SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR the quarter ended September 30, 1997
or
[ ] TRANSITIONAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
COMMISSION FILE NUMBER 0-27014
AFFILIATED COMMUNITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-3277217
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
716 Main Street, Waltham, Massachusetts 02254-9035
(Address of principal executive offices) (Zip Code)
(781) 894-6810
(Registrant's telephone number, including area code)
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
At October 31, 1997 there were 6,498,184 shares of common stock, par value
$.01 per share, outstanding.
- ------------------------------------
1
<PAGE>
AFFILIATED COMMUNITY BANCORP, INC.
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1.
Consolidated Statements of Financial Condition at
September 30, 1997 and December 31, 1996...............................3
Consolidated Statements of Income for the Three Months
and Nine Months Ended September 30, 1997 and 1996......................4
Consolidated Statements of Stockholders' Equity for
the Nine Months Ended September 30, 1997 and 1996......................5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1997 and 1996......................................6
Notes to Consolidated Financial Statements.............................7
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Three and Nine Month Periods
Ended September 30, 1997 and 1996......................................9
PART II - OTHER INFORMATION
Item 1.
Legal Proceedings......................................................19
Item 2.
Changes in Securities..................................................19
Item 3.
Defaults Upon Senior Securities........................................19
Item 4.
Submission of Matters to a Vote of Security Holders....................19
Item 5.
Other Information......................................................19
Item 6.
Exhibits and Reports on Form 8-K.......................................19
SIGNATURES.............................................................20
EXHIBITS:
Computation of Primary and Fully Diluted Earnings Per
Share for the Three and Nine Month Periods Ended
September 30, 1997 and September 30, 1996..............................21
Financial Data Schedule................................................22
2
<PAGE>
<TABLE>
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
<CAPTION>
September 30, December 31,
1997 1996
------------ -----------
(Unaudited)
<S> <C> <C>
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 6,390 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 110,158 101,402
------- -------
Total liabilities and stockholders' equity $ 1,128,579 $ 1,032,213
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
<TABLE>
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share data)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
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 noninterest income 562 404 1,458 1,259
--- --- ----- -----
Noninterest 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 1,754 1,902
--- --- ----- -----
Total noninterest 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
===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
<TABLE>
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)
<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
($0.29 per share) -- -- -- (1,837) -- -- (1,837)
Changes in net unrealized
gain (loss) on securities
available for sale, net
of tax effect -- -- -- -- -- (1,615) (1,615)
--- ------- ------- ------- ----- ------- -------
Balance at September 30, 1996 $66 $48,623 ($4,081) $55,550 ($571) ($1,525) $98,062
=== ======= ======== ======== ====== ======== =======
Net Unrealized
Additional Unearned Gain (Loss) on
Common Paid-in Treasury Retained Compensation- Investment
Stock Capital Stock Earnings ESOP Securities Total
--- ------- ------- ------- ----- ------- -------
Balance at December 31, 1996 $66 $49,146 ($3,402) $57,518 ($1,394) ($532) $101,402
Net income -- -- -- 8,828 -- -- 8,828
ESOP transactions -- 225 -- 32 286 -- 543
Issuance of common stock
under stock option plan 1 418 -- -- -- -- 419
Tax benefit from stock option
exercise -- 251 -- -- -- -- 251
Purchase of treasury stock -- -- -- -- -- -- --
Cash dividends declared
($0.36 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.
5
<PAGE>
<TABLE>
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<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
6
<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 Community Bancorp, Inc. was incorporated on April 13, 1995 for
the purpose of effecting the affiliation (the "Affiliation") of Lexington and
Main Street Community Bancorp, Inc. ("Main Street") including Main Street's
wholly-owned subsidiary, Federal, pursuant to the Affiliation Agreement and Plan
of Reorganization dated March 14, 1995 between Lexington and Main Street. The
Affiliation was consummated on October 18, 1995 and was treated as a pooling of
interests for accounting purposes. 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,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $8,228 $7,240 $7,759 $7,127
Provision for possible loan 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>
7
<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 SFAS 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.
8
<PAGE>
ITEM 2. MANAGEMENT'S
DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996.
General
- -------
The Company is a holding company that conducts substantially all its
activities through its bank subsidiaries. The Company's results of operations
are dependent primarily on net interest income, which is the difference between
(i) the interest income earned on loans and investment securities and (ii) the
cost of funds, which consists of the interest paid on deposits and borrowings.
Net interest income can be adversely affected by changes in interest rates,
interest rate caps in effect on adjustable rate securities and loans in the
portfolio, and loan and mortgage-backed security prepayments.
The Company's net income is also affected by noninterest income, such as
service charges and fees and gains or losses on asset sales, and operating
expenses, which consist primarily of compensation and benefits, occupancy and
equipment expenses, federal deposit insurance premiums, other real estate owned
("OREO") operations and other general administrative expenses. The earnings of
the Company are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government policies
and actions of regulatory authorities.
