gains and losses, are as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------------------------- ----------------------------------------
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.. $106,986 $ 334 $(140) $107,180 $ 86,645 $ 86 $ (849) $ 85,882
Corporate bonds........ 1,012 3 -- 1,015 2,034 5 (1) 2,038
Asset-backed
securities............ 14,861 190 (52) 14,999 4,473 12 (161) 4,324
Mortgage-backed
securities:
Balloons............... -- -- -- -- -- -- -- --
Fixed.................. 12,294 202 (6) 12,490 12,018 47 (118) 11,947
Variable............... 21,149 448 (98) 21,499 25,313 389 (139) 25,563
-------- ------ ----- -------- -------- ------ ------- --------
Total mortgage-backed
securities........... 33,443 650 (104) 33,989 37,331 436 (257) 37,510
-------- ------ ----- -------- -------- ------ ------- --------
Mortgage-backed
derivatives........... 10,947 87 -- 11,034 7,585 11 -- 7,596
Marketable equity
securities............ 35,884 929 (184) 36,629 22,327 368 (201) 22,494
-------- ------ ----- -------- -------- ------ ------- --------
Total securities
available for sale... $203,133 $2,193 $(480) $204,846 $160,395 $ 918 $(1,469) $159,844
======== ====== ===== ======== ======== ====== ======= ========
SECURITIES HELD TO
MATURITY:
Government securities.. $ 52,687 $ 214 $ (42) $ 52,859 $ 39,304 $ 232 $ (67) $ 39,469
Corporate bonds........ 1,254 12 -- 1,266 3,003 12 -- 3,015
Asset-backed
securities............ 21,592 156 (64) 21,684 19,466 100 (195) 19,371
Mortgage-backed
securities:
Balloons............... 28,480 110 (99) 28,491 43,583 49 (526) 43,106
Fixed.................. 45,107 957 (5) 46,059 39,702 402 (157) 39,947
Variable............... 12,551 66 (57) 12,560 14,958 59 (149) 14,868
-------- ------ ----- -------- -------- ------ ------- --------
Total mortgage-backed
securities........... 86,138 1,133 (161) 87,110 98,243 510 (832) 97,921
-------- ------ ----- -------- -------- ------ ------- --------
Mortgage-backed
derivatives........... 10,952 155 (26) 11,081 13,494 174 (72) 13,596
-------- ------ ----- -------- -------- ------ ------- --------
Total securities held
to maturity.......... $172,623 $1,670 $(293) $174,000 $173,510 $1,028 $(1,166) $173,372
======== ====== ===== ======== ======== ====== ======= ========
Federal Home Loan Bank
stock, at cost........ 16,426 -- -- 16,426 14,638 -- -- 14,638
-------- ------ ----- -------- -------- ------ ------- --------
Total investment
securities........... $392,182 $3,863 $(773) $395,272 $348,543 $1,946 $(2,635) $347,854
======== ====== ===== ======== ======== ====== ======= ========
At December 31, 1997 and 1996, the Company has pledged certain investment
securities with an amortized cost of $53,116,000 and $70,434,000,
respectively, and a fair value of $53,406,000 and $69,885,000, 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, 1997, 1996 and 1995,
are as follows:
DECEMBER 31,
-----------------------
1997 1996 1995
------- ------ ------
(IN THOUSANDS)
Proceeds from sales of investment securities...... $27,637 $1,104 $4,423
======= ====== ======
Realized gains on sales of investment securities.. $ 364 $ -- $ 70
======= ====== ======
Realized losses on sales of investment
securities....................................... $ (114) $ (47) $ (37)
======= ====== ======
50
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, 1997 and 1996 is as follows:
DECEMBER 31, 1997
------------------------------------------------------------------------------------------------------------
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... $ 1,003 $ 1,003 $1,012 $1,015 $ -- $ -- $ -- $ -- $ -- $ -- $ 2,015 $ 2,018
1 to 5 years.... 6,830 6,846 -- -- -- -- -- -- -- -- 6,830 6,846
5 to 10 years... 87,442 87,592 -- -- -- -- -- -- 19 19 87,461 87,611
Over 10 years... 11,711 11,739 -- -- 14,861 14,999 33,443 33,989 10,928 11,015 70,943 71,742
-------- -------- ------ ------ ------- ------- ------- ------- ------- ------- -------- --------
$106,986 $107,180 $1,012 $1,015 $14,861 $14,999 $33,443 $33,989 $10,947 $11,034 $167,249 $168,217
======== ======== ====== ====== ======= ======= ======= ======= ======= ======= ======== ========
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, 1997
------------------------------------------------------------------------------------------------------------
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... $ -- $ -- $ -- $ -- $ -- $ -- $ 1,148 $ 1,144 $ -- $ -- $ 1,148 $ 1,144
1 to 5 years.... 10,985 11,015 250 251 109 108 26,302 26,278 1,554 1,552 39,200 39,204
5 to 10 years... 40,902 41,046 -- -- 621 617 9,170 9,480 885 883 51,578 52,026
Over 10 years... 800 798 1,004 1,015 20,862 20,959 49,518 50,208 8,513 8,646 80,697 81,626
-------- -------- ------ ------ ------- ------- ------- ------- ------- ------- -------- --------
$ 52,687 $ 52,859 $1,254 $1,266 $21,592 $21,684 $86,138 $87,110 $10,952 $11,081 $172,623 $174,000
======== ======== ====== ====== ======= ======= ======= ======= ======= ======= ======== ========
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
======== ======== ====== ====== ======= ======= ======= ======= ======= ======= ======== ========
51
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, 1997, the mortgage-backed portfolio consisted of 1 year
adjustable rate securities ($34.1 million), 5 and 7 year balloons ($28.5
million), 15 year fixed rate securities ($51.1 million) and 30 year fixed rate
securities ($6.5 million). The adjustable rate securities were predominantly
30 year loans with annual rate adjustments. The $28.5 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 1.8 years at
December 31, 1997. The weighted average lives for the 15 and 30 year
securities were 3.6 and 3.3 years, respectively.
The mortgage-backed derivatives portfolio totalled $22.0 million, or 5.6% 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 $22.0 million balance at year end had an average life of 1.3 years
with 49% in monthly adjusting securities and the remaining 51% in fixed rate
securities.
4. LOANS
The following is a comparative summary of loan balances:
DECEMBER 31,
------------------
1997 1996
-------- --------
(IN THOUSANDS)
Mortgage loans on real estate:
1-4 family............................................. $469,453 $428,308
Multifamily............................................ 29,047 31,092
Commercial............................................. 108,183 94,419
Construction and land development, net................. 43,037 46,344
Premium on loans acquired.............................. 131 135
-------- --------
649,851 600,298
-------- --------
Other loans:
Consumer............................................... 3,074 3,545
Equity lines of credit................................. 18,636 16,204
Commercial............................................. 41,414 35,338
-------- --------
63,124 55,087
-------- --------
Less: Deferred loan fees and unearned income........... (1,273) (1,829)
-------- --------
Total loans............................................ 711,702 653,556
Less: Allowance for possible loan losses............... (8,641) (7,759)
-------- --------
Loans, net............................................. $703,061 $645,797
======== ========
52
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,
--------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Nonaccrual loans................................. $ 4,336 $ 4,886 $ 5,402
======== ======== ========
Restructured loans............................... $ 162 $ -- $ 199
======== ======== ========
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Income in accordance with original terms......... $ 441 $ 543 $ 552
Income recognized................................ 382 300 314
-------- -------- --------
Foregone interest income during year............. $ 59 $ 243 $ 238
======== ======== ========
For the year ended December 31, 1997 the average recorded investment in
impaired loans was $3,602,000 and the income recognized related to impaired
loans was $356,000. At December 31, 1997, the Company classified $3,897,000 of
its loans as impaired. The $3,897,000 has been measured under the fair value
of collateral method. A portion of these impaired loans, $2,989,000, has a
related valuation reserve of $578,000. In addition, $908,000 of impaired loans
did not, in the opinion of management, require a related valuation reserve.
