INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of Affiliated Community Bancorp,
Inc.:

We have audited the accompanying consolidated statements of financial
condition of Affiliated Community Bancorp, Inc. and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the financial statements of The Federal Savings Bank, a bank acquired
during 1995 in a transaction accounted for as a pooling of interests, as of and
for the years ended December 31, 1995 and 1994, as discussed in Note 2. Such
statements are included in the consolidated financial statements of Affiliated
Community Bancorp, Inc. and reflect total assets of 52 percent as of December
31, 1995 and total interest income of 53 percent and 52 percent in 1995 and
1994, respectively, of the related consolidated totals. These statements were
audited by other auditors whose report has been furnished to us and our opinion
on the consolidated financial statements of Affiliated Community Bancorp, Inc.
and subsidiaries as of December 31, 1995 and for the two years in the period
ended December 31, 1995, insofar as it relates to amounts included for The
Federal Savings Bank, is based solely upon the report of the other auditors.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements were free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of other auditors
provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Affiliated Community Bancorp, Inc. and subsidiaries as
of December 31, 1996 and 1995 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Boston, Massachusetts
January 15, 1997

INDEPENDENT AUDITORS' REPORT

The Board of Directors
The Federal Savings Bank:

We have audited the consolidated statements of financial condition of The
Federal Savings Bank and subsidiaries as of December 31, 1994 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the two-year period ended December 31, 1995. These
consolidated financial statements, which are not presented separately herein,
are the responsibility of the Bank's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Federal
Savings Bank and subsidiaries as of December 31, 1994 and 1995 and the results
of their operations and their cash flows for each of the years in the two-year
period ended December 31, 1995, in conformity with generally accepted accounting
principles.

As discussed in notes 1 and 3 to the consolidated financial statements
referred to above, the Company changed its method of accounting for investment
securities in 1994.

KPMG PEAT MARWICK LLP

Boston, Massachusetts
January 15, 1996

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Main Street Community Bancorp, Inc.:

We have audited the consolidated statement of financial condition of Main
Street Community Bancorp, Inc. and subsidiary as of December 31, 1994, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the year then ended. These consolidated financial statements, which are not
presented separately herein, are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Main Street
Community Bancorp, Inc. and subsidiary as of December 31, 1994, and the results
of their operations and their cash flows for the year ended December 31, 1994,
in conformity with generally accepted accounting principles.

As discussed in notes 1 and 3 to the consolidated financial statements
referred to above, the Company changed its method of accounting for investment
securities in 1994.

KPMG PEAT MARWICK LLP

Boston, Massachusetts
January 20, 1995

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

December 31, 1996 and 1995
(Dollars in thousands, except share data)

December 31,
------------------
1996 1995
--------- ------
Assets

Cash and due from banks ....................................................... $11,331 $14,037
Federal funds sold and overnight deposits ..................................... 4,464 4,125
Investment securities--held to maturity (market value $173,372 and $177,384 at
December 31, 1996 and 1995, respectively) (notes 3 and 8) .................... 173,510 176,100
Investment securities--available for sale (amortized cost $160,395 and $114,292
at December 31, 1996 and 1995, respectively) (notes 3 and 8) ................ 159,844 114,836
Loans held for sale ........................................................... -- 1,071
Loans receivable, net of allowance for possible loan losses of $7,759 and $7,127
at December 31, 1996 and 1995, respectively (notes 4 and 11)................. 645,797 535,679
Federal Home Loan Bank stock, at cost (note 3) ................................ 14,638 10,355
Other real estate owned, net (note 5) ......................................... 133 1,201
Accrued interest receivable ................................................... 7,124 5,873
Office properties and equipment, net (note 6) ................................. 8,428 8,446
Deferred tax asset, net (note 10) ............................................. 3,405 3,096
Other assets .................................................................. 3,539 3,661
---------- --------
Total assets ............................................................. $1,032,213 $878,480
========== ========

Liabilities and Stockholders' Equity

Liabilities:

Deposits (note 7) ......................................................... $652,509 $583,832
Federal Home Loan Bank advances (note 8) .................................. 267,171 186,835
ESOP debt (note 14) ....................................................... 1,394 679
Mortgagors' escrow payments ............................................... 2,087 1,904
Securities sold under agreements to repurchase (note 9) 727 --
Other (note 14) ........................................................... 6,923 5,940
-------- --------
Total liabilities ..................................................... 930,811 779,190
======== ========

Commitments and contingencies (notes 4, 11, and 12)
Stockholders' equity (notes 13 and 14):

Preferred stock, $.01 par value; 2,000,000 shares authorized, none issued -- --
Common stock, $.01 par value; 18,000,000 shares authorized; shares
issued 5,347,166 in 1996 and 5,296,700 in 1995 .......................... 53 53
Additional paid-in capital ................................................ 49,159 48,263
Retained earnings--restricted (notes 2 and 13) ............................ 57,518 51,563
Treasury stock at cost, 198,000 shares at December 31, 1996 ............... (3,402) --
Unearned compensation--ESOP (note 14) ..................................... (1,394) (679)
Net unrealized gain (loss) on investment securities, net of tax effects
(notes 3 and 10) ........................................................ (532) 90
---------- --------
Total stockholders' equity ............................................ 101,402 99,290
---------- --------
Total liabilities and stockholders' equity ............................ $1,032,213 $878,480
========== ========

The accompanying notes are an integral part of these consolidated financial
statements.

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended December 31, 1996, 1995 and 1994

(In thousands, except per share data)

1996 1995 1994
------ ------ ------

Interest and dividend income:
Interest and fees on loans ............................. $48,661 $41,924 $33,150
Interest and dividend income on investment securities .. 22,415 18,598 13,752
Interest on federal funds sold and overnight deposits .. 265 474 469
------- ------- -------
Total interest and dividend income .................. 71,341 60,996 47,371
------- ------- -------
Interest expense:
Interest on deposits (note 7) ........................... 25,775 22,878 17,762
Interest on borrowed funds .............................. 14,289 -10,346 5,130
------- ------- -------
Total interest expense .............................. 40,064 33,224 22,892
------- ------- -------
Net interest income ........................................ 31,277 27,772 24,479
Provision for possible loan losses (note 4) ................ 605 325 550
------- ------- -------
Net interest income after provision for possible loan losses 30,672 27,447 23,929
------- ------- -------
Noninterest income:
Mortgage loan servicing fees ............................ 309 324 293
Customer service fees and other ......................... 1,300 1,320 1,383
Gain (loss) on sales of securities, net ................. (47) 33 (420)
Gain on sales of loans, net ............................. 76 16 92
------- ------- -------
Total noninterest income ............................ 1,638 1,693 1,348
------- ------- -------
Noninterest expenses:
Compensation and employee benefits (notes 14 and 15) .... 9,054 8,587 7,930
Occupancy and equipment (notes 6 and 12) ................ 2,086 1,994 1,772
Data processing ......................................... 835 792 809
Professional services ................................... 702 786 810
Federal Deposit Insurance premiums (notes 1 and 7) ...... 2,860 1,006 1,251
Other real estate owned expenses (income), net (note 5) . 129 (107) (124)
Marketing and promotion ................................. 572 496 449
Merger expenses (note 2) ................................ -- 1,989 --
Other ................................................... 2,728 2,691 2,548
------- ------- -------
Total noninterest expenses .......................... 18,966 18,234 15,445
------- ------- -------
Income before provision for income taxes ................... 13,344 10,906 9,832
Provision for income taxes (note 10) ....................... 4,821 5,199 2,806
------- ------- -------
Net income .......................................... $8,523 $5,707 $7,026
====== ====== ======
Earnings per share:
Primary ................................................ $1.65 $1.07 $1.32
====== ====== ======
Fully diluted .......................................... $1.64 $1.07 $1.32
====== ====== ======
Weighted average shares outstanding:

Primary ................................................ 5,169 5,327 5,303
====== ====== ======
Fully diluted .......................................... 5,208 5,346 5,306
====== ====== ======

The accompanying notes are an integral part of these consolidated
financial statements.

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

For the Years Ended December 31, 1996, 1995 and 1994

(In thousands, except per share data)

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, 1993 ...................... $53 $47,935 $-- $42,341 $(964) $78 $89,443
Net income ...................................... -- -- $-- 7,026 -- -- 7,026
ESOP transactions ............................... -- 63 -- -- 143 -- 206
Issuance of common stock under stock
option plan .................................... -- 71 -- -- -- -- 71
Cash dividends declared ($35 per
share) ......................................... -- -- -- (1,839) -- -- (1,839)
Change in net unrealized gain (loss) on
securities available for sale, net of
tax effect ..................................... -- -- -- -- -- (1,621) (1,621)
--- ------ --- ------ ------ ------ ------

Balance at December 31, 1994 ...................... 53 48,069 -- 47,528 (821) (1,543) 93,286
Net income ....................................... -- -- -- 5,707 -- -- 5,707
ESOP transactions ................................ -- 86 -- -- 142 -- 228
Issuance of common stock under stock
option plan .................................... -- 108 -- -- -- -- 108
Cash dividends declared ($.32 per
share) ......................................... -- -- -- (1,672) -- -- (1,672)
Changes in net unrealized gain (loss)
on securities available for sale, net
of tax effect .................................. -- -- -- -- -- 1,633 1,633
--- ------ --- ------ ----- ----- -----

Balance at December 31, 1995 ...................... 53 48,263 -- 51,563 (679) 90 99,290
Net income ...................................... -- -- -- 8,523 -- -- 8,523
Common stock acquired by ESOP ................... -- 231 679 -- (910) -- --
ESOP transactions ............................... -- 127 -- 34 195 -- 356
Issuance of common stock under stock
option plan .................................... -- 396 -- -- -- -- 396
Purchase of treasury stock ...................... -- -- (4,081) -- -- -- (4,081)
Tax benefit from stock options
exercised ...................................... -- 142 -- -- -- -- 142
Cash dividends declared ($.51 per
share) ......................................... -- -- -- (2,602) -- -- (2.602)
Change in net unrealized gain (loss) on
securities available for sale, net of
tax effect ..................................... -- -- -- -- -- (622) (622)
--- ------ ------ ------ ----- ---- ----

Balance at December 31, 1996 ....................... $53 $49,159 $(3,402) $57,518 $(1,394) $(532) $101,402
=== ======= ======= ======= ======= ===== ========

The accompanying notes are an integral part of these consolidated
financial statements.

