RATE/VOLUME ANALYSIS
The following tables present, for the periods indicated, the change in interest income and the change in interest expense attributable to the change in interest rates and the change in the volume of earning assets and interest–bearing liabilities. The change attributable to both volume and rate has been allocated proportionately to the change due to volume and the change due to rate.
| | Three Months Ended September 30 | |
| | 2001 vs. 2000 | |
| | Increase (decrease) | |
| | Due to | |
| | Volume | | Rate | | Total | |
| | (In thousands) | |
Interest and dividend income: | | | | | | | |
| | | | | | | |
Loans | | $ | 151 | | $ | 5 | | $ | 156 | |
Mortgage-backed investments | | 1,407 | | (336 | ) | 1,071 | |
Bonds and obligations | | (644 | ) | 13 | | (631 | ) |
Equity securities | | (45 | ) | (6 | ) | (51 | ) |
Short-term investments | | 23 | | (20 | ) | 3 | |
| | | | | | | |
Total interest and dividend income | | 892 | | (344 | ) | 548 | |
| | | | | | | |
Interest expense: | | | | | | | |
NOW deposits | | 34 | | (60 | ) | (26 | ) |
Savings deposits | | 131 | | (23 | ) | 108 | |
Time deposits | | 242 | | (43 | ) | 199 | |
Short-term borrowings | | (1,015 | ) | (178 | ) | (1,193 | ) |
Long-term debt | | 949 | | (541 | ) | 408 | |
Total interest expense | | 341 | | (845 | ) | (504 | ) |
| | | | | | | |
Net interest income | | $ | 551 | | $ | 501 | | $ | 1,052 | |
| | Nine Months Ended June 30 | |
| | 2001 vs. 2000 | |
| | Increase (decrease) | |
| | Due to | |
| | Volume | | Rate | | Total | |
| | (In thousands) | |
Interest and dividend income: | | | | | | | |
| | | | | | | |
Loans | | $ | (361 | ) | $ | 268 | | $ | (93 | ) |
Mortgage-backed investments | | 2,961 | | (84 | ) | 2,877 | |
Bonds and obligations | | (813 | ) | 309 | | (504 | ) |
Equity securities | | 6 | | 31 | | 37 | |
Short-term investments | | 15 | | (9 | ) | 6 | |
| | | | | | | |
Total interest and dividend income | | 1,808 | | 515 | | 2,323 | |
| | | | | | | |
Interest expense: | | | | | | | |
NOW deposits | | 61 | | (79 | ) | (18 | ) |
Savings deposits | | 307 | | (59 | ) | 248 | |
Time deposits | | 1,051 | | 519 | | 1,570 | |
Short-term borrowings | | (3,537 | ) | (855 | ) | (4,392 | ) |
Long-term debt | | 3,191 | | (400 | ) | 2,791 | |
Total interest expense | | 1,073 | | (874 | ) | 199 | |
| | | | | | | |
Net interest income | | $ | 735 | | $ | 1,389 | | $ | 2,124 | |
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
GENERAL. Net income for the quarter ended September 30, 2001 was $1,239,000 or $.38 per diluted share compared to net income of $1,180,000 or $.37 per diluted share in the corresponding period of 2000, a net increase of $59,000 or 5.0% in net income or 2.7% in diluted earnings per share. The overall increase in net income was mainly attributable to increases in net interest income, customer service fees and gains on sales of mortgage loans partially offset by increases in provisions for possible loan losses and non-interest expenses.
INTEREST AND DIVIDEND INCOME. Interest and dividend income increased $548,000 or 4.4% during the three month period ended September 30, 2001, as compared to the same period in 2000. The increase was attributable to increases in the volume of earning assets, which was partially offset by the lower yield earned on those assets. The balance of average earning assets for the three month period ended September 30, 2001 was approximately $722,864,000 as compared to $674,643,000 for the same period in 2000, an overall increase of $48,221,000 or 7.1%.
The increase in earning assets was primarily driven by the combined increase in average mortgage-backed investments and investment securities which were $265,222,000 and $51,681,000, respectively, for the quarter ended September 30, 2001 as compared to $187,222,000 and $85,819,000, respectively for the same period in 2000. These balances when combined increased $43,862,000 or 16.1%. The yield on mortgage-backed investments and investment securities was 6.48% and 6.80%, respectively, in the three months ended September 30, 2001 as compared to 6.89% and 7.01%, respectively, in the same period of 2000. Throughout 2000 and through the first three months of 2001, yields on securities generally increased due to the rising interest rate environment which existed for most of 2000. From June 1999 to July 2000, the Federal Reserve Bank increased rates 175 basis points. While the investments purchased by the Company are generally not tied to prime, many other rates and indices which do impact the yield on assets purchased also increased in this timeframe. From January 2001 through September 2001, the Federal Reserve Bank lowered rates 350 basis points which in turn, to a lesser degree, began to influence the yields on assets purchased by the Company into the third quarter of 2001 as compared to the prior year.
The average balance of loans increased to $386,730,000 for the three months ended September 30, 2001 from $379,621,000 for the same period in 2000, an increase of $7,109,000 or 1.9%. These balances increased as a result of more residential loans being purchased and/or originated for the Company's loan portfolio since March 2001. The yield on loans was relatively flat at 7.74% in the third quarter of 2001 as compared to 7.73% for the same period in 2000. While there was a rising interest rate environment for most of 2000, which impacted the yields on this portfolio favorably, we have seen a steady decline in the yields on newly originated or acquired assets due to the aforementioned falling rate environment which has existed for much of 2001.