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.
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, 1997
and 1996, Federal had approximately $4,632,000 and $4,248,000, respectively,
of outstanding loans to a single borrower secured by commercial and
construction properties.
Lexington and Middlesex, as state chartered banks, are subject to a 20% of
capital limitation with regard to outstanding loans to any one borrower.
53
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,
-------------------------
1997 1996 1995
------- -------- --------
(IN THOUSANDS)
Loans serviced for others......................... $98,449 $101,060 $111,980
======= ======== ========
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, 1997 and 1996 amounted to
$152,000 and $467,000, 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, 1997 and
1996 is as follows:
YEARS ENDED
DECEMBER 31,
---------------
1997 1996
------- ------
(IN THOUSANDS)
Balance at beginning of year................................ $ 2,513 $8,634
New loans................................................. 1,034 562
Payments.................................................. (1,364) (1,074)
Other..................................................... -- (5,609)
------- ------
Balance at end of year...................................... $ 2,183 $2,513
======= ======
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 $173,000 for 1997 and $166,000 for each of 1996 and
1995.
An analysis of the allowance for possible loan losses follows:
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Balance at beginning of year..................... $ 7,759 $ 7,127 $ 6,996
Provision for possible loan losses............... 1,000 605 325
Recoveries....................................... 90 447 150
------- -------- -------
8,849 8,179 7,471
Loans charged-off................................ (208) (420) (344)
------- -------- -------
Balance at end of year........................... $ 8,641 $ 7,759 $ 7,127
======= ======== =======
54
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,
---------------
1997 1996
------- -------
(IN THOUSANDS)
Residential 1-4 family....................................... $ -- $ 123
Land......................................................... 1 10
------- -------
Total.................................................... $ 1 $ 133
======= =======
The following is a summary of other real estate owned income (expenses),
net:
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
---------------- --------
(IN THOUSANDS)
Net gain on sales................................ $ 44 $ 285 $ 361
Provision for loss............................... -- (220) (220)
Net holding (costs) income....................... 139 (194) (34)
------- -------- --------
$ 183 $ (129) $ 107
======= ======== ========
6. OFFICE PROPERTIES AND EQUIPMENT, NET
Office properties and equipment at cost less accumulated depreciation and
amortization consisted of the following:
DECEMBER 31,
----------------
1997 1996
------- -------
(IN THOUSANDS)
Land....................................................... $ 1,621 $ 1,621
Office buildings and improvements.......................... 6,934 6,682
Leasehold improvements..................................... 621 430
Furniture, fixtures and equipment.......................... 3,989 3,468
------- -------
13,165 12,201
Accumulated depreciation and amortization.................. (4,418) (3,773)
------- -------
$ 8,747 $ 8,428
======= =======
Depreciation expense for the three years ended December 31, 1997, 1996 and
1995 amounted to $907,000, $771,000 and $644,000, respectively, and is
included in occupancy and equipment expenses.
55
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. DEPOSITS
Deposits are summarized as follows:
DECEMBER 31,
-----------------
1997 1996
-------- --------
(IN THOUSANDS)
Demand.................................................... $ 48,120 $ 41,557
NOW....................................................... 60,781 51,347
Regular savings........................................... 120,921 122,739
Money market.............................................. 72,571 66,492
-------- --------
Total non-certificate accounts.......................... 302,393 282,135
-------- --------
Certificates of less than $100,000........................ 315,075 297,990
Certificates of $100,000 and over......................... 111,628 72,384
-------- --------
Total certificate accounts.............................. 426,703 370,374
-------- --------
Total deposits.......................................... $729,096 $652,509
======== ========
Contractual maturities of certificate accounts at December 31, 1997 and 1996
were as follows:
1997 1996
------------------ ------------------
WEIGHTED WEIGHTED
AMOUNT AVG. RATE AMOUNT AVG. RATE
-------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
Within one year........................ $297,633 5.56% $267,177 5.51%
One to two years....................... 69,132 5.87% 47,416 5.93%
Two to three years..................... 24,503 6.29% 22,513 6.11%
Three to four years.................... 9,774 6.52% 11,241 6.52%
Four to five years..................... 16,426 6.48% 9,163 6.59%
Over five years........................ 9,235 6.67% 12,864 6.68%
-------- --------
$426,703 5.73% $370,374 5.70%
======== ==== ======== ====
Certificates of deposit obtained through brokers amounted to approximately
$57,087,000 at December 31, 1997 and $30,086,000 at December 31, 1996. The
terms of the $57,087,000 of certificates of deposit at December 31, 1997
provide for rates ranging between 5.20% and 7.00%, a weighted average rate of
5.82%, 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,
--------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Regular savings.................................. $ 3,121 $ 3,121 $ 3,206
NOW and money market accounts.................... 3,211 2,998 3,025
Certificate accounts............................. 22,201 19,656 16,647
-------- -------- --------
$ 28,533 $ 25,775 $ 22,878
======== ======== ========
56
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,
-------------------------------------
1997 1996
------------------ ------------------
WEIGHTED WEIGHTED
AMOUNT AVG. RATE AMOUNT AVG. RATE
-------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
Within 1 year.......................... $231,041 5.82% $177,300 5.64%
Over 1 year to 2 years................. 40,430 6.09 70,041 6.04
Over 2 years to 3 years................ 15,552 6.10 14,000 6.04
Over 3 years........................... 10,000 5.96 4,500 6.69
-------- --------
$297,023 5.88% $265,841 5.78%
======== ==== ======== ====
The advances require interest to be paid monthly, with principal due upon
maturity. In addition to the above borrowings, the Company had $335,000 and
$1,330,000 outstanding under its overnight lines of credit with the FHLBB at
December 31, 1997 and 1996, respectively.
The Company has available overnight lines of credit totaling $25.0 million
with the FHLBB at an interest rate that adjusts daily. The Company's total
borrowing capacity from the FHLBB was approximately $653 million at December
31, 1997. 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:
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
Average balance during the year.................. $ 3,214 $ 203
Average interest rate during the year............ 4.82% 4.76%
Maximum month-end balance during the year........ $ 4,758 $ 1,119
Agency securities underlying the agreements at
year end:
Carrying value................................. $ 3,804 $ 1,109
Estimated fair value........................... $ 3,804 $ 1,109
57
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 1997, 1996 and 1995 is as
follows:
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Current tax provision:
Federal....................................... $ 5,979 $ 4,097 $ 3,464
State......................................... 1,174 638 984
-------- -------- --------
7,153 4,735 4,448
-------- -------- --------
Deferred (prepaid) provision:
Federal....................................... (114) 35 555
State......................................... (24) 51 216
Change in valuation reserve................... -- -- (20)
-------- -------- --------
(138) 86 751
-------- -------- --------
$ 7,015 $ 4,821 $ 5,199
======== ======== ========
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,
----------------------------
1997 1996 1995
-------- -------- --------
Statutory rates................................ 35.0% 34.0% 34.0%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit...... 4.0 3.4 7.3
Merger expenses.............................. -- -- 6.2
Change in valuation reserve.................. -- -- (.2)
Dividends received deduction................. (2.0) (1.7) --
Other, net................................... .2 .4 .4
-------- -------- --------
Effective tax rates........................ 37.2% 36.1% 47.7%
======== ======== ========
At December 31, 1997 and 1996, the tax effects of items that give rise to
deferred taxes are as follows:
1997 1996
------- -------
(IN THOUSANDS)
Allowance for possible loan losses......................... $ 2,858 $ 2,737
Accrued expenses........................................... 310 231
Deferred loan fees......................................... (167) 24
Employee benefit plans..................................... 681 565
Depreciable property....................................... (609) (505)
Investments................................................ (538) 334
Valuation reserve.......................................... -- (46)
Other...................................................... 136 65
------- -------
Net deferred tax asset................................. $ 2,671 $ 3,405
======= =======
58
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's gross deferred tax asset was $3,985,000 and $3,956,000, at
December 31, 1997 and 1996, respectively. Gross deferred tax liabilities were
$1,314,000 and $551,000 at December 31, 1997 and 1996, 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, 1997, 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 $7,159,000 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,
---------------
1997 1996
------- -------
(IN THOUSANDS)
Financial instruments whose contract amounts represent
credit risk:
Commitments to originate loans and advance funds........ $60,398 $37,723
Unused lines of credit.................................. 53,326 41,953
Letters of credit....................................... 2,001 2,350
Fixed and variable rate loan origination commitments approximated
$15,028,000 and $21,891,000, respectively, at December 31, 1997 and
$11,240,000 and $4,653,000, respectively, at December 31, 1996.
