SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR the quarter ended March 31, 1998
or
[ ] TRANSITIONAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
COMMISSION FILE NUMBER 0-27014
AFFILIATED COMMUNITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-3277217
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
716 Main Street, Waltham, Massachusetts 02254-9035
(Address of principal executive offices) (Zip Code)
(781) 894-6810
(Registrant's telephone number, including area code)
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
At April 30, 1997 there were 6,612,524 shares of common stock, par value
$.01 per share, outstanding.
- ------------------------------------
1
AFFILIATED COMMUNITY BANCORP, INC.
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1.
- -------
Consolidated Statements of Financial Condition at
March 31, 1998 and December 31, 1997..................................3
Consolidated Statements of Income for the Three Months
Ended March 31, 1998 and 1997..........................................4
Consolidated Statements of Comprehensive Income for the
Three Months Ended March 31, 1998 and 1997.............................5
Consolidated Statements of Stockholders' Equity for
the Three Months Ended March 31, 1998 and 1997........................6
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1997.........................................7
Notes to Consolidated Financial Statements.............................8
Item 2.
- -------
Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Three Months Ended
March 31, 1998 and 1997................................................11
Item 3.
- -------
Qualitative and Quantitative Disclosures About Market Risk.............20
PART II - OTHER INFORMATION
Item 1.
- -------
Legal Proceedings......................................................21
Item 2.
- -------
Changes in Securities and Use of Proceeds..............................21
Item 3.
- -------
Defaults Upon Senior Securities........................................21
Item 4.
- -------
Submission of Matters to a Vote of Security Holders....................21
Item 5.
- -------
Other Information......................................................21
Item 6.
- -------
Exhibits and Reports on Form 8-K.......................................21
SIGNATURES.............................................................22
EXHIBITS:
Stock Purchase Agreement (Shares of Middlesex
Bank & Trust Company...................................................23
Computation of Basic and Diluted Earnings Per Share
For Three Months Ended March 31, 1998 and 1997.........................52
Financial data schedule................................................53
Financial data schedule Restated.......................................54
2
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
March 31, December 31,
1998 1997
---- ----
(Unaudited)
ASSETS
Cash and due from banks $ 16,023 $ 16,911
Federal funds sold and overnight deposits 7,868 10,344
Investment securities - held to maturity (fair value $154,944 and $174,000
at March 31, 1998 and December 31, 1997, respectively) 152,973 172,623
Investment securities - available for sale (amortized cost $220,035 and $203,133
at March 31, 1998 and December 31, 1997, respectively) 221,503 204,846
Loans held for sale 9,694 3,955
Loans receivable - net of allowance for possible loan losses of $8,783 and $8,641
at March 31, 1998 and December 31, 1997, respectively 690,498 703,061
Federal Home Loan Bank stock - at cost 16,443 16,426
Other real estate owned, net 1 1
Accrued interest receivable 7,898 8,727
Office properties and equipment, net 8,662 8,747
Deferred tax asset, net 2,770 2,671
Other assets 6,429 6,736
----- -----
Total assets $1,140,762 $1,155,048
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 727,703 $ 729,096
Federal Home Loan Bank advances 279,871 297,358
ESOP debt 947 1,037
Mortgagors' escrow payments 2,538 2,343
Securities sold under agreements to repurchase 6,199 3,804
Other 7,529 8,357
----- -----
Total liabilities 1,024,787 1,041,995
--------- ---------
Stockholders' Equity (note 4):
Preferred stock, $0.01 Par Value; 2,000,000 shares authorized, none issued - -
Common stock, $0.01 Par Value; 18,000,000 shares authorized; shares
issued 6,828,070 in 1998 and 6,751,146 in 1997 68 67
Additional paid-in capital 51,032 50,360
Retained earnings - restricted 68,375 66,128
Treasury stock at cost, 247,500 shares (3,402) (3,402)
Unearned compensation - ESOP (929) (1,019)
Unrealized gain on investment securities, net of tax effects 831 919
--- ---
Total stockholders' equity 115,975 113,053
------- -------
Total liabilities and stockholders' equity $ 1,140,762 $ 1,155,048
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share data)
Three Months Ended
March 31,
------------------
1998 1997
(Unaudited)
Interest and dividend income:
Interest and fees on loans $ 14,686 $ 13,581
Interest and dividend income on investment securities 6,469 5,934
Interest on federal funds sold and overnight deposits 130 45
--- --
Total interest and dividend income 21,285 19,560
------ ------
Interest expense:
Interest on deposits 7,600 6,795
Interest on borrowed funds 4,318 4,088
----- -----
Total interest expense 11,918 10,883
------ ------
Net interest income 9,367 8,677
Provision for possible loan losses 126 200
--- ---
Net interest income after provision for possible loan losses 9,241 8,477
----- -----
Noninterest income:
Mortgage loan servicing fees 58 67
Customer service fees and other 437 361
Gain (loss) on sales of securities, net 118 (2)
Gain on sales of loans, net 145 1
--- ---
Total noninterest income 758 427
--- ---
Noninterest expenses:
Compensation and employee benefits 2,943 2,508
Occupancy and equipment 618 537
Data processing 308 234
Professional services 141 166
Federal Deposit Insurance premiums 69 65
Other real estate owned (income) expenses, net (8) (22)
Marketing and promotion 190 156
Other 721 563
--- ---
Total noninterest expenses 4,982 4,207
----- -----
Income before provision for income taxes 5,017 4,697
Provision for income taxes 1,805 1,760
----- -----
Net Income $ 3,212 $ 2,937
======== ========
Earnings per share:
Basic $ 0.50 $ 0.46
======== ========
Diluted $ 0.47 $ 0.45
======== ========
Weighted average shares outstanding:
Basic 6,437 6,333
===== =====
Diluted 6,792 6,571
===== =====
The accompanying notes are an integral part of these consolidated financial
statements.
