1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES
EXCHANGE ACT OF 1934 for Quarter Ended June 30, 1997
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Commission File Number 0-16018
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ABINGTON BANCORP, INC.
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(Exact name of Registrant as specified in its charter)
MASSACHUSETTS 04-3334127
- --------------------------------- ---------------------------
(State or Other Jurisdiction (I.R.S. Identification No.)
of Incorporation or Organization)
538 BEDFORD STREET, ABINGTON, MASSACHUSETTS 02351
- ------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 982-3200
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 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
----- -----
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 1,840,238 shares as of August
5, 1997.
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ABINGTON BANCORP, INC.
FORM 10-Q
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INDEX
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PAGE
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Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1997
(Unaudited) and December 31, 1996.............................. 1
Consolidated Statements of Operations (Unaudited)
for the Three and Six Months Ended June 30, 1997 and 1996...... 2
Consolidated Statements of Changes in Stockholders'
Equity (Unaudited) for the Six Months Ended
June 30, 1997 and 1996......................................... 3
Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended June 30, 1997 and 1996................ 4
Notes to Unaudited Consolidated Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations.................. 9
Part II Other Information
Item 1. Legal Proceedings ............................................. 29
Item 2. Change in Securities .......................................... 29
Item 3. Defaults upon Senior Securities................................ 29
Item 4. Submission of Matters to a Vote of Security Holders............ 29
Item 5. Other Information.............................................. 29
Item 6. Exhibits and Reports on Form 8-K............................... 29
Signature Page............................................................. 32
Index to Exhibits.......................................................... 33
3
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ABINGTON BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
Unaudited
June 30, December 31,
1997 1996
-------- --------
(In Thousands)
ASSETS
Cash and due from banks $ 10,243 $ 9,556
Short-term investments 161 152
-------- --------
Total cash and cash equivalents 10,404 9,708
-------- --------
Loans held for sale 1,109 3,176
Securities:
Mortgage-backed investments - held for
investment - market value of $61,511
in 1997 and $62,456 in 1996 62,659 63,670
Securities available for sale - at
market value 105,677 91,561
Loans 301,366 297,605
Less:
Allowance for possible loan losses (2,090) (1,811)
-------- --------
Loans, net 299,276 295,794
-------- --------
Federal Home Loan Bank stock 7,903 7,903
Banking premises and equipment, net 6,261 6,346
Other real estate owned, net -- 500
Intangible assets 3,480 3,685
Other assets 4,487 4,615
-------- --------
$501,256 $486,958
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $310,624 $300,445
Short-term borrowings 39,983 63,171
Long-term debt 111,395 84,353
Accrued taxes and expenses 2,679 3,447
Other liabilities 1,895 1,996
-------- --------
Total liabilities 466,576 453,412
-------- --------
Commitments and contingencies
Stockholders' equity:
Serial preferred stock, $.10 par value,
3,000,000 shares authorized; none issued -- --
Common stock, $.10 par value 7,000,000
shares authorized; 2,332,238 and 2,330,238
shares issued in 1997 and 1996, respectively 233 233
Additional paid-in capital 20,939 20,923
Retained earnings 18,230 16,455
-------- --------
39,402 37,611
Treasury stock - 480,700 and 437,000 shares for
1997 and 1996, respectively, at cost (4,697) (3,703)
Unearned compensation - ESOP (272) (312)
Net unrealized gain (loss) on available for
sale securities, net of taxes 247 (50)
-------- --------
Total stockholders' equity 34,680 33,546
-------- --------
$501,256 $486,958
======== ========
See accompanying notes to unaudited consolidated financial statements.
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ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
------- -------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(In thousands, except per share data)
Interest and dividend income:
Interest and fees on loans ................. $ 6,132 $ 5,635 $ 12,171 $ 11,149
Interest on mortgage-backed investments .... 2,324 2,305 4,554 4,640
Interest on bonds and obligations .......... 412 380 805 727
Dividend income ............................ 145 133 292 271
Interest on short-term investments ......... 15 18 23 28
---------- ---------- ---------- ----------
Total interest and dividend income ....... 9,028 8,471 17,845 16,815
---------- ---------- ---------- ----------
Interest expense:
Interest on deposits ........................ 2,714 2,612 5,394 5,236
Interest on short-term borrowings ........... 636 954 1,453 1,879
Interest on long-term debt .................. 1,657 1,290 2,924 2,558
---------- ---------- ---------- ----------
Total interest expense ................... 5,007 4,856 9,771 9,673
---------- ---------- ---------- ----------
Net interest income .......................... 4,021 3,615 8,074 7,142
Provision for possible loan losses ........... 157 120 315 240
---------- ---------- ---------- ----------
Net interest income, after provision for
Possible loan losses ....................... 3,864 3,495 7,759 6,902
---------- ---------- ---------- ----------
Non-interest income:
Loan servicing fees ........................ 119 169 262 346
Other customer service fees ................ 791 630 1,471 1,189
Gain on sales of securities, net ........... 108 144 218 265
Gain on sales of mortgage loans, net ....... 40 64 121 197
Gain on sales and write-down of
other real estate owned, net .............. 78 -- 94 --
Other ........................................ 65 50 172 134
---------- ---------- ---------- ----------
Total non-interest income ................ 1,201 1,057 2,338 2,131
---------- ---------- ---------- ----------
Non-interest expense:
Salaries and employee ...................... 1,577 1,505 3,197 2,938
Occupancy and equipment expenses ........... 604 571 1,184 1,196
Other non-interest expense ................. 1,105 1,136 2,196 2,206
---------- ---------- ---------- ----------
Total non-interest expense ............... 3,286 3,212 6,577 6,340
---------- ---------- ---------- ----------
Income before provision for income
taxes ......................... 1,779 1,340 3,520 2,693
Provision for income taxes ................... 683 494 1,372 1,013
---------- ---------- ---------- ----------
Net income ............................... $ 1,096 $ 846 $ 2,148 $ 1,680
========== ========== ========== ==========
Dividends per share .......................... $ .10 $ .10 $ .20 $ .20
========== ========== ========== ==========
Earnings per share ........................... $ .55 $ .43 $ 1.08 $ .85
========== ========== ========== ==========
Weighted average common and common share
equivalents ................................ 1,987,000 1,973,000 1,997,000 1,975,000
========== ========== ========== ==========
See accompanying notes to unaudited consolidated financial statements.