INTEREST EXPENSE. Interest expense for the quarter ended September 30, 2001 decreased $504,000 or 6.8% compared to the same period in 2000, generally due to decreases in the rates paid on borrowed funds and core deposits, offset in part by increases in the average balances of deposits and increases in the rates paid on time deposits. The average balance of core and time deposits rose to $285,708,000 and $189,611,000, respectively, for the third quarter of 2001 as compared to $246,123,000 and $173,672,000, respectively, for the corresponding period in 2000, for increases of 16.1% and 9.2%, respectively. The increases noted for the three month period ended September 30, 2001, generally relate to the attractiveness of the Company's retail products and services to the marketplace it serves as well as reflecting some of the fallout from "in market" bank merger activity in mid-2000 which has displaced many customers who have sought an alternative to their previous banking relationship. The Company will continue to closely manage its cost of deposits by continuing to seek methods of acquiring new core deposits and maintaining its current core deposits while prudently adding time deposits at reasonable rates in comparison to local markets and other funding alternatives, including borrowings. The average balances of borrowed funds decreased overall during the third quarter of 2001 as compared to 2000, to $239,855,000 from $247,145,000, a decrease of 2.9%. The decrease in borrowings was achieved due to the Company's success in attracting deposits over the past year.
The blended weighted average rate paid on deposits and borrowed funds was 3.85% for the three months ended September 30, 2001 as compared to 4.43% for the same period in 2000. The overall weighted average rates paid on borrowed funds decreased to approximately 5.50% for the quarter ended September 30, 2001 from 6.61% in 2000. This decrease is reflective of actions taken by the Federal Reserve Bank in 2001. From January 2001 to September 2001, the Federal Reserve lowered the inter-bank borrowing rate 350 basis points. The weighted average rates paid on deposits was 3.02% for the quarter ended September 30, 2001 as compared to 3.15% for the same period in 2000. The overall cost of deposits has decreased in the third quarter of 2001 generally due to the rate environment. This was in spite of intense competition on the pricing of time deposits which has existed since the third quarter of 2000. It is anticipated, given the current rate environment, that the rates paid on time deposits and borrowed funds could decline from current levels in future quarters or as they are refinanced as they reach maturity. The Company will continue to evaluate the use of borrowing as an alternative funding source for asset growth in future periods. See "Asset/Liability Management" for further discussion of the competitive market for deposits and overall strategies for uses of borrowed funds.
NON-INTEREST INCOME. Total non-interest income increased $371,000 or 15.6% in the third quarter of 2001 in comparison to the same period in 2000. Customer service fees, which were $1,963,000 for the quarter ended September 30, 2001 as compared to $1,739,000 for 2000, for an increase of $224,000 or 12.9%, rose primarily due to growth in deposit accounts, primarily NOW and checking account portfolios and continued success in cross-selling customers other products and services, debit card activity, and sales of mutual funds and annuities. Loan servicing fees and gains on sales of mortgage loans were $59,000 and $642,000, respectively, for the third quarter of 2001 as compared to $80,000 and $336,000, respectively, for the same period in 2000. Gains on sales of mortgage loans increased $306,000 or 91.1% in the third quarter of 2001 as compared to the same period in 2000. This generally is reflective of the improved market for loan originations and related higher volume of loans being originated and sold in the third quarter of 2001 as compared to the same period in 2000. The favorable market was due to lower available residential mortgage rates in 2001. As mortgage rates remain lower than they were for most of 2000, it is anticipated that volumes of loans originated for sale should continue at these levels given current market conditions for the fourth quarter. As the Company has been selling loans generally on a servicing release basis since 1996, the portfolio of loan serviced for others has declined which has caused the continued drop in loan servicing income of $21,000 or 26.3%.
Realized gains on securities, net, were $16,000 for the third quarter of 2001 as compared to gains of $99,000 for 2000 for a decrease of $83,000. The results from the third quarter 2001 include $813,000 of gains generated generally from the sale of higher coupon mortgage-backed investments and discounted callable agency securities which were at a higher risk of being prepaid or called within the year. These gains were offset by net realized losses on the sales of equity securities, primarily in the technology and telecommunication sectors which totaled $797,000 in the quarter ended September 30, 2001. These securities were sold as part of management’s strategy to re-position the Company’s equity portfolio in light of current market conditions and as part of an overall tax strategy.
NON-INTEREST EXPENSES. Non-interest expenses for the quarter ended September 30, 2001 increased $731,000 or 13.3% compared to the same period in 2000. Salaries and employee benefits increased 5.3% or $156,000. This increase was attributable to several factors, including increases in salaries, commissions, payroll taxes and benefits associated with increased residential mortgage volumes ($41,000); increased costs associated with the opening of the Canton and Hanover branches (in November 2000 and July 2001, respectively) ($78,000); increases in retirement and insurance benefits ($41,000). These increases correspond with the Company's strategic focus of attracting core deposits and new customer relationships. Occupancy expenses increased $108,000 or 15.0%. The increase was in part due to higher costs associated with the Canton and Hanover branches (approximately $66,000) and higher costs associated with facilities maintenance and utilities in 2001 as compared to the same period in 2000. Other non-interest expenses, including trust preferred expenses, also increased $467,000 or 25.0% for the quarter ended September 30, 2001 in comparison to the same period in 2000. This increase is generally the result of costs associated with the third-party service bureau contract for computer mainframe systems and services (approximately $108,000), increases in marketing expenses (approximately $250,000) and other costs associated with customer volumes and general cost increases.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses for the quarter ended September 30, 2001 was $510,000 as compared to $0 for the corresponding period in 2000. The levels of provision in both periods are generally attributable to the asset quality factors that management uses to measure and evaluate the adequacy of loan loss reserve levels, which include delinquency rates, charge offs, problem or "watched" assets and anticipated losses. The increase in the provision for possible loan losses for the quarter ended September 30, 2001 was primarily influenced by potential exposure on a commercial credit. Management believes that the current status of overall asset quality and delinquency (.32% at September 30, 2001 as compared to .22% at December 31, 2000 and .46% at September 30, 2000) to be strong. The resulting level of loan loss reserves were approximately 1.08% of period end loans at September 30, 2001 as compared to 1.02% and 1.00% at December 31, and September 30, 2000, respectively.