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
59
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 purchase securities in the open market to deliver against the
contract or settle the contract for cash.
At December 31, 1997, the remaining commitments to deliver loans pursuant to
master commitments with secondary mortgage market investors amounted to
approximately $38,860,000. 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, the
President of Middlesex and the President of Federal, that provide for a
specified level of compensation for periods of eighteen, 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, 1997 pertaining to office properties and equipment, future
minimum lease payments are as follows:
FUTURE MINIMUM
YEARS ENDING DECEMBER 31, LEASE PAYMENTS
------------------------- --------------
(IN THOUSANDS)
1998..................................................... $549
1999..................................................... 416
2000..................................................... 300
2001..................................................... 272
2002..................................................... 258
Thereafter............................................... 46
Three of the lease agreements contain options to extend for a period up to
fifteen years. The cost of such extensions is not included above. Total rent
expense for the years ended December 31, 1997, 1996 and 1995 amounted to
$510,000, $476,000 and $540,000, respectively, and is included in occupancy
and equipment expenses.
60
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 15, 1997, Affiliated Community Bancorp, Inc. announced that it
had signed an Affiliation Agreement and Plan of Reorganization under which it
would be acquired by UST Corp. The transaction, which will be accounted for as
a pooling of interests, is expected to close during the second quarter of
1998, and is structured to qualify as a pooling of interests for accounting
purposes and as a tax-free exchange of 1.41 shares of UST common stock for
each share of Affiliated common stock. UST Corp. is a $3.7 billion Boston
based bank holding company which serves as the parent company to USTrust and
United States Trust Company. Through its subsidiaries, UST Corp. operates a
total of 66 banking offices throughout eastern Massachusetts and provides a
broad range of financial services, principally to individuals and small-and
medium-sized companies in New England. The transaction is subject to the
necessary shareholder and 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, 1997, that the Company and its primary subsidiary
banks meet all capital adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notification from the Company's
primary regulators categorized the Company as well capitalized and the
Company's three Banking subsidiaries 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.
61
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, 1997:
Total Capital (to Risk
Weighted Assets):
Affiliated
consolidated........... $ 119,049 18.65% $ 51,067 8.00% N/A
Federal................. 58,151 19.22% 24,206 8.00% 30,257 10.00%
Lexington............... 49,047 15.05% 26,069 8.00% 32,586 10.00%
Middlesex (1)........... 7,216 70.16% 823 8.00% 1,029 10.00%
Tier 1 Capital (to Risk
Weighted Assets):
Affiliated
consolidated........... $ 111,062 17.40% $ 25,534 4.00% N/A
Federal................. 54,419 17.99% 12,103 4.00% 18,154 6.00%
Lexington............... 45,759 14.04% 13,034 4.00% 19,552 6.00%
Middlesex (1)........... 7,179 69.80% 411 4.00% 617 6.00%
Tier 1 Capital (to
Average Assets):
Affiliated
consolidated........... $ 111,062 9.79% $ 34,045 3.00% N/A
Federal................. 54,419 9.23% 17,679 3.00% 29,464 5.00%
Lexington............... 45,759 8.58% 15,992 3.00% 26,653 5.00%
Middlesex (1)........... 7,179 42.05% 512 3.00% 854 5.00%
Tangible Capital (to
Adjusted Assets)
Federal................. $ 54,419 9.00% $ 9,070 1.50% N/A
- --------
(1) The high capital ratios of Middlesex reflect its status as a start-up
bank.
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% $ 22,741 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
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. Middlesex cannot pay dividends to the Company for a period
of three years or until initial operating losses are recovered, whichever
comes first.
62
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At the time of Lexington's and Federal's conversion from mutual to stock
form, liquidation accounts were established for the benefit of eligible
deposit account holders in the event of the failure of the Banks. The
liquidation accounts are reduced annually to the extent that eligible deposit
account holders reduce their qualifying deposits. In the event of a complete
liquidation of assets due to the failure of Lexington or Federal, an unlikely
event, eligible account holders could be entitled to receive a distribution
from the liquidation accounts to the extent that funds are available after
creditors have been paid. At December 31, 1997, Lexington's and Federal's
liquidation accounts had a balance of approximately $3,102,000 and
$12,864,000, respectively.
14. EMPLOYEE BENEFITS
Two of the Company's subsidiary banks, Lexington and Federal, provide the
following benefit programs. As of December 31, 1997, Middlesex had not yet
implemented any of the following described plans.
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 $337,000
for 1997, $383,000 for 1996 and $61,000 in 1995.
Net periodic pension cost for the plan years ended October 31, 1997, 1996
and 1995 consisted of the following:
1997 1996 1995
----- ----- ----
(IN THOUSANDS)
Service cost-benefits earned during year................. $ 312 $ 298 $206
Interest cost on projected benefits...................... 254 220 162
Actual return on plan assets............................. (398) (295) (273)
Net amortization and deferral............................ (4) (4) (4)
Amortization of net loss................................. 211 153 155
----- ----- ----
$ 375 $ 372 $246
===== ===== ====
Total Lexington pension expense for the years ended December 31, 1997, 1996
and 1995 amounted to $394,000, $312,000 and $313,000, 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, 1997, and 1996:
1997 1996
------- ------
(IN THOUSANDS)
Plan assets at fair value.................................. $ 3,277 $2,637
Projected benefit obligation............................... (4,207) (3,386)
------- ------
Excess of projected benefit obligation over plan assets.... (930) (749)
Unrecognized net obligation at transition.................. (71) (75)
Unrecognized net (gain) loss............................... 100 (39)
------- ------
Pension liability included on balance sheet................ $ (901) $ (863)
======= ======
63
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The accumulated benefit obligation (substantially all vested) at October 31,
1997 and 1996, amounted to $2,099,000 and $1,956,000, respectively, which was
less than the fair value of plan assets at those dates.
For the plan years ended October 31, 1997, 1996 and 1995, actuarial
assumptions include an assumed discount rate on benefit obligations of 7.25%,
7.50% and 7.00%, respectively, and an expected long-term rate of return on
plan assets of 7.00%, 8.00% and 8.00%, respectively. An annual salary increase
of 6% was utilized for all years.
Pension Plan--SERP
Beginning in 1995, Lexington and in 1997, Federal, provided 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
the two banks and executives. The SERP provides for yearly retirement benefits
based on the return on certain insurance policies purchased by the banks 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
$3,761,000 and $1,710,000 as of December 31, 1997 and 1996, 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,
1997, 1996 and 1995, was approximately $103,000, $17,000 and $3,000,
respectively. For 1997 compensation and employee benefits expense included
$31,000 in connection with the SERP plan. No expenses were incurred under the
SERP plan for 1996 and 1995.
Pension Plan--Federal
Under the Federal pension 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, 1997, 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, 1997, 1996 and
1995 was $7,000, $123,000 and $208,000, respectively, and is included in
compensation and employee benefits. Pension expense consists of Federal's
annual contributions to the Fund and certain administrative costs.
