AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
ASSETS
Cash and due from banks $15,979 $11,331
Federal funds sold and overnight deposits 4,584 4,464
Investment securities - held to maturity
(market value $190,230 and $173,372
at September 30, 1997 and December 31, 1996,
respectively) 188,115 173,510
Investment securities - available for sale
(amortized cost $176,151 and $160,395
at September 30, 1997 and December 31, 1996,
respectively) 177,168 159,844
Loans held for sale 944 -
Loans receivable - net of allowance for
possible loan losses of $8,381 and $7,759
at September 30, 1997 and December 31, 1996,
respectively 699,554 645,797
Federal Home Loan Bank stock - at cost 16,162 14,638
Other real estate owned, net 1 133
Accrued interest receivable 7,968 7,124
Office properties and equipment, net 8,790 8,428
Deferred tax asset, net 2,924 3,405
Other assets 6390 3,539
---------- -----------
Total assets $1,128,579 $1,032,213
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 702,994 $ 652,509
Federal Home Loan Bank advances 301,971 267,171
ESOP debt 1,127 1,394
Mortgagors' escrow payments 2,440 2,087
Securities sold under agreements to repurchase 3,032 727
Other 6,857 6,923
---------- ----------
Total liabilities 1,018,421 930,811
---------- ----------
Stockholders' Equity (Note 4):
Preferred stock, $0.01 Par Value; 2,000,000
shares authorized, none issued
Common stock, $0.01 Par Value; 18,000,000
shares authorized; shares issued 6,740,109
in 1997 and 6,683,957 in 1996 67 66
Additional paid-in capital 50,040 49,146
Retained earnings - restricted 64,055 57,518
Treasury stock at cost, 247,500 shares (3,402) (3,402)
Unearned compensation - ESOP (1,108) (1,394)
Unrealized gain (loss) on investment
securities, net of tax effects 506 (532)
Total stockholders' equity 101,158 101,402
---------- ----------
Total liabilities and stockholders' equity $l,128,579 $1,032,213
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
82
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share data)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
(Unaudited) (Unaudited)
Interest and dividend income:
Interest and fees on loans $14,370 $12,498 $41,879 $35,586
Interest and dividend income
on investment securities 6,300 5,704 18,242 16,617
Interest on federal funds sold
and overnight deposits 70 78 162 200
------- ------- ------- -------
Total interest and dividend income 20,740 18,280 60,283 52,403
------- ------- ------- -------
Interest expense:
Interest on deposits 7,114 6,577 20,847 18,988
Interest on borrowed funds 4,710 3,724 13,067 10,389
------- ------ ------- ------
Total interest expense 11,824 10,301 33,914 29,377
------- ------ ------- ------
Net interest income 8,916 7,979 26,369 23,026
Provision for possible loan losses 250 135 700 405
------- ------ ------- -------
Net interest income after provision
for possible loan losses 8,666 7,844 25,669 22,621
------- ------ ------- -------
Noninterest income:
Mortgage loan servicing fees 64 63 198 225
Customer service fees and other 346 312 1,078 948
Gain on sales of securities, net 90 - 97 -
Gain on sales of loans, net 62 29 85 86
------- ------- ------- -------
Total non-interest income 562 404 1,458 1,259
------- ------- ------- -------
Non-interest expenses:
Compensation and employee benefits 2,714 2,308 7,783 6,863
Occupancy and equipment 618 552 1,708 1,562
Data processing 275 205 764 619
Professional services 159 169 439 538
Federal Deposit Insurance premiums 66 2,318 198 2,707
Other real estate owned (income)
expenses, net (17) 25 (141) 164
Marketing and promotion 210 132 541 435
Other 515 658 1754 1,902
------- ------- ------- -------
Total non-interest expenses 4,540 6,367 13,046 14,790
------- ------- ------- -------
Income before provision for income taxes 4,688 1,881 14,081 9,090
Provision for income taxes 1,739 579 5,253 3,266
------- ------- ------- -------
Net Income $2,949 $1,302 $8,828 $5,824
======= ======= ======= =======
Earnings per share (Note 4):
Primary $0.44 $0.20 $1.33 $0.90
======= ======= ======= =======
Fully diluted $0.43 $0.20 $1.32 $0.90
======= ======= ======= =======
Weighted average shares outstanding:
Primary 6,682 6,460 6,623 6,450
======= ======= ======= =======
Fully diluted 6,706 6,482 6,679 6,496
======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
83
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTE 4)
For the Nine Months Ended September 30, 1997 and 1996