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

For The Years Ended December 31, 1996, 1995 and 1994
(Dollars in thousands)

Years ended December 31,
-------------------------------
1996 1995 1994
---- ---- ----
Cash flows from operating activities:

Net income .............................................................................. $ 8,523 $ 5,707 $ 7,026
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for possible loan losses ..................................................... 605 325 550
Provision for losses on other real estate owned ........................................ 220 220 233
Depreciation and amortization .......................................................... 771 644 601
Gain on sales of loans ................................................................. (76) (16) (92)
(Gain) loss on sales of securities ..................................................... 47 (33) 420
Net gain on sales of other real estate owned ........................................... (285) (361) (432)
Net amortization of premiums on investment securities .................................. 696 620 1,158
(Benefit) provision for (prepaid) deferred income taxes ................................ 86 751 (1,135)
ESOP transactions ...................................................................... 392 228 206
Increase in Federal Home Loan Bank stock ............................................... (4,283) (549) (3,690)
(Increase) decrease in loans held for sale ............................................. 1,071 (1,071) 5,726
Increase in accrued interest receivable ................................................ (1,251) (1,014) (898)
Other, net ............................................................................. 715 (242) (1,559)
------ ------ ------
Net cash provided by operating activities ............................................ 7,231 5,209 8,114
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale .......................... 1,104 4,423 25,511
Proceeds from maturities of investment securities available for sale ..................... 30,510 21,040 13,522
Proceeds from maturities of investment securities held to maturity ....................... 10,974 15,503 606
Purchases of investment securities available for sale .................................... (85,953) (45,172) (41,874)
Purchases of investment securities held to maturity ...................................... (34,162) (37,587) (117,254)
Principal payments received on investment securities available for sale .................. 8,642 3,136 7,856
Principal payments received on investment securities held to maturity .................... 27,464 28,353 30,564
Loan originations, net of repayments ..................................................... (112,482) (67,016) (71,943)
Proceeds from sale of office properties and equipment .................................... -- 201 3
Purchases of office properties and equipment ............................................. (753) (1,466) (1,177)
Capitalized costs associated with other real estate owned net of payments received ....... (108) (92) (524)
Proceeds from sales of other real estate owned ........................................... 815 1,938 4,950
------- ------- ------
Net cash used by investing activities ................................................ (153,949) (76,739) (149,760)
Cash flows from financing activities:
Net increase in deposits ................................................................. 68,677 51,562 6,799
Additions to Federal Home Loan Bank advances ............................................. 80,336 26,635 98,200
Increase in mortgagors' escrow payments .................................................. 183 87 246
Increase in securities sold under agreements to repurchase ............................... 727 -- --
Proceeds from issuance of common stock ................................................... 396 108 71
Unfilled conversion stock subscription orders ............................................ -- -- (8,478)
Purchase of treasury stock ............................................................... (4,081) -- --
Proceeds from issuance of long-term debt ................................................. 859 -- --
Purchase of common stock by ESOP ......................................................... (910) -- --
Proceeds from sale of treasury stock ..................................................... 910 -- --
ESOP transactions ........................................................................ (144) (142) (143)
Cash dividends paid on common stock ...................................................... (2,602) (2,203) (1,665)
------ ------ ------
Net cash provided by financing activities ............................................ 144,351 76,047 95,030
Net increase (decrease) in cash and cash equivalents ...................................... (2,367) 4,517 (46,616)
Cash and cash equivalents at beginning of year ............................................ 18,162 13,645 60,261
------ ------ ------
Cash and cash equivalents at end of year .................................................. $ 15,795 $18,162 $ 13,645
======== ======= ========
Supplemental disclosures of cash flow information:
Interest paid on deposits ................................................................ $ 25,742 $25,373 $ 18,399
Interest paid on borrowed funds .......................................................... 14,859 10,115 4,655
Income taxes paid, net of refunds ........................................................ 5,525 4,437 3,547
Supplemental disclosures of non-cash transactions:
Transfers to (from) foreclosed real estate ............................................... 1,006 (622) 1,993
Loans granted on sale of foreclosed real estate .......................................... 1,497 827 1,189
Investment securities transferred to available for sale .................................. -- 24,788 35,063
Investment securities transferred from available for sale to held to
maturity, net of unrealized depreciation ............................................... -- -- 14,393
Securitization of loans to mortgage backed investments available for sale ................ 2,326 -- 5,753

The accompanying notes are an integral part of these consolidated
financial statements.

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1996

1. Summary of Significant Accounting Policies

Basis of presentation and consolidation

The accompanying consolidated financial statements include the accounts of
Affiliated Community Bancorp, Inc., a Massachusetts corporation (the "Company"
or "Affiliated"), and its two wholly owned direct subsidiaries, Lexington
Savings Bank ("Lexington"), a Massachusetts chartered savings bank, and The
Federal Savings Bank, a federally chartered savings bank ("Federal"), which are
located in Lexington, Massachusetts and Waltham, Massachusetts, respectively.
Lexington, as a state chartered savings bank, is insured by the Bank Insurance
Fund ("BIF") and Federal, as a federally chartered savings institution, is
insured by the Savings Association Insurance Fund ("SAIF") of the Federal
Deposit Insurance Corporation.

Federal converted from a federally chartered mutual savings bank to a
federally chartered stock savings bank on December 28, 1993. As part of the
conversion, Main Street Community Bancorp, Inc. ("Main Street") was formed,
acquired all of Federal's conversion stock and issued its common stock in a
subscription offering. As a part of the affiliation of Federal and Lexington,
Main Street was merged into Affiliated on October 18, 1995. See Note 2 for
details of the affiliation.

Lexington has four wholly owned subsidiaries, Lexington Financial Planning,
Inc. ("LFP"), Lexington Securities Corporation, Mass. Ave. Securities
Corporation and Minuteman Investment Corporation. LFP provides financial
planning services to individuals within the Bank's market area. The other
subsidiaries were established in December 1993 for the purpose of buying,
holding and selling investment securities. Federal has four wholly owned
subsidiaries, Main Street Building Corporation ("MSBC"), Main Street Investment
Corporation ("MSIC"), TFSB Securities Corp I and TFSB Securities Corp II. MSBC
holds, operates, manages and disposes of real estate owned acquired through
foreclosure. MSIC was established in June 1994 as a service corporation to offer
discount brokerage services. TFSB Securities Corp I and TFSB Securities Corp II
were established in February 1996 for the purpose of buying, holding and selling
investment securities. All material intercompany accounts and transactions have
been eliminated in consolidation.

The Company and its subsidiaries provide a full range of banking services
to individual and corporate customers, are subject to competition from other
financial institutions, are subject to regulations of certain federal and state
agencies, and undergo periodic examinations by those regulatory authorities.

The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the balance sheets and
income and expenses during the reporting periods. Actual results could differ
from those estimates.

Material estimates that are particularly susceptible to change relate to
the determination of the allowance for possible loan losses and the valuation of
real estate acquired in connection with foreclosures or in satisfaction of
loans.

Cash equivalents

Cash equivalents include federal funds sold with maturities of one day,
Federal Home Loan Bank overnight deposits and interest-bearing deposits in banks
which mature within 30 days.

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Investment securities

Debt securities that management has the positive intent and ability to hold
to maturity be classified as "held to maturity" and reflected at amortized cost.
Investments that are purchased and held principally for the purpose of selling
in the near term are classified as "trading securities" and are reflected on the
balance sheet at fair value, with unrealized gains and losses included in
earnings. Investments not classified as either of the above are classified as
"available for sale" and are reflected on the balance sheet at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity, net of tax.

In the fourth quarter of 1995, concurrent with the adoption of its
implementation guide on SFAS No. 115, the Financial Accounting Standards Board
("FASB") allowed a one time reassessment of the SFAS No. 115 classifications of
all securities currently held. Any reclassifications are accounted for at fair
value in accordance with SFAS No. 115, and any reclassifications from the
held-to-maturity portfolio that result from this one time reassessment do not
call into question the intent of the Company to hold other debt securities to
maturity in the future. The Company used the opportunity under this one time
reassessment to reclassify securities from held-to-maturity to the available-
for-sale portfolio with an amortized cost of approximately $24,788,000. In
connection with this reclassification, net unrealized gains of $142,000 were
recorded in available-for-sale securities and in stockholders' equity (on a
net-of-tax basis).

Federal Home Loan Bank stock is reflected at cost. Premiums and discounts
are amortized and accreted over the term of the securities on the interest
method or a method that approximates the interest method over the terms of the
investments.

If a decline in fair value below the amortized cost basis of an investment
security is judged to be other than temporary, the cost basis of the investment
is written down to fair value as a new cost basis and the amount of the write
down is included in earnings. Gains and losses on the sale of investment
securities are recognized at the time of the sale using the specific
identification method.

Loans

The Company grants mortgage, commercial and consumer loans to customers
that are primarily located in the eastern Massachusetts area. The ability of
borrowers to honor their contracts is primarily dependent on the real estate and
construction economic sectors and the general economy.

Loans are stated at the amount of unpaid principal increased by the
unamortized premium on loans purchased and reduced by unadvanced loan funds, net
deferred loan fees and the allowance for possible loan losses. Premiums paid on
loans acquired are amortized as an adjustment of the related loan yields by a
method which approximates the interest method. Loan origination and commitment
fees and certain direct loan origination costs, applicable to mortgage,
commercial and construction loans, are deferred and amortized to interest income
over the contractual lives of the loans by the interest method or taken into
income at the time the loans are sold.

Interest on loans is recognized on a simple-interest basis and is generally
not accrued for loans which are ninety days or more past due. Interest income
previously accrued on such loans is reversed against current period earnings.

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Loans held for sale are carried at the lower of aggregate cost or
market value. No adjustments for unrealized losses were required for 1996,
1995 and 1994.

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
accounting standards, loans are considered impaired when it is probable that
the Company will not be able to collect principal, interest and fees
according to the contractual terms of the loan agreement. Management
considers the paying status, net worth and earnings potential of a borrower,
and the value and cash flow of the collateral as factors to determine if a
loan will be paid in accordance with its contractual terms. Management does
not set any minimum delay of payments as a factor in reviewing for impaired
classification. The amount judged to be impaired is the difference between
the present value of the expected cash flows using as a discount rate the
original contractual effective interest rate and the recorded investment of
the loan. If foreclosure on a collateralized loan is probable, impairment is
measured based on the fair value of the collateral compared to the recorded
investment. If appropriate, a valuation reserve is established to recognize
the difference between the recorded investment and the present value.
Impaired loans are charged off when management believes that the collectibility
of the loan's principal is remote. The Company considers nonaccrual loans,
except for smaller balance homogenous residential and consumer loans, and
troubled debt restructures to be impaired under SFAS No. 114, as amended. All
impaired loans are classified as nonaccrual. 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 ISF was reclassified to loans.

Allowance for possible loan losses

The allowance for possible loan losses is established through a
provision for possible loan losses charged to earnings and is maintained at a
level considered adequate by management to provide for potential loan losses.

The provision and the level of the allowance are evaluated on a regular
basis by management and are based upon management's periodic review of the
collectibility of the loans in light of historical experience, known and
inherent risks in the nature and volume of the loan portfolio, adverse
situations that may affect the borrower's ability to repay, estimated value
of any underlying collateral, and prevailing economic conditions.

The allowance is an estimate, and ultimate losses may vary from current
estimates and future additions to the allowance may be necessary. As
adjustments become necessary, they are reported in the results of operations
for the periods in which they become known. Loan losses are charged against
the allowance when management believes the collectibility of the loan balance
is unlikely.