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 measurable impact on the
achievement of long-term business objectives. Compensation
64
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
under this plan is based on achievement of several performance objectives
established by the Affiliated Compensation Committee.
No individual obtained compensation from more than one of these plans. Total
expenses under these plans amounted to $579,000, $468,000 and $332,000 for
1997, 1996 and 1995, 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 $281,000, $317,000 and $110,000 for 1997, 1996
and 1995, 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 $140,000, $113,000, and $106,000
for the years ended December 31, 1997, 1996 and 1995, 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 75,000 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 50,000 shares of the Company's stock of
which 47,185 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 and is due February 27, 2001. 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
65
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
lending bank. The rate in effect at December 31, 1997 was 8.06%. Total
compensation expense applicable to the Lexington ESOP amounted to $299,000 and
$99,000 for 1997 and 1996, resectively. There was no compensation expense or
allocation of shares for the year ended December 31, 1995. In 1997 and 1996,
11,797 and 2,815 shares, respectively, were released and allocated to eligible
employees. Under the Lexington ESOP, shares are released annually and
allocated to particpants on October 31 of each year. There were no shares
committed to be released as of December 31, 1997. Dividends on allocated and
unreleased ESOP shares are credited to the accounts of the participants.
(Share numbers have been adjusted for the May 30, 1997 stock split.)
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 (125,000 shares) of the common stock of Main Street in
the Conversion. The Company recognized $470,000, $360,000 and $298,000 in
related compensation expense for the years ended December 31, 1997, 1996 and
1995, respectively. A portion of the shares are released annually by the
lender from collateral and allocated to employees; 17,857 shares were released
for allocation in each of the past three years. There were no shares committed
to be released as of December 31, 1997. 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
$393,000 and $535,000 at December 31, 1997 and 1996, 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, 1997 was 9.85%. The loan is due in 2000 and is secured
by 49,107 and 66,964 shares of Company common stock at December 31, 1997 and
1996, respectively. (Share numbers adjusted for May 30, 1997 stock split.)
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
287,500 and 143,750 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
363,400 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, 219,650
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 219,650
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 granted options on 132,501 shares for
the year ended December 31, 1996. On April 23, 1997 the Company received
shareholder approval to add an additional 312,500 shares under the 1995 Plan.
The Company granted options on 142,505 shares during 1997 and at December 31,
1997, 227,150 shares are available for future option grants.
66
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.
1997 1996 1995
-------- ------- -------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net Income:
As reported....................................... $ 11,856 $ 8,523 $ 5,707
Pro forma......................................... $ 11,610 $ 8,409 $ 5,643
Basic EPS:
As reported....................................... $ 1.86 $ 1.35 $ .88
Pro forma......................................... $ 1.82 $ 1.33 $ .87
Diluted EPS:
As reported....................................... $ 1.78 $ 1.32 $ .86
Pro forma......................................... $ 1.74 $ 1.30 $ .85
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 1997 and 1996:
Risk free interest rates of 6.54% to 6.87% (1997), 6.59% to 6.69% (1996) and
5.77% to 6.81% (1995)
Expected dividends of 2.4% for 1997 and 2.8% per annum for 1996 and 1995
Expected lives of 7.0 years
Expected volatility of 25% for 1997 and 23% for 1996 and 1995
The combined activity for options granted under the plans is as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- -----------------------
NUMBER OF WEIGHTED NUMBER OF WEIGHTED NUMBER OF WEIGHTED
SHARES AVERAGE PRICE SHARES AVERAGE PRICE SHARES AVERAGE PRICE
--------- ------------- --------- ------------- --------- -------------
Outstanding at
beginning
of year.............. 560,251 $10.10 493,125 $ 8.68 441,875 $ 7.99
Granted............... 142,505 $20.48 132,501 $13.56 63,750 $13.14
Forfeited............. -- $ -- (2,291) $ 8.00 -- --
Exercised............. (67,312) $ 8.06 (63,084) $ 6.28 (12,500) $ 7.00
------- ------ ------- ------ ------- ------
Outstanding at end of
year................. 635,444 $12.65 560,251 $10.10 493,125 $ 8.68
======= ====== ======= ====== ======= ======
Options exercisable at
end of year............ 454,600 $10.56 439,413 $ 9.16 383,326 $ 7.86
======= ====== ======= ====== ======= ======
Weighted average fair
value of options
granted................ $ 6.60 $ 3.68 $ 4.09
====== ====== ======
67
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- -------- --------
Detail of exercises during the year:
Exercised--at $ 4.20............................ 6,100 1,875 --
--at $ 5.00................................. 23,875 40,375 6,875
--at $ 6.80................................. 1,000 3,750 --
--at $ 8.00................................. 17,875 12,084 3,750
--at $11.30................................. 1,000 -- --
--at $12.30................................. 3,750 -- 1,875
--at $12.60................................. 3,750 3,750 --
--at $13.30................................. 3,750 -- --
--at $13.55................................. 2,187 1,250 --
--at $13.70................................. 2,775 -- --
--at $20.30................................. 1,250 -- --
-------- -------- --------
Total..................................... 67,312 63,084 12,500
======== ======== ========
The following table summarizes information about stock options outstanding
at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 12/31/97 LIFE PRICE AT 12/31/97 PRICE
- ------------------------ ----------- ----------- -------- ----------- --------
$ 4.20................... 13,900 3 years $ 4.20 13,900 $ 4.20
5.00................... 45,125 2 years $ 5.00 45,125 $ 5.00
6.80................... 40,250 5 years $ 6.80 40,250 $ 6.80
8.00................... 114,625 6 years $ 8.00 114,625 $ 8.00
10.70................... 3,750 6 years $10.70 3,750 $10.70
11.30................... 10,250 7 years $11.30 10,250 $11.30
12.30 to 12.60.......... 91,250 6 years $12.51 91,250 $12.51
13.30 to 13.90.......... 175,039 8 years $13.55 106,700 $13.56
19.75 to 21.50.......... 138,130 9 years $20.39 28,750 $20.23
$24.38................... 3,125 9 years $24.38 -- $ --
------- -------
635,444 454,600
======= =======
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.
68
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Investment Securities
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).
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.
69
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, 1997 and 1996 are as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
Financial assets:
Cash and due from banks.............. $ 16,911 $ 16,911 $ 11,331 $ 11,331
Federal funds sold and overnight
deposits............................ 10,344 10,344 4,464 4,464
Investment securities................ 377,469 378,846 333,354 333,216
Loans held for sale.................. 3,955 3,955 -- --
Loans, net........................... 703,061 709,651 645,797 646,783
Federal Home Loan Bank stock......... 16,426 16,426 14,638 14,638
Financial liabilities:
Non-certificate deposits............. 302,393 302,393 282,135 282,135
Certificates of deposits............. 426,703 427,166 370,374 370,507
Borrowed funds....................... 298,395 298,328 268,565 268,888
Escrow deposits...................... 2,343 2,343 2,087 2,087
Securities sold under agreements to
repurchase.......................... 3,804 3,804 727 727
Off-balance sheet instruments (see note
11):
Commitments to extend credit......... $ 631 $ 631 $ 285 $ 285
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.