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ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(Unaudited)
Net
Unrealized
Gain
(Loss) on
Additional Available Unearned
Common Paid-In Retained Treasury for Sale Compensa-
Stock Capital Earnings Stock Securities tion-ESOP Total
- -------------------------------------------------------------------------------------------------------------------------
(In thousands)
Balance at December 31, 1996 ........... $233 $20,923 $16,455 $(3,703) $ (50) $(312) $33,546
Net income ............................. -- -- 2,148 -- -- -- 2,148
Decrease in unearned compen-
sation - ESOP ........................ -- -- -- -- -- 40 40
Increase in unrealized gain (loss) on
available for sale securities,
net of taxes ......................... -- -- -- -- 297 -- 297
Exercise of stock options .............. -- 16 -- -- -- -- 16
Repurchase of stock .................... -- -- -- (994) -- -- (994)
Dividends declared ($.20 per share) .... -- -- (373) -- -- -- (373)
---- ------- ------- ------- ----- ----- -------
Balance at June 30, 1997 ............... $233 $20,939 $18,230 $(4,697) $ 247 $(272) $34,680
==== ======= ======= ======= ===== ===== =======
Balance at December 31, 1995 ........... $232 $20,811 $13,676 $(3,703) $ (62) $(393) $30,561
Net income ............................. -- -- 1,680 -- -- -- 1,680
Decrease in unearned compen-
sation - ESOP ........................ -- -- -- -- -- 40 40
Exercise of stock options .............. -- 18 -- -- -- -- 18
Increase in unrealized loss on
available for sale securities,
net of taxes ......................... -- -- -- -- (487) -- (487)
Dividends declared ($.20 per share) .... -- -- (376) -- -- -- (376)
---- ------- ------- ------- ----- ----- -------
Balance at June 30, 1996 .............. $232 $20,829 $14,980 $(3,703) $(549) $(353) $31,436
==== ======= ======= ======= ===== ===== =======
See accompanying notes to unaudited consolidated financial statements.
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ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(Unaudited)
Six Months Ended
June 30,
----------------------
1997 1996
-------- --------
(In thousands)
Cash flows from operating activities:
Net income .............................................. $ 2,148 $ 1,680
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for loan losses ............................ 315 240
(Gain) loss on sales and write-down of
other real estate owned, net ...................... (94) --
Amortization, accretion and depreciation, net ........ 948 822
Gain on sales of securities, net ......................... (218) (265)
Loans originated for sale in the
secondary market ..................................... (9,098) (9,883)
Proceeds from sales of loans ......................... 11,286 8,427
Gain on sales of mortgage loans, net ................. (121) (197)
Other, net ........................................... (1,099) 165
-------- --------
Net cash provided (used) by operating
activities ......................................... 4,067 989
-------- --------
Cash flows from investing activities:
Maturities of held for investment
investment securities .............................. -- --
Purchase of held for investment
investment securities .............................. (2,067) (3,633)
Proceeds from principal payments received
on held for investment securities .................. 3,099 4,550
Proceeds from sales of available for sale
securities ............................................ 17,280 11,983
Proceeds from principal payments on
available for sale securities ......................... 5,549 10,435
Purchase of available for sale securities ............... (36,188) (24,575)
Loans originated/purchased, net ......................... (3,797) (25,347)
Proceeds from sales of loans held in portfolio .......... -- 3,038
Purchases of FHLB stock ................................. -- (472)
See accompanying notes to unaudited consolidated financial statements
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ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
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(Unaudited)
Six Months Ended
June 30,
----------------------
1997 1996
-------- --------
(In thousands)
Purchase of banking premises and equipment
and improvements to other real estate owned .......... $ (520) $ (420)
Proceeds from sales of other real estate owned ........ 594 310
-------- --------
Net cash provided (used) by investing activities ...... (16,050) (24,131)
-------- --------
Cash flows from financing activities:
Net increase in deposits .............................. 10,179 13,827
Net increase (decrease) in borrowings with original
maturities of three months or less ................... (1,188) 19,130
Proceeds from short-term borrowings with
maturities in excess of three months ................. 10,000 5,000
Proceeds from exercise of stock options ............... 16 18
Principal payments on short-term borrowings with
maturities in excess of three months ................. (32,000) (15,500)
Proceeds from issuance of long-term debt .............. 34,000 9,500
Principal payments on long term debt .................. (6,958) (9,081)
Purchase of treasury stock ............................ (994) --
Cash paid for dividends ................................ (376) (376)
-------- --------
Net cash provided from financing activities .......... 12,679 22,518
-------- --------
Net increase (decrease)in cash and cash equivalents .... 696 (624)
Cash and cash equivalents at beginning of period ....... 9,708 10,611
-------- --------
Cash and cash equivalents at end of period ............. $ 10,404 $ 9,987
======== ========
Supplemental cash flow information:
Interest paid on deposits ........................... $ 5,396 $ 5,217
Interest paid on borrowed funds ..................... 4,316 4,436
Income taxes paid ................................... 2,427 225
Transfers to other real estate owned, net ........... -- --
See accompanying notes to unaudited consolidated financial statements.
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ABINGTON BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
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A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Abington Bancorp, Inc. (the "Company") is a one-bank holding company
which owns all of the outstanding capital stock of Abington Savings Bank
("the Bank"). Abington Bancorp, Inc., was reestablished as the Bank's
holding company on January 31, 1997. Previously, the Company's
predecessor, also known as Abington Bancorp, Inc. had served as the
Bank's holding company from February 1988 until its dissolution in
December 1992. The Company's primary business is serving as the holding
company of the Bank.
The accompanying consolidated financial statements as of June 30, 1997
and for the three and six month periods ended June 30, 1997 and 1996 have
been prepared by the Company without audit, and reflect all adjustments
(consisting of normal recurring adjustments) which, in the opinion of
management, are necessary to reflect a fair statement of the results of
the interim periods presented. On January 31, 1997, in connection with
the holding company formation, each share of the Bank's common stock
previously outstanding was converted automatically into one share of
common stock of the Company, and the Bank became a wholly-owned
subsidiary of the Company. This reorganization had no impact on the
consolidated financial statements. Certain information and footnote
disclosures normally included in the annual consolidated financial
statements which are prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Accordingly, the
Company believes that although the disclosures are adequate to make the
information presented not misleading, these consolidated financial
statements should be read in conjunction with the footnotes contained in
the Bank's consolidated financial statements as of and for the year ended
December 31, 1996, which are included in the Company's Annual Report to
Stockholders. Interim results are not necessarily indicative of results
to be expected for the entire year.
The consolidated financial statements include the accounts of Abington
Bancorp, Inc. and its wholly-owned subsidiary, Abington Savings Bank.
Abington Savings Bank also includes its wholly-owned subsidiaries, Holt
Park Place Development Corporation and Norroway Pond Development
Corporation each typically owning properties being marketed for sale,
ABBK Corporation, which invested in real estate limited partnerships and
was dissolved in January 1997, and Abington Securities Corporation, which
invests primarily in obligations of the United States Government and its
agencies and equity securities. All significant intercompany balances and
transactions have been eliminated in consolidation.
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ABINGTON BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(continued)
- --------------------------------------------------------------------------------
B) DIVIDEND DECLARATION
The Board of Directors of Abington Bancorp., Inc. declared a cash
dividend of $.10 per share to holders of its common stock in June 1997.
The dividend was payable on July 24, 1997 to stockholders of record as of
the close of business on July 10, 1997.
C) EARNINGS PER SHARE
In February 1997, Financial Accounting Standards Board Statement No. 128,
"Earnings Per Share" (SFAS No. 128) was issued. This Statement is
effective for both interim and annual periods ending after December 15,
1997, and replaces the presentation of "primary" earnings per share (EPS)
with a presentation of "basic" EPS. Basic EPS excludes dilution and is
computed by dividing income available to holders of common stock by the
weighted-average number of common shares outstanding during the period.
The Statement also requires the presentation of diluted EPS, if
applicable, which is computed similarly to "fully diluted" EPS, under
existing accounting rules.
The pro forma earnings per share for the three and six month periods
ended June 30, 1997 and 1996 using the methods prescribed by SFAS No.
