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, 1996
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)
(617) 893-3969
-------------------------
(Registrant's telephone number, including area code)
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
-------- --------
At April 30, 1996, there were 5,076,466 shares of common stock, par value $.01
per share, outstanding.
- - ----------
AFFILIATED COMMUNITY BANCORP, INC.
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1.
Consolidated Statements of Financial Condition at
March 31, 1996 and December 31, 1995 . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income for the
Three Months Ended March 31, 1996 and 1995 . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 6
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations for the Three Months
Ended March 31, 1996 (including Liquidity and Capital
Resources) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
PART II - OTHER INFORMATION
Item 1.
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 2.
Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 3.
Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . . . . 15
Item 4.
Submission of Matters to a Vote of Security Holders. . . . . . . . . . . 15
Item 5.
Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 6.
Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
EXHIBITS:
Computation of Primary and Fully Diluted Earnings Per Share
for the Three Months Ended March 31, 1996 and March 31, 1995 . . . . . . 17
FINANCIAL DATA SCHEDULE. . . . . . . . . . . . . . . . . . . . . . . . . 18
2
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
March 31, December 31,
1996 1995
----------- ------------
(Unaudited)
ASSETS
Cash and due from banks $ 12,199 $ 14,037
Federal funds sold and overnight deposits 4,570 4,125
Investment securities--held to maturity (market value $175,340 and
$177,384 at March 31, 1996 and December 31, 1995, respectively) 176,350 176,100
Investment securities--available for sale (amortized cost $156,657 and
$114,292 at March 31, 1996 and December 31, 1995, respectively) 156,062 114,836
Federal Home Loan Bank stock--at cost 12,139 10,355
Loans receivable--net of allowance for possible loan losses of $7,203 and
$7,127 at March 31, 1996 and December 31, 1995, respectively) 553,270 535,679
Loans held for sale 367 1,071
Other real estate owned, net 1,220 1,201
Accrued interest receivable 6,407 5,873
Office properties and equipment, net 8,427 8,446
Deferred tax asset, net 3,441 3,096
Other assets 3,879 3,661
-------- --------
Total assets $938,331 $878,480
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $598,743 $583,832
Federal Home Loan Bank advances 234,915 186,835
ESOP debt 643 679
Mortgagors' escrow payments 1,997 1,904
Other 5,839 5,940
-------- --------
Total liabilities 842,137 779,190
-------- --------
Stockholders' Equity:
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 5,309,666 in 1996 and 5,296,700 in 1995 53 53
Additional paid-in capital 48,396 48,263
Treasury stock at cost, 238,000 shares at March 31, 1996 (4,081) --
Retained earnings--restricted 53,068 51,563
Unearned compensation--ESOP (643) (679)
Unrealized gain (loss) on investment securities, net of tax effects (599) 90
-------- --------
Total stockholders' equity 96,194 99,290
-------- --------
Total liabilities and stockholders' equity $938,331 $878,480
======== ========
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 per share data)
Three months ended March 31,
1996 1995
------- -------
(Unaudited)
Interest and dividend income:
Interest and fees on loans $11,322 $ 9,727
Interest and dividend income on investment securities 5,267 4,532
Interest on federal funds sold and overnight deposits 71 40
------- -------
Total interest and dividend income 16,660 14,299
------- -------
Interest expense:
Interest on deposits 6,195 5,037
Interest on borrowed funds 3,120 2,525
------- -------
Total interest expense 9,315 7,562
------- -------
Net interest income 7,345 6,737
Provision for possible loan losses 135 100
------- -------
Net interest income after provision for possible loan losses 7,210 6,637
------- -------
Noninterest income:
Mortgage loan servicing fees 83 76
Customer service fees and other 320 367
Gain (loss) on sales of loans, net 29 (9)
------- -------
Total noninterest income 432 434
------- -------
Noninterest expense:
Compensation and employee benefits 2,279 2,135
Occupancy and equipment 517 483
Data processing 209 193
Professional services 193 222
Federal Deposit Insurance premiums 193 310
Other real estate owned expenses, net 94 47
Marketing and promotion 127 115
Other 640 667
------- -------
Total noninterest expense 4,252 4,172
------- -------