4
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three Months Ended
March 31,
------------------
1998 1997
---- ----
(Unaudited)
Net Income $ 3,212 $ 2,937
Other comprehensive income:
Unrealized losses on investment securities arising during
the period, net of tax benefits of $127,000 in 1998 and
$648,000 in 1997 (88) (851)
Less: Reclassification adjustment for gains included in net income (43) -
---- ---
Other comprehensive income (131) 851
---- ---
Comprehensive income $ 3,081 $ 2,086
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
5
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1998 and 1997
(In thousands, except per share data)
(Restated for May 30, 1997 stock split)
(Unaudited)
Net Unrealized
Additional Unearned Gain (Loss) on
Common Paid-in Treasury Retained Compensation- Investment
Stock Capital Stock Earnings ESOP Securities Total
----- ------- ----- -------- ---- ---------- -----
Balance at December 31, 1996 $ 66 $ 49,146 ($ 3,402) $ 57,518 ($ 1,394) ($ 532) $ 101,402
Net income - - - 2,937 - - 2,937
ESOP transactions - 58 - 13 107 - 178
Issuance of common stock under stock
option plan 1 156 - - - - 157
Cash dividends declared ($.12 per share) - - - (774) - - (774)
Changes in net unrealized gain (loss) on
securities available for sale, net of tax effect - - - - - (851) (851)
----- ------- ----- -------- ---- ---------- -----
Balance at March 31, 1997 $ 67 $ 49,360 ($ 3,402) $ 59,694 ($ 1,287) ($1,383) $ 103,049
==== ======== ======== ======== ======== ======= =========
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, 1997 $ 67 $ 50,360 ($ 3,402) $ 66,128 ($ 1,019) $ 919 $ 113,053
Net income - - - 3,212 - - 3,212
ESOP transactions - 167 - 11 90 - 268
Issuance of common stock under stock
option plan 1 328 - - - - 329
Tax benefit from stock options exercised - 177 - - - - 177
Cash dividends declared ($.15 per share) - - - (976) - - (976)
Changes in net unrealized gain (loss) on
securities available for sale, net of tax effect - - - - - (88) (851)
----- ------- ----- -------- ---- ---------- -----
Balance at March 31, 1998 $ 68 $ 51,032 ($ 3,402) $ 68,375 ($ 929) $ 831 $ 115,975
===== ======== ======== ======== ======= ===== =========
The accompanying notes are integral part of these consolidated financial
statements.
6
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
March 31,
---------
1998 1997
----------------
(Unaudited)
Cash flows from operating activities:
Net Income
$ 3,212 $ 2,937
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for possible loan losses 126 200
Provision for losses on other real estate owned - -
Depreciation and amortization 238 203
Gain on sales of loans (145) (1)
(Gain) loss on sales of securities (118) 2
Net gain on sales of other real estate owned - (44)
Net amortization of premiums and discounts on investment securities 49 90
Provision for deferred income taxes - (200)
ESOP transactions 268 178
Increase in Federal Home Loan Bank stock (17) -
Originations of loans held for sale (20,981) -
Proceeds from sales of loans originated for resale 15,387 -
(Increase) decrease in accrued interest receivable 829 (412)
Other, net (48) 869
--- ----
Net cash provided by (used in) operating activities (1,200) 3,822
------ -----
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale 1,518 2,501
Proceeds from maturities of investment securities held to maturity 29,750 5,419
Proceeds from maturities of investment securities available for sale 37,826 4,700
Purchase of investment securities available for sale (60,315) (8,409)
Purchase of investment securities held to maturity (17,869) (20,239)
Principal payments received on investment securities available for sale 4,065 2,306
Principal payments received on investment securities held to maturity 7,788 5,318
Loan originations, net of repayments 12,437 (14,610)
Purchases of office properties and equipment (153) (261)
Organizational Costs - USTB (184) -
Capitalized costs associated with other real estate owned, net of payments received - -
Proceeds from sales of other real estate owned - 339
------ -------
Net cash provided by (used in) investing activities 14,863 (22,936)
------ -------
Cash flows from financing activities:
Net increase (decrease) in deposits (1,393) 12,637
Additions (reductions) to Federal Home Loan Bank advances (17,487) 5,600
Increase in mortgagors' escrow payments 195 249
Increase in repurchase agreements 2,395 2,616
Proceeds from issuance of common stock 329 157
ESOP transactions (90) (89)
Cash dividends paid on common stock (976) (774)
---- ----
Net cash provided by (used in) financing activities (17,027) 20,396
------- ------
Net increase (decrease) in cash and cash equivalents (3,364) 1,282
Cash and cash equivalents at beginning of period 27,255 15,795
------ ------
Cash and cash equivalents at end of period $ 23,891 $ 17,077
======== ========
Supplemental disclosures of cash flow information:
Interest paid on deposits $ 7,291 $ 6,627
Interest paid on borrowed funds 4,468 4,087
Income taxes paid, net of refunds 299 364
Supplemental disclosures of non-cash transactions:
Transfers to foreclosed real estate - 172
Loans granted on sale of foreclosed real estate - -
The accompanying notes are an integral part of these consolidated financial
statements
7
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
1) Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Affiliated Community Bancorp, Inc. (the "Company" or "Affiliated") and its three
wholly-owned subsidiaries, Lexington Savings Bank ("Lexington"), a Massachusetts
chartered savings bank, The Federal Savings Bank ("Federal"), a federally
chartered 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.
