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 September 30, 1997
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Commission File Number 0-16018
ABINGTON BANCORP, INC.
------------------------------------------------------------
(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
----------------
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: 1,824,788 shares as of
November 7, 1997.
2
ABINGTON BANCORP, INC.
FORM 10-Q
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INDEX Page
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Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1997
(Unaudited) and December 31, 1996............................................... 1
Consolidated Statements of Operations (Unaudited)
for the Three and Nine Months Ended September 30, 1997 and 1996................. 2
Consolidated Statements of Changes in Stockholders'
Equity (Unaudited) for the Nine Months Ended
September 30, 1997 and 1996..................................................... 3
Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended September 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)
September 30, December 31,
1997 1996
--------- ---------
(In Thousands)
ASSETS
Cash and due from banks .............................................. $ 9,759 $ 9,556
Short-term investments ............................................... 162 152
--------- ---------
Total cash and cash equivalents .................................... 9,921 9,708
--------- ---------
Loans held for sale .................................................. 1,586 3,176
Securities:
Mortgage-backed investments - held for
investment - market value of $59,762
in 1997 and $62,456 in 1996 ...................................... 60,166 63,670
Securities available for sale - at
market value ..................................................... 100,977 91,561
Loans ................................................................ 308,887 297,605
Less:
Allowance for possible loan losses ............................... (2,193) (1,811)
--------- ---------
Loans, net ....................................................... 306,694 295,794
--------- ---------
Federal Home Loan Bank stock ......................................... 7,903 7,903
Banking premises and equipment, net .................................. 6,404 6,346
Other real estate owned, net ......................................... 160 500
Intangible assets .................................................... 3,381 3,685
Other assets ......................................................... 4,430 4,615
--------- ---------
$ 501,622 $ 486,958
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits ............................................................. $ 315,568 $ 300,445
Short-term borrowings ................................................ 32,870 63,171
Long-term debt ....................................................... 112,000 84,353
Accrued taxes and expenses ........................................... 4,363 3,447
Other liabilities .................................................... 1,077 1,996
--------- ---------
Total liabilities ................................................ 465,878 453,412
--------- ---------
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; 2,336,788 and 2,330,238
shares issued in 1997 and 1996, respectively ..................... 234 233
Additional paid-in capital ......................................... 20,978 20,923
Retained earnings .................................................. 19,172 16,455
--------- ---------
40,384 37,611
Treasury stock - 497,000 and 437,000 shares for
1997 and 1996, respectively, at cost ............................... (5,158) (3,703)
Unearned compensation - ESOP ....................................... (251) (312)
Net unrealized gain (loss) on available for
sale securities, net of taxes .................................... 769 (50)
--------- ---------
Total stockholders' equity ....................................... 35,744 33,546
--------- ---------
$ 501,622 $ 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 Nine Months Ended
September 30 September 30
------------ ------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(In thousands, except per share data)
Interest and dividend income:
Interest and fees on loans ........................................ $ 6,226 $ 5,799 $ 18,397 $ 16,948
Interest on mortgage-backed investments ........................... 2,315 2,339 6,869 6,979
Interest on bonds and obligations ................................. 440 398 1,245 1,125
Dividend income ................................................... 147 140 439 410
Interest on short-term investments ................................ 12 8 35 36
---------- ---------- ---------- ----------
Total interest and dividend income .............................. 9,140 8,684 26,985 25,498
---------- ---------- ---------- ----------
Interest expense:
Interest on deposits ............................................... 2,803 2,730 8,197 7,966
Interest on short-term borrowings .................................. 499 936 1,952 2,815
Interest on long-term debt ......................................... 1,767 1,262 4,691 3,819
---------- ---------- ---------- ----------
Total interest expense .......................................... 5,069 4,928 14,840 14,600
---------- ---------- ---------- ----------
Net interest income ................................................. 4,071 3,756 12,145 10,898
Provision for possible loan losses .................................. 158 120 473 360
---------- ---------- ---------- ----------
Net interest income, after provision for
Possible loan losses .............................................. 3,913 3,636 11,672 10,538
---------- ---------- ---------- ----------
Non-interest income:
Loan servicing fees ............................................... 152 132 414 478
Other customer service fees ....................................... 834 684 2,305 1,873
Gain on sales of securities, net .................................. 108 97 326 362
Gain on sales of mortgage loans, net .............................. 49 55 170 252
Gain on sales and write-down of
other real estate owned, net ..................................... -- 41 94 41
Other ............................................................... 69 53 241 187
---------- ---------- ---------- ----------
Total non-interest income ....................................... 1,212 1,062 3,550 3,193
---------- ---------- ---------- ----------
Non-interest expense:
Salaries and employee ............................................. 1,701 1,513 4,898 4,451
Occupancy and equipment expenses .................................. 612 548 1,796 1,744
Other non-interest expense ........................................ 994 1,167 3,190 3,373