128, are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1997 1996 1997 1996
---- ---- ---- ----
(In thousands except per share and share data)
Net Income ........................ $ 1,096 $ 846 $ 2,148 $ 1,680
========== ========== ========== ==========
EARNINGS PER SHARE:
Basic-
Earnings per share ............. $ .59 $ .45 $ 1.14 $ .89
========== ========== ========== ==========
Weighted average common shares . 1,869,000 1,885,000 1,882,000 1,884,000
========== ========== ========== ==========
Diluted-
Earnings per share ............. $ .55 $ .43 $ 1.08 $ .85
========== ========== ========== ==========
Weighted average common shares
and share equivalents .......... 1,987,000 1,973,000 1,997,000 1,975,000
========== ========== ========== ==========
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ABINGTON BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 (continued)
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D) Stock Repurchase Program
On March 27, 1997, the Company announced that its Board of Directors had
authorized the Company to repurchase up to 10% (187,000 shares) of its currently
outstanding Common stock from time to time at prevailing market prices. The
Board delegated to the discretion of the Company's senior management the
authority to determine the timing of the repurchase program's commencement,
subsequent purchases and the prices at which the repurchases will be made.
As of August 5, 1997, the Company had repurchased 55,000 shares of its common
stock under this plan at a total cost of approximately $1,309,000. All of the
repurchases were subsequent to March 31, 1997.
E) Stock Option Plan
In March 1997, the Board of Directors has approved an Incentive and
Non-qualified Stock Option Plan (the 1997 Stock Option Plan), which was also
approved by the stockholders of the Company at its annual meeting in June 1997.
The 1997 Stock Option Plan authorizes the grant of (i) options to purchase
Common Stock intended to qualify as incentive stock options ("Incentive
Options"), as defined in Section 422 of the Code, and (ii) options that do not
so qualify ("Nonqualified Options"). Up to 150,000 shares of Common
Stock(subject to adjustment upon certain changes in the capitalization of the
Company) may be issued pursuant to awards granted by the Stock Compensation
Committee(the "Compensation Committee"). The Compensation Committee will select
the individuals to whom awards are granted and will determine the terms of each
award, subject to the provisions of the 1997 Stock Option Plan. Incentive
Options may be granted under the 1997 Stock Option Plan only to officers and
other employees of the Company or its subsidiaries. Nonqualified Options may be
granted under the 1997 Stock Option Plan to officers or other employees of the
Company or its subsidiaries, and to members of the Board of Directors and
consultants or other persons who render services to the Company.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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GENERAL
The Company's results of operations depend primarily on its net interest income
after provision for possible loan losses, its revenue from other banking
services and non-interest expenses. The Company's net interest income depends
upon the net interest rate spread between the yield on the Company's loan and
investment portfolios and the cost of funds, consisting primarily of interest
expense on deposits and Federal Home Loan Bank advances. The interest rate
spread is affected by the match between the maturities or repricing intervals of
the Company's assets and liabilities, the mix and composition of interest
sensitive assets and liabilities, economic factors influencing general interest
rates, loan demand and savings flows, as well as the effect of competition for
deposits and loans. The Company's net interest income is also affected by the
performance of its loan portfolio and the level of non-earning assets. Revenues
from loan fees and other banking services depend upon the volume of new
transactions and the market level of prices for competitive products and
services. Non-interest expenses depend upon the efficiency of the Company's
internal operations and general market and economic conditions.
NET INTEREST INCOME
Net interest income is affected by the mix and volume of assets and liabilities,
the movement and level of interest rates, and interest spread, which is the
difference between the average yield received on earning assets and the average
rate paid on deposits and borrowings. The Company's net interest rate spread was
3.31% and 3.33% for the quarter and six months ended June 30, 1997,respectively
and 3.08% and 3.10% for the quarter and six months ended June 30, 1996,
respectively.
The level of impaired loans and other real estate owned also has an impact on
net interest income. At June 30, 1997, the Company had $866,000 in impaired
loans, with no other real estate owned, compared to $1,028,000 in impaired loans
and $500,000 in other real estate owned, respectively, as of December 31, 1996.
All impaired loans for the respective periods noted were accounted for on a
non-accrual basis.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The table below presents the components of interest income and expense for the
major categories of assets and liabilities for the periods indicated.
Three Months Ended Six Months Ended
June 30 June 30
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
Interest and dividend income:
Interest and fees on loans .................. $6,132 $5,635 $12,171 $11,149
Interest on mortgage-backed investments ..... 2,324 2,305 4,554 4,640
Interest on bonds and obligations ........... 412 380 805 727
Dividend income ............................. 145 133 292 271
Interest on short-term investments .......... 15 18 23 28
------ ------ ------- -------
Total interest and dividend income ......... $9,028 $8,471 $17,845 $16,815
------ ------ ------- -------
Interest expense:
Interest on deposits ........................ 2,714 2,612 5,394 5,236
Interest on short-term borrowings ........... 636 954 1,453 1,879
Interest on long-term debt .................. 1,657 1,290 2,924 2,558
------ ------ ------- -------
Total interest expense ..................... 5,007 4,856 9,771 9,673
------ ------ ------- -------
Net interest income .......................... $4,021 $3,615 $ 8,074 $ 7,142
====== ====== ======= =======
A breakdown of the components of the Company's net interest-rate spread is as
follows:
Three Months Ended Six Months Ended
June 30 June 30
------- -------
1997 1996 1997 1996
---- ---- ---- ----
Weighted average yield earned on:
Loans ......................................... 8.18% 8.08% 8.14% 8.18%
Mortgage-backed investments ................... 6.86 6.62 6.87 6.67
Bonds and obligations ......................... 7.10 6.47 7.20 6.24
Marketable and other equity securities ........ 4.87 4.94 4.90 5.08
Short-term investments ........................ 11.17 7.76 5.15 5.75
Weighted average yield earned on
interest-earning assets ....................... 7.67 7.47 7.65 7.53
Weighted average rate paid on:
NOW and non-interest NOW deposits ............. .88 .88 .87 .86
Savings deposits ......................... 2.23 2.36 2.27 2.38
Time deposits ............................ 5.64 5.73 5.69 5.80
Total deposits ........................... 3.54 3.65 3.57 3.69
Short-term borrowings .................... 5.54 5.51 5.45 5.66
Long-term debt ........................... 6.18 5.91 6.02 5.91
Weighted average rate paid on
interest-bearing liabilities .................. 4.36 4.39 4.32 4.43
Net interest-rate spread ......................... 3.31% 3.08% 3.33% 3.10%
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
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 June 30,
--------------------------------
1997 vs. 1996
Increase (Decrease)
--------------------------------
Due to
--------------------------------
Volume Rate Total
--------------------------------
(In thousands)
Interest and dividend income:
Loans .................................... $ 425 $ 72 $ 497
Mortgage-backed investments .............. (277) 296 19
Bonds and obligations .................... (31) 63 32
Equity securities ........................ 24 (12) 12
Short-term investments ................... (32) 29 (3)
----- ----- -----
Total interest and dividend
income .............................. 109 448 557
----- ----- -----
Interest expense:
NOW deposits ............................. 21 (3) 18
Savings deposits ......................... 81 (94) (13)
Time deposits ............................ 272 (175) 97
Short-term borrowings .................... (349) 31 (318)
Long-term debt ........................... 305 62 367
----- ----- -----
Total interest expense ............... 330 (179) 151
----- ----- -----
Net interest income ........................ $(221) $ 627 $ 406
===== ===== =====
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
Six Months Ended June 30,
--------------------------------
1997 vs. 1996
Increase (Decrease)
--------------------------------
Due to
--------------------------------
Volume Rate Total
--------------------------------
(In thousands)
Interest and dividend income:
Loans ................................... $1,182 $(160) $1,022
Mortgage-backed investments ............. (391) 305 (86)
Bonds and obligations ................... (78) 156 78
Equity securities ....................... 46 (25) 21
Short-term investments .................. (2) (3) (5)
------ ----- ------
Total interest and dividend
income ............................. 757 273 1,030
------ ----- ------
Interest expense:
NOW deposits ............................ 34 3 37
Savings deposits ........................ 72 (96) (24)
Time deposits ........................... 332 (187) 145
Short-term borrowings ................... (358) (68) (426)
Long-term debt .......................... 317 49 366
------ ----- ------
Total interest expense .............. 397 (299) 98
------ ----- ------
Net interest income ....................... $ 360 $ 572 $ 932
====== ===== ======
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996
GENERAL. Net income for the quarter ended June 30, 1997 was $1,096,000 or $.55
per share compared to a net income of $846,000 or $.43 per share in the
corresponding period of 1996, a net increase of $250,000 or 29.6%. The overall
improvement in net income was mainly attributable to increases in net interest
income and customer service fees.