70
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, 1997 and 1996 are as follows:
1997 1996
-------- --------
(IN THOUSANDS)
ASSETS
Cash and cash equivalents...................... $ 2,894 $ 10,160
Investment securities.......................... -- 740
Other assets................................... 811 35
Investment in bank subsidiaries:
The Federal Savings Bank..................... 54,593 49,006
Lexington Savings Bank....................... 47,072 41,609
Middlesex Bank & Trust Company............... 7,683 --
-------- --------
Total Assets............................... $113,053 $101,550
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses............................... $ -- $ 148
Stockholders' equity........................... 113,053 101,402
-------- --------
Total liabilities and stockholders'
equity.................................... $113,053 $101,550
======== ========
The condensed income statements for the years ended December 31, 1997, 1996
and 1995 are as follows:
1997 1996 1995
-------- -------- ------
(IN THOUSANDS)
Dividends from bank subsidiaries............... $ 4,010 $ 2,817 $2,029
Interest income................................ 304 486 546
Other.......................................... 194 10 --
-------- -------- ------
Total income................................. 4,508 3,313 2,575
Expenses....................................... 848 679 1,502
-------- -------- ------
Income before equity in undistributed
earnings of bank subsidiaries and income
taxes....................................... 3,660 2,634 1,073
-------- -------- ------
Equity in undistributed earnings of bank
subsidiaries:
The Federal Savings Bank..................... 4,337 2,217 3,225
Lexington Savings Bank....................... 4,079 3,617 1,390
Middlesex Bank & Trust Company............... (331) -- --
-------- -------- ------
Income before benefit for income taxes...... 11,745 8,468 5,688
Benefit for income taxes....................... (111) (55) (19)
-------- -------- ------
Net income................................. $ 11,856 $ 8,523 $5,707
======== ======== ======
71
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, 1997, 1996 and 1995:
1997 1996 1995
-------- ------- -------
(IN THOUSANDS)
Net Income..................................... $ 11,856 $ 8,523 $ 5,707
Adjustments to reconcile net income to net cash
provided by operations:
Undistributed earnings of bank subsidiaries.. (8,085) (5,834) (4,615)
Gain on sales of securities.................. (174) -- --
Decrease (increase) in other assets.......... (775) 446 (21)
(Decrease) increase in accrued expenses...... (103) 404 (14)
-------- ------- -------
Net cash provided by operating activities.... 2,719 3,539 1,057
Investment transactions:
Investment in subsidiary..................... (8,000) -- --
Purchase of securities....................... -- (740) --
Proceeds from sales of securities............ 772 -- --
Financing transactions:
Proceeds from issuance of common stock....... 540 396 108
Dividends paid............................... (3,297) (2,602) (2,203)
Increase in treasury stock................... -- (3,402) --
-------- ------- -------
Net decrease in cash......................... (7,266) (2,809) (1,038)
Cash and cash equivalents at beginning of
year.......................................... 10,160 12,969 14,007
-------- ------- -------
Cash and cash equivalents at end of year....... $ 2,894 $10,160 $12,969
======== ======= =======
Cash paid for taxes............................ $ 5,643 $ 4,237 $ 1,360
======== ======= =======
18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of consolidated operating results on a quarterly basis for the
years ended December 31, 1997 and 1996 is as follows:
1997
---------------------------------------------------------
FOURTH QUARTER THIRD QUARTER SECOND QUARTER FIRST QUARTER
-------------- ------------- -------------- -------------
(DOLLARS IN THOUSANDS)
Interest and dividend
income................. $21,228 $20,740 $19,983 $19,560
Interest expense........ 12,098 11,824 11,207 10,883
------- ------- ------- -------
Net interest
income............. 9,130 8,916 8,776 8,677
Provision for loan
losses................. 300 250 250 200
------- ------- ------- -------
Net interest income,
after provision...... 8,830 8,666 8,526 8,477
Other income............ 840 562 469 427
Operating expenses...... 4,880 4,540 4,299 4,207
------- ------- ------- -------
Income before income
taxes.................. 4,790 4,688 4,696 4,697
Provision for income
taxes.................. 1,762 1,739 1,754 1,760
------- ------- ------- -------
Net income.............. $ 3,028 $ 2,949 $ 2,942 $ 2,937
======= ======= ======= =======
Earnings per share
(diluted).............. $ .45 $ .44 $ .44 $ .45
======= ======= ======= =======
72
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
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
(diluted)(1)........... $ .42 $ .19 $ .38 $ .33
======= ======= ======= =======
- --------
(1) Third quarter of 1996 included pre-tax charge of $2,121,000 or $.19 per
share (after tax effect) for recapitalization of the Savings Association
Insurance Fund (SAIF) of the FDIC.
73
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
DIRECTORS
The Board of Directors of Affiliated consists of six members and is divided
into three classes, with each class consisting of two members. Directors serve
for staggered three-year terms with one class of Directors being elected at
each annual meeting of Affiliated stockholders.
Set forth below is certain information regarding Directors, based on
information furnished by them to Affiliated.
NAME AGE* DIRECTOR SINCE TERM TO EXPIRE
---- ---- -------------- --------------
Fred C. Bailey......................... 72 1995 2000
Kendrick G. Bushnell................... 68 1995 1999
Jack E. Chappell....................... 70 1995 2000
Timothy J. Hansberry................... 54 1995 1998
Edward S. Heald........................ 51 1995 1998
James E. McCobb, Jr.................... 55 1995 1999
- --------
* As of March 1, 1998
MR. BAILEY was Chairman of the Board of Directors of Lexington from 1994 to
1997 and was a member of the Lexington Board from 1986 to 1997. Prior to his
retirement in 1991, he was a Group Executive and Consultant for Teledyne,
Inc., an engineering and manufacturing firm.
MR. BUSHNELL is Chairman of the Board of Directors of Lexington and has been
a member of the Lexington Board since 1986. He is an independent management
consultant.
MR. CHAPPELL has served as Chairman of the Board of Directors of Affiliated
since the Affiliation in October 1995 and was a Director of Federal from 1980
until 1995. From 1987 to 1990, he was President and Chief Executive Officer of
Federal. From Federal's conversion to stock form in 1993 until the
Affiliation, Mr. Chappell also served as Chairman of Main Street, the holding
company of Federal prior to the Affiliation.
MR. HANSBERRY has been President, Chief Executive Officer and a Director of
Affiliated since its formation in April 1995. Mr. Hansberry served as the
President & Chief Executive Officer of Lexington from 1992 to 1995. Prior to
joining Lexington, Mr. Hansberry served as President and Chief Executive
Officer of Randolph Savings Bank from 1990 to 1992, and prior to that, as
Executive Vice President of Shawmut Bank, N.A.
MR. HEALD is Corporate Vice President and Branch Manager of A.G. Edwards &
Sons, Inc., Newton, Massachusetts, a financial services firm, where he has
been employed since 1982. He has been a Director of Federal since 1987 and was
a Director of Main Street from 1993 until the Affiliation.
MR. MCCOBB has served as President, Chief Executive Officer and Director of
Federal since August 1994. Mr. McCobb also served as Senior Vice President and
Chief Financial Officer of Federal from 1991 to 1994. Mr McCobb was President
and Chief Executive Officer and a Director of Main Street from 1994 until the
Affiliation, having previously seved as Main Street's Chief Financial Officer.
Prior to joining Federal, Mr. McCobb was employed from 1984 to 1991 by Andover
Bank, a Massachusetts chartered stock savings bank and a subsidiary of Andover
Bancorp, Inc., where he served at various times as President, Executive Vice
President, Chief Financial Officer and a Director.
74
EXECUTIVE OFFICERS
Each of Affiliated's executive officers serves at the discretion of the
Board. Set forth below is certain information as of March 1, 1998 regarding
all of the current executive officers of Affiliated.
NAME AGE POSITION
---- --- --------
Timothy J. Hansberry........ 54 President, Chief Executive Officer and Director
John G. Fallon.............. 51 Executive Vice President and Chief Financial Officer
Quentin J. Greeley, Esq..... 55 Executive Vice President, General Counsel and Clerk
MR. HANSBERRY has been President, Chief Executive Officer and a Director of
Affiliated since its formation in April 1995. (See additional biographical
information above.)
MR. FALLON has been Executive Vice President and Chief Financial Officer of
Affiliated since its formation in April 1995 and formerly served as Executive
Vice President of Lexington. Mr. Fallon has also been a Director of Middlesex
since May 1997. Prior to joining Lexington in 1993, Mr. Fallon was a Senior
Vice President at Shawmut Bank, N.A.
