<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report: February 6, 1998
UST CORP.
(Exact name of registrant as specified in its charter)
Massachusetts 0-9623 04-2436093
(State or other jurisdiction (Commission File No.) (IRS Employer
of Incorporation) Identification No.)
40 Court Street 02108
Boston, Massachusetts (Zip Code)
(Address of principal executive offices)
(617) 726-7000
(Registrant's telephone number,
including area code)
- --------------------------------------------------------------------------------
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
The following exhibits are filed with this Current Report on Form 8-K:
Exhibit
Number Description
23.1 Consent of Arthur Andersen LLP, Independent
Auditors of Firestone Financial Corp.
23.2 Consent of Wolf & Company, P.C., Independent
Auditors of Somerset Savings Bank
23.3 Consent of Arthur Andersen LLP, Independent Auditors
of Affiliated Community Bancorp, Inc.
23.4 Consent of KPMG Peat Marwick LLP, Independent
Auditors of The Federal Savings Bank and Main Street
Community Bancorp, Inc.
99.1 Unaudited Financial Information of Firestone
Financial Corp. as of September 30, 1997
99.2 Financial Statements of Firestone Financial Corp.
as of December 31, 1996
99.3 Financial Statements of Firestone Financial Corp.
as of December 31, 1995
99.4 Unaudited Financial Information of Somerset
Savings Bank as of September 30, 1997
99.5 Financial Statements of Somerset Savings Bank
as of December 31, 1996
99.6 Unaudited Financial Information of Affiliated
Community Bancorp, Inc. as of September 30, 1997
99.7 Financial Statements of Affiliated Community
Bancorp, Inc. as of December 31, 1996
99.8 UST Corp., Firestone Financial Corp., Somerset
Savings Bank and Affiliated Community Bancorp,
Inc. Unaudited Pro Forma Condensed Financial
Information
-2-
<PAGE>
EXHIBIT INDEX
Exhibit Page
Number Description Number
23.1 Consent of Arthur Andersen LLP, Independent Auditors of 5
Firestone Financial Corp.
23.2 Consent of Wolf & Company, P.C., Independent Auditors of 6
Somerset Savings Bank
23.3 Consent of Arthur Andersen LLP, Independent Auditors of 7
Affiliated Community Bancorp, Inc.
23.4 Consent of KPMG Peat Marwick LLP, Independent Auditors 8
of The Federal Savings Bank and Main Street Community
Bancorp, Inc.
99.1 Unaudited Financial Information of Firestone 9
Financial Corp. as of September 30, 1997
99.2 Financial Statements of Firestone Financial Corp. 13
as of December 31, 1996
99.3 Financial Statements of Firestone Financial Corp. 28
as of December 31, 1995
99.4 Unaudited Financial Information of Somerset 49
Savings Bank as of September 30, 1997
99.5 Financial Statements of Somerset Savings Bank 56
as of December 31, 1996
99.6 Unaudited Financial Information of Affiliated 82
Community Bancorp, Inc. as of September 30, 1997
99.7 Financial Statements of Affiliated Community Bancorp, 88
Inc. as of December 31, 1996
99.8 UST Corp., Firestone Financial Corp., Somerset Savings 125
Bank and Affiliated Community Bancorp, Inc. Unaudited
Pro Forma Condensed Financial Information
-3-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
UST Corp.
/s/ James K. Hunt
---------------------------------
James K. Hunt
Executive Vice President, Chief
Financial Officer and Treasurer
/s/ Eric R. Fischer
---------------------------------
Eric R. Fischer
Executive Vice President,
General Counsel and Clerk
Dated: February 6, 1998
-4-
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
in the Prospectuses constituting part of the Registration Statements on Forms
S-8 and S-3 (Nos. 333-43785, 333-42123, 33-54390, 33-38836 and 333-05911) of
UST Corp. of our reports dated January 31, 1997 and January 26, 1996 relating
to the consolidated financial statements of Firestone Financial Corp., which
appear in the Current Report on Form 8-K of UST Corp. dated February 6, 1998.
It should be noted that we have not audited any financial statements of
Firestone subsequent to December 31, 1996 or performed any audit procedures
subsequent to the date of our report.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 5, 1998
5
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
in the Prospectuses constituting part of the Registration Statements on Forms
S-8 and S-3 (Nos. 333-43785, 333-42123, 33-54390, 33-38836 and 333-05911) of
UST Corp. of our report dated February 4, 1997 relating to the consolidated
financial statements of Somerset Savings Bank as of December 31, 1996 and
1995, and for each of the years in the three-year period ended December 31,
1996, which appears in the Current Report on Form 8-K of UST Corp. dated
February 6, 1998.
WOLF & COMPANY, P.C.
Boston, Massachusetts
February 3, 1998
6
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
in the Prospectuses constituting part of the Registration Statements on Forms
S-8 and S-3 (Nos. 333-43785, 333-42123, 33-54390, 33-38836 and 333-05911) of
UST Corp. of our report dated January 15, 1997 relating to the consolidated
financial statements of Affiliated Community Bancorp, Inc., which appears in
the Current Report on Form 8-K of UST Corp. dated February 6, 1998. It should
be noted that we have not audited any financial statements of Affiliated
subsequent to December 31, 1996 or performed any audit procedures subsequent
to the date of our report.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 5, 1998
7
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to incorporation by reference in the Prospectuses constituting
part of the Registration Statements on Forms S-8 and S-3 (Nos. 333-43785,
333-42123, 33-54390, 33-38836 and 333-05911) of UST Corp. of our reports on
the consolidated financial statements of the Federal Savings Bank as of
December 31, 1995 and 1994 and for each of the years in the two-year period
ended December 31, 1995 and on the consolidated financial statements of Main
Street Community Bancorp, Inc. as of and for the year ended December 31,
1994, which reports appears in the Current Report on Form 8-K of UST Corp.
dated February 6, 1998.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
February 5, 1998
8
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1997 1996
- ------ ------------- ------------
<S> <C> <C>
CASH $ 20,927 $ 193,652
NOTES RECEIVABLE 81,816,599 79,622,175
FINANCE LEASE RECEIVABLES 3,466,862 2,810,578
------------ ------------
TOTAL RECEIVABLES 85,283,461 82,432,753
LESS - ALLOWANCE FOR CREDIT LOSSES 1,650,016 1,779,750
------------ ------------
NET RECEIVABLES 83,633,445 80,653,003
OTHER ASSETS 1,446,135 1,966,777
------------ ------------
$ 85,100,507 $ 82,813,432
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
NOTES PAYABLE TO BANKS $ 65,439,237 $ 61,775,719
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 4,336,151 3,178,730
ACCRUED INCOME TAXES 42,930 82,027
DEALER RESERVES 992,213 344,930
SUBORDINATED NOTES PAYABLE 4,000,000
------------ ------------
TOTAL LIABILITIES 70,810,531 69,381,406
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 2,750,000 shares
authorized, 2,000,000 shares outstanding 20,000 20,000
Additional paid-in-capital 1,231,000 1,231,000
Retained earnings 13,038,976 12,181,026
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 14,289,976 13,432,026
------------ ------------
$ 85,100,507 $ 82,813,432
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-9-
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -----------------------------
1997 1996 1997 1996
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST AND FEE INCOME:
Interest and fees on loans $ 2,639,669 $ 2,657,325 $ 7,783,444 $ 7,915,420
Finance lease income and related fees 127,116 135,398 415,737 371,842
------------ ----------- ----------- -----------
Total interest income 2,766,785 2,792,723 8,199,181 8,287,262
INTEREST EXPENSE 1,250,726 1,321,677 3,637,142 3,850,381
------------ ----------- ----------- -----------
Net interest income 1,516,059 1,471,046 4,562,039 4,436,881
PROVISION FOR CREDIT LOSSES 48,000 144,000
------------ ----------- ----------- -----------
Net interest income after
provision for credit losses 1,516,059 1,423,046 4,562,039 4,292,881
NONINTEREST INCOME:
Other income 250,275 286,751 947,994 751,726
------------ ----------- ----------- -----------
Total noninterest income 250,275 286,751 947,994 751,726
NONINTEREST EXPENSE:
Salaries and wages 565,432 667,196 1,699,070 1,892,991
Merger related expenses 714,150 714,150
Other operating expenses 391,890 295,993 1,290,396 874,539
------------ ----------- ----------- -----------
Total noninterest expense 1,671,472 963,189 3,703,616 2,767,530
Income before provision
for income taxes 94,862 746,608 1,806,417 2,277,077
PROVISION FOR INCOME TAXES 304,064 302,721 948,467 918,650
------------ ----------- ----------- -----------
Net income (209,202) 443,887 857,950 1,358,427
RETAINED EARNINGS, beginning of year 12,181,026 12,181,026 12,181,026 12,181,026
------------ ----------- ----------- -----------
RETAINED EARNINGS, end of year $ 11,971,824 $12,624,913 $13,038,976 $13,539,453
============ =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-10-
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1996
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 857,950 $ 1,358,427
Adjustments to reconcile net income
to net cash provided by operating activities:
Loss on writedown of assets 26,033 4,473
Depreciation and amortization 86,774 77,454
Amortization of residual value (302,605) (244,805)
Provision for credit losses 144,000
Income from real estate joint venture (66,978)
Changes in assets and liabilities
Increase in equipment held for re-lease (52,439) (28,252)
Decrease in other assets 169,386 116,915
Increase (decrease) in accounts payable and accruals 1,157,421 (335,295)
Increase (decrease) in accrued income taxes 235,903 (664,729)
Increase (decrease) in dealers' reserves 647,283 (418,622)
------------- ------------
Net cash provided by operating activities 2,758,728 9,566
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of leases and loans 376,684 784,478
Leases funded to customers (2,157,086) (1,875,520)
Loans made to customers (107,783,626) (90,869,303)
Lease principal payments 1,794,382 2,473,324
Loan principal repayments 105,091,809 87,243,370
Equipment and leasehold improvements purchased (29,971) (30,374)
Distributions received from real estate joint venture 112,837 36,068
------------- ------------
Net cash used in investing activities (2,594,971) (2,237,957)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 58,155,559 64,252,424
Repayment of notes payable to banks (54,492,041) (62,098,573)
Repayment of 1995 subordinated notes payable (4,000,000)
------------- ------------
Net cash (used in) provided by financing activities (336,482) 2,153,851
NET DECREASE IN CASH (172,725) (74,540)
CASH AT BEGINNING OF YEAR 193,652 102,625
------------- ------------
CASH AT SEPTEMBER 30, 1997 AND 1996 $ 20,927 $ 28,085
============= ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 3,946,924 $ 4,117,317
============= ============
Income taxes $ 792,071 $ 1,583,380
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-11-
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The consolidated financial statements of Firestone Financial
Corp. and its subsidiary (the "Company") included herein have been prepared by
the Company, without audit. Certain information and footnote disclosure normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. In the opinion of
management, the financial statements reflect all adjustments (consisting
primarily of normal recurring accruals) necessary for a fair presentation of
such information. The financial statements should be read in conjunction with
the Company's financial statements and notes thereto for the fiscal year ended
December 31, 1996. The results of operations for the three and nine months ended
September 30, 1997 and 1996 are not necessarily indicative of the results of
operations for the full year or any other interim period.
(2) Merger of the Company
Subsequent to September 30, 1997, on October 15, 1997, the
Company was acquired by UST Corp. The transaction was accounted for as a pooling
of interests and was structured as a tax-free exchange of 0.59 shares of UST
Corp. common stock for each of the 2.0 million issued and outstanding shares of
Company common stock. As all of the regulatory contingencies related to
consummation of the transaction were satisfied as of September 30, 1997, the
Company recorded a one-time charge in the amount of $714 thousand in
nonrecurring costs associated with the transaction.
-12-
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
TOGETHER WITH AUDITORS' REPORT
-13-
<PAGE>
[ARTHUR ANDERSEN LLP LETTERHEAD]
Report of Independent Public Accountants
To the Stockholders of
Firestone Financial Corp.:
We have audited the accompanying consolidated balance sheets of Firestone
Financial Corp. and Subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of income and retained earnings and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 financial statements referred to above present fairly, in
all material respects, the financial position of Firestone Financial Corp. and
Subsidiary as of December 31, 1996 and 1995, and the results of their operations
and their cash flows for the years then ended, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
January 31, 1997
-14-
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
1996 1995
---- ----
ASSETS
CASH $ 193,652 $ 102,625
----------- -----------
NOTES RECEIVABLE (Notes 3, 4 and 10) $79,622,175 $77,653,062
FINANCE LEASE RECEIVABLES (Notes 3,4 and 10) 2,810,578 3,208,024
----------- -----------
TOTAL RECEIVABLES $82,432,753 $80,861,086
LESS - ALLOWANCE FOR CREDIT LOSSES (Notes 3 and 7) 1,779,750 1,861,535
----------- -----------
NET RECEIVABLES $80,653,003 $78,999,551
----------- -----------
OTHER ASSETS (Notes 3 and 8) $ 1,966,777 $ 1,596,036
----------- -----------
$82,813,432 $80,698,212
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOTES PAYABLE TO BANKS (Notes 5 and 10) $61,775,719 $60,677,801
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 3,178,730 3,460,458
ACCRUED INCOME TAXES (Notes 3 and 8) 82,027 291,558
DEALER RESERVES 344,930 932,441
SUBORDINATED NOTES PAYABLE (Notes 6 and 10) 4,000,000 4,000,000
----------- -----------
TOTAL LIABILITIES $69,381,406 $69,362,258
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY (Notes 2 and 9):
Common stock, $.01 par value, 2,750,000 shares
authorized, 2,000,000 shares outstanding $ 20,000 $ 20,000
Additional paid-in-capital 1,231,000 1,231,000
Retained earnings 12,181,026 10,084,954
----------- -----------
TOTAL STOCKHOLDERS' EQUITY $13,432,026 $11,335,954
----------- -----------
$82,813,432 $80,698,212
=========== ===========
The accompanying notes are an integral
part of these consolidated financial statements
-15-
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
---- ----
INTEREST AND FEE INCOME (Notes 3 and 10):
Interest and fees on loans $10,411,713 $ 9,754,162
Finance lease income and related fees 493,107 541,666
----------- -----------
Total interest income $10,904,820 $10,295,828
INTEREST EXPENSE (Notes 5 and 6) 5,074,422 5,070,387
----------- -----------
Net interest income $ 5,830,398 $ 5,225,441
PROVISION FOR CREDIT LOSSES (Notes 3 and 7) -- 280,000
----------- -----------
Net interest income after
provision for credit losses $ 5,830,398 $ 4,945,441
----------- -----------
NONINTEREST INCOME:
Accretion of purchase discount (Note 2) $ -- $ 1,223,501
Other income 1,115,843 939,368
----------- -----------
Total noninterest income $ 1,115,843 $ 2,162,869
----------- -----------
NONINTEREST EXPENSE:
Salaries and wages (Note 3) $ 2,523,236 $ 2,394,478
Other operating expenses 1,207,070 1,250,797
----------- -----------
Total noninterest expense $ 3,730,306 $ 3,645,275
----------- -----------
Income before provision for income taxes $ 3,215,935 $ 3,463,035
PROVISION FOR INCOME TAXES (Notes 3 and 8) 1,119,863 667,218
----------- -----------
Net income $ 2,096,072 $ 2,795,817
RETAINED EARNINGS, beginning of year 10,084,954 $ 7,289,137
----------- -----------
RETAINED EARNINGS, end of year $12,181,026 $10,084,954
=========== ===========
The accompanying notes are an integral
part of these consolidated financial statements
-16-
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,096,072 $ 2,795,817
Adjustments to reconcile net income to net cash
provided by operating activities -
Accretion of purchase discount -- (1,223,501)
Depreciation and amortization 97,584 117,014
Amortization of residual value (343,762) (427,382)
Provision for credit losses -- 280,000
Provision (benefit) for deferred income taxes 69,628 (162,302)
Loss on write-down of assets 4,473 --
Changes in assets and liabilities -
(Increase) decrease in other assets (153,326) 49,966
Decrease in accounts payable and
accrued expenses (281,728) (405,404)
(Decrease) increase in accrued income taxes (598,631) 182,359
(Decrease) increase in dealer reserves (587,511) 562,096
------------- ------------
Net cash provided by operating activities $ 302,799 $ 1,768,663
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of leases and loans $ 1,079,157 $ 1,697,817
Leases funded to customers (2,588,523) (2,726,443)
Loans made to customers (120,219,192) (98,775,904)
Lease principal repayments 3,330,199 2,863,464
Loan principal repayments 117,088,669 85,905,132
------------- ------------
Net cash used in investing activities $ (1,309,690) $(11,035,934)
------------- ------------
The accompanying notes are an integral
part of these consolidated financial statements
-17-
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(Continued)
1996 1995
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to banks $ 84,706,692 $ 71,406,447
Proceeds from issuance of the 1995 subordinated
notes payable -- 1,192,000
Repayment of notes payable to banks (83,608,774) (58,127,433)
Repayment of subordinated notes payable to bank -- (4,000,000)
Repayment of 1992 subordinated notes payable -- (1,192,000)
------------ ------------
Net cash provided by financing activities $ 1,097,918 $ 9,279,014
------------ ------------
NET INCREASE IN CASH $ 91,027 $ 11,743
CASH, BEGINNING OF YEAR 102,625 90,882
------------ ------------
CASH, END OF YEAR $ 193,652 $ 102,625
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for--
Interest $ 5,039,756 $ 4,906,409
Income taxes 1,936,156 841,670
============ ============
Noncash financing activities--
Rollover of 1992 subordinated notes payable into
1995 subordinated notes payable $ -- $ 2,808,000
============ ============
The accompanying notes are an integral
part of these consolidated financial statements
-18-
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) Company Overview
Firestone Financial Corp. (the Corporation) was founded in 1965. The Corporation
and its wholly owned subsidiary, Firestone Financial Canada Ltd. (collectively
referred to as the Company), provide primarily secured installment loan and
lease financing to customers primarily throughout the United States and within
various provinces of Canada. The Company has, over the years, built a long
history of growth and profitability by focusing on a specific customer base.
This customer base is composed of the "route operators" throughout North America
that own (or lease) and maintain various types of coin-operated amusement
equipment and vending machines, park and ride equipment, video lottery and
gaming devices, as well as owner/operators of dry-cleaning stores and
coin-operated laundry equipment. Vending machines include coin-operated snack,
juice, cigarette, coffee and candy vending machines, while amusement equipment
includes various types of coin-operated music, pinball and video amusement
games, as well as pool tables, shuffleboard and electronic dart games.
(2) Acquisition of the Corporation
In January 1992, Stonefire Financial Corp., a Massachusetts corporation, was
formed for the purpose of acquiring the Corporation. On August 21, 1992,
Stonefire Financial Corp. purchased all of the outstanding stock of the
Corporation for $5,250,000. On August 25, 1992, Stonefire Financial Corp. and
the Corporation merged, and Firestone Financial Corp. was the surviving entity.
The Corporation accounted for the acquisition by allocating the purchase price
paid by Stonefire Financial Corp. to the Corporation's net assets based upon
relative fair values. The fair value of the net assets acquired exceeded the
purchase price by approximately $5,700,000. This purchase discount was accreted
on a straight-line basis over a period of 36 months ended August 1995.
(3) Summary of Significant Accounting Policies
The accounting and reporting policies of the Company conform with generally
accepted accounting principles and practices applicable to the finance company
industry. The following is a summary of significant accounting policies:
Principles of Consolidation
The consolidated financial statements include the accounts of the parent company
and its wholly owned subsidiary. Intercompany accounts and transactions have
been eliminated in consolidation.
Income Recognition
The Company recognizes income from installment loans and finance leases over the
term of the loan or lease using the effective-interest method.
When, in the judgment of management, collection of any portion of the interest
or principal amount of a receivable is in doubt, accrual of income is
discontinued and income is recorded when received.
-19-
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(3) Summary of Significant Accounting Policies (Continued)
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Allowance for Credit Losses
The allowance for credit losses is maintained at a level that represents the
Company's best judgment of the loan and lease loss exposure based upon
management's evaluation of the combined loan and lease portfolio and actual
historical loss experience. The allowance for credit losses is based on
estimates; ultimate losses may vary from the current estimates. These estimates
are reviewed periodically, with any necessary adjustments reported in earnings
in the period in which they become known.
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan." A
note receivable or finance lease receivable (loan) is considered impaired when
it is probable that a creditor will be unable to collect all principal and
interest due according to the contractual terms of the financing agreement. SFAS
No. 114 requires, among other things, that creditors measure impaired loans at
the present value of expected future cash flows, discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. The Company recognizes interest income on impaired loans on a cash
basis only when the ultimate collectibility of principal is no longer considered
doubtful.
The Company has determined based on its policies that loans recognized as
nonaccrual are equivalent to "impaired loans" as defined by SFAS No. 114. The
Company has also determined that the allowance for credit losses as of December
31, 1996 and 1995 does not require an additional provision as a result of the
adoption of this standard. The components of impaired loans as of December 31,
1996 and 1995 are as follows (in thousands):
1996 1995
---- ----
Total impaired loans $527 $322
Total impaired loans requiring allocation of
allowance for credit losses 105 112
Allocation of allowance for credit losses
for impaired loans 83 112
The average outstanding impaired loans during the years ended December 31, 1996
and 1995 was approximately $394,000 and $597,000, respectively.
-20-
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(3) Summary of Significant Accounting Policies (Continued)
Leases
The Company accounts for its leases under the direct finance method of
accounting.
Equipment Held for Re-lease or Sale
When the Company repossesses equipment under direct financing leases, it records
the equipment at the lower of the net investment in the lease or the estimated
fair value of the equipment less estimated selling costs. Equipment held for
re-lease or sale included in "Other Assets" in the accompanying consolidated
financial statements amounted to $31,751 and $13,723 at December 31, 1996 and
1995, respectively.
401(k) Plan
The Company has a 401(k) plan (the Plan), established in January 1993, which
covers substantially all employees. Under the Plan, employees may contribute a
portion of their earnings to the Plan to be invested in various savings
alternatives. The Company makes matching contributions at a rate of 100% of an
employee's contribution, not to exceed 5% of an employee's salary. The matching
contributions vest ratably over five years. Company contributions ($74,216 in
1996 and $71,465 in 1995) were charged to expense.
Income Taxes
The Company accounts for income taxes in accordance with the liability method of
accounting for income taxes. The liability method provides that deferred tax
assets and liabilities are recorded based on the estimated future tax effects of
the difference between the tax bases of assets and liabilities and their
carrying amounts for financial reporting purposes.