PROVISION FOR INCOME TAXES. The Company's effective income tax rate for the quarter ended September 30, 2001 was 37.9% compared to 34.9% for the quarter ended September 30, 2000. The lower effective tax rate in comparison to statutory rates for both periods is reflective of income earned by certain non-bank subsidiaries which are taxed, for state tax purposes, at lower rates. These subsidiaries contributed a lower proportionate level of income in comparison to the total income in the current period as compared to 2000.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
GENERAL. Net income for the nine months ended September 30, 2001 was $3,815,000 or $1.18 per diluted share compared to net income of $3,455,000 or $1.08 per diluted share in the corresponding period of 2000, a net increase of $360,000 or 10.4% on a net income basis or an increase of $.10 or 9.3% on a per diluted share basis. The overall increase in net income was mainly attributable to increases in net interest income, customer service fees and increases in gains on sales of mortgage loans partially offset by increases in provisions for possible loan losses and non-interest expenses and decreases in net gains on securities.
INTEREST AND DIVIDEND INCOME. Interest and dividend income increased $2,323,000 or 6.5% during the nine-month period ended September 30, 2001, as compared to the same period in 2000. The increase was attributable to increases in earning assets and increases in the yield earned on those assets. The balance of average earning assets for the nine month period ended September 30, 2001 was approximately $703,746,000 as compared to $663,709,000 for the same period in 2000, an overall increase of $40,037,000 or 6.0%. Overall yields increased to 7.23% for the nine months ended September 30, 2001 as compared to 7.20% for the corresponding period in 2000.
The increase in earning assets was primarily driven by the combined increase in the average balances of mortgage-backed investments and investment securities which were $239,363,000 and $65,304,000, respectively for the nine months ended September 30, 2001 as compared to $180,281,000 and $78,878,000, respectively, for the corresponding period in 2000. These balances, when combined, increased $45,508,000 or 17.6%. The yields on mortgage-backed investments and investment securities were 6.64% and 7.30%, respectively, for the nine months ended September 30, 2001 as compared to 6.69% and 6.91%, respectively for the same period in 2000. The yield on investment securities for the nine months ended September 30, 2001 was influenced by two agency issued bonds which had been purchased at a discount and were called during the first nine months of 2001. This resulted in $221,000 of discounts being taken into income in the period which influenced the yield by 45 basis points in 2001. Adjusted for these discounts, the yield on investment securities would have been 6.85% for the nine months ended September 30, 2001. The yields on both mortgage-backed investments and investment securities have been influenced by the rate environment which has existed throughout most of 2001. From June 1999 through July 2000, the Federal Reserve Bank raised the inter-bank borrowing rate by 175 basis points. From January 2001 through September 2001, the Federal Reserve Bank lowered the inter-bank borrowing rate 350 basis points which in turn, but to a lesser degree, has begun to influence yields on assets purchased in the second and third quarters of 2001, particularly in relation to the yields available for comparable securities a year ago.
The average balance of loans decreased to $377,730,000 for the nine months ended September 30, 2001 from $383,329,000 for the same period in 2000, for a decrease of $5,599,000 or 1.5%. The balances declined as a result of fewer residential loans being purchased and/or originated for the Company’s loan portfolio in 2000 and through the first quarter of 2001. The yield on loans increased to 7.73% for the nine-months ended September 30, 2001 compared to 7.65% for the corresponding period in 2000. This was generally due to the rising rate environment which existed for most of 2000, which impacted new loan originations and adjustable rate loans. This increase was also reflective of increases in commercial loans which generally earn higher rates than residential loans. Commercial loans were approximately $97,100,000 at September 30, 2001 as compared to $76,800,000 at September 30, 2000, an increase of 26.4%.
INTEREST EXPENSE. Interest expense for the nine months ended September 30, 2001 increased $199,000 or .9% compared to the same period in 2000, generally due to increases in the average balances of deposits and funds as well as the rates paid on time deposits, offset in part by decreases in borrowed funds and the rates paid on borrowed funds. The average balance of core and time deposits rose to $271,756,000 and $194,507,000, respectively, for the nine month period ended September 30, 2001 as compared to $235,789,000 and $172,208,000, respectively, for the corresponding period in 2000, for increases of 15.3% and 13.0%, respectively. The increases noted for the nine months ended September 30, 2001 as compared to the same period in 2000 relate to the attractiveness of the Company’s retail products and services in the marketplace it serves as well as reflecting some of the fallout from “in market” bank merger activity in mid-2000 which displaced many customers who have sought an alternative to their prior banking relationship. The Company will continue to closely manage its cost of deposits by continuing to seek methods of acquiring new core deposits and maintaining its current core deposits while prudently adding time deposits at reasonable rates in comparison to local markets and other funding alternatives, including borrowings. The average balances of borrowed funds decreased overall during the nine month period ending September 30, 2001 as compared to 2000, to $228,307,000 from $247,567,000 a decrease of 7.8%. The decrease in borrowings was achieved due to the Company’s success in attracting deposits over the past year.
The blended average rate paid on deposits and borrowed funds was 4.06% in the nine-month period ended September 2001 as compared to 4.26% for the same period in 2000. The overall weighted average rates paid on borrowed funds declined to 5.81% for the nine months ended September 30, 2001 from 6.22% for the corresponding period in 2000. This decrease is reflective of actions taken by the Federal Reserve Bank in 2001. The weighted average rates paid on deposits was 3.20% for the nine months ended September 30, 2001 as compared to 3.07% for the same period in 2000. The overall cost of deposits has increased in the first nine months of 2001 as compared to the corresponding period in 2000, despite the declining rate environment which has existed thus far in 2001 generally due to intense competition on the pricing of time deposits which has existed since the third quarter of 2000. It is anticipated, given the current interest rate environment, that the rates paid on time deposits and borrowed funds could decline from current levels in future periods as they reach maturity. The Company will continue to evaluate the use of borrowings as an alternative funding source for asset growth in future periods. See “Asset/Liability Management” for further discussion of the competitive market for deposits and overall strategies for the uses of borrowed funds.