Loan Servicing

The Company adopted SFAS No. 122, "Accounting for Mortgage Servicing
Rights" effective January 1, 1996. SFAS No. 122 requires entities that
engage in mortgage banking activities to recognize as separate assets rights
to service mortgage loans for others acquired through either the purchase or
origination of mortgage loans and sale or securitization of those loans with
servicing retained.

The cost of mortgage servicing rights is amortized in proportion to, and
over the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights. Fair
values are estimated using discounted cash flows based on a current market
interest rate. For purposes of measuring impairment, the rights are
stratified based on the following predominant risk characteristics of the

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

underlying loans; interest rates, type of interest and loan maturity dates. the
amount of impairment recognized is the amount by which the capitalized mortgage
servicing rights for a stratum exceed their fair value.

When participating interests in loans sold have an average contractual
interest rate, adjusted for normal servicing fees, that differs from the agreed
yield to the purchaser, gains or losses are recognized equal to the present
value of such differential over the estimated remaining life of such loans. The
resulting "excess servicing receivable" or "deferred servicing revenue" is
amortized over the estimated life using a method approximating the interest
method.

The excess servicing receivables are periodically evaluated in relation to
estimated future servicing revenues, taking into consideration changes in
interest rates, current prepayment rates, and expected future cash flows. The
Bank evaluates the carrying value of the excess servicing receivables by
estimating the future servicing income of the excess servicing receivables based
on management's best estimate of remaining loan lives and discounted at the
original discount rate.

Mortgage servicing rights of $31,000 were capitalized and amortization of
the mortgage servicing rights was $3,000 in 1996. No adjustment was required in
1996 to write down the capitalized asset to fair value.

Other real estate owned

Real estate acquired in settlement of loans is held for sale and is carried
at the lower of cost or fair value less estimated costs to sell. Troubled loans
are transferred to foreclosed property upon completion of formal foreclosure
proceedings.

Real estate properties acquired through foreclosure are initially recorded
at fair value at the date of foreclosure, with any reduction in value charged to
the allowance for possible loan losses at the time of transfer. Costs relating
to development and improvement of property are capitalized, whereas costs
relating to holding property are expensed.

Valuations are periodically performed by management, and a valuation
allowance is established through a charge to earnings if the carrying value of a
property exceeds its fair value less estimated costs to sell.

Office premises and equipment

Land is carried at cost. Buildings and equipment are carried at cost, less
accumulated depreciation computed on the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are carried at cost, less
accumulated amortization computed on the straight-line method over the shorter
of the lease or the estimated lives of the assets. It is general practice to
charge the cost of maintenance and repairs to earnings when incurred; major
expenditures for improvements are capitalized and depreciated.

Intangible assets

Goodwill attributable to the acquisition of Suburban National Corporation
in 1993 is being amortized over ten years by the straight-line method. The
Company reviews goodwill quarterly to assess realizability. Any impairments
deemed permanent are recognized in current operating results. Based on the most
recent analysis, the Company believes that no material impairment of goodwill
existed at December 31, 1996 or December 31, 1995.

Income taxes

The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 requires that deferred tax assets
and liabilities be reflected at currently enacted income tax rates applicable to
the period in which the deferred tax assets or liabilities are expected to be
realized or

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

settled. As changes in tax laws or tax rates are enacted, deferred tax assets
and liabilities will be adjusted accordingly through the provision for income
taxes.

For regulatory capital purposes, the recognition of deferred tax assets,
when realization of such is dependent on an institution's future taxable income,
is limited to the amount that can be realized within one year or 10% of capital,
whichever is less.

Retirement plans

The compensation cost of an employee's pension benefit is recognized on the
net periodic pension cost method over the employee's approximate service period.
The aggregate cost method is utilized for funding purposes.

Earnings and dividends declared per share

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 years ended December 31, 1995 and 1994
represent the combined historical dividends declared by Lexington and Main
Street determined by dividing the sum of the total dividends declared by
Lexington and Main Street by the sum of the outstanding shares of common stock
of Lexington and Main Street to which the dividends declared apply.

Recent Accounting Pronouncements

In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", which is
generally effective for transfers and servicing of financial assets and
extinguishments of liabilities, as defined, after December 31, 1996. SFAS No.
125, as amended, requires an entity to recognize upon a transfer the financial
and servicing assets it controls and the liabilities it has incurred,
derecognize financial assets when control has been surrendered, and derecognize
liabilities when extinguished. SFAS No. 125 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
Company's management anticipates that the adoption of this statement will not
have a material impact on its financial condition or results of operations.

Reclassifications

Certain reclassifications have been made to the 1994 and 1995 consolidated
financial statements to conform with the 1996 presentation. Such
reclassifications have no effect on previously reported consolidated net income.

2. Affiliation

Effective at the close of business on October 18, 1995, Affiliated acquired
by merger all of the outstanding stock of two savings banks, Federal and
Lexington, in a merger-of-equals transaction consummating the affiliation of
Lexington and Federal (the "Affiliation").

Main Street, Federal's former holding company, was a business corporation
formed at the direction of Federal under the laws of the Commonwealth of
Massachusetts on September 1, 1993. On December 28, 1993 (i) Federal converted
from a federally chartered mutual savings bank to a federally chartered stock
savings bank, (ii) Federal issued all of its outstanding capital stock to Main
Street, and (iii) Main Street consummated its initial public offering of common
stock, par value $.0l per share by selling 2,907,200 shares at a price of $10.00
per share, to Federal's Employee Stock Ownership Plan ("Federal ESOP") and to
certain of Federal's eligible account holders who had subscribed for such shares
(collectively, the "Conversion").

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

As a result of the Conversion, Federal became a wholly owned subsidiary of
Main Street. Main Street ceased operations on October 18, 1995 as a consequence
of the Affiliation.

Lexington and Main Street entered into an Affiliation Agreement and Plan
of Reorganization dated as of March 14, 1995 (the "Affiliation Agreement"). The
Affiliation Agreement provided for, among other things, (a) the formation by
Lexington of a temporary bank holding company, LEXB Holding, Inc., (b) the
acquisition by LEXB Holding, Inc. of all of the outstanding stock of Lexington,
(c) the merger of LEXB Holding, Inc. with and into Affiliated and (d) the merger
of Main Street with and into Affiliated. The Affiliation was subject to approval
by the stockholders of Main Street and Lexington and approval of state and
federal bank regulatory agencies. At a Special Meeting of Main Street
stockholders on August 22, 1995, the stockholders of Main Street approved the
Affiliation Agreement and related transactions. At a Special Meeting of
Lexington stockholders on September 14, 1995, the stockholders of Lexington
approved the Affiliation Agreement and related transactions. The final remaining
bank regulatory approval of the Affiliation was obtained on October 17, 1995.

The transaction was accounted for as a pooling of interests under which
the shareholders of Main Street, holding 2,907,200 shares received 2,907,200
shares of Affiliated common stock, and the shareholders of Lexington, holding
2,383,500 shares, received 2,383,500 shares of Affiliated common stock.

The following table summarizes the separate results of operations and
financial condition of Lexington and Main Street as of and for the nine months
ended September 30, 1995 (unaudited).

Lexington Main Street
--------- -----------
(Dollars in thousands,
except per share data)

Net interest income ............................ $ 9,483 $ 11,076
Net income ..................................... $ 2,482 $ 3,090
Earnings per share:
Primary ..................................... $ 1.01 $ 1.08
Fully diluted ............................... $ 1.01 $ 1.08
Total assets ................................... $404,717 $432,393
Deposits ....................................... $256,511 $317,826
Stockholders' equity ........................... $ 38,936 $ 59,790

The following table summarizes the separate results of operations and
financial condition of Lexington and Main Street as of and for the year ended
December 31, 1994.

Lexington Main Street
--------- -----------
(Dollars in thousands,
except per share data)

Net interest income ............................ $ 11,762 $ 12,551
Net income (1) ................................. $ 3,007 $ 4,019
Earnings per share: (1)
Primary ..................................... $ 1.22 $ 1.41
Fully diluted ............................... $ 1.22 $ 1.41
Total assets ................................... $393,659 $399,937
Deposits ....................................... $227,400 $304,870
Stockholders' equity ........................... $ 36,301 $ 56,985

(1) Results for Main Street include tax benefits resulting from the change in
SFAS No. 109 tax valuation reserve of $1,075,000 or $.38 per share for the
year ended December 31, 1994.

As a result of the pooling, the financial statements of Lexington, Federal
and Main Street have been combined as if Affiliated had been in existence for
the periods reported on.

100

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

3. Investment Securities

The amortized cost and fair value of investment securities at
December 31, 1996 and 1995, with gross unrealized gains and losses,
are as follows:

December 31, 1996 December 31, 1995
----------------------------------------- --------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- ----- --------- ---------- ---------- -----
(In thousands) (In thousands)

Securities available for sale:
Government securities .................. $ 86,645 $ 86 $ (849) $ 85,882 $ 50,620 $ 341 $ (76) $ 50,885
Corporate bonds ........................ 2,034 5 (1) 2,038 4,591 18 (18) 4,591
Asset-backed securities ................. 4,473 12 (161) 4,324 5,801 --- (100) 5,701
Mortgage-backed securities:
Balloons .............................. -- -- -- -- -- --- -- --
Fixed ................................. 12,018 47 (118) 11,947 11,518 139 -- 11,657
Variable .............................. 25,313 389 (139) 25,563 30,190 322 (134) 30,378
-------- ----- ------- -------- -------- --- ------- --------

Total mortgage-backed securities .... 37,331 436 (257) 37,510 41,708 461 (134) 42,035
-------- ----- ------- -------- -------- --- ------- --------

Mortgage-backed derivatives ............ 7,585 11 -- 7,596 8,229 32 -- 8,261
Marketable equity securities ........... 22,327 368 (201) 22,494 3,343 37 (17) 3,363
-------- ----- ------- -------- -------- --- ------- --------

Total securities available for sale . $160,395 $ 918 $(1,469) $159,844 $114,292 $ 889 $ (345) $114,836
======== ===== ======= ======== ======== === ======= ========

Securities held to maturity:
Government securities .................. $ 39,304 $ 232 $ (67) $ 39,469 $ 22,408 $ 415 $ (22) $ 22,801
Corporate bonds ........................ 3,003 12 -- 3,015 4,011 47 -- 4,058
Asset-backed securities ................ 19,466 100 (195) 19,371 17,695 72 (207) 17,560
Mortgage-backed securities:
Balloons .............................. 43,583 49 (526) 43,106 50,458 239 (283) 50,414
Fixed ................................. 39,702 402 (157) 39,947 46,851 965 (28) 47,788
Variable .............................. 14,958 59 (149) 14,868 17,927 56 (188) 17,795
-------- ------ --------- -------- -------- ------ ------- --------

Total mortgage-backed securities .... 98,243 510 (832) 97,921 115,236 1,260 (499) 115,997
-------- ------ --------- -------- -------- ------ ------- --------

Mortgage-backed derivatives ............ 13,494 174 (72) 13,596 16,750 218 -- 16,968
-------- ------ --------- -------- -------- ------ ------- --------

Total securities held to maturity ... $173,510 $1,028 $(1,166) $173,372 $176,100 $2,012 $ (728) $177,384
======== ====== ========= ======== ======== ====== ======= ========

Federal Home Loan Bank stock, at cost .. 14,638 -- -- 14,638 10,355 -- -- 10,355
-------- ------ --------- -------- -------- ------ ------- --------
Total investment securities .......... $348,543 $1,946 $(2,635) $347,854 $300,747 $2,901 $(1,073) $302,575
======== ====== ========= ======== ======== ====== ======= ========

At December 31, 1996 and 1995, the Company has pledged certain investment
securities with an amortized cost of $70,434,000 and $55,176,000, respectively,
and a fair value of $69,885,000 and $55,135,000, respectively, as collateral
against its Federal Home Loan Bank advances, securities sold under agreements to
repurchase and the treasury, tax and loan account.