---------- ---------- ---------- ----------
Total non-interest expense ...................................... 3,307 3,228 9,884 9,568
---------- ---------- ---------- ----------
Income before provision for income
taxes ...................................................... 1,818 1,470 5,338 4,163
Provision for income taxes .......................................... 691 550 2,063 1,563
---------- ---------- ---------- ----------
Net income ...................................................... $ 1,127 $ 920 $ 3,275 $ 2,600
========== ========== ========== ==========
Dividends per share ................................................. $ .10 $ .10 $ .30 $ .30
========== ========== ========== ==========
Earnings per share .................................................. $ .57 $ .47 $ 1.65 $ 1.32
========== ========== ========== ==========
Weighted average common and common share
equivalents ....................................................... 1,973,000 1,979,000 1,989,000 1,976,000
========== ========== ========== ==========
See accompanying notes to unaudited consolidated financial statements
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ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(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 ........................ -- -- 3,275 -- -- -- 3,275
Decrease in unearned compen-
sation - ESOP ................... -- -- -- -- -- 61 61
Increase in unrealized gain on
available for sale securities,
net of taxes .................... -- -- -- -- 819 -- 819
Exercise of stock options ......... 1 55 -- -- -- -- 56
Repurchase of stock ............... -- -- -- (1,455) -- -- (1,455)
Dividends declared ($.30 per share) -- -- (558) -- -- -- (588)
---- ------- -------- ------- ----- ----- --------
Balance at September 30, 1997 ..... $234 $20,978 $ 19,172 $(5,158) $ 769 $(251) $ 35,744
==== ======= ======== ======= ===== ===== ========
Balance at December 31, 1995 ...... $232 $20,811 $ 13,676 $(3,703) $ (62) $(393) $ 30,561
Net income ........................ -- -- 2,600 -- -- -- 2,600
Decrease in unearned compen-
sation - ESOP ................... -- -- -- -- -- 60 60
Exercise of stock options ......... -- 18 -- -- -- -- 18
Increase in unrealized loss on
available for sale securities,
net of taxes .................... -- -- -- -- (277) -- (277)
Dividends declared ($.30 per share) -- -- (563) -- -- -- (563)
------- -------- ------- ----- ----- --------
Balance at September 30, 1996 .... $232 $20,829 $ 15,713 $(3,703) $(339) $(333) $ 32,399
==== ======= ======== ======= ===== ===== ========
See accompanying notes to unaudited consolidated financial statements.
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ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
------------------------
1997 1996
-------- -------
(In thousands)
Cash flows from operating activities:
Net income ........................................ $ 3,275 2,600
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for loan losses ........................ 473 360
(Gain) loss on sales and write-down of
other real estate owned, net ..................... (94) (41)
Amortization, accretion and depreciation, net .... 1,363 1,223
Gain on sales of securities, net ................... (326) (362)
Loans originated for sale in the secondary market .. (14,400) (12,128)
Proceeds from sales of loans ..................... 16,160 15,299
Gain on sales of mortgage loans, net ............. (170) (252)
Other, net ....................................... (426) 1,637
-------- -------
Net cash provided (used) by operating activities ... 5,855 8,336
-------- -------
Cash flows from investing activities:
Maturities of held for investment
investment securities ............................ -- --
Purchase of held for investment securities ......... (2,067) (3,633)
Proceeds from principal payments received
on held for investment securities ................ 5,556 7,137
Proceeds from sales of available for sale securities 21,471 19,386
Proceeds from principal payments on
available for sale securities ................. 10,756 14,275
Purchase of available for sale securities ......... (39,949) (32,013)
Loans originated/purchased, net ................... (11,533) (38,756)
Proceeds from sales of loans held in portfolio .... -- 3,038
Purchases of FHLB stock ........................... -- (504)
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)
Nine Months Ended
September 30,
-------------------------
1997 1996
-------- --------
(In thousands)
Purchase of banking premises and equipment
and improvements to other real estate
owned .......................................................... $ (982) $ (547)
Proceeds from sales of other real estate
owned .......................................................... 594 538
-------- --------
Net cash provided (used) by investing
activities ..................................................... (16,154) (31,079)
-------- --------
Cash flows from financing activities:
Net increase in deposits ........................................ 15,123 19,969
Net increase (decrease) in borrowings with original
maturities of three months or less ............................. (301) 38,935
Proceeds from short-term borrowings with
maturities in excess of three months ........................... 15,000 5,000
Principal payments on short-term borrow-
ings with maturities in excess of
three months ................................................... (45,000) (39,500)
Proceeds from issuance of long-term debt ........................ 39,000 27,000
Principal payments on long term debt ............................ (11,353) (30,502)
Proceeds from exercise of stock options........................ 56 18
Purchase of treasury stock ....................................... (1,455) --
Cash paid for dividends .......................................... (558) (563)
-------- --------
Net cash provided from financing
activities .................................................... 10,512 20,357
-------- --------
Net increase (decrease)in cash and cash
equivalents .................................................... 213 (2,386)
Cash and cash equivalents at beginning of
period ......................................................... 9,708 10,611
-------- --------
Cash and cash equivalents at end of period ....................... $ 9,921 $ 8,225
======== ========
Supplemental cash flow information:
Interest paid on deposits ..................................... $ 8,196 $ 7,963
Interest paid on borrowed funds ............................... 6,623 6,723
Income taxes paid ............................................. 2,876 369
Transfers to other real estate owned,
net .......................................................... 160 62
See accompanying notes to unaudited consolidated financial statements.