Income before provision for income taxes 3,390 2,899
Provision for income taxes 1,267 1,184
------- -------
Net income $2,123 $ 1,715
======= =======
Earnings per share:
Primary $ 0.41 $ 0.32
======= =======
Fully diluted $ 0.41 $ 0.32
======= =======
Weighted average shares outstanding:
Primary 5,199 5,307
======= =======
Fully diluted 5,204 5,308
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
THREE MONTHS ENDED
MARCH 31
-----------------------------
1996 1995
-------- --------
(Unaudited)
Cash flows from operating activities:
Net income $ 2,123 $ 1,715
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for possible loan losses 135 100
Provision for losses on other real estate owned 60 35
Depreciation and amortization 182 144
(Gain) loss on sales of loans (29) 9
Net gain on sales of other real estate owned (11) (20)
Net amortization of premiums and discounts on investment securities 181 177
Provision for (prepaid) deferred income taxes (216) 447
ESOP transactions 62 14
Increase in Federal Home Loan Bank stock (1,784) --
(Increase) decrease in loans held for sale 704 (400)
Increase in accrued interest receivable (534) (171)
Other, net (771) (622)
-------- --------
Net cash provided by operating activities 102 1,428
-------- --------
Cash flows from investing activities:
Proceeds from maturities of investment securities available for sale 11,500 1,500
Proceeds from maturities of investment securities held to maturity 56 1,003
Purchase of investment securities available for sale (56,355) (3,885)
Purchase of investment securities held to maturity (6,000) (8,801)
Principal payments received on investment securities available for sale 2,190 388
Principal payments received on investment securities held to maturity 6,618 5,310
Loan originations, net of repayments (18,038) (8,666)
Proceeds from sale of office properties and equipment -- 189
Purchases of office properties and equipment (163) (308)
Capitalized costs associated with other real estate owned, net of payments received 1 (43)
Proceeds from sales of other real estate owned 243 794
-------- --------
Net cash used by investing activities (59,948) (12,519)
-------- --------
Cash flows from financing activities:
Net increase in deposits 14,911 6,883
Additions to Federal Home Loan Bank advances 48,080 8,100
Increase in mortgagors' escrow payments 93 185
Additions to treasury stock (4,081) --
Net proceeds from common stock issued pursuant to stock options exercised 106 --
ESOP transactions (36) (35)
Cash dividend paid on common stock (620) (460)
-------- --------
Net cash provided by financing activities 58,453 14,673
-------- --------
Net increase (decrease) in cash and cash equivalents (1,393) 3,582
Cash and cash equivalents at beginning of quarter 18,162 13,645
-------- --------
Cash and cash equivalents at end of quarter $ 16,769 $ 17,227
-------- --------
Supplemental disclosures of cash flow information:
Interest paid on deposits $ 6,353 $ 5,370
Interest paid on borrowed funds 3,213 2,447
Income taxes paid, net of refunds 1,406 1,030
Supplemental disclosures of non-cash transactions:
Transfers to foreclosed real estate 312 341
Loans granted on sale of foreclosed real estate -- 284
The accompanying notes are an integral part of these consolidated financial
statements.
5
Affiliated Community Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1996
1) Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Affiliated Community Bancorp, Inc. (the "Company" or "Affiliated") and its two
wholly owned subsidiaries, Lexington Savings Bank ("Lexington"), a Massachusetts
chartered savings bank, and The Federal Savings Bank, a federally chartered
savings bank ("Federal") which are based in Lexington, Massachusetts and
Waltham, Massachusetts, respectively.
Affiliated Community Bancorp, Inc. was incorporated on April 13, 1995 for
the purpose of effecting the affiliation (the "Affiliation") of Lexington and
Main Street Community Bancorp. Inc. ("Main Street") including Main Street's
wholly-owned subsidiary, Federal, pursuant to the Affiliation Agreement and Plan
of Reorganization dated March 14, 1995 between Lexington and Main Street. The
Affiliation was consummated on October 18, 1995 and was treated as a pooling of
interests for accounting purposes. As of such date, Lexington and Federal
became wholly-owned subsidiaries of Affiliated and Affiliated issued 5,290,700
shares of its $.01 par value per share common stock. The operations of
Affiliated consist of those of its two bank subsidiaries, Lexington and Federal.
The information presented herein for 1996 and 1995 represents the financial
condition and the results of the Company and its wholly-owned bank subsidiaries
on a consolidated basis.