INTEREST AND DIVIDEND INCOME. Interest and dividend income increased $557,000 or
6.6% during the three month period ended June 30, 1997 as compared to the same
period in 1996. The increase was attributable to increases in earning assets,
particularly loans, and the rates earned on those assets. The balance of average
earning assets for the three month period ended June 30, 1997 was approximately
$470,967,000 as compared to $453,465,000 for the same period in 1996, an overall
increase of $17,502,000 or 3.9%. The increase in earning assets was generally
due to increases in average loan balances which were $299,730,000 for the three
months ended June 30, 1997, as compared to $278,914,000 for the same period in
1996, an increase of $20,816,000 or 7.5%. This increase was generally caused by
larger volumes of commercial loan originations in the latter half of 1996 and
into 1997 as well as higher residential loan balances which were the result of
the steady volume of loan originations and purchases in this area throughout
1996 and into 1997. See "Liquidity and Capital Resources" and "Asset-Liability
Management" for further discussion of the Company's investment strategies. The
average yield earned on loans also increased for the second quarter of 1997 as
compared to 1996 primarily due to overall increases in the rates earned on loans
and the mortgage backed and investment securities portfolios. The yield on loans
averaged a yield of 8.18% in the second quarter of 1997 as compared to 8.08% in
the same period in 1996. This increase was generally due to a change in the
composition of the Company's loan portfolio which had higher concentrations of
commercial loans in 1997. As of June 30, 1997, commercial loans, including
commercial real estate comprised 12.6% of the Company's loan portfolio at June
30, 1997 (approximately $37,893,000) as compared to 7.5% at June 30, 1996
(approximately $21,562,000). Additionally, in March 1997, the Company
experienced increases in general economic rates, including the prime lending
rate, which generally coincided with the Federal Reserve's decision to increase
the Federal discount rate 25 basis points, which has also had a favorable impact
on rates earned on loans. Average balances of mortgage-backed and investment
securities were $135,588,000 and $23,202,000, respectively in the second quarter
of 1997, as compared to $139,347,000 and $23,503,000, respectively, for the same
period in 1996. These balances, when combined, generally declined as run-off
from the investment portfolio was generally re-invested into loan production
throughout 1996 and into 1997.
13
16
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
The yield on the mortgage-backed and investment securities portfolios increased
to 6.86% and 7.10%, respectively, from 6.62% and 6.47%, respectively. This was
generally achieved through the sale of various lower yielding securities held by
the Bank in its portfolio of securities available for sale and the acquisition
of securities at higher yields, both of which took place during the second half
of 1996 and the first half of 1997.
INTEREST EXPENSE. Interest expense for the quarter ended June 30, 1997 increased
$151,000 or 3.1% compared to the same period in 1996 generally due to increases
in deposit balances, which were partially offset by decreases in the average
rates paid on savings and time deposits. The blended weighted average rate paid
on deposits and borrowed funds was 4.36% for the three months ended June 30,
1997 as compared to 4.39% for the same period in 1996. The weighted average
rates paid on deposits was 3.54% for the quarter ended June 30, 1997 as compared
to 3.65% for the same period in 1996. The overall cost of deposits has declined
in the second quarter of 1997 as compared to the same period in 1996, generally
due to the success of continued promotional efforts to attract core deposits
(NOW accounts, savings and money markets), which typically have a lower cost of
funds than time deposits and borrowings, as well as due to overall declines in
the cost of funds related to time deposits. The average balance of core and time
deposits rose to $162,951,000 and $143,528,000, respectively, for the second
quarter of 1997 as compared to $151,707,000 and $134,550,000, respectively, for
the corresponding period in 1996, increases of 7.4% and 6.7%, respectively.
Additionally, the weighted average rate paid on time deposits declined to 5.64%
for the second quarter of 1997, as compared to 5.73% in 1996. This change
reflects the re-financing of various certificates as they have matured at lower
rates than they had been paying in previous periods and is the result of the
generally declining rate environment which has existed over the past year. The
Bank 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. Borrowing levels
decreased slightly, overall, during the second quarter of 1997 as compared to
1996, to $153,186,000 from $156,568,000, a decline of 2.2%. The overall weighted
average rates paid on borrowed funds increased to approximately 5.99% for the
quarter ended June 30, 1997 from 5.73% in 1996. This increase was generally due
to economic rate increases in March 1997 as well as a result of management's
decision to extend $28 million in borrowings from short term to long term
(generally refinanced out 3 and 4 years) at the end of the first and into the
second quarter to provide further protection against potential interest rate
increases. The Bank 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.
14
17
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
NON-INTEREST INCOME. Total non-interest income increased $144,000 or 13.6% in
the second quarter of 1997 in comparison to the same period in 1996. Customer
service fees, which were $791,000 for the quarter ended June 30, 1997 as
compared to $630,000 for 1996, for an increase of $161,000 or 25.6%, rose
primarily due to growth in deposit accounts, primarily NOW and checking account
portfolios. Non-interest income was also favorably impacted by the sales of
various other real estate owned properties at better than anticipated prices.
Income related to the sales of other real estate owned was $78,000 for the
second quarter of 1997 for which there was no corresponding income or loss in
the same period in 1996. Loan servicing fees and gains on sales of mortgage
loans have declined to $119,000 and $40,000, respectively, for the second
quarter of 1997 as compared to $169,000 and $64,000, respectively, for the same
period in 1996. This generally is reflective of management's decision to sell
most of its residential mortgage production on a servicing released basis
commencing in 1996, the amortization of previously capitalized servicing rights
and also due to fewer loans being originated for sale in 1997. The average
balances of loans serviced for others declined to $229,007,000 for the second
quarter of 1997 as compared to $245,876,000 in the corresponding period in 1996,
a decline of 6.9%. The loan serving income for the second quarter was further
negatively impacted by accelerated amortization of certain mortgage servicing
rights (approximately $35,000) given changes in management's estimates for
future prepayments on the related loan servicing pools. Declining trends in
servicing income are expected to continue due to the Company's strategic change
of selling wholesale mortgage production on a servicing released basis and also
due to accounting changes for loans sold servicing retained prescribed by FASB
No. 122-"Accounting for Mortgage Servicing Rights" and FASB No. 125-"Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities". Gains on sales of securities remained relatively consistent at
$108,000 for the second quarter of 1997 as compared to $144,000 for 1996
generally due to a consistently strong market for equity securities. Gains on
sales of securities were somewhat less in 1997 as compared to 1996 due to losses
taken on certain mortgage-backed securities sales during the quarter which has
helped increase the overall yield on that portfolio.
