1
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 June 30, 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
(State of other jurisdiction of
incorporation or organization)
04-3277217
(I.R.S. Employer
Identification Number)
716 Main Street, Waltham, Massachusetts
(Address of principal executive offices)
02254-9035
(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 July 31, 1996, there were 5,080,666 shares of common stock, par value
$.01 per share, outstanding.
2
AFFILIATED COMMUNITY BANCORP, INC.
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1.
Consolidated Statements of Financial Condition at June
30, 1996 and December 31, 1995 3
Consolidated Statements of Income for the Three Months
Ended and Six Months Ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2.
Management's Discussion and Analysis of Financial
Condition, including Liquidity and Capital Resources, and
Results of Operations for the Three and Six Month Periods
Ended June 30, 1996 and 1995 9
PART II - OTHER INFORMATION
Item 1.
Legal Proceedings 23
Item 2.
Changes in Securities 23
Item 3.
Defaults Upon Senior Securities 23
Item 4.
Submission of Matters to a Vote of Security Holders 23
Item 5.
Other Information 23
Item 6.
Exhibits and Reports on Form 8-K 23
SIGNATURES 24
EXHIBITS:
Computation of Primary and Fully Diluted Earnings Per
Share for the Three Months Ended and Six Months Ended
June 30, 1996 and June 30, 1995 25
Financial Data Schedule 26
3
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
ASSETS June 30, December 31,
1996 1995
(unaudited)
Cash and due from banks $ 14,593 $ 14,037
Federal Funds sold and overnight deposits 8,522 4,125
Investment securities - held to maturity (market
value ($175,371 and $177,384 at June 30, 1996 and
December 31, 1995, respectively) 177,914 176,100
Investment securities - available for sale
(amortized cost $156,729 and $114,292 at June 30,
1996 and December 31, 1995, respectively) 153,973 114,836
Federal Home Loan Bank stock - at cost 13,217 10,355
Loans receivable - net of allowance for possible
loan losses of $7,240 and $7,172 at June 30, 1996
and December 31, 1995, respectively) 589,678 535,679
Loans held for sale 1,133 1,071
Other real estate owned, net 1,313 1,201
Accrued interest receivable 6,797 5,873
Office properties and equipment, net 8,509 8,446
Deferred tax asset, net 4,435 3,096
Other assets 3,820 3,661
-------- -------
Total assets $983,904 $878,480
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $621,338 $583,832
Federal Home Loan Bank Advances 257,997 186,835
ESOP debt 607 679
Mortgagors' escrow payments 1,770 1,904
Other 5,321 5,940
-------- --------
Total liabilities 887,033 779,190
-------- --------
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 5,318,666 in 1996 and
5,296,700 in 1995 53 53
Additional paid-in capital 48,479 48,263
Treasury stock at cost, 238,000 shares at June
30, 1996 (4,081) -
Retained earnings - restricted 54,857 51,563
Unearned compensation - ESOP (607) (679)
Unrealized gain (loss) on investment securities,
net of tax effects (1,830) 90
-------- --------
Total stockholders' equity 96,871 99,290
-------- --------
Total liabilities and stockholders' equity $983,904 $878,480
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
(unaudited) (unaudited)
Interest and dividend income:
Interest and fees on loans $11,766 $10,311 $23,088 $20,038
Interest and dividend income on
investment securities 5,646 4,756 10,913 9,288
Interest on federal funds sold
and overnight deposits 51 120 122 160
------- ------- ------- -------
Total interest and dividend
income 17,463 15,187 34,123 29,486
------- ------- ------- -------
Interest expense:
Interest on deposits 6,216 5,608 12,411 10,645
Interest on borrowed funds 3,545 2,658 6,665 5,183
------- ------- ------- -------
Total interest expense 9,761 8,266 19,076 15,828
------- ------- ------- -------
Net interest income 7,702 6,921 15,047 13,658
Provision for possible loan
losses 135 100 270 200
------- ------- ------- -------
Net interest income after
provision for possible loan
losses 7,567 6,821 14,777 13,458
------- ------- ------- -------
Noninterest income:
Mortgage loan servicing fees 79 75 162 151
Customer service fees and other 316 300 636 667
Gain on sales of securities - 33 - 33
Gain on sales of loans, net 28 28 57 19
------- ------- ------- -------
Total noninterest income 423 436 855 870
------- ------- ------- -------
Noninterest expenses:
Compensation and employee
benefits 2,201 2,094 4,480 4,229
Occupancy and equipment 493 460 1,010 943