The proceeds from sales of investment securities available for sale and
related gains and losses for the years ended December 31, 1996, 1995 and 1994,
are as follows:

December 31,
--------------
1996 1995 1994
---- ---- ----
(In thousands)

Proceeds from sales of investment securities .... $1,104 $4,423 $25,511
====== ====== =======
Realized gains on sales of investment securities $ -- $ 70 $ 10
====== ====== =======
Realized losses on sales of investment securities $ (47) $ (37) $ (430)
====== ====== =======

101

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

The amortized cost and fair value of debt securities by contractual
maturity at December 31, 1996 and 1995 is as follows:

December 31, 1996
----------------------------------------------------------------------------------------------------------
Government Corporate Asset-backed Mortgage-backed Mortgage-backed
securities securities securities securities derivatives Total
---------- ---------- ---------- ---------- ----------- -----
Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- ----- ---- ----- ---- ----- ---- -----
(In thousands)

Available for sale:
Within l year ........... $ 1,506 $ 1,504 $1,005 $1,004 $ -- $ -- $ -- $ -- $ -- $ -- $ 2,511 $ 2,508
1 to 5 years ............ 14,333 14,243 1,029 1,034 -- -- -- -- -- -- 15,362 15,277
5 to 10 years ........... 60,298 59,887 -- -- -- -- -- -- -- -- 60,298 59,887
Over 10 years ........... 10,508 10,248 -- -- 4,473 4,324 37,331 37,510 7,585 7,596 59,897 59,678
------- ------- ------ ------ ------ ------- ------- ------- ------ -------- -------- --------
$86,645 $85,882 $2,034 $2,038 $4,473 $ 4,324 $37,331 $37,510 $7,585 $ 7,596 $138,068 $137,350
======= ======= ====== ====== ====== ======= ======= ======= ====== ======== ======== ========

December 31, 1995
----------------------------------------------------------------------------------------------------------
Government Corporate Asset-backed Mortgage-backed Mortgage-backed
securities securities securities securities derivatives Total
---------- ---------- ---------- ---------- ----------- -----
Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- ----- ---- ----- ---- ----- ---- -----
(In thousands)

Available for sale:
Within 1 year ............ $20,049 $20,263 $2,501 $2,485 $ -- $ -- $ -- $ -- $ 52 $ 52 $ 22,602 $ 22,800
1 to 5 years ............. 10,072 10,015 2,090 2,106 -- -- -- -- -- -- 12,162 12,121
5 to 10 years ............ 20,499 20,607 -- -- -- -- -- -- -- -- 20,499 20,607
Over 10 years ............ -- -- -- -- 5,801 5,701 1,708 42,035 8,177 8,209 55,686 55,945
------- ------- ------ ------ ------ ------ ------- ------- ------ -------- -------- --------
$50,620 $50,885 $4,591 $4,591 $5,801 $5,701 $41,708 $42,035 $8,229 $ 8,261 $110,949 $111,473
======= ======= ====== ====== ====== ====== ======= ======= ====== ======== ======== ========

Held to maturity:
Within 1 year ..... $ 3,897 $ 3,895 $3,003 $3,015 $ 45 $ 45 $ 8,823 $ 8,828 $ -- $ -- $ 15,768 $ 15,783
1 to 5 years ...... 9,721 9,817 -- -- 586 586 33,732 33,239 2,127 2,114 446,166 45,756
5 to 10 years ..... 25,686 25,757 -- -- 1,533 1,517 11,525 11,765 1,229 1,216 39,973 40,255
Over 10 years ..... -- -- -- -- 17,302 217,223 44,163 44,089 10,138 10,266 71,603 71,578
------- ------- ------ ------ ------- -------- ------- ------- ------- -------- -------- --------
$39,304 $39,469 $3,003 $3,015 $19,466 $ 19,371 $98,243 $97,921 $13,494 $ 13,596 $173,510 $173,372
======= ======= ====== ====== ======= ======== ======= ======= ======= ======== ======== ========

Held to maturity:
Within l year ...... $ -- $ -- $1,001 $1,001 $ -- $ $ 457 $ 462 $ -- $ -- $ 1,458 $ 1,463
1 to 5 years ....... 11,608 11,814 3,010 3,057 1,562 1,555 48,274 48,248 3,044 3,021 67,498 67,695
5 to 10 years ...... 10,800 10,987 -- -- -- -- 9,682 9,772 456 454 20,938 21,213
Over 10 years ...... -- -- -- -- 16,133 16,005 56,823 57,515 13,250 13,493 86,206 87,013
------- ------- ------ ------ ------- -------- -------- ------ ------ ------- -------- --------
$22,408 $22,801 $4,011 $4,058 $17,695 $ 17,560 $115,236 $115,997 $16,750 $16,968 $176,100 $177,384
======= ======= ====== ====== ======= ======== ======== ====== ====== ======= ======== ========

102

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Mortgage-backed securities and mortgage-backed derivatives are shown at
their final contractual maturity dates, but actual maturities may differ as
borrowers have the right to prepay obligations without incurring prepayment
penalties.

At December 31, 1996, the mortgage-backed portfolio consisted of 1 year
adjustable rate securities ($40.3 million), 5 and 7 year balloons ($43.6
million), 15 year fixed rate securities ($28.8 million) and 30 year fixed rate
securities ($22.8 million). The adjustable rate securities were predominantly 30
year loans with annual rate adjustments. The $43.6 million in balloon
securities, which had 4 to 5 year average lives when purchased and contractual
maturity dates of 5 to 7 years, had a weighted average life of 2.1 years at
December 31, 1996. The weighted average lives for the 15 and 30 year securities
were 3.9 and 5.7 years, respectively.

The mortgage-backed derivatives portfolio totalled $21.4 million, or 6.1%
of total investment securities, and consisted of planned amortization classes
(PAC's), targeted amortization classes (TAC's), sequential payment classes
(SEQ's), scheduled amortization classes (SCH's) and accretion directed classes
(AD's). The $21.4 million balance at year end had an average life of 2.0 years
with 35.3% in monthly adjusting securities and the remaining 64.7% in fixed rate
securities.

4. Loans

The following is a comparative summary of loan balances:

December 31,
-------------------
1996 1995
------ ------
(In thousands)
Mortgage loans on real estate:
1-4 family ................................... $ 428,308 $ 367,687
Multifamily .................................. 31,092 27,833
Commercial ................................... 94,419 72,896
Construction and land development, net ....... 46,344 28,405
Premium on loans acquired .................... 135 180
-------- --------
600,298 497,001
-------- --------
Other loans:
Consumer ..................................... 3,545 3,664
Equity lines of credit ....................... 16,204 15,387
Commercial ................................... 35,338 28,636
-------- --------
55,087 47,687
Less: Deferred loan fees and unearned income . (1,829) (1,882)
-------- --------
Total loans .................................. 653,556 542,806
Less: Allowance for possible loan losses ..... (7,759) (7,127)
-------- --------
Loans, net ................................... $ 645,797 $ 535,679
======== ========

103

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following table summarizes information regarding nonaccrual and
restructured loans:

At December 31,
----------------------
1996 1995 1994
------ ------ ------
(In thousands)
Nonaccrual loans ............................ $4,886 $5,402 $978
====== ====== ====
Restructured loans .......................... $ -- $ 199 $205
====== ====== ====

Years ended December 31,
-------------------------
1996 1995 1994
-------- ------ -------
(In thousands)
Income in accordance with original terms .... $ 543 $ 552 $219
Income recognized ........................... 300 314 174
------ ------ ----
Foregone interest income during year ........ $ 243 $ 238 $ 45
====== ====== ====

For the year ended December 31, 1996, the average recorded investment in
impaired loans was $3,753,000 and the income recognized related to impaired
loans was $213,000. At December 31, 1996, the Company classified $3,798,000 of
its loans as impaired. Of the $3,798,000, $3,691,000 has been measured under the
fair value of collateral method and $107,000 has been measured under the present
value of the expected cash flows method. A portion of these impaired loans,
$3,555,000, has a related valuation reserve of $667,000. In addition, $243,000
of impaired loans did not, in the opinion of management, require a related
valuation reserve.

For the year ended December 31, 1995 the average recorded investment in
impaired loans was $2,900,000 and the income recognized related to impaired
loans was $208,000. At December 31, 1995, the Company classified $2,693,000 of
its loans as impaired. Of the $2,693,000, $2,494,000 has been measured under the
fair value of collateral method and $199,000 has been measured under the present
value of the expected cash flows method. A portion of these impaired loans,
$2,007,000, has a related valuation reserve of $624,000. In addition, $686,000
of impaired loans did not, in the opinion of management, require a related
valuation reserve.

The Company's lending activities are conducted principally in
Massachusetts and include single-family and multifamily residential loans,
commercial real estate loans, small business loans, home equity loans and loans
on deposits. In addition, the Company grants loans for the construction of
residential homes, multifamily properties, commercial real estate properties and
for land development. The ability and willingness of the single-family
residential and other borrowers to honor their repayment commitments is
generally dependent on the level of overall economic activity within the
borrowers' geographic areas and real estate values. The ability and willingness
of commercial real estate, multifamily and construction loan borrowers to honor
their repayment commitments is generally dependent on the health of the real
estate sector in the borrowers' geographic areas and the general economy.

Pursuant to OTS regulations, Federal is limited in the amount of loans to
one borrower to 15% of unimpaired capital and surplus. At December 31, 1996 and
1995, Federal had approximately $4,248,000 and $3,970,000, respectively, of
outstanding loans to a single borrower secured by commercial and construction
properties.

Lexington, as a state chartered savings bank, is subject to a 20% of
capital limitation with regard to outstanding loans to any one borrower.

104

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following table summarizes information regarding loans sold and
serviced for others by the Company:

December 31,
-------------------------------------
1996 1995 1994
------ ------ ------
(In thousands)
Loans serviced for others ....... $101,060 $111,980 $110,826
======== ======== ========

The Company sold certain convertible mortgage loans to investors pursuant
to agreements which provide the investor with the right to require the Company
to repurchase the loan should the buyer's conversion option be exercised. The
balance of these convertible loans at December 31, 1996 and 1995 amounted to
$467,000 and $473,000, respectively.