NON-INTEREST INCOME. Total non-interest income increased $1,758,000 or 27.7% in the first nine months of 2001 in comparison to the same period in 2000. Customer services fees, which were $5,635,000 for the nine months ended September 30, 2001 as compared to $4,475,000 for 2000, for an increase of $1,160,000 or 25.9%, rose primarily due to growth in deposit accounts, primarily NOW and checking account portfolios and continued success in cross-selling customers other products and services, debit card activity and sales of mutual funds and annuities (the Company received regulatory approval to sell insurance annuities in May 2000). The sales of mutual funds and insurance annuities accounted for $394,000 of the aforementioned increase in customer service fees. Loan servicing fees and gains on sales of mortgage loans were $203,000 and $2,006,000, respectively, for the first nine months of 2001 compared to $239,000 and $878,000, respectively, for the same period in 2000. This generally is reflective of the improved market for residential loan originations in 2001 as compared to 2000 and related higher volume of loans being originated and sold in the first nine months of 2001 as compared to the same period in 2000. This favorable market was due to lower available mortgage rates in 2001. As mortgage rates remain lower than they were for most of 2000, it is anticipated that volumes of loans originated for sale should be consistent, given current market conditions, resulting in similar loan gains in the fourth quarter. As the Company has been selling loansgenerally on aservicing release basis since 1996, the portfolio of loans serviced for others has declined which has caused the continued drop in loan servicing income of $36,000 or 15.1%.
Losses on securities, net, were $47,000 in the first nine months of 2001 as compared to net gains of $402,000 for the same period in 2000, for a decrease of $449,000. These results for the first nine months of 2001, included $1,470,000 of gains generated by the sales of higher coupon mortgage-backed investments and discounted callable agency securities which were deemed to be at a higher risk of being prepaid or called within the next year. These gains were offset by net realized losses of approximately $1,097,000 on the Company’s sales of various equity securities, particularly in the technology and telecommunication sectors as part of management’s strategy to re-position the equity portfolio holdings given current market conditions and as part of overall tax planning. Additionally, management realized a loss of approximately $420,000 on a corporate bond. This loss was recorded to reflect management’s change in its intent with regard to an investment which has a current market value below the amortized cost.
NON-INTEREST EXPENSE. Non-interest expenses for the nine-months ended September 30, 2001 increased $2,459,000 or 15.5% compared to the same period in 2000. Salaries and employee benefits increased $1,356,000 or 16.9%. This increase was attributable to several factors, including increases to incentive and benefit expenses associated with greater sales volumes and revenues associated with commissions on brokerage and annuity sales (approximately $210,000); increases in salaries, commissions and benefits associated with the increase in mortgage loan sales volumes and related gains on sales (approximately $148,000); increases in insurance and retirement benefits (approximately $264,000); the opening of the Canton branch in November 2000 (approximately $216,000) and other general increases in salaries and customer service related staff levels. These increases correspond with the Company’s strategic focus of attracting core deposits and new customer service relationships. Occupancy expenses were higher for the nine months ended September 30, 2001 at $2,515,000 which was $123,000 or 5.1% over levels incurred for the same period in 2000. The amounts for 2001 included increases associated with the new Hanover and Canton branches (approximately $150,000) and higher snow removal and utilities costs (approximately $49,000). These increases were offset by a reduction in computer mainframe related expenses which were incurred in 2000 but not in the nine month period ended September 30, 2001 as the Company converted its computer systems to a third party service bureau in June 2000. The.increases associated with payments to the third party service bureau were approximately $444,000 and are included in other non-interest expenses. Other non-interest expenses, including trust preferredexpenses, also increased $980,000 or 18.1% in the first nine months of 2001 as compared to the same period in 2000. This increase, which includes the aforementioned service bureau expense increase, also increased due to increases in marketing expenses ($329,000) and other costs associated with customer service volumes. The effect of these increases was offset in part by the reduction in conversion related expenses (approximately $170,000) which were incurred in the nine-months ended September 30, 2000 for which there was no corresponding expense for the same period in 2001.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses for the nine months ended September 30, 2001 was $840,000 as compared to $60,000 for the same period in 2000. The levels of provision in both periods is attributable to asset quality factors, such as delinquency, charge-offs, non-performing and “watched” assets that management uses to measure and evaluate the adequacy of loan loss reserve levels. The provision for possible loan losses for the nine-month period ended September 30, 2001 was primarily influenced by potential exposure on two specific loans. Management believes that the current status of overall asset quality and delinquency (.32% at September 30, 2001 as compared with .22% at December 31, 2000 and .46% at September 30, 2000) to be strong. The resulting level of loan loss reserves were approximately 1.08% of period end loans at September 30, 2001 as compared to 1.02% and 1.00% at December 31, and September 30, 2000, respectively.
PROVISION FOR INCOME TAXES. The Company’s effective income tax rate for the nine months ended September 30, 2001 was 36.3% compared to 35.3% for the nine months ended September 30, 2000. The lower effective tax rate in comparison to statutory rates for both periods is reflective of income earned by certain non-bank subsidiaries which are taxed, for state tax purposes, at lower rates. These subsidiaries contributed a lower proportionate level of income in comparison to the total in the nine-month period ended September 30, 2001 as compared to 2000 which resulted in a higher effective tax rate.
ASSET/LIABILITY MANAGEMENT. The objective of asset/liability management is to ensure that liquidity, capital and market risk are prudently managed. Asset/liability management is governed by policies reviewed and approved annually by the Company's Board of Directors (Board). The Board delegates responsibility for asset/liability management to the corporate Asset/Liability Management Committee (ALCO). ALCO sets strategic directives that guide the day-to-day asset/liability management activities of the Company. ALCO also reviews and approves all major funding, capital and market risk-management programs. ALCO is comprised of members of management and executive management of the Company and the Bank.