(In thousands, except per share data)
(Unaudited)
Net Unrealized
Additional Unearned Gain (Loss) on
Common Paid-in Treasury Retained Compensation- Investment
Stock Capital Stock Earnings ESOP Securities Total
------ ------- -------- -------- ------------- ---------- -----
Balance at December 31, 1995 $66 $48,250 $ - $51,563 ($679) $90 $99,290
Net income - - - 5,824 - - 5,824
ESOP transactions - 86 - - 108 - 194
Issuance of common stock under
stock option plan - 287 - - - - 287
Purchase of treasury stock - - (4,081) - - - (4,081)
Cash dividends declared ($.29 per share) - - - (1,837) - - (1,837)
Changes in net unrealized gain (loss) on
securities available for sale, net
of tax effect - - - - - (1,615) (1,615)
--- ------- --- ------- ------ ------- --------
Balance at September 30, 1996 $66 $48,623 ($4,081) $55,550 ($571) ($1,525) $98,062
=== ======= ======= ======= ===== ======= =======
Net Unrealized
Additional Unearned Gain (Loss) on
Common Paid-in Treasury Retained Compensation- Investment
Stock Capital Stock Earnings ESOP Securities Total
----- ------- ----- -------- ---- ---------- -----
Balance at December 31, 1996 $66 $49,146 ($3,402) $57,518 ($1,394) ($532) $101,402
Net income - - - 8,828 - - 8,828
ESOP transactions - 225 - 32 286 - 543
Issuance of common stock under stock
option plan 1 418 - - - - 419
Tax benefit from stock options exercised - 251 - - - - 251
Purchase of treasury stock - - - - - - -
Cash dividends declared ($.36 per share) - - - (2,323) - - (2,323)
Changes in net unrealized gain (loss) on
securities available for sale, net of tax
effect
- - - - - 1,038 1,038
--- -------- ------- -------- -------- ----- -------
Balance at September 30, 1997 $67 $50,040 ($3,402) $64,055 ($1,108) $506 $110,158
=== ======= ======= ======= ======= ==== ========
The accompanying notes are integral part of these consolidated financial
statements.
84
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine Months Ended
September 30
-------------------
1997 1996
---- ----
(Unaudited)
Cash flows from operating activities:
Net Income $8,828 $5,824
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for possible loan losses 700 405
Provision for losses on other real estate owned - 180
Depreciation and amortization 655 568
Gain on sales of loans (85) (86)
Gain on sales of securities (97) -
Net gain on sales of other real estate owned (44) (177)
Net amortization of premiums and discounts on investment securities 159 603
Provision for deferred income taxes 197 421
ESOP transactions 543 194
Increase in Federal Home Loan Bank stock (1,524) (3,137)
(Increase) decrease in loans held for sale (944) 595
Increase in accrued interest receivable (844) (1,149)
Other, net (1,651) 1,452
------- ------
Net cash provided by operating activities 5,893 5,693
------- ------
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale 21,411 -
Proceeds from sales of investment securities held to maturity which were called 3,956 -
Proceeds from maturities of investment securities available for sale 12,428 16,510
Proceeds from maturities of investment securities held to maturity 19,197 3,251
Purchase of investment securities available for sale (58,922) (68,076)
Purchase of investment securities held to maturity (58,900) (22,949)
Principal payments received on investment securities available for sale 7,966 6,558
Principal payments received on investment securities held to maturity 21,180 21,559
Loan originations, net of repayments (54,544) (77,748)
Proceeds from sale of office properties and equipment - -
Purchases of office properties and equipment (1,017) (519)
Capitalized costs associated with other real estate owned, net of payments received - (42)
Proceeds from sales of other real estate owned 348 1,267
--- -----
Net cash used by investing activities (86,897) (120,189)
-------- ---------
Cash flows from financing activities:
Net increase in deposits 50,485 53,197
Additions to Federal Home Loan Bank advances 34,800 71,006
Increase in mortgagors' escrow payments 353 147
Increase in repurchase agreements 2,305 972
Purchase of treasury stock - (4,081)
Proceeds from issuance of common stock 419 287
ESOP transactions (267) (108)
Cash dividends paid on common stock (2,323) (1,837)
------- -------
Net cash provided by financing activities 85,772 119,583
------ -------
Net increase in cash and cash equivalents 4,768 5,087
Cash and cash equivalents at beginning of period 15,795 18,162
------- -------