Lexington is insured by the Bank Insurance Fund ("BIF") and Federal is
insured by the Savings Association Insurance Fund ("SAIF") of the Federal
Deposit Insurance Corporation. In the opinion of management, the unaudited
consolidated financial statements presented herein reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation. Interim results are not necessarily indicative of results to be
expected for the entire year.
2) Earnings and Dividends Declared Per Share
Primary earnings per share computations include common stock (excluding
unallocated ESOP shares) and dilutive common stock equivalents attributable to
outstanding stock options. Fully diluted earnings per share computations
reflect the higher market price of the Company's common stock at period end, if
applicable, and the assumed further dilution applicable to outstanding stock
options.
Dividends declared per share for the three months ended March 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.
3) Allowance for Possible Loan Losses
The following is a summary of the allowance for possible loan losses for the
three month periods ended March 31, 1996 and 1995:
1996 1995
------ ------
(In Thousands)
Balance at beginning of period $7,127 $6,996
Provision for possible loan losses 135 100
Recoveries 54 59
------ ------
7,316 7,155
Loans charged-off 113 81
------ ------
Balance at end of period $7,203 $7,074
====== ======
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
6
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.
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures", on January 1, 1995. Under these new
accounting standards, loans are considered impaired when it is probable that the
Company will not be able to collect all amounts due according to the contractual
terms of the loan agreement. Management considers the paying status, net worth
and earnings potential of a borrower, and the value and cash flow of the
collateral as factors to determine if a loan will be paid in accordance with its
contractual terms. Management does not set any minimum delay of payments as a
factor in reviewing for impaired classification. The amount judged to be
impaired is the difference between the present value of the expected cash flows
using as a discount rate the original contractual effective interest rate and
the recorded investment of the loan. If foreclosure on a collateralized loan is
probable, impairment is measured based on the fair value of the collateral
compared to the recorded investment. If appropriate, a valuation reserve is
established to recognize the difference between the recorded investment and the
present value. Impaired loans are charged off when management believes that the
collectibility of the loan's principal is remote. All impaired loans are
classified as nonaccrual. The adoption of this new standard on January 1, 1995
did not have an impact on the Company's allowance for possible loan losses.
SFAS No. 114 also revises the definition of In-Substance Foreclosures
("ISF"). Under the new definition, ISF classification applies only to loans for
which collateral is in the physical possession of the creditor. Upon adoption
of SFAS No. 114, $1,816,000 of the Company's ISF was reclassified to loans.
During the three months ended March 31, 1996 and 1995, the average recorded
investment in impaired loans was $2,838,000 and $2,701,000, respectively, and
the income recognized related to impaired loans was $14,000 and $33,000,
respectively. At March 31, 1996 and December 31, 1995, the Company classified
$2,925,000 and $2,693,000, respectively, of its loans as impaired. Of the
$2,925,000 in impaired loans at March 31, 1996, $2,727,000 has been measured
under the fair value of collateral method and $198,000 has been measured under
the present value of the expected cash flows method. A portion of these
impaired loans, $2,238,000, has a related valuation reserve of $762,000.
4) Impact of New Accounting Standards
In March 1995, the FASB issued SFAS No. 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of", which is
effective for fiscal years beginning after December 15, 1995. SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The statement also requires that certain long-lived assets and
identifiable intangibles to be disposed of be reported at the lower of the
carrying amount or fair value less cost to sell. The Company adopted this new
statement on January 1, 1996, and such adoption did not have a significant
impact on its results of operations or financial condition.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights", which is effective for fiscal years beginning after December
15, 1995. SFAS No. 122 requires entities that engage in mortgage banking
activities to recognize as separate assets rights to service mortgage loans for
others acquired through either the purchase or origination of mortgage loans and
sale or securitization of those loans with servicing retained. In addition,
capitalized mortgage servicing rights are required to be assessed for impairment
based in the fair value of those rights. The Company adopted this new statement
on January 1, 1996, and such adoption did not have a significant impact on the
Company's results of operations or financial condition.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
General
- - -------
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
effected 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
expenses, federal deposit insurance premiums, real estate owned operations and
other general administrative expenses. The earnings of the Company are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain 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, changes in interest rates and increased
competition in the Company's market area.
