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 March 31, 1998
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 April 30, 1997 there were 6,612,524 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
March 31, 1998 and December 31, 1997..................................3
Consolidated Statements of Income for the Three Months
Ended March 31, 1998 and 1997..........................................4
Consolidated Statements of Comprehensive Income for the
Three Months Ended March 31, 1998 and 1997.............................5
Consolidated Statements of Stockholders' Equity for
the Three Months Ended March 31, 1998 and 1997........................6
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1997.........................................7
Notes to Consolidated Financial Statements.............................8
Item 2.
- -------
Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Three Months Ended
March 31, 1998 and 1997................................................11
Item 3.
- -------
Qualitative and Quantitative Disclosures About Market Risk.............20
PART II - OTHER INFORMATION
Item 1.
- -------
Legal Proceedings......................................................21
Item 2.
- -------
Changes in Securities and Use of Proceeds..............................21
Item 3.
- -------
Defaults Upon Senior Securities........................................21
Item 4.
- -------
Submission of Matters to a Vote of Security Holders....................21
Item 5.
- -------
Other Information......................................................21
Item 6.
- -------
Exhibits and Reports on Form 8-K.......................................21
SIGNATURES.............................................................22
EXHIBITS:
Stock Purchase Agreement (Shares of Middlesex
Bank & Trust Company...................................................23
Computation of Basic and Diluted Earnings Per Share
For Three Months Ended March 31, 1998 and 1997.........................52
Financial data schedule................................................53
Financial data schedule Restated.......................................54
2
<PAGE>
<TABLE>
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
<CAPTION>
March 31, December 31,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 16,023 $ 16,911
Federal funds sold and overnight deposits 7,868 10,344
Investment securities - held to maturity (fair value $154,944 and $174,000
at March 31, 1998 and December 31, 1997, respectively) 152,973 172,623
Investment securities - available for sale (amortized cost $220,035 and $203,133
at March 31, 1998 and December 31, 1997, respectively) 221,503 204,846
Loans held for sale 9,694 3,955
Loans receivable - net of allowance for possible loan losses of $8,783 and $8,641
at March 31, 1998 and December 31, 1997, respectively 690,498 703,061
Federal Home Loan Bank stock - at cost 16,443 16,426
Other real estate owned, net 1 1
Accrued interest receivable 7,898 8,727
Office properties and equipment, net 8,662 8,747
Deferred tax asset, net 2,770 2,671
Other assets 6,429 6,736
----- -----
Total assets $1,140,762 $1,155,048
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 727,703 $ 729,096
Federal Home Loan Bank advances 279,871 297,358
ESOP debt 947 1,037
Mortgagors' escrow payments 2,538 2,343
Securities sold under agreements to repurchase 6,199 3,804
Other 7,529 8,357
----- -----
Total liabilities 1,024,787 1,041,995
--------- ---------
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 6,828,070 in 1998 and 6,751,146 in 1997 68 67
Additional paid-in capital 51,032 50,360
Retained earnings - restricted 68,375 66,128
Treasury stock at cost, 247,500 shares (3,402) (3,402)
Unearned compensation - ESOP (929) (1,019)
Unrealized gain on investment securities, net of tax effects 831 919
--- ---
Total stockholders' equity 115,975 113,053
------- -------
Total liabilities and stockholders' equity $ 1,140,762 $ 1,155,048
=========== ===========
</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
March 31,
------------------
1998 1997
(Unaudited)
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 14,686 $ 13,581
Interest and dividend income on investment securities 6,469 5,934
Interest on federal funds sold and overnight deposits 130 45
--- --
Total interest and dividend income 21,285 19,560
------ ------
Interest expense:
Interest on deposits 7,600 6,795
Interest on borrowed funds 4,318 4,088
----- -----
Total interest expense 11,918 10,883
------ ------
Net interest income 9,367 8,677
Provision for possible loan losses 126 200
--- ---
Net interest income after provision for possible loan losses 9,241 8,477
----- -----
Noninterest income:
Mortgage loan servicing fees 58 67
Customer service fees and other 437 361
Gain (loss) on sales of securities, net 118 (2)
Gain on sales of loans, net 145 1
--- ---
Total noninterest income 758 427
--- ---
Noninterest expenses:
Compensation and employee benefits 2,943 2,508
Occupancy and equipment 618 537
Data processing 308 234
Professional services 141 166
Federal Deposit Insurance premiums 69 65
Other real estate owned (income) expenses, net (8) (22)
Marketing and promotion 190 156
Other 721 563
--- ---
Total noninterest expenses 4,982 4,207
----- -----
Income before provision for income taxes 5,017 4,697
Provision for income taxes 1,805 1,760
----- -----
Net Income $ 3,212 $ 2,937
======== ========
Earnings per share:
Basic $ 0.50 $ 0.46
======== ========
Diluted $ 0.47 $ 0.45
======== ========
Weighted average shares outstanding:
Basic 6,437 6,333
===== =====
Diluted 6,792 6,571
===== =====
</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 COMPREHENSIVE INCOME
(In thousands)
<CAPTION>
Three Months Ended
March 31,
------------------
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Net Income $ 3,212 $ 2,937
Other comprehensive income:
Unrealized losses on investment securities arising during
the period, net of tax benefits of $127,000 in 1998 and
$648,000 in 1997 (88) (851)
Less: Reclassification adjustment for gains included in net income (43) -
---- ---
Other comprehensive income (131) 851
---- ---
Comprehensive income $ 3,081 $ 2,086
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
<TABLE>
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1998 and 1997
(In thousands, except per share data)
(Restated for May 30, 1997 stock split)
(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, 1996 $ 66 $ 49,146 ($ 3,402) $ 57,518 ($ 1,394) ($ 532) $ 101,402
Net income - - - 2,937 - - 2,937
ESOP transactions - 58 - 13 107 - 178
Issuance of common stock under stock
option plan 1 156 - - - - 157
Cash dividends declared ($.12 per share) - - - (774) - - (774)
Changes in net unrealized gain (loss) on
securities available for sale, net of tax effect - - - - - (851) (851)
----- ------- ----- -------- ---- ---------- -----
Balance at March 31, 1997 $ 67 $ 49,360 ($ 3,402) $ 59,694 ($ 1,287) ($1,383) $ 103,049
==== ======== ======== ======== ======== ======= =========
</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, 1997 $ 67 $ 50,360 ($ 3,402) $ 66,128 ($ 1,019) $ 919 $ 113,053
Net income - - - 3,212 - - 3,212
ESOP transactions - 167 - 11 90 - 268
Issuance of common stock under stock
option plan 1 328 - - - - 329
Tax benefit from stock options exercised - 177 - - - - 177
Cash dividends declared ($.15 per share) - - - (976) - - (976)
Changes in net unrealized gain (loss) on
securities available for sale, net of tax effect - - - - - (88) (851)
----- ------- ----- -------- ---- ---------- -----
Balance at March 31, 1998 $ 68 $ 51,032 ($ 3,402) $ 68,375 ($ 929) $ 831 $ 115,975
===== ======== ======== ======== ======= ===== =========
</TABLE>
The accompanying notes are integral part of these consolidated financial
statements.
6
<PAGE>
<TABLE>
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Three Months Ended
March 31,
---------
1998 1997
----------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net Income
$ 3,212 $ 2,937
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for possible loan losses 126 200
Provision for losses on other real estate owned - -
Depreciation and amortization 238 203
Gain on sales of loans (145) (1)
(Gain) loss on sales of securities (118) 2
Net gain on sales of other real estate owned - (44)
Net amortization of premiums and discounts on investment securities 49 90
Provision for deferred income taxes - (200)
ESOP transactions 268 178
Increase in Federal Home Loan Bank stock (17) -
Originations of loans held for sale (20,981) -
Proceeds from sales of loans originated for resale 15,387 -
(Increase) decrease in accrued interest receivable 829 (412)
Other, net (48) 869
--- ----
Net cash provided by (used in) operating activities (1,200) 3,822
------ -----
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale 1,518 2,501
Proceeds from maturities of investment securities held to maturity 29,750 5,419
Proceeds from maturities of investment securities available for sale 37,826 4,700
Purchase of investment securities available for sale (60,315) (8,409)
Purchase of investment securities held to maturity (17,869) (20,239)
Principal payments received on investment securities available for sale 4,065 2,306
Principal payments received on investment securities held to maturity 7,788 5,318
Loan originations, net of repayments 12,437 (14,610)
Purchases of office properties and equipment (153) (261)
Organizational Costs - USTB (184) -
Capitalized costs associated with other real estate owned, net of payments received - -
Proceeds from sales of other real estate owned - 339
------ -------
Net cash provided by (used in) investing activities 14,863 (22,936)
------ -------
Cash flows from financing activities:
Net increase (decrease) in deposits (1,393) 12,637
Additions (reductions) to Federal Home Loan Bank advances (17,487) 5,600
Increase in mortgagors' escrow payments 195 249
Increase in repurchase agreements 2,395 2,616
Proceeds from issuance of common stock 329 157
ESOP transactions (90) (89)
Cash dividends paid on common stock (976) (774)
---- ----
Net cash provided by (used in) financing activities (17,027) 20,396
------- ------
Net increase (decrease) in cash and cash equivalents (3,364) 1,282
Cash and cash equivalents at beginning of period 27,255 15,795
------ ------
Cash and cash equivalents at end of period $ 23,891 $ 17,077
======== ========
Supplemental disclosures of cash flow information:
Interest paid on deposits $ 7,291 $ 6,627
Interest paid on borrowed funds 4,468 4,087
Income taxes paid, net of refunds 299 364
Supplemental disclosures of non-cash transactions:
Transfers to foreclosed real estate - 172
Loans granted on sale of foreclosed real estate - -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
7
<PAGE>
AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
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 1998 and
1997 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 1997 consolidated financial
statements to conform with the March 31, 1998 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.
On December 15, 1997, Affiliated Community Bancorp, Inc. announced that it
had signed an Affiliation Agreement and Plan of Reorganization under which it
would be acquired by UST Corp. The transaction is expected to close during the
second or third quarter of 1998, and is structured to qualify as a pooling of
interests for accounting purposes and as a tax-free exchange of 1.41 shares of
UST common stock for each share of Affiliated common stock. UST Corp. is a $3.8
billion Boston-based bank holding company which serves as the parent company to
USTrust and United States Trust Company. Through its subsidiaries, UST Corp.
operates a total of 66 banking offices throughout eastern Massachusetts and
provides a broad range of financial services, principally to individuals and
small-and medium-sized companies in New England. The transaction is subject to
the necessary shareholder and regulatory approvals.
2) Earnings and Dividends Declared Per Share
The Company adopted SFAS No. 128 "Earnings Per Share (EPS)" effective for
annual periods ending after December 15, 1997. In accordance with SFAS No. 128
earnings per share are calculated in two ways:
-Basic earnings per share is computed by dividing reported net income by
the weighted average number of common stock shares outstanding during the
year.
-Diluted earnings per share is computed by dividing net income by the
weighted average number of common stock shares outstanding during the year,
plus the common stock equivalents of stock options calculated using the
average share price during the reporting period.
Prior year earnings per share amounts have been restated accordingly.
8
<PAGE>
3) Allowance for Possible Loan Losses
The following is a summary of the allowance for possible loan losses for
the three month period ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Balance at beginning of period $8,641 $7,759
Provision for possible loan losses 126 200
Recoveries 16 43
----- -----
8,783 8,002
Loans charged-off - 40
----- -----
Balance at end of period $8,783 $7,962
====== ======
</TABLE>
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, 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 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 three months ended March 31, 1998 and 1997, the average recorded
investment in impaired loans was $3,893,000 and $3,567,000, respectively, and
the income recognized on related impaired loans was $69,000 and $56,000,
respectively. At March 31, 1998 and December 31, 1997, the Company classified
$4,142,000 and $3,897,000, respectively, of its loans as impaired. The
$4,142,000 in impaired loans at March 31, 1998 has been measured under the fair
value of collateral method. At March 31, 1998 impaired loans totaling $3,204,000
had a related valuation reserve of $587,000. The $3,897,000 in impaired loans at
December 31, 1997 has been measured under the fair value of collateral method.
At December 31, 1997, impaired loans totaling $2,989,000 had a related valuation
reserve of $578,000.
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
The Company adopted SFAS No. 130, "Reporting Comprehensive Income"
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 for the three months ended March 31, 1998 and
1997 is presented within a separate financial statement contained in this
report.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." This statement establishes standards for
reporting information about segments in annual and interim financial statements.
SFAS 131 introduces a new model for segment reporting, called the "management
approach." The management approach is based on the way the chief operating
decision-maker organizes segments within a company for making operating
decisions and assessing performance. Reportable segments are based on products
and services, geography, legal structure, management structure -- any
9
<PAGE>
manner in which management disaggregates a company. This statement is effective
and will be adopted for the Company's financial statements for the fiscal year
ending December 31, 1998 and requires the restatement of previously reported
segment information for all periods presented.