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ABINGTON BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 30, 1997
and for the three and nine month periods ended September 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
September 30, 1997
(continued)
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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 September 1997. The
dividend was payable on October 23, 1997 to stockholders of record as of
the close of business on October 9, 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 nine month periods ended
September 30, 1997 and 1996 using the methods prescribed by SFAS No. 128,
are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
1997 1996 1997 1996
--------- --------- --------- ----------
(In thousands except per share and share data)
Net Income ..................... $ 1,127 $ 920 $ 3,275 $ 2,600
========= ========= ==========
EARNINGS PER SHARE:
Basic-
Earnings per share ........... $ .61 $ .49 $ 1.75 $ 1.38
========= ========= ========= ==========
Weighted average common shares 1,843,000 1,887,000 1,868,000 1,885,000
========= ========= ========= ==========
Diluted-
Earnings per share ........... $ .57 $ .47 $ 1.65 $ 1.32
========= ========= ========= ==========
Weighted average common shares
and share equivalents ........ 1,973,000 1,979,000 1,989,000 1,976,000
========= ========= ========= ==========
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ABINGTON BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 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 November 7, 1997, the Company had repurchased 75,000 shares of its common
stock under this plan at a total cost of approximately $1,951,000. 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.
F) Stock Dividend
On October 30, 1997, the Board of Directors of Abington Bancorp Inc. approved a
split of its common stock on a two-for-one basis in the form of a stock dividend
payable on December 12, 1997, to shareholders of record as of November 14, 1997.
No disclosures or information presented in this quarterly report on Form 10-Q
for the quarter ended September 30, 1997 has been effected for this event.
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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
3.29% and 3.31% for the quarter and nine months ended September 30, 1997,
respectively, and 3.13% and 3.11% for the quarter and nine months ended
September 30, 1996, respectively.
The level of impaired loans and other real estate owned also has an impact on
net interest income. At September 30, 1997, the Company had $617,000 in impaired
loans, and $160,000 in other real estate owned, compared to $1,028,000 in
impaired loans and $500,000 in other real estate owned 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 Nine Months Ended
September 30 September 30
----------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
Interest and dividend income:
Interest and fees on loans ............ $6,226 $5,799 $18,397 $16,948
Interest on mortgage-backed investments 2,315 2,339 6,869 6,979
Interest on bonds and obligations ..... 440 398 1,245 1,125
Dividend income ....................... 147 140 439 410
Interest on short-term investments .... 12 8 35 36
------ ------ ------- -------
Total interest and dividend income ... $9,140 $8,684 $26,985 $25,498
====== ====== ======= =======
Interest expense:
Interest on deposits .................. 2,803 2,730 8,197 7,966
Interest on short-term borrowings ..... 499 936 1,952 2,815
Interest on long-term debt ............ 1,767 1,262 4,691 3,819
------ ------ ------- -------
Total interest expense ............... 5,069 4,928 14,840 14,600
------ ------ ------- -------
Net interest income .................... $4,071 $3,756 $12,145 $10,898
====== ====== ======= =======
A breakdown of the components of the Company's net interest-rate spread is as
follows:
Three Months Ended Nine Months Ended
September 30 September 30
----------------- ---------------
1997 1996 1997 1996
---- ---- ---- ----
Weighted average yield earned on:
Loans ................................ 8.17% 8.09% 8.15% 8.15%
Mortgage-backed investments .......... 6.87 6.78 6.87 6.70
Bonds and obligations ................ 7.16 6.57 7.19 6.35
Marketable and other equity securities 4.94 5.12 4.91 5.09
Short-term investments ............... 6.88 6.53 6.30 5.91
Weighted average yield earned on
interest-earning assets .............. 7.67 7.54 7.65 7.53
Weighted average rate paid on:
NOW and non-interest NOW deposits .... .87 .90 .87 .87
Savings deposits ................... 2.17 2.41 2.24 2.39
Time deposits ...................... 5.77 5.85 5.72 5.82
Total deposits ..................... 3.57 3.71 3.58 3.70
Short-term borrowings .............. 5.62 5.50 5.50 5.61
Long-term debt ..................... 6.21 5.97 6.09 5.93
Weighted average rate paid on
interest-bearing liabilities ......... 4.38 4.41 4.34 4.42
Net interest-rate spread ................ 3.29% 3.13% 3.31% 3.11%
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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 September 30
------------------------------------
1997 vs. 1996
------------------------------------
Increase (decrease)
------------------------------------
Due To