This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The Company's actual results could differ
materially from those set forth in the forward-looking statements. Important
factors that might cause such a difference include general economic conditions,
particularly the real estate market, in the Company's primary market area,
potential increases in the Company's non-performing assets (as well as increases
in the allowance for possible loan losses that might be necessary),
concentrations of loans in a particular geographic area or with certain large
borrowers, changes in government regulation and supervision, including increased
deposit insurance premiums or increased capital or reserve requirements, changes
in interest rates and increased competition, and bank consolidations in the
Company's market area.
The results for the third quarter of 1997 included the first full quarter
of operations for Middlesex which opened for business on June 2, 1997. The
expenses and consolidated net income of Affiliated were, and will be, negatively
impacted by the start-up of Middlesex.
Changes in Financial Condition from December 31, 1996
- -----------------------------------------------------
Total assets at September 30, 1997 amounted to $1.13 billion as compared to
$1.03 billion at December 31, 1996, reflecting an increase of $100 million or
9.7%. The increase in the Company's assets is primarily attributable to growth
in loans and additional purchases of investment securities.
Investments: Investment securities designated as held to maturity amounted
-----------
to $188.1 million at September 30, 1997 versus $173.5 million at December 31,
1996. At September 30, 1997 investment securities available for sale amounted to
$177.2 million versus $159.8 million at December 31,1996. During the current
nine month period ended September 30, 1997, sales of investment securities
amounted to $25.4 million and resulted in a net gain of $97,000. The $4 million
in sales of investment securities held to maturity represent issues that had
been called by the issuers, and as a result would have matured within three
months. There were no sales during the comparable 1996 period.
The carrying values of investment securities at September 30, 1997 and
December 31, 1996 is presented in the following table:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
Available Held to Available Held to
for Sale Maturity for Sale Maturity
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Government securities $ 95,916 $ 60,544 $ 85,882 $ 39,304
Corporate and other bonds 1,052 1,005 6,362 22,469
Mortgage-backed and asset-backed securities 49,365 114,675 37,510 98,243
Mortgage-backed derivatives 4,866 11,891 7,596 13,494
Marketable equity securities 25,969 - 22,494 -
------ ------ ------ ------
$177,168 $188,115 $159,844 $173,510
======== ======== ======== ========
</TABLE>
The mortgage-backed derivatives portfolio consisted of planned amortization
classes (PAC's), targeted amortization classes (TAC's), sequential payment
classes (SEQ's), scheduled amortization classes (SCH's) and accretion directed
classes (AD's). The balance at September 30, 1997 had an average life of 1.4
years with 28.5% in monthly adjusting securities and the remaining 71.5% in
fixed rate securities.
Loans: Gross loans outstanding, excluding loans held for sale, at September
-----
30, 1997 amounted to $707.9 million versus $653.6 million at December 31, 1996.
The increase of $54.3 million or 8.3% was primarily attributed to growth in
residential real estate loans. The gross
9
<PAGE>
balances of loans outstanding at September 30, 1997 and December 31, 1996 are
shown in the following table:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(In thousands)
<S> <C> <C>
Real estate:
1-4 family $ 470,203 $ 428,308
Commercial and construction 177,700 171,990
Commercial 39,570 35,338
Equity lines of credit and other 21,887 19,749
Less: net deferred loan fees (1,425) (1,829)
------ ------
$ 707,935 $ 653,556
========= =========
</TABLE>
At September 30, 1997 loans delinquent 60 days or more amounted to $2.3
million and represented 0.3% of total loans outstanding. The comparable amounts
at December 31, 1996 were $4.2 million or 0.6%.
The following table sets forth information regarding non-accrual loans,
troubled debt restructurings, OREO and other assets:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(Dollars in thousands)
<S> <C> <C>
Non-accrual loans $3,321 $4,886
Troubled debt restructurings 511 -
--- ---
Total non-performing loans 3,832 4,886
Other real estate owned, net 1 133
--- ---
Total non-performing assets $3,833 $5,019
====== ======
Loans past due 90 days or more and
still accruing $ - 136
====== ===
Non-performing loans as a percent of
total loans .54% .75%
Non-performing assets as a percent of
total assets .34% .49%
Allowance for possible loan losses as
a percent of non-performing loans 218.71% 158.80%
Allowance for possible loan losses as
a percent of total loans 1.18% 1.19%
==== ====
</TABLE>
Liabilities: The Company's deposit products include passbook and statement
-----------
savings accounts, NOW accounts, demand (checking) accounts, money market
accounts and certificate of deposit accounts. The certificate accounts consist
of regular and retirement funds and are either fixed or variable in nature.
The following table summarizes the Company's deposit liabilities at
September 30, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(Dollars in thousands)
<S> <C> <C>
Demand $ 46,682 $ 41,557
NOW 56,513 51,347
Regular savings 121,035 122,739
Money market 74,877 66,492
------ ------
Total non-certificate accounts 299,107 282,135
------- -------
Certificates less than $100,000 308,827 297,990
Certificates of $100,000 and over 95,060 72,384
------ ------
Total certificate accounts 403,887 370,374
------- -------
Total deposits $702,994 $652,509
======== ========
</TABLE>
10
<PAGE>
At September 30, 1997 and December 31, 1996, brokered certificates of
deposit amounted to $38.8 million and $29.1 million, respectively. Brokered
certificates of deposit include $24.2 and $14.9 million in Depository Trust
Company ("DTC") certificates at September 30, 1997 and December 31, 1996,
respectively.