Data processing 205 196 414 389
Professional services 182 230 369 452
Federal Deposit Insurance
premiums 196 309 389 619
Other real estate owned
expenses, net 45 (162) 139 (115)
Marketing and promotion 176 123 303 238
Other 673 696 1,319 1,363
------- ------- ------- -------
Total noninterest expense 4,171 3,946 8,423 8,118
------- ------- ------- -------
Income before provision for
income taxes 3,819 3,311 7,209 6,210
Provision for income taxes 1,420 1,347 2,687 2,531
------- ------- ------- -------
Net income $2,399 $1,964 $4,522 $3,679
======= ======= ======= =======
Earnings per share:
Primary $0.47 $0.37 $0.88 $0.69
========== ========== ========== ==========
Fully diluted $0.47 $0.37 $0.88 $0.69
========== ========== ========== ==========
Weighted average shares
outstanding:
Primary 5,128 5,313 5,163 5,310
======== ======== ======= =======
Fully diluted 5,134 5,325 5,166 5,317
======== ======== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
5
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Six Months Ended
June 30,
1996 1995
(Unaudited)
Cash flows from operating activities:
Net income $4,522 $3,679
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for possible loan losses 270 200
Provision for losses on other real estate owned 120 100
Depreciation and amortization 372 295
Gain on sales of loans (57) (19)
Gain on sales of securities - (33)
Net gain on sales of other real estate owned (105) (275)
Net amortization of premiums and discounts on
investment securities 362 343
Provision for deferred income taxes 232 491
ESOP transactions 125 36
Increase in Federal Home Loan Bank stock (2,862) -
Increase in loans held for sale (62) (1,171)
Increase in accrued interest receivable (924) -
Other, net (2,050) (1,401)
------- -------
Net cash provided (used) by operating
activities (57) 2,245
------- -------
Cash flows from investing activities:
Proceeds from sales of investment securities available
for sale - 4,423
Proceeds from maturities of investment securities
available for sale 13,510 4,500
Proceeds in from maturities of investment securities
held to maturity 3,206 8,003
Purchase of investment securities available
for sale (61,695) (9,181)
Purchase of investment securities held
to maturity (17,804) (13,318)
Principal payments received on investment
securities available for sale 4,716 868
Principal payments received on investment
securities held to maturity 14,594 12,200
Loan originations, net of repayments (55,127) (27,435)
Proceeds from sale of office properties
and equipment - 201
Purchases of office properties and equipment (435) (864)
Capitalized costs associated with other real estate
owned, net of payments received 4 (80)
Proceeds from sales of other real estate owned 727 2,428
------- -------
Net cash used by investing activities (98,304) (18,255)
------- -------
Cash flows from financing activities:
Net increase in deposits 37,506 28,968
Additions to Federal Home Loan Bank advances 71,162 (100)
Increase in mortgagors' escrow payments (134) 8
Additions to treasury stock (4,081) -
Net proceeds from common stock issued pursuant to
stock options exercised 162 12
ESOP transactions (72) (71)
Cash dividend paid on common stock (1,229) (978)
------- -------
Net cash provided by financing activities 103,314 27,839
------- -------
Net increase in cash and cash equivalents 4,953 11,829
Cash and cash equivalents at beginning of period 18,162 13,645
------- -------
Cash and cash equivalents at end of period 23,115 25,474
======= =======
Supplemental disclosures of cash flow information:
Interest paid on deposits $8,707 $11,121
Interest paid on borrowed funds 6,888 3,887
Income taxes paid, net of refunds 3,910 2,441
Supplemental disclosures of non-cash transactions:
Transfers to foreclosed real estate 858 787
Loans granted on sale of foreclosed real estate 372 284
Securitization of loans to mortgage-backed
investments (classified as available for sale) 1,190 -
The accompanying notes are an integral part of these consolidated financial
statements
6
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 ("Federal"),
a federally chartered savings bank, 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
treasury shares and unallocated ESOP shares) and dilutive common stock
equivalents attributable to outstanding stock options. Fully diluted earnings
per share computations reflect the higher market price of the Company's common
stock at period end, if applicable, and the assumed further dilution applicable
to outstanding stock options.