MR. GREELEY has been Executive Vice President, General Counsel and Clerk of
Affiliated since its formation in April 1995 and also has been a Vice
President, General Counsel and Secretary of Federal from 1990 to the present.
He has been a Senior Vice President of Federal since 1993. Mr Greeley has also
been the Clerk of Middlesex since May 1997 and Secretary pro tem of Lexington
since 1996. Mr. Greeley was Senior Vice President, General Counsel and Clerk
of Main Street from 1993 until the Affiliation.
75
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows the annual compensation paid to the five highest
paid executive officers among Affiliated and its subsidiary banks who received
cash compensation in excess of $100,000 for 1997. Under the terms of a cost
allocation agreement among Affiliated, Federal and Lexington, the compensation
and benefits of Affiliated executives are paid either by Federal or Lexington
with subsequent reimbursement by Affiliated to Federal or Lexington as
appropriate. Effective May 30, 1997 Affiliated implemented a 25% stock split
of its common stock effected in the form of a stock dividend. Therefore, all
Affiliated common stock share numbers and values set forth below have been
restated to reflect the stock split.
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------- -----------------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL COMPENSATION OPTIONS COMPENSATION
POSITION YEAR SALARY($) BONUS($)(1) ($)(2) (#)(3) ($)
------------------ ---- --------- ----------- ------------ ---------- ------------
Timothy J. Hansberry.... 1997 250,000 100,000 -- 18,750 19,856(5)(6)
President & CEO 1996 228,750 75,000 -- 18,750 3,472(5)(6)
(Affiliated) 1995 194,376 66,000 -- -- 1,022(6)
James E. McCobb, Jr..... 1997 179,000 75,000 -- 10,000 41,572(4)(5)
President & CEO 1996 167,500 60,000 -- 10,000 28,039(4)(5)
(Federal) 1995 150,769 60,000 -- -- 20,802(4)(5)
William J. Gaddis, Jr... 1997 155,000 75,000 -- 10,000 19,152(5)(6)
President & CEO 1996 140,000 50,000 -- 8,750 2,828(5)(6)
(Lexington) 1995 123,385 25,000 -- -- 427(6)
Jonh G. Fallon.......... 1997 154,000 75,000 -- 10,000 19,237(5)(6)
Executive V.P. & CFO 1996 142,500 45,000 -- 8,750 2,899(5)(6)
(Affiliated) 1995 123,000 31,000 -- -- 561(6)
Richard E. Green........ 1997 119,375 26,000 -- 3,750 36,275(4)(5)
Senior VP & Chief 1996 110,750 26,000 -- 5,625 22,975(4)(5)
Lending Officer 1995 102,000 22,000 -- -- 15,371(4)(5)
(Federal)
- --------
(1) Bonus compensation includes any cash incentive payments (including total
incentive compensation and/or profit sharing plans). Amounts reported for
each year include payments made in the subsequent fiscal year that relate
back to the year reported.
(2) There were none of the following: (a) payment of above-market or
preferential earnings on restricted stock, options or stock appreciation
rights ("SARs"), or deferred compensation; (b) deferred payments of
earnings with respect to long-term incentive plans; (c) tax payment
reimbursements; (d) preferential discounts on purchases of Common Stock;
or (e) perquisites over the lesser of $50,000 or 10% of the individual's
aggregate salary and bonus for the year.
(3) Represents the number of stock options granted under the Affiliated 1995
Stock Option Plan in 1996 and 1997, respectively.
(4) Includes amount of contributions by Federal to Federal's tax-exempt profit
sharing plan that is qualified under Section 401(k) of the Internal
Revenue Code of 1986, as amended.
(5) Includes dollar value determined by multiplying the number of shares of
Affiliated Common Stock allocated to the account of the executive under
Federal's or Lexington's Employees' Stock Ownership Plan ("ESOP") for each
fiscal year by the closing price of such Common Stock as listed on the
NASDAQ National Market System on the last trading date of such year. The
aggregate number of allocated shares with respect to any of the above
executives as of December 31, 1997 is as follows: Mr. Hansberry--626; Mr.
McCobb--4,266; Mr. Gaddis--626; Mr. Fallon--626 and Mr. Green--3,522.
(6) Includes insurance benefits attributable to the Lexington Supplemental
Executive Retirement Plan.
76
OPTION GRANTS IN LAST FISCAL YEAR
The following table describes stock options granted during 1997 to the
executive officers set forth in the Summary Compensation Table above.
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATE OF
SECURITIES TOTAL STOCK PRICE
UNDERLYING OPTIONS APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM($)(2)
GRANTED EMPLOYEES PRICE EXPIRATION ------------------
NAME (#)(1) IN 1997 ($/SH) DATE 5% 10%
---- ---------- ---------- -------- ---------- -------- ---------
Timothy J. Hansberry.... 18,750 16.5% 20.30 4-23-07 239,373 606,618
James E. McCobb, Jr..... 10,000 8.8% 20.30 4-23-07 127,666 323,530
William J. Gaddis, Jr... 10,000 8.8% 20.30 4-23-07 127,666 323,530
John G. Fallon.......... 10,000 8.8% 20.30 4-23-07 127,666 323,530
Richard E. Green........ 3,750 3.3% 20.30 4-23-07 47,875 121,324
- --------
(1) Except as described in Note (3) below, all are incentive stock options
under the Affiliated 1995 Stock Option Plan (the "Plan"). These options
were granted on April 23, 1997 and vest ratably over the first three
anniversaries of the grant date.
(2) Net gains from potential stock option exercises are estimated based on
assumed rates of stock price appreciation over the options' terms, as set
forth in rules promulgated by the Securities and Exchange Commission, and
are not intended to forecast possible future appreciation of the Common
Stock. The actual net gains, if any, are dependent on the actual future
performance of the Common Stock and overall stock market conditions.
(3) By application of Internal Revenue Code section 422(d) to the extent that
the aggregate fair market value of stock with respect to which incentive
stock options first become exercisable during any calendar year exceeds
$100,000, such options shall be treated as options which are not incentive
stock options.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR END VALUES
The following table sets forth certain information concerning the number and
value of exercised and unexercised options to purchase Affiliated's Common
Stock at December 31, 1997. Affiliated has never granted any SARs.
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT YEAR-END(#) OPTIONS AT YEAR-END($)(2)
SHARES ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------------- ----------- ------------- ----------- -------------
Timothy J. Hansberry.... 1,000 16,700 46,500 31,250 1,396,988 629,688
James E. McCobb, Jr..... -- -- 28,333 16,667 781,409 335,841
William J. Gaddis, Jr... -- -- 25,416 15,834 636,442 315,683
John G. Fallon.......... -- -- 25,416 15,834 636,442 315,683
Richard E. Green........ -- -- 16,875 7,500 491,625 156,188
- --------
(1) Represents the spread between the market value of the shares on the date
of exercise and the option exercise price.
(2) Represents the market value of shares of Common Stock covered by in-the-
money options on December 31, 1997, less the aggregate option exercise
price. Options are in-the-money if the market value of the shares covered
thereby is greater than the option exercise price. The closing market
price of the Common Stock on December 31, 1997 was $37.75 per share.
77
PENSION PLANS
Two of Affiliated's subsidiary banks, Federal and Lexington, maintain
pension plans. The following tables show estimated annual benefits payable
upon retirement in specified compensation and years of service classifications
for each of Federal and Lexington.