In February 1998, the FASB issued SFAS No. 131 "Employers' Disclosures
about Pensions and Other Postretirement Benefits" which is to become effective
for fiscal years beginning after December 15, 1997. This Statement revises
employers' disclosures about pension and other postretirement benefits plans. It
does not change the measurement or recognition of those plans. Restatement of
disclosures for earlier periods provided for comparative purposes is required
unless the information is not readily available.
In April 1998, the AICPA issued Statement of Position No. 98-5, "Reporting
on the Costs of Start-Up Activities", which is effective for fiscal years
beginning after December 31, 1998. This statement establishes standards on the
financial reporting of start-up and organization costs. It requires that costs
of start-up activities and organization costs be expensed as incurred.
Management does not anticipate that the adoption of this statement will have a
material impact on the Company or its results of operations.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997.
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.
During the third quarter of 1997, the Company conducted a review of its
operations and systems to identify the impact of the so-called Year 2000 issue
on it. An assessment and a plan were developed to resolve the issue. The Year
2000 issue, which is common to most corporations and especially most banks,
concerns the inability of information systems, primarily computer hardware and
computer software programs, to properly recognize and process date-sensitive
information as the year 2000 approaches. Since the Company's information systems
functions are either outsourced to service bureaus or processed in-house using
programs developed by third party vendors, the direct effort to correct Year
2000 issues will largely be undertaken by third parties and will therefore not
be within the Company's direct control. The Company currently is not aware of a
situation where either a vendor will not be able to modify their product or the
Company will not be able to replace any affected system in time to avoid
material adverse effects on operations.
The Company's plan to resolve the Year 2000 issue was developed along the
five phase (awareness; assessment; renovation; validation and implementation)
project management process outlined in the Federal Financial Institutions
Examination Council (FFIEC) Year 2000 statement of May 5, 1997. The awareness
phase has been completed, a Year 2000 assessment was completed and monitoring is
ongoing. Renovation of third party systems that were identified as non-compliant
is being undertaken by those third parties and is scheduled to be completed by
December 31, 1998. Testing and implementation will occur during 1998 and into
1999.
The chief components of the Company's expense related to the Year 2000
issue are currently believed to be the replacement of personal computer
equipment, the purchase or upgrade of third party software and costs related to
testing. External costs and internal modification costs will be expensed as
incurred; costs of new hardware and software will be capitalized and amortized
in accordance with the Company's policies. While cost estimates have been
prepared, final costs have not been determined. The Company anticipates that,
while such costs may impact the Company's results of operations in one or more
fiscal quarters, they will not have a material adverse impact on the long term
results of operations or consolidated financial position of the Company.
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. Actual events could differ materially from
those anticipated 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 capital or reserve requirements, the so-called Year 2000 issue,
changes in interest rates, and increased competition and bank consolidations in
the Company's market area.
The results for the first quarter of 1998 included the 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, 1997
- -----------------------------------------------------
Total assets at March 31, 1998 amounted to $1.141 billion as compared to
$1.155 billion at December 31, 1997, reflecting a decrease of $14 million or
1.2%. The decrease in the Company's assets is primarily attributable to a
decline in investment securities held to maturity and loans.
11
<PAGE>
Investments: Investment securities designated as held to maturity amounted
------------
to $153.0 million at March 31, 1998 versus $172.6 million at December 31, 1997.
At March 31, 1998 investment securities available for sale amounted to $221.5
million versus $204.8 million at December 31,1997.
The decline in investment securities held to maturity reflects maturities,
amortization of mortgaged backed investments and agency securities that were
called. Proceeds from such were reinvested into mortgage-backed certificates and
mortgage-backed derivatives within the available for sale portfolio.
The carrying values of investment securities at March 31, 1998 and December
31, 1997 is presented in the following table:
March 31, 1998 December 31, 1997
-------------- ------------------
Available Held to Available Held to
for Sale Maturity for Sale Maturity
-------- -------- -------- --------
(In thousands)
Government securities $ 80,121 $ 24,207 $107,180 $ 52,687
Corporate and other bonds 17,408 20,386 16,014 22,846
Mortgage-backed securities 54,791 95,254 33,989 86,138
Mortgage-backed derivatives 32,827 13,126 11,034 10,952
Marketable equity securities 36,356 - 36,629 -
------ ------ ------ ------
$221,503 $152,973 $204,846 $172,623
======== ======== ======== ========
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 March 31, 1998 had an average life of 2.7 years
with 20% in monthly adjusting securities and the remaining 80% in fixed rate
securities.
Loans: Gross loans outstanding, excluding loans held for sale, at March 31,
------
1998 amounted to $699.3 million versus $711.7 million at December 31, 1997. The
decrease of $12.4 million or 1.75% was primarily attributed to the refinancing
and/or payoff of adjustable rate residential loans and commercial real estate
loans during the first quarter of 1998. There were no sales of loans into the
secondary market during year first quarter of 1997; $15 million of fixed rate
residential originations were sold into the secondary market during the first
quarter of 1998. Loans held for sale totaled $9.7 million as of March 31, 1998
versus $4.0 million on December 31, 1997. The gross balances of loans
outstanding at March 31, 1998 and December 31, 1997 are shown in the following
table:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Real estate:
1-4 family $ 459,802 $ 469,453
Commercial and construction 175,729 180,398
Commercial 43,355 41,414
Equity lines of credit and other 21,610 21,710
Less: net deferred loan fees (1,215) (1,273)
------ ------
$ 699,281 $ 711,702
========= =========
</TABLE>
At March 31, 1998 loans delinquent 60 days or more amounted to $2.6 million
and represented 0.4% of total loans outstanding. The comparable amounts at
December 31, 1997 were $1.9 million or 0.3%.
12
<PAGE>
The following table sets forth information regarding non-accrual loans,
troubled debt restructurings, OREO and other assets:
March 31, December 31,
1998 1997
---- ----
(Dollars in thousands)
Non-accrual loans $4,547 $4,336
Troubled debt restructurings 162 162
--- ---
Total non-performing loans 4,709 4,498
Other real estate owned, net 1 1
--- ---
Total non-performing assets $4,710 $4,499
====== ======
Loans past due 90 days or more and
still accruing $ - $ -
====== ======
Non-performing loans as a percent of
total loans .66% .63%
Non-performing assets as a percent of
total assets .41% .39%
Allowance for possible loan losses as
a percent of non-performing loans 186.52% 192.11%
Allowance for possible loan losses as
a percent of total loans 1.26% 1.21%
==== ====
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 March
31, 1998 and December 31, 1997:
March 31, December 31,
1998 1997
---- ----
(Dollars in thousands)
Demand $ 51,600 $ 48,120
NOW 62,939 60,781
Regular savings 123,879 120,921
Money market 69,804 72,571
------ ------
Total non-certificate accounts 308,222 302,393
------- -------
Certificates less than $100,000 314,316 315,075
Certificates of $100,000 and over 105,165 111,628
-------- ------- -------
Total certificate accounts 419,481 426,703
------- -------
Total deposits $727,703 $729,096
======== ========
At March 31, 1998 and December 31, 1997, brokered certificates of deposit
amounted to $49.1 million and $57.1 million, respectively. Brokered certificates
of deposit include $30.0 million and $36.4 million in Depository Trust Company
("DTC") certificates at March 31, 1998 and December 31, 1997, respectively.
Borrowings from the Federal Home Loan Bank ("FHLB") amounted to $279.9
million at March 31, 1998 versus $297.4 million at December 31, 1997. The
decrease reflects matured fixed rate advances that were not renewed due to the
decrease in real estate loans and the held to maturity investment portfolio.
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
13
<PAGE>
April 16, 1998 the Company declared a regular quarterly dividend of $0.15 per
share payable on May 15, 1998 to stockholders of record on April 30, 1998. This
first quarter dividend is the same amount as that announced last quarter and 25%
higher than a year ago.
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 decrease in earning assets of $12.1
million for the three month period ended March 31, 1998 was primarily due to
loan refinancing or prepayments and a moderation in investing activities. As a
result of these trends, the Company reduced its FHLB borrowings by $17.5 million
in the first quarter.
The Company's bank subsidiaries, as members of the FHLB, have overnight
lines of credit of approximately $26 million and an overall borrowing capacity
of approximately $643.7 million from the FHLB. At March 31, 1998 outstanding
borrowings were $279.9 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 March 31, 1998, the Company had outstanding commitments of $112.2
million to originate loans and advance funds. As of that date, the Company had
commitments to sell loans of $9.7 million. The Company believes that it will
have sufficient funds available to meet all of its commitments as a result of
the liquidity inherent in its balance sheet, combined with its available
borrowing capacity through the FHLB.
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. Per share numbers in this report have been restated to reflect this
split.
On December 15, 1997, Affiliated and UST Corp. jointly announced that they
had signed an Affiliation Agreement and Plan of Reorganization under which UST
Corp. would acquire Affiliated. This transaction is expected to close in the
second or third quarter of 1998 and is structured to qualify as a pooling of
interests for accounting purposes and as a tax-free exchange of 1.41 shares of
UST Corp. common stock for each share of Affiliated common stock.
On May 1, 1998, Affiliated and William R. Berkley, of Greenwich,
Connecticut jointly announced that they had signed a definitive agreement under
which Mr. Berkley will acquire 100% of the stock of Middlesex Bank & Trust
Company, a wholly owned subsidiary of Affiliated for $8.24 million. This
transaction is subject to the UST transaction closing.
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 slightly 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 March 31, 1998. 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 ......... 18.71% 14.66% 52.23% 18.08% 4.00%
Total capital .......... 19.96 15.72 52.55 19.34 8.00
Tangible equity ratio ....... 9.52 N/A N/A N/A 2.00
Tier 1 leverage capital ratio 9.52 8.86 35.85 10.00 4.00
</TABLE>
Market Risk
- -----------
As a financial institution, the Company's chief market risk is interest
rate risk. The Company has no material exposure to foreign currency or commodity
prices. Its exposure to equity prices is limited to marketable equity securities
contained within its available for sale investment portfolio. The Company does
not have a trading portfolio.
Interest rate risk is the sensitivity of income to variations in interest
rates over defined time horizons. The primary goal of
14
<PAGE>
interest rate risk management is to control this risk within limits and
guidelines approved by the Company's Asset/Liability Committee (ALCO). These
limits and guidelines reflect the Company's tolerance for interest rate risk.
The Company attempts to control interest rate risk by identifying
exposures, quantifying them, and identifying their impact on income. The Company
quantifies its interest rate risk exposures using simulation models as well as
simpler gap analyses. The Company manages its interest rate exposures using a
combination of on-balance sheet instruments, consisting principally of fixed and
variable rate securities, deposit pricing and FHLB borrowings.
As of March 31, 1998, the Company had no outstanding exposure to
off-balance sheet interest rate instruments such as swaps, forwards or futures.
However, it has had limited exposure to such instruments in the past in order to
hedge its interest rate risk position and may do so in the future.
Asset/Liability Management. The Company's ALCO, under the authority of the
Board of Directors, has established guidelines within which management operates
to meet liquidity needs and manage interest rate risk. These liquidity needs are
defined by the needs of the depositors and borrowers of the Company. The
Company's primary source of funds is its deposit base. Management uses the
investment portfolio and borrowing capabilities to manage the liquidity position
and interest rate risk position, in its efforts to maximize interest income
within the ALCO's guidelines.
The ALCO consists of members of the Board of Directors and management.
Meetings are held on a quarterly basis and topics of discussion include, but are
not limited to, levels and direction of interest rates, deposit flows, loan
demand, investment portfolio and borrowed funds positions, interest rate
sensitivity or "gap" position and other variables which impact the Company's
interest rate sensitivity position.
Interest Rate Sensitivity Analysis. The matching of assets and liabilities
are analyzed by examining the extent to which such assets and liabilities are
"interest rate sensitive" and by monitoring an institution's interest rate
sensitivity "gap." An asset or liability is considered to be interest rate
sensitive within a specific time period if it will mature or reprice within that
time period. The interest rate sensitivity gap is defined as the difference
between the amount of interest-earning assets anticipated, based upon certain
assumptions, to mature or reprice within a specific time period and the amount
of interest-bearing liabilities anticipated, based upon certain assumptions, to
mature or reprice within that time period. A gap is considered positive when the
amount of interest rate sensitive assets maturing or repricing within a period
exceeds the amount of interest rate sensitive liabilities maturing or repricing
within that period; a gap is considered negative when the converse occurs.
During a decreasing interest rate environment, a negative gap would tend to
result in an increase in net interest income while a positive gap would tend to
adversely affect net interest income. In a rising interest rate environment, an
institution with a positive gap would generally expect an increase in net
interest income, whereas an institution with a negative gap would generally be
expected to experience the opposite result.