Affiliated Community Bancorp, Inc. was incorporated on April 13, 1995 for
the purpose of effecting the affiliation (the "Affiliation") of Lexington and
Main Street Community Bancorp, Inc. ("Main Street") including Main Street's
wholly-owned subsidiary, Federal, pursuant to the Affiliation Agreement and Plan
of Reorganization dated March 14, 1995 between Lexington and Main Street. The
Affiliation was consummated on October 18, 1995 and was treated as a pooling of
interests for accounting purposes. On May 20, 1997, Affiliated provided the
initial capital to Middlesex in exchange for all of Middlesex's outstanding
stock, making Middlesex a wholly owned subsidiary of Affiliated. Middlesex
opened on June 2, 1997 as a de novo, full-service commercial bank. The
operations of Affiliated consist of those of its three bank subsidiaries,
Lexington, Federal and Middlesex. The information presented herein for 1998 and
1997 represents the financial condition and the operating results of the Company
and its wholly-owned bank subsidiaries on a consolidated basis.
Lexington and Middlesex are insured by the Bank Insurance Fund ("BIF") and
Federal is insured by the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC").
Certain reclassifications have been made to the 1997 consolidated financial
statements to conform with the March 31, 1998 presentation. Such
reclassifications had no effect on previously reported consolidated net income.
In the opinion of management, the unaudited consolidated financial
statements presented herein reflect all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation. Interim results are
not necessarily indicative of results to be expected for the entire year.
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 is expected to close during the
second or third 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 $3.8
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.
2) 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.
8
3) Allowance for Possible Loan Losses
The following is a summary of the allowance for possible loan losses for
the three month period ended March 31, 1998 and 1997:
Three Months Ended
March 31,
---------
1998 1997
---- ----
(In thousands)
Balance at beginning of period $8,641 $7,759
Provision for possible loan losses 126 200
Recoveries 16 43
----- -----
8,783 8,002
Loans charged-off - 40
----- -----
Balance at end of period $8,783 $7,962
====== ======
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, 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 attempts to use the best
information available to make determinations with respect to the Company's
allowance for possible loan losses, loan losses may ultimately vary
significantly from current estimates and future adjustments may be necessary if
economic conditions differ substantially from the assumed economic conditions
used in making the initial determination or if other circumstances change.
Loans are considered impaired when it is probable that the Company will not
be able to collect all amounts due according to the contractual terms of the
loan agreement. Management does not set any minimum delay of payments as a
factor in reviewing for impaired classification. The amount judged to be
impaired is the difference between the present value of the expected cash flows
using as a discount rate the original contractual effective interest rate and
the recorded investment of the loan. If foreclosure on a collateralized loan is
probable, impairment is measured based on the fair value of the collateral
compared to the recorded investment. If appropriate, a valuation reserve is
established to recognize the difference between the recorded investment and the
present value. Impaired loans are charged off when management believes that the
collectibility of the loan's principal is remote. All impaired loans are
classified as nonaccrual.
For the three months ended March 31, 1998 and 1997, the average recorded
investment in impaired loans was $3,893,000 and $3,567,000, respectively, and
the income recognized on related impaired loans was $69,000 and $56,000,
respectively. At March 31, 1998 and December 31, 1997, the Company classified
$4,142,000 and $3,897,000, respectively, of its loans as impaired. The
$4,142,000 in impaired loans at March 31, 1998 has been measured under the fair
value of collateral method. At March 31, 1998 impaired loans totaling $3,204,000
had a related valuation reserve of $587,000. The $3,897,000 in impaired loans at
December 31, 1997 has been measured under the fair value of collateral method.
At December 31, 1997, impaired loans totaling $2,989,000 had a related valuation
reserve of $578,000.