Foreign Currency
The functional currency of the subsidiary is the U.S. dollar. The subsidiary's
assets, liabilities and results of operations are transacted in U.S. dollars,
and hence, the subsidiary is not required to translate any amounts at the
financial statement date. Translation gains and losses are charged directly to
operations as incurred.
Certain receivables of the subsidiary, however, are denominated in Canadian
dollars. The Company, therefore, enters into forward exchange contracts to hedge
against changes in the Canadian exchange rate.
-21-
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(4) Notes Receivable and Finance Lease Receivables
The components of notes receivable as of December 31, 1996 and 1995 are as
follows (in thousands):
1996 1995
---- ----
Gross note payments receivable $ 88,163 $ 87,400
Less - Due to participants 1,576 2,173
-------- --------
Note payments receivable $ 86,587 $ 85,227
Less - Unearned finance charges 6,965 7,574
-------- --------
Net investment in notes receivable $ 79,622 $ 77,653
======== ========
The Company's notes receivable are primarily with commercial borrowers and are
typically secured by assets used by the borrowers in their businesses. At
December 31, 1996 and 1995, the Company's notes receivable are primarily
concentrated in amusement and vending equipment (approximately $72,012,000 in
1996) and inventory financing notes (approximately $7,976,000 in 1996). Included
in "Note payments receivable" are interest bearing notes receivable of
approximately $3,212,000 and $2,795,000 as of December 31, 1996 and 1995,
respectively.
The components of finance lease receivables as of December 31, 1996 and 1995 are
as follows (in thousands):
1996 1995
---- ----
Gross lease payments receivable $2,794 $3,121
Less - Due to participants 205 320
------ ------
Lease payments receivable $2,589 $2,801
Add - Estimated residual value of leased equipment 754 996
Less - Unearned finance charges 206 259
Unearned residual income 326 330
------ ------
Net investment in finance lease receivables $2,811 $3,208
====== ======
(5) Notes Payable to Banks
In October 1996, the Company amended its Revolving Credit Agreement (the
Agreement) with its U.S. Lenders and Canadian Lender. The Agreement, which
expires on October 24, 1997, provides that U.S. Lenders make U.S. Revolving
Credit Loans and Swing Line Loans to the Company for up to $75,000,000 or such
greater amount, up to a maximum of $85,000,000, as may be effected by the
addition of one or more additional commitment amounts provided by new banks, as
defined by the Agreement. The Agreement provides for interest on the U.S.
Revolving Credit Loans and the Swing Line Loans to be charged at the U.S. Base
rate or for interest on the U.S. Revolving Credit Loans to be charged on
fixed-rate borrowings at U.S Eurodollar rates. Under the terms of the Agreement,
the Banks were granted a continuing security interest in and lien on all of the
Corporation's assets and
-22-
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(5) Notes Payable to Banks (Continued)
proceeds thereof. As of December 31, 1996, the Company had approximately
$58,606,000 in outstanding U.S. Revolving Credit and Swing Line Loans.
At December 31, 1996, a total of $56,500,000 of the U.S. Revolving Credit Loans
was borrowed as fixed-rate U.S. Eurodollar term loans. These term loans mature
on various dates through April 21, 1997, with fixed interest rates ranging from
6.5625% to 6.875%. The U.S. Base rate on the remaining portion of the
outstanding loans was 8.25% at December 31, 1996.
The Agreement further provides that the Canadian Lender make Canadian Revolving
Credit Loans to the subsidiary for up to $5,000,000 or such greater amount, up
to a maximum of $6,000,000, as defined by the Agreement. Interest on the
Canadian Revolving Credit Loans is charged at the Canadian Base rate or at
Canadian Eurodollar rates for fixed-rate borrowings. Under the terms of the
Agreement, the Company pledged certain assets of the subsidiary to the Canadian
Lender. As of December 31, 1996, the subsidiary had approximately $3,170,000 in
outstanding Canadian Revolving Credit Loans.
A total of $2,600,000 of the Canadian Revolving Credit Loans was borrowed as
fixed-rate Canadian Eurodollar term loans at December 31, 1996. These term loans
mature at dates through April 21, 1997, at a fixed Canadian Eurodollar rate of
6.875%. The Canadian Base rate on the remaining portion of the outstanding loans
was 8.75% at December 31, 1996.
The Agreement also calls for a commitment fee of 1/4% of the unused portion of
the facility.
The Agreement contains various restrictive covenants, including, among other
things, restrictions on indebtedness, liens, dividends and investments. The
Company is also required to maintain certain financial ratios under the
covenants. As of December 31, 1996, the Company was in compliance with all debt
covenants.
Based on the month-end balances, total borrowings during 1996 and 1995 averaged
approximately $61,015,000 and $55,129,000, respectively, for outstanding
indebtedness under the Agreement, with maximum borrowings of approximately
$64,280,000 and $60,678,000 in 1996 and 1995, respectively. The weighted average
effective interest rate for this debt was 7.67% and 8.27% for the years ended
December 31, 1996 and 1995, respectively.
(6) Subordinated Notes Payable
During October 1985 and March 1988, the Corporation entered into two
subordinated note agreements for $2,000,000 each with an investor, to mature in
October 1995 and March 1995, respectively. Under the terms of these agreements,
as amended, interest was accrued and paid monthly on the 1985 note at 9.26% and
on the 1988 note at a rate equal to a base rate as announced from time to time
by the investor. Each of the notes was repaid in full in March 1995.
-23-
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(6) Subordinated Notes Payable (Continued)
On October 28, 1992, the Corporation issued $4,000,000 in subordinated notes
payable (1992 Subordinated Notes) to 37 investors, to mature on October 28,
1996. Interest on the 1992 Subordinated Notes was accrued at 12% per annum and
paid quarterly in arrears. On November 9, 1995, the outstanding balance of the
1992 Subordinated Notes was prepaid in full without penalty.
On November 10, 1995, the Corporation issued $4,000,000 in subordinated notes
payable (1995 Subordinated Notes) to 41 investors. Interest on the 1995
Subordinated Notes is floating based upon the prime rate of interest announced
from time to time by a bank, plus one and three quarters percent (1.75%) per
annum, (10% as of December 31, 1996), payable quarterly in arrears. The
Corporation will further make principal payments as follows:
1997 and 1998 $125,000 on the last day of each calendar quarter
($500,000 for each year)
1999 and 2000 $375,000 on the last day of each calendar quarter
($1,500,000 for each year)
Under the terms of the 1995 Subordinated Notes, the Corporation may prepay the
1995 Subordinated Notes, at any time, without premium or penalty.
Certain of the 1992 Subordinated Notes and the 1995 Subordinated Notes were
purchased by individuals that are related parties to the Corporation. All such
Notes were purchased on the same terms offered to nonrelated parties. Certain of
the 1992 Subordinated Notes ($2,808,000) were repaid through issuance of the
1995 Subordinated Notes.
Based on the month-end outstanding balances of notes payable to banks and
subordinated notes payable, total borrowings during the years ended December 31,
1996 and 1995 averaged approximately $65,015,000 and $59,796,000, with maximum
borrowings of approximately $68,280,000 and $64,678,000 in 1996 and 1995,
respectively. The weighted average effective interest rate for all outstanding
indebtedness was 7.89% and 8.53% for the years ended December 31, 1996 and 1995,
respectively.
(7) Allowance for Credit Losses
The following is an analysis of the allowance for credit losses for the years
ended December 31, 1996 and 1995 (in thousands):
1996 1995
---- ----
Balance, beginning of year $ 1,862 $ 1,631
Provision for credit losses -- 280
Loan and lease charge-offs, net (82) (49)
------- -------
Balance, end of year $ 1,780 $ 1,862
======= =======
-24-
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(8) Income Taxes
The provision for income taxes consists of the following components (in
thousands):
1996 1995
---- ----
Currently payable-
Federal $ 841 $ 547
State 163 235
Foreign 46 47
------ -----
Total current $1,050 $ 829
------ -----
Deferred charges (credits)-
Federal $ 55 $(129)
State 15 (33)
------ -----
Total deferred $ 70 $(162)
------ -----
Provision for income taxes $1,120 $ 667
====== =====
The difference between the statutory U. S. federal income tax rate and the
Company's effective income tax rate for 1996 and 1995, respectively, as a
percentage of pretax income, is a result of the following:
1996 1995
---- ----
Federal statutory rate 34.0% 34.0%
Increase (decrease) in rate resulting from -
State taxes, net of federal benefit 3.7 3.9
Accretion of purchase discount -- (12.2)
Reversal of tax reserves in excess of
tax liabilities (3.3) (7.3)
Other .4 1.1
---- ----
Effective income tax rate 34.8% 19.5%
---- ----
---- ----
"Other Assets" in the accompanying consolidated financial statements includes an
income tax receivable of $363,000 and $0, and net deferred income tax assets of
approximately $662,000 and $731,000 as of December 31, 1996 and 1995,
respectively. Deferred taxes are determined based on the estimated future tax
effects of differences between the financial statement and tax bases of assets
and liabilities given the provisions of enacted tax laws. The tax effect of
significant temporary differences representing deferred tax assets and
liabilities are as follows (in thousands):
1996 1995
---- ----
Credit losses $699 $739
Depreciation (2) 5
Leases (2) 60
Other (33) (73)
---- ----
$662 $731
==== ====
-25-
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(8) Income Taxes (Continued)
The Company has not established a valuation allowance against its deferred tax
assets as of December 31, 1996 or 1995.
(9) Commitments and Contingencies
The Company leases office premises under an operating lease that was renewed in
January 1995 for a five-year period. The future minimum lease payments due under
this lease are as follows (in thousands):
1997 $ 187
1998 192
1999 197
2000 171
----
$747
====
On February 4, 1994, the Corporation entered into a Buy-Sell Agreement with the
Stockholders of the Corporation which provides for the purchase of the shares of
the capital stock of the Corporation owned by each stockholder upon his or her
death. In order to fund the Buy-Sell Agreement, the Corporation has purchased
renewable term life insurance on each stockholder. As of December 31, 1996, the
insurance proceeds would be sufficient to cover the purchase price in the event
of the death of any stockholder.
(10) Financial Instruments
Fair Value of Financial Instruments
Effective December 31, 1995, the Company adopted Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments," which requires that the Company disclose estimated fair values for
certain of its financial instruments. Financial instruments include such items
as loans, securities, deposits, swaps, and other instruments, as defined in the
standard.
The estimated fair value amounts have been determined based on the Company's
assessment of available market information and appropriate valuation
methodologies. However, these estimates may not necessarily be indicative of the
amount that the Company could realize in a current market exchange.
Most of the Company's current assets and current liabilities are financial
instruments. The carrying amounts of these financial instruments approximate
their estimated fair value. The fair value of notes and finance lease
receivables have been determined by discounting the projected cash flows at
December 31, 1996, using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for similar maturities. The
majority of these receivables are collateralized.
-26-
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(10) Financial Instruments (Continued)
Fair Value of Financial Instruments (Continued)
Notes payable to banks was valued based on quoted market prices for debt of the
same remaining maturities.
Off-Balance Sheet Risk
As of December 31, 1996 and 1995, the Company had forward exchange contracts
totaling approximately $649,000 and $620,000, respectively, for purposes of
hedging certain firm commitments related to the subsidiary's collection of
Canadian notes receivable. All outstanding forward exchange contracts had
maturities of under three years. Gains and losses on these forward exchange
contracts are deferred and recognized into interest income over the term of the
underlying commitment. The market values of the forward exchange contracts were
approximately $661,000 and $621,000 at December 31, 1996 and 1995, respectively.
In November 1995, the Company entered into an interest rate swap agreement (the
Swap Agreement) with a bank for the purpose of effectively converting a portion
of the Company's interest rate obligation on 1995 Subordinated Notes from a
floating rate to a fixed rate until the expiration of the Swap Agreement in
December 1998. The Swap Agreement effectively fixes the Company's interest rate
on the 1995 Subordinated Notes to 10.42% on the notional amount of $4,000,000,
as reduced by quarterly principal payments beginning in 1997. Net quarterly
payments or quarterly receipts under the Swap Agreement are recorded as
adjustments to interest expense. The fair value of the Swap Agreement at
December 31, 1996 and 1995 was an unrealized loss of approximately $8,000 and
$65,000, respectively.
In assessing financial instruments with off-balance-sheet risk, the Company is
exposed to potential credit loss in the event of nonperformance by its
counterparties. The Company, however, does not anticipate any material adverse
affect on its financial position resulting from its involvement in these
instruments, nor does it anticipate nonperformance by the counterparties.
-27-
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995 AND 1994
TOGETHER WITH AUDITORS' REPORT
28
<PAGE>
[ARTHUR ANDERSEN LLP LETTERHEAD]
Report of Independent Public Accountants
To the Stockholders of
Firestone Financial Corp.:
We have audited the accompanying consolidated balance sheets of Firestone
Financial Corp. and Subsidiary as of December 31, 1995 and 1994, and the related
consolidated statements of income and retained earnings and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 financial statements referred to above present fairly, in
all material respects, the financial position of Firestone Financial Corp. and
Subsidiary as of December 31, 1995 and 1994, and the results of their operations
and their cash flows for the years then ended, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Boston Massachusetts
January 26, 1996
29
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET - ASSETS
AS OF DECEMBER 31, 1995 AND 1994
1995 1994
---- ----
CASH $ 102,256 $ 90,882
----------- -----------
NOTES RECEIVABLE (Notes 3, 4 and 10) $77,653,062 $66,534,179
FINANCE LEASE RECEIVABLES (Notes 3,4 and 10) 3,208,024 2,912,623
----------- -----------
TOTAL RECEIVABLES $80,861,086 $69,446,802
LESS - ALLOWANCE FOR CREDIT LOSSES (Notes 3 and 7) 1,861,535 1,630,567
----------- -----------
NET RECEIVABLES $78,999,551 $67,816,235
----------- -----------
OTHER ASSETS (Notes 3 and 8) $ 1,596,036 1,600,714
----------- -----------
$80,698,212 $69,507,831
=========== ===========
The accompanying notes are an integral
part of these consolidated financial statements
30
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS - LIABILITIES AND STOCKHOLDERS' EQUITY
AS OF DECEMBER 31, 1995 AND 1994
1995 1994
---- ----
NOTES PAYABLE TO BANKS (Note 5) $60,677,801 $47,398,787
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 3,460,458 3,865,862
ACCRUED INCOME TAXES (Notes 3 and 8) 291,558 109,199
DEALER RESERVES 932,441 370,345
SUBORDINATED NOTES PAYABLE (Notes 6 and 10) 4,000,000 8,000,000
----------- -----------
TOTAL LIABILITIES $69,362,258 $59,744,193
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 9)
EXCESS OF FAIR VALUE OVER
NET ASSETS ACQUIRED (Note 2) $ -- $ 1,223,501
----------- -----------
STOCKHOLDERS EQUITY (Notes 2 and 9):
Common stock, $.0l par value, 2,750,000 shares
authorized, 2,000,000 shares outstanding $ 20,000 $ 20,000
Additional paid-in-capital 1,231,000 1,231,000
Retained earnings 10,084,954 7,289,137
----------- -----------
TOTAL STOCKHOLDERS' EQUITY $11,335,954 $ 8,540,137
----------- -----------
$80,698,212 $69,507,831
=========== ===========
The accompanying notes are an integral
part of these consolidated financial statements
31
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
---- ----
INTEREST AND FEE INCOME (Note 3 and 10):
Interest and fees on loans $ 9,754,162 $8,102,121
Finance lease income and related fees 541,666 469,117
----------- ----------
Total interest income $10,295,828 $8,571,238
INTEREST EXPENSE (Notes 5 and 6) 5,070,387 3,866,822
----------- ----------
Net interest income $ 5,225,441 $4,704,416
PROVISION FOR CREDIT LOSSES (Notes 3 and 7) 280,000 193,000
----------- ----------
Net interest income after
provision for credit losses $ 4,945,441 $4,511,416
----------- ----------
NONINTEREST INCOME:
Accretion of purchase discount (Note 2) $ 1,223,501 $1,912,356
Other income 939,368 928,905
----------- ----------
Total noninterest income $ 2,162,869 $2,841,261
----------- ----------
NONINTEREST EXPENSE:
Salaries and wages $ 2,394,478 $2,166,246
Other operating expenses 1,250,797 1,361,318
----------- ----------
Total noninterest expense $ 3,645,275 $3,527,564
----------- ----------
Income before provision for income taxes $ 3,463,035 $3,825,113
PROVISION FOR INCOME TAXES (Notes 3 and 8) 667,218 785,999
----------- ----------
Net income $ 2,795,817 $3,039,114
RETAINED EARNINGS, beginning of year 7,289,137 4,250,023
----------- ----------
RETAINED EARNINGS, end of year $10,084,954 $7,289,137
=========== ==========
The accompanying notes are an integral
part of these consolidated financial statements
32
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,795,817 $ 3,039,114
Adjustments to reconcile net income to net cash
provided by operating activities -
Accretion of purchase discount (1,223,501) (1,912,356)
Depreciation and amortization 117,014 216,569
Amortization of residual value (427,382) (186,445)
Provision for credit losses 280,000 193,000
Provision for prepaid income taxes (162,302) (82,971)
Loss on write-down of assets -- 1,878
Changes in assets and liabilities -
Decrease (increase) in other assets 49,966 (757)
(Decrease) increase in accounts payable and
accrued expenses (405,404) 1,308,216
Increase in accrued income taxes 182,359 137,125
Increase in dealer reserves 562,096 94,428
------------ ------------
Net cash provided by operating activities $ 1,768,663 $ 2,807,801
============ ============
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of leases and loans $ 1,697,817 $ 3,151,486
Leases funded to customers (2,726,443) (1,847,492)
Loans made to customers (98,775,904) (90,414,013)
Lease principal repayments 2,863,464 2,070,674
Loan principal repayments 85,905,132 74,294,895
------------ ------------
Net cash used in investing activities $(11,035,934) $(12,744,450)
============ ============
The accompanying notes are an integral
part of these consolidated financial statements
33
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(Continued)
1995 1994
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to banks $ 71,406,447 $ 154,919,123
Proceeds from issuance of the 1995
subordinated notes payable 1,192,000 --
Repayment of notes payable to banks (58,127,433) (144,908,143)
Repayment of subordinated notes payable to bank (4,000,000) --
Repayment of 1992 subordinated notes payable (1,192,000) --
------------ -------------
Net cash provided by financing activities $ 9,279,014 $ 10,010,980
------------ -------------
NET INCREASE IN CASH $ 11,743 $ 74,331
CASH AT BEGINNING OF YEAR 90,882 16,551
------------ -------------
CASH AT END OF YEAR $ 102,625 $ 90,882
============ =============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest $ 4,906,409 $ 3,696,437
Income taxes 841,670 731,845
============ =============
Noncash financing activities:
Rollover of 1992 subordinated notes payable
into 1995 subordinated notes payable $ 2,808,000 $ --
============ =============
The accompanying notes are an integral
part of these consolidated financial statements
34
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(1) Company Overview
Firestone Financial Corp. (the Corporation) was founded in 1965. The Corporation
and its wholly owned subsidiary, Firestone Financial Canada Ltd. (collectively
referred to as the Company), provide primarily secured installment loan and
lease financing to customers primarily throughout the United States and within
various provinces of Canada. The Company has, over the years, built a long
history of growth and profitability by focusing on a specific customer base.
This customer base is composed of the "route operators" throughout North America
that own (or lease) and maintain various types of coin-operated amusement
equipment and vending machines, park and ride equipment, video lottery and
gaming devices, as well as owner/operators of dry-cleaning stores and
coin-operated laundry equipment. Vending machines include coin-operated snack,
juice, cigarette, coffee and candy vending machines, while amusement equipment
includes various types of coin-operated music, pinball and video amusement
games, as well as pool tables, shuffleboard and electronic dart games.
(2) Acquisition of the Corporation and Formation of a Subsidiary
In January 1992, Stonefire Financial Corp., a Massachusetts corporation, was
formed for the purpose of acquiring the Corporation. On August 21, 1992,
Stonefire Financial Corp. purchased all of the outstanding stock of the
Corporation for $5,250,000.
The Corporation accounted for the acquisition by allocating the purchase price
paid by Stonefire Financial Corp. to the Corporation's net assets based upon
relative fair values. The fair value of the net assets acquired exceeded the
purchase price by approximately $5,700,000. This purchase discount was accreted,
on a straight-line basis, over a period of 36 months ended August 1995.
Stonefire Financial Corp. was capitalized with $1,251,000 and had a net
operating loss of $33,625 prior to the acquisition of the Corporation. On August
25, 1992, Stonefire Financial Corp. and the Corporation merged, and Firestone
Financial Corp. was the surviving entity.
In February 1994, the Corporation formed a wholly owned subsidiary, Firestone
Financial Canada Ltd., whose purpose is to provide financing in all the
provinces of Canada.
(3) Summary of Significant Accounting Policies
The accounting and reporting policies of the Company conform with generally
accepted accounting principles and practices applicable to the finance company
industry. The following is a summary of the significant accounting policies:
35
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Continued)
(3) Summary of Significant Accounting Policies (Continued)
Principles of Consolidation
The consolidated financial statements include the accounts of the parent company
and its wholly owned subsidiary. Intercompany accounts and transactions have
been eliminated in consolidation.
Income Recognition
The Company recognizes income from installment loans and finance leases over the
term of the loan or lease using the effective interest method.
When, in the judgment of management, collection of any portion of the interest
or principal amount of a receivable is in doubt, accrual of income is
discontinued and income is recorded when received.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Allowance for Credit Losses
The allowance for credit losses is maintained at a level that represents the
Company's best judgment of the loan and lease loss exposure based upon
management's evaluation of the combined loan and lease portfolio and actual
historical loss experience. The allowance for credit losses is based on
estimates; ultimate losses may vary from the current estimates. These estimates
are reviewed periodically with any necessary adjustments reported in earnings in
the periods in which they become known.
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 114, "Accounting for Impairment of a Loan." A note
receivable or finance lease receivable (loan) is considered impaired when it is
probable that a creditor will be unable to collect all principal and interest
due according to the contractual terms of the financing agreement. SFAS No. 114
requires, among other things, that creditors measure impaired loans at the
present value of expected future cash flows, discounted at the loan's effective
interest rate or, as a practical expedient at the loan's observable market price
or the fair value of the collateral if the loan is collateral dependent. The
Company will recognize interest income on impaired loans on a cash basis only
when the ultimate collectibility of principal is no longer considered doubtful.