Changes in Financial Conditions from December 31, 1995
- - ------------------------------------------------------
Total assets at March 31, 1996 amounted to $938.3 million as compared to
$878.5 million at December 31, 1995, reflecting an increase of $59.8 million or
6.8%. The increase in the Company's assets is primarily attributed to
additional purchases of investment securities for the available for sale
portfolio and continued growth in loans.
Investment securities designated as available for sale amounted to $156.1
million at March 31, 1996 versus $114.8 million at December 31, 1995. The
increase of $41.3 million for the quarter represents additional purchases of
Government agency securities and high quality preferred stocks. Total
marketable equity securities at March 31, 1996 amounted to $14.2 million as
compared to $3.4 million at December 31, 1995. There were no sales of
investment securities during the first quarter of 1996.
The carrying value of investment securities at March 31, 1996 is presented
in the following table:
Available Held to
for Sale Maturity
--------- --------
Government securities $ 82,191 $ 24,411
Corporate bonds 4,066 4,008
Mortgage-backed and asset-
backed securities 47,463 131,672
Mortgage-backed derivatives 8,139 16,209
Marketable equity securities 14,203 50
------ --------
$156,062 $176,350
======== ========
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, 1996 had an average life of 2.1 years
with 33% in monthly adjusting securities and the remaining 67% in fixed rate
securities.
8
Gross loans outstanding, excluding loans held for sale, at March 31, 1996
amounted to $560.5 million versus $542.8 million at December 31, 1995. The
increase of $17.7 million or 3.3% was primarily attributed to continued growth
in residential real estate loans, small business commercial loans and commercial
real estate loans. The gross balances of loans outstanding at March 31, 1996 and
December 31, 1995 are shown in the following table:
March 31, December 31,
1996 1995
--------- -----------
Real estate:
1-4 family $376,774 $367,867
Commercial and construction 134,569 129,134
Commercial 32,529 28,636
Equity lines of credit and other 18,537 19,051
Less: deferred loan fees (1,936) (1,882)
-------- --------
$560,473 $542,806
======== ========
At March 31, 1996 loans delinquent 60 days or more amounted to $4,844,000
and represented .86% of total loans outstanding. The comparable amounts at
December 31, 1995 were $5,764,000 or 1.06%.
The following table sets forth information regarding non-accrual loans,
troubled debt restructurings, other real estate owned and other assets.
March 31, December 31,
1996 1995
--------- ------------
Non-accrual loans $ 4,889 $ 5,402
Troubled debt restructurings,
accruing -- 199
------- -------
Total non-performing loans 4,889 5,601
Other real estate owned 1,220 1,201
Other assets 200 200
------- -------
Total non-performing assets $ 6,309 $ 7,002
======= =======
Loans past due 90 days or more and
still accruing $ -- $ --
======= =======
Non-performing loans as a percent of
total loans .87% 1.03%
Non-performing assets as a percent of
total assets .67% .80%
Allowance for possible loan losses as
a percent of non-performing loans 147.33% 127.25%
Allowance for possible loan losses as
a percent of total loans 1.29% 1.31%
======= =======
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.
9
The following table summarizes the Company's deposit liabilities at March
31, 1996 and December 31,1995:
March 31, December 31,
1996 1995
--------- -----------
Demand $ 37,516 $ 33,680
NOW 52,712 50,487
Regular savings 121,648 119,995
Money market 64,489 61,219
-------- --------
Total non-certificate accounts 276,365 265,381
-------- -------
Certificates less than $100,000 281,070 276,512
Certificates of $100,000 and over 41,308 41,939
-------- -------
Total certificate accounts 322,378 318,451
-------- -------
Total deposits $598,743 $583,832
======== ========
At March 31, 1996 and December 31, 1995, brokered certificates of deposits
amounted to $13.6 million and $10.9 million, respectively.
Borrowings from the Federal Home Loan Bank ("FHLB") increased to $234.9
million at March 31, 1996 from the December 31, 1995 level of $186.8 million as
a result of the Company continuing to lever its strong capital position by
adding loans and government agency securities to its balance sheet.
During the three month period ended March 31, 1996, the Company instituted
and completed a stock repurchase program under which 238,000 shares or 4.5% of
its common stock was purchased in open market transactions. Total shares
outstanding, excluding 238,000 shares of treasury stock, at March 31, 1996 were
5,071,666 as compared to 5,296,700 at December 31, 1995.