Dividends declared per share for the three and six month periods ended
June 30, 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 and six month periods ended June 30, 1996 and 1995:
7
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
(in thousands)
Balance at beginning of period $7,203 $7,074 $7,127 $6,996
Provision for possible loan losses 135 100 270 200
Recoveries 79 24 133 83
------ ------ ------ ------
7,417 7,198 7,530 7,279
Loans charged-off 177 78 290 159
------ ------ ------ ------
Balance at end of period $7,240 $7,120 $7,240 $7,120
====== ====== ====== ======
The Company's allowance for possible loan losses is established and
maintained through a provision for possible loan losses. Charges to the
provision for possible loan losses are based on management's evaluation of
numerous factors, including the risk characteristics of the Company's loan
portfolio generally, the portfolio's historical experience, the level of non-
accruing loans, current economic conditions, collateral values, and trends in
loan delinquencies and charge-offs. Although management believes it uses the
best information available to make determinations with respect to the Company's
allowance for possible loan losses, loan losses may ultimately vary
significantly from current estimates and future adjustments may be necessary if
economic conditions differ substantially from the assumed economic conditions
used in making the initial determinations or if other circumstances change.
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 six months ended June 30, 1996 and 1995, the average recorded
investment in impaired loans was $2,918,000 and $2,236,000, respectively, and
the income recognized related to impaired loans was $62,000 and $57,000,
respectively. At June 30, 1996 and December 31, 1995, the Company classified
$2,677,000 and $2,693,000, respectively, of its loans as impaired. Of the
$2,677,000 in impaired loans at June 30, 1996, $2,564,000 has been measured
under the fair value of collateral method and $113,000 has been measured under
the present value of the expected cash flows method. At June 30, 1996 impaired
loans totaling $2,169,000, had a related valuation reserve of $602,000.
8
4) Impact of New Accounting Standards
In June 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 on 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.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1996
General
The Company is a holding company that conducts substantially all its
activities through its bank subsidiaries. The Company's results of operations
are dependent primarily on net interest income, which is the difference between
(i) the interest income earned on loans and investment securities and (ii) the
cost of funds, which consists of the interest paid on deposits and borrowings.
Net interest income can be adversely affected by changes in interest rates,
interest rate caps in effect on adjustable rate securities and loans in the
portfolio, and loan and mortgage-backed security prepayments.
The Company's net income is also affected by noninterest income, such as
service charges and fees and gains or losses on asset sales, and operating
expenses, which consist primarily of compensation and benefits, occupancy and
equipment expenses, federal deposit insurance premiums, real estate owned
operations and other general administrative expenses. The earnings of the
Company are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government policies
and actions of regulatory authorities.
This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The Company's actual results could differ
materially from those set forth in the forward-looking statements. Important
factors that might cause such a difference include general economic conditions,
particularly the real estate market, in the Company's primary market area,
potential increases in the Company's non-performing assets (as well as
increases in the allowance for possible loan losses that might be necessary),
concentrations of loans in a particular geographic area or with certain large
borrowers, changes in government regulation and supervision, changes in
interest rates and increased competition in the Company's market area.
Changes in Financial Condition from December 31, 1995
Total assets at June 30, 1996 amounted to $983.9 million as compared to
$878.5 million at December 31, 1995, reflecting an increase of $105.4 million
or 12.0%. The increase in the Company's assets is primarily attributed to
growth in loans and additional purchases of investment securities for the
available for sale portfolio.
Investments: Investment securities designated as available for sale
amounted to $154.0 million at June 30, 1996 versus $114.8 million at December
31, 1995. The increase of $39.2 million for the current year represents
additional purchases of government agency securities and high quality preferred
stocks that were added to the Company's portfolio during the first six months
of 1996. Total marketable equity securities at June 30, 1996 amounted to $15.4
million as compared to $3.4 million at December 31, 1995. There were no sales
of investment securities during the first six months of 1996.
10
The carrying value of investment securities at June 30, 1996 is presented
in the following table:
Available for Held to
Sale Maturity
(in thousands)
Government securities $ 81,564 $ 32,067
Corporate bonds 4,044 3,007
Mortgage-backed and asset-backed securities 44,789 127,961
Mortgage-backed derivatives 8,202 14,879
Marketable equity securities 15,374 -
-------- --------
$153,973 $177,914
======== ========
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 June 30, 1996 had an average life of
2.35 years with 30.9% in monthly adjusting securities and the remaining 69.1%
in fixed rate securities.
Loans: Gross loans outstanding, excluding loans held for sale, at June
30, 1996 amounted to $596.9 million versus $542.8 million at December 31, 1995.
The increase of $54.1 million or 10.0% was primarily attributed to growth in
residential real estate loans, commercial real estate loans and small business
commercial loans. The gross balances of loans outstanding at June 30, 1996 and
December 31, 1995 are shown in the following table:
June 30, December 31,
1996 1995
(in thousands)
Real estate:
1-4 family $394,745 $367,867
Commercial and construction 148,942 129,134
Commercial 35,784 28,636
Equity lines of credit and other 19,193 19,051
Less: net deferred loan fees (1,746) (1,882)
-------- --------
$596,918 $542,806
======== ========
11
At June 30, 1996 loans delinquent 60 days or more amounted to $4,177,000
and represented .70% 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.