Interest rate risk is the sensitivity of income to variations in interest rates over both short-term and long-term time horizons. The primary objective of interest rate risk management is to control this risk within limits approved by the Board and by ALCO. These limits and guidelines reflect the Company's tolerance for interest rate risk. The Company attempts to control interest rate risk by identifying potential exposures and developing tactical plans to address such potential exposures. The Company quantifies its interest rate risk exposures using sophisticated simulation and valuation models, as well as a more simple gap analysis. The Company manages its interest rate exposures by generally using on-balance sheet strategies, which is most easily accomplished through the management of the durations and rate sensitivities of the Company's investments, including mortgage-backed securities portfolios, and by extending or shortening maturities of borrowed funds. Additionally, pricing strategies, asset sales and, in some cases, hedge strategies are also considered in the evaluation and management of interest rate risk exposures. The Company uses simulation analysis to measure the exposure of net interest income to changes in interest rates over a 1 to 5 year time horizon. Simulation analysis involves projecting future interest income and expense from the Company's assets, liabilities, and off-balance sheet positions under various interest rate scenarios.
The Company's limits on interest rate risk specify that if interest rates were to ramp up or down 200 basis points over a 12 month period, estimated net interest income for the next 12 months should decline by less than 10%. The following table reflects the Company's estimated exposure, as a percentage of estimated net interest income for the next 12 months, which does not materially differ from the impact on net income, on the above basis:
Rate Change | | Estimated Exposure as a | |
(Basis Points) | | % of Net Interest Income | |
+200 | | 4.2 | % |
-200 | | (3.4 | )% |
Interest rate gap analysis provides a static view of the maturity and repricing characteristics of the on-balance sheet and off-balance sheet positions. The interest rate gap analysis is prepared by scheduling all assets, liabilities and off-balance sheet positions according to scheduled repricing or maturity. Interest rate gap analysis can be viewed as a short-hand complement to simulation and valuation analysis.
The Company's policy is to match, as well as possible, the interest rate sensitivities of its assets and liabilities. Residential mortgage loans that the Company currently originates or purchases for the Company's own portfolio are primarily 1-year, 3-year and 5-year adjustable rate mortgages and shorter term (generally 15-year or seasoned 30-year) fixed rate mortgages. Residential mortgage loans currently originated by the Company are primarily sold in the secondary market.
The Company also emphasizes loans with terms to maturity or repricing of 3 years or less, such as certain adjustable rate residential mortgage loans, commercial mortgages, business loans, residential construction loans, second mortgages and home equity loans.
Management desires to expand its interest earning asset base in future periods primarily through growth in the Company's loan portfolio. Loans comprised approximately 54% of the average interest earning assets for the first nine months of 2001. In the future, the Company intends to continue to be competitive in the residential mortgage market but plans to place greater emphasis on home equity and commercial loans. The Company also expects to become more active in pursuing wholesale opportunities to purchase loans. During the first nine months of 2001 and 2000, the Company acquired approximately $68,800,000 and $0, respectively, of residential first mortgages which are serviced by others.
The Company has also used mortgage-backed investments (typically with weighted average lives of 5 to 7 years) as a vehicle for fixed and adjustable rate investments and as an overall asset/liability tool. These securities have been highly liquid given current levels of prepayments in the underlying mortgage pools and, as a result, have provided the Company with greater reinvestment flexibility. The level of the Company's liquid assets and the mix of its investments may vary, depending upon management's judgment as to market trends, the quality of specific investment opportunities and the relative attractiveness of their maturities and yields.
Management has been aggressively promoting the Company's core deposit products since the second quarter of 1995, particularly checking and NOW accounts. The success of this program has favorably impacted the overall deposit growth to date, despite interest rate and general market pressures, and has helped the Company to increase its customer base. However, given the strong performance of mutual funds and the equity markets in general, the Company and many of its peers have begun to see lower levels of growth in time deposits as compared to prior years as customers reflect their desire to increase their returns on investment. This pressure has been exacerbated currently by the historically low long-term economic interest rates. Management believes that the markets for future time deposit growth, particularly with terms of 1 to 2 years, will remain highly competitive. Management will continue to evaluate future funding strategies and alternatives accordingly as well as to continue to focus its efforts on attracting core, retail deposit relationships.
The Company is also a voluntary member of the Federal Home Loan Bank ("FHLB") of Boston. This borrowing capacity assists the Company in managing its asset/liability growth because, at times, the Company considers it more advantageous to borrow money from the FHLB of Boston than to raise money through non-core deposits (i.e., certificates of deposit). Borrowed funds totaled $217,760,000 at September 30, 2001 compared to $222,132,000 at December 31, 2000. These borrowings are primarily comprised of FHLB of Boston advances and have primarily funded residential loan originations and purchases as well as mortgage-backed investments and investment securities.
Additionally, the Company obtained funding in June 1998 through the issuance of trust preferred securities which carry a higher interest rate than similar FHLB borrowings but at the same time are included as capital, without diluting earnings per share and are tax deductible. See “Liquidity and Capital Resources” for further discussion.
The following table sets forth maturity and repricing information relating to interest sensitive assets and liabilities at September 30, 2001. The balance of such accounts has been allocated among the various periods based upon the terms and repricing intervals of the particular assets and liabilities. For example, fixed rate residential mortgage loans and mortgage-backed securities, regardless of "available for sale" classification, are shown in the table in the time periods corresponding to projected principal amortization computed based on their respective weighted average maturities and weighted average rates using prepayment data available from the secondary mortgage market.
Adjustable rate loans and securities are allocated to the period in which the rates would be next adjusted. The following table does not reflect partial or full prepayment of certain types of loans and investment securities prior to scheduled contractual maturity. Additionally, all securities or borrowings which are callable at the option of the issuer or lender are reflected in the following table based upon the likelihood of call options being exercised by the issuer on certain investments or borrowings in a most likely interest rate environment. Since regular passbook savings and NOW accounts are subject to immediate withdrawal, such accounts have been included in the "Other Savings Accounts" category and are assumed to mature within 6 months. This table does not include non-interest bearing deposits.