In the ordinary course of business, the Company makes loans to its
executive officers, directors and their affiliated companies at substantially
the same terms as loans made to nonrelated borrowers. An analysis of related
party loans, individually over $60,000, for the years ended December 31, 1996
and 1995 is as follows:
Years Ended
December 31,
-------------------
1996 1995
------ ------
(In thousands)
Balance at beginning of year ....................... $ 8,634 $8,116
New loans ..................................... 562 999
Payments ...................................... (1,074) (481)
Other ......................................... (5,609) --
------- ------
Balance at end of year ............................. $ 2,513 $8,634
======= ======

The other reduction for 1996 represents loans to an individual who is no
longer a related party due to his resignation from the Board of Directors of a
subsidiary bank. The Company leases office space from a realty trust of which
the former director holds an ownership interest. Rent and other expenses under
the lease amounted to $166,000 for each of 1996, 1995 and 1994, respectively.

An analysis of the allowance for possible loan losses follows:

Years Ended December 31,
-------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
Balance at beginning of year ....... $ 7,127 $ 6,996 $ 6,603
Provision for possible loan losses.. 605 325 550
Recoveries ......................... 447 150 49
------- ------- -------
8,179 7,471 7,202
Loans charged-off .................. (420) (344) (206)
------- ------- -------
Balance at end of year ............. $ 7,759 $ 7,127 $ 6,996
======= ======= =======

105

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

5. Other Real Estate Owned

The components of other real estate owned are as follows:

December 31,
----------------
1996 1995
---- ----
(In thousands)
Residential:
1-4 family ........................................... $123 $ 232
Multifamily .......................................... -- --
Commercial real estate .................................. -- 960
Land .................................................... 10 9
---- ------
133 1,201
Less: Accumulated income from in-substance foreclosures.. -- --
---- ------
Total ............................................ $133 $1,201
==== ======

The following is a summary of other real estate owned income (expenses),
net:
Years ended December 31,
------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
Net gain on sales ............. $ 285 $ 361 $ 432
Provision for loss ............ (220) (220) (233)
Net holding costs ............. (194) (34) (75)
----- ----- -----
$(129) $ 107 $ 124
===== ===== =====

6. Office Properties and Equipment, Net

Office properties and equipment at cost less accumulated depreciation and
amortization consisted of the following:

December 31,
--------------------
1996 1995
------ ------
(In thousands)
Land ......................................... $ 1,621 $ 1,621
Office buildings and improvements ............ 6,682 6,186
Leasehold improvements ....................... 430 382
Construction in process ...................... -- 292
Furniture, fixtures and equipment ............ 3,468 3,158
-------- --------
12,201 11,639
Accumulated depreciation and amortization .... (3,773) (3,193)
-------- --------
$ 8,428 $ 8,446
======== ========

Depreciation expense for the three years ended December 31, 1996, 1995 and
1994 amounted to $771,000, $644,000 and $601,000, respectively, and is included
in occupancy and equipment expenses.

106

AFFILIATED COMMUNiTY BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

7. Deposits

Deposits are summarized as follows:
December 31,
--------------------
1996 1995
------ ------
(In thousands)
Demand ..................................... $ 41,557 $ 33,680
NOW ........................................ 51,347 50,487
Regular savings ............................ 122,739 119,995
Money market ............................... 66,492 61,219
-------- --------
Total non-certificate accounts .......... $282,135 $265,381
======== ========
Certificates of less than $100,000 ......... 297,990 276,512
Certificates of $100,000 and over .......... 72,384 41,939
-------- --------
Total certificate accounts ............ 370,374 318,451
-------- --------
Total deposits ........................ $652,509 $583,832
======== ========

Contractual maturities of term deposits at December 31, 1996 and 1995 were
as follows:

1996 1995
------------------- -------------------
Weighted Weighted
Amount Avg. Rate Amount Avg. Rate
------- --------- ------ ---------
(Dollars in thousands)
Within one year .......... $267,177 5.51% $193,564 5.83%
One to two years ......... 47,416 5.93% 62,487 5.93%
Two to three years ....... 22,513 6.11% 26,424 6.06%
Three to four years ...... 11,241 6.52% 11,160 6.28%
Four to five years ....... 9,163 6.59% 10,727 6.62%
Over five years .......... 12,864 6.68% 14,089 6.72%
-------- ---- -------- ----
$370,374 5.70% $318,451 5.95%
======== ==== ======== ====

Certificates of deposit obtained through brokers amounted to approximately
$30,086,000 at December 31, 1996 and $10,892,000 at December 31, 1995. The terms
of the $30,086,000 of certificates of deposit at December 31, 1996 provide for
rates ranging between 5.15% and 7.00%, a weighted average rate of 5.87%, and
maturities extending through February, 2003.

Effective September 30, 1996 the FDIC imposed a special one-time
assessment on the SAIF-insured deposits of each depository institution in an
amount sufficient to recapitalize the SAIF to 1.25% of total insured deposits.
The FDIC determined that a special assessment of 0.657% of the SAIF assessable
deposits as of March 31, 1995 was required. This one-time charge based on the
SAIF assessable deposits as of March 31, 1995 amounted to approximately
$2,121,000 and is included in Federal Deposit Insurance premiums in the
accompanying consolidated statements of income for the year ended December 31,
1996.

Interest expense on deposits consisted of the following:

Years ended December 31,
-----------------------------
1996 1995 1994
---- ---- ----
(In thousands)
Regular savings ..................... $ 3,121 $ 3,206 $ 3,400
NOW and money market accounts ....... 3,458 3,025 3,518
Certificate accounts ................ 19,196 16,647 10,844
------- ------- -------
$25,775 $22,878 $17,762
======= ======= =======

107

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

8. Federal Home Loan Bank Advances

A summary of Federal Home Loan Bank of Boston ("FHLBB") advances by
maturity is as follows:

December 31,
-----------------------------------------
1996 1995
------------------- -------------------
Weighted Weighted
Amount Avg. Rate Amount Avg. Rate
------- --------- ------ ---------
(Dollars in thousands)

Within 1 year ................ $177,300 5.64% $136,500 5.98%
Over 1 year to 2 years ....... 70,041 6.04 31,800 5.96
Over 2 years to 3 years ...... 14,000 6.04 4,800 5.94
Over 3 years ................. 4,500 6.69 -12,000 6.14
-------- ---- -------- ----
$265,841 5.78% $185,100 5.98%
======== ==== ======== ====

The advances require interest to be paid monthly, with principal due upon
maturity. In addition to the above borrowings, the Company had $1,330,000 and
$1,735,000 outstanding under its overnight lines of credit with the FHLBB at
December 31, 1996 and 1995, respectively.

The Company has available overnight lines of credit totaling $23.5 million
with the FHLBB at an interest rate that adjusts daily. The Company's total
borrowing capacity from the FHLBB was approximately $604 million at December 31,
1996. Total borrowings from the FHLBB are limited to 20 times the value of the
FHLBB Capital Stock owned by the Company. All borrowings from the FHLBB are
secured by a blanket lien on certain qualified collateral, defined principally
as 90% of the fair value of U.S. Government and federal agency obligations and
75% of the carrying value of first mortgage loans on 1-4 family, owner-occupied
residential property. The Company may be subject to a substantial penalty upon
prepayment of FHLBB advances.

9. Securities Sold Under Agreements to Repurchase

Information concerning securities sold under agreements to repurchase is
summarized as follows:

1996
------------
(Dollars in thousands)
Average balance during the year .............................. $ 203
Average interest rate during the year ........................ 4.76%
Maximum month-end balance during the year .................... $1,119
Agency securities underlying the agreements at year end:
Carrying value .......................................... $1,109
Estimated fair value .................................... $1,109

There were no repurchase agreements outstanding during the year ended
December 31, 1995.

108

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

10. Income Taxes

Allocation of federal and state income taxes between current and deferred
portions, calculated using the liability method in 1996, 1995 and 1994 is as
follows:

Years ended December 31,
-----------------------------
1996 1995 1994
---- ---- ----
(In thousands)
Current tax provision:
Federal ......................... $4,097 $3,464 $ 3,103
State ........................... 638 984 838
------ ------ -------
4,735 4,448 3,941
------ ------ -------
Deferred (prepaid) provision:
Federal ......................... 35 555 (67)
State ........................... 51 216 7
Change in valuation reserve ..... -- (20) (1,075)
------ ------ -------
86 751 (1,135)
------ ------ -------
$4,821 $5,199 $ 2,806
====== ====== =======

The reasons for the differences between the statutory federal income tax
rates and the effective tax rates are summarized as follows:

Years ended December 31,
------------------------
1996 1995 1994
---- ---- ----
Statutory rates .............................. 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit . 3.4 7.3 5.1
Merger expenses ......................... -- 6.2 --
Change in valuation reserve ............. -- (.2) (10.9)
Dividends received deduction ............ (1.7) -- (.1)
Other, net .............................. .4 .4 .4
---- ---- ----
Effective tax rates .................. 36.1% 47.7% 28.5%
==== ==== ====

At December 31, 1996 and 1995, the tax effects of items that give rise to
deferred taxes are as follows:

1996 1995
---- ----
(In thousands)
Allowance for possible loan losses ......... $2,737 $2,433
Accrued expenses ........................... 231 315
Deferred loan fees ......................... 24 207
Employee benefit plans ..................... 565 664
Depreciable property ....................... (505) (477)
Investments ................................ 334 43
Valuation reserve .......................... (46) (46)
Other ...................................... 65 (43)
------- -------
Net deferred tax asset .............. $3,405 $3,096
======= =======

109

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company's gross deferred tax asset was $3,956,000 and $3,662,000, at
December 31, 1996 and 1995, respectively. Gross deferred tax liabilities were
$551,000 and $566,000 at December 31, 1996 and 1995, respectively.

In August of 1996, Congress passed the Small Business Job Protection Act
of 1996. Included in this bill was the repeal of IRC Section 593, which allowed
thrift institutions special provisions in calculating bad debt deductions for
income tax purposes. Thrift institutions now will be viewed as commercial banks
for income tax purposes. The repeal is effective for tax years beginning after
December 31, 1995.

One effect of this legislative change is to suspend the Company's bad debt
reserve for income tax purposes as of its base year, December 31, 1987 for
Federal and October 31, 1988 for Lexington. Any bad debt reserve in excess of
the base year amount is subject to recapture over a six-year time period. The
suspended (i.e. base year) amount is subject to recapture upon the occurrence of
certain events, such as a complete or partial redemption of the Company's stock
or if the Company ceases to qualify as a bank for income tax purposes.

At December 31, 1996, the Company's surplus includes approximately
$16,902,000 of bad debt reserves, representing the base year amount, for which
income taxes have not been provided. Since the Company does not intend to use
the suspended bad debt reserve for purposes other than to absorb the losses for
which it was established, deferred taxes in the amount of $7,034,000 have not
been recorded with respect to such reserve.