4) Stock Split
On May 30, 1997 the Company effected a 25% stock split paid in the form of
a stock dividend. All common stock share and per share information prior to the
stock split, except for shares authorized, has been retroactively restated to
reflect this stock split.
5) Impact of New Accounting Standards
The Company adopted SFAS No. 130, "Reporting Comprehensive Income"
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 for the three months ended March 31, 1998 and
1997 is presented within a separate financial statement contained in this
report.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." This statement establishes standards for
reporting information about segments in annual and interim financial statements.
SFAS 131 introduces a new model for segment reporting, called the "management
approach." The management approach is based on the way the chief operating
decision-maker organizes segments within a company for making operating
decisions and assessing performance. Reportable segments are based on products
and services, geography, legal structure, management structure -- any
9
manner in which management disaggregates a company. This statement is effective
and will be adopted for the Company's financial statements for the fiscal year
ending December 31, 1998 and requires the restatement of previously reported
segment information for all periods presented.
In February 1998, the FASB issued SFAS No. 131 "Employers' Disclosures
about Pensions and Other Postretirement Benefits" which is to become effective
for fiscal years beginning after December 15, 1997. This Statement revises
employers' disclosures about pension and other postretirement benefits plans. It
does not change the measurement or recognition of those plans. Restatement of
disclosures for earlier periods provided for comparative purposes is required
unless the information is not readily available.
In April 1998, the AICPA issued Statement of Position No. 98-5, "Reporting
on the Costs of Start-Up Activities", which is effective for fiscal years
beginning after December 31, 1998. This statement establishes standards on the
financial reporting of start-up and organization costs. It requires that costs
of start-up activities and organization costs be expensed as incurred.
Management does not anticipate that the adoption of this statement will have a
material impact on the Company or its results of operations.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997.
General
- -------
The Company is a holding company that conducts substantially all its
activities through its bank subsidiaries. The Company's results of operations
are dependent primarily on net interest income, which is the difference between
(i) the interest income earned on loans and investment securities and (ii) the
cost of funds, which consists of the interest paid on deposits and borrowings.
Net interest income can be adversely affected by changes in interest rates,
interest rate caps in effect on adjustable rate securities and loans in the
portfolio, and loan and mortgage-backed security prepayments.
The Company's net income is also affected by noninterest income, such as
service charges and fees and gains or losses on asset sales, and operating
expenses, which consist primarily of compensation and benefits, occupancy and
equipment expenses, federal deposit insurance premiums, other real estate owned
("OREO") operations and other general administrative expenses. The earnings of
the Company are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government policies
and actions of regulatory authorities.
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, the purchase or upgrade of third party software and costs related to
testing. External costs 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-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. 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.
The results for the first quarter of 1998 included the operations for
Middlesex which opened for business on June 2, 1997. The expenses and
consolidated net income of Affiliated were, and will be, negatively impacted by
the start-up of Middlesex.
Changes in Financial Condition from December 31, 1997
- -----------------------------------------------------
Total assets at March 31, 1998 amounted to $1.141 billion as compared to
$1.155 billion at December 31, 1997, reflecting a decrease of $14 million or
1.2%. The decrease in the Company's assets is primarily attributable to a
decline in investment securities held to maturity and loans.
11
Investments: Investment securities designated as held to maturity amounted
------------
to $153.0 million at March 31, 1998 versus $172.6 million at December 31, 1997.
At March 31, 1998 investment securities available for sale amounted to $221.5
million versus $204.8 million at December 31,1997.
The decline in investment securities held to maturity reflects maturities,
amortization of mortgaged backed investments and agency securities that were
called. Proceeds from such were reinvested into mortgage-backed certificates and
mortgage-backed derivatives within the available for sale portfolio.
The carrying values of investment securities at March 31, 1998 and December
31, 1997 is presented in the following table:
March 31, 1998 December 31, 1997
-------------- ------------------
Available Held to Available Held to
for Sale Maturity for Sale Maturity
-------- -------- -------- --------
(In thousands)
Government securities $ 80,121 $ 24,207 $107,180 $ 52,687
Corporate and other bonds 17,408 20,386 16,014 22,846
Mortgage-backed securities 54,791 95,254 33,989 86,138
Mortgage-backed derivatives 32,827 13,126 11,034 10,952
Marketable equity securities 36,356 - 36,629 -
------ ------ ------ ------
$221,503 $152,973 $204,846 $172,623
======== ======== ======== ========
The mortgage-backed derivatives portfolio consisted of planned amortization
classes (PAC's), targeted amortization classes (TAC's), sequential payment
classes (SEQ's), scheduled amortization classes (SCH's) and accretion directed
classes (AD's). The balance at March 31, 1998 had an average life of 2.7 years
with 20% in monthly adjusting securities and the remaining 80% in fixed rate
securities.