While this table presents a cumulative negative gap position in the 6 month to 5 year horizon, the Company considers its earning assets to be more sensitive to interest rate movements than its liabilities. In general, assets are tied to increases that are immediately impacted by interest rate movements while deposit rates are generally driven by market area and demand which tend to be less sensitive to general interest rate changes. In addition, other savings accounts and money market accounts are substantially stable core deposits, although subject to rate changes. A substantial core balance in these type of accounts is anticipated to be maintained over time.
At September 30, 2001 | |
Repricing/Maturity | |
| | (1) | | (2) | | (3) | | (4) | | (5) | | (6) | | | |
| | | | | | | | | | | | Over | | | |
| | 0-6 MOS. | | 6-12 MOS. | | 1-2 YRS. | | 2-3 YRS. | | 3-5 YRS. | | 5 YRS. | | Total | |
(Dollars in thousands) | | | | | | | | | | | | | | | |
Assets subject to interest rate adjustment: | | | | | | | | | | | | | | | |
Short-term investments | | $ | 13,646 | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | 13,646 | |
Bonds and obligations | | 9,548 | | - | | 14,003 | | 2,983 | | 1,000 | | 3,108 | | 30,642 | |
Mortgage-backed investments | | 40,182 | | 18,992 | | 28,612 | | 25,169 | | 41,127 | | 91,584 | | 245,666 | |
Mortgage loans subject to rate review | | 46,160 | | 20,700 | | 21,391 | | 22,316 | | 28,298 | | 1,245 | | 140,110 | |
Fixed-rate mortgage loans | | 87,444 | | 32,862 | | 39,704 | | 28,201 | | 48,594 | | 30,053 | | 266,859 | |
Commercial and other loans | | 11,228 | | 4,192 | | 1,645 | | 1,279 | | 3,286 | | 479 | | 22,108 | |
Total | | $ | 208,208 | | $ | 76,746 | | $ | 105,355 | | $ | 79,948 | | $ | 122,305 | | $ | 126,469 | | $ | 719,031 | |
| | | | | | | | | | | | | | | |
Liabilities subject to interest rate adjustment: | | | | | | | | | | | | | | | |
Money market deposit accounts | | $ | 21,114 | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | 21,114 | |
Savings deposits – term certificates | | 109,176 | | 45,725 | | 12,563 | | 6,728 | | 15,511 | | - | | 189,703 | |
Other savings accounts | | 206,695 | | - | | - | | - | | - | | - | | 206,695 | |
Borrowed funds | | 28,260 | | 50,000 | | 35,000 | | 25,000 | | 5,000 | | 74,500 | | 217,760 | |
Total | | $ | 365,245 | | $ | 95,725 | | $ | 47,563 | | $ | 31,728 | | $ | 20,511 | | $ | 74,500 | | $ | 635,272 | |
Guaranteed preferred beneficial
interest in junior subordinated
debentures | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | 12,143 | | $ | 12,143 | |
Excess (deficiency of rate-sensitive)
assets over rate-sensitive liabilities | | (157,037 | ) | (18,979 | ) | 57,792 | | 48,220 | | 101,794 | | 39,826 | | 71,616 | |
| | | | | | | | | | | | | | | |
Cumulative excess (deficiency)
of rate-sensitive assets over
rate sensitive liabilities(1) | | $ | (157,037 | ) | $ | (176,016 | ) | $ | (118,224 | ) | $ | (70,004 | ) | $ | 31,790 | | $ | 71,616 | | | |
| | | | | | | | | | | | | | | |
Rate-sensitive assets as a percent of rate-sensitive liabilities (cumulative)(1) | | 57.0 | % | 61.8 | % | 76.8 | % | 87.0 | % | 105.7 | % | 111.1 | % | | |
(1) Cumulative as to the amounts previously repriced or matured. Assets held for sale are reflected in the period in which sales are expected to take place. Securities classified as available for sale are shown at repricing/maturity intervals as if they are to be held to maturity as there is no definitive plan of disposition. They are also shown at amortized cost.
Liquidity and Capital Resources
Payments and prepayments on the Company's loan and mortgage-backed investment portfolios, sales of fixed rate residential loans, increases in deposits, borrowed funds and maturities of various investments comprise the Company's primary sources of liquidity. The Company is also a voluntary member of the FHLB of Boston and, as such, is entitled to borrow an amount up to the value of its qualified collateral that has not been pledged to outside sources. Qualified collateral generally consists of residential first mortgage loans, securities issued, insured or guaranteed by the U.S. Government or its agencies, and funds on deposit at the FHLB of Boston. Short-term advances may be used for any sound business purpose, while long-term advances may be used only for the purpose of providing funds to finance housing. At September 30, 2001, the Company had approximately $233,000,000 in unused borrowing capacity that is contingent upon the purchase of additional FHLB of Boston stock. Use of this borrowing capacity is also impacted by capital adequacy considerations.
The Company's short-term borrowing position consists primarily of FHLB of Boston advances with original maturities of approximately 1 to 3 months. The Company utilizes borrowed funds as a primary vehicle to manage interest rate risk, due to the ability to easily extend or shorten maturities as needed. This enables the Company to adjust its cash needs to the increased prepayment activity in its loan and mortgage-backed investment portfolios, as well as to quickly extend maturities when the need to further balance the Company's GAP position arises.
Non-performing assets were $946,000 at September 30, 2001, compared to $556,000 at December 31, 2000, an increase of $390,000 or 70.1%. The Company's percentage of delinquent loans to total loans was .32% at September 30, 2001, as compared to .22 at December 31, 2000.