THE FEDERAL SAVINGS BANK PENSION PLAN
YEARS OF SERVICE
---------------------------------
RENUMERATION 10 20 30 40
------------ ------- ------- -------- --------
$ 60,000...................................... $ 8,900 $17,900 $ 26,800 $ 36,600
80,000...................................... 12,400 24,900 37,300 50,600
100,000...................................... 15,900 31,900 47,800 64,600
120,000...................................... 19,400 38,900 58,300 78,600
150,000...................................... 24,700 49,400 74,100 99,600
200,000(1)................................... 33,400 66,900 100,300 134,600
- --------
(1) Represents maximum amount payable under the pension plan in 1997. Above
figures do not reflect the change in maximum compensation limit from
$235,840 to $150,000 effective July 1, 1994. Benefits accrued prior to
July 1, 1994 are based on the prior compensation limit.
LEXINGTON SAVINGS BANK PENSION PLAN
YEARS OF SERVICE
------------------------------------
RENUMERATION 10 15 30 25 AND AFTER
------------ ------- ------- ------- ------------
$ 60,000................................... $ 9,342 $14,013 $18,684 $23,354
80,000................................... 13,042 19,563 26,084 32,604
100,000................................... 16,742 25,113 33,484 41,854
120,000................................... 20,442 30,663 40,884 51,104
150,000(2)................................ 25,992 38,988 51,984 64,979
160,000(2)................................ 27,842 41,763 55,684 69,604
- --------
(2) Federal law does not permit defined benefit pension plans to recognize
compensation in excess of $150,000 for plan years beginning in 1994.
To determine the annual amount to be received by an individual under the
pension plans, the three highest yearly amounts of cash compensation are
averaged to determine the individual's "Remuneration" for purposes of the
table. The individual's annual pension plan payments then are ascertained by
locating the person's years of service on the table. Benefits are not subject
to any deduction for Social Security.
The years of service of each executive for purposes of the table are as
follows: Mr. Hansberry (Lexington)--5, Mr. McCobb (Federal)--6, Mr. Gaddis
(Lexington)--4, Mr. Fallon (Lexington)--4 and Mr. Green (Federal)--6.
DIRECTOR COMPENSATION
Affiliated Director compensation levels were initially approved in December
1995 and modified in October 1997. In summary, Director's fees were
established as follows: Affiliated's Directors (other than employees of
Affiliated) are paid a retainer of $1,500 per quarter (annually, $6,000) and
$1,000 for each Board meeting attended. For membership on each Committee they
are paid a further retainer of $500 per quarter (annually, $2,000) and $500
per meeting. The Chairman of the Board of Directors is paid an annual retainer
of $5,000 per
78
quarter (annually, $20,000) and receives no other retainer fees. In addition,
the Chairman of the Board of Directors has use of office space at Affiliated's
offices. Each Chairman of a Committee receives $750 per quarter (annually,
$3,000) in lieu of the regular Committee retainer. During 1997 a total of
$85,000 was paid to Directors for various meetings.
SPECIAL TERMINATION AND SEVERANCE AGREEMENTS
Affiliated has entered into special termination agreements with Messrs.
Hansberry, Gaddis, Fallon, Green and Greeley. These agreements provide for the
payment of certain severance benefits if any such officer's employment with
Affiliated is terminated (other than for cause), or if such officer terminates
his employment under certain circumstances, within three years after a change
of control of Affiliated. With respect to Mr. Hansberry, the payment is equal
to three times his annualized includible compensation for the base period, as
defined in the agreement, and two times for Messrs. Gaddis, Fallon, Green and
Greeley. These agreements were modified in 1997 to increase the benefit
payment to their current levels. Prior to the revision, Mr Hansberry's benefit
was two times his annualized includible compensation for the base period, and
one and one-half times for Messrs. Gaddis, Fallon, Green and Greeley. For
purposes of each of the special termination agreements, a "change of control"
is generally deemed to have occurred (i) when any "person" (as such term is
used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "1934 Act") becomes a "beneficial owner" (as such term is defined
in Rule 13d-3 promulgated under the 1934 Act), directly or indirectly, of
securities of Affiliated representing 25% or more of the total number of votes
that may be cast for the election of Directors; or (ii) if, as a result of, or
in connection with, any tender or exchange offer, merger or other business
combination, sale of assets or contested election, or any combination of the
foregoing transactions, the persons who were Directors of Affiliated
immediately before such transaction shall cease to constitute a majority of
the Board of Directors of Affiliated or of any successor institution.
Affiliated has also entered into a severance agreement with Mr. Hansberry
which would enable him to receive certain termination payments and benefits in
the event his employment were terminated, whether or not as a result of a
change in control. In such event, Mr. Hansberry's salary would continue to be
paid for a period of eighteen months.
Mr. McCobb also has a severance agreement with Federal similar to that noted
above for Mr. Hansberry calling for continuation of salary payments for a
period of twelve months in the event his employment were terminated. Mr.
McCobb also has a special termination agreement with Federal similar to those
of Messrs. Hansberry, Gaddis, Fallon, Green and Greeley noted above, providing
for payments equivalent to two times annualized includible compensation for
the base period, as defined in the agreement, for Mr. McCobb.
If the existing special termination agreements were triggered in 1998, then
based on the agreements with the six executive officers involved, the amounts
payable under such agreements would approximate the following: Mr. Hansberry--
$791,000; Mr. McCobb--$406,000; Mr. Gaddis--$342,000; Mr. Fallon--$325,000;
Mr. Greeley--$217,000; and Mr. Green--$246,000.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
In 1995 Lexington, and in 1997 Federal, began providing key executives a
Supplemental Executive Retirement Plan ("SERP"). The SERPs are funded through
life insurance policies with the policy benefits accruing to the two banks and
the executives. The SERPs provide for yearly retirement benefits based on the
return on certain insurance policies purchased by the two banks in excess of
the yield on an alternative investment of an equal amount deemed the
opportunity cost as outlined in the 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 in the aggregate is approximately
$3,761,000 as of December 31, 1997. Insurance benefits attributable to this
plan for 1997 for Mr. Hansberry were $1,271; for Mr. Gaddis $567; and for Mr.
Fallon $652 respectively.
79
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, to the best knowledge and belief of
Affiliated, certain information as of March 6, 1998, regarding the beneficial
ownership of the Common Stock by (i) each of Affiliated's Directors; (ii) each
of Affiliated's executive officers and the named executive officers in the
Summary Compensation Table above and (iii) each person (including any "group,"
as that term is used in Section 13(d)(3) of the 1934 Act) known to Affiliated
to own more than 5% of the outstanding Common Stock.
NAME OF BENEFICIAL OWNER SHARES BENEFICIALLY OWNED(1) PERCENT OF CLASS
------------------------ ---------------------------- ----------------
Fred C. Bailey................... 18,403(2) *
Kendrick G. Bushnell............. 11,175(3) *
Jack E. Chappell................. 33,751(4) *
Timothy J. Hansberry............. 77,547(5) 1.2%
Edward S. Heald.................. 6,876(6) *
James E. McCobb, Jr.............. 43,015(7) *
William J. Gaddis, Jr............ 47,187(8) *
John G. Fallon................... 36,169(9) *
Quentin J. Greeley............... 25,668(10) *
Richard E. Green................. 26,564(11) *
Directors and executive officers
as a group (10 persons)......... 326,355(12) 4.8%
First Manhattan Co............... 348,624(13) 5.4%
437 Madison Avenue
New York, NY 10022
- --------
* Less than 1%.
(1) Beneficial ownership is determined pursuant to Rule 13d-3 under the 1934
Act. Accordingly, a beneficial owner of a security includes any person
who, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise has or shares the power to vote
such security or the power to dispose of such security. The amounts set
forth above as beneficially owned include shares owned, if any by spouses
and relatives living in the same home, as to which beneficial ownership
may be disclaimed. The percent of class calculation for each line is made
assuming options on that line are exercised, thus these do not sum to the
total.
(2) Includes 10,625 shares as to which Mr. Bailey holds currently exercisable
options or options exercisable within 60 days.
(3) Includes 10,625 shares to which Mr. Bushnell holds currently exercisable
options or options exercisable within 60 days.