36
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Continued)
(3) Summary of Significant Accounting Policies (Continued)
Allowance for Credit Losses (Continued)
The Company has determined based on its policies that loans recognized as
nonaccrual, are equivalent to "impaired loans" as defined by SFAS No. 114. The
Company has also determined that the allowance for credit losses as of December
31, 1995 did not require an additional provision as a result of the adoption of
this new standard. At December 31, 1995, the Company had approximately $322,000
of total impaired net receivables of which approximately $112,000 required
allocation of the allowance for credit losses of approximately $112,000. The
average outstanding impaired net receivables during the year ended December 31,
1995 was approximately $597,000.
Leases
The Company accounts for its leases under the direct finance method of
accounting.
Equipment Held for Re-lease or Sale
When the Company repossesses equipment under direct financing leases, it records
the equipment at the lower of the net investment in the lease or estimated
market value less estimated selling costs. Equipment held for re-lease or sale
included in Other Assets amounted to $13,723 and $161,892 at December 31, 1995
and 1994, respectively.
Income Taxes
The Company accounts for income taxes in accordance with the liability method in
accounting for income taxes. The liability method provides that deferred tax
assets and liabilities are recorded based on the estimated future tax effects of
the difference between the tax bases of assets and liabilities and their
carrying amounts for financial reporting purposes.
Foreign Currency
In accordance with the provisions of Statement of Financial Accounting Standards
No. 52 "Foreign Currency Translation," the functional currency of the subsidiary
is the U.S. dollar. The subsidiary's assets, liabilities and results of
operations are transacted in U.S. dollars, and hence, the subsidiary is not
required to translate any amounts at the financial statement date. Translation
gains and losses are charged directly to operations as incurred.
Certain receivables of the subsidiary, however, are denominated in Canadian
dollars. The Company, therefore, enters into forward exchange contracts to hedge
against changes in the Canadian exchange rate.
37
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Continued)
(4) Notes Receivable and Finance Lease Receivables
The components of notes receivable as of December 31, 1995 and 1994 are as
follows (in thousands):
1995 1994
---- ----
Gross note payments receivable $87,400 $76,425
Less - Due to participants 2,173 2,884
------- -------
Note payments receivable $85,227 $73,541
Less - Unearned finance charges 7,574 7,007
------- -------
Net investment in notes receivable $77,653 $66,534
======= =======
The Company's notes receivable are primarily with commercial borrowers and are
typically secured by assets used by the borrowers in their businesses.
The contractual maturities of notes receivable as of December 31, 1995 and the
maximum terms of the loans outstanding were as follows (in thousands):
Interest-
Installment bearing Total
----------- ------- -----
Due within -
1 year $60,959 $ 1,376 $62,335
2 years 17,512 410 17,922
3 years 3,370 379 3,749
4 years 497 249 746
5 years 94 161 255
Thereafter -- 220 220
------- ------- -------
$82,432 $ 2,795 $85,227
======= ======= =======
Maximum original
term (months) 72 84
== ==
Experience has shown that a number of loans will be paid out or renewed prior to
their contractual maturity. Accordingly, the foregoing tabulation is not
regarded as a forecast of future cash collections.
38
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Continued)
(4) Notes Receivable and Finance Lease Receivables (Continued)
The concentration of notes receivable at December 31, 1995 and 1994 is presented
in the following table (in thousands):
1995 1994
---- ----
Amusement and vending equipment $65,468 $55,558
Video lottery and other gaming devices 6,964 9,254
Inventory financing 6,081 645
Laundry equipment 4,312 6,978
Office coffee equipment 599 566
Other 1,803 540
------- -------
$85,227 $73,541
======= =======
A major consideration in granting loans is the value of the borrower's
collateral. The loans made by the Company generally range between $3,000 and
$500,000. The Company has aggregate loans in excess of $1,000,000 to two
borrowers for an aggregate outstanding loan balance of $3,218,358 at December
31, 1995. These contracts are secured by the equipment. The value of the
collateral has been determined based upon appraisals that have been reviewed by
Company personnel. In addition, all contracts for these borrowers are made on a
recourse basis, with the distributor of the collateral fully guaranteeing the
related debt. In the opinion of management, the current net realizable value of
the collateral supporting these contracts is adequate in relation to their
outstanding balances.
The components of finance lease receivables as of December 31, 1995 and 1994 are
as follows (in thousands):
1995 1994
---- ----
Gross lease payments receivable $3,121 $3,156
Less - Due to participants 320 406
------ ------
Lease payments receivable $2,801 $2,750
Add - Estimated residual value of
leased equipment 996 702
Less -
Unearned finance charges 259 217
Unearned residual income 330 322
------ ------
Net investment in finance lease
receivables $3,208 $2,913
====== ======
39
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Continued)
(4) Notes Receivable and Finance Lease Receivables (Continued)
The future minimum finance lease payments receivable as of December 31, 1995 are
as follows (in thousands):
1996 $ 1,799
1997 666
1998 229
1999 90
2000 17
------
$2,801
======
The concentration of minimum lease payments receivable at December 31, 1995 and
1994, by type of equipment, is presented in the following table (in thousands):
1995 1994
---- ----
Dairy equipment $1,237 $1,240
Amusement and vending equipment 1,088 894
Laundry equipment 476 616
------ ------
$2,801 $2,750
====== ======
As of December 31, 1995 and 1994, the geographical distribution of combined
notes receivable and finance lease receivables, net of unearned finance charges
and income, was as follows (in thousands):
1995 1994
---- ----
Region
- ------
Southeast $16,669 $15,567
Midwest 14,195 9,419
West 13,313 12,262
Northeast 12,749 14,156
Southwest 6,694 3,377
Mid-Atlantic 5,873 6,016
Plains States 3,385 3,015
Canada 3,624 2,754
Outside U.S.A. (excluding Canada) 4,359 2,881
------- -------
$80,861 $69,447
======= =======
40
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Continued)
(5) Notes Payable to Banks
In October 1995, the Company amended its Revolving Credit Agreement (the
Agreement) with The First National Bank of Boston (FNBB), National Bank of
Canada (the Canadian Lender), and various other banks and financial institutions
(U.S. Lenders)--collectively with FNBB and the Canadian Lender (the Banks)--and
FNBB in its capacity as agent for the Banks. The Agreement, which expires on
October 25, 1996, provides that U.S. Lenders make U.S. Revolving Credit Loans
and Swing Line Loans to the Company for up to $67,500,000 or such greater
amount, up to a maximum of $77,500,000 as may be effected by the addition of one
or more additional commitment amounts provided by new banks as defined by the
Agreement. The Agreement provides for interest on the U.S. Revolving Credit
Loans and the Swing Line Loans to be charged at the U.S. Base rate or for
interest on the U.S. Revolving Credit Loans to be charged on fixed-rate
borrowings at U.S. Eurodollar rates. Under the terms of the Agreement, the Banks
were granted a continuing security interest in and lien on all of the
Corporation's assets and proceeds thereof.
The Agreement further provides that the Canadian Lender make Canadian Revolving
Credit Loans to the subsidiary for up to $5,000,000 or such greater amount, up
to a maximum of $6,000,000 as defined by the Agreement. Interest on the Canadian
Revolving Credit Loans is charged at the Canadian Base rate or at Canadian
Eurodollar rates for fixed rate borrowings. Under the terms of the Agreement,
the Company pledged certain assets of the subsidiary to the Canadian Lender.
As of December 31, 1995, the amounts available and the loan balances under the
Agreement were as follows (in thousands):
Commitment Loan
Amounts Balances
------- --------
U.S. Lenders -
The First National Bank of Boston $ 23,000 $ 19,992
Fleet Bank of Massachusetts, N.A. 18,000 14,461
NatWest Bank N.A. 13,500 11,735
Citizens Bank of Massachusetts 6,500 5,650
National Bank of Canada 6,500 5,650
------- -------
$67,500 $57,488
======= =======
Canadian Lender -
National Bank of Canada 5,000 3,190
------- -------
Total $72,500 $60,678
======= =======
The Agreement also calls for a commitment fee of 3/8% of the unused portion of
the facility.
41
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Continued)
(5) Notes Payable to Banks (Continued)
At December 31, 1995, a total of $54,500,000 of the U.S. Revolving Credit Loans
was borrowed as fixed-rate U.S. Eurodollar term loans. These term loans mature
on various dates through April 24, 1996, with fixed interest rates ranging from
7.375% to 7.625%. The U.S. Base rate on the remaining portion of the outstanding
loans was 8.5% at December 31, 1995.
A total of $2,750,000 of the Canadian Revolving Credit Loans was borrowed as
fixed-rate Canadian Eurodollar term loans at December 31, 1995. These term loans
mature at dates through February 26, 1996, with fixed Canadian Eurodollar rates
ranging from 7.4375% to 7.5%. The Canadian Base rate on the remaining portion of
the outstanding loans was 9% at December 31, 1995.
The Agreement contains various restrictive covenants including, among other
things, restrictions on indebtedness, liens, dividends and investments. This
Company is also required to maintain certain financial ratios under the
covenants. As of December 1995, the Company was in compliance with all debt
covenants.
Based on the month-end balances, total borrowings during 1995 and 1994 averaged
approximately $55,129,000 and $44,842,000, respectively, for outstanding
indebtedness under the Agreement, with maximum borrowings of approximately
$60,678,000 and $48,323,000 in 1995 and 1994, respectively. The weighted average
effective interest rate for this debt was 8.27% and 6.90% for the years ended
December 31, 1995 and 1994, respectively.
(6) Subordinated Notes Payable
As of December 31, 1995 and 1994, subordinated notes payable were comprised of
the following (in thousands):
1995 1994
---- ----
Subordinated Notes Payable to
New Bedford Institution for Savings $ -- $4,000
Subordinated Notes Payable to Investors 4,000 4,000
------ ------
$4,000 $8,000
====== ======
During October 1985 and March 1988, the Corporation entered into two
subordinated note agreements for $2,000,000 each with PT Investment Corporation
to mature in October 1995 and March 1995, respectively. Under a Purchase and
Assumption agreement between New Bedford
42
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Continued)
(6) Subordinated Notes Payable (Continued)
Institution for Savings (NBIS) and the Federal Deposit Insurance Corp., NBIS
assumed these subordinated notes payable as of August 21, 1992. Under the terms
of these agreements, as amended on September 30, 1993, interest was accrued and
paid monthly on the 1985 note at 9.26% and on the 1988 note at a rate equal to
the base rate as announced from time to time by NBIS. Each of the notes was
repaid in full in March 1995.
On October 28, 1992, the Corporation issued $4,000,000 in subordinated notes
payable (1992 Subordinated Notes) to 37 investors to mature on October 28, 1996.
Interest on the 1992 Subordinated Notes was accrued at 12% per annum and paid
quarterly in arrears. On November 9, 1995, the 1992 Subordinated Notes were
prepaid in full without penalty. In connection with the issuance of the 1992
Subordinated Notes, the Corporation also issued to the investors warrants to
purchase an aggregate of 500,000 shares of the Corporation's common stock. On
December 9, 1995, all the warrants expired unexercised.
On November 10, 1995, the Corporation issued $4,000,000 in subordinated notes
payable (1995 Subordinated Notes) to 41 investors. Interest on the 1995
Subordinated Notes is floating based upon the prime rate of interest announced
from time to time by The First National Bank of Boston, plus one and three
quarters percent (1.75%) per annum, (10.25% as of December 31, 1995), payable
quarterly in arrears. The Corporation will further make principal payments as
follows:
1997 and 1998 $125,000 on the last day of each calendar quarter
($500,000 for each year)
1999 and 2000 $375,000 on the last day of each calendar quarter
($1,500,000 for each year)
Under the terms of the 1995 Subordinated Notes, the Corporation may prepay the
1995 Subordinated Notes at any time, without premium or penalty.
Certain of the 1992 Subordinated Notes and the 1995 Subordinated Notes were
purchased by individuals that are related parties to the Corporation. All such
Notes were purchased on the same terms offered to nonrelated parties. Certain of
the 1992 Subordinated Notes ($2,808,000) were repaid through issuance of the
1995 Subordinated Notes.
Based on the month-end outstanding balances of notes payable to banks and
subordinated notes payable, total borrowings during the years ended December 31,
1995 and 1994 averaged approximately $59,796,000 and $52,842,000 with maximum
borrowings of approximately
43
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Continued)
(6) Subordinated Notes Payable (Continued)
$64,678,000 and $56,323,000 in 1995 and 1994, respectively. The weighted average
effective interest rate for all outstanding indebtedness was 8.53% and 7.40% for
the years ended December 31, 1995 and 1994.
(7) Allowance for Credit Losses
The following is an analysis of the allowance for credit losses for the years
ended December 31, 1995 and 1994 (in thousands):
1995 1994
---- ----
Balance, beginning of year $ 1,631 $1,509
Provision for credit losses 280 193
Loan and lease charge-offs,
net of amounts recovered (49) (71)
------- ------
Balance, end of year $ 1,862 $1,631
(8) Income Taxes
The provision for income taxes consists of the following components (in
thousands):
1995 1994
---- ----
Currently payable -
Federal $ 547 $ 670
State 235 196
Foreign 47 3
---- ----
Total current $ 829 $ 869
---- ----
Deferred charges (credits)-
Federal (129) (68)
State (33) (15)
---- ----
Total deferred $(162) $ (83)
---- ----
Provision for income taxes $ 667 $ 786
===== =====
44
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Continued)
(8) Income Taxes (Continued)
The difference between the statutory U.S. federal income tax rate and the
Company's effective income tax rate for 1995 and 1994, respectively, as a
percentage of pretax income, is a result of the following:
1995 1994
---- ----
Federal statutory rate 34.0% 34.0%
Increase (decrease) in rate resulting from -
State taxes, net of federal benefit 3.9 3.0
Accretion of purchase discount (12.2) (17.0)
Reversal of tax reserves in excess
of tax liabilities (7.3) --
Other 1.1 0.5
---- ----
Effective income tax rate 19.5% 20.5%
==== ====
Included in "Other Assets" on the accompanying consolidated financial statements
are deferred income tax assets of approximately $731,000 and $636,000 as of
December 31, 1995 and 1994, respectively. Deferred taxes are determined based on
the estimated future tax effects of differences between the financial statement
and tax bases of assets and liabilities given the provisions of enacted tax
laws. The tax effect of significant temporary differences representing deferred
tax assets and liabilities are as follows (in thousands):
1995 1994
---- ----
Credit losses $ 739 $ 649
Deferred expenses -- 41
Depreciation 5 13
Leases 60 (33)
Other (73) (34)
----- -----
$ 731 $ 636
===== =====
The Company did not record any valuation allowances against deferred tax assets
as of December 31, 1995 or 1994.
45
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Continued)
(9) Commitments and Contingencies
The Company leases office premises under an operating lease that was renewed in
January 1995 for a five-year period. The future minimum lease payments due under
this lease are as follows (in thousands):
1996 $ 183
1997 187
1998 192
1999 197
2000 171
----
$930
====
On February 4, 1994, the Corporation entered into a Buy-Sell Agreement with the
Stockholders of the Corporation which provides for the purchase of the shares of
the capital stock of the Corporation owned by each stockholder upon his or her
death. In order to fund the Buy-Sell Agreement, the Corporation has purchased
renewable term life insurance on each stockholder. As of December 31, 1995, the
purchase price in the event of the death of certain stockholders exceeds the
insurance proceeds in aggregate by approximately $427,000 with no one individual
in excess of $88,000.
(10) Financial Instruments
Fair Value of Financial Instruments
Effective December 31, 1995, the Company adopted Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of Financial
Instruments" which requires that the Company disclose estimated fair values for
certain of its financial instruments. Financial instruments include such items
as loans, securities, deposits, swaps, and other instruments as defined in the
standard.
The estimated fair value amounts have been determined based on the Company's
assessment of available market information and appropriate valuation
methodologies. However, these estimates may not necessarily be indicative of the
amount that the Company could realize in a current market exchange.
46
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Continued)
(10) Financial Instruments (Continued)
Fair Value of Financial Instruments (Continued)
Most of the Company's current assets and current liabilities are financial
instruments. The carrying amounts of these financial instruments (excluding
notes and finance lease receivables and notes payable to banks) approximate
their estimated fair value. The following table summarizes estimated fair value
information for the Company's notes receivable and notes payable to banks at
December 31, 1995 (in thousands):
Estimated
Fair Value Book Basis
---------- ----------
Notes receivable $ 77,448 $ 77,653
Notes payable to banks 60,665 60,678
Notes and finance lease receivables have been valued by discounting the
projected cash flows at December 31, 1995, using the current rates at which
similar loans would be made to borrowers with similar credit ratings and for
similar maturities. The majority of these receivables are collateralized. Notes
payable to banks was valued based on quoted market prices for debt of the same
remaining maturities.
Off-Balance Sheet Risk
As of December 31, 1995 and 1994, the Company had forward exchange contracts
totaling approximately $620,000 and $405,000, respectively, for purposes of
hedging certain firm commitments related to the subsidiary's collection of
Canadian notes receivable. All outstanding forward exchange contracts had
maturities of under three years. Gains and losses on these forward exchange
contracts are deferred and recognized into interest income over the term of the
underlying commitment. The market value of the forward exchange contracts based
on The First National Bank of Boston and National Bank of Canada's valuations
was approximately $621,000 at December 31, 1995. The market value of the forward
exchange contracts as determined by the Company based on rates quoted by The
First National Bank of Boston was approximately $400,000 at December 31, 1994.
47
<PAGE>
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Continued)
(10) Financial Instruments (Continued)
Off-Balance Sheet Risk (Continued)
In November 1995, the Company entered into an interest rate swap agreement (the
Swap Agreement) with The First National Bank of Boston for the purpose of
effectively converting a portion of the Company's interest rate exposure on 1995
Subordinated Notes from a floating rate to a fixed rate until the expiration of
the Swap Agreement in December 1998. The Swap Agreement effectively fixes the
Company's interest rate on the 1995 Subordinated Notes to 10.42% on the notional
amount of $4,000,000 as reduced by quarterly principal payments beginning in
1997. Net quarterly payments or quarterly receipts under the Swap Agreement are
recorded as adjustments to interest expense. The fair value of the Swap
Agreement at December 31, 1995 was an unrealized loss of approximately $65,000
based on The First National Bank of Boston's market valuation.
In assessing financial instruments with off-balance-sheet risk, the Company is
exposed to potential credit loss in the event of nonperformance by The First
National Bank of Boston or National Bank of Canada. The Company, however, does
not anticipate any material adverse affect on its financial position resulting
from its involvement in these instruments nor does it anticipate nonperformance
by the counterparties.
48
<PAGE>
- --------------------------------------------------------------------------------
SOMERSET SAVINGS BANK AND SUBSIDIARIES
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
September 30, December 31,
1997 1996
--------- ---------
(In Thousands)
(Unaudited)
Assets
Cash and due from banks ............................ $ 7,527 $ 6,942
Federal Home Loan Bank overnight deposits .......... 1,155 1,000
Interest-bearing deposits in other banks ........... 177 277
--------- ---------
Total cash and cash equivalents ................ 8,859 8,219
--------- ---------
Investment securities - fair value
$92,927,000 and $87,633,000 ....................... 92,909 88,065
Loans, net of unearned income ...................... 396,960 394,956
Allowance for loan losses .......................... (7,434) (6,236)
--------- ---------
Loans, net ..................................... 389,526 388,720
--------- ---------
Other real estate owned, net ....................... 7,240 8,910
Land, buildings and equipment, net ................. 12,668 12,575
Accrued interest receivable ........................ 3,125 3,048
Federal Home Loan Bank of Boston stock, at cost .... 2,273 4,422
Deferred income taxes .............................. 2,375 1,450
Other assets ....................................... 1,364 1,933
--------- ---------
$ 520,339 $ 517,342
========= =========
Liabilities and Stockholders' Equity
Deposits ........................................... $ 457,813 $ 442,535
Borrowed funds ..................................... 23,547 40,447
Other liabilities .................................. 4,646 4,512
--------- ---------
Total liabilities ............................... 486,006 487,494
--------- ---------
Commitments and contingencies (note 2)
Stockholders' equity:
Serial preferred stock, $1.00 par value;
5,000,000 shares authorized, none issued
and outstanding
Common stock, $1.00 par value; 20,000,000
shares authorized, 16,651,602 shares
issued and outstanding ........................... 16,652 16,652
Additional paid-in capital ......................... 18,637 18,597
Retained deficit ................................... (956) (5,401)
--------- ---------
Total stockholders' equity ..................... 34,333 29,848
--------- ---------
$ 520,339 $ 517,342
========= =========
See accompanying notes to unaudited consolidated financial statements.
49
<PAGE>
- --------------------------------------------------------------------------------
SOMERSET SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Income
- --------------------------------------------------------------------------------
Three Months Ended
September 30,
----------------------
1997 1996
--------- ---------
(In Thousands,
Except Per Share Data)
(Unaudited)
Interest and dividend income:
Loans .............................................. $ 8,955 $ 8,829
Mortgage-backed securities ......................... 1,397 1,247
Other debt securities .............................. 50 30
Equity securities .................................. 37 115
Short-term, investments ............................ 35 20
--------- ---------
Total interest and dividend income ............ 10,474 10,241
--------- ---------
Interest expense:
Deposits ........................................... 5,220 5,078
Borrowed funds ..................................... 294 501
--------- ---------
Total interest expense ........................ 5,514 5,579
--------- ---------
Net interest income ................................ 4,960 4,662
Provision for loan losses .......................... 300 300
--------- ---------
Net interest income
after provision for loan losses ............... 4,660 4,362
--------- ---------
Other income:
Net gain on sales of loans ......................... 1 13
Gain on sale of interest-rate exchange agreement ... 172 --
Service charges on deposit accounts ................ 159 150
Miscellaneous income ............................... 118 110
--------- ---------
Total other income ............................ 450 273
--------- ---------
Operating expenses:
Salaries and employee benefits ..................... 1,823 1,731
Occupancy and equipment ............................ 407 401
Data processing .................................... 140 126
Legal and professional fees ........................ 108 202
FDIC insurance assessments ......................... 124 263
Costs associated with problem assets ............... 246 472
Net loss on other real estate owned ................ 206 198
Other general and administrative ................... 625 625
--------- ---------
Total operating expenses ....................... 3,679 4,018
--------- ---------
Income before income taxes ......................... 1,431 617
Income tax provision (benefit) ..................... (318) 10
--------- ---------
Net income ......................................... $ 1,749 $ 607
========= =========
Net income per share ............................... $ 0.10 $ 0.04
========= =========
Weighted average shares outstanding ................ 16,945 16,652
========= =========
See accompanying notes to unaudited consolidated financial statements.