Borrowings from the Federal Home Loan Bank ("FHLB") amounted to $302.0
million at September 30, 1997 versus $267.2 million at December 31, 1996 as a
result of continued leveraging of the Company's strong capital position. The
additional borrowings funded residential loans and investments that were added
to the balance sheet.
Liquidity and Capital Resources
- -------------------------------
The Company's primary sources of liquidity are dividends from subsidiaries,
and maturities, repayments and interest on investments. The Company may use its
liquidity to pay cash dividends to stockholders, fund operating expenses and pay
taxes. On October 16, 1997 the Company declared a regular quarterly dividend of
$0.15 per share payable on November 14, 1997 to stockholders of record on
October 30, 1997. This third quarter dividend represented a 25% increase over
the $0.12 per share declared in the second quarter of 1997.
On October 16, 1997 Affiliated also announced Board approval of a stock
repurchase program effective on November 1, 1997. This program will run through
October 31, 1998 and authorizes the purchase of up to 300,000 shares, roughly 5%
of Affiliated's outstanding common stock, in open market transactions, the
amount and timing of such purchases, if any, to be subject to market conditions.
The stock purchased will be placed in Treasury and may be used for general
corporate purposes, including existing options and employee benefit programs.
The primary sources of funds for the Company's bank subsidiaries are
deposits, FHLB borrowings, principal and interest payments on loans,
mortgage-backed and mortgaged-backed derivative securities, and maturities of
investment securities. While maturities and scheduled amortization of loans and
investment securities are predictable sources of funds, deposit inflows and
mortgage prepayments are greatly influenced by economic conditions, interest
rate levels, and regulatory changes. The earning asset growth of $88.9 million
for the nine month period ended September 30, 1997 was primarily funded by a net
gain in core deposits of $17 million, term certificates of $30.5 million, and
additional advances from the FHLB and repurchase agreements amounting to $37.1
million.
The Company's bank subsidiaries, as members of the FHLB, have overnight
lines of credit of approximately $25 million and an overall borrowing capacity
of approximately $645.1 million from the FHLB. At September 30, 1997 outstanding
borrowings were $302.0 million under these facilities. Any borrowings must be
collateralized by a combination of investment securities and certain first
mortgage loans. The subsidiaries also have the ability to enter into repurchase
agreements, with an aggregate credit line of $150 million, with various brokers.
At September 30, 1997, the Company had outstanding commitments of $98.6
million to originate loans and advance funds. As of that date, the Company had
commitments to sell loans of $0.9 million. The Company believes that it will
have sufficient funds available to meet all of its commitments as a result of
the liquidity inherent in its balance sheet, combined with its available
borrowing capacity through the FHLB.
On April 23, 1997 the Company announced a 25% stock split of its common
stock to be effected in the form of a stock dividend. This split was implemented
on May 30, 1997 in the form of one additional share for each four shares of
common stock held by stockholders of record as of the close of business on May
15, 1997.
On May 20, 1997 Affiliated completed the transaction entered into on
December 18, 1996 by providing the initial capitalization for Middlesex Bank &
Trust Company located in Newton, Massachusetts. Middlesex opened for business on
June 2, 1997.
The Company's bank subsidiaries are subject to certain capital standards
prescribed by regulations. While the regulations are the same for Affiliated,
Lexington, and Middlesex, the method of calculation differs for banks regulated
by the Office of Thrift Supervision such as Federal. The following tables show
the subsidiaries' regulatory capital ratios as they compare to the minimum
guidelines at September 30, 1997. The high capital ratios of Middlesex reflect
its status as a start-up bank.
<TABLE>
<CAPTION>
Affiliated
The Federal Lexington Middlesex Community Minimum
Savings Bank Savings Bank Bank & Trust Co. Bancorp, Inc. Requirements
------------ ------------ ---------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Risk-based ratios:
Tier 1 capital ...... 18.33% 14.08% 91.69% 17.52% 4.00%
Total capital ....... 19.58 15.07 91.90 18.77 8.00
Tangible capital ......... 9.15 N/A N/A N/A 1.50
Core capital ............. 9.15 N/A N/A N/A 3.00
Tier 1 leverage capital... N/A 8.42 54.18 9.87 3.00
</TABLE>
11
<PAGE>
Comparison of Results of Operations for the Three Months Ended September 30,
- --------------------------------------------------------------------------------
1997 and 1996
- -------------
General Operating Results. Net income for the three months ended September
30, 1997 was $2.9 million or $0.43 per share, compared to net income of $1.3
million or $0.20 per share in the corresponding quarter of 1996, an increase of
$1.6 million or 126%. The results of the third quarter of 1996 were negatively
impacted by a charge for recapitalization of the Savings Association Insurance
Fund (SAIF) of the FDIC. The SAIF recapitalization was a pre-tax charge of
$2,121,000 or $1,236,000 ($0.19 per share fully diluted) after taxes.