June 30, December 31,
1996 1995
(Dollars in thousands)
Non-accrual loans $5,379 $5,402
Troubled debt restructurings, accruing - 199
---------- ----------
Total non-performing loans 5,379 5,601
Other real estate owned 1,313 1,201
Other assets 100 200
---------- ----------
Total non-performing assets $6,792 $7,002
========== ==========
Loans past due 90 days or more and still
accruing - -
========== ==========
Non-performing loans as a percent of total
loans .90% 1.03%
Non-performing assets as a percent of total
assets .69% .80%
Allowance for possible loan losses as a
percent of non-performing loans 134.60% 127.25%
Allowance for possible loan losses as a
percent of total loans 1.21% 1.31%
========== ==========
Liabilities: 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.
12
The following table summarizes the Company's deposit liabilities at June
30, 1996 and December 31, 1995:
June 30, December 31,
1996 1995
(in thousands)
Demand $ 45,564 $ 33,680
NOW 51,558 50,487
Regular savings 122,887 119,995
Money market 65,097 61,219
-------- --------
Total non-certificate accounts 285,106 265,381
======== ========
Certificates less than $100,000 284,613 276,512
Certificates of $100,000 and over 51,619 41,939
-------- --------
Total certificate accounts 336,232 318,451
-------- --------
Total deposits $621,338 $583,832
======== ========
At June 30, 1996 and December 31, 1995, brokered certificates of deposits
amounted to $15.8 million and $10.9 million, respectively.
Borrowings from the Federal Home Loan Bank ("FHLB") were increased by the
Company to $258.0 million at June 30, 1996 from the December 31, 1995 level of
$186.8 million as a result of continued leveraging of the Company's strong
capital position. The additional borrowings funded loans and government agency
securities that were added to the balance sheet.
During the first quarter of 1996, the Company instituted and completed a
stock repurchase program under which 238,000 shares or 4.5% of its common stock
was purchased in open market transactions. At June 30, 1996 total shares
outstanding, excluding 238,000 shares of treasury stock were 5,080,666 as
compared to 5,296,700 at December 31, 1995.
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 July 18, 1996 the Company declared a
regular quarterly dividend of $0.12 per share payable on August 16, 1996 to
stockholders of record on July 31, 1996. This second quarter dividend is a
continuation of the $0.12 per share paid in recent periods.
The primary sources of funds for the Company's bank subsidiaries are
deposits, FHLB borrowings, principal and interest payments on loans, mortgage-
backed and mortgaged-backed derivative securities, and maturities of investment
securities. While maturities and scheduled amortization of loans and
investment securities are predictable sources of funds, deposit inflows and
mortgage prepayments are greatly influenced by economic conditions, interest
rate levels, and regulatory changes. The earning asset growth of $102.3
million in the first half of 1996 was funded by a net gain in deposits of $37.5
million, primarily from term certificates and core deposits, and additional
advances from the FHLB amounting to $71.2 million.
The Company's bank subsidiaries, as members of the FHLB, have overnight
lines of credit of approximately $23.5 million and an overall borrowing
capacity of approximately $577.4 million from the FHLB. At June 30, 1996
outstanding borrowings were $258.0 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 June 30, 1996, the Company had outstanding commitments of $73.6 million
to originate loans and advance funds. As of that date, the Company had
commitments to sell loans of $1.1 million and commitments to purchase
investments of $1.7 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.
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 compared to the minimum guidelines at June
30, 1996:
The Federal Lexington Minimum
Savings Bank Savings Bank Requirements
Risk-based ratios:
Tier 1 capital 19.47% 14.41% 4.00%
Total capital 20.73 15.33 8.00
Tangible capital 9.60 N/A 1.50
Core capital 9.60 N/A 3.00
Tier 1 leverage capital N/A 8.52 4.00
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1995
General Operating Results. Net income for the three months ended June 30,
1996 was $2.4 million or $0.47 per share, compared to net income of $2.0
million or $0.37 per share in the corresponding quarter of 1995, an increase of
$435,000 or 22.1%. The earnings increase was attributable 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 $781,000 or 11.3% in the second quarter of 1996
versus the same period of 1995.
The following table sets forth the Company's average balances and net
interest income components for the three months ended June 30, 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."
14
Three Months Ended June 30,
-----------------------------------------------------------------
1996 1995
------------------------------- -------------------------------
(Dollars in thousands)
Interest Avg. Interest Avg.