Cash and cash equivalents at end of period $20,563 $23,249
======= =======
Supplemental disclosures of cash flow information:
Interest paid on deposits $20,682 $19,590
Interest paid on borrowed funds 13,335 10,766
Income taxes paid, net of refunds 5,019 3,432
Supplemental disclosures of non-cash transactions
Transfers to foreclosed real estate 172 1,006
Loans granted on sale of foreclosed real estate 162 857
Securitization of loans to mortgage-backed investments - 2,326
The accompanying notes are an integral part of these consolidated financial
statements
85
AFFILIATED COMMUNITY BANCORP, INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
1) Basis of Presentation
The accompanying consolidated financial statements include the
accounts of Affiliated Community Bancorp, Inc, (the "Company" or
"Affiliated") and its three wholly-owned subsidiaries, Lexington Savings
Bank ("Lexington"), a Massachusetts chartered savings bank, The Federal
Savings Bank ("Federal"), a federally chartered savings bank, and
Middlesex Bank & Trust Company ("Middlesex") a Massachusetts chartered
trust company, which are headquartered in Lexington, Massachusetts,
Waltham, Massachusetts, and Newton Massachusetts, respectively.
Affiliated was incorporated on April 13, 1995 for the purpose of
effecting the affiliation (the "Affiliation") of Lexington and Main
Street Community Bancorp, Inc. ("Main Street") including Main Street's
wholly-owned subsidiary, Federal, pursuant to the Affiliation Agreement
and Plan of Reorganization dated March 14, 1995 between Lexington and
Main Street. The Affiliation was consummated on October 18, 1995 and
was treated as a pooling of interests for accounting purposes. On May
20, 1997, Affiliated provided the initial capital to Middlesex in
exchange for all of Middlesex's outstanding stock, making Middlesex a
wholly owned subsidiary of Affiliated. Middlesex opened on June 2, 1997
as a de novo, full-service commercial bank. The operations of
Affiliated consist of those of its three bank subsidiaries, Lexington,
Federal and Middlesex. The information presented herein for 1997 and
1996 represents the financial condition and the operating results of
the Company and its wholly-owned bank subsidiaries on a consolidated
basis.
Lexington and Middlesex are insured by the Bank Insurance Fund
("BIF") and Federal is insured by the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
Certain reclassifications have been made to the 1996 consolidated
financial statements to conform with the September 30, 1997 presentation.
Such reclassifications had no effect on previously reported consolidated
net income.
In the opinion of management, the unaudited consolidated financial
statements presented herein reflect all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation. Interim
results are not necessarily indicative of results to be expected for the
entire year.
2) Earnings and Dividends Declared Per Share
Primary earnings per share computations include common stock issued
(excluding treasury shares and unallocated ESOP shares) and dilutive
common stock equivalents attributable to outstanding stock options. Fully
diluted earnings per share computations reflect the higher market price of
the Company's common stock at period end, if applicable, and the assumed
further dilution applicable to outstanding stock options.
3) Allowance for Possible Loan Losses
The following is a summary of the allowance for possible loan losses
for the three and nine month periods ended September 30, 1997 and 1996:
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
l997 1996 l997 1996
------------------ -----------------
(In thousands)
Balance at beginning of period $8,228 $7,240 $7,759 $7,127
Provision for possible losses 250 135 700 405
Recoveries 19 14 78 147
------ ------ ------ ------
8,497 7,389 8,537 7,679
Loans charged-off 116 3 156 293
------ ------ ------ ------
Balance at end of period $8,381 $7,386 $8,381 $7,386
====== ====== ====== ======
86
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 attempts
to use the best information available to make determinations with respect
to the Company's allowance for possible loan losses, loan losses may
ultimately vary significantly from current estimates and future
adjustments may be necessary if economic conditions differ substantially
from the assumed economic conditions used in making the initial
determination or if other circumstances change.