15
<PAGE>
The following table represents management's anticipated cash flows and
repricings of Affiliated's March 31, 1998 consolidated balance sheet based upon
assumptions derived from historical experience, the current interest rate and
economic outlook, standardized mortgage prepayment models and various other data
input sources. Management monitors these assumptions on a regular basis and
revises them when necessary. Management believes that these assumptions are
accurate but understands that actual cash flows and repricings will be
determined by changes in interest rates and customer behavior which may vary
from these projections.
<TABLE>
<CAPTION>
At March 31, 1998
------------------------------------------------------------------
More Than More Than
--------- ---------
Less than Six Months to One Year to More Than
------------- ----------- ---------
Six Months One Year Five Years Five Years Total
---------- -------- ---------- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest sensitive assets:
Federal funds sold and interest
bearing deposits ............... $ 7,868 $ - $ - $ - $ 7,868
Investment securities ........... 161,912 69,490 122,300 37,217 390,919
Mortgage loans .................. 163,141 117,565 228,987 124,623 634,316
Commercial loans ................ 43,355 -- - -- 43,355
Home equity loans ............... 18,680 -- -- -- 18,680
Consumer loans .................. 524 495 1,788 123 2,930
Other Assets .................... 9,694 -- -- 33,000 42,694
----- ------ ------ ------ ------
Total Assets ............... $ 405,174 $ 187,550 $ 353,075 $ 194,963 $1,140,762
========== ========== ========== ========== ==========
Liabilities & Stockholders' Equity
Savings accounts ................ $ 10,530 $ 9,635 $ 68,448 $ 35,266 $ 123,879
NOW/DDA accounts ................ 9,738 8,910 63,258 32,633 114,539
Money Market accounts ........... 12,886 10,506 45,483 929 69,804
Time Deposits ................... 161,622 128,070 126,841 2,948 419,481
Borrowed Funds .................. 195,969 28,715 64,871 -- 289,555
Other Liabilities ............... -- -- -- 7,529 7,529
Stockholders' equity ............ -- -- -- 115,975 115,975
----- ------ ------ ------ ------
Total Liabilities & Stockholders' Equity $ 390,745 $ 185,836 $ 368,901 $ 195,280 $1,140,762
========== ========== ========== ========== ==========
Period GAP ...................... $ 14,429 $ 1,714 $ (15,826) $ (317)
Cumulative GAP .................. $ 14,429 $ 16,143 $ 317 -
Period GAP as a Percentage
of total assets ................ 1.26% 0.15% (1.39)% (0.03)%
Cumulative GAP as a percentage of
total assets.................... 1.26% 1.42% 0.03% --
</TABLE>
The following list outlines some of the significant assumptions utilized
for the above analysis:
- Fixed rate assets are displayed using contractual maturity.
- Adjustable rate assets are displayed using repricing dates.
- Assets with prepayment options (fixed and adjustable) are modeled utilizing
an industry standard financial modeling system to project asset cash flows
based upon current interest rates.
- Loans held for sale are classified as "Less than Six Months".
- Fixed rate deposits and borrowings are displayed using repricing dates.
- Deposits that do not possess contractual maturity dates or are not directly
linked to an interest rate index are modeled utilizing deposit decay rates
provided by one of the federal banking regulatory agencies. These
categories include Savings accounts, NOW/DDA accounts and money market
accounts. Although DDA accounts do not pay interest, management believes
that DDA cash flows are impacted by changes in interest rates. When
comparing the decay rates to internal management analysis of its deposit
cash flows, it was determined that the decay rates represent faster cash
flow patterns than those displayed by the past customer practice. However,
to be conservative, the regulatory decay rates are utilized for this
presentation.
Interest Rate Risk. Interest rate gap analysis provides a static view of
the maturity and repricing characteristics of the Company's balance sheet
positions. The Company's internal guidelines on interest rate risk specify that
the cumulative one year gap should be less than 10% of assets. As of March 31,
1998, the gap was approximately 1% of assets.
16
<PAGE>
The Company uses simulation analysis to measure the exposure of net
interest income to changes in interest rates over a two-year time horizon.
Simulation analysis involves projecting future interest income and expenses from
the Company's assets and liabilities under various rate scenarios.
The Company's internal guidelines on interest rate risk specify that if
interest rates were to shift immediately up or down 200 basis points, estimated
net interest income for each of the next twelve and twenty-four months should
decline by less than 12%. As of March 31, 1998, the Company's estimated exposure
as a percentage of estimated net interest income for the next twelve and twenty
four month periods, respectively, are as follows:
a. 200 basis point increase in rates: -4.3%; -3.1%
b. 200 basis point decrease in rates: -1.1%; -2.3%
Comparison of Results of Operations for the Three Months Ended March 31, 1998
- --------------------------------------------------------------------------------
and 1997
- --------
General Operating Results. Net income for the three months ended March 31,
1998 was $3.2 million compared to net income of $2.9 million in the
corresponding quarter of 1997, an increase of $275,000 or 9.4%. The earnings
increase was attributed to a higher level of net interest income and gains on
sales of assets, partially offset by increased operating expenses. Basic
earnings per share ("EPS") was $0.50 per share for the three months ended March
31, 1998 versus $0.46 for the three months ended March 31, 1997, a 9% increase.
Diluted EPS was $0.47 for the 1998 period versus $0.45 for 1997, a 4% increase.
The increase in diluted earnings per share was reduced by the impact of the
increase in Affiliated's stock price from 1997 to 1998 on the common stock
equivalents used to calculate diluted earnings per share.
Net interest income for the three months ended March 31, 1998 amounted to
$9.4 million as compared to $8.7 million for the corresponding period in 1997.
17
<PAGE>
The following table sets forth the Company's average balances and net
interest income components for the three months ended March 31, 1998 and 1997.
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."
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------------------------------------------------
1998 1997
------------------------------------ ----------------------------------------
(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 $ 713,915 $ 14,686 8.23% $ 659,003 $ 13,581 8.24%
--------- ------ ---- --------- ------ ----
Investments:
Investment and mortgage-backed
securities held-to-maturity 162,595 2,738 6.74% 182,416 3,040 6.67%
Investment and mortgage-backed
securities available-for-sale 206,428 3,468 6.72% 160,956 2,663 6.62%
Federal Home Loan Bank stock 16,427 263 6.40% 14,638 231 6.31%
Federal funds sold and
overnight deposits 10,011 130 5.19% 4,488 45 4.01%
--------- ------ ---- --------- ------ ----
Total investments 395,461 6,599 6.67% 362,498 5.979 6.60%
--------- ------ ---- --------- ------ ----
Total interest-earning assets 1,109,376 21,285 7.67% 1,021,501 19,560 7.66%
--------- ------ ---- --------- ------ ----
Noninterest-earning assets 41,938 33,175
Allowance for possible loan losses (8,696) (7,823)
--------- -------
Total assets $ 1,142,618 $ 1,046,853
=========== ===========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Regular savings, NOW and money
market accounts $ 254,054 $ 1,582 2.49%$ 236,363 $ 1,496 2.53%
Certificate accounts 423,419 6,018 5.69% 377,513 5,299 5.61%
Borrowings 294,999 4,318 5.85% 284,239 4,088 5.75%
--------- ------ ---- --------- ------ ----
Total interest-bearing liabilities 972,472 11,918 4.90% 898,115 10,883 4.85%
--------- ------ ---- --------- ------ ----
Noninterest-bearing liabilities:
Demand deposits 47,925 39,469
Other 7,996 7,119
--------- -------
Total liabilities 1,028,393 944,703
--------- -------
Stockholders' equity 114,225 102,150
--------- -------
Total liabilities and
stockholders' equity $ 1,142,618 $ 1,046,853
=========== ===========
Net interest income $ 9,367 $ 8,677
=========== ===========
Interest rate spread 2.77% 2.81%
==== ====
Net yield on earning assets 3.38% 3.40%
==== ====
</TABLE>
Interest Income. Total interest and dividend income increased from $19.6
million in the first quarter of 1997 to $21.3 million in the same period of
1998, an increase of 8.8%. The additional income was due mostly to the higher
volume of loans and mortgage-backed securities available for sale. The yield on
average earning assets was essentially flat at 7.67% in the first quarter of
1998 compared to 7.66% in the same period of 1997. Average loans outstanding in
the current quarter amounted to $713.9 million and produced an average yield of
8.23%, as compared to a 1997 average volume of $659.0 million with an average
yield of 8.24%. The average balance of all investment categories amounted to
$395.5 million in the first quarter of 1998 with an average yield of 6.67%
compared to $362.5 million and 6.60%, respectively, in the comparable quarter of
1997.
18
<PAGE>
Interest Expense. Interest expense in the first quarter of 1998 amounted to
$11.9 million, up $1.0 million or 9.5% from $10.9 million in the same quarter of
1997. The main factors contributing to this increase were higher volume in
certificates of deposit and borrowings. The average rate paid on total
interest-bearing deposits increased from 4.85% in the first quarter of 1997 to
4.90% in the comparable period of 1998. Average interest-bearing deposit volume
increased from $613.9 million in the 1997 period to $677.5 million in the first
quarter of 1998, up $63.6 million or 10.4%. Average certificates increased $45.9
million or 12.2% in 1998 from the comparable 1997 quarter. The Company had
average borrowings of $295.0 million for the three months ended March 31, 1998,
with a related interest expense of $4.3 million, compared to $284.2 million and
$4.1 million, respectively, for the first quarter of 1997. The average rate paid
on borrowings increased from 5.75% in 1997 to 5.85% for 1998.
The following table illustrates the extent to which changes in interest
rates and changes in the volumes of interest-earning assets and interest-bearing
liabilities affected the components of the Company's interest income and
interest expense during the period. For each interest related asset and
liability category, information is provided with respect to (i) changes
attributable to changes in volume (changes in volume multiplied by prior rate),
(ii) changes attributable to changes in interest rates (changes in rate
multiplied by prior volume), and (iii) the 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.
Three Months Ended March 31,
----------------------------
1998 Compared with 1997
-----------------------
Increase (Decrease)
Due to Change in:
-----------------
Average Average
Volume Rate Total
------ ---- -----
(In thousands)
Interest Income:
Loans ............................ $ 1,130 ($ 25) $ 1,105
Investments:
Investment and mortgage-backed
securities held-to-maturity . (334) 32 (302)
Investment and mortgage-backed
securities available-for-sale 763 42 805
Federal Home Loan Bank stock .. 29 3 32
Federal funds sold ............ 69 16 85
-- -- --
Total interest income ......... 1,657 68 1,725
----- -- -----
Interest Expense:
Regular savings, NOW and money
market accounts ............... 110 (24) 86
Certificate accounts ............. 652 67 719
--- -- ---
Total deposits ................ 762 43 805
Borrowed funds ................... 157 73 230
--- -- ---
Total interest expense ........ 919 116 1,035
--- --- -----
Change in net interest income ........ $ 738 ($ 48) $ 690
======= ======= =======
The increase in 1998 first quarter net interest income was primarily
attributable to a volume increase in loans and mortgage-backed securities
available-for-sale. 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 first quarter of 1998 amounted to $126,000 versus $200,000 for the first
quarter of 1997. The decreased provision is attributable to the current level of
non-performing loans, the level of the Company's allowance for losses and
favorable charge off experience in recent years. At March 31, 1998, the
Company's allowance for possible loan losses amounted to $8.8 million which
represented 186% 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
19
<PAGE>
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. Management believes
that the March 31, 1998 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 first quarter of 1998, total noninterest income
amounted to $758,000, an increase of $331,000 or 77.5% from $427,000 in the
first quarter of 1997. Loan servicing fees, which amounted to $58,000 this
quarter compared to $67,000 in the first quarter of 1997, reflect a reduction in
the volume of loans serviced. Customer service fees and other income increased
by $76,000 or 21.1% in the first quarter from the same period in 1997, as a
result of non-recurring escrow income and an increase in cash surrender value of
life insurance policies. The Company had gains on securities sales of $118,000
in the first quarter of 1998 compared to a loss for the quarter ended March 31,
1997 of $2,000. The gain on sales of loans was $145,000 in the first quarter of
1998, compared to $1,000 for the same period in 1997 reflecting the sale of
current residential mortgage production into the secondary market.
Noninterest Expenses. Total noninterest expenses increased by $775,000 or
18.4% in the first quarter of 1998 to $5.0 million, compared to $4.2 million in
the corresponding quarter of 1997. Major components of the change in expenses
included a $435,000 or 17.3% increase in compensation and benefits, a $74,000
increase in data processing expense, an increase in marketing expense of
$34,000, and a $158,000 increase in other expenses.