NON-INTEREST EXPENSES. Non-interest expenses for the quarter ended June 30, 1997
increased $74,000 or 2.3% compared to the same period in 1996. Salaries and
employee benefits increased 4.8% or $72,000 primarily due to increases in health
insurance costs and staffing levels in the Company's business banking and retail
areas which correspond with the Company's strategic focuses of increasing
commercial loans and attracting core deposits. Occupancy expenses increased
$33,000 or 5.8% primarily due to general inflation on increases in capital
expenditures, particularly technology. Other non-interest expenses also
decreased $31,000 or 2.7% for the quarter ended June 30, 1997 in comparison to
the same period in 1996, generally due to lower legal and other professional
services expenses as compared to the same period in 1996.
15
18
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses was
$157,000 for the quarter ended June 30, 1997 as compared to $120,000 for the
same period in 1996. This increase of $37,000 primarily reflects management's
estimate of general increased risk associated with increases in the Company's
commercial loan portfolios over the past year, considering the type of loans
being made and current economic conditions.
PROVISION FOR INCOME TAXES. The Company's effective income tax rate for the
quarter ended June 30, 1997 was 38.4% compared to 36.9% for the quarter ended
June 30, 1996. The lower effective tax rate in comparison to statutory rates for
both periods is reflective of the levels of income earned by certain non- bank
subsidiaries which are taxed, for state tax purposes, at lower rates. The
increased effective tax rate for 1997 generally reflects state taxes accrued
associated with dividends from Abington Savings Bank to Abington Bancorp, Inc.
16
19
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
GENERAL. Net income for the six months ended June 30, 1997 was $2,148,000 or
$1.08 per share compared to a net income of $1,680,000 or $.85 per share in
1996, an increase of 27.9% or $468,000. The overall improvement in net income
was generally attributable to increases in net interest income and customer
service fees.
INTEREST AND DIVIDEND INCOME. Interest and dividend income increased $1,030,000
or 6.1% for the six month period ended June 30, 1997 as compared to the same
period in 1996. This increase was attributable to both increases in earning
assets and the rate earned on those assets. The balance of average earning
assets for the six months ended June 30, 1997 was $466,829,000 as compared to
$446,699,000 for the same period in 1996, an increase of $20,130,000 or 4.5%.
The increase in earning assets was generally due to increases in average loan
balances which were $298,996,000 for the six months ended June 30, 1997 as
compared to $272,537,000 for the same period in 1996, an increase of $26,459,000
or 9.7%. This increase was caused by larger volume of commercial loan
originations in the latter half of 1996 and into 1997 as well as higher
residential loan balances which were the result of the steady volume of loan
origination and purchases in this area throughout 1996 and into 1997. See
"Liquidity and Capital Resources" and "Asset-Liability Management" for further
discussion of the Company's investment strategies. The average yield earned on
loans was slightly lower for the six months ended June 30, 1997 at 8.14% as
compared to 8.18% in 1996. These declines were generally caused by the generally
declining rate environment for mortgage originations and purchases throughout
the second half of 1996 and into 1997. The effect of this environment on the
yields on residential mortgage originations and purchases was somewhat offset by
continued growth in the Company's commercial and commercial real estate loan
portfolio which was 12.6% of the Company's loan portfolio at June 30, 1997
(approximately $37,893,000) as compared to 7.5% at June 30, 1996 (approximately
$21,562,000). Average balances of mortgage-backed and investment securities were
$132,660,000 and $22,350,000, respectively, for the six months ended June 30,
1997 as compared to $139,197,000 and $23,313,000, respectively in 1996. These
balances have declined in 1997 as the run-off from the investment portfolio was
generally being reinvested into loan production throughout 1996 and into 1997.
The yield on the mortgage-backed and investment securities portfolios increased
to 6.87% and 7.20%, respectively, for the six month period ended June 30, 1997
as compared to 6.67% and 6.24%, respectively, in 1996. This was generally
achieved through the sale of various lower yielding securities held by the Bank
in its portfolio of securities available for sale and the acquisition of
securities at higher yields, both of which took place in the second half of 1996
and the first six months of 1997.
17
20
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
INTEREST EXPENSE. Interest expense for the six months ended June 30, 1997
increased $98,000 or 1.0% compared to the same period in 1996 generally due to
increases in deposit balances, which were partially offset by decreases in the
average rates paid on deposits. The average balance of core deposits (NOW
accounts, savings and money markets) and time deposits, rose to $160,647,000 and
$141,261,000, respectively, for the six month period ended June 30, 1997 as
compared to $150,006,000 and $133,557,000, respectively in 1996, for increases
of 7.1% and 5.8%, respectively. The weighted average rates paid on deposits
decreased to 3.57% for the six months ended June 30, 1997 from 3.69% for 1996,
generally due to the success of continued promotional efforts to attract core
deposits, which typically have lower cost of funds as compared to time deposits
and borrowed funds, as well as overall decreases in the rates paid on time
deposits to 5.69% for the six month period ended June 30, 1997 as compared to
5.80% for the corresponding period in 1996. This change reflects the refinancing
of various certificates as they matured at lower rates than they had been paying
in previous periods as a result of the generally declining interest rate
environment which has generally existed over the past year. The Bank will
continue to closely manage its cost of deposits by continuing to seek new
methods of acquiring core deposits and maintaining its current core deposits at
reasonable rates in comparison to local markets and other funding alternatives,
including borrowings. Borrowings levels decreased slightly from an average of
$152,911,000 for the six months ended June 30, 1996 to $150,418,000 for the same
period in 1997, a decline of 1.6%. The overall weighted average cost of borrowed
funds increased slightly to 5.82% for the six months ended June 30, 1997 from
5.80% for 1996 generally due to economic rate increases since the beginning of
the second quarter and also due to management's decision to extend approximately
$28,000,000 of short-term borrowings from short-term to longer term maturities
with terms of generally 3 and 4 years to provide for further protection against
potential future interest rate increases. The Bank 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 uses of borrowed
funds.
18
21
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
NON INTEREST INCOME. Total non-interest income increased $207,000 or 9.7% in the
first six months of 1997 in comparison to 1996. Customer service fees, which
were $1,471,000 for the six months ended June 30, 1997 as compared to $1,189,000
or 23.7%, for an increase of $282,000 or 23.7%, rose primarily due to growth in
deposit accounts, primarily NOW and checking account portfolios. Non-interest
income was also favorably impacted by the sales of various other real estate
owned properties at better than anticipated prices. Income related to the sales
of other real estate owned was $94,000 for the six months ended June 30, 1997
for which there was no corresponding income or loss in the same period in 1996.