Comparison of Results of Operations for the Quarters Ended
- - ----------------------------------------------------------
March 31, 1996 and 1995
- - -----------------------
General Operating Results. Net income for the three months ended March 31,
1996 was $2.1 million or $ .41 per share, compared to net income of $1.7 million
or $.32 per share in the corresponding quarter of 1995, an increase of $408,000
or 23.8%. The earnings increase was attributed to a higher level of net
interest income achieved with only a modest increase in overall operating
expenses. As a result of higher levels of interest earning assets, net interest
income increased by $608,000 or 9.0% in the first quarter of 1996 versus the
same period of 1995.
The following table sets forth average balances and net interest income
components relating to the Company for the three months ended March 31, 1996 and
1995. 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."
10
Three Months Ended March 31,
--------------------------------------------------------------
1996 1995
------------------------------- -----------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
---------- -------- --------- --------- -------- --------
(Dollars in thousands)
Assets
Interest-earning assets:
Loans $550,533 $11,322 8.23% $478,992 $ 9,727 8.12%
-------- ------- ---- -------- ------- ----
Investments:
Investment and mortgage-backed
securities held-to-maturity 175,957 2,861 6.50% 209,589 3,296 6.29%
Investment and mortgage-backed
securities available-for-sale 136,383 2,234 6.55% 71,131 1,047 5.89%
Federal Home Loan Bank stock 10,980 172 6.27% 9,806 189 7.71%
Federal funds sold 6,145 71 4.62% 2,561 40 6.25%
-------- ------- ---- -------- ------- ----
Total investments 329,465 5,338 6.48% 293,087 4,572 6.24%
-------- ------- ---- -------- ------- ----
Total interest-earning assets 879,998 16,660 7.57% 772,079 14,299 7.41%
-------- ------- ---- -------- ------- ----
Noninterest earning assets 32,403 30,919
Allowance for possible loan losses (7,178) (7,044)
-------- --------
Total assets $905,223 $795,954
======== ========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Regular savings, NOW and money
market accounts $232,223 1,487 2.56% $245,816 1,582 2.57%
Certificate accounts 320,934 4,708 5.87% 256,192 3,455 5.39%
Borrowings 213,163 3,120 5.85% 165,762 2,525 6.09%
-------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities 766,320 9,315 4.86% 667,770 7,562 4.53%
-------- ------- ---- -------- ------- ----
Noninterest-bearing liabilities:
Demand deposits 31,679 26,910
Other 9,648 6,890
-------- --------
Total liabilities 807,647 701,570
-------- --------
Stockholder's equity 97,576 94,384
-------- --------
Total liabilities and
stockholders' equity $905,223 $795,954
======== ========
Net interest income $ 7,345 $ 6,737
======= =======
Interest rate spread 2.71% 2.88%
==== ====
Net yield on earning assets 3.34% 3.49%
==== ====
Interest Income. Total interest income increased from $14.3 million in the
first quarter of 1995 to $16.7 million in the same period of 1996, an increase
of 16.8%. This was due to increasing interest rates on, and the higher volume
of, investments and loans. As a result, the yield on average earning assets
increased from 7.41% in the first quarter of 1995 to 7.57% in the same period of
1996. Average loans outstanding in the current quarter amounted to $550.5
million and produced an average yield of 8.23%, as compared to a 1995 average
volume of $479.0 million with an average yield of 8.12%. The average balance of
all investment categories amounted to $329.5 million in the first quarter of
1996 with an average yield of 6.48% compared to $293.1 million and 6.24%,
respectively, in the comparable quarter of 1995.
Interest Expense. Interest expense in the first quarter of 1996 amounted to
$9.3 million, up $1.7 million or 22.4% from $7.6 million in the same quarter of
1995. The contributing factors to this increase were higher interest rates on
certificate accounts, and higher volumes in certificate accounts and borrowed
funds. The average rate paid on deposits increased from 4.01% in the first
quarter of 1995 to 4.48% in the comparable period of 1996. Average interest
bearing deposit volume increased from $502.0 million in the 1995 period to
$553.2 million in the first quarter of 1996, up $51.2 million or 10.2%. Average
certificates increased $64.7 million or 25.3% in 1996 from the
11
comparable 1995 quarter. The Company had average borrowings of $213.2 million
for the three months ended to March 31, 1996, with a related interest expense of
$3.1 million, compared to $165.8 million and $2.5 million, respectively, for the
first quarter of 1995.