The first quarter of 1998 included expenses for Middlesex Bank and Trust
which opened for business in June 1997. Middlesex accounted for $342,000 or 44%
of the total increase in non-interest expenses. Approximately $100,000 of the
increase in compensation and benefits was related to ESOP compensation caused by
the significant year to year increase in the Company's stock price. The
remaining increase in compensation and benefits costs was due to normal salary
increases, commissions, payroll taxes, and increased costs associated with the
401(k) plans at subsidiary banks. Apart from Middlesex, data processing costs
increased due to new technology options and expanded banking facilities. Other
expenses increased as a result of a non-recurring legal settlement in the first
quarter of 1997, and increased miscellaneous recurring costs in 1998.
Provision for Income Taxes. The provision for income taxes was $1,805,000
million for the first quarter of 1998, compared to $1,760,000 for the
corresponding quarter in 1997. The combined effective tax rate for the three
months ended March 31, 1998 was 36.0% versus 37.5% for the same period in 1997.
The lower effective rate in 1998 reflects the tax benefit resulting from the
lower state tax rate in the Company's investment subsidiaries and certain tax
exemptions on preferred stocks. At March 31, 1998, the net deferred income tax
asset amounted to $2.8 million. The primary sources of recovery of the deferred
income tax asset are taxes paid, which are available for carry back, from 1997,
1996, and 1995, and the expectation that the deductible temporary differences
will reverse during periods when the Company generates taxable income.
ITEM 3. Qualitative and Quantitative Disclosures About Market Risk.
See the discussion set forth in ITEM 2 above.
20
<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 and Use of Proceeds.
------------------------------------------
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 April 16, 1998, the
payment of a cash dividend was declared, providing for payment of
$0.15 per share on May 15, 1998 to holders of record on April 30,
1998.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
a. Exhibits: 10.0 -- Stock Purchase Agreement (Shares of Middlesex
Bank & Trust Company)
11.0 -- Computation of per share earnings.
27.0 -- Financial Data Schedule.
27.2 -- Financial Data Schedule Restated.
b. Reports on Form 8-K: No reports on Form 8-K were filed during the
quarter ended March 31, 1998.
21
<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)
/S/ Timothy J. Hansberry
Date: May 11, 1988 By -------------------------------------
Timothy J. Hansberry
President and Chief Executive Officer
/S/ John G. Fallon
By -------------------------------------
John G. Fallon
Executive Vice President and
Chief Financial Officer
22
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT, entered into as of May 1, 1998 (this
"Agreement") between Affiliated Community Bancorp, Inc. ("Seller"), a
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Massachusetts corporation with its principal offices at 716 Main Street,
Waltham, Massachusetts, and William R. Berkley ("Buyer"), an individual residing
in the State of Connecticut.
W I T N E S S E T H
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Whereas, Seller desires to sell and Buyer desires to buy all of the issued
and outstanding shares of the capital stock of Middlesex Bank & Trust Company, a
Massachusetts trust company that is presently a wholly owned subsidiary of
Seller ("Middlesex"); and
Whereas, the Board of Directors of Seller believes that the transactions
set forth herein will be in the best interests of Seller and its stockholders,
customers, employees and other constituencies, as applicable, as well as the
communities served by Middlesex; and
Whereas, Seller and Buyer desire to provide for certain undertakings,
conditions, representations, warranties and covenants in connection with the
transactions contemplated hereby;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements contained herein, and other valuable consideration the
receipt and adequacy of which is hereby acknowledged, the parties hereto do
hereby agree as follows:
ARTICLE 1
DEFINITIONS
As used in this Agreement, the following capitalized terms shall have the
meanings set forth below.
"BHCA" shall mean the Bank Holding Company Act of 1956, as amended.
"Business Day" shall mean a day other than a Saturday, a Sunday or a
Federal or Massachusetts legal holiday.
"Buyer" shall mean William R. Berkley, individually.
"Closing Date" shall have the meaning ascribed thereto Section 2.3(a)
hereof.
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"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Commissioner" shall mean the Commissioner of Banks of the
Commonwealth of Massachusetts.
"Confidentiality Agreement" shall mean that certain letter agreement
by and among Interlaken Capital, Inc., an entity controlled by Buyer,
Seller and Middlesex dated as of March 28, 1998.
"Cutoff Date" shall have the meaning ascribed thereto in Section 3.7
hereof.
"Damages" shall mean all actions, costs, losses, damages,
disbursements, obligations, penalties, liabilities or expenses of any
kind or nature (including, but not limited to interest and penalties
and all reasonable legal, accounting and other professional fees and
expenses incurred in the defense of claims and amounts paid in
settlement and any defense, set-off, or counter-claim) that are
actually imposed or otherwise incurred or suffered by a Person.
"Executive Agreements" shall have the meaning ascribed thereto in
Section 5.20(b) hereof.
"FDIA" shall mean the Federal Deposit Insurance Act, as amended.
"FDIC" shall mean the Federal Deposit Insurance Corporation.
"Lien" shall mean any lien, pledge, charge, encumbrance, security
interest, mortgage, lease, or other adverse claim of any nature, kind
or description, contingent or otherwise.
"Middlesex" shall mean Middlesex Bank & Trust Company, a Massachusetts
trust company.
"Middlesex Common Stock" shall have the meaning ascribed thereto in
Section 3.2 hereof.
"Middlesex Plan" shall have the meaning ascribed thereto in Section
3.12(a) hereof.
"Middlesex Preferred Stock" shall have the meaning ascribed thereto in
Section 3.2 hereof.
"Material Adverse Effect" shall mean, when used with respect to any
Person, (i) a material adverse change in or effect on the assets,
liabilities, business, operations or prospects of such Person,
provided that, with respect to Middlesex, any such change or effect
resulting directly or indirectly from changes in law, regulations or
generally accepted accounting principles (or interpretations of any
thereof), changes in the general level of market interest rates, or
changes in the economic, financial or market conditions affecting the
banking industry generally in the region in which Middlesex operates,
shall not constitute a Material Adverse Effect, or (ii) such Person's
ability to satisfy its obligations under this Agreement.
"NASDAQ" shall mean the Nasdaq Stock Market, Nasdaq Regulation, Inc.
and/or NASD, Inc. as and to the extent applicable.
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"Ownership Claim" shall have the meaning ascribed thereto in Section
5.19(b) hereof.
"Person" shall mean any natural person, corporation, business trust,
joint venture, association, company, partnership or any other entity.
"Purchase Price" shall have the meaning ascribed thereto in Section
2.2 hereof.
"Requisite Regulatory Approvals" shall have the meaning ascribed
thereto in Section 6.1(b) hereof.
"Seller" shall mean Affiliated Community Bancorp, Inc., a
Massachusetts corporation.
"Shares" shall have the meaning ascribed thereto in Section 2.1
hereof.
"Stock Purchase" shall have the meaning ascribed thereto in Section
2.1 hereof.
"subsidiary" shall mean, when used with reference to any party, any
corporation of which the majority of the securities or other interests
having by their terms ordinary voting power to elect a majority of the
board of directors is directly or indirectly owned or controlled by
such party or by any one or more of its subsidiaries, or by such party
and one or more of its subsidiaries.
"Tax Claim" shall have the meaning ascribed thereto in Section 5.19(a)
hereof.
"Taxes" shall mean all foreign, federal, state and local taxes
(including deficiencies, interest and penalties relating thereto) of
any kind, including without limitation all income, gross income, gross
receipts, sales, use, ad valorem, franchise, profits, withholding,
payroll, employment, excise, stamp, occupancy, premium, property or
windfall profits tax, customs, duty or other taxes or governmental
fees, assessments or charges, together with any interest and any
penalties, additions to tax or additional amounts, imposed by any
taxing authority (domestic or foreign).
"Tax Returns" shall mean all returns, declarations, reports and
information returns and statements required to be filed in respect of
any Taxes.
"Transfer Taxes" shall have the meaning ascribed thereto in Section
5.16 hereof.
"UST Agreement" shall mean that certain Affiliation Agreement and Plan
of Reorganization dated as of December 15, 1997 by and among UST
Corp., Mosaic Corp., a wholly owned subsidiary of UST Corp., and
Seller.
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ARTICLE 2
THE STOCK PURCHASE
2.1 Shares Sold and Acquired. Subject to the terms set forth in this
Agreement, on the Closing Date, and upon payment of the Purchase Price, Seller
shall sell, convey, transfer, assign and deliver to Buyer an aggregate of
800,000 shares of the common stock of Middlesex, par value $1.00 per share (the
"Shares"), which constitute 100% of the issued and outstanding shares of capital
stock of Middlesex. Such sale and purchase of the Shares is referred to
hereinafter as the "Stock Purchase."
2.2 Price for Shares. Buyer shall deliver to Seller as consideration for
the sale, conveyance, transfer, assignment and delivery to Buyer of the Shares,
in accordance with the terms and conditions of this Agreement, the sum of Eight
Million Two Hundred Forty Thousand and 00/100 Dollars ($8,240,000.00) in cash
(the "Purchase Price").
2.3 Closing.
(a) The purchase and sale of the Shares hereunder shall occur at the
offices of Sullivan & Worcester LLP, One Post Office Square, Boston,
Massachusetts, or at such other place as shall be mutually agreeable to the
parties, at a time and on a date (the "Closing Date") to be mutually agreed
upon by Buyer and Seller, which date shall be within five (5) Business Days
after the last of the conditions precedent set forth in Article 6 hereof
has been satisfied or properly waived.
(b) On the Closing Date, the following actions shall be taken:
(i) Buyer shall pay the Purchase Price to Seller by wire transfer
of immediately available federal funds in an amount equal to the
Purchase Price to such bank account in the United States of America as
Seller shall have designated at least two (2) Business Days prior to
the Closing Date;
(ii) Seller shall deliver or cause to be delivered one or more
certificates for the Shares to Buyer, duly endorsed in blank or with
stock powers duly endorsed in blank, together with such other
documents as Buyer may reasonably request to evidence the transfer to
Buyer of good and valid title in and to the Shares, free and clear of
any Lien, together with such minute books, stock record books and
other corporate documents and records relating to Middlesex which are
in the possession of Seller and not otherwise located in the Middlesex
offices or otherwise held in the custody of Middlesex; and
(iii) Each party shall take such other actions, and shall execute
and deliver such other instruments or documents, as shall be required
under Article 6 hereof.
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ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer as follows:
3.1 Corporate Organization. Seller is a business corporation duly
organized, validly existing and in corporate good standing under the laws of the
Commonwealth of Massachusetts. Seller is a bank holding company registered with
the Board of Governors of the Federal Reserve System under the BHCA. Middlesex
is a trust company duly organized and validly existing under the laws of the
Commonwealth of Massachusetts. Middlesex is an "insured bank" as such term is
defined in Section 3(h) of the FDIA. Middlesex has the corporate power and
authority to own, lease or operate all of its properties and assets and to carry
on its business as it is now being conducted. All of the issued and outstanding
shares of the capital stock of Middlesex are owned beneficially and of record by
Seller, free and clear of any Lien. Middlesex has no subsidiaries and owns no
equity interest beneficially or of record in any other Person.
3.2 Capitalization of Middlesex.
(a) The authorized capital stock of Middlesex consists of 3,000,000
shares of common stock, par value of $1.00 per share (the "Middlesex Common
Stock"), and 100,000 shares of preferred stock, par value of $1.00 per
share (the "Middlesex Preferred Stock"). As of the date hereof, there are
800,000 shares of Middlesex Common Stock issued and outstanding, no shares
of Middlesex Preferred Stock issued or outstanding and no shares of
Middlesex capital stock of any kind held in Middlesex's treasury.
(b) Neither Seller nor Middlesex is bound by any outstanding
subscriptions, options, warrants, calls, commitments or agreements of any
character calling for the transfer, sale, purchase or issuance of, or
representing the right to purchase, subscribe for or otherwise receive, any
shares of the capital stock of Middlesex or any securities convertible into
or representing the right to receive, purchase or subscribe for any such
shares of Middlesex.
3.3 Authority. Seller has full corporate power and authority to execute and
deliver this Agreement and to consummate the Stock Purchase as contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
Stock Purchase as contemplated hereby have been duly and validly authorized and
approved by the Board of Directors of Seller. No other corporate actions or
proceedings on the part of Seller or Middlesex are necessary to consummate the
Stock Purchase. This Agreement has been duly and validly executed and delivered
by Seller, and (assuming due authorization, execution and delivery by Buyer)
constitutes the valid and binding obligation of Seller, enforceable against
Seller in accordance with its terms, except that enforcement thereof may be
limited by the receivership, conservatorship and supervisory powers of bank
regulatory agencies generally as well as bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting enforcement of creditors' rights
generally and except that enforcement thereof may be subject to general
principles of equity (regardless of whether enforcement is considered in a
proceeding in equity or at law) and the availability of equitable remedies.