Loan servicing fees and gains on sales of mortgage loans have declined to
$262,000 and $121,000 for the first six months of 1997 as compared to $346,000
and $197,000, respectively, for the same period in 1996. This generally is
reflective of management's decision to sell most of its residential mortgage
production on a servicing released basis commencing in 1996, amortization of
previously capitalized servicing rights and also due to fewer loans being
originated for sale in 1997. The average balances of loans serviced for others
declined to $231,667,000 for the six months ended June 30, 1997 as compared to
$248,527,000 in the corresponding period in 1996, decline of 6.8%. The loan
servicing income for the first half of 1997 was further negatively impacted by
accelerated amortization of certain mortgage servicing rights (approximately
$35,000) given management's changes in estimated future prepayments on the
related loan servicing pools. Declining trends in servicing income are expected
to continue due to the Company's strategic change of selling wholesale mortgage
production on a servicing released basis and also due to accounting changes for
loans sold servicing retained prescribed by FASB No. 125-"Accounting for
Mortgage Servicing Rights" and FASB No. 125- "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities". Gains on sales
of securities remained relatively consistent at $121,000 for the first six
months of 1997 as compared to $197,000 for the corresponding period in 1996
generally due to a consistently strong market for equity securities. Gains on
sales of securities were somewhat less in 1997 as compared to 1996 due to losses
taken on certain mortgage-backed securities sales in the six month period ended
June 30, 1997 which has helped increase the overall yield in that portfolio.
NON INTEREST EXPENSES. Non interest expenses for the six months ended June 30,
1997 increased $237,000 or 3.7% compared to the same period in 1996. Salaries
and employee benefits increased 8.8% or $260,000 primarily due to increases in
health insurance costs and staffing levels which correspond with the Company's
business banking and retail areas which correspond with the Company's strategic
focuses of increasing commercial loans and attracting core deposits. Occupancy
expenses decreased $12,000 or 5.8% primarily due to lower costs of snow removal
partially offset by general inflation on increases in capital expenditures,
particularly technology. Other non-interest expenses decreased $10,000 or .5%
for the period ended June 30, 1997 in comparison to the same period in 1996,
generally due to lower legal and other professional service expenses as compared
to the same period in 1996.
19
22
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses was
$315,000 for the six months ended June 30, 1997 as compared to $240,000 for the
same period in 1996. This increase of $75,000 primarily reflects management's
estimate of general increased risk associated with increases in the Company's
commercial loan portfolio over the past year, considering the type of loans
being made and current economic conditions.
PROVISION FOR INCOME TAXES. The Company's effective income tax rate for the six
months ended June 30, 1997 was 39.0% compared to 37.6% for the six months ended
June 30, 1996. The lower effective tax rate in comparison to statutory rates for
both periods is reflective of the levels of income earned by certain non-bank
subsidiaries which are taxed, for state tax purposes, at lower rates. The
increased effective tax rate for 1997 generally reflects state taxes associated
with dividends from Abington Savings Bank to Abington Bancorp, Inc.
20
23
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
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ASSET/LIABILITY MANAGEMENT
Management uses a variety of investment and loan alternatives and funding
sources in managing the overall levels of the Company's net interest margins.
The Asset/Liability Committee ("ALCO") of the Bank is comprised of members of
management and executive management who represent residential, commercial and
consumer lending, secondary marketing, retail banking, marketing and finance.
ALCO meets monthly to discuss business and market trends, lending and retail
deposit performance and expected goals for the future and specific strategies
designed to maximize the overall net interest margins of the Bank without
subjecting financial results to high degrees of volatility due to future
interest rate movements. A dynamic income simulation model is the primary
mechanism used in assessing the impact on net interest income of anticipated
changes in interest rates. The model reflects management's assumptions with
respect to growth rates of specific interest earning assets and liabilities,
pricing strategies, consensus prepayment rate estimates and other
rate-influenced variables. The model also reflects the impact of any off-balance
sheet hedge strategies which may be in place at a given time. This model then
projects various financial results of the Bank in light of various interest rate
assumptions provided by a notable economic forecasting firm, which are also
based, in part, on industry consensus. These interest rate scenarios typically
include various dramatic interest rate movements which may be less probable than
others. The model is updated monthly, including all assumptions. Management uses
this model as its primary source in measuring interest rate sensitivity.
The Bank's policy is to match, as well as possible, the interest rate
sensitivities of its assets and liabilities. Residential mortgage loans which
the Bank currently originates and retains for the Bank's own portfolio are
primarily 1 and 3-year adjustable rate mortgages. Fixed rate residential
mortgage loans originated by the Bank are primarily sold in the secondary
market, although in each year since 1989 the Bank has originated or purchased
approximately $30,000,000 primarily in shorter-term fixed rate mortgage loans
(generally 10 to 15-year) to be held in portfolio, in order to provide a hedge
against the Bank's asset sensitivity.
The Bank also emphasizes loans with terms to maturity or repricing of 3 years or
less, such as certain adjustable rate residential mortgage loans, residential
construction loans, commercial mortgages, business loans, second mortgages and
home equity loans.
In addition, to help manage interest rate sensitivity, in July 1994, the Bank
entered into an interest rate swap agreement with an international investment
banking firm whereby the Bank receives a fixed rate of interest of 5.35% and
pays interest based on the 6-month floating LIBOR rate which resets
semi-annually (February and August). The notional amount of this swap was
initially $15,000,000. This amount amortizes down at a rate consistent with the
amortization and prepayments of a referenced pool of residential mortgages as
specified in the agreement.
21
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
The notional amount of this swap was approximately $12,731,000 at June 30, 1997.
In addition to the fixed rate of interest, the Bank also received a discount of
$300,000 from the investment banking firm in cash upon execution of this
agreement. This discount is also being accreted to income over the life of the
swap agreement at a rate consistent with the payment and prepayment levels of
the referenced pool of mortgages. The resulting yield received by the Bank,
including the impact of this accretion was approximately 6.25%. This agreement
terminates, regardless of the balance remaining on the referenced collateral, on
August 25, 1997. Management does not intend to review this interest rate swap or
to acquire a new interest rate swap at this time given its evaluation of the
Company's current asset-liability position. The Bank entered into this agreement
as a micro-hedge against its one year adjustable rate mortgage portfolio
(including those held as mortgage-backed securities). Interest income (expense)
associated with this swap is recognized generally by the accrual method with
monthly settlements. Before the implementation of this strategy, ALCO reviewed
various stress tests performed on the interest rate swap and the Bank's one-year
adjustable rate mortgage portfolio. The results of this testing indicated that
the hedge strategy would not result in a material amount of lost income (as
compared to results without the interest rate swap) in the most disadvantageous
scenario presented.
Management desires to expand its interest earning asset base in future periods
primarily through growth in the Bank's loan portfolio. Loans comprised
approximately 64.1% of the average interest earning assets in the first six
months of 1997. Over the past few years, this ratio has been negatively impacted
by several factors. First, the acquisitions of Holbrook (June 1995), Hull (June
1994) and Landmark (June 1992), were predominately assumption's of deposits;
loans acquired in those transactions accounted for only 29.2% of the total
deposits acquired of approximately $91,153,000. Also during this period, the
Bank has gone through two key cycles in the residential lending market, which
has historically been the Bank's primary source of loan growth. In 1992 and
through the early portion of 1994, interest rates on mortgages generally
declined to levels which were the lowest in recent history. While this market
was very favorable for loan originations, it also had a negative impact on the
balances of loans outstanding primarily due to high prepayment rates, a
competitive marketplace for loan originations and the types of loans being made.