The Company regularly monitors its asset quality to determine the level of its loan loss reserves through periodic credit reviews by members of the Company's Management Credit Committee. The Management Credit Committee, which reports to the Loan Committee of the Company's Board of Directors, also works on the collection of non-accrual loans and disposition of real estate acquired by foreclosure. The Company establishes provisions for loan losses in order to maintain the allowance for loan losses at a level that management estimates is appropriate to absorb future charge-offs of loans deemed uncollectible. In determining the appropriate level of the allowance for loan losses, management considers past and anticipated loss experience, evaluations of real estate collateral, current and anticipated economic conditions, volume and type of lending and the levels of non-performing and other classified loans. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates.
At September 30, 2001, the Company had outstanding commitments to originate, sell and purchase residential mortgage loans in the secondary market amounting to $52,711,000, $9,331,000 and $11,280,000, respectively. The commitment to purchase residential mortgage loans as of September 30, 2001 is accrued for on the Company’s Consolidated Balance Sheet and included under the caption “Other Liabilities.” The Company also has outstanding commitments to grant advances under existing home equity lines of credit amounting to $18,016,000. Unadvanced commitments under outstanding commercial and construction loans totaled $21,215,000 as of September 30, 2001. The Company believes it has adequate sources of liquidity to fund these commitments.
The Company's total stockholders' equity was $41,781,000 or 5.3% of total assets at September 30, 2001, compared with $34,305,000 or 4.7% of total assets at December 31, 2000. The increase in total stockholders' equity of approximately $7,476,000 or 21.8% primarily resulted from income in the first nine months of 2001 and increases in unrealized gains on securities, net of taxes, offset in part by dividends paid or payable, by the Company.
The Company issued $12,650,000 or 8.25% Trust Preferred Securities in June 1998. Under current regulatory guidelines, trust preferred securities are allowed to represent up to approximately 25% of the Company's Tier 1 capital with any excess amounts available as Tier 2 capital. As of September 30, 2001, all of these securities were included in Tier 1 capital.
Bank regulatory authorities have established a capital measurement tool called "Tier 1" leverage capital. A 4.00% ratio of Tier 1 capital to assets now constitutes the minimum capital standard for most banking organizations and a 5.00% Tier 1 leverage capital ratio is required for a "well-capitalized" classification. At September 30, 2001, the Company's Tier 1 leverage capital ratio was approximately 6.06%. In addition, regulatory authorities have also implemented risk-based capital guidelines requiring a minimum ratio of Tier 1 capital to risk-weighted assets of 4.00% (6.00% for "well-capitalized") and a minimum ratio of total capital to risk-weighted assets of 8.00% (10.00% for "well-capitalized"). At September 30, 2001, the Company's Tier 1 and total risk-based capital ratios were approximately 11.84% and 12.99%, respectively. The Company is categorized as "well-capitalized" under the Federal Deposit Insurance Corporation Improvement Act of 1991 (F.D.I.C.I.A.). The Bank is also categorized as "well-capitalized" as of September 30, 2001.
IMPACT OF INFLATION
The Consolidated Financial Statements of the Company and related Financial Data presented herein have been prepared in accordance with accounting principles generally accepted in the United States which generally require the measurement of financial condition and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on operations of the Company is reflected in increased operating costs. Unlike most industrial companies, almost all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services.
PROPOSED ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement supercedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. Under this statement it is required that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and it broadens the presentation of discontinued operations to include more disposal transactions. The provisions of this statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company is currently evaluating the impact of this statement on its results of operations or financial position upon the adoption of SFAS No. 144.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis - Asset/Liability Management."
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is a defendant in various legal matters, none of which is believed by management to be
material to the consolidated financial statements.
Item 2. Changes in Securities.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
2.1 Plan of Reorganization and Acquisition dated as of October 15, 1996 between the Company and Abington Savings Bank incorporated by reference to the Company's Registration Statement on Form 8-A, effective January 13, 1997.
3.1 Articles of Organization of the Company incorporated by reference to the Company's Registration Statement on Form 8-A, effective January 13, 1997.
3.2 3.2 By-Laws of the Company, incorporated by reference to the Company's quarterly report on Form 10-Q for the second quarter of 2000, filed on May 12, 2000.
3.3 Specimen stock certificate for the Company's Common Stock incorporated by reference to the Company's Registration Statement on Form 8-A, effective January 31, 1997.
4.2 Form of Indenture between Abington Bancorp, Inc. and State Street Bank and Trust Company incorporated by reference to Exhibit 4.1 of the Registration Statement on Form S-2 of the Company and Abington Bancorp Capital Trust, filed on May 12, 1998.
4.3 Form of Junior Subordinated Debenture incorporated by reference to Exhibit 4.2 of the Registration Statement on Form S-2 of the Company and Abington Bancorp Capital Trust, filed on May 12, 1998.
4.4 Form of Amended and Restated Trust Agreement by and among the Company, State Street Bank and Trust Company, Wilmington Trust Company and the Administrative Trustees of the Trust incorporated by reference to Exhibit 4.4 of the Registration Statement on Form S-2 of the Company and Abington Bancorp Capital Trust, filed on May 12, 1998.
4.4 Form of Preferred Securities Guarantee Agreement by and between the Company and State Street Bank and Trust Company incorporated by reference to Exhibit 4.6 of the Registration Statement on Form S-2 of the Company and Abington Bancorp Capital Trust, filed on May 12, 1998.
*10.1 (a) Amended and Restated Special Termination Agreement dated as of January 1997 among the Company, the Bank and James P. McDonough incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 filed on March 31, 1997. *(b) Amendment to Amended and Restated Special Termination Agreement, dated as of July 1, 1997 among the Company, the Bank and James P. McDonough, incorporated by reference to the Company's quarterly report on Form 10-Q for the second quarter of 1997, filed on August 13, 1997.
*10.2 Special Termination Agreement dated as of November 2, 1998 among the Company, the Bank and Kevin M. Tierney, incorporated by reference to the Company's quarterly report on Form 10-Q for the third quarter of 1998, filed on November 12, 1998.