Loans: Gross loans outstanding, excluding loans held for sale, at March 31,
------
1998 amounted to $699.3 million versus $711.7 million at December 31, 1997. The
decrease of $12.4 million or 1.75% was primarily attributed to the refinancing
and/or payoff of adjustable rate residential loans and commercial real estate
loans during the first quarter of 1998. There were no sales of loans into the
secondary market during year first quarter of 1997; $15 million of fixed rate
residential originations were sold into the secondary market during the first
quarter of 1998. Loans held for sale totaled $9.7 million as of March 31, 1998
versus $4.0 million on December 31, 1997. The gross balances of loans
outstanding at March 31, 1998 and December 31, 1997 are shown in the following
table:
March 31, December 31,
1998 1997
-------- --------
(In thousands)
Real estate:
1-4 family $ 459,802 $ 469,453
Commercial and construction 175,729 180,398
Commercial 43,355 41,414
Equity lines of credit and other 21,610 21,710
Less: net deferred loan fees (1,215) (1,273)
------ ------
$ 699,281 $ 711,702
========= =========
At March 31, 1998 loans delinquent 60 days or more amounted to $2.6 million
and represented 0.4% of total loans outstanding. The comparable amounts at
December 31, 1997 were $1.9 million or 0.3%.
12
The following table sets forth information regarding non-accrual loans,
troubled debt restructurings, OREO and other assets:
March 31, December 31,
1998 1997
---- ----
(Dollars in thousands)
Non-accrual loans $4,547 $4,336
Troubled debt restructurings 162 162
--- ---
Total non-performing loans 4,709 4,498
Other real estate owned, net 1 1
--- ---
Total non-performing assets $4,710 $4,499
====== ======
Loans past due 90 days or more and
still accruing $ - $ -
====== ======
Non-performing loans as a percent of
total loans .66% .63%
Non-performing assets as a percent of
total assets .41% .39%
Allowance for possible loan losses as
a percent of non-performing loans 186.52% 192.11%
Allowance for possible loan losses as
a percent of total loans 1.26% 1.21%
==== ====
Liabilities: The Company's deposit products include passbook and statement
------------
savings accounts, NOW accounts, demand (checking) accounts, money market
accounts and certificate of deposit accounts. The certificate accounts consist
of regular and retirement funds and are either fixed or variable in nature.
The following table summarizes the Company's deposit liabilities at March
31, 1998 and December 31, 1997:
March 31, December 31,
1998 1997
---- ----
(Dollars in thousands)
Demand $ 51,600 $ 48,120
NOW 62,939 60,781
Regular savings 123,879 120,921
Money market 69,804 72,571
------ ------
Total non-certificate accounts 308,222 302,393
------- -------
Certificates less than $100,000 314,316 315,075
Certificates of $100,000 and over 105,165 111,628
-------- ------- -------
Total certificate accounts 419,481 426,703
------- -------
Total deposits $727,703 $729,096
======== ========
At March 31, 1998 and December 31, 1997, brokered certificates of deposit
amounted to $49.1 million and $57.1 million, respectively. Brokered certificates
of deposit include $30.0 million and $36.4 million in Depository Trust Company
("DTC") certificates at March 31, 1998 and December 31, 1997, respectively.
Borrowings from the Federal Home Loan Bank ("FHLB") amounted to $279.9
million at March 31, 1998 versus $297.4 million at December 31, 1997. The
decrease reflects matured fixed rate advances that were not renewed due to the
decrease in real estate loans and the held to maturity investment portfolio.
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
13
April 16, 1998 the Company declared a regular quarterly dividend of $0.15 per
share payable on May 15, 1998 to stockholders of record on April 30, 1998. This
first quarter dividend is the same amount as that announced last quarter and 25%
higher than 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 decrease in earning assets of $12.1
million for the three month period ended March 31, 1998 was primarily due to
loan refinancing or prepayments and a moderation in investing activities. As a
result of these trends, the Company reduced its FHLB borrowings by $17.5 million
in the first quarter.
The Company's bank subsidiaries, as members of the FHLB, have overnight
lines of credit of approximately $26 million and an overall borrowing capacity
of approximately $643.7 million from the FHLB. At March 31, 1998 outstanding
borrowings were $279.9 million under these facilities. Any borrowings must be
collateralized by a combination of investment securities and certain first
mortgage loans. The subsidiaries also have the ability to enter into repurchase
agreements, with an aggregate credit line of $150 million, with various brokers.
At March 31, 1998, the Company had outstanding commitments of $112.2
million to originate loans and advance funds. As of that date, the Company had
commitments to sell loans of $9.7 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 announced a 25% stock split of its common
stock to be effected in the form of a stock dividend. This split was implemented
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 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 or third 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.
On May 1, 1998, Affiliated and William R. Berkley, of Greenwich,
Connecticut jointly announced that they had signed a definitive agreement under
which Mr. Berkley will acquire 100% of the stock of Middlesex Bank & Trust
Company, a wholly owned subsidiary of Affiliated for $8.24 million. This
transaction is subject to the UST transaction closing.
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 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 March 31, 1998. The high capital ratios of Middlesex
reflect its status as a start-up bank.