50
<PAGE>
- --------------------------------------------------------------------------------
SOMERSET SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Income
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
----------------------
1997 1996
--------- ---------
(In Thousands,
Except Per Share Data)
(Unaudited)
Interest and dividend income:
Loans ............................................ $ 26,753 $ 26,596
Mortgage-backed securities ....................... 4,063 3,294
Other debt securities ............................ 215 31
Equity securities ................................ 185 255
Short-term investments ........................... 135 257
--------- ---------
Total interest and dividend income ............ 31,351 30,433
--------- ---------
Interest expense:
Deposits ......................................... 15,353 15,155
Borrowed funds ................................... 1,218 1,528
--------- ---------
Total interest expense ........................ 16,571 16,683
--------- ---------
Net interest income ................................ 14,780 13,750
Provision for loan losses .......................... 900 900
--------- ---------
Net interest income
after provision for loan losses ............. 13,880 12,850
--------- ---------
Other income:
Net gain on sales of loans ....................... 22 25
Gain on sale of interest-rate exchange agreement . 172 --
Service charges on deposit accounts .............. 479 434
Miscellaneous income ............................. 331 288
--------- ---------
Total other income ............................ 1,004 747
--------- ---------
Operating expenses:
Salaries and employee benefits ................... 5,237 5,154
Occupancy and equipment .......................... 1,194 1,151
Data processing .................................. 411 375
Legal and professional fees ...................... 463 577
FDIC insurance assessments ....................... 673 776
Costs associated with problem assets ............. 980 1,486
Net loss on other real estate owned .............. 431 630
Other general and administrative ................. 1,968 1,886
--------- ---------
Total operating expenses ...................... 11,357 12,035
--------- ---------
Income before income taxes ......................... 3,527 1,562
Income tax benefit ................................. (918) (440)
--------- ---------
Net income .................................... $ 4,445 $ 2,002
========= =========
Net income per share ............................... $ 0.26 $ 0.12
========= =========
Weighted average shares outstanding ................ 16,878 16,652
========= =========
See accompanying notes to unaudited consolidated financial statements.
51
<PAGE>
- --------------------------------------------------------------------------------
SOMERSET SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Nine Months Ended
September 30, 1997 and 1996
- --------------------------------------------------------------------------------
Additional
Common Paid-in Retained
Stock Capital Deficit Total
------- ------- ------- -------
(In Thousands)
(unaudited)
Balance at December 31, 1996 .......... $16,652 $18,597 $(5,401) $29,848
Net income ............................ -- -- 4,445 4,445
Issuance of stock options ............. -- 40 -- 40
------- ------- ------- -------
Balance at September 30, 1997 ......... $16,652 $18,637 $ (956) $34,333
======= ======= ======= =======
Balance at December 31, 1995 .......... $16,652 $18,597 $(8,214) $27,035
Net income ............................ -- -- 2,002 2,002
------- ------- ------- -------
Balance at September 30, 1996 ......... $16,652 $18,597 $(6,212) $29,037
======= ======= ======= =======
See accompanying notes to unaudited consolidated financial statements.
52
<PAGE>
- --------------------------------------------------------------------------------
SOMERSET SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
----------------------
1997 1996
--------- ---------
(In Thousands)
(Unaudited)
Cash flows from operating activities:
Net income ......................................... $ 4,445 $ 2,002
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses ..................... 900 900
Loans originated for sale ..................... (7,947) (5,494)
Principal balance of loans sold ............... 7,947 5,494
Net amortization (accretion) of premiums and
discounts on investment securities ........... 39 (21)
Amortization of net deferred loan fees
and unearned income .......................... (718) (887)
Issuance of stock options ..................... 40
Depreciation and amortization expense ......... 518 460
Net loss on other real estate owned ........... 431 630
Increase in accrued interest receivable ....... (77) (101)
Deferred income tax benefit ................... (925) (450)
Decrease in other assets ...................... 569 314
Increase (decrease) in other liabilities ...... 134 (549)
--------- ---------
Net cash provided by operating activities ... 5,356 2,298
--------- ---------
Cash flows from investing activities:
Proceeds from calls and maturities
of investment securities ......................... 5,000 --
Purchase of investment securities ................. (16,824) (26,641)
Principal payments received on
mortgage-backed securities ....................... 6,941 5,304
Loans purchased ................................... (9,920) --
Net decrease in loans ............................. 5,921 4,114
Proceeds from sales and principal reductions
of other real estate owned ....................... 4,250 4,768
Improvements to other real estate owned ........... -- (42)
Redemption of Federal Home Loan Bank stock ........ 2,149 --
Purchase of equipment ............................. (611) (410)
--------- ---------
Net cash used by investing activities ......... (3,094) (12,907)
========= =========
(Continued)
53
<PAGE>
- --------------------------------------------------------------------------------
SOMERSET SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Continued)
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
----------------------
1997 1996
--------- ---------
(In Thousands)
(Unaudited)
Cash flows from financing activities:
Net increase in deposits .......................... 15,278 2,626
Net increase in short-term borrowings
with maturities of three months or less .......... 3,100 10,200
Proceeds from issuance of borrowings
with maturities in excess of three months ........ 30,000 --
Repayment of borrowings with maturities
in excess of three months ........................ (50,000) (10,000)
--------- ---------
Net cash provided by (used by) financing
activities .................................. (1,622) 2,826
--------- ---------
Net increase (decrease) in cash and cash
equivalents ...................................... 640 (7,783)
Cash and cash equivalents at
beginning of period .............................. 8,219 12,581
--------- ---------
Cash and cash equivalents at end of period ......... $ 8,859 $ 4,798
========= =========
Supplementary Cash Flow Information:
Interest paid on deposits .......................... $ 15,260 $ 15,152
Interest paid on borrowed funds .................... 1,393 1,577
Property acquired in settlement of loans ........... 3,011 2,484
See accompanying notes to unaudited consolidated financial statements.
54
<PAGE>
- --------------------------------------------------------------------------------
SOMERSET SAVINGS BANK AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
September 30, 1997
- --------------------------------------------------------------------------------
1) Basis of Presentation and Consolidation
The consolidated interim financial statements of Somerset Savings Bank and
subsidiaries presented herein should be read in conjunction with the
consolidated financial statements of Somerset Savings Bank in the annual
report for the year ended December 31, 1996.
In the opinion of management, the financial statements reflect all
adjustments (consisting solely of normal recurring accruals) necessary for
a fair presentation of such information. Interim results are not
necessarily indicative of results to be expected for the entire year.
2) Commitments and Contingencies
At September 30, 1997, the Bank had outstanding commitments to originate
loans amounting to approximately $6.8 million, unadvanced funds on
construction loans and lines of credit amounting to approximately $9.6
million and $13.3 million, respectively, and standby letters of credit
amounting to $479,000.
3) Earnings Per Share
Earnings per share is computed using the weighted average number of shares
and common stock equivalents outstanding during each period. Earnings per
share computations include common stock equivalents attributable to
outstanding stock options.
55
<PAGE>
Independent Auditors' Report
To the Board of Directors and Stockholders of Somerset Savings Bank:
We have audited the consolidated balance sheets of Somerset Savings Bank and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements 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 Somerset
Savings Bank and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the consolidated financial statements, the Bank is
operating under a cease and desist order (the "Order") as issued by the Federal
Deposit Insurance Corporation ("FDIC") in March 1991 and as modified in November
1993. The Order required, among other things, the Bank to increase its Tier 1
leverage capital ratio to at least 6.0% by June 30, 1995. At December 31, 1996,
the Bank was not in compliance with the Order's capital requirement. The Bank
submitted a revised capital/profit plan (the "1996 Capital Plan") to the FDIC
and to the Massachusetts Division of Banks, which contemplates that the Bank
will increase its Tier 1 leverage capital ratio solely through the accumulation
of retained earnings, and that the Bank will achieve a Tier 1 leverage capital
ratio of 6.0% during the second quarter of 1997. The 1996 Capital Plan was
approved by the FDIC and projects the continued resolution of nonperforming
assets and sustained profitability.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
February 4, 1997
56
<PAGE>
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
(In Thousands)
ASSETS
Cash and due from banks (note 3) ................... $ 6,942 $ 6,304
Federal Home Loan Bank overnight deposits .......... 1,000 6,000
Interest-bearing deposits in other banks ........... 277 277
- --------------------------------------------------------------------------------
Total cash and cash equivalents .................. 8,219 12,581
- --------------------------------------------------------------------------------
Investment securities -- fair value
$87,633,000 and $61,845,000 (notes 4 and 9) ...... 88,065 61,530
Loans, net of unearned income ...................... 394,956 403,880
Allowance for loan losses .......................... (6,236) (7,136)
- --------------------------------------------------------------------------------
Loans, net (notes 5, 9 and 15) ................... 388,720 396,744
- --------------------------------------------------------------------------------
Other real estate owned, net (note 6) .............. 8,910 11,496
Land, buildings and equipment, net (note 7) ........ 12,575 12,621
Accrued interest receivable ........................ 3,048 3,014
Federal Home Loan Bank of Boston stock, at cost .... 4,422 4,422
Deferred income taxes (note 10) .................... 1,450 1,000
Other assets ....................................... 1,933 3,028
- --------------------------------------------------------------------------------
$ 517,342 $ 506,436
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (note 8) .................................. $ 442,535 $ 434,007
Borrowed funds (note 9) ............................ 40,447 40,447
Other liabilities (note 12) ........................ 4,512 4,947
- --------------------------------------------------------------------------------
Total liabilities ................................ 487,494 479,401
- --------------------------------------------------------------------------------
Commitments and contingencies (notes 2 and 11)
Stockholders' equity (notes 2 and 13):
Serial preferred stock, $1.00 par value;
5,000,000 shares authorized, none issued
and outstanding .............................. -- --
Common stock, $1.00 par value; 20,000,000
shares authorized, 16,651,602 shares
issued and outstanding ....................... 16,652 16,652
Additional paid-in capital ...................... 18,597 18,597
Retained deficit ................................ (5,401) (8,214)
- --------------------------------------------------------------------------------
Total stockholders' equity .................... 29,848 27,035
- --------------------------------------------------------------------------------
$ 517,342 $ 506,436
================================================================================
See accompanying notes to consolidated financial statements.
57
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C>
Interest and dividend income:
Loans ............................................ $ 35,521 $ 36,350 $ 34,326
Mortgage-backed securities ....................... 4,617 3,498 2,762
Other debt securities ............................ 91 -- 25
Equity securities ................................ 326 346 322
Short-term investments ........................... 303 242 61
- ----------------------------------------------------------------------------------------------------
Total interest and dividend income ............. 40,858 40,436 37,496
- ----------------------------------------------------------------------------------------------------
Interest expense:
Deposits ......................................... 20,202 18,932 16,325
Borrowed funds ................................... 2,126 3,841 2,818
- ----------------------------------------------------------------------------------------------------
Total interest expense ......................... 22,328 22,773 19,143
- ----------------------------------------------------------------------------------------------------
Net interest income ................................ 18,530 17,663 18,353
Provision for loan losses (note 5) ................. 1,200 1,200 1,800
- ----------------------------------------------------------------------------------------------------
Net interest income
after provision for loan losses .............. 17,330 16,463 16,553
- ----------------------------------------------------------------------------------------------------
Other income:
Net gain (loss) on sales of loans ................ 43 54 (32)
Service charges on deposit accounts .............. 587 587 609
Miscellaneous .................................... 427 415 378
- ----------------------------------------------------------------------------------------------------
Total other income ............................. 1,057 1,056 955
- ----------------------------------------------------------------------------------------------------
Operating expenses:
Salaries and employee benefits (notes 12 and 14).. 6,869 6,476 6,085
Occupancy and equipment (notes 7 and 11) ......... 1,536 1,535 1,613
Data processing .................................. 521 447 357
Legal and professional fees ...................... 810 662 814
FDIC insurance assessments ....................... 1,040 1,189 1,296
Costs associated with problem assets ............... 1,873 2,384 4,114
Net loss on other real estate owned (note 6) ....... 855 2,257 9,270
Other general and administrative ................... 2,510 2,491 2,295
- ----------------------------------------------------------------------------------------------------
Total operating expenses ........................... 16,014 17,441 25,844
- ----------------------------------------------------------------------------------------------------
Income (loss) before income taxes .................. 2,373 78 (8,336)
Income tax provision (benefit) (note 10) ........... (440) (1,000) 7
- ----------------------------------------------------------------------------------------------------
Net income (loss) ................................. $2,813 $ 1,078 $ (8,343)
====================================================================================================
Net income (loss) per share ........................ $0.17 $ 0.06 $ (0.50)
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Weighted average shares outstanding ................ 16,652 16,652 16,652
====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
58
<PAGE>
Consolidated Statements of Changes in
Stockholders' Equity
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1996, 1995 and 1994
- ----------------------------------------------------------------------------------------------------------------------
Additional Unearned Total
Common Paid-in Retained Compensation Stockholders
Stock Capital Deficit -ESOP Equity
- ----------------------------------------------------------------------------------------------------------------------
(in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 .............. $16,652 $ 20,842 $ (949) $(3,294) $ 33,251
Net loss .................................. -- -- (8,343) -- (8,343)
Amortization of ESOP obligation ........... -- -- -- 516 516
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 .............. 16,652 20,842 (9,292) (2,778) 25,424
Net income ................................ -- -- 1,078 -- 1,078
Amortization of ESOP obligation -- -- -- 451 451
Termination of ESOP (note 14) ............. -- (2,245) -- 2,327 82
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 .............. 16,652 18,597 (8,214) -- 27,035
Net income ................................ -- -- 2,813 -- 2,813
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 .............. $16,652 $ 18,597 $(5,401) $ -- $ 29,848
======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
59
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................................. $ 2,813 $ 1,078 $ (8,343)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for loan losses ....................................................... 1,200 1,200 1,800
Net amortization (accretion) of premiums and
discounts on investment securities .......................................... 8 (97) 6
Amortization of net deferred loan fees and unearned income ...................... (1,150) (1,274) (965)
Amortization of ESOP obligation ................................................. -- 451 516
Depreciation and amortization expense ........................................... 625 600 654
Loans originated for sale ....................................................... (8,626) (7,059) --
Principal balance of loans sold ................................................. 8,626 7,059 --
Net (gain) loss on sales of portfolio loans ..................................... -- -- 32
Gain on sale of building ........................................................ -- (83) --
Net loss on other real estate owned ............................................. 855 2,257 9,270
Increase in accrued interest receivable ......................................... (34) (245) (47)
Deferred income tax benefit ..................................................... (450) (1,000) --
(Increase) decrease in other assets ............................................. 1,095 (1,012) 2,320
Increase (decrease) in other liabilities ........................................ (435) 616 266
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities ................................... 4,527 2,491 5,509
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities and call of investment securities ......................... 1,469 -- 1,000
Purchase of investment securities .................................................. (34,650) (5,797) (28,973)
Principal payments received on mortgage-backed securities .......................... 6,638 2,812 6,876
Purchase of Federal Home Loan Bank of Boston stock ................................. -- (572) (367)
Purchase of loans .................................................................. -- -- (10,790)
Proceeds from sales of loans ....................................................... -- -- 6,671
Net (increase) decrease in loans ................................................... 4,896 (502) (1,750)
Proceeds from sales and principal reductions of other real estate owned ............ 4,852 20,596 17,511
Improvements to other real estate owned ........................................... (43) (5,995) (2,318)
Purchase of equipment .............................................................. (579) (211) (159)
Proceeds from sale of building ..................................................... -- 96 --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities ......................... (17,417) 10,427 (12,299)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits ............................................... 8,528 19,512 (15,071)
Proceeds from issuance of borrowings
with maturities in excess of three months ...................................... 10,000 86,000 33,447
Repayment of borrowings with
maturities in excess of three months ........................................... (10,000) (116,000) (10,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities ......................... 8,528 (10,488) 8,376
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents ................................. (4,362) 2,430 1,586
Cash and cash equivalents at beginning of year ....................................... 12,581 10,151 8,565
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year ............................................. $ 8,219 $ 12,581 $ 10,151
====================================================================================================================================
Supplementary Cash Flow Information:
Interest paid on deposits ............................................................ $ 20,276 $ 19,187 $ 16,477
Interest paid on borrowed funds ...................................................... 2,142 3,978 2,619
Property acquired in settlement of loans ............................................. 3,078 7,492 5,440
</TABLE>
See accompanying notes to consolidated financial statements.
60
<PAGE>
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of presentation and consolidation
The consolidated financial statements include the accounts of Somerset
Savings Bank (the "Bank") and its wholly-owned subsidiaries, Somco Investment,
Inc., Somrock Corp., SSB Leeway Corp., Jerad Place II Development Corp. and
Chestco Corp.
On March 31, 1994, Somrock Corp. was dissolved. On June 2, 1995, SSB Leeway
Corp., Jerad Place II Development Corp. and Chestco Corp. were dissolved. The
dissolutions had no significant effect on the consolidated financial statements
of the Bank. All intercompany accounts and transactions have been eliminated in
consolidation.
Use of estimates
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
consolidated balance sheet date and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses, the
valuation of other real estate owned ("OREO") and the valuation of deferred tax
assets.
Business
The Bank provides a broad range of banking and related services to
individuals and small businesses through its five offices in eastern
Massachusetts. Its principal business consists of attracting deposits from the
general public and using such deposits to originate real estate, construction,
commercial and consumer loans.
Reclassification
Certain amounts previously reported have been reclassified to conform to
the current year's presentation.
Cash equivalents
Cash equivalents include amounts due from banks and interest-bearing
deposits in banks.
Investment securities
Debt securities are classified as held to maturity, as there is a positive
intent and ability to hold them to maturity, and are recorded at amortized cost.
Discounts and premiums relating to mortgage-backed securities are amortized
to income by the interest or straight-line method over the estimated terms of
the investments. Income using the straight-line method would not differ
materially if accounted for on the interest method. Discounts and premiums
relating to other investment securities are amortized to income by the interest
method over the terms of the investments. The investment in Savings Bank Life
Insurance stock is carried at cost, as there is no readily determinable fair
value. Gains and losses on the disposition of investment securities are recorded
on the trade date and computed by the specific identification method.
Loans
The Bank grants mortgage, commercial and consumer loans to customers located
primarily in eastern Massachusetts. The ability of the Bank's debtors to honor
their contracts is dependent upon the real estate and construction economic
sectors, as well as the economy in general.
Interest on loans is recognized on a simple interest basis. Unearned income
on loans consists primarily of net deferred loan fees and discounts resulting
from preferential financing terms on sales of OREO. Net deferred loan fees and
discounts on
61
<PAGE>
Notes to Consolidated Financial Statements - (Continued)
loans relating to sales of OREO are accreted on the interest method over the
contractual life of the loan. Interest on loans, including impaired loans, and
accretion of net deferred fees is not recognized when the collection of interest
or principal is ninety days or more past due, or earlier when in the judgment of
management collectibility of either principal or interest becomes doubtful. When
a loan is placed on nonaccrual status, all interest previously accrued but not
collected is reversed against current period interest income.
Allowance for loan losses
The adequacy of the allowance for loan losses is evaluated on a regular
basis by management. Factors considered in evaluating the adequacy of the
allowance include previous loss experience, current economic conditions and
their effect on borrowers, the performance of individual loans in relation to
contract terms, the risk characteristics of the loan portfolio and the estimated
fair value of collateral. Provisions for loan losses charged to operations are
based upon management's judgment, reflective of information available at the
time, of the amount necessary to maintain the allowance at a level adequate to
absorb reasonable foreseeable losses. Losses are charged against the allowance
when management believes the collectibility of the principal is unlikely.
Recoveries on loans previously charged-off are credited to the allowance. While
management believes the allowance to be adequate, it should be noted that it is
based on estimates and ultimate losses may vary from the estimates if future
conditions differ substantially from the assumptions used in making the
evaluation. It is possible that future events may result in additional
charge-offs or recoveries and changes in the level of the allowance for loan
losses. Further, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additional provisions to the
allowance based on judgments different from those of management.
The Bank adopted Statement of Financial Accounting Standards ("SFAS") No.
114, "Accounting by Creditors for Impairment of a Loan," on January 1, 1995.
Under this Statement, a loan is considered impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
the scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Impairment is measured on a loan by
loan basis by either the present value of expected future cash flows discounted
at the loan's effective interest rate, the loan's obtainable market price, or
the fair value of the collateral if the loan is collateral dependent.
Substantially all of the Bank's loans which have been identified as impaired
have been measured by the fair value of existing collateral.
The Statement is not applicable to large groups of smaller balance
homogeneous loans that are collectively evaluated for impairment. Accordingly,
the Bank has not applied SFAS No. 114 to its consumer loan portfolio.
SFAS No. 114 also limits the classification of loans as in-substance
foreclosures to situations where the creditor actually receives physical
possession of the debtor's assets. Accordingly, upon adoption of SFAS No. 114,
the Bank transferred loans previously classified as in-substance foreclosures in
the amount of $3,512,000 to its impaired loan portfolio and transferred $546,000
from the allowance for OREO losses to the allowance for loan losses.
The adoption of SFAS No. 114 had no effect on the Bank's assessment of the
overall adequacy of the allowance for loan losses. The restatement of previously
issued financial statements to conform with SFAS No. 114 was expressly
prohibited.
Other real estate owned
OREO is comprised of properties acquired through foreclosure proceedings or
acceptance of a deed in lieu of foreclosure and, prior to January 1, 1995,
properties considered repossessed in-substance. Upon the adoption of SFAS No.
114 on January 1, 1995, all in-substance foreclosed assets that were not in the
Bank's possession were reclassified to loans. Related loss allowances were also
reclassified. OREO is recorded at the lower of the carrying value of the loan or
the net fair value of the property received. Loan losses arising from the
acquisition of such properties are charged against the allowance for loan
losses. Costs relating to development and improvement of property are
capitalized, while operating expenses and any subsequent provisions to reduce
the carrying value to fair value less costs to sell are charged to current
period operations. Gains and losses upon disposition are reflected in operations
as realized.
62
<PAGE>
Notes to Consolidated Financial Statements - (Continued)
Losses resulting from preferential financing terms offered to facilitate
sales of OREO are recognized at the time of sale.