Affiliated's third quarter 1997 net income of $2.9 million is 16% higher than
the third quarter 1996 net income of $2.5 million excluding the cost of SAIF
recapitalization. The 1997 fully diluted earnings per share of $0.43 is 10%
higher than the 1996 earnings per share, excluding the SAIF recapitalization, of
$0.39. The increase in earnings per share was partially reduced by the impact of
the increase in Affiliated's stock price from 1996 to 1997 on the common stock
equivalents used to calculate fully diluted earnings per share.
Net interest income for the three months ended September 30, 1997 amounted
to $8.9 million as compared to $8.0 million for the corresponding period in
1996.
The following table sets forth the Company's average balances and net
interest income components for the three months ended September 30, 1997 and
1996. It includes (i) the average balance sheet for the period, based on daily
average balances; (ii) the total amount of interest earned or paid on the
various categories of interest-earning assets and interest-bearing liabilities;
and (iii) the resulting weighted average yields and costs. Such yields and costs
are derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods shown except where noted otherwise.
In addition, the table reflects the Company's interest rate spreads and net
yields on earning assets. The average balance of loans receivable includes loans
on which the Company has discontinued accruing interest. The yields and costs
include fees which are considered "adjustments to yield."
12
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30,
----------------------------------------------------------------------------------------------
1997 1996
--------------------------------------------- ---------------------------------------------
(Dollars in thousands)
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans $ 696,679 $ 14,370 8.25% $ 604,714 $ 12,498 8.27%
---------- ---------- ---- ---------- ----------- ----
Investments:
Investment and mortgage-backed
securities held-to-maturity 186,834 3,158 6.76% 178,308 2,861 6.42%
Investment and mortgage-backed
securities available-for-sale 170,567 2,885 6.77% 156,885 2,622 6.69%
Federal Home Loan Bank stock 15,665 257 6.56% 13,492 221 6.55%
Federal funds sold and
overnight deposits 6,041 70 4.63% 6,132 78 5.09%
---------- ---------- ---- ---------- ----------- ----
Total investments 379,107 6,370 6.72% 354,817 5,782 6.52%
---------- ---------- ---- ---------- ----------- ----
Total interest-earning assets 1,075,786 20,740 7.71% 959,531 18,280 7.62%
---------- ---------- ---- ---------- ----------- ----
Noninterest-earning assets 37,855 32,249
Allowance for possible loan losses (8,311) (7,288)
---------- ----------
Total assets $1,105,330 $ 984,492
========== ==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Regular savings, NOW and money
market accounts $ 248,845 $ 1,625 2.61% $ 236,024 $ 1,547 2.62%
Certificate accounts 379,888 5,489 5.78% 349,341 5,030 5.76%
Borrowings 315,805 4,710 5.97% 255,213 3,724 5.84%
---------- ---------- ---- ---------- ----------- ----
Total interest-bearing
liabilities 944,538 11,824 5.01% 840,578 10,301 4.90%
---------- ---------- ---- ---------- ----------- ----
Noninterest-bearing liabilities:
Demand deposits 45,906 37,771
Other 6,883 8,352
---------- ----------
Total liabilities 997,327 886,701
---------- ----------
Stockholders' equity 108,003 97,791
---------- ----------
Total liabilities and
stockholders' equity $1,105,330 $ 984,492
========== ==========
Net interest income $ 8,916 $ 7,979
========== ==========
Interest rate spread 2.70% 2.72%
==== ====
Net yield on earning assets 3.32% 3.33%
==== ====
</TABLE>
Interest Income. Total interest and dividend income increased from $18.3
million in the third quarter of 1996 to $20.7 million in the same period of
1997, an increase of 13.1%. The additional income was due mostly to the higher
volume of loans and investments. The yield on average earning assets increased
from 7.62% in the third quarter of 1996 to 7.71% in the same period of 1997 due
to higher yields on investments, and an increase in loans as a percentage of
earning assets. Average loans outstanding in the current quarter amounted to
$696.7 million and produced an average yield of 8.25%, as compared to a 1996
average volume of $604.7 million with an average yield of 8.27%. The average
balance of all investment categories amounted to $379.1 million in the third
quarter of 1997 with an average yield of 6.72% compared to $354.8 million and
6.52%, respectively, in the comparable quarter of 1996.
Interest Expense. Interest expense in the third quarter of 1997 amounted to
$11.8 million, up $1.5 million or 14.6% from $10.3 million in the same quarter
of 1996. The main factors contributing to this increase were higher volume in
certificates of deposit and higher volume and cost of borrowed funds. The
average rate paid on total interest-bearing deposits increased fractionally from
4.49% in the third quarter of 1996 to 4.53% in the comparable period of 1997.
Average interest-bearing deposit volume increased from $585.4 million in the
1996 period to $628.7 million in the third quarter of 1997, up $43.3 million or
7.4%. Average certificates increased $30.5 million or 8.7% in 1997 from the
comparable 1996 quarter. The Company had average borrowings of $315.8 million
for the three months ended September 30, 1997, with a related interest expense
of $4.7 million, compared to $255.2 million and $3.7 million, respectively, for
the third quarter of 1996. The average rate paid on borrowings increased from
5.84% to 5.97%.