Average Income/ Yield/ Average Income/ Yield/
ASSETS Balance Expense Rate Balance Expense Rate
Interest-earning assets:
Loans $575,777 $11,766 8.17% $492,189 $10,311 8.38%
-------- ------- ----- -------- ------- -----
Investments:
Investment and mort-
gage-backed securities
held-to-maturity 178,577 2,901 6.50% 210,794 3,365 6.39%
Investment and mort-
gage-backed securities
available for sale 156,673 2,544 6.50% 72,282 1,092 6.04%
Federal Home Loan Bank
stock 12,632 201 6.36% 9,806 299 12.20%
Federal Funds sold 5,139 51 3.97% 8,693 120 5.52%
-------- ------- ----- -------- ------- ------
Total investments 353,021 5,697 6.46% 301,575 4,876 6.47%
-------- ------- ----- -------- ------- ------
Total interest-
earning assets 928,798 17,463 7.52% 793,764 15,187 7.65%
-------- ------- ----- -------- ------- ------
Noninterest earning assets 33,508 31,802
Allowance for possible loan
losses (7,168) (7,089)
-------- --------
Total assets $955,138 $818,477
======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Regular savings, NOW and
money market accounts $236,912 $1,529 2.58% $235,924 $1,556 2.64%
Certificate accounts 327,843 4,687 5.72% 282,267 4,052 5.74%
Borrowings 250,433 3,545 5.66% 167,992 2,658 6.33%
-------- ------- ----- ------- ------- ------
Total interest-
bearing liabilities 815,188 9,761 4.79% 686,183 8,266 4.82%
-------- ------- ----- ------- ------- ------
Noninterest-bearing
liabilities:
Demand deposits 36,121 28,597
Other 7,567 7,355
-------- --------
Total liabilities 858,876 722,135
-------- --------
Stockholders' equity 96,262 96,342
-------- --------
Total liabilities
and stockholders'
equity $955,138 $818,477
======== ========
Net interest income $7,702 $6,921
======== ========
Interest rate spread 2.73% 2.83%
===== ======
Net yield on earning assets 3.32% 3.49%
15
Interest Income. Total interest income grew from $15.2 million in the
second quarter of 1995 to $17.5 million in the same period of 1996, an increase
of 15.0%. The additional income is due to the higher volume of investments and
loans. The yield on average earning assets decreased from 7.65% in the second
quarter of 1995 to 7.52% in the same period of 1996 due to a lower yield on the
Company's loan portfolio. Average loans outstanding in the current quarter
amounted to $575.8 million and produced an average yield of 8.17%, as compared
to a 1995 average volume of $492.2 million with an average yield of 8.38%. The
average balance of all investment categories amounted to $353.0 million in the
second quarter of 1996 with an average yield of 6.46% compared to $301.6
million and 6.47%, respectively, in the comparable quarter of 1995.
Interest Expense. Interest expense in the second quarter of 1996 amounted
to $9.8 million, up $1.5 million or 18.1% from $8.3 million in the same quarter
of 1995. The main contributing factors to this increase were higher volumes in
certificate accounts and borrowed funds. The average rate paid on total
interest bearing deposits increased from 4.33% in the second quarter of 1995 to
4.40% in the comparable period of 1996. Average interest bearing deposit
volume increased from $518.2 million in the 1995 period to $564.8 million in
the second quarter of 1996, up $46.6 million or 9.0%. Average certificates
increased $45.6 million or 16.1% in 1996 from the comparable 1995 quarter. The
Company had average borrowings of $250.4 million for the three months ended to
June 30, 1996, with a related interest expense of $3.5 million, compared to
$168.0 million and $2.7 million, respectively, for the second 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 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 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.
16
Three Months Ended June 30,
1996 Compared with 1995
Increase (Decrease)
Due to Change in:
Average Average
Volume Rate Total
(Dollars in thousands)
Interest Income:
Loans $1,701 ($246) $1,455
Investments:
Investment and mortgage-backed
securities held-to-maturity (525) 61 (464)
Investment and mortgage-backed
securities available-for-sale 1,365 87 1,452
Federal Home Loan Bank stock 149 (247) (98)
Federal funds sold (41) (28) (69)
------ ------ ------
Total interest income 2,649 (373) 2,276
------ ------ ------
Interest Expense:
Regular savings, NOW and money
market accounts 7 (34) (27)
Certificate accounts 652 (17) 635
------ ------ ------
Total deposits 659 (51) 608
Borrowed funds 1,129 (242) 887
------ ------ ------
Total interest expense 1,788 (293) 1,495
------ ------ ------
Change in net interest income $ 861 $ (80) $ 781
====== ====== ======
17
The increase in 1996 second quarter net interest income was primarily
attributed to volume increases in loans and in investment and mortgage-backed
securities designated as available for sale, which offset the decreases in
average yields. Volume increases in certificates of deposits and borrowed
funds partially offset the volume increases in earning assets.