During the third quarter of 1994, management announced its intention to
accelerate the disposition of nonperforming assets and was actively considering
a bulk sale of certain OREO properties. As part of this plan, additional
provisions for OREO losses were established. Subsequently, management concluded
that it would be more economically advantageous to abandon the bulk sale and
instead dispose of such assets in separate transactions. The additional
provisions taken during the third quarter of 1994 were maintained to facilitate
accelerated sale transactions.
Land, buildings and equipment
Land is carried at cost. Buildings, leasehold improvements and equipment are
carried at cost, less accumulated depreciation and amortization computed on the
straight-line method over the estimated useful lives of the assets or the terms
of the leases, if shorter. It is the Bank's practice to charge the cost of
maintenance and repairs to operations when incurred; major expenditures for
improvements are capitalized and depreciated.
Income taxes
The Bank recognizes income taxes under the asset and liability method. Under
this method, deferred tax assets and liabilities are established for the
temporary differences between the accounting basis and the tax basis of the
Bank's assets and liabilities at enacted tax rates expected to be in effect when
the amounts related to such temporary differences are realized or settled. A
valuation allowance is established if, based upon available evidence, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.
Pension
The Bank accounts for pension plan benefits on the net periodic pension cost
method. This method recognizes the compensation cost of an employee's pension
benefit over the employee's approximate service period. Pension costs are funded
in the year of accrual using the aggregate cost method.
Employee stock ownership plan ("ESOP")
Compensation expense is recognized based on cash contributions paid or
committed to be paid to the ESOP. All shares held by the ESOP have been deemed
outstanding for purposes of earnings per share calculations. The value of
unearned compensation to be contributed to the ESOP for future services not yet
performed was reflected in stockholders' equity on the consolidated balance
sheet. Effective December 31, 1995, the Bank terminated the Employee Stock
Ownership Plan. Accordingly, the excess of the amount of ESOP debt payable to
the Bank, at that date, over the fair value of the unallocated shares held by
the ESOP was charged to additional paid-in capital.
Stock compensation plans
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." This Statement encourages all
entities to adopt a fair value based method of accounting for employee stock
compensation plans, whereby compensation cost is measured at the grant date
based on the value of the award and is recognized over the service period, which
is usually the vesting period. However, it also allows an entity to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees," whereby compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date (or other measurement date) over the
amount an employee must pay to acquire the stock. Stock options issued under the
Bank's stock option plan generally have no intrinsic value at the grant date,
and under Opinion No. 25 no compensation cost is recognized for them. The Bank
has elected to remain with the accounting in Opinion No. 25 and as a result,
must make pro forma disclosures of net income and earnings per share as if the
fair value based method of accounting had been applied. The disclosure
requirements of this Statement are effective for the Bank's consolidated
financial statements for the year ended December 31, 1996. The pro forma
disclosures include the effects of all awards granted on or after January 1,
1995. (See note 13.)
63
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
Interest-rate exchange agreements
Interest-rate exchange agreements (swaps) designated as hedges against
future fluctuations in the interest rates of specifically identified assets or
liabilities are accounted for on the same basis as the underlying asset or
liability, which is amortized cost. Net interest income (expense) resulting from
the differential between exchanging floating and fixed-rate interest payments is
recorded on a current basis in the interest income or expanse account related to
the asset or liability being hedged.
Earnings per share
Earnings per share computations are based on the weighted average number of
shares outstanding during each period. The dilutive effect of stock options
granted is not material.
2. Capital and Related Matters
The Bank is subject to various regulatory capital requirements administered
by the Federal Deposit Insurance Corporation ("FDIC"). 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 Bank's consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of its assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgements by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier 1 capital (as defined) to average and
risk-weighted assets (as defined).
In March 1991, the Bank consented to the issuance of a regulatory order (the
"Order") by the FDIC. On November 15, 1993, the FDIC issued, with the Bank's
consent, a Modification of the Order (the "Modification"). The Modification
required the Bank to have a ratio of Tier 1 leverage capital to total assets (a
"Tier 1 leverage capital ratio") of at least 6.0% by June 30, 1995. The Bank's
Tier I leverage capital ratio was 5.79% at December 31, 1996. As long as the
Order remains in effect, if the Bank's Tier 1 leverage capital ratio at the end
of a month is less that 6.0%, the Bank is required to submit to its regulators a
written plan for increasing its Tier I leverage capital ratio to at least 6.0%.
The Bank has submitted a revised capital/profit plan (the "1996 Capital Plan")
to the FDIC and the Massachusetts Division of Banks. The 1996 Capital Plan
contemplates that the Bank will increase its Tier 1 leverage capital ratio
solely through the accumulation of retained earnings and was approved by the
FDIC in 1996. The Bank currently expects that it will achieve a Tier 1 leverage
capital ratio of 6.0% during the second quarter of 1997. In accordance with the
Order, the Bank may not declare or pay dividends on its common stock without the
prior written consent of the FDIC and the Massachusetts Commissioner of Banks.
In addition to the regulatory consequences of falling below the respective
minimum capital levels set forth in the Order and in the FDIC regulations
generally applicable to state-chartered, FDIC-insured institutions such as the
Bank, Section 38 of the FDIA requires the FDIC to take prompt corrective
supervisory action against undercapitalized institutions. Enacted as part of the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
Section 38 specifies five capital categories ("well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized") that are used to determine the extent of
regulatory oversight that must be exercised. The restrictions become
increasingly more severe as an institution's capital category declines.
As of December 31, 1996, the most recent notification from the FDIC
categorized the Bank as adequately capitalized under the regulatory framework
for prompt corrective action. To be categorized as adequately capitalized, the
Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth in the following table. There are no conditions or
events since the notification that management believes have changed the Bank's
category. The Bank's actual capital amounts and ratios as of December 31, 1996
are also presented in the table.
64
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
<TABLE>
<CAPTION>
Minimum To Be
Adequately
For Minimum Capitalized Under
Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------- --------------------- ---------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk Weighted Assets: ........ $34,456 9.39% $29,359 8.0% $29,359 8.0%
Tier 1 Capital to Risk Weighted Assets ........ 29,848 8.13 14,680 4.0 14,680 4.0
Tier 1 Capital to Average Assets:
Generally .................................. 29,848 5.79 20,616 to 4.0 to 20,616 4.0
25,770 5.0
Per Order .................................. 29,848 5.79 30,924 6.0 N/A N/A
</TABLE>
The Bank's ability to achieve the steps generally contemplated by the 1996
Capital Plan to increase profits and capital is dependent on many factors,
including the continued resolution of its nonperforming assets and sustained
profitability. Failure to achieve the capital targets prescribed by the Order,
as amended by the Modification, or to be at least "adequately capitalized" for
purposes of Section 38 of the FDIA, exposes the Bank to further restrictions and
regulatory actions.
In connection with the Bank's 1993 Common Stock Offering, the Bank
transferred $33,897,000 from additional paid-in capital to retained deficit so
as to eliminate the accumulated deficit from the Bank's books, as of September
30, 1993. The transfer was approved by the Commissioner of Banks as required
under Massachusetts law.
3. Cash and Due From Banks
At December 31, 1996, cash and due from banks of $1,638,000 was utilized to
satisfy the reserve and compensating balance requirements of the Federal Reserve
Bank.
4. Investment Securities
The amortized cost and approximate fair value of investment securities with
gross unrealized gains and losses are as follows:
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Debt securities:
Federal agency obligations ............................. $ 4,996 $ 5 $ 22 $ 4,979
------- ------ ------- -------
Fixed rate mortgage-backed securities
Federal agency REMICS ................................ 27,100 40 744 26,396
Private issue REMICS ................................. 69 -- 3 66
------- ------ ------- -------
27,169 40 747 26,462
------- ------ ------- -------
Adjustable rate mortgage-backed securities
Federal agency REMICS ................................ 32,255 416 317 32,354
Federal agency pass-throughs ......................... 22,243 272 79 22,436
------- ------ ------- -------
54,498 688 396 54,790
------- ------ -------
Savings Bank Life Insurance stock ......................... 1,402 -- -- 1,402
------- ------ ------- -------
$88,065 $ 733 $ 1,165 $87,633
======= ====== ======= =======
</TABLE>
65
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
<TABLE>
<CAPTION>
December 31, 1995
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Debt securities:
Fixed rate mortgage-backed securities
Federal agency REMICS ................................. $28,316 $ 256 $ 230 $28,342
Private issue REMICS .................................. 192 2 1 193
------- ------- ------- -------
28,508 258 231 28,535
------- ------- ------- -------
Adjustable rate mortgage-backed securities
Federal agency REMICS ................................. 14,249 247 124 14,372
Federal agency pass-throughs .......................... 17,364 165 -- 17,529
Private issue pass-throughs ........................... 7 -- -- 7
------- ------- ------- -------
31,620 412 124 31,908
------- ------- ------- -------
Savings Bank Life Insurance stock .......................... 1,402 -- -- 1,402
------- ------- ------- -------
$61,530 $ 670 $ 355 $61,845
======= ======= ======= =======
</TABLE>
The amortized cost and approximate fair value of federal agency obligations by
contractual maturity follows. Actual maturities may differ from contractual
maturities because the issuers may have the right to call or repay obligations
with or without call or prepayment penalties.
December 31, 1966
-------------------------
Amortized Fair
Cost Value
-------------------------
(In Thousands)
Over 1 to 5 years ................... $ 996 $1,000
Over 5 to 10 years .................. 4,000 3,979
------ ------
$4,996 $4,979
====== ======
Substantially all of the Bank's mortgage-backed securities have contractual
maturities in excess of 10 years based upon the maturity of the final scheduled
payment. Such securities generally amortize on a regular basis, predominantly
monthly, and are subject to prepayment. Taking into account such contractual
amortization and expected prepayments, a significant amount of principal
reduction will occur within five years.
There is no readily determinable fair value for Savings Bank Life Insurance
stock because of ownership restrictions relating to the stock. Management
believes that the carrying value is equivalent to the fair value.
Mortgage-backed securities with carrying values of $2,697,000 at December
31, 1996 were pledged as collateral against treasury tax and loan deposits and
interest-rate exchange agreements.
66
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
5. Loans
The composition of the loan portfolio at the dates indicated is as
follows:
December 31,
------------------------
1996 1995
------------------------
(In Thousands)
Real estate loans:
Residential ..................................... $ 150,353 $ 155,180
Construction .................................... 35,267 24,499
Commercial ...................................... 192,569 201,266
Second mortgages and equity lines ............... 6,250 5,576
--------- ---------
Total principal balances .................... 384,439 386,521
Less: Due to borrowers on incomplete loans ...... (12,045) (6,600)
Unearned income ............................. (2,277) (2,960)
--------- ---------
Total real estate loans .................. 370,117 376,961
--------- ---------
Commercial loans:
Secured ......................................... 19,414 20,942
Unsecured ....................................... 1,286 1,482
--------- ---------
Total principal balances .................... 20,700 22,425
--------- ---------
Less: Unearned income ........................... (241) (221)
--------- ---------
Total commercial loans ................... 20,459 22,204
--------- ---------
Other loans:
Consumer ........................................ 2,668 2,942
Passbook ........................................ 1,712 1,773
--------- ---------
Total other loans ........................... 4,380 4,715
--------- ---------
Total loans .............................. 394,956 403,880
Less: Allowance for loan losses ................. (6,236) (7,136)
--------- ---------
$ 388,720 $ 396,744
========= =========
At December 31, 1996 and 1995, loans owned by others and serviced by the
Bank amounted to approximately $16,752,000 and $12,714,000, respectively, and
are not included in the accompanying consolidated financial statements.
The following is a summary of the recorded investment in impaired loans
(see note 1):
December 31,
------------------------
1996 1995
------------------------
(In Thousands)
Loans with no valuation allowance ...................... $ 9,702 $11,557
Loans with a corresponding valuation allowance ......... 1,796 2,010
------- -------
Total impaired loans ................................... $11,498 $13,567
======= =======
Corresponding valuation allowance ...................... $ 384 $ 392
======= =======
At December 31, 1996 and 1995, no additional funds were committed to be
advanced in connection with impaired loans.
67
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
At December 31, 1996 and 1995, unpaired loans totaling $5,524,000 and
$3,996,000, respectively were on nonaccrual status. Impaired loans totaling
$3,798,000 and $7,863,000 at December 31, 1996 and 1995, respectively, are
classified as restructured loans and are included in the restructured loan
totals below. For the years ended December 31, 1996 and 1995, the average
recorded investment in impaired loans amounted to $12,904,000 and $10,910,000,
respectively. The Bank recognized $646,000 and $349,000, respectively, of
interest income on impaired loans during the period that they were impaired.
At December 31, 1996 and 1995, nonaccrual loans amounted to $6,203,000 and
$4,742,000, respectively.
At December 31, 1996 and 1995, restructured loans on accrual status amounted
to $19,137,000 and $35,336,000, respectively. Interest income that would have
been recorded under the original terms of these loans compared to the interest
income actually recognized is as follows:
Years Ended December 31,
------------------------
1996 1995 1994
------------------------
(In Thousands)
Interest income that would have been recorded ..... $2,153 $3,732 $3,417
Interest income recognized ........................ 1,523 2,434 2,093
------ ------ ------
Interest income forgone ........................... $ 630 $1,298 $1,324
====== ====== ======
An analysis of the allowance for loan losses is as follows:
Years Ended December 31,
------------------------
1996 1995 1994
------------------------
(In Thousands)
Balance at beginning of year ..................... $ 7,136 $ 8,121 $ 8,254
Provision for loan losses ........................ 1,200 1,200 1,800
Recoveries ....................................... 949 720 624
------- ------- -------
9,285 10,041 10,678
Loans charged-off ................................ (3,049) (3,451) (2,557)
Transfer from allowance for OREO losses
upon adoption of SFAS No. 114 (see note 1) .. -- 546 --
------- ------- -------
Balance at end of year ...................... $ 6,236 $ 7,136 $ 8,121
======= ======= =======
68
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
6. Other Real Estate Owned
A summary of OREO is as follows:
December 31,
----------------------
1996 1995
----------------------
(In Thousands)
Raw land and construction projects ............... $ 5,719 $ 6,878
One to four family residential property .......... 150 549
Residential condominiums ......................... 543 --
Commercial condominiums .......................... -- 1,278
Other commercial property ........................ 5,343 6,998
-------- --------
11,755 15,703
Deposits received ................................ (18) (15)
Allowance for losses ............................. (2,827) (4,192)
-------- --------
$ 8,910 $ 11,496
======== ========
An analysis of the allowance for losses on OREO is as follows:
Years Ended December 31,
------------------------------
1996 1995 1994
------------------------------
(In Thousands)
Balance at beginning of year .................. $ 4,192 $ 7,823 $ --
Provision for losses .......................... 900 2,775 9,211
Losses charged to the allowance ............... (2,265) (5,860) (1,388)
Transfer to allowance for loan losses
upon adoption of SFAS No. 114 (note 1) ...... -- (546) --
------- ------- -------
Balance at end of year ........................ $ 2,827 $ 4,192 $ 7,823
======= ======= =======
An analysis of the net loss on OREO is as follows:
Years Ended December 31,
----------------------------------
1996 1995 1994
----------------------------------
(In Thousands)
Provision for losses ................... $ 900 $ 2,775 $9,211
Net loss (gain) on sales ............... (45) (518) 59
------ ------- ------
$ 855 $ 2,257 $9,270
====== ======= ======
Included in the net loss are interest rate losses resulting from
preferential financing terms offered to facilitate sales of OREO. For the years
ended December 31, 1996, 1995 and 1994, interest rate losses totaled $56,000,
$1,665,000 and $887,000, respectively. Accretion of these amounts included in
interest income amounted to $828,000, $927,000 and $686,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
69
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
7. Land, Buildings and Equipment
A summary of the cost and accumulated depreciation and amortization of land,
buildings and equipment and their estimated useful lives is as follows:
<TABLE>
<CAPTION>
December 31, Estimated
-------------- Useful
1996 1995 Lives
-------------- ---------
(In Thousands)
<S> <C> <C> <C>
Land ............................................... $ 2,430 $ 2,430 --
Buildings .......................................... 11,989 11,913 5-50 years
Leasehold improvements ............................. 544 544 3-10 years
Equipment .......................................... 2,596 2,093 3-10 years
-------- -------
17,559 16,980
Less: Accumulated depreciation and amortization .... (4,984) (4,359)
-------- -------
$ 12,575 $12,621
======== =======
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1996,
1995 and 1994 amounted to $625,000, $600,000 and $654,000, respectively.
8. Deposits
A summary of deposit balances, by type, is as follows:
Years Ended December 31,
------------------------
1996 1995
------------------------
(In Thousands)
Demand deposits .............................. 18,967 $ 16,274
-------- --------
NOW accounts ................................. 25,142 25,273
Money market deposits ........................ 44,463 46,501
Regular and other ............................ 69,719 71,861
-------- --------
Total savings deposits ................... 139,324 143,635
-------- --------
Term certificates ............................ 284,244 274,098
-------- --------
$442,535 $434,007
======== ========
70
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
A summary of certificate accounts by maturity, is as follows:
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------------------------
Under $100,000 Over $100,000 Total
-----------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
--------------------- ----------------------- ----------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Within one year ...... $130,672 5.6% $27,520 5.5% $158,192 5.6%
One to two years ..... 49,083 6.0 6,047 6.1 55,130 6.0
Two to three years ... 31,448 5.9 7,559 6.0 39,007 5.9
Over three years ..... 24,389 6.7 7,526 6.7 31,915 6.7
-------- ------- --------
$235,592 5.8 $48,652 5.8 $284,244 5.8
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------------------------------------------
Under $100,000 Over $100,000 Total
-----------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
--------------------- ----------------------- ----------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Within one year ...... $132,342 5.7% $19,469 5.6% $151,811 5.7%
One to two years ..... 44,913 6.0 5,801 6.0 50,714 6.0
Two to three years ... 26,913 6.3 3,188 6.5 30,101 6.3
Over three years ..... 33,263 6.7 8,209 6.7 41,472 6.7
-------- ------- --------
$237,431 6.0 $36,667 6.0 $274,098 6.0
======== ======= ========
</TABLE>
9. Borrowed Funds and Interest-Rate Exchange Agreement
Borrowings consist of the following advances from the Federal Home Loan Bank
of Boston ("FHLBB"):
<TABLE>
<CAPTION>
Interest December 31,
Maturity Date Rate 1996 1995
------------------------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Short-term borrowings:
February 23, 1996 ............ 5.80% $ -- $ 5,000
------- --------
Long-term borrowings:
October 17, 2000 (1)(2) ...... 5.49 20,000 20,000
October 24, 2000 (1) ......... 5.48 10,000 15,000
October 2, 2001 (1) .......... 5.53 10,000 --
December 1, 2014 ............. 5.42 447 447
------- --------
40,447 35,447
------- --------
$40,447 $ 40,447
======= ========
</TABLE>
(1) Interest rate adjusts quarterly.
(2) The Bank has entered into an interest-rate exchange agreement with a
notional amount of $20,000,000 that matures on October 17, 2000.
This agreement effectively converts this advance from the FHLBB to a
fixed-rated instrument with an interest rate of 6.035%.
71
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
The Bank has an available line of credit of $10,295,000 with the FHLBB at an
interest rate that adjusts daily. At December 31, 1996 and 1995, no borrowings
were outstanding under this line of credit.
All borrowings from the FHLBB are secured by certain qualified collateral. At
December 31, 1996, the Bank had qualified collateral listed with the FHLBB
consisting of residential mortgage loans and mortgage-backed securities totaling
$146,900,000 representing a maximum borrowing capacity of approximately
$119,000,000.
10. Income Taxes
The allocation of federal and state income taxes is as follows:
Years Ended December 31,
----------------------------
1996 1995 1994
----------------------------
(In Thousands)
Current tax provision:
Federal ..................................... $ -- $ -- $ --
State ....................................... 10 -- 7
------- ------- ----
10 -- 7
------- ------- ----
Deferred:
Federal ..................................... 838 -- --
State ....................................... 110 -- --
------- ------- ----
948 -- --
------- ------- ----
Reversal of valuation reserve
due to anticipation of future income ...... (1,398) (1,000) --
------- ------- ----
$ (440) $(1,000) $ 7
======= ======= ====
The reasons for the differences between the statutory federal income tax rate
of 34% and the effective tax rates are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1996 1995 1994
------------------------------
(In Thousands)
<S> <C> <C> <C>
Tax at statutory rate of 34% ............................ $ 807 $ 27 $(2,834)
Increase (decrease) resulting from:
State income tax, net of federal benefit ........... (158) (127) --
Change in valuation allowance - net of reduction
of carryforwards due to change in control ........ (1,077) (904) 2,850
Other, net ......................................... (12) 4 (9)
------- ------- -------
Income tax provision (benefit) .......................... $ (440) $(1,000) $ 7
======= ======= =======
</TABLE>
72
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
Deferred income taxes relating to temporary differences between the financial
reporting basis and the tax basis of the Bank's assets and liabilities are as
follows:
December 31,
------------------
1996 1995
------------------
(In Thousands)
Deferred tax assets:
Allowance for loan losses ..................... $ 3,593 $ 3,320
Writedowns and capitalized expenses on OREO ... 3,763 4,487
Net operating loss carryforward ............... 2,988 2,626
Deferred loss on below market rate loans ...... 501 816
Alternative minimum tax credit carryforward ... 294 294
Other ......................................... 357 432
-------- --------
Gross deferred assets ....................... 11,496 11,975
Valuation allowance .............................. (10,046) (10,975)
-------- --------
Net deferred tax asset ........................... $ 1,450 $ 1,000
======== ========
A valuation allowance is established when it is more likely than not that
some portion of the deferred income tax asset will not be realized. As of
December 31, 1994, management established a valuation allowance for almost all
of the net operating loss and tax credit carryforwards. At December 31, 1996,
the Bank anticipates that future taxable income will be realized to allow the
recognition of $1,450,000 of such benefits.
A summary of the activity in the valuation allowance applicable to the net
deferred tax asset is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1996 1995 1994
----------------------------------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year ................................ $ 10,975 $ 12,653 $ 9,337
Change in assumptions due to anticipation of future income .. (1,398) (1,031) --
Benefits created from current year's operations ............. 554 -- 3,685
Benefits forfeited during the year .......................... (85) (647) (369)
-------- -------- --------
Balance at end of year ...................................... $ 10,046 $ 10,975 $ 12,653
======== ======== ========
</TABLE>
The Bank has included, as a potential asset, a benefit of $513,000 for the
forgiveness from taxation of its "thrift status tax bad debt reserve" as of its
1987 base year as a result of its interpretation of tax legislation signed into
federal law in August 1996. All of this potential benefit has been fully
reserved against and is reflected in the analysis of the valuation reserve as
benefits created from the current year's operations.