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3.4 No Violation. Neither the execution and delivery of this Agreement, nor
the consummation of the Stock Purchase by Seller does or will (i) violate any
provision of the articles of organization or by-laws of Seller or Middlesex or
(ii) assuming that the consents and approvals referred to in Section 3.5 hereof
are duly obtained, (a) violate any statute, code, ordinance, permit,
authorization, registration, rule, regulation, judgment, order, writ, decree or
injunction applicable to Seller or Middlesex or (b) violate, conflict with,
result in a breach of any provisions of, constitute a default (or an event
which, with notice or lapse of time, or both, would constitute a default) under,
result in the termination of, accelerate the performance required by, or result
in the creation of any lien, security interest, charge or other encumbrance upon
any of the properties or assets of Seller or Middlesex, under any of the terms,
conditions or provisions of any note, bond, capital note, debenture, mortgage,
indenture, deed of trust, license, lease, agreement or other instrument or
obligation to which Seller or Middlesex is a party, or by which Seller or
Middlesex or any of their respective properties or assets may be bound or
affected, except for any such breach or default referred to in this clause (b)
which individually or in the aggregate would not have a Material Adverse Effect
on Middlesex following the consummation of the Stock Purchase.
3.5 Consents and Approvals. Except for notice of the consummation of the
Stock Purchase that is required to be filed with the Commissioner or as
otherwise disclosed in Schedule 3.5 hereto, no consents or approvals of, filings
or registrations with or notices to any governmental agency or authority or any
nongovernmental third party are necessary to be obtained or made by Seller or
Middlesex in connection with the execution and delivery by Seller of this
Agreement and the consummation by Seller of the Stock Purchase as contemplated
hereby.
3.6 Legal Proceedings. There is no suit, action, proceeding or claim
pending or, to the knowledge of Seller, threatened, (i) against Seller or
Middlesex or (ii) challenging the validity or propriety of the transactions
contemplated by this Agreement, as to which, in either case, there is a
reasonable probability of an adverse determination and which, if adversely
determined, would have or could be reasonably expected to have, individually or
in the aggregate, a Material Adverse Effect on Seller or Middlesex, as
applicable, nor is there any judgment, decree, injunction, rule or order of any
legal or administrative body or arbitrator outstanding against Seller or
Middlesex having any such effect.
3.7 Tax Matters.
(a) Seller or Middlesex have timely filed or will timely file all Tax
Returns that are or will be required to be filed by or with respect to
activities of Middlesex on or prior to the day immediately preceding the
Closing Date (the "Cutoff Date") and have paid or will pay on a timely
basis all material Taxes due or have provided or will provide for such
Taxes in accordance with generally accepted accounting principles. All such
Tax Returns that have been filed were correct and complete in all material
respects.
(b) Seller or Middlesex has withheld and paid all Taxes required to
have been withheld and paid in connection with amounts paid to any employee
or independent contractor of Middlesex or other third party providing
services to Middlesex.
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(c) No consent or agreement has been filed relating to Middlesex under
Section 341(f) of the Code.
(d) No extension of time with respect to any date on which any Tax
Return was or is to be filed by or with respect to Middlesex is in effect,
and no waiver or agreement is in effect for the extension of time for the
assessment or payment of any Tax for which Middlesex may be liable.
(e) No Tax Return of Middlesex is, as of the date of this Agreement,
currently the subject of an audit or, to Seller's knowledge, investigation
by any taxing authority. No returns of Taxes of Middlesex have been
examined by any taxing authority. There is no claim or assessment pending
or, to Seller's knowledge, threatened against Middlesex for any deficiency
in Taxes.
(f) All tax sharing agreements and other similar procedures between
Middlesex and Seller or any of Seller's affiliates will terminate, having
been fully satisfied, by the Closing Date.
(g) Middlesex is a member of Seller's affiliated group and will be
included in Seller's consolidated federal income tax return that includes
the period from January 1, 1998 through the Cutoff Date. As such, Seller is
and will be eligible to file an election under Section 338(h)(10) of the
Code with respect to a "qualified stock purchase" (as such term is defined
in Section 338 of the Code) of the capital stock of Middlesex.
3.8 Broker's Fees. Neither Seller nor any of its officers or directors has
employed any broker or finder or incurred any liability for any broker's fees,
commissions or finder's fees in connection with any of the transactions
contemplated by this Agreement.
3.9 Absence of Undisclosed Liabilities. To the best knowledge of Seller, as
of March 31, 1998, Middlesex does not have any obligation or liability
(contingent or otherwise) that is material, or that when combined with all
similar obligations or liabilities would be material, except as disclosed or
reflected in Middlesex's Call Report (Form FFIEC 034) for the period ended March
31, 1998.
3.10 Subsequent Events. To the best knowledge of Seller, except as set
forth on Schedule 3.10 hereto, since March 31, 1998, Middlesex has not (i)
conducted its business other than in the ordinary course, (ii) incurred or
discharged any liability other than in the ordinary course of business, (iii)
made any sale or disposition of any assets, including loans, other than sales
and dispositions in the ordinary course of business, (iv) made, amended, or
entered into any employment contract or bonus, incentive, stock option, profit
sharing, pension, retirement, or other similar plan or arrangement, other than
any increases in compensation or bonus payments to officers or employees paid in
the ordinary course of business, (v) entered into or engaged in any transaction
with, or made any payment to, any officer, director, stockholder or affiliate,
other than in the ordinary course of business, (vi) made any change in
accounting practices, methods or principles except in accordance with generally
accepted accounting principles, (vii) made any commitment to borrow money or
make
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a capital expenditure other than in the ordinary course of business, (viii)
amended its bylaws or articles of organization, (ix) terminated or waived any
material rights of value to its business or (x) entered into any agreement or
commitment to do any of the foregoing.
3.11 Material Agreements. To the best knowledge of Seller, except as
disclosed in Schedule 3.11 hereto and except for this Agreement, the UST
Agreement and any other agreements specifically referred to herein, (i) neither
Seller nor any of its subsidiaries, other than Middlesex, is a party to any
written agreement, arrangement or commitment relating to the business,
operations, properties, assets, liabilities or personnel of Middlesex and (ii)
Middlesex is not a party to or bound by (a) any written agreement, arrangement
or commitment relating to the employment (including severance) of any person,
(b) any written contract, agreement or understanding with any labor union or (c)
any other written contract, agreement or commitment that is material to the
business, operations or financial condition of Middlesex.
3.12 Employee Benefit Plans.
(a) To the best knowledge of Seller, Schedule 3.12 lists each employee
benefit plan that Middlesex maintains or to which it contributes (each a
"Middlesex Plan"). To the best knowledge of Seller, all contributions
(including all employer contributions and employee salary reduction
contributions) which are required to have been paid to date to each
Middlesex Plan have been so paid.
(b) To the best knowledge of Seller, Middlesex has no obligation to
provide retiree health or welfare benefits to any of its current or former
employees. To the best knowledge of Seller, there are no actions, suits or
claims (other than routine claims for benefits) pending or threatened
against Middlesex or Seller with respect to any Middlesex Plan or the
assets of any such plan, and Seller is not aware of any facts that exist
that could give rise to any actions, suits or claims (other than routine
claims for benefits ) against any Middlesex Plan or the assets of any such
plan.
3.13 Affiliate Transactions. To the best knowledge of Seller, except as
disclosed in Schedule 3.13 hereto, Middlesex is not a party to any agreement or
arrangement pursuant to which assets and/or liabilities may be transferred
between Middlesex and Seller or any of Seller's other subsidiaries or services
may be provided to or for the benefit of Middlesex by Seller or any of Seller's
other subsidiaries or by Middlesex to or for the benefit of Seller or any of
Seller's other subsidiaries, other than agreements or arrangements containing
terms and conditions that are substantially the same as those that would be
entered into with unaffiliated third parties or that are immaterial with respect
to the assets or liabilities transferred or services provided.
For purposes of this Agreement, including without limitation this Article
3, when a representation or warranty of Seller is given to the best of its
knowledge or to its knowledge or with reference to matters of which Seller is
aware or which are known to Seller, or with any other similar qualification, the
relevant knowledge or awareness is limited to the actual knowledge or awareness,
without any special or additional investigation or inquiry having been
undertaken for the purpose of this Agreement or any specific representation or
warranty contained herein, of the following officers
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of Seller: Timothy J. Hansberry, President and Chief Executive Officer; John G.
Fallon, Executive Vice President and Chief Financial Officer; and Quentin J.
Greeley, Executive Vice President and General Counsel.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller as follows:
4.1 Authority. Buyer is legally competent and otherwise authorized to
execute and deliver this Agreement and to consummate the Stock Purchase as
contemplated by this Agreement. This Agreement has been duly and validly
executed and delivered by Buyer, and (assuming due authorization, execution and
delivery by Seller) constitutes the valid and binding obligation of Buyer,
enforceable against Buyer in accordance with its terms, except that enforcement
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting enforcement of creditors' rights generally and
except that enforcement thereof may be subject to general principles of equity
(regardless of whether enforcement is considered in a proceeding in equity or at
law) and the availability of equitable remedies.
4.2 No Violations. Neither the execution and delivery of this Agreement,
nor the consummation of the Stock Purchase by Buyer does or will, assuming that
the consents and approvals referred to in Section 4.3 hereof are duly obtained,
(i) violate any statute, code, ordinance, permit, authorization, registration,
rule, regulation, judgment, order, writ, decree or injunction applicable to
Buyer or (ii) violate, conflict with, result in a breach of any provisions of,
constitute a default (or an event which, with notice or lapse of time, or both,
would constitute a default) under, result in the termination of, accelerate the
performance required by, or result in the creation of any lien, security
interest, charge or other encumbrance upon any of the properties or assets of
Buyer, under any of the terms, conditions or provisions of any note, bond,
capital note, debenture, mortgage, indenture, deed of trust, license, lease,
agreement or other instrument or obligation to which Buyer is a party, or by
which he or any of his properties or assets may be bound or affected, except for
any such breach or default referred to in this clause (ii) which individually or
in the aggregate would not have a Material Adverse Effect on Buyer.
4.3 Consents and Approvals. Except for consents and approvals of or filings
or registrations with the FDIC and the Massachusetts Commissioner, no consents
or approvals of, filings or registrations with or notices to any governmental
agency or authority or any nongovernmental third party are necessary to be
obtained or made by Buyer in connection with the execution and delivery by Buyer
of this Agreement and the consummation by Buyer of the Stock Purchase as
contemplated hereby.
4.4 Legal Proceeding. There is no suit, action, proceeding or claim pending
or, to the knowledge of Buyer, threatened, (i) against Buyer or (ii) challenging
the validity or propriety of the transactions contemplated by this Agreement, as
to which, in either case, there is a reasonable
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probability of an adverse determination and which, if adversely determined,
would have or could be reasonably expected to have, individually or in the
aggregate, a Material Adverse Effect on Buyer, nor is there any judgment,
decree, injunction, rule or order of any legal or administrative body or
arbitrator outstanding against Buyer having any such effect.
4.5 Regulatory Approvals. Buyer is not aware of any reason why he would be
unable to obtain all of the consents and approvals referenced in Section 4.3
above in a timely manner.
4.6 Financing. Buyer has presently available to him capital and cash
sufficient to fulfill his obligations hereunder and to consummate the Stock
Purchase.
4.7 Broker's Fees. Neither Buyer nor any other Person affiliated with Buyer
has employed any broker or finder or incurred any liability for any broker's
fees, commissions or finder's fees in connection with any of the transactions
contemplated by this Agreement.
ARTICLE 5
COVENANTS OF BUYER AND SELLER
5.1 Conduct of Business.
(a) During the period from the date of this Agreement to the Closing
Date, unless otherwise permitted by the prior written consent of Buyer,
Seller shall cause Middlesex to:
(i) maintain its legal existence and good standing;
(ii) conduct business and engage in transactions only in the
ordinary course of business and consistent with past practice;
(iii) use all commercially reasonable efforts to (x) preserve its
business organization intact, (y) keep available to itself the present
or future services of its employees, and (z) preserve for itself the
good will of customers and others with whom business relationships
exist;
(iv) use all commercially reasonable efforts to maintain and keep
its properties in as good repair and condition in all material
respects as existing on the date hereof, except for depreciation due
to ordinary wear and tear and damage due to casualty;
(v) use all commercially reasonable efforts to maintain in full
force and effect insurance generally comparable in amount and in scope
of coverage to that maintained by it as of the date hereof; and
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(vi) comply with and perform in all material respects all of its
obligations and duties (x) under contracts, leases and documents
relating to or affecting its assets, properties, business and
operations and (y) imposed upon it by all federal and state laws and
all rules, regulations and orders imposed by federal or state
governmental authorities.