The following table illustrates the extent to which changes in interest
rates and changes in the volumes of interest-earning assets and interest-bearing
liabilities affected the components of the Company's interest income and
interest expense during the period. For each interest related
13
<PAGE>
asset and liability category, information is provided with respect to (i)
changes attributable to changes in volume (changes in volume multiplied by prior
rate), (ii) changes attributable to changes in interest rates (changes in rate
multiplied by prior volume), and (iii) the total change. The changes
attributable to the combined impact of both volume and rates have been allocated
proportionately to the change due to volume and the change due to rates.
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1997 Compared with 1996
-----------------------
Increase (Decrease)
Due to Change in:
-----------------
Average Average
Volume Rate Total
------ ---- -----
(In thousands)
<S> <C> <C> <C>
Interest Income:
Loans $ 1,897 ($25) $ 1,872
Investments:
Investment and mortgage-backed
securities held-to-maturity 140 157 297
Investment and mortgage-backed
securities available-for-sale 231 32 263
Federal Home Loan Bank stock 36 - 36
Federal funds sold (1) (7) (8)
-- -- --
Total interest income 2,303 157 2,460
----- --- -----
Interest Expense:
Regular savings, NOW and money
market accounts 84 (6) 78
Certificate accounts 441 18 459
--- -- ---
Total deposits 525 12 537
Borrowed funds 902 84 986
--- -- ---
Total interest expense 1,427 96 1,523
----- -- -----
Change in net interest income $ 876 $ 61 $ 937
======= ====== =======
</TABLE>
The increase in 1997 third quarter net interest income was primarily
attributable to a volume increase in loans. Volume increases in certificates of
deposits and borrowed funds partially offset the favorable benefit of the volume
increase in earning assets.
Provision for Possible Loan Losses. The provision for possible loan losses
for the third quarter of 1997 amounted to $250,000 versus $135,000 for the third
quarter of 1996. The increased provision is attributable to the ongoing growth
of the Company's loan portfolio. At September 30, 1997, the Company's allowance
for possible loan losses amounted to $8.4 million which represented 219% of
non-performing loans at that date. The provision and the level of the allowance
are evaluated on a regular basis by management and are based upon management's
periodic review of the collectibility of the loans, in light of historical
experience, known and inherent risks in the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral and prevailing economic conditions.
The allowance is a forward-looking estimate and ultimate losses may vary from
current estimates and future additions to the allowance may be necessary. As
adjustments become necessary, they are reported in the results of operations for
the periods in which they become known. Loan losses are charged against the
allowance when management believes the collectibility of the loan balance is
unlikely. Although no assurance can be given, management believes that the
September 30, 1997 level of the allowance was adequate to provide for known and
reasonably anticipated loan losses inherent in the portfolio at that date.
Noninterest Income. For the third quarter of 1997, total noninterest income
amounted to $562,000, an increase of $158,000 or 39.1% from $404,000 in the
third quarter of 1996. Customer service fees and other income increased by
$34,000 or 10.9% in the third quarter from the same period in 1996, as a result
of business checking fees, and an increase in cash surrender value of life
insurance policies. The Company had gains on securities sales of $90,000 in the
third quarter of 1997 compared to no gain or loss for the quarter ended
September 30, 1996. The gain on sales of loans was $62,000 in the third quarter
of 1997, compared to $29,000 for the same period in 1996.
Noninterest Expenses. Total noninterest expenses decreased by $1.8 million
or 28.7% in the third quarter of 1997 to $4.5 million, compared to $6.4 million
in the corresponding quarter of 1996. The most significant change in expenses
was the decrease in federal deposit insurance premiums of $2.3 million, which
included $2.1 million for the SAIF recapitalization in the third quarter of
1996. Other components of the change in expenses included a $406,000 or 17.6%
increase in compensation and benefits, a $70,000 increase in data processing
expense, a decrease in OREO expense of $42,000, and a $65,000 decrease in
marketing and other expenses.
14
<PAGE>
The increase in compensation and benefits costs was caused by staff
additions, normal salary increases, payroll taxes, and increased costs
associated with the 401(k) and ESOP plans at subsidiary banks. The increase in
ESOP costs is related to the year to year increase in the Company's stock price
used for the fair value adjustment to compensation expense. Data processing
costs increased due to new technology options and expanded banking facilities.
OREO expenses, which tend to be volatile and are not tied to the Company's core
business, decreased as a result of minimal foreclosure activity, and repayments
of carrying cost. Other expenses declined as a result of a legal settlement,
offset by increased marketing costs for new banking services and locations, and
Middlesex's first quarter of operations.
Provision for Income Taxes. The provision for income taxes was $1.7 million
for the third quarter of 1997, compared to $579,000 for the corresponding
quarter in 1996. The combined effective tax rate for the three months ended
September 30, 1997 was 37.1% versus 30.8% for the same period in 1996. The lower
effective rate in 1996 reflects the tax benefit resulting from the SAIF
recapitalization. At September 30, 1997, the net deferred income tax asset
amounted to $2.9 million. The primary sources of recovery of the deferred income
tax asset are taxes paid, which are available for carry back, from 1996, 1995,
and 1994, and the expectation that the deductible temporary differences will
reverse during periods when the Company generates taxable income.