As of December 31, 1996, the Bank had a net operating loss carryforward for
federal tax purposes of $28,300,000 expiring as follows: $13,900,000, 1997;
$5,200,000, 2007; $4,000,000, 2008 and $200,000 in 2009 and $5,000,000 in 2010.
Tax credit carryforwards of approximately $1,100,000 expire in years 2004
through 2010. Alternative minimum tax credit carryforwards of $294,000 have no
expiration date and are available to offset regular tax.
The Bank's 1993 Common Stock Offering resulted in a "change in control" for
income tax purposes. As a result, the net operating loss and tax credit
carryforwards are limited so that only $177,000 per year can be utilized to
offset taxable income generated during the years in the carryforward period
which expires in 2008. Accordingly, approximately $19,500,000 of such loss
carryforwards and nearly all of the tax credit carryforwards are expected to be
lost as a result of the 1993 Offering. The preceding table of gross deferred tax
asset items at December 31, 1996 and 1995 reflects the reduction in the
available carryforwards due to the change in control.
73
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
11. Commitments and Contingencies
Employment and special termination agreement
The Bank has entered into a five-year employment agreement with the
President providing for specified minimum annual compensation and the
continuation of benefits currently received, The agreement is automatically
extended on each anniversary date for successive five-year periods unless notice
is given prior to the anniversary date. However, such employment may be
terminated for cause, as defined, without incurring any continuing obligations.
The agreement provides for certain lump-sum severance payments within a
three-year period following a "change in control" of the Bank, as defined in the
agreement.
Financial instruments with off-balance sheet risk
The Bank is a 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 extend credit, standby letters of credit and
interest-rate exchange agreements. Such instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the accompanying consolidated balance sheets. The contract and notional amounts
of these instruments reflect the extent of involvement the Bank has in these
particular classes of financial instruments.
For commitments to extend credit and standby letters of credit, the Bank's
exposure to credit loss is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. For
interest-rate exchange agreements, the notional amounts do not represent
exposure to credit loss. The Bank's credit exposure on these agreements is
limited to the value of interest-rate exchange agreements that have become
favorable to the Bank.
The following financial instruments were outstanding at the dates indicated:
<TABLE>
<CAPTION>
Contract or Notional Amount
---------------------------
December 31,
---------------------------
1996 1995
------------ ------------
(In Thousands)
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Unadvanced funds on construction loans ........................................ $12,045 $ 6,600
Commitments to grant loans .................................................... 15,863 4,255
Unadvanced funds on lines of credit ........................................... 10,385 8,163
Standby letters of credit and other guarantees ................................ 1,211 909
Financial instruments whose notional amount exceeds the amount of credit risk:
Interest-rate exchange agreement ............................................. 20,000 20,000
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and typically
require payment of a fee. The commitments for lines of credit may expire without
being drawn upon, and therefore, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case by case basis. Funds disbursed under these financial
instruments, except for certain commercial loans and commercial lines of credit,
are collateralized by real estate and other business assets.
Standby letters of credit and other guarantees are conditional commitments
issued by the Bank to guarantee the performance of a customer to a third party.
These agreements are primarily issued to support borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Other guarantees are
generally collateralized by deposits held by the Bank. Unsecured letters of
credit amounted to $211,000, and $111,000 at December 31, 1996 and 1995,
respectively.
74
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
Interest-rate exchange agreements are used by the Bank in the management of
interest-rate risk. These instruments are currently used to manage interest rate
exposure on borrowed funds, and are not used for speculative purposes. The Bank
controls the credit risk of such agreements through credit approval and
monitoring procedures.
Lease commitments
Pursuant to the terms of non-cancelable lease agreements in effect at
December 31, 1996, future minimum rent commitments aggregate $260,000 through
2001. Certain leases contain options to extend for periods of five years as well
as real estate tax escalation clauses. These costs are not included above. Rent
expense for the years ended December 31, 1996, 1995 and 1994 amounted to
$131,000, $127,000 and $118,000, respectively.
Minimum future rental income
Pursuant to the terms of a non-cancelable lease agreement, the Bank is
committed to lease a portion of its office space to an unrelated third party for
a term which expires July 31, 1999. Minimum rental income, arising from this
agreement, for the years ended December 31, 1997, 1998 and 1999 amounts to
$243,000, $247,000 and $144,000, respectively.
The lease contains an option to extend for a period of ten years and
requires reimbursement for real estate tax increases. The income from this
option and reimbursement is not included above. Rental income for the years
ended December 31, 1996, 1995 and 1994, amounted to $294,000, $269,000 and
$235,000, respectively.
Contingencies
In the ordinary course of business, various legal claims are made against
the Bank from time to time, and, in the opinion of management, none of these
claims pending or threatened as of December 31, 1996 will have a material effect
on the Bank's consolidated financial position.
12. Employee Benefit Plans
Pension plan
The Bank provides basic and supplemental pension benefits for eligible
employees through the Savings Banks Employees Retirement Association's ("SBERA")
Pension Plan. Each employee reaching the age of 21 and having completed at least
1,000 hours of service in the previous twelve-month period beginning with such
employee's date of employment automatically becomes a participant in the
retirement plan. All participants are fully vested upon the completion of three
years of service or at age 62, if earlier.
Net pension expense 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 ...... $ 431 $ 327 $ 263
Interest cost on projected benefits ........... 336 341 221
Actual return on plan assets .................. (598) (704) (213)
Net amortization and deferral ................. (13) (13) (13)
Amortization of net loss (gain) ............... 288 407 (136)
----- ----- -----
$ 444 $ 358 $ 122
===== ===== =====
Total pension expense for the years ended December 31, 1996, 1995 and 1994
amounted to $447,000, $475,000 and $153,000, respectively.
75
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
According to SBERA's actuary, the funded status of the plan at October 31,
1996 and 1995 (the dates as of which information is available) is as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------
(In Thousands)
<S> <C> <C>
Plan assets at fair value .................................... $ 4,575 $ 3,962
Actuarial present value of projected benefit obligation ...... 4,891 4,797
------- -------
Deficiency of plan assets over projected benefit obligation .. (316) (835)
Unrecognized net surplus since adoption of SFAS No. 87 ....... (145) (158)
Unrecognized net loss (gain) ................................. (674) 173
------- -------
Accrued pension cost ......................................... $(1,135) $ (820)
======= =======
</TABLE>
The accumulated benefit obligation at October 31, 1996 amounted to
$3,070,000, which was less than the fair value of plan assets at that date. Of
this amount, $3,048,000 is vested and $22,000 is non-vested.
Actuarial assumptions used to calculate the projected benefit obligation
were as follows:
October 31,
------------------------------
1996 1995 1994
------ ------ ------
Discount rate .............................. 7.50% 7.00% 8.00%
Expected long-term rate of return .......... 8.00 8.00 8.60
Annual salary increases .................... 6.00 6.00 6.00
401(k) plan
In 1995, the Bank adopted a 401(k) savings plan that provides for voluntary
contributions by eligible employees ranging from one to fifteen percent of their
compensation, subject to certain limitations. Each employee reaching the age of
21 and having completed one year of service is eligible to participate in the
plan. Under the terms of the plan, the Bank may at its discretion, match a
percentage of the employees' contributions. The Bank's matching contribution is
determined on an annual basis and all Bank contributions will be used to
purchase the Bank's common stock. For the years ended December 31, 1996 and
1995, the Bank made matching contributions totaling $165,000 and $0,
respectively to the plan.
Supplemental compensation agreements
The former Chairman of the Board and the President have entered into
supplemental compensation agreements with the Bank that provide for payments
upon attaining age 62 and are subject to certain limitation as set forth in the
agreements. The present value of these future payments is provided for over the
terms of employment. The expense associated with these agreements totaled
$18,000 for each of the years ended December 31, 1996, 1995 and 1994.
13. Stock Option Plans
The Bank has 1,009,000 shares of Common Stock reserved for the benefit of
directors and certain senior employees under the Amended and Restated 1986
Incentive Stock Option Plan and the 1995 Equity Incentive Plan. Both incentive
stock options and non-qualified stock options may be granted with a maximum
option term of ten years. The Bank's 1995 Equity Incentive Plan also provides
for stock appreciation rights, performance stock units, restricted stock, stock
units, book value awards.
76
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
The Bank applies APB Opinion 25 and related Interpretations in accounting
for the plans. Accordingly, compensation cost has been recognized to the extent
that the quoted market price of the common stock at the date of grant exceeds
the amount that the employee is required to pay. Had compensation cost for the
Bank's stock-based compensation plans been determined based on the fair value at
the grant dates consistent with the method prescribed by SFAS No. 123, the
Bank's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
Years Ended December 31,
------------------------
1996 1995
-------- ---------
(In Thousands
Except Per Share Data)
Net income As reported ................. $ 2,813 $ 1,078
Pro forma ................... 2,744 1,030
Earnings per share As reported ................. $ 0.17 $ 0.06
Pro forma ................... 0.16 0.06
Stock option activity is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------
1996 1995 1994
------------------- ------------------ -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Shares under option:
Outstanding at beginning of period .. 251,750 $ 1.25 48,000 $32.71 48,000 $32.71
Granted ............................. -- -- 251,750 1.25 -- --
Canceled ............................ -- -- (48,000) $32.71 -- --
------- ------- ------
Outstanding at end of period ........ 251,750 1.25 251,750 1.25 48,000 32.71
------- ------- ------
Exercisable at end of period ........ 50,350 1.00 -- -- 48,000 32.71
======= ======= ======
Weighted average fair value
of options granted during the year .. $ -- $ 0.89 $ --
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1995: dividend yield of 0.0 percent, expected
volatility of 58%, risk-free interest rate of 7.42% and expected lives of 6
years.
77
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
Information pertaining to options outstanding at December 31, 1996 is as
follows:
Options Options
Outstanding Exercisable
----------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
- --------- ----------- ----------- -------- ----------- --------
$1.00 83,959 4.2 years $1.00 50,350 $1.00
1.25 83,958 4.2 years 1.25 - -
1.50 83,833 4.2 years 1.50 - -
------- ------
251,750 4.2 years 1.25 50,350 1.00
======= ======
14. Employee Stock Ownership Plan
In 1986, the Bank established an Employee Stock Ownership Plan and Trust
("ESOP") for the benefit of each employee that has reached the age of 21 and has
completed at least 1,000 hours of service. Effective December 31, 1995, the Bank
terminated the Plan.
The Bank had contributed to the Plan for each Plan year an amount determined
by the Bank in its discretion and had generally made contributions to the ESOP
based on the debt service requirements of the loans payable by the ESOP to the
Bank. Participants could also elect to make contributions to the Plan on an
after-tax basis in an amount from 1% to 10% of compensation. The Bank matched
participation contributions up to 5% of compensation.
Shares purchased with loan proceeds were held in a suspense account and
released for allocation to participants as the loans were repaid. The ESOP had
not acquired any unallocated shares since 1989.
At December 31, 1995, shares held by the ESOP were as follows:
Allocated ................................................ 131,490
Committed to be allocated ................................ 2,215
Unallocated .............................................. 60,780
-------
194,485
=======
Upon termination of the ESOP, participants became fully vested in the
allocated shares held by the ESOP. As of December 31, 1995, the market value of
the unallocated shares, which were sold in the open market during 1996, was
approximately $82,000 and loans by the ESOP payable to the Bank amounted to
$2,327,000. As a result, the Bank transferred the difference of $2,245,000 from
Unearned compensation - ESOP to Additional paid-in capital to reflect the
termination of the ESOP.
Total ESOP compensation expense amounted to $175,000 and $516,000 for the
years ended December 31, 1995 and 1994, respectively.
15. Related Party Transactions
In the ordinary course of business, the Bank has granted loans to its
executive officers and Directors amid their affiliates. The aggregate amount of
such loans which exceeded $60,000 in aggregate outstanding to any one individual
amounted to $1,429,000 and $1,463,000 at December 31, 1996 and 1995,
respectively. During the year ended December 31, 1996, total principal
additions were $4,000 and total principal reductions were $38,000.
78
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
16. Fair Values of Financial Instruments
The following disclosure of the estimated fair values of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by using available quoted market information
or other valuation methodologies permitted under SFAS No. 107.
The fair value estimates provided are made at a specific point in time,
based on relevant market information and the characteristics of the financial
instrument. The estimates do not provide for any premiums or discounts that
could result from concentrations of ownership of financial instruments. Certain
fair value estimates are based on subjective judgments regarding current
economic conditions, risk characteristics of the financial instruments, future
expected loss experience, prepayment assumptions, and other factors. The
resulting estimates involve uncertainties and therefore cannot be determined
with precision. Changes made to any of the underlying assumptions could
significantly affect the estimates.
The estimated fair values, and related carrying or notional amounts, of the
Bank's financial instruments are as follows:
December 31, 1996 December 31, 1995
------------------ -------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------------ -------------------
(In Thousands)
Assets:
Cash and cash equivalents ...... $8,219 $8,219 $12,581 $12,581
Investment securities .......... 88,065 87,633 61,530 61,845
Federal Home Loan Bank stock ... 4,422 4,422 4,422 4,422
Loans, net ..................... 388,720 390,966 396,744 389,445
Accrued interest receivable .... 3,048 3,048 3,014 3,014
Liabilities:
Deposits ....................... 442,535 443,620 434,007 435,488
Borrowed funds ................. 40,447 39,754 40,447 40,428
Accrued interest payable ....... 1,737 1,737 1,827 1,827
<TABLE>
<CAPTION>
Contractual Contractual
or Notional Fair or Notional Fair
Amount Value Amount Value
-------------------------------------------------
<S> <C> <C> <C> <C>
Off-balance sheet financial instruments:
Commitments to extend credit ........ $39,504 $ -- $19,927 $ --
Interest-rate exchange agreement .... 20,000 119 20,000 (440)
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
fair value.
Cash and cash equivalents
The carrying values for cash and cash equivalents approximate fair value
because of the short-term maturity of these instruments.
Investment securities
The fair values presented for investment securities are based on quoted bid
prices received from securities dealers. The fair value of restricted equity
securities approximates carrying value.
79
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
Loans
Fair value estimates are based on loans with similar financial
characteristics. Loans have been segregated by homogeneous groups for
calculation purposes and presented as single line items for disclosure purposes.
Fair value estimates are estimated by discounting contractual cash flows
adjusted for prepayment estimates and using discount rates approximately equal
to current market rates on loans with similar characteristics and maturities.
The fair value of nonaccrual loans was estimated using the estimated fair values
of the underlying collateral.
Federal Home Loan Bank stock
The carrying value for Federal Home Loan Bank stock approximates fair value.
If redeemed, the Bank will receive an amount equal to the par value of the
stock.
Accrued interest receivable and payable
The carrying values for accrued interest receivable and payable approximate
fair value because of the short-term nature of these financial instruments.
Deposits
The fair values reported for regular, demand, NOW, and money market accounts
are equal to their respective carrying values. The fair values disclosed are, by
definition, equal to the amount payable on demand at the reporting date. The
fair values reported for term certificates are based upon the discounted value
of contractual cash flows. The discount rates are representative of approximate
rates currently offered on term certificates with similar remaining maturities.
Borrowed funds
The value of borrowed funds is estimated by discounting the contractual cash
flows at rates currently available to the Bank for debt with similar terms and
maturities.
Commitments
The Bank's commitments for unused lines of credit, unadvanced construction
loans, and loan commitments are primarily at floating rates and, accordingly
fair value is immaterial.
Financial instruments
The fair value reported for the interest-rate exchange agreement is based on
a dealer quote.
80
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
17. Quarterly Data (Unaudited)
Summaries of consolidated operating results on a quarterly basis are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1996 Year Ended December 31, 1995
------------------------------------------ ----------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and dividend income ............ $10,425 $10,241 $ 10,152 $10,040 $ 10,134 $10,372 $10,123 $9,807
Interest expense ........................ 5,645 5,579 5,499 5,605 5,703 5,886 5,818 5,366
------- ------- -------- ------- -------- ------- ------- ------
Net interest income ..................... 4,780 4,662 4,653 4,435 4,431 4,486 4,305 4,441
Provision for loan losses ............... 300 300 300 300 300 300 300 300
------- ------- -------- ------- -------- ------- ------- ------
Net interest income after provision
for loan losses ....................... 4,480 4,362 4,353 4,135 4,131 4,186 4,005 4,141
------- ------- -------- ------- -------- ------- ------- ------
Other income ............................ 310 273 250 224 276 262 311 207
Net loss on OREO ........................ 225 198 217 215 1,314 349 320 274
Operating expenses ...................... 3,754 3,820 3,852 3,733 3,686 3,761 3,790 3,947
------- ------- -------- ------- -------- ------- ------- ------
Income (loss) before income taxes ....... 811 617 534 411 (593) 338 206 127
Income taxes (1) ........................ -- 10 (100) (350) (1,000) -- -- --
------- ------- -------- ------- -------- ------- ------- ------
Net Income .............................. $ 811 $ 607 $ 634 $ 761 $ 407 $ 338 $ 206 $ 127
======= ======= ======== ======= ======== ======= ======= ======
Net income per share .................... $ 0.05 $ 0.04 $ 0.04 $ 0.05 $ 0.02 $ 0.02 $ 0.01 $ 0.01
======= ======= ======== ======= ======== ======= ======= ======
</TABLE>
Quarterly per share amounts may not total to the full year due to
rounding.
(1) Refer to "Management's Discussion and Analysis -- Results of
Operations -- Provision for Income Taxes" for a discussion regarding
the income tax benefit recognized in 1996 and 1995.
81
<PAGE>
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
ASSETS
Cash and due from banks $15,979 $11,331
Federal funds sold and overnight deposits 4,584 4,464
Investment securities - held to maturity
(market value $190,230 and $173,372
at September 30, 1997 and December 31, 1996,
respectively) 188,115 173,510
Investment securities - available for sale
(amortized cost $176,151 and $160,395
at September 30, 1997 and December 31, 1996,
respectively) 177,168 159,844
Loans held for sale 944 -
Loans receivable - net of allowance for
possible loan losses of $8,381 and $7,759
at September 30, 1997 and December 31, 1996,
respectively 699,554 645,797
Federal Home Loan Bank stock - at cost 16,162 14,638
Other real estate owned, net 1 133
Accrued interest receivable 7,968 7,124
Office properties and equipment, net 8,790 8,428
Deferred tax asset, net 2,924 3,405
Other assets 6390 3,539
---------- -----------
Total assets $1,128,579 $1,032,213
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 702,994 $ 652,509
Federal Home Loan Bank advances 301,971 267,171
ESOP debt 1,127 1,394
Mortgagors' escrow payments 2,440 2,087
Securities sold under agreements to repurchase 3,032 727
Other 6,857 6,923
---------- ----------
Total liabilities 1,018,421 930,811
---------- ----------
Stockholders' Equity (Note 4):
Preferred stock, $0.01 Par Value; 2,000,000
shares authorized, none issued
Common stock, $0.01 Par Value; 18,000,000
shares authorized; shares issued 6,740,109
in 1997 and 6,683,957 in 1996 67 66
Additional paid-in capital 50,040 49,146
Retained earnings - restricted 64,055 57,518
Treasury stock at cost, 247,500 shares (3,402) (3,402)
Unearned compensation - ESOP (1,108) (1,394)
Unrealized gain (loss) on investment
securities, net of tax effects 506 (532)
Total stockholders' equity 101,158 101,402
---------- ----------
Total liabilities and stockholders' equity $l,128,579 $1,032,213
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
82
<PAGE>
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share data)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
(Unaudited) (Unaudited)
Interest and dividend income:
Interest and fees on loans $14,370 $12,498 $41,879 $35,586
Interest and dividend income
on investment securities 6,300 5,704 18,242 16,617
Interest on federal funds sold
and overnight deposits 70 78 162 200
------- ------- ------- -------
Total interest and dividend income 20,740 18,280 60,283 52,403
------- ------- ------- -------
Interest expense:
Interest on deposits 7,114 6,577 20,847 18,988
Interest on borrowed funds 4,710 3,724 13,067 10,389
------- ------ ------- ------
Total interest expense 11,824 10,301 33,914 29,377
------- ------ ------- ------
Net interest income 8,916 7,979 26,369 23,026
Provision for possible loan losses 250 135 700 405
------- ------ ------- -------
Net interest income after provision
for possible loan losses 8,666 7,844 25,669 22,621
------- ------ ------- -------
Noninterest income:
Mortgage loan servicing fees 64 63 198 225
Customer service fees and other 346 312 1,078 948
Gain on sales of securities, net 90 - 97 -
Gain on sales of loans, net 62 29 85 86
------- ------- ------- -------
Total non-interest income 562 404 1,458 1,259
------- ------- ------- -------
Non-interest expenses:
Compensation and employee benefits 2,714 2,308 7,783 6,863
Occupancy and equipment 618 552 1,708 1,562
Data processing 275 205 764 619
Professional services 159 169 439 538
Federal Deposit Insurance premiums 66 2,318 198 2,707
Other real estate owned (income)
expenses, net (17) 25 (141) 164
Marketing and promotion 210 132 541 435
Other 515 658 1754 1,902
------- ------- ------- -------
Total non-interest expenses 4,540 6,367 13,046 14,790
------- ------- ------- -------
Income before provision for income taxes 4,688 1,881 14,081 9,090
Provision for income taxes 1,739 579 5,253 3,266
------- ------- ------- -------
Net Income $2,949 $1,302 $8,828 $5,824
======= ======= ======= =======
Earnings per share (Note 4):
Primary $0.44 $0.20 $1.33 $0.90
======= ======= ======= =======
Fully diluted $0.43 $0.20 $1.32 $0.90
======= ======= ======= =======
Weighted average shares outstanding:
Primary 6,682 6,460 6,623 6,450
======= ======= ======= =======
Fully diluted 6,706 6,482 6,679 6,496
======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
83
<PAGE>
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTE 4)
For the Nine Months Ended September 30, 1997 and 1996
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Net Unrealized
Additional Unearned Gain (Loss) on
Common Paid-in Treasury Retained Compensation- Investment
Stock Capital Stock Earnings ESOP Securities Total
------ ------- -------- -------- ------------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $66 $48,250 $ - $51,563 ($679) $90 $99,290
Net income - - - 5,824 - - 5,824
ESOP transactions - 86 - - 108 - 194
Issuance of common stock under
stock option plan - 287 - - - - 287
Purchase of treasury stock - - (4,081) - - - (4,081)
Cash dividends declared ($.29 per share) - - - (1,837) - - (1,837)
Changes in net unrealized gain (loss) on
securities available for sale, net
of tax effect - - - - - (1,615) (1,615)
--- ------- --- ------- ------ ------- --------
Balance at September 30, 1996 $66 $48,623 ($4,081) $55,550 ($571) ($1,525) $98,062
=== ======= ======= ======= ===== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Net Unrealized
Additional Unearned Gain (Loss) on
Common Paid-in Treasury Retained Compensation- Investment
Stock Capital Stock Earnings ESOP Securities Total
----- ------- ----- -------- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $66 $49,146 ($3,402) $57,518 ($1,394) ($532) $101,402
Net income - - - 8,828 - - 8,828
ESOP transactions - 225 - 32 286 - 543
Issuance of common stock under stock
option plan 1 418 - - - - 419
Tax benefit from stock options exercised - 251 - - - - 251
Purchase of treasury stock - - - - - - -
Cash dividends declared ($.36 per share) - - - (2,323) - - (2,323)
Changes in net unrealized gain (loss) on
securities available for sale, net of tax
effect
- - - - - 1,038 1,038
--- -------- ------- -------- -------- ----- -------
Balance at September 30, 1997 $67 $50,040 ($3,402) $64,055 ($1,108) $506 $110,158
=== ======= ======= ======= ======= ==== ========
</TABLE>
The accompanying notes are integral part of these consolidated financial
statements.