Provision for Possible Loan Losses. The provision for possible loan
losses for the second quarter of 1996 amounted to $135,000 versus $100,000 for
the second quarter of 1995.
At June 30, 1996, the Company's allowance for possible loan losses
amounted to $7.2 million which represented 134.6% of non-performing loans at
that date. The provision and the level of the allowance are evaluated on a
regular basis by management and are based upon management's periodic review of
the collectibility of the loans in light of historical experience, known and
inherent risks in the nature and volume of the loan portfolio, adverse
situations that may affect the borrower's ability to repay, estimated value of
any underlying collateral and prevailing economic conditions. The allowance is
a forward-looking estimate and ultimate losses may vary from current estimates
and future additions to the allowance may be necessary. As adjustments become
necessary, they are reported in the results of operations for the periods in
which they become known. Loan losses are charged against the allowance when
management believes the collectibility of the loan balance is unlikely.
Although no assurance can be given, management believes that the June 30, 1996
level of the allowance is adequate to provide for known and reasonably
anticipated loan losses inherent in the portfolio at that date.
Noninterest Income. For the second quarter of 1996, total noninterest
income amounted to $423,000, down $13,000 or 3.0% from $436,000 in the second
quarter of 1995. Results for the second quarter of 1995 included gains on
securities sold of $33,000. Customer service and other fees increased by
$16,000 or 5.3% in the second quarter from the same period in 1995. This was
mainly due to increases in checking and NOW account fees. Loan servicing fees
amounted to $79,000 this quarter, compared to $75,000 in the second quarter of
1995. The Company had gains on loan sales of $28,000 in the second quarter of
1996, which was identical to the same quarter of 1995.
Noninterest Expenses. Total noninterest expense increased by $225,000 or
5.7% in the second quarter of 1996 to $4.2 million, compared to $3.9 million in
the corresponding quarter of 1995. The significant components of the change in
expenses include a $107,000 or 5.1% increase in compensation and benefits, a
$33,000 or 7.2% increase in occupancy and equipment costs, a decrease in
professional services of $48,000 or 20.9%, a $113,000 or 36.6% decrease in
federal deposit insurance premiums, an increase in other real estate owned
expense of $207,000, and a $53,000 or 43.0% increase in marketing and promotion
costs.
18
The increase in compensation and benefits costs was caused by staff
additions, normal salary increases, and increased costs associated with the
Company's 401(k) 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 second quarter reflects the 1995 premium
restructuring of the FDIC's Bank Insurance Fund, Lexington's deposit insurer.
Other real estate owned expenses, a net of $45,000 in the second quarter of
1996, is the result of foreclosure activity. For the 1995 period, there was a
net credit of $162,000 in other real estate owned expenses reflecting gains on
sale of foreclosed properties.
Provision for Income Taxes. The provision for income taxes was $1.4
million for the second quarter of 1996, compared to $1.3 million for the
corresponding quarter in 1995. The combined effective tax rate for the three
months ended June 30, 1996 was 37.2% versus 40.7% for the same period in 1995.
The lower effective rate in 1996 reflects a lower state tax rate applicable to
certain subsidiaries of the Company's bank subsidiaries and an increase in tax
exempt dividend income from preferred stocks. At June 30, 1996, the net
deferred income tax asset amounted to $4.4 million. The primary sources of
recovery of the deferred income tax asset are taxes paid, which are available
for carry back, from 1995, 1994, and 1993, and the expectation that the
deductible temporary differences will reverse during periods when the Company
generates taxable income.
Comparison of Results of Operations for the Six Months Ended
June 30, 1996 and 1995
General Operating Results. Net income for the six months ended June 30,
1996 was $4.5 million or $0.88 per share, compared to net income of $3.7
million or $0.69 per share in the corresponding period of 1995, an increase of
$843,000 or 22.9%. The earnings increase reflects a higher level of net
interest income with only a modest increase in operating expenses. As a result
of increased levels of interest earning assets, net interest income increased
by $1.4 million or 10.2% in the first six months of 1996 versus the same period
of 1995. Noninterest expense increased by $305,000 or 3.8% in the first half
of 1996 compared to the first half of 1995. A significant portion of the
expense increase resulted from a net cost of $139,000 for other real estate
owned expenses for the first half of 1996, versus a net gain of $115,000 for
the comparable period of 1995.