Affiliated
The Federal Lexington Middlesex Community Minimum
Savings Bank Savings Bank Bank & Trust Co. Bancorp, Inc. Requirements
------------ ------------ ---------------- ------------- ------------
Risk-based ratios:
Tier 1 capital ......... 18.71% 14.66% 52.23% 18.08% 4.00%
Total capital .......... 19.96 15.72 52.55 19.34 8.00
Tangible equity ratio ....... 9.52 N/A N/A N/A 2.00
Tier 1 leverage capital ratio 9.52 8.86 35.85 10.00 4.00
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
14
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 March 31, 1998, the Company had 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.
Asset/Liability Management. The Company's 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.
15
The following table represents management's anticipated cash flows and
repricings of Affiliated's March 31, 1998 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 regular 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.
At March 31, 1998
------------------------------------------------------------------
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)
Interest sensitive assets:
Federal funds sold and interest
bearing deposits ............... $ 7,868 $ - $ - $ - $ 7,868
Investment securities ........... 161,912 69,490 122,300 37,217 390,919
Mortgage loans .................. 163,141 117,565 228,987 124,623 634,316
Commercial loans ................ 43,355 -- - -- 43,355
Home equity loans ............... 18,680 -- -- -- 18,680
Consumer loans .................. 524 495 1,788 123 2,930
Other Assets .................... 9,694 -- -- 33,000 42,694
----- ------ ------ ------ ------
Total Assets ............... $ 405,174 $ 187,550 $ 353,075 $ 194,963 $1,140,762
========== ========== ========== ========== ==========
Liabilities & Stockholders' Equity
Savings accounts ................ $ 10,530 $ 9,635 $ 68,448 $ 35,266 $ 123,879
NOW/DDA accounts ................ 9,738 8,910 63,258 32,633 114,539
Money Market accounts ........... 12,886 10,506 45,483 929 69,804
Time Deposits ................... 161,622 128,070 126,841 2,948 419,481
Borrowed Funds .................. 195,969 28,715 64,871 -- 289,555
Other Liabilities ............... -- -- -- 7,529 7,529
Stockholders' equity ............ -- -- -- 115,975 115,975
----- ------ ------ ------ ------
Total Liabilities & Stockholders' Equity $ 390,745 $ 185,836 $ 368,901 $ 195,280 $1,140,762
========== ========== ========== ========== ==========
Period GAP ...................... $ 14,429 $ 1,714 $ (15,826) $ (317)
Cumulative GAP .................. $ 14,429 $ 16,143 $ 317 -
Period GAP as a Percentage
of total assets ................ 1.26% 0.15% (1.39)% (0.03)%
Cumulative GAP as a percentage of
total assets.................... 1.26% 1.42% 0.03% --
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".
- 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 the past customer practice. However,
to be conservative, the regulatory decay rates are utilized for this
presentation.
Interest Rate Risk. 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 March 31,
1998, the gap was approximately 1% of assets.
16
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 March 31, 1998, 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: -4.3%; -3.1%
b. 200 basis point decrease in rates: -1.1%; -2.3%
Comparison of Results of Operations for the Three Months Ended March 31, 1998
- --------------------------------------------------------------------------------
and 1997
- --------
General Operating Results. Net income for the three months ended March 31,
1998 was $3.2 million compared to net income of $2.9 million in the
corresponding quarter of 1997, an increase of $275,000 or 9.4%. The earnings
increase was attributed to a higher level of net interest income and gains on
sales of assets, partially offset by increased operating expenses. Basic
earnings per share ("EPS") was $0.50 per share for the three months ended March
31, 1998 versus $0.46 for the three months ended March 31, 1997, a 9% increase.
Diluted EPS was $0.47 for the 1998 period versus $0.45 for 1997, a 4% increase.
The increase in diluted earnings per share was reduced by the impact of the
increase in Affiliated's stock price from 1997 to 1998 on the common stock
equivalents used to calculate diluted earnings per share.
Net interest income for the three months ended March 31, 1998 amounted to
$9.4 million as compared to $8.7 million for the corresponding period in 1997.
17
The following table sets forth the Company's average balances and net
interest income components for the three months ended March 31, 1998 and 1997.
It includes (i) the average balance sheet for the period, based on daily average
balances; (ii) the total amount of interest earned or paid on the various
categories of interest-earning assets and interest-bearing liabilities; and
(iii) the resulting weighted average yields and costs. Such yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods shown except where noted otherwise.
In addition, the table reflects the Company's interest rate spreads and net
yields on earning assets. The average balance of loans receivable includes loans
on which the Company has discontinued accruing interest. The yields and costs
include fees which are considered "adjustments to yield."