(b) Seller agrees that from the date of this Agreement to the Closing
Date, except as otherwise specifically permitted or required, or otherwise
contemplated, by this Agreement or consented to in writing by Buyer, it
shall cause Middlesex not to:
(i) change any provision of Middlesex's articles of organization
or by- laws;
(ii) change the number of shares of Middlesex's authorized
capital;
(iii) issue any shares of Middlesex's capital stock or issue or
grant any option, warrant, call, commitment, subscription, right to
purchase or agreement of any character relating to such capital stock;
(iv) hypothecate, pledge or otherwise encumber any shares of
Middlesex's capital stock;
(v) grant any severance or termination pay to, or enter into any
employment, severance or termination agreement (other than the
Executive Agreements), noncompetition, bonus, stock option,
profit-sharing, retirement or incentive plan or any other similar plan
or agreement with, any of Middlesex's directors, officers or other
employees or grant any increase in the compensation or benefits of, or
pay any bonus to, any Middlesex officer or employee other than in the
ordinary course of business consistent with past practices;
(vi) merge into, consolidate with, affiliate with, or be
purchased or acquired by, any other Person, or permit any other Person
to be merged, consolidated or affiliated with Middlesex or be
purchased or acquired by Middlesex, or acquire any significant portion
of the assets or securities of any other Person, or sell any
significant portion of Middlesex's assets or issue any of Middlesex's
securities to any other Person;
(vii) make any change in Middlesex's accounting methods or
practices, other than changes required in accordance with applicable
law and/or generally accepted accounting principles;
(viii) engage or participate in any material transaction or incur
or sustain any material obligation or liability except in the ordinary
course of its businesses consistent with past practices;
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(ix) except in the ordinary course of business consistent with
past practices, sell, lease, transfer, assign, encumber or otherwise
dispose of, or enter into any contract, agreement or understanding to
sell, lease, transfer, assign, encumber or otherwise dispose of, any
of its assets;
(x) declare or pay any dividends on or make any other
distributions in respect of the Middlesex Common Stock;
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(xi) incur any additional debt obligation or other obligation for
borrowed money, or guaranty any additional debt obligation or other
obligation for borrowed money, except in the ordinary course of
business consistent with past practices, which shall include but not
necessarily be limited to creation of deposit liabilities, purchases
of federal funds and entry into repurchase agreements or other similar
arrangements commonly employed by banks;
(xii) incur or commit to any capital expenditures or any
obligations or liabilities in connection therewith, other than capital
expenditures and such related obligations or liabilities incurred or
committed to in the ordinary course of business consistent with past
practices, which, in all cases, do not individually exceed $25,000 or
cumulatively exceed $75,000;
(xiii) engage in any transaction with Seller or any of Seller's
other subsidiaries involving any transfer of assets or liabilities to
or from or for the benefit of Middlesex or providing of services to or
by or for the benefit of Middlesex, other than transactions of a type
engaged in by and between or among Middlesex, Seller and Seller's
other subsidiaries as of or prior to the date of this Agreement or
which are otherwise immaterial to Middlesex individually and in the
aggregate; and
(xiv) agree to do or publicly announce an intention to do or to
agree to do any of the foregoing or any other action that would make
any of Seller's representations or warranties contained in this
Agreement untrue or incorrect or would otherwise violate any of
Seller's agreements or commitments contained in this Agreement.
5.2 No Solicitation. Neither Seller nor any of its directors, officers,
employees, representatives or agents shall, and Seller shall cause Middlesex not
to, solicit any Person or group (other than Buyer or any affiliate thereof or
advisor thereto or any regulatory authority, in each such case in connection
with the Stock Purchase as contemplated by this Agreement) concerning any
affiliation, merger, disposition of substantial assets, sale of capital stock or
any similar transaction involving Middlesex. Seller shall promptly (and in any
event within 24 hours) advise Buyer following the receipt by Seller of any
inquiry or proposal concerning any affiliation, merger, disposition of
substantial assets, sale of capital stock or any similar transaction involving
Middlesex and the substance thereof (including the identity of the Person making
such inquiry or proposal), and shall advise Buyer of any developments with
respect thereto promptly following the occurrence thereof.
<PAGE>
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5.3 Current Information. During the period from the date of this Agreement
to the Closing Date, Seller shall cause Middlesex to make available one or more
designated representatives to confer on a regular and frequent basis with
representatives of Buyer to report the general status of its ongoing operations.
Seller shall promptly notify Buyer of any material change in Middlesex's
business, operations, properties, assets or liabilities and of any governmental
complaints, investigations or hearings (or communications indicating that the
same may be contemplated) relating to Middlesex, or the institution or the
threat of any litigation or similar proceeding involving Middlesex, as soon as
Seller becomes aware of any of the foregoing, and Seller will keep Buyer
informed of any such events as known to Seller. Each of Buyer and Seller shall
report to the other any material breach of any representation or warranty of the
reporting party contained in this Agreement promptly after such reporting party
has become aware of such breach.
5.4 Buyer Access to Properties and Records. Seller shall cause Middlesex to
permit Buyer access during normal business hours, during the period prior to the
Closing Date, to Middlesex's properties and to disclose and make available to
Buyer and its advisors all material books, papers and records relating to
Middlesex's assets, stock ownership, properties, operations, obligations and
liabilities, including, but not limited to, all books of account (including the
general ledger), tax records, minute books, organizational documents, by-laws,
material contracts and agreements, filings with regulatory authorities,
litigation files and plans affecting employees, including the Middlesex Plans.
The rights of access granted pursuant to this section shall not diminish or in
any manner affect the express representations, warranties or agreements of
Seller contained in this Agreement or in any manner constitute a waiver or
relinquishment on the part of Buyer of the right to rely upon any such
representations, warranties and agreements of Seller in accordance with their
terms hereunder.
5.5 Financial and Other Statements.
(a) As soon as prepared, and in any case prior to submission, Seller
shall cause Middlesex to deliver to Buyer all reports or other statements
filed after the date hereof with the FDIC, the Commissioner and any other
federal or state governmental agency or authority, except to the extent
that any such disclosure of any such reports or statements is prohibited by
law.
(b) Promptly upon receipt thereof, Seller shall cause Middlesex to
furnish to Buyer copies of all internal control reports submitted to it by
independent accountants in connection with each annual, interim or special
audit of its books made by such accountants.
(c) With reasonable promptness, Seller shall cause Middlesex to
furnish to Buyer such additional financial data pertaining to Middlesex as
Buyer may reasonably request, including without limitation monthly
financial statements.
5.6 Confidentiality. Seller, Interlaken Capital, Inc. and Middlesex shall
continue to be bound by the terms and conditions of the Confidentiality
Agreement. In addition, Buyer hereby covenants and agrees to comply with all of
the restrictions and fulfill all applicable obligations applicable to Interlaken
Capital, Inc. under the terms of the Confidentiality Agreement.
<PAGE>
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5.7 Regulatory Matters; Consents. Each of Buyer and Seller will cooperate
with the other and use all commercially reasonable efforts to prepare all
necessary documentation, to effect all necessary filings and registrations with
and to obtain all necessary permits, consents, approvals and authorizations of
all federal and state governmental agencies and authorities and all
nongovernmental third parties necessary to consummate the transactions
contemplated by this Agreement. Each party hereto shall have the right to review
and approve in advance all descriptions of it, its subsidiaries or affiliates
and/or the business and operations thereof which appear in any application,
registration or other filing made in connection with the transactions
contemplated by this Agreement with any governmental agency or authority. In
exercising the foregoing right, the parties hereto shall act reasonably and as
promptly as practicable.
5.8 Public Announcements. Except as otherwise required by law or the rules
of the Securities and Exchange Commission or NASDAQ, neither Buyer nor Seller
will distribute any news releases or other public information disclosures with
respect to this Agreement or the Stock Purchase as contemplated hereby, unless
approved by the other party (which approval will not be unreasonably withheld).
5.9 Further Assurances. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use all commercially reasonable
efforts to, as promptly as practicable, take, or cause to be taken, all action
and to do, or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the Stock
Purchase as contemplated by this Agreement. In case at any time on or after the
Closing Date any further action is necessary or desirable to carry out the
purpose of this Agreement, the proper officers and directors, to the extent
applicable, of each party to this Agreement shall take all such necessary steps.
5.10 Buyer Reliance on Due Diligence. Buyer acknowledges and agrees that he
has undertaken or caused to be undertaken a full investigation of Middlesex,
including its management, business, operations, properties, assets and
liabilities, that he has only a contractual relationship with Seller, based
solely on the terms of this Agreement, and that other than the express
representations and warranties of Seller contained in Article 3 hereof, neither
Seller nor Middlesex nor any of their respective officers, directors, employees,
representatives or agents has made, nor has Buyer relied upon, any other
representations or warranties of any kind as an inducement to or in connection
with Buyer's entering into this Agreement.
5.11 Prohibition on Middlesex Change of Control. Unless otherwise required
by law, for a period of not less than three years following the Closing Date,
Buyer shall not cause any Person, other than an immediate family member of Buyer
or a Person controlled directly or indirectly by Buyer, to acquire, or otherwise
take any action that would result in any Person, other than an immediate family
member of Buyer or a Person controlled directly or indirectly by Buyer,
acquiring five percent or more of the outstanding shares of any class or series
of voting securities of Middlesex; provided, however, that nothing contained in
this Section 5.11 shall prevent or otherwise prohibit the following
transactions: (i) any transfer of up to ten percent in the aggregate of the
outstanding shares of any class or series of voting securities of Middlesex to
the senior management of Middlesex and/or any other employees of any Person
controlled directly or indirectly by Buyer; and (ii) the
<PAGE>
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authorization and issuance by Middlesex of additional shares of Middlesex
capital stock, so long as (a) no shareholder other than Buyer (including Buyer's
immediate family and other Persons controlled directly or indirectly by Buyer)
shall control more than ten percent of the outstanding shares of any class or
series of voting securities of Middlesex and (b) Buyer, together with his
immediate family members and other Persons controlled directly or indirectly by
Buyer, shall continue to own beneficially and of record, not less than thirty
percent of the outstanding shares of each class and series of voting securities
of Middlesex.
5.12 Directors' and Officers' Indemnification and Insurance.
(a) Buyer agrees that all rights to indemnification existing in favor,
and all limitations on the personal liability, of any director, officer or
other employee of Middlesex provided for in Middlesex's articles of
organization or by-laws as in effect as of the date hereof with respect to
matters occurring prior to the Closing Date shall survive and continue in
effect following the consummation of the Stock Purchase. In the event that
(i) any of the Buyer's successors or assigns consolidates with or merges
into any other Person and shall not be the continuing or surviving
corporation or entity of such consolidation or merger, or (ii) the Buyer or
any of his successors or assigns transfers or conveys the Shares or any
other controlling interest in Middlesex or otherwise transfers or conveys
all or substantially all of Middlesex's properties and assets to any
Person, then, and in each such case, to the extent necessary, proper
provision shall be made so that the successors and assigns of Buyer assume
the obligations set forth in this Section 5.12(a).
(b) Buyer shall cause the persons serving as officers and directors of
Middlesex immediately prior to the consummation of the Stock Purchase to be
covered for a period of six (6) years from the Closing Date by a directors'
and officers' liability insurance policy containing terms and conditions,
including terms of coverage and coverage amounts, which are at least as
advantageous as the terms and conditions of the directors' and officers'
liability insurance policy maintained as of the date hereof by Seller with
respect to acts or omissions occurring at or prior to the Closing Date,
which were committed by any such officers or directors of Middlesex in
their capacity as such. Buyers' obligation under this Section 5.12(b) shall
be deemed to be satisfied without any further action or expenditure by
Buyer if and to the extent that Seller notifies Buyer in writing that the
continuing directors' and officers' liability insurance coverage to be
provided for the benefit of the directors and officers of Seller and its
subsidiaries pursuant to the terms of the UST Agreement provides
satisfactory coverage to those persons who would otherwise be covered by
the directors' and officers' liability insurance policy contemplated by
this Section 5.12(b).
5.13 Mutual Access to Records. Following the Closing Date, each of Buyer
and Seller shall afford to the other and their respective attorneys,
accountants, officers and other representatives reasonable access, during normal
business hours, to the books and records of Middlesex or Seller (as such books
and records of Seller relate to its prior ownership of Middlesex), as the case
may be, to the extent they relate to a period prior to the Closing Date (and
shall permit such persons to examine and copy such books and records to the
extent reasonably requested by the requesting party at such requesting party's
sole cost and expense) in connection with financial reporting and tax matters
<PAGE>
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(including financial and tax audits and tax contests) and other similar business
purposes. Each of Buyer and Seller shall cause to be maintained all such books
and records for a period of not less than seven years after the Closing Date and
thereafter shall not cause any such books and records to be destroyed or
disposed of unless sixty (60) days' prior written notice of such party's
intention to so destroy or dispose of such books and records has been given to
the other party. During such sixty (60) day period, the party receiving such
notice may request that some or all of such documents be delivered to such party
at such party's expense, in which case the party that has delivered such notice
shall promptly do so.