The following table sets forth the Company's average balances and net
interest income components for the six months ended June 30, 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."
19
Six Months Ended June 30,
-----------------------------------------------------------------
1996 1995
------------------------------- -------------------------------
(Dollars in thousands)
Interest Avg. Interest Avg.
Average Income/ Yield/ Average Income/ Yield/
ASSETS Balance Expense Rate Balance Expense Rate
Interest-earning assets:
Loans $563,177 $23,088 8.20% $485,609 $20,038 8.25%
-------- ------- ----- -------- ------- -----
Investments:
Investment and mort-
gage-backed securities
held-to-maturity 177,280 5,762 6.50% 210,525 6,661 6.33%
Investment and mort-
gage-backed securities
available for sale 146,552 4,778 6.52% 71,394 2,139 5.99%
Federal Home Loan Bank
stock 11,808 373 6.32% 9,806 488 9.95%
Federal Funds sold 5,640 122 4.33% 5,632 160 5.68%
-------- ------- ----- -------- ------- ------
Total investments 341,280 11,035 6.47% 297,357 9,448 6.35%
-------- ------- ----- -------- ------- ------
Total interest-
earning assets 904,457 34,123 7.55% 782,966 29,486 7.53%
-------- ------- ----- -------- ------- ------
Noninterest earning assets 33,142 31,376
Allowance for possible loan
losses (7,172) (7,066)
-------- --------
Total assets $930,427 $807,276
======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Regular savings, NOW and
money market accounts $234,576 $3,053 2.60% $240,849 $3,138 2.61%
Certificate accounts 324,410 9,358 5.77% 269,268 7,507 5.58%
Borrowings 232,253 6,665 5.74% 166,897 5,183 6.21%
-------- ------- ----- ------- ------- ------
Total interest-
bearing liabilities 791,239 19,076 4.82% 677,014 15,828 4.68%
-------- ------- ----- ------- ------- ------
Noninterest-bearing
liabilities:
Demand deposits 34,678 27,764
Other 7,790 7,189
-------- --------
Total liabilities 833,707 711,967
-------- --------
Stockholders' equity 96,720 95,309
-------- --------
Total liabilities
and stockholders'
equity $930,427 $807,276
======== ========
Net interest income $15,047 $13,658
======== ========
Interest rate spread 2.73% 2.85%
===== ======
Net yield on earning assets 3.33% 3.49%
20
Interest Income. Total interest income increased from $29.5 million in
the first six months of 1995 to $34.1 million in the same period of 1996, an
increase of 15.6%. The higher level of interest income is chiefly due to an
increased volume of loans and investments available for sale. The yield on
average earning assets was 7.53% in the first six months of 1995 and 7.55% in
the same period of 1996. Average loans outstanding in the current period
amounted to $563.2 million and produced an average yield of 8.20%, as compared
to a 1995 average volume of $485.6 million with an average yield of 8.25%. The
average balance of all investment categories amounted to $341.3 million in the
first half of 1996 with an average yield of 6.47% compared to $297.4 million
and 6.35%, respectively, in the comparable period of 1995.
Interest Expense. Interest expense in the first half of 1996 amounted to
$19.1 million, up $3.3 million or 20.9% from $15.8 million in 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 4.17% for the first six months of
1995 to 4.44% for the comparable period of 1996. Average interest bearing
deposits increased from $510.1 million in the 1995 period to $559.0 million in
the first half of 1996, up $48.9 million or 9.6%. Average certificates
increased $55.1 million or 20.5% in 1996 from the comparable 1995 period. The
Company had average borrowings of $232.3 million for the six months ended June
30, 1996, with a related interest expense of $6.7 million, compared to $166.9
million and $5.2 million, respectively, for the first six months 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.
21
Six Months Ended June 30,
1996 Compared with 1995
Increase (Decrease)
Due to Change in:
Average Average
Volume Rate Total
(Dollars in thousands)
Interest Income:
Loans $3,179 ($129) $3,050
Investments:
Investment and mortgage-backed
securities held-to-maturity (1,087) 188 (899)
Investment and mortgage-backed
securities available-for-sale 2,435 204 2,639
Federal Home Loan Bank stock 146 (261) (115)
Federal funds sold 0 (38) (38)
------ ----- ------
Total interest income 4,673 (36) 4,637
------ ----- ------
Interest Expense:
Regular savings, NOW and money
market accounts (82) (3) (85)
Certificate accounts 1,583 268 1,851
------ ----- ------
Total deposits 1,501 265 1,766
Borrowed funds 1,838 (356) 1,482
------ ----- ------
Total interest expense 3,339 (91) 3,248
------ ----- ------
Change in net interest income $1,334 $ 55 $1,389
====== ===== ======
The increase in the year-to-date net interest income was primarily
attributed to volume increases in loans and volume and rate increases in
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 for the first six months of 1996 amounted to $270,000 versus $200,000
for the first half of 1995.