Three Months Ended March 31,
--------------------------------------------------------------------------------
1998 1997
------------------------------------ ----------------------------------------
(Dollars in thousands)
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
Assets
Interest-earning assets:
Loans $ 713,915 $ 14,686 8.23% $ 659,003 $ 13,581 8.24%
--------- ------ ---- --------- ------ ----
Investments:
Investment and mortgage-backed
securities held-to-maturity 162,595 2,738 6.74% 182,416 3,040 6.67%
Investment and mortgage-backed
securities available-for-sale 206,428 3,468 6.72% 160,956 2,663 6.62%
Federal Home Loan Bank stock 16,427 263 6.40% 14,638 231 6.31%
Federal funds sold and
overnight deposits 10,011 130 5.19% 4,488 45 4.01%
--------- ------ ---- --------- ------ ----
Total investments 395,461 6,599 6.67% 362,498 5.979 6.60%
--------- ------ ---- --------- ------ ----
Total interest-earning assets 1,109,376 21,285 7.67% 1,021,501 19,560 7.66%
--------- ------ ---- --------- ------ ----
Noninterest-earning assets 41,938 33,175
Allowance for possible loan losses (8,696) (7,823)
--------- -------
Total assets $ 1,142,618 $ 1,046,853
=========== ===========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Regular savings, NOW and money
market accounts $ 254,054 $ 1,582 2.49%$ 236,363 $ 1,496 2.53%
Certificate accounts 423,419 6,018 5.69% 377,513 5,299 5.61%
Borrowings 294,999 4,318 5.85% 284,239 4,088 5.75%
--------- ------ ---- --------- ------ ----
Total interest-bearing liabilities 972,472 11,918 4.90% 898,115 10,883 4.85%
--------- ------ ---- --------- ------ ----
Noninterest-bearing liabilities:
Demand deposits 47,925 39,469
Other 7,996 7,119
--------- -------
Total liabilities 1,028,393 944,703
--------- -------
Stockholders' equity 114,225 102,150
--------- -------
Total liabilities and
stockholders' equity $ 1,142,618 $ 1,046,853
=========== ===========
Net interest income $ 9,367 $ 8,677
=========== ===========
Interest rate spread 2.77% 2.81%
==== ====
Net yield on earning assets 3.38% 3.40%
==== ====
Interest Income. Total interest and dividend income increased from $19.6
million in the first quarter of 1997 to $21.3 million in the same period of
1998, an increase of 8.8%. The additional income was due mostly to the higher
volume of loans and mortgage-backed securities available for sale. The yield on
average earning assets was essentially flat at 7.67% in the first quarter of
1998 compared to 7.66% in the same period of 1997. Average loans outstanding in
the current quarter amounted to $713.9 million and produced an average yield of
8.23%, as compared to a 1997 average volume of $659.0 million with an average
yield of 8.24%. The average balance of all investment categories amounted to
$395.5 million in the first quarter of 1998 with an average yield of 6.67%
compared to $362.5 million and 6.60%, respectively, in the comparable quarter of
1997.
18
Interest Expense. Interest expense in the first quarter of 1998 amounted to
$11.9 million, up $1.0 million or 9.5% from $10.9 million in the same quarter of
1997. The main factors contributing to this increase were higher volume in
certificates of deposit and borrowings. The average rate paid on total
interest-bearing deposits increased from 4.85% in the first quarter of 1997 to
4.90% in the comparable period of 1998. Average interest-bearing deposit volume
increased from $613.9 million in the 1997 period to $677.5 million in the first
quarter of 1998, up $63.6 million or 10.4%. Average certificates increased $45.9
million or 12.2% in 1998 from the comparable 1997 quarter. The Company had
average borrowings of $295.0 million for the three months ended March 31, 1998,
with a related interest expense of $4.3 million, compared to $284.2 million and
$4.1 million, respectively, for the first quarter of 1997. The average rate paid
on borrowings increased from 5.75% in 1997 to 5.85% for 1998.
The following table illustrates the extent to which changes in interest
rates and changes in the volumes of interest-earning assets and interest-bearing
liabilities affected the components of the Company's interest income and
interest expense during the period. For each interest related asset and
liability category, information is provided with respect to (i) changes
attributable to changes in volume (changes in volume multiplied by prior rate),
(ii) 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.
Three Months Ended March 31,
----------------------------
1998 Compared with 1997
-----------------------
Increase (Decrease)
Due to Change in:
-----------------
Average Average
Volume Rate Total
------ ---- -----
(In thousands)
Interest Income:
Loans ............................ $ 1,130 ($ 25) $ 1,105
Investments:
Investment and mortgage-backed
securities held-to-maturity . (334) 32 (302)
Investment and mortgage-backed
securities available-for-sale 763 42 805
Federal Home Loan Bank stock .. 29 3 32
Federal funds sold ............ 69 16 85
-- -- --
Total interest income ......... 1,657 68 1,725
----- -- -----
Interest Expense:
Regular savings, NOW and money
market accounts ............... 110 (24) 86
Certificate accounts ............. 652 67 719
--- -- ---
Total deposits ................ 762 43 805
Borrowed funds ................... 157 73 230
--- -- ---
Total interest expense ........ 919 116 1,035
--- --- -----
Change in net interest income ........ $ 738 ($ 48) $ 690
======= ======= =======
The increase in 1998 first quarter net interest income was primarily
attributable to a volume increase in loans and mortgage-backed securities
available-for-sale. Volume increases in certificates of deposits and borrowed
funds partially offset the favorable benefit of the volume increase in earning
assets.