*10.3 Special Termination Agreement dated as of September 13, 2000 among the Company, the Bank and Cynthia A. Mulligan, incorporated by reference to the Company's quarterly report on Form 10-Q for the second quarter of 2001, filed on November 15, 2000.
*10.4 (a) Amended and Restated Special Termination Agreement dated as of January 31, 1997 among the Company, the Bank and Mario A. Berlinghieri incorporated by reference to the Company's Annual Report for the year ended December 31, 1996 on Form 10-K filed on March 31, 1997.
(b) Amendment to Amended and Restated Special Termination Agreement, dated as of July 1, 1997 among the Company, the Bank and Mario A. Berlinghieri, incorporated by reference to the Company's quarterly report on Form 10-Q for the second quarter of 1997, filed on August 13, 1997.
(c) Amendment No. 2 to Amended and Restated Special Termination Agreement, dated as of April 16, 1998, by and among the Company, the Bank and Mario A. Berlinghieri, incorporated by reference to the Company's quarterly report on Form 10-Q for the second quarter of 1998, filed on May 8, 1998.
*10.5 Abington Bancorp, Inc. Incentive and Nonqualified Stock Option Plan, as amended and restated to reflect holding company formation incorporated by reference to the Company's Annual Report for the year ended December 31, 1996 on Form 10-K filed on March 31, 1997.
*10.6 Senior Management Incentive Plan, incorporated by reference to the Company's Annual Report for the year ended December 31, 2000 on Form 10-K filed on March 28, 2000.
*10.7 Revised Long Term Performance Incentive Plan dated July, 2001, incorporated by reference to the Company’s quarterly report on From 10-Q for the second quarter of 2001, filed on August 10, 2001.
10.8 (a) Lease for office space located at 538 Bedford Street, Abington, Massachusetts ("lease"), used for the Bank's principal and administrative offices dated January 1, 1996 incorporated by reference to the Company's Annual Report for the year ended December 31, 1996 on Form 10-K filed on March 31, 1997. Northeast Terminal Associates, Limited owns the property. Dennis E. Barry and Joseph L. Barry, Jr., who beneficially own more than 5% of the Company's Common Stock, are the principal beneficial owners of Northeast Terminal Associates, Limited.
(b) Amendment to Lease dated December 31, 1997, incorporated by reference to the Company's Annual Report for the year ended December 31, 1997 on Form 10-K filed on March 25, 1998.
(c) Amendment to lease dated September 30, 2000, incorporated by reference to the Company's quarterly report on Form 10-Q for the second quarter of 2001, incorporated by reference to the Company’s quarterly report on From 10-Q for the first quarter of 2001, filed on May 11, 2001.
10.9 Dividend Reinvestment and Stock Purchase Plan is incorporated by reference herewith to the Company's Registration Statement on Form S-3, effective January 31, 1997.
*10.10 Abington Bancorp, Inc. 1997 Incentive and Nonqualified Stock Option Plan, incorporated by reference herewith to Appendix A to the Company's proxy statement relating to its special meeting in lieu of annual meeting held on June 17, 1997, filed with the Commission on April 29, 1997.
*10.11 (a) Special Termination Agreement dated as of July 1, 1997 among the Company, the Bank and Robert M. Lallo, incorporated by reference to the Company's quarterly report on Form 10-Q for the second quarter of 1997, filed on August 13, 1997.
(b) Amendment No. 1 to Special Termination Agreement, dated April 16, 1998, by and among the Company, the Bank and Robert M. Lallo, incorporated by reference to the Company's quarterly report on Form 10-Q for the second quarter of 1998, filed on May 8, 1998.
*10.12 Merger Severance Benefit Program dated as of August 28, 1997, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the third quarter of 1997, filed on November 15, 1997.
*10.13 Supplemental Executive Retirement Agreement between the Bank and James P. McDonough dated as of August 23, 2001, filed herewith.
*10.14 Deferred Stock Compensation Plan for Directors, effective July 1, 1998 incorporated by reference to Appendix A to the Company's proxy statement (schedule 14A) for its 1998 Annual Meeting, filed with the Commission on April 13, 1998.
*10.15 Special Termination Agreement dated as of February 7, 2000 among the Company, the Bank and Jack B. Meehl, incorporated by reference to the Company's Annual Report for the year ended December 31, 2000 on Form 10-K filed on March 28, 2000.
*10.16 Abington Bancorp, Inc. 2000 Incentive and Nonqualified Stock Option Plan, incorporated by reference herewith to Appendix A to the Company's proxy statement relating to its annual meeting held on May 16, 2000, filed with the Commission on April 13, 2000.
*10.17 Abington Bancorp, Inc. Board of Directors Transition and Retirement Plan, incorporated by reference to the Company's quarterly report on Form 10-Q for the second quarter of 2000, filed on August 11, 2000.
*10.18 Defined Contribution Supplemental Executive Retirement Agreement between the Bank and Kevin M. Tierney, Sr. dated July 26, 2001, incorporated by reference to the Company’s quarterly report on Form 10-Q for the second quarter of 2001, filed on August 10, 2001.
*10.19 Defined Contribution Supplemental Executive Retirement Agreement between the Bank and Robert M. Lallo dated July 26, 2001, incorporated by reference to the Company’s quarterly report on Form 10-Q for the second quarter of 2001, filed on August 10, 2001.
11.1 A statement regarding the computation of earnings per share is included in Note D to Unaudited Consolidated Financial Statements included in this Report.
b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the third quarter of 2001.
*Management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | ABINGTON BANCORP, INC. |
| | | | (Company) |
| | | | |
| | | | |
Date: | November 8, 2001 | | By | /s/ James P. McDonough |
| | | | James P. McDonough |
| | | | President and Chief Executive Officer |
| | | | |
| | | | |
Date: | November 8, 2001 | | By | /s/ Robert M. Lallo |
| | | | Robert M. Lallo |
| | | | Treasurer |
| | | | (Principal Financial Officer) |