Noninterest Income. For the first six months of 1996, total noninterest
income amounted to $855,000, down $15,000 or 1.7% from $870,000 in the first
half of 1995. Customer service and other fees were down $31,000 or 4.6% in the
first half from the same period in 1995 due to decreases in penalties on early
withdrawals, and checking and NOW account fees. This decrease was partially
offset by loan servicing fees which amounted to $162,000 this period, compared
to $151,000 in the first six months of 1995. The Company had gains on loan
sales of $57,000 in the first half of 1996, compared to gains of $19,000 in the
same period of 1995. Sales of investments produced gains of $33,000 in the
first half of 1995, compared to no gain or loss during the 1996 period.
22
Noninterest Expenses. Total noninterest expense increased by $305,000 or
3.8% in the first six months of 1996 to $8.4 million, compared to $8.1 million
in the corresponding period of 1995. The significant components of the change
in expense include a $251,000 or 5.9% increase in compensation and benefits, a
$67,000 or 7.1% increase in occupancy and equipment costs, a decrease in
professional services of $83,000 or 18.4%, a $230,000 or 37.2% decrease in
federal deposit insurance premiums, an increase in other real estate owned
expense of $254,000, and $65,000 or 27.3% increase in marketing and promotion
costs.
The increase in compensation and benefits costs were caused by staff
additions, normal salary increases, and increased costs associated with the
Company's medical insurance program, 401(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 six months
reflects the premium restructuring of the FDIC's Bank Insurance Fund,
Lexington's deposit insurer. Other real estate owned expense, a net of
$139,000 in the first half of 1996, is the result of foreclosure activity.
In 1995 there was a net credit of $115,000 in other real estate owned
expenses reflecting gains on sales of foreclosed property.
Provision for Income Taxes. The provision for income taxes was $2.7
million for the first six months of 1996, compared to $2.5 million for the
corresponding period in 1995. The combined effective tax rate for the six
months ended June 30, 1996 was 37.3% 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.
23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company and its subsidiaries are not involved in any pending
legal proceedings other than those arising in the ordinary course of
the Company's business. Management believes that the resolution of
these matters will not materially affect the Company's business or
the consolidated financial condition of the Company.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
At a meeting of the Board of Directors held on July 18,
1996, the payment of a cash dividend was declared, providing for
payment of $0.12 per share on August 16, 1996 to holders of
record on July 31, 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.
24
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: August 14, 1996 By: /s/ Timothy J. Hansberry
TIMOTHY J. HANSBERRY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: August 14, 1996 By: /s/John G. Fallon
JOHN G. FALLON
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
25
Exhibit 11.0
AFFILIATED COMMUNITY BANCORP, INC.
COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
(Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
(Unaudited) (Unaudited)
Primary:
Weighted average shares 5,076,406 5,287,634 5,108,371 5,287,170
ESOP shares not released
or committed to be released (64,247) (78,572) (66,032) (80,357)
---------- ---------- ----------- ----------
5,012,159 5,209,062 5,042,339 5,206,813
Common stock equivalents:
Stock Options 116,159 103,516 120,804 103,038
---------- ---------- ---------- ----------
Primary weighted average
shares 5,128,318 5,312,578 5,163,143 5,309,851
========== ========== ========== ==========
Net income $2,399 $1,964 $4,522 $3,679
========== ========== ========== ==========
Earnings per share $0.47 $0.37 $0.88 $0.69
========== ========== ========== ==========
Fully diluted:
Weighted average shares 5,076,406 5,287,634 5,108,371 5,287,170
ESOP shares not released
or committed to be released (64,247) (78,572) (66,032) (80,357)
---------- ---------- ---------- ----------
5,012,159 5,209,062 5,042,339 5,206,813
Common stock equivalents:
Stock Options 121,583 115,104 123,818 110,057
---------- ---------- ---------- ----------
Fully diluted weighted
average shares 5,133,742 5,324,166 5,166,157 5,316,870
========== ========== ========== ==========
Net income $2,399 $1,964 $4,522 $3,679
========== ========== ========== ==========
Earnings per share $0.47 $0.37 $0.88 $0.69
========== ========== ========== ==========