84
<PAGE>
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-------------------
1997 1996
---- ----
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net Income $8,828 $5,824
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for possible loan losses 700 405
Provision for losses on other real estate owned - 180
Depreciation and amortization 655 568
Gain on sales of loans (85) (86)
Gain on sales of securities (97) -
Net gain on sales of other real estate owned (44) (177)
Net amortization of premiums and discounts on investment securities 159 603
Provision for deferred income taxes 197 421
ESOP transactions 543 194
Increase in Federal Home Loan Bank stock (1,524) (3,137)
(Increase) decrease in loans held for sale (944) 595
Increase in accrued interest receivable (844) (1,149)
Other, net (1,651) 1,452
------- ------
Net cash provided by operating activities 5,893 5,693
------- ------
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale 21,411 -
Proceeds from sales of investment securities held to maturity which were called 3,956 -
Proceeds from maturities of investment securities available for sale 12,428 16,510
Proceeds from maturities of investment securities held to maturity 19,197 3,251
Purchase of investment securities available for sale (58,922) (68,076)
Purchase of investment securities held to maturity (58,900) (22,949)
Principal payments received on investment securities available for sale 7,966 6,558
Principal payments received on investment securities held to maturity 21,180 21,559
Loan originations, net of repayments (54,544) (77,748)
Proceeds from sale of office properties and equipment - -
Purchases of office properties and equipment (1,017) (519)
Capitalized costs associated with other real estate owned, net of payments received - (42)
Proceeds from sales of other real estate owned 348 1,267
--- -----
Net cash used by investing activities (86,897) (120,189)
-------- ---------
Cash flows from financing activities:
Net increase in deposits 50,485 53,197
Additions to Federal Home Loan Bank advances 34,800 71,006
Increase in mortgagors' escrow payments 353 147
Increase in repurchase agreements 2,305 972
Purchase of treasury stock - (4,081)
Proceeds from issuance of common stock 419 287
ESOP transactions (267) (108)
Cash dividends paid on common stock (2,323) (1,837)
------- -------
Net cash provided by financing activities 85,772 119,583
------ -------
Net increase in cash and cash equivalents 4,768 5,087
Cash and cash equivalents at beginning of period 15,795 18,162
------- -------
Cash and cash equivalents at end of period $20,563 $23,249
======= =======
Supplemental disclosures of cash flow information:
Interest paid on deposits $20,682 $19,590
Interest paid on borrowed funds 13,335 10,766
Income taxes paid, net of refunds 5,019 3,432
Supplemental disclosures of non-cash transactions
Transfers to foreclosed real estate 172 1,006
Loans granted on sale of foreclosed real estate 162 857
Securitization of loans to mortgage-backed investments - 2,326
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
85
<PAGE>
AFFILIATED COMMUNITY BANCORP, INC, AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
1) Basis of Presentation
The accompanying consolidated financial statements include the
accounts of Affiliated Community Bancorp, Inc, (the "Company" or
"Affiliated") and its three wholly-owned subsidiaries, Lexington Savings
Bank ("Lexington"), a Massachusetts chartered savings bank, The Federal
Savings Bank ("Federal"), a federally chartered savings bank, and
Middlesex Bank & Trust Company ("Middlesex") a Massachusetts chartered
trust company, which are headquartered in Lexington, Massachusetts,
Waltham, Massachusetts, and Newton Massachusetts, respectively.
Affiliated was incorporated on April 13, 1995 for the purpose of
effecting the affiliation (the "Affiliation") of Lexington and Main
Street Community Bancorp, Inc. ("Main Street") including Main Street's
wholly-owned subsidiary, Federal, pursuant to the Affiliation Agreement
and Plan of Reorganization dated March 14, 1995 between Lexington and
Main Street. The Affiliation was consummated on October 18, 1995 and
was treated as a pooling of interests for accounting purposes. On May
20, 1997, Affiliated provided the initial capital to Middlesex in
exchange for all of Middlesex's outstanding stock, making Middlesex a
wholly owned subsidiary of Affiliated. Middlesex opened on June 2, 1997
as a de novo, full-service commercial bank. The operations of
Affiliated consist of those of its three bank subsidiaries, Lexington,
Federal and Middlesex. The information presented herein for 1997 and
1996 represents the financial condition and the operating results of
the Company and its wholly-owned bank subsidiaries on a consolidated
basis.
Lexington and Middlesex are insured by the Bank Insurance Fund
("BIF") and Federal is insured by the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
Certain reclassifications have been made to the 1996 consolidated
financial statements to conform with the September 30, 1997 presentation.
Such reclassifications had no effect on previously reported consolidated
net income.
In the opinion of management, the unaudited consolidated financial
statements presented herein reflect all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation. Interim
results are not necessarily indicative of results to be expected for the
entire year.
2) Earnings and Dividends Declared Per Share
Primary earnings per share computations include common stock issued
(excluding treasury shares and unallocated ESOP shares) and dilutive
common stock equivalents attributable to outstanding stock options. Fully
diluted earnings per share computations reflect the higher market price of
the Company's common stock at period end, if applicable, and the assumed
further dilution applicable to outstanding stock options.
3) Allowance for Possible Loan Losses
The following is a summary of the allowance for possible loan losses
for the three and nine month periods ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
l997 1996 l997 1996
------------------ -----------------
(In thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $8,228 $7,240 $7,759 $7,127
Provision for possible losses 250 135 700 405
Recoveries 19 14 78 147
------ ------ ------ ------
8,497 7,389 8,537 7,679
Loans charged-off 116 3 156 293
------ ------ ------ ------
Balance at end of period $8,381 $7,386 $8,381 $7,386
====== ====== ====== ======
</TABLE>
86
<PAGE>
The Company's allowance for possible loan losses is established and
maintained through a provision for possible loan losses. Charges to the
provision for possible loan losses are based on management's evaluation of
numerous factors, including the risk characteristics of the Company's loan
portfolio generally, the portfolio's historical experience, the level of
non-accruing loans, current economic conditions, collateral values, and
trends in loan delinquencies and charge-offs. Although management attempts
to use the best information available to make determinations with respect
to the Company's allowance for possible loan losses, loan losses may
ultimately vary significantly from current estimates and future
adjustments may be necessary if economic conditions differ substantially
from the assumed economic conditions used in making the initial
determination or if other circumstances change.
Loans are considered impaired when it is probable that the Company
will not be able to collect all amounts due according to the contractual
terms of the loan agreement. Management considers the paying status, net
worth and earnings potential of a borrower, and the value and cash flow of
the collateral, as factors to determine if a loan will be paid in
accordance with its contractual terms. Management does not set any minimum
delay of payments as a factor in reviewing for impaired classification.
The amount judged to be impaired is the difference between the present
value of the expected cash flows using as a discount rate the original
contractual effective interest rate and the recorded investment of the
loan. If foreclosure on a collateralized loan is probable, impairment is
measured based on the fair value of the collateral compared to the
recorded investment. If appropriate, a valuation reserve is established to
recognize the difference between the recorded investment and the present
value. Impaired loans are charged off when management believes that the
collectibility of the loan's principal is remote. All impaired loans are
classified as nonaccrual.
For the nine months ended September 30, 1997 and 1996, the average
recorded investment in impaired loans was $3,665,000 and $3,536,000
respectively, and the income recognized on related impaired loans was
$140,000 and $134,000, respectively. At September 30, 1997 and December
31, 1996, the Company classified $3,535,000 and $3,798,000, respectively,
of its loans as impaired. Of the $3,535,000 in impaired loans at September
30, 1997, $3,435,000 has been measured under the fair value of collateral
method and $100,000 has been measured under the present value of the
expected cash flows method. At September 30, 1997 impaired loans totaling
$2,845,000, had a related valuation reserve of $607,000. Of the $3,798,000
in impaired loans at December 31, 1996, $3,691,000 has been measured under
the fair value of collateral method and $107,000 has been measured under
the present value of the expected cash flows method. At December 31, 1996,
impaired loans totaling $3,555,000 had a related valuation reserve of
$667,000.
4) Stock Split
On May 30, 1997 the Company effected a 25% stock split paid in the
form of a stock dividend. All common stock share and per share information
prior to the stock split, except for shares authorized, has been
retroactively restated to reflect this stock split.
5) Impact of New Accounting Standards
In September 1996, the FASB issued SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which is generally effective for transfers and servicing of
financial assets and extinguishments of liabilities, as defined, after
December 31, 1996. SFAS No. 125, as amended, requires an entity to
recognize upon a transfer the financial and servicing assets it controls
and the liabilities it has incurred, derecognize financial assets when
control has been surrendered, and derecognize liabilities when
extinguished. SFAS No. 125 supersedes SFAS No. 122. For servicing
contracts in existence before January 1, 1997, previously recognized
servicing rights and "excess servicing" receivables that do not exceed
contractually specified servicing fees are combined, net of any previously
recognized servicing obligations, as a servicing asset or liability, with
previously recognized servicing receivables that exceed contractually
specified servicing fees being reclassified as interest-only strips
receivable. The adoption of this statement did not have a material impact
on its financial condition or results of operations.
In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share",
which is to become effective for fiscal years ending after December 15,
1997. The more significant changes are the replacement of primary earnings
per share (EPS) with basic EPS. Basic EPS is computed by dividing reported
earnings available to common stockholders by weighted average shares
issued (excluding treasury shares and unallocated ESOP shares). No
dilution for any potentially dilutive securities is included. Fully
diluted EPS, now called diluted EPS, is still required. The Company's
management anticipates that the application of the new statement will not
have a significant impact on the Company's reported results when adopted.
If SFAS No. 128 were in effect, basic EPS for the third quarter of
1997 would have been $0.46 versus $0.21 for the third quarter of 1996 and
basic EPS for nine months ended September 30, 1997 would have been $1.39
versus $0.93 for the nine months ended September 1996. The 1996 third
quarter and nine month basic EPS excluding the one time SAIF
recapitalization charge of $2,121,000 that was assessed in the third
quarter of 1996 would have been $0.40 for the third quarter of 1996 and
$1.12 for the nine months ended September 30, 1996.
In July 1997, the FASB issued SPAS No. 130, "Reporting Comprehensive
Income", which is to become effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 established standards for reporting and
display of comprehensive income and its components. Comprehensive income
is the total of net income and all other nonowner changes in equity. The
Company's management anticipates that the applications of this statement
will not have a significant impact on the Company's reported results when
adopted.
87
<PAGE>
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
88
<PAGE>
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
89
<PAGE>
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
90
<PAGE>
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1996 and 1995
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
------------------
1996 1995
--------- ------
Assets
<S> <C> <C>
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
========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
91
<PAGE>
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)
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
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.
</TABLE>
92
<PAGE>
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)
<TABLE>
<CAPTION>
Net
Unrealized
Additional Unearned Gain (Loss) on
Common Paid-in Treasury Retained Compensation- Investment
Stock Capital Stock Earnings ESOP Securities Total
----- ------- ----- -------- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
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
=== ======= ======= ======= ======= ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
93
<PAGE>
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1996, 1995 and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
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
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
94
<PAGE>
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.
95
<PAGE>
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.
96
<PAGE>
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
97
<PAGE>
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
98
<PAGE>
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").
99
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
======== ====== ========= ======== ======== ====== ======= ========
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
======= ======= ====== ====== ====== ======= ======= ======= ====== ======== ======== ========
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
======= ======= ====== ====== ====== ====== ======= ======= ====== ======== ======== ========
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
======= ======= ====== ====== ======= ======== ======= ======= ======= ======== ======== ========
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
======= ======= ====== ====== ======= ======== ======== ====== ====== ======= ======== ========
</TABLE>
102
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
December 31,
--------------
1996 1995
----- -----
(In thousands)
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Minimum for Minimum for
Capital Adequacy Well Capitalized
Actual Purposes Status
---------------- --------------- ---------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------
1996 1995
----------------------- -----------------------
Number of Weighted Number of Weighted
Shares Average Price Shares Average Price
------- ------------- -------- -------------
<S> <C> <C> <C> <C>
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
====== ======
</TABLE>
118
<PAGE>
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:
<TABLE>
<CAPTION>
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
- ------------------------ ----------- ----------- -------- ----------- --------
<C> <C> <C> <C> <C> <C>
$ 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
======= =======
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------- ------------------
Carrying Fair Carrying Fair
value value value value
-------- -------- -------- --------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1996
------------------------------------------------------------
Fourth Quarter Third Quarter Second Quarter First Quarter
-------------- ------------- -------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
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
======= ======= ======= =======
</TABLE>
123
<PAGE>
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
<TABLE>
<CAPTION>
1995
------------------------------------------------------------
Fourth Quarter Third Quarter Second Quarter First Quarter
-------------- ------------- -------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
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
======= ======= ======= =======
</TABLE>
- ----------
(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
<PAGE>
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
UST CORP.
AFFILIATED COMMUNITY BANCORP, INC.
FIRESTONE FINANCIAL CORP.
SOMERSET SAVINGS BANK
UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET
September 30, 1997
The following Unaudited Pro Forma Condensed Combining Balance Sheet
presents the combined financial position of UST Corp. and Subsidiaries ("UST")
and Somerset Savings Bank ("Somerset) as of September 30, 1997, assuming the
Merger had occurred as of September 30, 1997. The Unaudited Pro Forma Condensed
Combining Balance Sheet also gives effect to the acquisition of Firestone
Financial Corp. ("Firestone") completed on October 15, 1997 and the pending
acquisition of Affiliated Community Bancorp, Inc. ("AFCB") pursuant to an
agreement entered into on December 15, 1997.
The accompanying pro forma information is based on historical balance
sheet data of UST, Firestone, Somerset and AFCB as of September 30, 1997, giving
effect to the completed merger of UST and Firestone and the proposed mergers of
UST with Somerset and AFCB under the pooling of interests method of accounting.
The Unaudited Pro Forma Condensed Combining Balance Sheet should be read
in conjunction with the Unaudited Pro Forma Condensed Combined Statements of
Income appearing elsewhere in this Current Report on Form 8-K and the historical
financial statements and notes thereto of UST, Firestone, Somerset and AFCB
which are included in this Current Report on Form 8-K. The Unaudited Pro Forma
Condensed Combining Balance Sheet is presented for informational purposes only
and is not necessarily indicative of the combined financial position that
would have occurred if the mergers of UST, Firestone, Somerset and
AFCB had been consummated on September 30, 1997 or at the beginning of the
periods indicated or which may be obtained in the future.
125
<PAGE>
UST CORP.
AFFILIATED COMMUNITY BANCORP, INC.
FIRESTONE FINANCIAL CORP.
SOMERSET SAVINGS BANK
UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET
September 30, 1997
<TABLE>
<CAPTION>
Pro Forma Pro Forma Pro
Historical Adjustments Pro Forma Adjustments Forma
-------------------------------------
UST Firestone Somerset (Notes 1 & 2) Combined AFCB (Notes 1 & 2) Combined
---------- ----------- ---------- ------------- --------- ---------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(in thousands)
ASSETS
Cash, due from banks
and interest
bearing deposits $ 92,171 $ 21 $ 7,704 $ (8,500) $ 91,396 $ 15,979 $ (12,000) $ 95,375
Excess funds sold 129,731 1,155 130,886 4,584 135,470
Securities
Available-for-sale 712,415 712,415 204,277 916,692
Held to maturity 92,909 92,909 177,168 270,077
Loans, net of reserve
for possible loan losses 2,587,498 83,633 389,526 3,060,657 699,554 3,760,211
Premises, furniture
and equipment 64,258 114 12,668 77,040 8,790 85,830
Intangible assets, net 59,634 59,634 59,634
Other real estate owned 1,106 104 7,240 8,450 1 8,451
Other assets 44,036 1,228 9,137 54,401 18,226 72,627
---------- -------- ---------- ---------- ---------- ---------- ---------- ----------
Total assets $3,690,849 $ 85,100 $ 520,339 $ (8,500) $4,287,788 $1,128,579 $ (12,000) $5,404,367
========== ======== ========== ========== ========== ========== ========== ==========
LIABILITIES AND
STOCKHOLDERS'
INVESTMENT
Deposits:
Noninterest bearing $ 618,862 $ $ 22,697 $ $641,559 $ 46,682 $ 688,241
Interest bearing:
NOW accounts 42,268 27,089 69,357 56,513 125,870
Regular savings 662,295 68,779 731,074 123,475 854,549
Money market 628,746 48,555 677,301 74,877 752,178
Time deposits 911,756 290,693 1,202,449 403,887 1,606,336
---------- -------- ---------- ---------- ---------- ---------- ---------- ----------
Total deposits 2,863,927 457,813 3,321,740 705,434 4,027,174
Short-term borrowings 427,782 65,439 3,100 496,321 260,073 756,394
Other borrowings 18,063 20,447 38,510 46,057 84,567
Other liabilities 66,743 5,371 $ 4,646 (2,200) 74,560 6,857 $ (3,300) 78,117
---------- -------- ---------- ---------- ---------- ---------- ---------- ----------
Total liabilities 3,376,515 70,810 486,006 (2,200) 3,931,131 1,018,421 (3,300) 4,946,252
Stockholders' investment:
Common Stock
UST 17,832 2,715 20,547 5,722 26,269
AFCB 67 (67)
Firestone 20 (20)
Somerset 16,652 (16,652)
Additional paid-in capital 116,087 1,231 18,637 13,957 149,912 50,040 (9,057) 190,895
Retained earnings (deficit) 179,767 13,039 (956) (6,300) 185,550 64,055 (8,700) 240,905
Unrealized gain on
securities held as
available-for-sale 245 245 506 751
Treasury stock, at cost (3,402) 3,402
Deferred compensation
and other 403 403 (1,108) (705)
---------- -------- ---------- ---------- ---------- ---------- ---------- ----------
Total stockholders'
investment 314,334 14,290 34,333 (6,300) 356,657 110,158 (8,700) 458,115
---------- -------- ---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and
stockholders' investment $3,690,849 $ 85,100 $ 520,339 $ (8,500) $4,287,788 $1,128,579 $ (12,000) $5,404,367
========== ======== ========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited pro forma condensed financial information.
126
<PAGE>
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
UST CORP.
AFFILIATED COMMUNITY BANCORP, INC.
FIRESTONE FINANCIAL CORP.
SOMERSET SAVINGS BANK
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
The following Unaudited Pro Forma Condensed Combined Statements of
Income give effect to UST's proposed acquisition of Somerset by combining the
results of operations of UST for the nine month periods ended September 30,
1997 and 1996, and for each of the three years ended December 31, 1996 (pro
forma including Walden Bancorp, Inc. ("Walden") acquired on January 3, 1997
as a pooling of interests as if the acquisition had occurred on January 1,
1994) with the results of operations of Firestone (acquired on October 15,
1997 as a pooling of interests) and Somerset for the nine month periods ended
September 30, 1997 and 1996 and for each of the three years ended December
31, 1997 on a pooling of interests basis, assuming the acquisitions had
occurred on January 1, 1994. Also presented are the Unaudited Pro Forma
Condensed Combined Statements of Income of UST (pro forma including Walden),
Firestone, Somerset and AFCB for the same periods. Income per common share and
weighted average shares outstanding are based on the exchange ratios
specified in the respective Affiliation Agreements. The Unaudited Pro Forma
Condensed Combined Statements of Income should be read in conjunction with
the Unaudited Pro Forma Condensed Combining Balance Sheet appearing elsewhere
in this Current Report on Form 8-K and the historical financial statements
and notes thereto of UST, Somerset, Firestone and AFCB which are included in
this Current Report on Form 8-K. The Unaudited Pro Forma Condensed Combined
Statements of Income are presented for information purposes only and are not
necessarily indicative of the combined results of operations that would have
occurred if UST's acquisitions of Somerset, Firestone and AFB had been
consummated on September 30, 1997 or at the beginning of the periods
indicated or which may be obtained in the future.
127
<PAGE>
UST CORP.
FIRESTONE FINANCIAL CORP.
SOMERSET SAVINGS BANK
AFFILIATED COMMUNITY BANCORP, INC.