(4) Includes 2,500 shares held by Mr. Chappell's spouse as to which he
disclaims beneficial ownership, and 10,000 shares as to which Mr. Chappell
holds currently exercisable options or options exercisable within 60 days.
(5) Includes 3,400 shares held jointly with Mr. Hansberry's spouse. Also
includes 58,999 shares as to which Mr. Hansberry holds currently
exercisable options or options exercisable within 60 days and 626 shares
allocated to Mr. Hansberry under the Lexington ESOP.
(6) Includes 6,250 shares as to which Mr. Heald holds currently exercisable
options or options exercisable within 60 days.
80
(7) Includes 3,125 shares held jointly with Mr. McCobb's spouse, 34,999
shares, as to which Mr. McCobb holds currently exercisable options or
options exercisable within 60 days and 4,266 shares allocated to Mr.
McCobb under the Federal ESOP.
(8) Includes 14,895 shares owned by Mr. Gaddis jointly with his wife, 31,666
shares as to which Mr. Gaddis holds currently exercisable options or
options exercisable within 60 days and 626 shares allocated to Mr. Gaddis
under the Lexington ESOP.
(9) Includes 31,666 shares as to which Mr. Fallon holds currently exercisable
options or options exercisable within 60 days and 626 shares allocated to
Mr. Fallon under the Lexington ESOP.
(10) Includes 3,351 shares held jointly with Mr. Greeley's spouse and 325
shares held by him as custodian for his son as to which he disclaims
beneficial ownership. Also includes 18,375 shares as to which Mr. Greeley
holds currently exercisable options or options exercisable within 60 days
and 3,101 shares allocated to Mr. Greeley under the Federal ESOP.
(11) Includes 20,000 shares as to which Mr. Green holds currently exercisable
options or options exercisable within 60 days and 3,522 shares allocated
to Mr. Green under the Federal ESOP.
(12) Includes 233,205 shares subject to currently exercisable options or
options exercisable within 60 days and 12,767 shares allocated under
Federal or Lexington ESOP plans.
(13) Based on a Schedule 13G filed under the 1934 Act dated February 9, 1998,
indicating that the reporting person, a registered investment adviser,
has sole voting and dispositive power with respect to 286,782 shares, has
shared voting and dispositive power with respect to 29,967 shares and has
shared dispositive power but no voting power with respect to 31,875
shares.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the 1934 Act requires Affiliated's executive officers,
Directors and greater than 10% shareholders ("Reporting Persons") to file
certain reports with respect to their beneficial ownership of Common Stock.
Based solely on a review of the Section 16 reports furnished by the Reporting
Persons and, where applicable, any written representation by any of them that
Annual Statements of Changes in Beneficial Ownership on Form 5 were not
required, Affiliated believes that all Section 16(a) filing requirements
applicable to the Reporting Persons during and with respect to 1997 have been
complied with on a timely basis.
ITEM 13. TRANSACTIONS WITH CERTAIN RELATED PERSONS
Directors, officers, and employees of Affiliated, Federal, Lexington and
Middlesex are eligible to apply for mortgage, home equity, and savings account
loans. Management believes these loans involve no more than the normal risk of
collectability and do not present any unfavorable features. These loans are
made in the ordinary course of business on substantially the same terms,
including interest rates and collateral, as those prevailing for comparable
transactions with the general public. Furthermore, under regulations
applicable to Federal, the interest rate charged on such loans may not be
below the institution's current cost of funds. Employees who have a specified
number of years of continuous employment and who are not key staff members may
receive preferential treatment on a portfolio mortgage for their primary
residence. Preferential treatment includes waiver of points, application fees
and credit fees. Moreover, all loans to executive officers and Directors must
be approved by the Loan Committee and the Board of Directors of the respective
bank.
81
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, 1997
and 1996
Consolidated Statements of Income for the years ended December 31, 1997,
1996 and 1995
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995
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.
(i) The Company filed a report on Form 8-K dated June 10, 1997 reporting
the capitalization of Middlesex Bank & Trust Company under items 5 and 7 of
Form 8-K.
(ii) The Company filed a report on Form 8-K dated December 22, 1997
reporting that Affiliated had entered into an Affiliation Agreement dated
December 15, 1997 to be acquired by UST Corp. under item 5 of Form 8-K.
(c) Exhibits.
EXHIBIT NO. DESCRIPTION
----------- -------------------------------------------------------------
2.1(1) Affiliation Agreement and Plan of Reorganization dated as of
March 14, 1995, as amended, by and between Main Street
Community Bancorp, Inc. ("Main Street") and Lexington
Savings Bank ("Lexington").
2.2(1) LEXB Holding Plan dated as of April 13, 1995 by and between
Lexington Holding, Inc., and Lexington.
2.3(1) Lexington Plan of Merger dated as of June 20, 1995 by and
between Lexington Holding, Inc., and Affiliated.
2.4(1) Main Street Plan of Merger dated as of June 20, 1995 by and
between Main Street and Affiliated.
2.5(3) Stock Subscription Agreement dated December 17, 1996 between
Affiliated and Middlesex Bank & Trust Company.
3.1(2) Restated Articles of Organization of Affiliated.
3.2(2) By-laws of Affiliated.
3.3(5) Amendment to By-laws of Affiliated dated July 17, 1997.
4.1(2) Specimen of Affiliated Common Stock certificate.
10.1(2) Severance Agreement between Affiliated and Timothy J.
Hansberry dated October 15, 1995.
82
EXHIBIT NO. DESCRIPTION
----------- -------------------------------------------------------------
10.2(5) Special Termination Agreement between Affiliated and Timothy
J. Hansberry dated October 14, 1997.
10.3(5) Special Termination Agreement between Affiliated and John G.
Fallon dated April 17, 1997.
10.4(5) Special Termination Agreement between Affiliated and William
J. Gaddis, Jr., dated April 17, 1997.
10.5(5) Special Termination Agreement between Affiliated and Quentin
J. Greeley, dated April 17, 1997.
10.6(5) Special Termination Agreement between Affiliated and Richard
E. Green dated April 17, 1997.
10.7(2) Severance Agreement between Federal and James E. McCobb, Jr.,
dated August 1, 1994.
10.8(2) Special Termination Agreement between Federal and James E.
McCobb, Jr., dated October 18, 1995.
10.9(3) 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).
10.10(4) Affiliation Agreement and Plan of Reorganization dated
December 15, 1997 between Affiliated and UST Corp.
21.1(5) Subsidiaries of the Registrant.
23.1(5) Consents of Auditors.
27.1(5) Financial Data Schedule
- --------
(1) Incorporated by reference to the Company's Form S-4 Registration Statement
filed on June 22, 1995 (No. 33-93784).
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(3) Incorporated by reference to the Company's Annual Report on form 10-K for
the year ended December 31, 1996.
(4) Incorporated by reference as Exhibit 3 to Form 8-K dated December 16, 1997
filed by UST Corp.
(5) Filed herewith.
83
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 16, 1998 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 16, 1998
- ------------------------------------- Executive Officer
TIMOTHY J. HANSBERRY and Director
/s/ John G. Fallon Executive Vice March 16, 1998
- ------------------------------------- President and Chief
JOHN G. FALLON Financial Officer
/s/ Fred C. Bailey Director March 16, 1998
- -------------------------------------
FRED C. BAILEY
/s/ Kendrick G. Bushnell Director March 16, 1998
- -------------------------------------
KENDRICK G. BUSHNELL
/s/ Jack E. Chappell Director March 16, 1998
- -------------------------------------
JACK E. CHAPPELL
/s/ Edward S. Heald Director March 16, 1998
- -------------------------------------
EDWARD S. HEALD
/s/ James E. McCobb, Jr. Director March 16, 1998
- -------------------------------------
JAMES E. MCCOBB, JR.
84