5.14 Financial Reporting, Tax and Audit Cooperation. To the extent
applicable following the Closing Date, Buyer shall cause his and Middlesex's
employees and agents (a) to prepare the normal monthly, quarterly and annual
financial reports of Middlesex for the year-to-date period ending on the Closing
Date consistent with past practices and (b) to cooperate fully with and assist
Seller in connection with any other financial reporting or tax matters relating
to Middlesex (including financial and tax audits and tax contests) or other
similar business purposes.
5.15 Litigation Cooperation. If either party shall become engaged or
participate in any action, claim or proceeding with any third party in respect
of the business or operations of Middlesex or Seller, as applicable, as
conducted on or prior to the Closing Date, then the other party shall cooperate
in all reasonable respects with such first party in connection therewith,
including, without limitation, making available to such first party, at such
first party's expense, relevant records and employees of Buyer or Middlesex or
Seller, as the case may be, which or who may be helpful with respect to such
action, claim or proceeding.
5.16 Transfer Taxes. All stamp, transfer, documentary, sales, use,
registration and other such Taxes and fees (including any penalties and
interest) incurred in connection with this Agreement and the Stock Purchase as
contemplated hereby (other than those imposed on or measured by the income of
Seller) (collectively, the "Transfer Taxes") shall be paid by Buyer, and Buyer
shall, at his own expense, procure any stock transfer stamps required by, and
properly file on a timely basis all necessary Tax Returns and other
documentation with respect to, any such Transfer Tax.
5.17 Federal and State Tax Returns. Seller shall (a) prepare and file on
timely basis the federal and all state income Tax Returns to be filed by or with
respect to the activities of Middlesex for the period from January 1, 1998
through the Cutoff Date, and (b) pay any Taxes relating to such period. Buyer
shall (and shall cause Middlesex to) fully cooperate with Seller so as to enable
Seller to include Middlesex in all requisite Tax Returns.
5.18 Section 338(h)(10) Election. If Buyer so elects, as evidenced by
written notice given to Seller not later than the Closing Date, Buyer and Seller
will join in making an election under Section 338(h)(10) of the Code. Buyer will
be responsible for preparing and filing all documents and materials necessary in
connection with electing treatment under Section 338(h)(10) of the Code with
respect to the purchase of the Shares. In connection with any such Section
338(h)(10) election, the fair market value of the assets of Middlesex shall be
determined on the basis of the parties' mutual agreement with respect thereto.
<PAGE>
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5.19 Seller Indemnification.
(a) Except as provided in Section 5.16 above, from and after the
Closing Date, Seller shall indemnify and save Buyer and Middlesex harmless
from, and shall be entitled to any refund (whether by direct payment or
offset) of, any and all liabilities for any Taxes imposed on Middlesex for
all taxable periods that end on or before the Closing Date. If any claim
for Taxes is asserted by any taxing authority against Buyer or Middlesex
that, if successful, would result in an indemnification payment by Seller
pursuant to this Section 5.19(a), then Buyer or Middlesex shall promptly
notify Seller in writing of such claim (a "Tax Claim"), and such notice
shall include in reasonable detail the circumstances surrounding such
claim. Seller shall control the handling and disposition of all Tax Claims
including, without limitation, (i) whether or not to contest or settle such
Tax Claim at the outset or at any stage, (ii) whether to pursue or forego
any administrative appeals and proceedings, (iii) if Seller chooses to
undertake judicial action with respect to a Tax Claim, the court or other
judicial body before which the action shall be commenced, and (iv) the
manner in which any such contest is to be conducted.
(b) Seller shall indemnify and save Buyer harmless from any and all
Damages suffered by Buyer or Middlesex as a result of a breach of Seller's
representation set forth in the penultimate sentence of Section 3.1 hereof.
Promptly after receipt by Buyer of notice of any claim or the commencement
of any action by any third party against Buyer resulting from a breach of
Seller's representation set forth in the penultimate sentence of Section
3.1 hereof, Buyer shall notify Seller in writing of such claim or
commencement of such action (in either case, an "Ownership Claim"), stating
in reasonable detail the nature and basis of such claim and Buyer's good
faith estimate of the amount thereof.
(c) The failure by Buyer to notify Seller promptly in writing of any
Tax Claim or Ownership Claim shall not relieve Seller from any liability
which it may have to Buyer hereunder unless and only to the extent that
such failure materially and adversely prejudices the ability of Seller to
defend against or mitigate damages arising out of any such claim. Subject
to the specific applicable provisions contained in Section 5.19(a) with
respect to a Tax Claim, if any Tax Claim or Ownership Claim shall be
brought against Buyer, it shall notify Seller thereof and Seller shall be
entitled to participate therein, and to assume the defense thereof, and to
settle and compromise any such claim or action; provided, however, that
Seller shall not agree or consent to any of the following without Buyer's
written consent, which consent shall not be unreasonably withheld: (i) the
application of any equitable relief upon Buyer or Middlesex or (ii) any
other settlement or compromise that affects Buyer directly other than with
respect to Buyer's ownership interest in Middlesex or (iii) any other
settlement or compromise that affects Middlesex directly. After notice from
Seller to Buyer of its election to assume the defense of any such claim or
action, Seller shall not be liable for other expenses subsequently incurred
by Buyer in connection with the defense thereof; provided, however, that if
Seller elects not to assume such defense, then Buyer may retain counsel
satisfactory to it and defend, compromise or settle such claim on behalf of
and for the account and risk of Seller, and Seller shall pay all reasonable
fees and expenses of such counsel for Buyer promptly as statements therefor
are received; and, provided, further, that
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Buyer shall not consent to entry of any judgment or enter into any
settlement or compromise without the written consent of Seller, which
consent shall not be unreasonably withheld. Buyer shall also have the right
to select its own counsel, at its own expense, to represent Buyer and to
participate in the defense of any such Tax Claim or Ownership Claim, as
applicable.
5.20 Corporate Governance Matters.
(a) Board of Directors. John G. Fallon shall resign from the
Middlesex Board of Directors effective as of the Closing Date. It is
the parties' present intention that following the Closing Date, the
Board of Directors of Middlesex shall consist, at least initially, of
seven persons, at least the majority of which shall consist of current
members of the Middlesex Board, including C. Bernard Fulp.
(b) Management. It is the parties' present intention that
following the Closing Date, C. Bernard Fulp shall continue to serve as
President and Chief Executive Officer of Middlesex, Edward L. Lowe
shall continue to serve as Senior Vice President and Senior Lending
Officer of Middlesex and Richard P. White shall continue to serve as
Vice President of Operations and Finance of Middlesex. On the Closing
Date, Buyer and/or Middlesex shall enter into an employment/severance
agreement with each such officer, such agreements to be substantially
in the forms included as Exhibit A hereto, subject to any modification
or revision thereof as may be required by the FDIC or any other
regulatory agency or authority (collectively, the "Executive
Agreements").
ARTICLE 6
CLOSING CONDITIONS
6.1 Conditions to Each Party's Obligations under this Agreement.
The respective obligations of each party to consummate the Stock Purchase
and the transactions contemplated by this Agreement shall be subject to the
fulfillment on or prior to the Closing Date of the following conditions, none of
which may be waived:
(a) Injunctions. None of the parties hereto shall be subject to any
order, decree or injunction of a court or agency of competent jurisdiction
which enjoins or prohibits the consummation of the transactions
contemplated by this Agreement.
(b) Regulatory Approvals. All necessary approvals, authorizations and
consents of all governmental agencies and authorities required to
consummate the transactions contemplated herein shall have been obtained
and shall remain in full force and effect and all waiting periods relating
to any such approvals, authorizations or consents shall have expired (all
such approvals, authorizations and consents and the lapse of all such
waiting periods being referred to as the "Requisite Regulatory Approvals").
<PAGE>
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6.2 Conditions to the Obligations of Buyer under this Agreement. The
obligations of Buyer to consummate the Stock Purchase and the transactions
contemplated by this Agreement shall be further subject to the satisfaction, on
or prior to the Closing Date, of the following conditions:
(a) Covenants; Representations. The obligations of Seller required to
be performed by it on or prior to the Closing Date pursuant to the terms of
this Agreement shall have been duly performed and complied with, and the
representations and warranties of Seller contained in this Agreement shall
be true and correct in all material respects as of the date of this
Agreement and as of the Closing Date, as though made at and as of the
Closing Date (except as otherwise specifically contemplated by this
Agreement and except as to any representation or warranty which
specifically relates to an earlier date), and Buyer shall have received a
certificate to such effect signed by the president and the chief financial
officer of Seller or such other appropriate executive officer(s) of any
permitted successor in interest to Seller.
(b) Absence of Any Material Adverse Effect. There shall have not
occurred any events or circumstances that have caused a Material Adverse
Effect on Middlesex.
(c) Third-Party Consents. All permits, consents, waivers, clearances,
approvals and authorizations of all nongovernmental and nonregulatory third
parties required to be obtained by Seller or Middlesex under the terms
hereof to consummate the transactions contemplated by this Agreement shall
have been obtained and shall remain in full force and effect, other than
any such permits, consents, waivers, clearances, approvals or
authorizations the failure of which to obtain would neither make it
impossible to consummate such transactions nor, individually or in the
aggregate, result in a Material Adverse Effect on Middlesex.
(d) Burdensome Condition. None of the Requisite Regulatory Approvals
shall impose a condition that Buyer provide additional capital to Middlesex
on the Closing Date or within a specified period of time thereafter;
provided, however, that no condition contained in any Requisite Regulatory
Approval that Buyer cause Middlesex to maintain any minimum capital ratios
from and after the Closing Date shall be considered to be a requirement of
additional capital as contemplated hereunder unless Buyer must provide
additional capital to Middlesex immediately in order to cause Middlesex to
satisfy any such capital ratios as of the Closing Date.
In addition to the foregoing, Seller and/or Middlesex will furnish Buyer
with such additional certificates, instruments or other documents in the name or
on behalf of Seller or Middlesex, executed by appropriate officers or others,
including without limitation certificates or correspondence of governmental
agencies or authorities or nongovernmental third parties, to evidence
fulfillment of the conditions set forth in this Section 6.2 as Buyer may
reasonably request.
<PAGE>
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6.3 Conditions to the Obligations of Seller under this Agreement. The
obligations of Seller to consummate the Stock Purchase and the transactions
contemplated by this Agreement shall be further subject to the satisfaction, at
or prior to the Closing Date, of the following conditions:
(a) Covenants; Representations. The obligations of Buyer required to
be performed by it on or prior to the Closing Date pursuant to the terms of
this Agreement shall have been duly performed and complied with, and the
representations and warranties of Buyer contained in this Agreement shall
be true and correct as of the date of this Agreement and as of the Closing
Date in all material respects, as though made at and as of the Closing Date
(except as otherwise specifically contemplated by this Agreement and except
as to any representation or warranty which specifically relates to an
earlier date), and Seller shall have received a certificate to such effect
signed by Buyer.
(b) Absence of Any Material Adverse Effect. There shall have not
occurred any events or circumstances that have caused a Material Adverse
Effect on Buyer.
(c) Third-Party Consents. All permits, consents, waivers, clearances,
approvals and authorizations of all nongovernmental and nonregulatory third
parties required to be obtained by Buyer under the terms hereof to
consummate the transactions contemplated by this Agreement shall have been
obtained and shall remain in full force and effect, other than any such
permits, consents, waivers, clearances, approvals or authorizations the
failure of which to obtain would neither make it impossible to consummate
such transactions nor, individually or in the aggregate, result in a
Material Adverse Effect on Buyer.
(d) Termination of Seller Contract Obligations. All of the contracts,
agreements or other commitments that impose any commitment or obligation on
Seller and relate to the business, operations, properties, assets,
liabilities or personnel of Middlesex, including without limitation any
such agreements with third-party vendors or other service providers and all
employment, severance and special termination agreements, all of which are
intended to be referenced in Schedule 3.11(i) hereto, shall have been
terminated or otherwise assigned to, with all such attendant commitments
and obligations of Seller assumed by, Buyer and/or Middlesex.
(e) Executive Agreements. All of the Executive Agreements shall have
been executed and delivered by the intended parties thereto.
(f) Consummation of UST Acquisition. The acquisition of Seller by UST
Corp. pursuant to the UST Agreement shall have been consummated.