Loan origination volumes represented loans which were generally not as desirable
for the Bank's asset-liability purposes (i.e., 30-year fixed rate mortgages).
Since early 1994 and through the early part of 1995, interest rates rose, which
resulted in slower prepayments on the Bank's loan portfolios. However, due to
the overall decreased refinancing demand, the competition increased among
residential mortgage lenders and loan origination volumes began to slow. As long
term interest rates eased in late 1995 and generally through 1996 and into 1997,
the market became more favorable for residential loan originations. In the
future, the Bank intends to be competitive in the residential mortgage market,
but plans to place greater emphasis on consumer and commercial loans.
22
25
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
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The Bank also has remained, and expects to remain, active in pursuing wholesale
opportunities to purchase loans. During the first six months of 1997 and 1996,
the Bank acquired approximately $11,400,000 and $26,200,000, respectively, of
residential first mortgages.
In light of the residential lending environment over the last few years and the
level of funds received by the Bank as a result of the Landmark and the Holbrook
acquisitions and deposit growth during 1995 and into 1996, the Bank has relied
more heavily on mortgage-backed investments (typically with weighted average
lives of 5 to 7 years) as a vehicle for fixed and adjustable rate investment and
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 Bank with greater reinvestment flexibility.
The level of the Bank's liquid assets and the mix of its investments may vary,
depending upon management's judgement 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 Bank's
core deposit products since the first quarter of 1995, particularly checking and
NOW accounts. The success of this program has favorably impacted the overall
deposit growth to date, despite heavy competition for such funds, and has helped
the Bank to increase its customer base.
The Bank has also sought prudent deposit growth by pricing deposits
competitively in its market area, although it does not necessarily offer the
highest rates available for deposits. During the latter portion of 1994 and into
1995, the market area in which the Bank operates began to show some signs of
pricing competitiveness for deposits, particularly certificates of deposit. At
the same time, the banks in the Bank's market area have not been aggressive in
pricing core deposits. This resulted in many banks experiencing a shift from
core deposits to certificates of deposit reflecting consumers' desire to
increase the rate of return on their deposits. The Bank experienced migration of
approximately $10 million of core deposits to certificates of deposit in early
1995. While no such material migration occurred in 1996 or thus far in 1997,
similar migrations of core deposits to certificates of deposit could continue to
the extent that customers perceive that the rates paid on certificates of
deposit exceed those paid on core deposits by amounts they perceive to be so
advantageous that they are willing to sacrifice their short-term liquidity for
increases in yield or to move their investments into the equity market,
including mutual funds.
The Bank is also a voluntary member of the Federal Home Loan Bank ("FHLB") of
Boston. This borrowing capacity assists the Bank in managing its asset/liability
growth because, at times, the Bank considers it more advantageous to borrow
money from the FHLB of Boston than to raise money through time deposits.
23
26
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
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Borrowed funds totaled $151,378,000 at June 30, 1997 compared to $147,524,000 at
December 31, 1996. These borrowings are primarily comprised of FHLB of Boston
advances and have primarily funded residential loan originations or purchases
and the purchase of mortgage-backed investments.
The following table sets forth maturity and repricing information relating to
interest-sensitive assets and liabilities and the Bank's interest rate swap at
June 30, 1997. 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 mortgage loans and mortgage-backed
securities, regardless of held for investment or 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 table on
the following page does not reflect partial or full prepayment of certain types
of loans and investment securities prior to scheduled contractual maturity.
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 NOW accounts.
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 are subject to interest rate
adjustments. 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.
24
27
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
At June 30, 1997
---------------------------------------------------------------------------------------
Repricing/Maturity Interval
---------------------------------------------------------------------------------------
(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 $ 161 -- -- -- -- -- $ 161
Bonds and obligations 4,193 2,000 2,035 998 2,078 12,113 23,417
Mortgage-backed investments 30,887 26,798 17,707 17,535 21,170 26,436 140,583
Mortgage loans subject to 42,061 15,973 16,283 15,084 15,783 -- 105,183
rate review 17,173 11,865 35,708 33,604 29,332 49,866 177,548
Fixed-rate mortgage loans 7,968 3,523 3,510 2,369 1,512 -- 19,745
--------- --------- --------- -------- -------- -------- --------
Commercial and other loans
Total $ 102,443 $ 60,158 $ 75,243 $ 69,590 $ 69,875 $ 88,415 $466,587
--------- --------- --------- -------- -------- -------- --------
Liabilities subject to interest
rate adjustment:
Money market deposit accounts 15,504 -- -- -- -- -- 15,504
Savings deposits - term
certificates 56,136 31,737 28,541 19,765 7,959 -- 144,138
Other savings accounts 120,162 -- -- -- -- -- 120,162
Borrowed funds 77,878 4,500 29,000 23,000 17,000 -- 151,378
--------- --------- --------- -------- -------- -------- --------
Total 269,860 36,237 57,541 42,765 24,959 -- 431,182
--------- --------- --------- -------- -------- -------- --------
Impact of interest rate swap -- -- -- -- -- -- --
Excess (deficiency) of rate-
sensitive assets over rate-
sensitive liabilities $(167,237) $ 23,921 $ 17,702 $ 26,825 $ 44,916 $ 88,415 $ 35,405
--------- --------- --------- -------- -------- -------- --------
Cumulative excess (deficiency)
of rate-sensitive assets over
rate sensitive liabilities $(167,237) $(143,316) $(125,614) $(98,789) $(53,873) $ 35,405
========= ========= ========= ======== ======== ========
Rate-sensitive assets as a
percent of rate-sensitive
liabilities (1) 38.0% 53.2% 65.4% 75.7% 87.5% 108.0%
(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.
25
28
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Payments on the Bank's loan and mortgage-backed investment portfolios,
prepayments on loans, sales of fixed-rate residential loans, increases in
deposits, borrowed funds and maturities of various investments comprise the
Bank's primary sources of liquidity. The Bank 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 June 30, 1997 the Bank had approximately
$100,000,000 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 Bank's short-term borrowing position consists primarily of FHLB of Boston
advances with original maturities of approximately one to nine months. The Bank
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 Bank 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 Bank's GAP position arises.
The Bank regularly monitors its asset quality to determine the level of its loan
loss reserves through periodic credit reviews by members of the Bank's
Management Credit Committee. The Management Credit Committee, which reports to
the Executive Committee of the Bank's Board of Directors, also works on the
collection of non-accrual loans and the disposition of real estate acquired by
foreclosure. The allowance for possible loan losses is determined by the
Management Credit Committee after consideration of several key factors
including, without limitation: potential risk in the current portfolio, levels
and types of non-performing assets and delinquency and the expectations for the
future state of the regional economy and the potential impact that it may have
on loan collateral and future delinquencies. Workout approach and financial
condition of borrowers are also key considerations to the evaluation of
non-performing loans. Non-performing assets were $986,000 at June 30, 1997
compared to $1,672,000 at December 31, 1996, a decrease of $686,000 or 41.0%.
The Bank's ratio of delinquent loans to total loans was .68% at June 30, 1997 as
compared to .72% at December 31, 1996. Management believes that overall levels
of delinquencies and non-performing assets continue to be favorable in 1997.