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 periods indicated. For each interest related-asset
and liability category, information is provided with respect to (i) changes
attributable to changes in volume (changes in volume multiplied by prior rate),
(ii) changes attributable to changes in interest rates (changes in rate
multiplied by prior volume), and (iii) the net change. The changes
attributable to the combined impact of both volume and rates have been allocated
proportionately to the change due to volume and the change due to rates.
Three Months Ended March 31,
-------------------------------
1996 Compared with 1995
-------------------------------
Increase (Decrease)
Due to Change in:
-------------------------------
Average Average
Volume Rate Total
---------- --------- --------
(Dollars in thousands)
Interest Income:
Loans $1,470 $125 $1,595
Investments:
Investment and mortgage-backed
securities held-to-maturity (552) 117 (435)
Investment and mortgage-backed
securities available-for-sale 1,057 130 1,187
Federal Home Loan Bank stock 30 (47) (17)
Federal funds sold 38 (7) 31
------ ---- ------
Total interest income 2,043 318 2,361
------ ---- ------
Interest expense:
Regular savings, NOW and money
market accounts (87) (8) (95)
Certificate accounts 930 323 1,253
------ ---- ------
Total deposits 843 315 1,158
Borrowed funds 689 (94) 595
------ ---- ------
Total interest expense 1,532 221 1,753
------ ---- ------
Change in net interest income $ 511 $ 97 $ 608
====== ==== ======
The increase in the first quarter's net interest income was primarily
attributed to volume increases and rate 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 volume
increases in earning assets.
Provision for Possible Loan Losses. The provision for possible loan losses
in the first quarter of 1996 amounted to $135,000 versus $100,000 for the first
quarter of 1995.
At March 31, 1996, the Company's allowance for possible loan losses amounted
to $7.2 million which represents 147.3% of non-performing loans at that date.
The provision and the level of the allowance are evaluated on a regular basis by
management and are based upon management's periodic review of the collectibility
of the loans in light of historical experience, known and inherent risks in the
nature and volume of the loan portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral and
prevailing economic conditions. The allowance is a forward-looking estimate and
ultimate losses may vary from current estimates and future additions to the
allowance may be necessary. As adjustments become necessary, they are reported
in the results of operations for the periods in which they become known. Loan
losses are charged against the allowance when management believes the
collectibility of the loan balance is unlikely. Management believes that the
March 31, 1996 level of the allowance is adequate to provide for known and
reasonably anticipated loan losses inherent in the portfolio at that date.
12
Noninterest Income. For the first quarter of 1996, total noninterest income
amounted to $432,000, down $2,000 or 0.5% from $434,000 in the first quarter of
1995. Customer service and other fees were down $47,000 or 12.8% in the first
quarter from the same period in 1995. This was mainly due to decreases in
penalties on early withdrawals and NOW account fees. This decrease was
partially offset by loan servicing fees which amounted to $83,000 this quarter,
compared to $76,000 in the first quarter of 1995. The Company had gains on loan
sales of $29,000 in the first quarter of 1996, compared to losses of $9,000 in
the same quarter of 1995.
Noninterest Expense. Total noninterest expense increased by $80,000 or 1.9%
in the first quarter of 1996 to $4.25 million, compared to $4.17 million in the
corresponding quarter of 1995. The significant components of the change in
expenses include a $144,000 or 6.7% increase in compensation and benefits, a
$34,000 or 7.0% increase in occupancy and equipment costs, a decrease in
professional services of $29,000 or 13.1%, a $117,000 or 37.7% decrease in
federal deposit insurance premiums, an increase in other real estate owned
expense of $47,000, and a $12,000 or 10.4% increase in marketing and promotion
costs.
The increase in compensation and benefits costs was caused by staff
additions, normal salary increases, and increased costs associated with the
Company's medical insurance program, 410(k), ESOP and profit sharing plans.