Loans are considered impaired when it is probable that the Company
will not be able to collect all amounts due according to the contractual
terms of the loan agreement. Management considers the paying status, net
worth and earnings potential of a borrower, and the value and cash flow of
the collateral, as factors to determine if a loan will be paid in
accordance with its contractual terms. Management does not set any minimum
delay of payments as a factor in reviewing for impaired classification.
The amount judged to be impaired is the difference between the present
value of the expected cash flows using as a discount rate the original
contractual effective interest rate and the recorded investment of the
loan. If foreclosure on a collateralized loan is probable, impairment is
measured based on the fair value of the collateral compared to the
recorded investment. If appropriate, a valuation reserve is established to
recognize the difference between the recorded investment and the present
value. Impaired loans are charged off when management believes that the
collectibility of the loan's principal is remote. All impaired loans are
classified as nonaccrual.
For the nine months ended September 30, 1997 and 1996, the average
recorded investment in impaired loans was $3,665,000 and $3,536,000
respectively, and the income recognized on related impaired loans was
$140,000 and $134,000, respectively. At September 30, 1997 and December
31, 1996, the Company classified $3,535,000 and $3,798,000, respectively,
of its loans as impaired. Of the $3,535,000 in impaired loans at September
30, 1997, $3,435,000 has been measured under the fair value of collateral
method and $100,000 has been measured under the present value of the
expected cash flows method. At September 30, 1997 impaired loans totaling
$2,845,000, had a related valuation reserve of $607,000. Of the $3,798,000
in impaired loans at December 31, 1996, $3,691,000 has been measured under
the fair value of collateral method and $107,000 has been measured under
the present value of the expected cash flows method. At December 31, 1996,
impaired loans totaling $3,555,000 had a related valuation reserve of
$667,000.
4) Stock Split
On May 30, 1997 the Company effected a 25% stock split paid in the
form of a stock dividend. All common stock share and per share information
prior to the stock split, except for shares authorized, has been
retroactively restated to reflect this stock split.
5) Impact of New Accounting Standards
In September 1996, the FASB issued SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which is generally effective for transfers and servicing of
financial assets and extinguishments of liabilities, as defined, after
December 31, 1996. SFAS No. 125, as amended, requires an entity to
recognize upon a transfer the financial and servicing assets it controls
and the liabilities it has incurred, derecognize financial assets when
control has been surrendered, and derecognize liabilities when
extinguished. SFAS No. 125 supersedes SFAS No. 122. For servicing
contracts in existence before January 1, 1997, previously recognized
servicing rights and "excess servicing" receivables that do not exceed
contractually specified servicing fees are combined, net of any previously
recognized servicing obligations, as a servicing asset or liability, with
previously recognized servicing receivables that exceed contractually
specified servicing fees being reclassified as interest-only strips
receivable. The adoption of this statement did not have a material impact
on its financial condition or results of operations.
In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share",
which is to become effective for fiscal years ending after December 15,
1997. The more significant changes are the replacement of primary earnings
per share (EPS) with basic EPS. Basic EPS is computed by dividing reported
earnings available to common stockholders by weighted average shares
issued (excluding treasury shares and unallocated ESOP shares). No
dilution for any potentially dilutive securities is included. Fully
diluted EPS, now called diluted EPS, is still required. The Company's
management anticipates that the application of the new statement will not
have a significant impact on the Company's reported results when adopted.
If SFAS No. 128 were in effect, basic EPS for the third quarter of
1997 would have been $0.46 versus $0.21 for the third quarter of 1996 and
basic EPS for nine months ended September 30, 1997 would have been $1.39
versus $0.93 for the nine months ended September 1996. The 1996 third
quarter and nine month basic EPS excluding the one time SAIF
recapitalization charge of $2,121,000 that was assessed in the third
quarter of 1996 would have been $0.40 for the third quarter of 1996 and
$1.12 for the nine months ended September 30, 1996.
In July 1997, the FASB issued SPAS No. 130, "Reporting Comprehensive
Income", which is to become effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 established standards for reporting and
display of comprehensive income and its components. Comprehensive income
is the total of net income and all other nonowner changes in equity. The
Company's management anticipates that the applications of this statement
will not have a significant impact on the Company's reported results when
adopted.
87