Comparison of Results of Operations for the Nine Months Ended September 30, 1997
- --------------------------------------------------------------------------------
and 1996
- --------
General Operating Results. Net income for the nine months ended September
30, 1997 was $8.8 million or $1.32 per share, compared to net income of $5.8
million or $0.90 per share in the corresponding period of 1996. The 1997 nine
month fully diluted earnings per share of $1.32 was 21% higher than the pre-SAIF
1996 level of $1.09. Net income for the first nine months of 1997 was 25% higher
than the $7.1 million nine month 1996 net income before SAIF. The increase in
earnings per share was reduced by the impact of higher stock prices on fully
diluted per share calculations. The current period results are attributable to a
higher level of net interest income, with only a modest increase in operating
expenses. As a result of increased levels of interest earning assets, net
interest income increased by $3.4 million or 14.5% in the first nine months of
1997 to $26.4 million compared to $23.0 million in the same period of 1996.
Noninterest expense increased by $377,000 or 3.0% in the first nine months of
1997 compared to the same period of 1996, not including the $2.1 million SAIF
recapitalization charge.
The following table sets forth the Company's average balances and net
interest income components for the nine months ended September 30, 1997 and
1996. It includes (i) the average balance sheet for the period, based on daily
average balances; (ii) the total amount of interest earned or paid on the
various categories of interest-earning assets and interest-bearing liabilities;
and (iii) the resulting weighted average yields and costs. Such yields and costs
are derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods shown except where noted otherwise.
In addition, the table reflects the Company's interest rate spreads and net
yields on earning assets. The average balance of loans receivable includes loans
on which the Company has discontinued accruing interest. The yields and costs
include fees which are considered "adjustments to yield."
15
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------------------------------------------------------------
1997 1996
-------------------------------------------- ---------------------------------------------
(Dollars in thousands)
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans $676,975 $41,879 8.25% $577,091 $35,586 8.22%
-------- ------- ---- -------- ------- ----
Investments:
Investment and mortgage-backed
securities held-to-maturity 184,849 9,289 6.70% 177,638 8,623 6.47%
Investment and mortgage-backed
securities available-for-sale 164,006 8,225 6.69% 150,014 7,400 6.58%
Federal Home Loan Bank stock 15,038 728 6.45% 12,373 594 6.40%
Federal funds sold and
overnight deposits 4,922 162 4.39% 5,811 200 4.59%
-------- ------- ---- -------- ------- ----
Total investments 368,815 18,404 6.65% 345,836 16,817 6.48%
-------- ------- ---- -------- ------- ----
Total interest-earning assets 1,045,790 60,283 7.69% 922,927 52,403 7.57%
-------- ------- ---- -------- ------- ----
Noninterest-earning assets 34,998 32,840
Allowance for possible loan losses (8,066) (7,211)
------ ------
Total assets $1,072,722 $948,556
========== ========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Regular savings, NOW and money
market accounts $243,249 $4,692 2.57% $235,064 $4,600 2.61%
Certificate accounts 378,385 16,155 5.69% 332,766 14,388 5.77%
Borrowings 296,187 13,067 5.88% 239,961 10,389 5.77%
-------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities 917,821 33,914 4.93% 807,791 29,377 4.85%
-------- ------- ---- -------- ------- ----
Noninterest-bearing liabilities:
Demand deposits 42,954 34,255
Other 7,049 9,432
------- -------
Total liabilities 967,824 851,478
------- -------
Stockholders' equity 104,898 97,078
------- -------
Total liabilities and
stockholders' equity $1,072,722 $948,556
========== ========
Net interest income $26,369 $23,026
======= =======
Interest rate spread 2.76% 2.72%
==== ====
Net yield on earning assets 3.36% 3.33%
==== ====
</TABLE>
Interest Income. Total interest income increased from $52.4 million in the
first nine months of 1996 to $60.3 million in the same period of 1997, an
increase of 15.0%. The higher level of interest income was chiefly due to an
increased volume of loans and investments. The yield on average earning assets
was 7.57% in the first nine months of 1996 and 7.69% in the same period of 1997.
Average loans outstanding in the current period amounted to $677.0 million and
produced an average yield of 8.25%, as compared to a 1996 average volume of
$577.1 million with an average yield of 8.22%. The average balance of all
investment categories amounted to $368.8 million in the first nine months of
1997 with an average yield of 6.65% compared to $345.8 million and 6.48%,
respectively, in the comparable period of 1996.