PRO FORMA COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
---------------------------------------------------------------------
UST FIRESTONE SOMERSET COMBINED AFCB COMBINED
---------- ---------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
(In thousands, except per share data)
Interest income:
Interest and fees on loans and leases................ $ 165,324 $ 8,199 $ 26,753 $ 200,276 $ 41,879 $ 242,155
Interest and dividends on securities................. 34,386 4,463 38,849 18,242 57,091
Interest on excess funds and other................... 3,728 135 3,863 162 4,025
---------- ----------- --------- ---------- --------- ----------
Total interest income............................... 203,438 8,199 31,351 242,988 60,283 303,271
---------- ----------- --------- ---------- --------- ----------
Interest expense:
Interest on deposits................................. 61,485 15,353 76,838 20,847 97,685
Interest on borrowed funds........................... 16,976 3,637 1,218 21,831 13,067 34,898
---------- ----------- --------- ---------- --------- ----------
Total interest expense.............................. 78,461 3,637 16,571 98,669 33,914 132,583
---------- ----------- --------- ---------- --------- ----------
Net interest income................................. 124,977 4,562 14,780 144,319 26,369 170,688
Provision for possible loan losses................... 600 900 1,500 700 2,200
---------- ----------- --------- ---------- --------- ----------
Net interest income after provision for possible
loan losses........................................ 124,377 4,562 13,880 142,819 25,669 168,488
---------- ----------- --------- ---------- --------- ----------
Noninterest income:
Asset management fees............................... 9,600 9,600 9,600
Fees and charges.................................... 11,047 479 11,526 1,170 12,696
Securities gains (losses), net...................... (1,151) (1,151) 97 (1,054)
Gain on sale of assets.............................. 1,804 194 1,998 85 2,083
Other............................................... 5,611 947 331 6,889 106 6,995
---------- ----------- --------- ---------- --------- ----------
Total noninterest income.......................... 26,911 947 1,004 28,862 1,458 30,320
---------- ----------- --------- ---------- --------- ----------
Noninterest expense:
Salary and employee benefits........................ 53,128 1,983 5,237 60,348 7,783 68,131
Occupancy and equipment............................. 14,661 270 1,194 16,125 1,708 17,833
Restructuring charges............................... 11,752 11,752 11,752
Merger related charges.............................. 3,082 714 3,796 3,796
Foreclosed and workout expense...................... 315 1,411 1,726 (141) 1,585
Deposit insurance assessment........................ 687 673 1,360 198 1,558
Other............................................... 33,389 736 2,842 36,967 3,498 40,465
---------- ----------- --------- ---------- --------- ----------
Total noninterest expense.......................... 117,014 3,703 11,357 132,074 13,046 145,120
---------- ----------- --------- ---------- --------- ----------
Income before taxes.................................. 34,274 1,806 3,527 39,607 14,081 53,688
Income tax expense (benefit)........................ 14,859 948 (918) 14,889 5,253 20,142
---------- ----------- --------- ---------- --------- ----------
---------- ----------- --------- ---------- --------- ----------
Net income........................................... $ 19,415 $ 858 $ 4,445 $ 24,718 $ 8,828 $ 33,546
---------- ----------- --------- ---------- --------- ----------
---------- ----------- --------- ---------- --------- ----------
Net income per share................................. $ 0.67 $ 0.43 $ 0.26 $ 0.74 $ 1.32 $ 0.79
Weighted average number of common shares
outstanding........................................ 28,855 2,000 16,878 33,242 6,679 42,659
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Financial
Information.
128
<PAGE>
UST CORP.
FIRESTONE FINANCIAL CORP.
SOMERSET SAVINGS BANK
AFFILIATED COMMUNITY BANCORP, INC.
PRO FORMA COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
---------------------------------------------------------------------
UST FIRESTONE SOMERSET COMBINED AFCB COMBINED
---------- ---------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
(In thousands, except per share data)
Interest income:
Interest and fees on loans and leases............... $ 128,979 $ 8,287 $ 26,596 $ 163,862 $ 35,586 $ 199,448
Interest and dividends on securities................ 40,792 3,580 44,372 16,617 60,989
Interest on excess funds and other.................. 440 257 697 200 897
---------- ----------- --------- ---------- --------- ----------
Total interest income.............................. 170,211 8,287 30,433 208,931 52,403 261,334
---------- ----------- --------- ---------- --------- ----------
Interest expense:
Interest on deposits................................ 53,123 15,155 68,278 18,988 87,266
Interest on borrowed funds.......................... 18,128 3,850 1,528 23,506 10,389 33,895
---------- ----------- --------- ---------- --------- ----------
Total interest expense............................. 71,251 3,850 16,683 91,784 29,377 121,161
---------- ----------- --------- ---------- --------- ----------
Net interest income................................. 98,960 4,437 13,750 117,147 23,026 140,173
Provision for possible loan losses.................. (17,674) 144 900 (16,630) 405 (16,225)
---------- ----------- --------- ---------- --------- ----------
Net interest income after provision for possible
loan losses........................................ 116,634 4,293 12,850 133,777 22,621 156,398
---------- ----------- --------- ---------- --------- ----------
Noninterest income:
Asset management fees............................... 9,807 9,807 9,807
Fees and charges.................................... 7,961 434 8,395 1,135 9,530
Securities gains (losses), net...................... 1,450 1,450 1,450
Gain on sale of assets.............................. 16 25 41 86 127
Other............................................... 5,127 751 288 6,166 38 6,204
---------- ----------- --------- ---------- --------- ----------
Total noninterest income........................... 24,361 751 747 25,859 1,259 27,118
---------- ----------- --------- ---------- --------- ----------
Noninterest expense:
Salary and employee benefits........................ 44,545 1,893 5,154 51,592 6,863 58,455
Occupancy and equipment............................. 11,593 230 1,151 12,974 1,562 14,536
Foreclosed and workout expense...................... 1,517 2,116 3,633 164 3,797
Deposit insurance assessment........................ 4,292 776 5,068 2,707 7,775
Other............................................... 21,437 644 2,838 24,919 3,494 28,413
---------- ----------- --------- ---------- --------- ----------
Total noninterest expense.......................... 83,384 2,767 12,035 98,186 14,790 112,976
---------- ----------- --------- ---------- --------- ----------
Income before taxes.................................. 57,611 2,277 1,562 61,450 9,090 70,540
Income tax expense (benefit)........................ 22,457 919 (440) 22,936 3,266 26,202
---------- ----------- --------- ---------- --------- ----------
Net income........................................... $ 35,154 $ 1,358 $ 2,002 $ 38,514 $ 5,824 $ 44,338
---------- ----------- --------- ---------- --------- ----------
---------- ----------- --------- ---------- --------- ----------
Net income per share................................. $ 1.24 $ 0.68 $ 0.12 $ 1.18 $ 0.90 $ 1.06
Weighted average number of common shares
outstanding........................................ 28,396 2,000 16,652 32,740 6,496 41,899
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Financial
Information.
129
<PAGE>
UST CORP.
FIRESTONE FINANCIAL CORP.
SOMERSET SAVINGS BANK
AFFILIATED COMMUNITY BANCORP, INC.
PRO FORMA COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------
<S> <C> <C> <C> <C> <C> <C>
UST FIRESTONE SOMERSET COMBINED AFCB COMBINED
---------- ---------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
(In thousands, except per share data)
Interest income:
Interest and fees on loans and leases............... $ 176,897 $ 10,904 $ 35,521 $ 223,322 $ 48,661 $ 271,983
Interest and dividends on securities................ 53,188 5,034 58,222 22,415 80,637
Interest on excess funds and other.................. 2,223 303 2,526 265 2,791
---------- ----------- --------- ---------- --------- ----------
Total interest income.............................. 232,308 10,904 40,858 284,070 71,341 355,411
---------- ----------- --------- ---------- --------- ----------
Interest expense:
Interest on deposits................................ 71,625 20,202 91,827 25,775 117,602
Interest on borrowed funds.......................... 25,428 5,074 2,126 32,628 14,289 46,917
---------- ----------- --------- ---------- --------- ----------
Total interest expense............................. 97,053 5,074 22,328 124,455 40,064 164,519
---------- ----------- --------- ---------- --------- ----------
Net interest income................................. 135,255 5,830 18,530 159,615 31,277 190,892
Provision for possible loan losses................... (17,300) 1,200 (16,100) 605 (15,495)
---------- ----------- --------- ---------- --------- ----------
Net interest income after provision for possible
loan losses........................................ 152,555 5,830 17,330 175,715 30,672 206,387
---------- ----------- --------- ---------- --------- ----------
Noninterest income:
Asset management fees............................... 12,947 12,947 12,947
Fees and charges.................................... 11,020 587 11,607 1,540 13,147
Securities gains (losses), net...................... 1,179 1,179 (47) 1,132
Gain on sale of bank subsidiary..................... 6,806 6,806 6,806
Gain on sale of assets.............................. 2 43 45 76 121
Other............................................... 6,871 1,116 427 8,414 69 8,483
---------- ----------- --------- ---------- --------- ----------
Total noninterest income........................... 38,825 1,116 1,057 40,998 1,638 42,636
---------- ----------- --------- ---------- --------- ----------
Noninterest expense:
Salary and employee benefits........................ 62,056 2,523 6,869 71,448 9,054 80,502
Occupancy and equipment............................. 15,877 264 1,536 17,677 2,086 19,763
Foreclosed and workout expense...................... 1,687 2,728 4,415 129 4,544
Deposit insurance assessment........................ 3,959 1,040 4,999 2,860 7,859
Acquisition related expenses........................ 5,933 5,933 5,933
Other............................................... 31,426 943 3,841 36,210 4,837 41,047
---------- ----------- --------- ---------- --------- ----------
Total noninterest expense.......................... 120,938 3,730 16,014 140,682 18,966 159,648
---------- ----------- --------- ---------- --------- ----------
Income before taxes.................................. 70,442 3,216 2,373 76,031 13,344 89,375
Income tax expense (benefit)........................ 27,261 1,120 (440) 27,941 4,821 32,762
---------- ----------- --------- ---------- --------- ----------
Net income........................................... $ 43,181 $ 2,096 $ 2,813 $ 48,090 $ 8,523 $ 56,613
---------- ----------- --------- ---------- --------- ----------
---------- ----------- --------- ---------- --------- ----------
Net income per share................................. $ 1.52 $ 1.05 $ 0.17 $ 1.47 $ 1.31 $ 1.35
Weighted average number of common shares
outstanding........................................ 28,396 2,000 16,652 32,740 6,510 41,919
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Financial
Information.
130
<PAGE>
UST CORP.
FIRESTONE FINANCIAL CORP.
SOMERSET SAVINGS BANK
AFFILIATED COMMUNITY BANCORP, INC.
PRO FORMA COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------
<S> <C> <C> <C> <C> <C> <C>
UST FIRESTONE SOMERSET COMBINED AFCB COMBINED
---------- ---------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
(In thousands, except per share data)
Interest income:
Interest and fees on loans and leases............... $ 172,480 $ 10,296 $ 36,350 $ 219,126 $ 41,924 $ 261,050
Interest and dividends on securities................ 42,503 3,844 46,347 18,598 64,945
Interest on excess funds and other.................. 3,939 242 4,181 474 4,655
---------- ----------- --------- ---------- --------- ----------
Total interest income.............................. 218,922 10,296 40,436 269,654 60,996 330,650
---------- ----------- --------- ---------- --------- ----------
Interest expense:
Interest on deposits................................ 69,381 18,932 88,313 22,878 111,191
Interest on borrowed funds.......................... 16,181 5,070 3,841 25,092 10,346 35,438
---------- ----------- --------- ---------- --------- ----------
Total interest expense............................. 85,562 5,070 22,773 113,405 33,224 146,629
---------- ----------- --------- ---------- --------- ----------
Net interest income................................. 133,360 5,226 17,663 156,249 27,772 184,021
Provision for possible loan losses................... 14,115 280 1,200 15,595 325 15,920
---------- ----------- --------- ---------- --------- ----------
Net interest income after provision for possible
loan losses........................................ 119,245 4,946 16,463 140,654 27,447 168,101
---------- ----------- --------- ---------- --------- ----------
Noninterest income:
Asset management fees............................... 13,581 13,581 13,581
Fees and charges.................................... 11,278 587 11,865 1,553 13,418
Securities gains (losses), net...................... 2,395 2,395 33 2,428
Gain on sale of assets.............................. 157 54 211 16 227
Other............................................... 6,943 939 415 8,297 91 8,388
---------- ----------- --------- ---------- --------- ----------
Total noninterest income........................... 34,354 939 1,056 36,349 1,693 38,042
---------- ----------- --------- ---------- --------- ----------
Noninterest expense:
Salary and employee benefits........................ 57,425 2,394 6,476 66,295 8,587 74,882
Occupancy and equipment............................. 15,471 287 1,535 17,293 1,994 19,287
Foreclosed and workout expense...................... 5,972 4,641 10,613 (107) 10,506
Deposit insurance assessment........................ 4,051 1,189 5,240 1,006 6,246
Other............................................... 31,557 964 3,600 36,121 6,754 42,875
---------- ----------- --------- ---------- --------- ----------
Total noninterest expense.......................... 114,476 3,645 17,441 135,562 18,234 153,796
---------- ----------- --------- ---------- --------- ----------
Income before taxes.................................. 39,123 2,240 78 41,441 10,906 52,347
Income tax expense (benefit)........................ 14,866 668 (1,000) 14,534 5,199 19,733
---------- ----------- --------- ---------- --------- ----------
Income before accretion of purchase discount......... 24,257 1,572 1,078 26,907 5,707 32,614
Accretion of purchase discount....................... 1,224 1,224 1,224
---------- ----------- --------- ---------- --------- ----------
Net income........................................... $ 24,257 $ 2,796 $ 1,078 $ 28,131 $ 5,707 $ 33,838
---------- ----------- --------- ---------- --------- ----------
---------- ----------- --------- ---------- --------- ----------
Income per share before accretion of purchase
discount........................................... $ 0.86 $ 0.79 $ 0.06 $ 0.83 $ 0.85 $ 0.78
Net income per share................................. $ 0.86 $ 1.40 $ 0.06 $ 0.86 $ 0.85 $ 0.81
Weighted average number of common shares
outstanding........................................ 28,237 2,000 16,652 32,581 6,683 42,004
</TABLE>
131
<PAGE>
UST CORP.
FIRESTONE FINANCIAL CORP.
SOMERSET SAVINGS BANK
AFFILIATED COMMUNITY BANCORP, INC.
PRO FORMA COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
--------------------------------------------
UST FIRESTONE SOMERSET COMBINED AFCB COMBINED
---------- ---------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
(In thousands, except per share data)
Interest income:
Interest and fees on loans and leases............... $ 146,263 $ 8,571 $ 34,326 $ 189,160 $ 33,150 $ 222,310
Interest and dividends on securities................ 43,643 3,109 46,752 13,752 60,504
Interest on excess funds and other.................. 2,717 61 2,778 469 3,247
---------- ----------- --------- ---------- --------- ----------
Total interest income.............................. 192,623 8,571 37,496 238,690 47,371 286,061
---------- ----------- --------- ---------- --------- ----------
Interest expense:
Interest on deposits................................ 52,944 16,325 69,269 17,762 87,031
Interest on borrowed funds.......................... 11,887 3,867 2,818 18,572 5,130 23,702
---------- ----------- --------- ---------- --------- ----------
Total interest expense............................. 64,831 3,867 19,143 87,841 22,892 110,733
---------- ----------- --------- ---------- --------- ----------
Net interest income................................. 127,792 4,704 18,353 150,849 24,479 175,328
Provision for possible loan losses................... 25,481 193 1,800 27,474 550 28,024
---------- ----------- --------- ---------- --------- ----------
Net interest income after provision for possible
loan losses........................................ 102,311 4,511 16,553 123,375 23,929 147,304
---------- ----------- --------- ---------- --------- ----------
Noninterest income:
Asset management fees............................... 14,419 14,419 14,419
Fees and charges.................................... 12,084 609 12,693 1,595 14,288
Securities gains (losses), net...................... 1,215 1,215 (420) 795
Gain on sale of assets.............................. 337 (32) 305 92 397
Other............................................... 5,992 929 378 7,299 81 7,380
---------- ----------- --------- ---------- --------- ----------
Total noninterest income........................... 34,047 929 955 35,931 1,348 37,279
---------- ----------- --------- ---------- --------- ----------
Noninterest expense:
Salary and employee benefits........................ 55,157 2,166 6,085 63,408 7,930 71,338
Occupancy and equipment............................. 15,342 166 1,613 17,121 1,772 18,893
Foreclosed and workout expense...................... 9,202 13,384 22,586 (124) 22,462
Deposit insurance assessment........................ 6,382 1,296 7,678 1,251 8,929
Other............................................... 29,095 1,195 3,466 33,756 4,616 38,372
---------- ----------- --------- ---------- --------- ----------
Total noninterest expense.......................... 115,178 3,527 25,844 144,549 15,445 159,994
---------- ----------- --------- ---------- --------- ----------
Income (loss) before taxes........................... 21,180 1,913 (8,336) 14,757 9,832 24,589
Income tax expense (benefit)........................ 6,946 786 7 7,739 2,806 10,545
---------- ----------- --------- ---------- --------- ----------
Income (loss) before accretion of purchase
discount........................................... 14,234 1,127 (8,343) 7,018 7,026 14,044
Accretion of purchase discount....................... 1,912 1,912 1,912
---------- ----------- --------- ---------- --------- ----------
Net income (loss).................................... $ 14,234 $ 3,039 $ (8,343) $ 8,930 $ 7,026 $ 15,956
---------- ----------- --------- ---------- --------- ----------
---------- ----------- --------- ---------- --------- ----------
Income (loss) per share before accretion of purchase
discount........................................... $ 0.51 $ 0.56 ($0.50) $ 0.22 $ 1.06 $ 0.34
Net income per share................................. $ 0.51 $ 1.52 ($0.50) $ 0.28 $ 1.06 $ 0.38
Weighted average number of common shares
outstanding........................................ 27,829 2,000 16,652 32,173 6,633 41,525
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Financial
Information.
132
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED FINANCIAL INFORMATION
NOTE 1:
It is contemplated that the pending acquisitions will be accounted for as
poolings of interests. Accordingly, pro forma financial information assumes that
the transactions were consummated as of the beginning of each of the periods
indicated herein. Certain reclassifications have been made to the accounts of
Firestone, Somerset and AFCB in the accompanying Unaudited Pro Forma Condensed
Combining Balance Sheet and Unaudited Pro Forma Condensed Combined Statements of
Income to conform to UST presentation. Pro forma results of operations do not
reflect recurring items of income and expense resulting directly from the
proposed mergers. In addition, the accompanying Unaudited Pro Forma Condensed
Combined Statements of Income do not include the $1.2 million and $1.9 million
accretion of purchase discount in 1995 and 1994, respectively, resulting from
the purchase of Firestone from the FDIC in 1992. The fair value of Firestone's
assets exceeded the purchase price by $5.7 million and was accreted into income
over a thirty-six month period ending in 1995 and was non-taxable.
The effect of an estimated one-time charge of $5.3 million ($7.5 million
pre-tax), to be taken by UST in connection with the Somerset acquisition has
been reflected in the accompanying Unaudited Pro Forma Condensed Combining
Balance Sheet as a reduction in cash and retained earnings, net of a 40% tax
benefit of $2.2 million recorded in other liabilities after excluding $2.1
million of nondeductible expense.
The effect of an estimated one-time charge of $8.7 million ($12.0 million
pre-tax), to be taken by UST in connection with the AFCB acquisition has been
reflected in the accompanying Unaudited Pro Forma Condensed Combining Balance
Sheet as a reduction in cash and retained earnings, net of a 40% tax benefit of
$3.3 million recorded in other liabilities after excluding $3.8 million of
nondeductible expense.
The effect of a one-time nondeductible charge of $1.0 million recorded by
UST and Firestone in connection with the Firestone acquisition has been
reflected in the accompanying Unaudited Pro Forma Condensed Combining Balance
Sheet as a reduction in cash and retained earnings.
These charges have not been reflected in the Unaudited Pro Forma Condensed
Combined Statements of Income since they are nonrecurring. The pro forma
financial information does not give effect to any cost savings in connection
with the pending acquisitions.
NOTE 2:
SOMERSET
The pro forma Stockholders' investment accounts of UST and Somerset have
been adjusted in the accompanying Unaudited Pro Forma Condensed Combining
Balance Sheet to reflect the issuance of shares of UST Common Stock in exchange
for all of the outstanding shares of Somerset Common Stock. The number of shares
of UST Common Stock to be issued pursuant to the acquisition of Somerset is
based upon the number of Somerset shares outstanding as of
133
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED FINANCIAL INFORMATION (Continued)
September 30, 1997, and the exchange ratio of 0.19 shares of UST Common
Stock for each share of Somerset Common Stock as specified in the Affiliation
Agreement. The excess of the par value of the Common Stock of Somerset to be
acquired over the par value of the UST Common Stock to be issued has been
credited to Additional paid-in-capital.
FIRESTONE AND AFCB
The pro forma Stockholders' investment accounts of UST, as adjusted for
Somerset, have been further adjusted to reflect the issuance of shares of UST
Common Stock in exchange for all of the outstanding shares of Firestone and AFCB
Common Stock.
The number of shares of UST Common Stock issued pursuant to the
acquisition of Firestone is based upon the number of Firestone shares
outstanding as of September 30, 1997, and the exchange ratio of 0.59 shares of
UST Common Stock for each share of Firestone Common Stock. The excess of the par
value of the UST Common Stock issued over the par value of the Firestone
Common Stock to be acquired has been charged to Additional paid-in-capital.
The number of shares of UST Common Stock to be issued pursuant to the
acquisition of AFCB is based upon the number of AFCB shares outstanding as of
September 30, 1997, and the exchange ratio of 1.41 shares of UST Common Stock
for each share of AFCB Common Stock. The excess of the par value of the UST
Common Stock to be issued over the par value of the AFCB Common Stock to be
acquired has been charged to Additional paid-in-capital. The Stockholders'
investment accounts of AFCB reflect the retirement of AFCB Treasury Stock ($3.4
million) upon consummation of the AFCB acquisition through a charge to surplus.
NOTE 3:
UST classifies its investments in debt and equity securities as
"Securities Available for Sale" in accordance with the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Accordingly, such securities are
carried at fair value, with unrealized gains and losses reported as a
separate component of Stockholders' investment. It is anticipated that, in
order to maintain UST's existing interest rate risk position, the securities
in the AFCB and Somerset portfolios which are designated as Held-to-Maturity,
and are carried at cost adjusted for the amortization of premium and
accretion of discount, will be redesignated as Available-for-Sale upon
consummation of the acquisitions. At September 30, 1997, the
Available-for-Sale designation would add approximately $1.2 million and $11
thousand, respectively, to the Stockholders' investment accounts of AFCB and
Somerset. The effect of the fair-value adjustments have not been reflected
in the accompanying Unaudited Pro Forma Condensed Combining Balance Sheet
since the actual amount of any unrealized gains or losses at consummation is
subject to market conditions and other factors and may vary significantly
from the balance reported at September 30, 1997.
NOTE 4:
Pro forma earnings per share amounts in the accompanying Unaudited Pro
Forma Condensed Combined Statements of Income are based on the weighted average
number of common shares of the constituent companies outstanding during each
period as specified in the respective Affiliation Agreements.
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