Provision for Possible Loan Losses. The provision for possible loan losses
for the first quarter of 1998 amounted to $126,000 versus $200,000 for the first
quarter of 1997. The decreased provision is attributable to the current level of
non-performing loans, the level of the Company's allowance for losses and
favorable charge off experience in recent years. At March 31, 1998, the
Company's allowance for possible loan losses amounted to $8.8 million which
represented 186% of non-performing loans at that date. The provision and the
level of the allowance are evaluated on a regular basis by management and are
based upon management's periodic review of the collectibility of the loans, in
light of historical experience, known and inherent risks in the nature and
volume of the loan portfolio, adverse situations that may affect the borrower's
ability to repay, estimated value of any underlying collateral and prevailing
economic conditions. The allowance is a forward-looking estimate and ultimate
losses may vary from current estimates and future
19
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 March 31, 1998 level of the allowance was adequate to provide for known
and reasonably anticipated loan losses inherent in the portfolio at that date.
Noninterest Income. For the first quarter of 1998, total noninterest income
amounted to $758,000, an increase of $331,000 or 77.5% from $427,000 in the
first quarter of 1997. Loan servicing fees, which amounted to $58,000 this
quarter compared to $67,000 in the first quarter of 1997, reflect a reduction in
the volume of loans serviced. Customer service fees and other income increased
by $76,000 or 21.1% in the first quarter from the same period in 1997, as a
result of non-recurring escrow income and an increase in cash surrender value of
life insurance policies. The Company had gains on securities sales of $118,000
in the first quarter of 1998 compared to a loss for the quarter ended March 31,
1997 of $2,000. The gain on sales of loans was $145,000 in the first quarter of
1998, compared to $1,000 for the same period in 1997 reflecting the sale of
current residential mortgage production into the secondary market.
Noninterest Expenses. Total noninterest expenses increased by $775,000 or
18.4% in the first quarter of 1998 to $5.0 million, compared to $4.2 million in
the corresponding quarter of 1997. Major components of the change in expenses
included a $435,000 or 17.3% increase in compensation and benefits, a $74,000
increase in data processing expense, an increase in marketing expense of
$34,000, and a $158,000 increase in other expenses.
The first quarter of 1998 included expenses for Middlesex Bank and Trust
which opened for business in June 1997. Middlesex accounted for $342,000 or 44%
of the total increase in non-interest expenses. Approximately $100,000 of the
increase in compensation and benefits was related to ESOP compensation caused by
the significant year to year increase in the Company's stock price. The
remaining increase in compensation and benefits costs was due to normal salary
increases, commissions, payroll taxes, and increased costs associated with the
401(k) plans at subsidiary banks. Apart from Middlesex, data processing costs
increased due to new technology options and expanded banking facilities. Other
expenses increased as a result of a non-recurring legal settlement in the first
quarter of 1997, and increased miscellaneous recurring costs in 1998.
Provision for Income Taxes. The provision for income taxes was $1,805,000
million for the first quarter of 1998, compared to $1,760,000 for the
corresponding quarter in 1997. The combined effective tax rate for the three
months ended March 31, 1998 was 36.0% versus 37.5% for the same period in 1997.
The lower effective rate in 1998 reflects the tax benefit resulting from the
lower state tax rate in the Company's investment subsidiaries and certain tax
exemptions on preferred stocks. At March 31, 1998, the net deferred income tax
asset amounted to $2.8 million. The primary sources of recovery of the deferred
income tax asset are taxes paid, which are available for carry back, from 1997,
1996, and 1995, and the expectation that the deductible temporary differences
will reverse during periods when the Company generates taxable income.
ITEM 3. Qualitative and Quantitative Disclosures About Market Risk.
See the discussion set forth in ITEM 2 above.
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
The Company and its subsidiaries are not involved in any pending legal
proceedings other than those arising in the ordinary course of the
Company's business. Management believes that the resolution of these
matters will not materially affect the Company's business or the
consolidated financial condition of the Company.
Item 2. Changes in Securities and Use of Proceeds.
------------------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities.
--------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
Not applicable.
Item 5. Other Information.
------------------
At a meeting of the Board of Directors held on April 16, 1998, the
payment of a cash dividend was declared, providing for payment of
$0.15 per share on May 15, 1998 to holders of record on April 30,
1998.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
a. Exhibits: 10.0 -- Stock Purchase Agreement (Shares of Middlesex
Bank & Trust Company)
11.0 -- Computation of per share earnings.
27.0 -- Financial Data Schedule.
27.2 -- Financial Data Schedule Restated.
b. Reports on Form 8-K: No reports on Form 8-K were filed during the
quarter ended March 31, 1998.
21
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Affiliated Community Bancorp, Inc.
----------------------------------
(Registrant)
/S/ Timothy J. Hansberry
Date: May 11, 1988 By -------------------------------------
Timothy J. Hansberry
President and Chief Executive Officer
/S/ John G. Fallon
By -------------------------------------
John G. Fallon
Executive Vice President and
Chief Financial Officer
22