Interest Expense. Interest expense in the nine months of 1997 amounted to
$33.9 million, up $4.5 million or 15.4% from $29.4 million in 1996. The
contributing factors to this increase were higher interest rates on borrowings,
and higher volumes in certificate accounts and borrowed funds. The average rate
paid on deposits remained relatively level at 4.46% for the first nine months of
1996 compared to 4.47% in the same period of 1997. Average interest-bearing
deposits increased from $567.8 million in the 1996 period to $621.6 million in
the first nine months of 1997, up $53.8 million or 9.5%. Average certificates
increased $45.6 million or 13.7% in 1997 from the comparable 1996 period. The
Company had average borrowings of $296.2 million for the nine months ended
September 30, 1997, with a related interest expense of $13.1 million, compared
to $240.0 million and $10.4 million, respectively, for the first nine months of
1996. The average rate paid on borrowings increased from 5.77% to 5.88%.
The following table illustrates the extent to which changes in interest
rates and changes in the volumes of interest-earning assets and interest-bearing
liabilities affected the components of the Company's interest income and
interest expense during the periods indicated. For each interest related-asset
and liability category, information is provided with respect to (i) changes
attributable to changes in volume (changes in volume
16
<PAGE>
multiplied by prior rate), (ii) changes attributable to changes in interest
rates (changes in rate multiplied by prior volume), and (iii) the total change.
The changes attributable to the combined impact of both volume and rates have
been allocated proportionately to the change due to volume and the change due to
rates.
<TABLE>
Nine Months Ended September 30,
1997 Compared with 1996
Increase (Decrease)
Due to Change in:
-----------------
<CAPTION>
Average Average
Volume Rate Total
------ ---- -----
(In thousands)
<S> <C> <C> <C>
Interest Income:
Loans $6,179 $114 $6,293
Investments:
Investment and mortgage-backed
securities held-to-maturity 357 309 666
Investment and mortgage-backed
securities available-for-sale 700 125 825
Federal Home Loan Bank stock 129 5 134
Federal funds sold (30) (8) (38)
----- --- -----
Total interest income 7,335 545 7,880
----- --- -----
Interest Expense:
Regular savings, NOW and money
market accounts 156 (64) 92
Certificate accounts 1,945 (178) 1,767
----- ---- -----
Total deposits 2,101 (242) 1,859
Borrowed funds 2,477 201 2,678
----- --- -----
Total interest expense 4,578 (41) 4,537
----- --- -----
Change in net interest income $2,757 $586 $3,343
====== ==== ======
</TABLE>
The increase in the year-to-date net interest income was primarily
attributable to volume increases in loans and investments. Volume increases in
certificates of deposit and borrowed funds tended to offset the volume increases
in earning assets.
Provision for Possible Loan Losses. The provision for possible loan losses
for the first nine months of 1997 amounted to $700,000 compared to $405,000 for
the first nine months of 1996. The increased provision was attributable to the
ongoing growth of the Company's loan portfolio.
Noninterest Income. For the first nine months of 1997, total noninterest
income amounted to $1.5 million, an increase of $199,000 or 15.8% from $1.3
million in the same period of 1996. Customer service fees and other income
increased by $130,000 or 13.7% in the first nine months of the year from the
same period in 1996 due to increases in checking account fees, and an increase
in cash surrender value of life insurance policies. Loan servicing fees, which
amounted to $198,000 this period compared to $225,000 in the first nine months
of 1996, reflect a reduction in the volume of loans serviced. The Company had
gains on loan sales of $85,000 in the first nine months of 1997 compared to
similar gains of $86,000 in the same period of 1996. Sales of investments
produced gains of $97,000 in the first nine months of 1997 compared to no gain
or loss during the 1996 period.
Noninterest Expenses. Total noninterest expense decreased by $1.8 million
or 11.8% in the first nine months of 1997 to $13.0 million, compared to $14.8
million in the corresponding period of 1996. The significant components of the
change in expense included a $2.1 million decrease for the SAIF recapitalization
as previously mentioned, a $920,000 or 13.4% increase in compensation and
benefits, a decrease in professional services of $99,000 or 18.4%, a $388,000 or
66.2% decrease in normal federal deposit insurance premiums, an increase in data
processing costs of $145,000 or 23.4%, and an increase in marketing costs of
$106,000 or 24.4%. The Company benefited from a decrease in OREO expense of
$305,000 and a decrease in other expenses of $148,000.
The increase in compensation and benefits costs were caused by staff
additions, normal salary increases, and increased costs associated with the
medical insurance and 401(k) and ESOP plans at subsidiary banks. Professional
fees declined as a result of a recovery of prior period legal costs. The
decrease in federal deposit insurance premiums for the first nine months
reflects the new rate restructuring of the FDIC. Data processing costs increased
due to new technology enhancements and expanded banking facilities. OREO income
of $141,000 for the first nine
17
<PAGE>
months of 1997 reflected gains on sales of foreclosed property, deferred income
recognized, and recoveries of carrying cost. This compared to a net OREO expense
of $164,000 in the same period of 1996 as a result of foreclosure activity
during such period. Marketing costs increased as a result of aggressive
promotional efforts for new banking services and facilities. Other expenses
declined as a result of a legal settlement.
Provision for Income Taxes. The provision for income taxes was $5.3 million
for the first nine months of 1997, compared to $3.3 million for the
corresponding period in 1996. The combined effective tax rate for the nine
months ended September 30, 1997 was 37.3% versus 35.9% for the same period in
1996.