26
29
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
There continues to be uncertainties regarding future events, particularly in
both the New England real estate market and the general economy. These events
could result in additional charge-offs, write-offs, changes in the level of the
allowance for loan or OREO losses and/or in the level of loans on non-accrual or
in foreclosure.
At June 30, 1997, the Bank had outstanding commitments to originate and sell
residential mortgage loans in the secondary market amounting to $1,238,000 and
$808,000, respectively. The Bank also has outstanding commitments to grant
advances under existing home equity lines of credit amounting to $10,954,000.
Commercial and construction loans totaling $13,353,000 have been committed to
and remain outstanding as of June 30, 1997. The Bank believes it has adequate
sources of liquidity to fund these commitments.
The Company's total stockholders' equity was $34,680,000 or 6.9% of total assets
at June 30, 1997, compared with $33,546,000, or 6.9% of total assets at December
31, 1996. The increase in total stockholders' equity, which was primarily
impacted by earnings of the Bank and increases in the market value of available
for sale securities net of tax effects and offset, in part, by dividends paid
and the purchase price of common stock repurchased by the Company as part of its
announced buy-back program, was approximately $289,000 or 0.9%. In accordance
with current guidelines, the net unrealized gain or loss on available for sale
securities has not been included in regulatory capital calculations.
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. At June
30, 1997, the Company's Tier 1 leverage capital ratio was approximately 6.18%.
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% and a minimum ratio of total capital to risk-weighted assets of 8.00%.
At June 30, 1997, the Company's Tier 1 and total risk-based capital ratios were
approximately 12.63% and 13.05%, respectively. The Bank 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
June 30, 1997.
27
30
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
IMPACT OF INFLATION
The Consolidated Financial Statements of the Company and related financial data
presented herein have been prepared in accordance with generally accepted
accounting principles 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.
28
31
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
During the quarter ended June 30, 1997 there were no material developments to
items reported in Part I, Item 3 of the Company's Annual Report for the year
ended December 31, 1996 on Form 10-K filed with the Securities and Exchange
Commission on March 31, 1997.
Item 2. Changes in Securities.
(a) On January 31, 1997, pursuant to the Plan of Reorganization and
Acquisition dated October 15, 1996 between the Company and the Bank, the Company
became the owner of all of the issued and outstanding shares of common stock of
the Bank, and each issued and outstanding share of the Bank's common stock, $.10
par value per share, was automatically converted into one share of common stock
of the Company, $.10 par value per share.
(b) Not applicable.
(c) None
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) On June 17, 1997, the Company held a Special Meeting in Lieu of Annual
Meeting of Stockholders (the "Meeting").
(b) At the Meeting, William F. Borhek, Rodney D. Henrikson and A. Stanley
Littlefield were elected to serve on the Board of Directors of the
Company for a three-year term ending at the 2000 Annual Meeting of
Stockholders (or special meeting in lieu thereof) and until their
successors are duly elected and qualified. Robert J. Armstrong was
elected to serve on the Board of the Company for a one-year term ending
at the 1998 Annual Meeting of Stockholders (or special meeting in lieu
thereof) and until his successor is duly elected and qualified.
Bruce G. Atwood, Ralph B. Carver, Jr., Joel S. Geller and Jay Timothy
Noonan continue to serve as Directors of the Company until the 1998
Annual Meeting of Stockholders (or special meeting in lieu thereof) and
until their successors are duly elected and qualified.
James P. McDonough, Gordon N. Sanderson, James J. Slattery and Wayne P.
Smith continue to serve as Directors until the 1999 Annual Meeting of
Stockholders (or special meeting in lieu thereof) and until their
successors are duly elected and qualified.
(c) At the Meeting, the stockholders of the Company voted to approve the
following actions by the following votes.
1. To elect the following individuals as Directors of the Company.
FOR WITHHOLD
--------- --------
William F. Borhek 1,499,679 95,010
Rodney D. Henrikson 1,499,575 95,114
A. Stanley Littlefield 1,495,333 99,357
Robert J. Armstrong 1,496,179 98,510
2. To approve the Abington Bancorp, Inc. 1997 Incentive and
Nonqualified Stock Option Plan.
NUMBER OF SHARES
----------------
For 940,731
Against 236,520
Abstain 12,302
Broker non-voters 405,136
(d) Not applicable.
Item 5. Other Matters.
None.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
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 By-Laws of the Company, incorporated by reference to the Company's
Registration Statement on Form 8-A, effective January 13, 1997.
4.1 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.
29
32
*10.1 (a) Amended and Restated Special Termination Agreement dated as of
January 31, 1997 among the Company, the Bank and James P. McDonough
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 James P.
McDonough, filed herewith.
*10.2 (a) Amended and Restated Special Termination Agreement dated as of
January 31, 1997 among the Company, the Bank and Edward J. Merritt
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 Edward J.
Merritt, filed herewith.
*10.3 (a) Amended and Restated Special Termination Agreement dated as of
January 31, 1997 among the Company, the Bank and Donna L. Thaxter
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 Donna L.
Thaxter, filed herewith.
*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, filed here with.
*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 Executive Incentive Compensation Plan dated March 1997 filed herewith.
30
33
*10.7 Long Term Performance Incentive Plan dated July 1997 filed herewith.
10.8 Lease for office space located at 538 Bedford Street, Abington,
Massachusetts, 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.
10.9 Dividend reinvestment and Stock Purchase Plan is incorporated by
reference herein 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 herein 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 Special Termination Agreement dated as of July 1, 1997 among the Company,
the Bank and Robert M. Lallo, filed herewith.
11.1 A statement regarding the computation of earnings per share is included
in Item 1 of this Report.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
31
34
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: August 10, 1997 By /s/ James P. McDonough
------------------------------
James P. McDonough
President and Chief
Executive Officer
Date: August 10, 1997 By /s/ Robert M. Lallo
------------------------------
Robert M. Lallo
Treasurer
(Principal Financial Officer)
32
35
INDEX TO EXHIBITS
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 By-Laws of the Company, incorporated by reference to the Company's
Registration Statement on Form 8-A, effective January 13, 1997.
4.1 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.
*10.1 (a) Amended and Restated Special Termination Agreement dated as of
January 31, 1997 among the Company, the Bank and James P. McDonough
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 James P.
McDonough, filed herewith.
*10.2 (a) Amended and Restated Special Termination Agreement dated as of
January 31, 1997 among the Company, the Bank and Edward J. Merritt
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 Edward J.
Merritt, filed herewith.
*10.3 (a) Amended and Restated Special Termination Agreement dated as of
January 31, 1997 among the Company, the Bank and Donna L. Thaxter
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 Donna L.
Thaxter, filed herewith.
33
36
*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, filed herewith.
*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 Executive Incentive Compensation Plan dated March 1997 filed herewith.
*10.7 Long Term Performance Incentive Plan dated July 1997 filed herewith.
10.8 Lease for office space located at 538 Bedford Street, Abington,
Massachusetts, 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.
10.9 Dividend reinvestment and Stock Purchase Plan is incorporated by
reference herein 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 herein 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 Special Termination Agreement dated as of July 1, 1997 among the Company,
the Bank and Robert M. Lallo, filed herewith.
11.1 A statement regarding the computation of earnings per share is included
in Item 1 of this Report.
27.1 Financial Data Schedule.
34