11. Financial Instruments with Off-balance Sheet Risk and Concentration of
Credit Risk

The Company is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to originate loans, lines of credit
and letters of credit, and commitments to sell loans. The instruments involve,
to varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated statement of financial condition. The
contractual amounts of those instruments reflect the extent of the Company's
involvement in particular classes of financial instruments.

The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for loan commitments, and lines and
letters of credit is represented by the contractual amount of those instruments.
The Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.

Financial instruments with off-balance sheet risk consisted of the
following:

December 31,
--------------
1996 1995
----- -----
(In thousands)

Financial instruments whose contract amounts represent credit risk:
Commitments to originate loans and advance funds ................ $37,723 $43,243
Unused lines of credit .......................................... 41,953 35,665
Letters of credit ............................................... 2,350 1,422

Fixed and variable rate loan origination commitments approximated
$11,240,000 and $4,653,000, respectively, at December 31, 1996 and $5,988,000
and $18,481,000, respectively, at December 31, 1995.

Commitments to originate loans and letters of credit are agreements to
lend to a customer provided there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some of the
commitments are expected to

110

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral deemed
necessary by the Company upon the extension of credit is based on management's
credit evaluation of the borrower.

Commitments to sell mortgage loans are contracts that the Company enters
into for the purpose of reducing the market risk associated with originating
loans for sale. In order to fulfill a commitment, the Company typically first
exchanges current production of loans for cash through the Federal Home Loan
Mortgage Corporation or the Federal National Mortgage Association, which loans
are then delivered to national securities firms at a future date at prices or
yields specified by the contracts. Risks may arise from the inability of the
Company to originate loans to fulfill the contracts. In this case, the Company
would usually substitute loans it may hold in portfolio or purchase securities
in the open market to deliver against the contract or settle the contract for
cash.

At December 31, 1996, the remaining commitments to deliver loans pursuant
to master commitments with secondary mortgage market investors amounted to
approximately $9,154,000. Failure to fulfill delivery requirements of
commitments may result in payment of certain fees to investors. Individual
commitments to sell loans require the Company to make delivery at a specific
future date of a specified amount, at a specified price or yield. Loans are
generally sold without recourse and, accordingly, risks arise principally from
movements in interest rates.

12. Commitments and Contingencies

Severance and special termination agreements

The Company has entered into Severance Agreements with its President and
the President of Federal, that provide for a specified level of compensation for
periods of eighteen and twelve months, respectively in the event of their
severance. However, employment may be terminated under such agreements for
cause, as defined, without incurring any continuing obligations. The Company
also has entered into Special Termination Agreements with certain senior
executives. The Agreements generally provide for certain lump sum severance
payments following termination within a three-year period following a "change in
control" as defined in the Agreements.

Operating lease commitments

Pursuant to the terms of noncancelable lease agreements in effect at
December 31, 1996 pertaining to office properties and equipment, future minimum
lease payments are as follows:
Future Minimum
Years Ending December 31, Lease Payments
------------------------- --------------
(In thousands)
1997 ................................................... $431
1998 ................................................... 265
1999 ................................................... 146
2000 ................................................... 86
2001 ................................................... 79
Thereafter ............................................. 103

Two of the lease agreements contain options to extend for a period up to
ten years. The cost of such extensions is not included above. Total rent expense
for the years ended December 31, 1996, 1995 and 1994 amounted to $476,000,
$540,000 and $515,000, respectively, and is included in occupancy and equipment
expenses.

111

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In the ordinary course of business, the Company is involved in litigation.
Management, after reviewing current litigation and discussing the same with
legal counsel, is of the opinion that resolution of these claims will not have a
material effect on the Company's consolidated financial position, annual results
of operations, or liquidity.

On December 18, 1996, Affiliated Community Bancorp, Inc. announced that it
had signed a definitive agreement to provide the initial capitalization for
Middlesex Bank and Trust Company (in organization), ("Middlesex"). Middlesex is
a de novo bank that will be located in City of Newton, Massachusetts and the
transaction is subject to the necessary regulatory approvals.

13. Stockholders' Equity and Regulatory Matters

The Company and its primary Bank subsidiaries are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory--and
possibly additional discretionary--actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and its primary bank subsidiaries must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Company's and its primary bank subsidiaries' capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Company and its primary bank subsidiaries to maintain minimum
amounts and ratios set forth in the table below of total and Tier I capital to
risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of December 31, 1996, that the Company and its primary subsidiary
banks meet all capital adequacy requirements to which they are subject.

As of December 31, 1996, the most recent notification from the Company's
two banking subsidiaries' primary regulators categorized them as well
capitalized under their regulatory framework for prompt corrective action. To be
categorized as well capitalized the Company and its primary banking subsidiaries
must maintain minimum total risk-based, Tier I risk-based, Tier 1 leverage and
tangible capital ratios as set forth in the table. There are no conditions or
events since these notifications that management believes have changed the
category classifications.

112

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company and its primary bank subsidiaries' actual capital amounts and
ratios are also presented in the table.

Minimum for Minimum for
Capital Adequacy Well Capitalized
Actual Purposes Status
---------------- --------------- ---------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)

As of December 31, 1996:
Total Capital (to Risk Weighted Assets):
Affiliated consolidated ................ $108,373 19.08% $45,428 8.00% N/A
Federal ................................ 52,910 19.26% 21,977 8.00% 27,471 10.00%
Lexington .............................. 43,748 15.01% 23,310 8.00% 29,138 10.00%

Tier 1 Capital (to Risk Weighted Assets):
Affiliated consolidated ................ $101,267 17.83% $22,714 4.00% N/A
Federal ................................ 49,475 18.01% 10,988 4.00% 16,482 6.00%
Lexington .............................. 41,099 14.10% 11,655 4.00% 17,483 6.00%

Tier 1 Capital (to Average Assets):
Affiliated consolidated ................ $101,267 9.98% $30,433 3.00% N/A
Federal ................................ 49,475 9.47% 15,680 3.00% 26,133 5.00%
Lexington .............................. 41,099 8.37% 14,733 3.00% 24,555 5.00%

Tangible Capital (to Adjusted Assets)
Federal ................................ $ 49,475 9.26% $ 8,012 1.50% N/A

As of December 31, 1995:
Total Capital (to Risk Weighted Assets):
Affiliated consolidated ................ $104,229 22.60% $36,901 8.00% N/A
Federal ................................ 49,773 21.90% 18,185 8.00% 22,731 10.00%
Lexington .............................. 40,407 17.19% 18,659 8.00% 23,324 10.00%

Tier 1 Capital (to Risk Weighted Assets):
Affiliated consolidated ................ $ 98,438 21.34% $18,451 4.00% N/A
Federal ................................ 46,932 20.65% 9,093 4.00% 13,639 6.00%
Lexington .............................. 38,128 16.22% 9,329 4.00% 13,994 6.00%

Tier 1 Capital (to Average Assets):
Affiliated consolidated ................ $ 98,438 11.47% $25,780 3.00% N/A
Federal ................................ 46,932 10.54% 13,364 3.00% 22,274 5.00%
Lexington .............................. 38,128 9.23% 12,392 3.00% 20,654 5.00%

Tangible Capital (to Adjusted Assets)
Federal ................................ $ 46,932 10.31% $ 6,825 1.50% N/A

The ability of Lexington and Federal to pay dividends to the Company is
limited to the extent necessary for the banks to comply with regulatory capital
guidelines.

At the time of Lexington's conversion from mutual to stock form in 1986,
Lexington established a liquidation account in the amount of $11,581,000 for the
benefit of eligible account holders. The liquidation account is reduced annually
to the extent that eligible account holders reduce their qualifying deposits. At
December 31, 1996, the liquidation account had a balance of approximately
$3,709,000. In the event of a complete liquidation of Lexington, eligible
account holders could be entitled to receive a distribution from the liquidation
account to the extent that funds are available.

113

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

At the time of Federal's conversion from mutual to stock form in 1993,
Federal established a liquidation account for the benefit of eligible account
holders in an amount equal to the retained earnings of the bank as of the date
of its latest balance sheet date contained in the final Prospectus used in
connection with the conversion. In the event of a complete liquidation of
Federal, eligible depositors who continue to maintain accounts at Federal would
be entitled to receive a distribution from the liquidation account. The total
amount of the liquidation account may be decreased if the balances of eligible
depositors decrease on the annual determination dates. At December 31, 1996,
Federal's liquidation account approximated $13,300,000.

14. Employee Benefits

The Company through its two wholly-owned subsidiary banks, Lexington and
Federal, provide the following benefit programs.

Pension Plan--Lexington

Lexington provides basic and supplemental pension benefits for eligible
employees through the Savings Bank Employees Retirement Association ("SBERA")
Pension Plan (the "Retirement Plan"). Each employee reaching the age of 21 and
having completed at least 1,000 hours of service in a twelve-month period,
beginning with such employee's date of employment, automatically becomes a
participant in the Retirement Plan. Participants are 100% vested after 3 years
of service or at age 62, if earlier. Lexington's funding policy is to contribute
annually the maximum amount that can be deducted for federal income tax
purposes. Contributions made under the plan totaled approximately $383,000 for
1996 and $61,000 for 1995. No contributions were made in 1994.

Net periodic pension cost for the plan years ended October 31, 1996, 1995
and 1994 consisted of the following:

1996 1995 1994
---- ---- ----
(In thousands)
Service cost-benefits earned during year ....... $ 298 $ 206 $165
Interest cost on projected benefits ............ 220 162 122
Actual return on plan assets ................... (295) (273) (77)
Net amortization and deferral .................. (4) (4) (4)
Amortization of net loss ....................... 153 155 (16)
----- ----- ----
$ 372 $ 246 $190
===== ===== ====

Total Lexington pension expense for the years ended December 31, 1996,
1995 and 1994 amounted to $312,000, $313,000 and $258,000, respectively, and is
included in compensation and employee benefits expense.

According to the Plan's actuary, the funded status of the plan is as
follows at October 31, 1996, and 1995:

1996 1995
---- ----
(In thousands)
Plan assets at fair value ............................... $ 2,637 $ 1,952
Projected benefit obligation ............................ (3,386) (3,142)
------- -------
Excess of projected benefit obligation over plan assets . (749) (1,190)
Unrecognized net obligation at transition ............... (75) (79)
Unrecognized net (gain) loss ............................ (39) 390
------- -------
Pension liability included on balance sheet ............. $ (863) $ (879)
======= =======

114

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The accumulated benefit obligation (substantially all vested) at October
31, 1996 and 1995, amounted to $1,956,000 and $1,689,000, respectively, which
was less than the fair value of plan assets at those dates.

For the plan years ended October 31, 1996, 1995 and 1994, actuarial
assumptions include an assumed discount rate on benefit obligations of 7.50%,
7.00% and 8.00%, respectively, and an expected long-term rate of return on plan
assets of 8.00%, 8.00% and 7.00%, respectively. An annual salary increase of 6%
was utilized for all years.