18
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
The Company and its subsidiaries are not involved in any pending
legal proceedings other than those arising in the ordinary course of
the Company's business. Management believes that the resolution of
these matters will not materially affect the Company's business or
the consolidated financial condition of the Company.
Item 2. Changes in Securities.
----------------------
Not applicable.
Item 3. Defaults Upon Senior Securities.
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
Not applicable.
Item 5. Other Information.
------------------
At a meeting of the Board of Directors held on October 16, 1997, the
payment of a cash dividend was declared, providing for payment of
$0.15 per share on November 14, 1997 to holders of record on October
30, 1997.
At a meeting of the Board of Directors held October 16, 1997, a stock
repurchase program of up to 300,000 shares was authorized effective
November 1, 1997. This program will run through October 31, 1998 and
authorizes the purchase of up to 300,00 shares, roughly 5% of
Affiliated's outstanding common stock, in open market transactions,
the amount and timing of such puchases, if any, to be subject to
market conditions. The stock purchased will be placed in Treasury and
may be used for general corporate purposes.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
a. Exhibits: 11.0 -- Computation of per share earnings.
27.0 -- Financial Data Schedule.
b. Reports on Form 8-K: No reports on Form 8-K were filed during the
quarter ended September 30, 1997.
19
<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 thereunto duly authorized.
Affiliated Community Bancorp, Inc.
----------------------------------
(Registrant)
Date: November 17, 1997
By /s/ Timothy J. Hansberry
----------------------------------
Timothy J. Hansberry
President and Chief Executive Officer
By /s/ John G. Fallon
----------------------------------
John G. Fallon
Executive Vice President and
Chief Financial Officer
20
<TABLE>
<CAPTION>
Exhibit 11.0
Affiliated Community Bancorp, Inc.
Computation of Primary and Fully Diluted Earnings Per Share (Note 4)
(Dollars in thousands, except share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
------------------------ ------------------------
September 30, September 30,
------------------------ ------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Primary:
Weighted average shares 6,474,523 6,357,889 6,461,056 6,376,205
ESOP shares not released or committed to be released (98,153) (75,845) (105,521) (80,292)
--------- --------- --------- ---------
6,376,370 6,282,044 6,355,535 6,295,913
Common stock equivalents:
Stock Options 305,622 177,780 267,793 154,166
--------- --------- --------- ---------
Primary weighted average shares 6,681,992 6,459,824 6,623,328 6,450,079
========= ========= ========= =========
Net income $2,949 $1,302 $8,828 $5,824
========= ========= ========= =========
Earnings per share $0.44 $0.20 $1.33 $0.90
========= ========= ========= =========
Fully diluted:
Weighted average shares 6,474,523 6,357,889 6,461,056 6,376,205
ESOP shares not released or committed to be released (98,153) (75,845) (105,521) (80,292)
--------- --------- --------- ---------
6,376,370 6,282,044 6,355,535 6,295,913
Common stock equivalents:
Stock Options 329,912 200,439 323,282 200,161
--------- --------- --------- ---------
Fully diluted weighted average shares 6,706,282 6,482,483 6,678,817 6,496,074
========= ========= ========= =========
Net income $2,949 $1,302 $8,828 $5,824
========= ========= ========= =========
Earnings per share $0.43 $0.20 $1.32 $0.90
========= ========= ========= =========
21
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 15,979 0
<INT-BEARING-DEPOSITS> 4,584 0
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 177,168 0
<INVESTMENTS-CARRYING> 188,115 0
<INVESTMENTS-MARKET> 190,230 0
<LOANS> 707,935 0
<ALLOWANCE> 8,381 0
<TOTAL-ASSETS> 1,128,579 0
<DEPOSITS> 702,994 0
<SHORT-TERM> 262,513 0
<LIABILITIES-OTHER> 6,857 0
<LONG-TERM> 46,057 0
0 0
0 0
<COMMON> 67 0
<OTHER-SE> 110,091 0
<TOTAL-LIABILITIES-AND-EQUITY> 1,128,579 0
<INTEREST-LOAN> 14,370 41,879
<INTEREST-INVEST> 6,300 18,242
<INTEREST-OTHER> 70 162
<INTEREST-TOTAL> 20,740 60,283
<INTEREST-DEPOSIT> 7,114 20,847
<INTEREST-EXPENSE> 11,824 33,914
<INTEREST-INCOME-NET> 8,916 26,369
<LOAN-LOSSES> 250 700
<SECURITIES-GAINS> 90 97
<EXPENSE-OTHER> 4,540 13,046
<INCOME-PRETAX> 4,688 14,081
<INCOME-PRE-EXTRAORDINARY> 4,688 14,081
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,949 8,828
<EPS-PRIMARY> .44 1.33
<EPS-DILUTED> .43 1.32
<YIELD-ACTUAL> 3.32 3.36
<LOANS-NON> 3,321 3,321
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 511 511
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 8,228 7,759
<CHARGE-OFFS> 116 156
<RECOVERIES> 19 78
<ALLOWANCE-CLOSE> 8,381 8,381
<ALLOWANCE-DOMESTIC> 8,381 8,381
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