Occupancy expenses increased as a result of higher rental costs, maintenance of
facilities, and depreciation expense. Professional fees declined as a result of
cost savings in the areas of consulting, legal, and accounting services. The
decrease in federal deposit insurance premiums for the first quarter reflects
the premium restructuring of the Bank Insurance Fund, Lexington's deposit
insurer. The increase in other real estate owned expense, net to $94,000 in the
first quarter of 1996 is the result of foreclosure activity and a decrease in
gains on property sales.
Income Tax Expense. The provision for income taxes was $1.3 million for the
first quarter of 1996, compared to $1.2 million for the corresponding quarter in
1995. The combined effective tax rate for the three months ended March 31, 1996
was 37.4% versus 40.8% 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 tax exempt dividend income from
preferred stocks. At March 31, 1996, the net deferred income tax asset amounted
to $3.4 million. The primary source 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 parent Company's primary sources of liquidity are dividends from
subsidiaries and maturities, and repayments and interest on investments. The
Company may use its liquidity to pay cash dividends to stockholders, fund
operating expenses and pay taxes. The Company declared a regular quarterly
dividend payable on May 17, 1996 to stockholders of record on April 30, 1996
equal to $0.12 per share. Management believes the Company's current sources of
liquidity are sufficient for its needs.
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, general
interest rates, and regulatory changes. The earning assets growth of $60.6
million in the first quarter was funded by a net gain in deposits of $14.9
million, primarily from core deposits, and additional advances from the FHLB.
The Company's bank subsidiaries, as members of the FHLB, have overnight
lines of credit of approximately $23 million and an overall borrowing capacity
of approximately $543.4 million from the FHLB. At March 31, 1996 outstanding
borrowings were $234.9 million under these facilities. Any borrowings must be
collateralized by a combination of investment securities and certain first
mortgage loans. In addition, the subsidiaries have the ability to enter into
repurchase agreements, with an aggregate credit line of $150.0 million, with
various brokers.
13
At March 31, 1996, the Company had outstanding commitments of $83.2 million
to originate loans and advance funds. As of that date, the Company had
commitments to sell loans of $367,000. There were no commitments to sell
investments at March 31, 1996. 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.
The Company's bank subsidiaries are subject to certain capital standards
prescribed by regulations. The following tables show the subsidiaries'
regulatory capital ratios as they compare to the minimum guidelines at March 31,
1996:
The Federal Lexington Minimum
Savings Bank Savings Bank Requirements
------------- ------------- -------------
Risk-based ratios:
Tier 1 capital............... 20.43% 15.04% 4.00%
Total capital................ 21.68 15.97 8.00
Tangible capital............. 9.87 N/A 1.50
Core capital................. 9.87 N/A 3.00
Tier 1 leverage capital...... N/A 8.88 4.00
14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
The Company and its subsidiaries are not involved in any pending legal
proceedings other than those involved in the ordinary course of the
Company's business. Management believes that the resolution of these
matters will not materially affect the Company's business or the
consolidated financial condition of the Company.
Item 2. Changes in Securities.
---------------------
Not applicable.
Item 3. Defaults Upon Senior Securities.
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
The Company's Annual Meeting of Stockholders was held on April 25,
1996. On the record date for the meeting, there were 5,065,866 shares
of Common Stock outstanding, of which approximately 4,467,343 shares
were represented at the meeting by proxy or in person. At the meeting,
two Directors of the Company were elected, each for a three-year term,
as follows:
VOTES FOR VOTES WITHHELD
Kendrick G. Bushnell 4,392,731 74,612
--------- ------
James E. McCobb, Jr. 4,392,979 74,464
--------- ------
Item 5. Other Information.
----------------------------------------------------
At a meeting of the Board of Directors held on April 18, 1996, the
payment of a cash dividend was declared, providing for payment of $0.12
per share to holders of record on April 30, 1996 for payment on May 17,
1996.
Item 6. Exhibits and Reports on Form 8-K.
----------------------------------------------------
a. Exhibits: 11.0 -- Computation of per share earnings.
---------
27.0 -- Financial Data Schedule.
b. Reports on Form 8-K: None.
-------------------
15
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Affiliated Community Bancorp, Inc.
--------------------------------------
(Registrant)
Date: May 15, 1996 By /s/ Timothy J. Hansberry
--------------------------------------
Timothy J. Hansberry
President and Chief Executive Officer
By /s/ John G. Fallon
--------------------------------------
John G. Fallon
Executive Vice President and
Chief Financial Officer
16