Beginning in 1995, Lexington offered a Supplemental Employees Retirement
Plan ("SERP") to certain key executives. The SERP plan is funded through life
insurance policies with the policy benefits accruing to Lexington and
executives. The SERP provides for yearly retirement benefits based on the return
on certain insurance policies purchased by Lexington in excess of the yield on
an alternative investment of an equal amount deemed the opportunity cost as
outlined in the SERP plan, if any. Upon retirement, the annual earnings in
excess of the opportunity cost, if any, are paid to the executives each year in
addition to the benefit accrued to the retirement date, if any. The cash
surrender value of the policies was approximately $1,710,000 and $1,693,000 as
of December 31, 1996 and 1995, respectively, and is included in other assets in
the accompanying consolidated balance sheets. Total income recognized on the
SERP plan for the years ended December 31, 1996 and 1995 was approximately
$17,000 and $3,000, respectively. No expenses were incurred under the SERP plan
for 1996 and 1995.

Pension Plan--Federal

Under the Federal plan all eligible officers and employees are included in
a noncontributory defined benefit pension plan provided by Federal as a
participating employer in the Financial Institutions Retirement Fund (the
"Fund"), a multi-employer plan. The Fund does not segregate its assets or
liabilities by participating employer. Contributions are based on the individual
employer's experience. According to the Fund's administrators, as of June 30,
1996, the date of the latest actuarial valuation, the market value of the Fund's
net assets exceeded the actuarial present value of accumulated vested and
nonvested benefits in the aggregate, using an assumed investment rate of return
of 7.5%. There is no liability for past service cost.

Pension expense for Federal for the years ended December 31, 1996, 1995
and 1994 was $123,000, $208,000 and $115,000, respectively, and is included in
compensation and employee benefits. Pension expense consists of Federal's annual
contributions to the Fund.

Incentive Compensation and Senior Management Incentive Plans

Federal adopted an Incentive Compensation Program in 1989 to provide an
incentive and reward to key staff and other significant contributors to motivate
and recognize them for individual and group performance. Compensation under this
plan is based on achievement of several performance objectives established
annually by the Federal Board of Directors.

Lexington adopted a Senior Management Incentive Plan ("SMIP") effective
January 1, 1994 to provide a financial incentive to executives whose job
performance has a measurable impact on the achievement of long-term business
objectives. Compensation under this plan, which is in lieu of profit sharing, is
based on achievement of several performance objectives established annually by
the Lexington Board of Directors.

Affiliated adopted a SMIP effective October 18, 1995 to provide a
financial incentive to executives whose job performance has a mesurable impact
on the achievement of long-term business objectives. Compensation under this
plan is based on achievement of several performance objectives established by
the Affiliated Compensation Committee.

115

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

No individual obtained compensation from more than one of these plans.
Total expenses under these plans amounted to $468,000, $332,000 and $297,000 for
1996, 1995 and 1994, respectively, and is included in compensation and employee
benefits and other expenses.

Profit Sharing Plans

Each profitable year, Lexington allocates for annual distribution 3.5% of
its operational earnings, as defined, for profit sharing to employees who have
at least three months of employment with Lexington. Employees share in the
allocated profits on the basis of annual salary, length of service, attendance
and meritorious service. Participants in the AFCB or Lexington SMIP do not
participate in the Lexington Profit Sharing Plan and their pro-rata share is
subtracted from the total profit sharing pool. Total profit sharing expense
(excluding SMIP) amounted to $317,000, $110,000 and $156,000 for 1996, 1995 and
1994, respectively, and is included in compensation and employee benefits. The
1996 expense amount includes approximately $60,000 that relates to 1995
performance.

In 1993, Federal established a qualified, tax-exempt profit sharing plan
(the "Savings Plan") that is qualified under Section 401(k) of the Internal
Revenue Code. All employees who have reached the age of 20, who have completed
one year of employment and have been credited with 1,000 or more hours of
service in a 12-month period are eligible to participate. Under the Savings
Plan, participants are permitted to make salary reduction contributions equal to
a percentage of annual salary up to 15% subject to Internal Revenue Service
("IRS") maximums. Federal matches 50% of the participant's contribution up to 4%
of the employee's salary. All matching contributions by Federal are 50% vested
after two years of employment and 100% vested after three years of employment.

In addition, in order to provide an incentive for performance, Federal may
make discretionary year end profit sharing contributions to eligible 401(k)
participants based on Federal's profitability, payable within IRS regulations.
The participants had the choice of receiving up to 50% of the discretionary
contributions in cash; the remaining funds are contributed to 401(k) accounts.
Total contributions to the plan, for both matching and discretionary
contributions, including cash payments, were $113,000, $106,000, and $96,000 for
the years ended December 31, 1996, 1995 and 1994, respectively, and are included
in compensation and employee benefits.

Employees' Stock Ownership Plan--Lexington

In 1986, Lexington established an Employees' Stock Ownership Plan (the
"Lexington ESOP") for eligible employees whereby benefits are payable upon
retirement, disability, death or separation from service with the Bank. On
December 19, 1986, Lexington issued 60,000 shares of common stock with a fair
market value of $570,000 to the Lexington ESOP. The funds used to purchase
the shares were borrowed by the Lexington ESOP from a third-party lender,
less Lexington's initial contribution of $20,000. The loan was fully paid in
1993. In November 1996 the Lexington ESOP purchased from the Company at the
then current market price an additional 40,000 shares of the Company's stock
of which 37,748 shares were financed by a $859,000 loan from a third party
lender. The note, which is secured by the unreleased shares, bears interest
at the 90-day LIBOR rate plus 225 basis points and is paid quarterly, both
principal and interest. Annually, the borrower has the option to choose
either the above specified rate of interest or a rate equal to the base rate
of the lending bank. The rate in effect at December 31, 1996 was 7.813%.
Total compensation expense applicable to the Lexington ESOP amounted to
$99,000 for 1996. There was no compensation expense or allocation of shares
for the years ended December 31, 1995 and 1994. In 1996, 2,252 shares were
released and allocated to eligible employees. Under the Lexington ESOP,
shares are released annually and allocated to participants at October 31 of
each year. There were no shares committed to be released as of December 31,
1996. Dividends on allocated and unreleased ESOP shares are credited to the
accounts of the participants.

116

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Employees' Stock Ownership Plan--Federal

In 1993 Federal established an Employees' Stock Ownership Plan (the
"Federal ESOP") in which all employees who have reached the age of 20 and who
have completed 1,000 hours of service in a 12-month period beginning with such
employee's date of employment may participate. Participants become 50% vested
after two years and 100% vested after three years of service. The Federal ESOP
purchased $1,000,000 (100,000 shares) of the common stock of Main Street in the
Conversion. The Company recognized $360,000, $298,000 and $272,000 in related
compensation expense for the years ended December 31, 1996, 1995 and 1994,
respectively. A portion of the shares are released annually by the lender from
collateral and allocated to employees; 14,286 shares were released for
allocation in each of the past three years. There were no shares committed to be
released as of December 31, 1996. Dividends on both allocated and unreleased
shares, net of certain administrative expenses, are paid to the ESOP
participants.

The outstanding balance of funds borrowed by the Federal ESOP that were
used to purchase Main Street stock in the subscription offering amounted to
$535,000 and $679,000 at December 31, 1996 and 1995, respectively. Principal and
interest payments are due in equal quarterly installments at an interest rate
equal to the Federal funds effective rate plus 2.60%. The index rate in effect
at December 31, 1996 was 8.01%. The loan is due in 2000 and is secured by 53,571
and 67,857 shares of Company common stock at December 31, 1996 and 1995,
respectively.

15. Stock Based Compensation Plans

Lexington had adopted stock option and stock appreciation rights plans for
the benefit of its directors, officers and employees. Lexington reserved 230,000
and 115,000 shares of its common stock, respectively, for issuance pursuant to
options granted under the 1986 Stock Option and Stock Appreciation Rights Plan
and the 1994 Stock Option Plan.

In 1993, Main Street, Federal's then parent, adopted a stock option plan
for the benefit of its directors, officers and other employees, and reserved
290,720 shares of its common stock issued in the Conversion for grants under the
Plan.

As of October 18, 1995, the effective date of the Affiliation, the
existing Lexington Option Plans and the Main Street Option Plan were terminated
except as to the administration of outstanding options, and no further options
can be granted under these plans. Immediately prior to the effective date,
175,720 shares of common stock would have been available for future option
grants under these plans.

In lieu of future option grants under the Lexington and Main Street plans,
Affiliated adopted the Affiliated Community Bancorp, Inc. 1995 Stock Option Plan
(the "Plan") as a replacement, pursuant to which options for 175,720 shares of
Affiliated common stock could be granted. Both incentive and non-qualified stock
options may be granted under this Plan. Options are generally granted at fair
market value of the related stock at the grant date and expire ten years from
such date. The Company had granted options on 130,000 shares through December
31, 1996. Effective January 16, 1997, the Company's Board of Directors amended
and restated the Plan, subject to stockholder approval, to add an additional
250,000 shares.

117

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company accounts for stock-based employee compensation plans in
accordance with APB No. 25 under which compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of grant over the amount an employee must pay to acquire the
stock. Had compensation cost for the stock-based employee compensation plans
been determined based on the fair value at the date of grant in accordance with
SFAS No. 123, the Company's net income and earnings would have been reduced to
the following pro-forma amounts.

1996 1995
---- ----

(In thousands,
except per share data)

Net Income:
As reported .................................. $8,523 $5,707
Pro forma .................................... $8,409 $5,643
Primary EPS:
As reported .................................. $ 1.65 $ 1.07
Pro forma .................................... $ 1.63 $ 1.06
Fully Diluted EPS:
As reported .................................. $ 1.64 $ 1.07
Pro forma .................................... $ 1.61 $ 1.06

Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.

In making the pro-forma calculations set forth above, the option exercise
price equals the stock's market price on the date of the grant. Non-qualified
options vest ratably over periods ranging from two to three years after the date
of the grant, except that options to directors are immediately vested in full.