In addition to the foregoing, Buyer will furnish Seller with such
additional certificates, instruments or other documents in the name or on behalf
of Buyer, executed by appropriate officers or others, including without
limitation certificates or correspondence of governmental agencies or
authorities or nongovernmental third parties, to evidence fulfillment of the
conditions set forth in this Section 6.3 as Seller may reasonably request
<PAGE>
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ARTICLE 7
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated at any time prior to the
Closing Date, if one or more of the following events shall occur:
(a) by mutual written consent of Buyer and Seller authorized by their
respective Boards of Directors;
(b) by Buyer or Seller if the Closing Date shall not have occurred on
or prior to September 30, 1998, or such later date as shall have been
agreed to in writing by Buyer and Seller, unless the failure of such
occurrence shall be due to the failure of the party seeking to terminate
this Agreement to perform or observe his or its agreements herein required
to be performed or observed at or prior to the Closing Date;
(c) by Buyer or Seller: (i) thirty days after the date on which any
request or application for a Requisite Regulatory Approval shall have been
denied, unless within the thirty-day period following such denial a
petition for rehearing or an amended application has been filed with such
governmental regulatory authority or agency, except that no party shall
have the right to terminate this Agreement pursuant to this clause (i) if
such denial shall be due to the failure of the party seeking to terminate
this Agreement to perform or observe in any material respects the covenants
and agreements of such party set forth herein; or (ii) if any governmental
or regulatory authority or agency, or court of competent jurisdiction,
shall have issued a final permanent order or injunction enjoining or
otherwise prohibiting the consummation of the transactions contemplated by
this Agreement and the time for appeal or petition for reconsideration of
such order or injunction shall have expired without such appeal or petition
being granted or such order or injunction shall otherwise have become final
and non-appealable; or
(d) by Buyer or Seller (provided that the terminating party is not
then in material breach of any representation, warranty, covenant or other
agreement contained herein), in the event of a material breach by the other
party of any representation , warranty, covenant or other agreement
contained herein, which breach is not cured after thirty (30) days written
notice thereof is given to the party committing such breach.
7.2 Effect of Termination. In the event of termination of this Agreement by
either Buyer or Seller as provided above, this Agreement shall forthwith become
null and void (other than Sections 5.6, 7.2 and 8.1 hereof, which shall remain
in full force and effect) and there shall be no further liability on the part of
Buyer or Seller or their respective officers or directors to the other, except
in the event of a willful breach of any representation, warranty, covenant or
agreement contained in this Agreement, in which case, the breaching party shall
remain liable for any and all damages, costs and expenses, including all
reasonable attorneys' fees, sustained or incurred by the nonbreaching party (i)
as a result thereof or in connection therewith, (ii) in connection with the
enforcement of its rights
<PAGE>
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hereunder and (iii) in connection with the negotiation and execution of this
Agreement and the transactions contemplated hereby.
7.3 Amendment, Extension and Waiver. Subject to applicable law and as may
be authorized by Seller's Board of Directors, at any time prior to the
consummation of the transactions contemplated by this Agreement or termination
of this Agreement in accordance with the provisions of Section 7.1 hereof, the
parties may (a) amend this Agreement, (b) extend the time for the performance of
any of the obligations or other acts of either party hereto, (c) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto, or (d) waive compliance with any of the
agreements or conditions contained in Articles 5 and 6 (other than Section 6.1)
hereof. This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto. Any agreement on the part of a
party hereto to any extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party, but such waiver or failure
to insist on strict compliance with such obligation, covenant, agreement or
condition shall not operate as a waiver of, or estoppel with respect to, any
subsequent or other failure.
ARTICLE 8
MISCELLANEOUS
8.1 Expenses. Except as may otherwise be agreed to hereunder or in a
writing by the parties of subsequent date hereto, all legal and other costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such costs and
expenses.
8.2 Survival. None of the representations, warranties, covenants and
agreements of any party shall survive after the Closing Date, except for the
representations, agreements and covenants contained or referred to in the
penultimate sentence of Section 3.1, Section 5.6, the last sentence of Section
5.9 and Sections 5.10 through 5.19, inclusive, all of which representations,
agreements and covenants shall survive and remain in effect following the
Closing Date in accordance with their terms.
8.3 Notices. All notices or other communications hereunder shall be in
writing and shall be delivered by hand, by overnight courier service, by
registered or certified mail (return receipt requested) or by telecopy (in which
case a copy thereof shall, simultaneously therewith, be sent by hand, by
overnight courier service or by registered or certified mail), addressed as
follows:
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(a) If to Seller, to:
Affiliated Community Bancorp, Inc.
716 Main Street
Waltham, Massachusetts 02154
Attention: Timothy J. Hansberry, President
and Chief Executive Officer
Copy to:
Sullivan & Worcester LLP
One Post Office Square
Boston, Massachusetts 02109
Attention: Stephen J. Coukos, Esq.
(b) If to Buyer, to:
William R. Berkley
165 Mason Street
Greenwich, Connecticut 06830
Copies to:
Edwards & Angell
2700 Hospital Trust Tower
Providence, Rhode Island 02903
Attention: V. Duncan Johnson, Esq.
and
William L. Mahone, Esq.
Vice President and General Counsel
Interlaken Capital, Inc.
475 Steamboat Road
Greenwich, Connecticut 06830
or such other address or telecopy number as shall be furnished in writing by any
party in conformity with the foregoing, and any such notice or communication
shall be deemed to have been given as of the date received.
8.4 Parties in Interest. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
assigns; provided, however, that neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any party hereto without
the prior written consent of the other parties, and that nothing in this
Agreement is intended to confer, expressly or by implication, upon any other
person any rights or remedies under
<PAGE>
-24-
or by reason of this Agreement; and provided further, however, that nothing
contained in this Section 8.4 shall prevent UST Corp.'s wholly owned subsidiary,
Mosaic Corp., or such other UST subsidiary as may merge with Seller pursuant to
the UST Agreement, from assuming all of the rights, interests and obligations of
Seller as Seller's successor in interest by merger pursuant to the UST
Agreement. Upon the consummation of the merger of Seller with and into Mosaic
Corp. or such other UST subsidiary, all of Seller's rights and remedies under
this Agreement shall be exercisable by Mosaic Corp. or such other UST subsidiary
and its permitted successors and assigns.
8.5 Complete Agreement. This Agreement, including the schedules referred to
herein, contain the entire agreement and understanding of the parties with
respect to its subject matter. There are no restrictions, agreements, promises,
warranties, covenants or undertakings between the parties other than those
expressly set forth herein. This Agreement supersedes all prior agreements
(except for the Confidentiality Agreement) and understandings between the
parties, both written and oral, with respect to its subject matter.
8.6 Counterparts. This Agreement may be executed in counterparts, all of
which shall be considered one and the same agreement and each of which shall be
deemed to be an original and shall become effective when a counterpart has been
signed by each of the parties and delivered to each of the other parties.
8.7 Governing Law. This Agreement shall be governed by the laws of the
Commonwealth of Massachusetts.
8.8 Captions. The Article and Section headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
8.9 Effect of Investigations. No investigation by the parties hereto made
heretofore or hereafter, whether pursuant to this Agreement or otherwise, shall
affect the express representations and warranties of the parties which are
contained herein and each such representation and warranty shall survive such
investigation in accordance with its terms, subject, however, to Section 8.2
hereof.
8.10 Severability. In the event that any one or more provisions of this
Agreement shall for any reason be held invalid, illegal or unenforceable in any
respect, by any court of competent jurisdiction, such invalidity, illegality or
unenforceability shall not affect any other provisions of this Agreement and the
parties shall use all reasonable efforts to substitute a valid, legal and
enforceable provision which, insofar as practicable, implements the purposes and
intents of this Agreement.
8.11 Specific Enforceability. The parties recognize and hereby acknowledge
that it is impossible to measure in money the damages that would result to a
party by reason of the failure of the other party to perform any of the
obligations imposed on it by this Agreement. Accordingly, if either party should
institute an action or proceeding seeking specific enforcement of the provisions
hereof, the party against which such action or proceeding is brought hereby
waives the claim or defense that the party instituting such action or proceeding
has an adequate remedy at law and hereby
<PAGE>
-25-
agrees not to assert in any such action or proceeding the claim or defense that
such a remedy at law exists.
8.12 WAIVER OF JURY TRIAL. ALL OF THE PARTIES HERETO HEREBY IRREVOCABLY
WAIVE ANY AND ALL RIGHTS TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF
OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
<PAGE>
-26-
IN WITNESS WHEREOF, Buyer has executed this Agreement and Seller has caused
this Agreement to be executed by its duly authorized officer, in each case as a
sealed instrument, as of the day and year first above written.
AFFILIATED COMMUNITY BANCORP, INC.
By: /s/ Timothy J. Hansberry
-------------------------
Timothy J. Hansberry
President and Chief Executive Officer
/s/ William R. Berkley
-------------------------
William R. Berkley, individually
<TABLE>
Affiliated Community Bancorp, Inc. Exhibit 11.0
Computation of Basic and Diluted Earnings Per Share
(Dollars in thousands, except share amounts)
(Restated for May 30, 1997 stock split)
<CAPTION>
Three Months Ended
------------------
March 31,
---------
1998 1997
---- ----
<S> <C> <C>
Basic:
Weighted average shares 6,519,906 6,445,811
ESOP shares not released or committed to be released (83,364) (113,020)
Basic weighted average shares 6,436,542 6,332,791
========= =========
Net income $ 3,212 $ 2,937
=========== ===========
Earnings per share $ 0.50 $ 0.46
=========== ===========
Diluted:
Weighted average shares 6,519,906 6,445,811
ESOP shares not released or committed to be released (83,364) (113,020)
------- --------
6,436,542 6,332,791
Common stock equivalents:
Stock Options 355,236 238,182
------- -------
Diluted weighted average shares 6,791,778 6,570,973
========= =========
Net income $ 3,212 $ 2,937
=========== ===========
Earnings per share $ 0.47 $ 0.45
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 16,023
<INT-BEARING-DEPOSITS> 7,868
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 237,946
<INVESTMENTS-CARRYING> 152,973
<INVESTMENTS-MARKET> 154,944
<LOANS> 699,281
<ALLOWANCE> 8,783
<TOTAL-ASSETS> 1,140,762
<DEPOSITS> 727,703
<SHORT-TERM> 222,146
<LIABILITIES-OTHER> 10,067
<LONG-TERM> 64,871
0
0
<COMMON> 68
<OTHER-SE> 115,907
<TOTAL-LIABILITIES-AND-EQUITY> 1,140,762
<INTEREST-LOAN> 14,686
<INTEREST-INVEST> 6,469
<INTEREST-OTHER> 130
<INTEREST-TOTAL> 21,285
<INTEREST-DEPOSIT> 7,600
<INTEREST-EXPENSE> 11,918
<INTEREST-INCOME-NET> 9,367
<LOAN-LOSSES> 126
<SECURITIES-GAINS> 118
<EXPENSE-OTHER> 4,982
<INCOME-PRETAX> 5,017
<INCOME-PRE-EXTRAORDINARY> 5,017
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,212
<EPS-PRIMARY> .50
<EPS-DILUTED> .47
<YIELD-ACTUAL> 3.38
<LOANS-NON> 4,547
<LOANS-PAST> 0
<LOANS-TROUBLED> 162
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,641
<CHARGE-OFFS> 0
<RECOVERIES> 16
<ALLOWANCE-CLOSE> 8,783
<ALLOWANCE-DOMESTIC> 8,783
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE UNAUDITED FINANCIAL STATEMENTS INCLUDED IN THE ACCOMPANYING
REPORT ON FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS. THIS SCHEDULE HAS BEEN RESTATED FOR SFAS 128.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 11,777
<INT-BEARING-DEPOSITS> 5,300
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 171,770
<INVESTMENTS-CARRYING> 183,009
<INVESTMENTS-MARKET> 181,161
<LOANS> 667,998
<ALLOWANCE> 7,962
<TOTAL-ASSETS> 1,054,997
<DEPOSITS> 665,146
<SHORT-TERM> 203,384
<LIABILITIES-OTHER> 9,383
<LONG-TERM> 74,035
0
0
<COMMON> 67
<OTHER-SE> 102,982
<TOTAL-LIABILITIES-AND-EQUITY> 1,054,997
<INTEREST-LOAN> 13,581
<INTEREST-INVEST> 5,934
<INTEREST-OTHER> 45
<INTEREST-TOTAL> 19,560
<INTEREST-DEPOSIT> 6,795
<INTEREST-EXPENSE> 10,883
<INTEREST-INCOME-NET> 8,677
<LOAN-LOSSES> 200
<SECURITIES-GAINS> (2)
<EXPENSE-OTHER> 4,207
<INCOME-PRETAX> 4,697
<INCOME-PRE-EXTRAORDINARY> 4,697
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,937
<EPS-PRIMARY> .46 <F1>
<EPS-DILUTED> .45 <F1>
<YIELD-ACTUAL> 3.40
<LOANS-NON> 4,860
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,759
<CHARGE-OFFS> 40
<RECOVERIES> 43
<ALLOWANCE-CLOSE> 7,962
<ALLOWANCE-DOMESTIC> 7,962
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
EARNINGS PER SHARE HAVE BEEN RESTATED FOR SFAS 128
</FN>
</TABLE>