The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1996 and 1995:

Risk free interest rates of 6.59% to 6.69% (1996) and 5.77% to 6.81%
(1995)
Expected dividends of 2.8% per annum
Expected lives of 7.0 years
Expected volatility of 23%

The combined activity for options granted under the plans is as follows:

Years ended December 31,
------------------------------------------------
1996 1995
----------------------- -----------------------
Number of Weighted Number of Weighted
Shares Average Price Shares Average Price
------- ------------- -------- -------------

Outstanding at beginning of year ............... 394,500 $10.85 353,500 $ 9.98
Granted ........................................ 106,000 $16.94 51,000 $16.42
Forfeited ...................................... (1,834) $10.00 -- --
Exercised ...................................... (50,466) $ 7.85 (10,000) $ 8.80
------- ------ ------- ------
Outstanding at end of year ..................... 448,200 $12.63 394,500 $10.85
======= ====== ======= ======
Options exercisable at end of year ............. 351,534 $11.45 306,667 $ 9.88
======= ====== ======= ======
Weighted average fair value of options granted.. $ 4.60 $ 5.11
====== ======

118

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Years ended December 31,
------------------------
1996 1995
------ ------

Detail of exercises during the year:
Exercised--at $ 5.25 ........................... 1,500 --
--at $ 6.25 ........................... 32,300 5,500
--at $ 8.50 ........................... 3,000 --
--at $10.00 ........................... 9,666 3,000
--at $15.75 ........................... 3,000 1,500
--at $16.9375 ......................... 1,000 --
------ ------
Total ............................ 50,466 10,000
====== ======

The following table summarizes information about stock options outstanding
at December 31, 1996:

Options Outstanding Options Exercisable
----------------------- ----------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices At 12/31/96 Life Price At 12/31/96 Price
- ------------------------ ----------- ----------- -------- ----------- --------

$ 5.25 .......................... 16,000 4 years $ 5.25 16,000 $ 5.25
6.25 .......................... 55,200 3 years $ 6.25 55,200 $ 6.25
8.50 .......................... 33,000 6 years $ 8.50 33,000 $ 8.50
10.00 .......................... 106,000 7 years $10.00 106,000 $10.00
13.375 ......................... 3,000 7 years $13.38 3,000 $13.38
14.125 ......................... 9,000 8 years $14.13 9,000 $14.13
15.375 to 15.75 ................ 79,000 7 years $15.63 76,334 $15.64
16.625 to 17.375 ............... 147,000 9 years $16.94 53,000 $16.90
------- -------
448,200 351,534
======= =======

16. Fair Values of Financial Instruments

The Company discloses fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. Certain financial instruments and all nonfinancial
instruments are excluded from this disclosure. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.

The following methods and assumptions were used by the Company in
estimating fair values of its financial instruments.

Cash and Due From Banks, Federal Funds Sold and Overnight Deposits

The carrying amounts reported in the balance sheet are a reasonable
estimate of fair value due to the short maturity of those investments.

Investment and Mortgage-backed Securities and Derivatives

Fair values are based on quoted market prices, where available. If quoted
market prices are not available, fair values are based on quoted market prices
of comparable instruments (see note 3).

119

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Loans Held-for-Sale

For loans held-for-sale, fair value is based on prevailing market
conditions and commitments from institutional investors to purchase such loans.

Loans

Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial real estate,
residential mortgage and consumer. Each loan category is further segmented into
fixed and adjustable rate interest terms and by classified and nonclassified
categories. The fair value of non-classified loans (other than those subject to
short term, periodic rate adjustment to current offered rates, which are valued
at the carrying amount) is estimated by discounting scheduled cash flows at the
interest rate at which similar loans would have been made by the Company to
borrowers with similar credit ratings and for similar loan products. Scheduled
maturities used were contractual maturities for such loans except for
residential loans where expected maturities took into account estimated
prepayment speeds supplied by secondary market sources.

Fair value for classified loans is based on estimated cash flows
discounted using a rate commensurate with the risk associated with the related
loans. Assumptions regarding credit risk, cash flows and discount rates are
judgmentally determined using available market information.

FHLB Stock

The carrying amount reported in the balance sheet approximates fair value.
If redeemed, the Company will receive an amount equal to the par value of the
stock.

Deposits

The fair value of non-certificate deposits (demand, NOW, money market and
regular savings accounts) is the amount payable on demand at the balance sheet
date. The estimated fair value of certificate accounts is based on the
discounted value of contractual future cash flows. The discount rate is based on
rates offered by the Company for deposits of similar remaining maturities.

Borrowed Funds

Fair values for FHLB advances and ESOP debt are estimated using a
discounted cash flow technique that applies interest rates currently being
offered on advances to a schedule of aggregated expected monthly maturities.

Escrow Deposits and Securities Sold Under Agreements to Repurchase

The carrying amounts of escrow deposits and securities sold under
agreements to repurchase at the balance sheet dates approximates fair value.

Commitments to Extend Credit and Letters of Credit

The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the counterparties.
The fair value of letters of credit is based on fees currently charged for
similar agreements.

120

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The carrying and estimated fair values of the Company's financial
instruments at December 31, 1996 and 1995 are as follows:

December 31, 1996 December 31, 1995
------------------- ------------------
Carrying Fair Carrying Fair
value value value value
-------- -------- -------- --------
(In thousands) (In thousands)

Financial assets:
Cash and due from banks ....................... $ 11,331 $ 11,331 $ 14,037 $ 14,037
Federal funds sold and overnight deposits ..... 4,464 4,464 4,125 4,125
Investment securities ......................... 333,354 333,216 290,936 292,220
Loans held for sale ........................... -- -- 1,071 1,071
Loans, net .................................... 645,797 646,783 535,679 544,830
Federal Home Loan Bank stock .................. 14,638 14,638 10,355 10,355
Financial liabilities:
Non-certificate deposits ...................... 282,135 282,135 265,381 265,381
Certificates of deposits ...................... 370,374 370,507 318,451 319,699
Borrowed funds ................................ 268,565 268,888 187,514 188,200
Escrow deposits ............................... 2,087 2,087 1,904 1,904
Securities sold under agreements to
repurchase .................................. 727 727 -- --
Off-balance sheet instruments (see note 11):
Commitments to extend credit .................. 285 285 395 395

Limitations

Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for some of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, cash flows, current economic conditions, risk
characteristics, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions and market conditions could
significantly affect the estimates. Further, the income tax ramifications
related to the realization of the unrealized gains and losses can have a
significant effect on the fair value estimates and have not been considered.

121

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

17. Parent Company Financial Statements

The Affiliated Community Bancorp, Inc. condensed balance sheets as of
December 31, 1996 and 1995 are as follows:

1996 1995
-------- -------
(In thousands)

Assets
Cash and cash equivalents .............................. $ 10,160 $12,969
Investment securities .................................. 740 --
Other assets ........................................... 35 481
Investment in bank subsidiaries:
The Federal Savings Bank ............................ 49,006 46,925
Lexington Savings Bank .............................. 41,609 38,986
-------- -------
Total Assets ..................................... $101,550 $99,361
======== =======

Liabilities and Stockholders' Equity
Accrued expenses ....................................... $ 148 $ 71
Stockholders' equity ................................... 101,402 99,290
-------- -------
Total liabilities and stockholders' equity ....... $101,550 $99,361
======== =======

The condensed income statements for the years ended December 31, 1996,
1995 and 1994 are as follows:

1996 1995 1994
------- ------- ------
(In thousands)
Dividends from bank subsidiaries ............. $ 2,817 $ 2,029 $1,839
Interest income .............................. 486 546 518
Other ........................................ 10 -- 32
------- ------- ------
Total income .............................. 3,313 2,575 2,389
Expenses ..................................... 679 1,502 151
------- ------- ------
Income before equity in undistributed
earnings of bank subsidiaries and
income taxes ............................ 2,634 1,073 2,238
------- ------- ------
Equity in undistributed earnings of
bank subsidiaries:
The Federal Savings Bank .................. 2,217 3,225 3,060
Lexington Savings Bank .................... 3,617 1,390 1,866
------- ------- ------
Income before provision for income taxes 8,468 5,688 7,164
Provision (benefit) for income taxes ......... (55) (19) 138
------- ------- ------
Net income ............................ $ 8,523 $ 5,707 $7,026
======= ======= ======

122

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The condensed statements of cash flows for Affiliated Community Bancorp,
Inc. are presented below for the years ended December 31, 1996, 1995 and 1994:

1996 1995 1994
-------- -------- --------
(In thousands)
Net Income .................................... $ 8,523 $ 5,707 $ 7,026
Adjustments to reconcile net income to net
cash provided by operations:
Undistributed earnings of bank subsidiaries (5,834) (4,615) (4,926)
Decrease (increase) in other assets ........ 446 (21) (223)
(Decrease) increase in accrued expenses .... 404 (14) (207)
-------- -------- --------
Net cash provided by operating activities .. 3,539 1,057 1,670
Investment transactions:
Purchase of securities ..................... (740) -- --
Financing transactions:
Proceeds from issuance of common stock ..... 396 108 71
Dividends paid ............................. (2,602) (2,203) (1,665)
Increase in treasury stock ................. (3,402) -- --
-------- -------- --------
Net (decrease) increase in cash ............. (2,809) (1,038) 76
Cash and cash equivalents at beginning of year 12,969 14,007 13,931
-------- -------- --------
Cash and cash equivalents at end of year ...... $ 10,160 $ 12,969 $ 14,007
-------- -------- --------
Cash paid for taxes ........................... $ 4,237 $ 1,360 $ 1,986
======== ======== ========

18. Quarterly Results of Operations (Unaudited)

A summary of consolidated operating results on a quarterly basis for the
years ended December 31, 1996 and 1995 is as follows:

1996
------------------------------------------------------------
Fourth Quarter Third Quarter Second Quarter First Quarter
-------------- ------------- -------------- -------------
(Dollars in thousands)

Interest and dividend income ........... $18,938 $18,280 $17,463 $16,660
Interest expense ....................... 10,687 10,301 9,761 9,315
------- ------- ------- -------
Net interest income ............. 8,251 7,979 7,702 7,345
Provision for loan losses .............. 200 135 135 135
------- ------- ------- -------

Net interest income, after
provision ......................... 8,051 7,844 7,567 7,210
Other income ........................... 379 404 423 432
Operating expenses (1) ................. 4,176 6,367 4,171 4,252
------- ------- ------- -------
Income before income taxes ............. 4,254 1,881 3,819 3,390
Provision for income taxes ............. 1,555 579 1,420 1,267
------- ------- ------- -------
Net income (1) ......................... $ 2,699 $ 1,302 $ 2,399 $ 2,123
======= ======= ======= =======
Earnings per share (1) ................. $ .52 $ .24 $ .47 $ .41
======= ======= ======= =======

123

AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)

1995
------------------------------------------------------------
Fourth Quarter Third Quarter Second Quarter First Quarter
-------------- ------------- -------------- -------------
(Dollars in thousands)

Interest and dividend income ............ $16,015 $15,443 $15,187 $14,351
Interest expense ........................ 8,914 8,483 8,266 7,561
------- ------- ------- -------
Net interest income ............. 7,101 6,960 6,921 6,790
Provision for loan losses ............... 25 100 100 100
------- ------- ------- -------
Net interest income, after
provision ....................... 7,076 6,860 6,821 6,690
Other income ............................ 420 454 436 383
Operating expenses (2) .................. 6,029 4,086 3,946 4,173
------- ------- ------- -------
Income before income taxes .............. 1,467 3,228 3,311 2,900
Provision for income taxes .............. 1,332 1,335 1,347 1,185
------- ------- ------- -------
Net income (2) .......................... $ 135 $ 1,893 $ 1,964 $ 1,715
======= ======= ======= =======
Earnings per share (2) .................. $ .03 $ .35 $ .37 $ .32
======= ======= ======= =======

- ----------
(1) Third quarter of 1996 included pre-tax charge of $2,121,000 or $.23 per
share (after tax effect) for recapitalization of the Savings Association
Insurance Fund (SAIF) of the FDIC.
(2) Fourth quarter of 1995 included pretax merger costs of $1,989,000 or $.35
per share (after tax effect).

124