------------------------------------
Volume Rate Total
------------------------------------
(In thousands)
Interest and dividend income:
Loans ......................... $ 365 $ 62 $ 427
Mortgage-backed investments ... (172) 148 (24)
Bonds and obligations ......... 5 37 42
Equity securities ............. 33 (26) 7
Short-term investments ........ (5) 9 4
----- ----- -----
Total interest and dividend
income ................... 226 230 456
----- ----- -----
Interest expense:
NOW deposits .................. 41 (27) 14
Savings deposits .............. 44 (95) (51)
Time deposits ................. 269 (159) 110
Short-term borrowings ......... (580) 143 (437)
Long-term debt ................ 452 53 505
----- ----- -----
Total interest expense .... 226 (85) 141
----- ----- -----
Net interest income ............. $ -- 315 $ 315
===== ===== =====
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
Nine Months Ended September 30,
--------------------------------------------
1997 Vs. 1996
Increase (Decrease)
--------------------------------------------
Due To
--------------------------------------------
Volume Rate Total
--------------------------------------------
(In thousands)
Interest and dividend income:
Loans ......................... $ 1,442 $ 7 $ 1,449
Mortgage-backed investments ... (347) 237 (110)
Bonds and obligations ......... (40) 160 120
Equity securities ............. 51 (22) 29
Short-term investments ........ (4) 3 (1)
------- ----- -------
Total interest and dividend
income ................... 1,102 385 1,487
------- ----- -------
Interest expense:
NOW deposits .................. 54 (3) 51
Savings deposits .............. 49 (124) (75)
Time deposits ................. 410 (155) 255
Short-term borrowings ......... (811) (52) (863)
Long-term debt ................ 767 105 872
------- ----- -------
Total interest expense .... 469 (229) 240
------- ----- -------
Net interest income ............. $ 633 $ 614 $ 1,247
======= ===== =======
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
GENERAL. Net income for the quarter ended September 30, 1997 was $1,127,000 or
$.57 per share compared to a net income of $920,000 or $.47 per share in the
corresponding period of 1996, a net increase of $207,000 or 22.5%. 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 $456,000 or
5.3% during the three month period ended September 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 September 30, 1997 was
approximately $476,366,000 as compared to $460,427,000 for the same period in
1996, an overall increase of $15,939,000 or 3.5%. The increase in earning assets
was generally due to increases in average loan balances which were $304,649,000
for the three months ended September 30, 1997, as compared to $286,772,000 for
the same period in 1996, an increase of $17,877,000 or 6.2%. 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 third
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 8.17% in the third quarter of 1997 as
compared to 8.09% 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 September 30, 1997, commercial
loans, including commercial real estate loans comprised 12.9% of the Company's
loan portfolio (approximately $40,187,000) as compared to 8.4% at September 30,
1996 (approximately $24,670,000). 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 $134,819,000 and $24,565,000, respectively in the third quarter
of 1997, as compared to $138,000,000 and $24,235,000, respectively, for the same
period in 1996. These balances, when combined, declined slightly 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 6.87% and 7.16%, respectively, in the third quarter of 1997, from 6.78% and
6.57%, respectively, in the corresponding period 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 during the second half of
1996 and the first half of 1997.
INTEREST EXPENSE. Interest expense for the quarter ended September 30, 1997
increased $141,000 or 2.9% 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 blended weighted average rate paid on
deposits and borrowed funds was 4.38% for the three months ended September 30,
1997 as compared to 4.41% for the same period in 1996. The weighted average
rates paid on deposits was 3.57% for the quarter ended September 30, 1997 as
compared to 3.71% for the same period in 1996. The overall cost of deposits has
declined in the third 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 $166,682,000 and $146,969,000, respectively, for
the third quarter of 1997 as compared to $157,032,000 and $137,519,000,
respectively, for the corresponding period in 1996, increases of 6.1% and 6.9%,
respectively. Additionally, the weighted average rate paid on time deposits
declined to 5.77% for the third quarter of 1997, as compared to 5.85% 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. The average balances of borrowed funds decreased slightly, overall,
during the third quarter of 1997 as compared to 1996, to $149,281,000 from
$152,650,000, a decline of 2.2%. The overall weighted average rates paid on
borrowed funds increased to approximately 6.07% for the quarter ended September
30, 1997 from 5.76% 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
approximately $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 $150,000 or 14.1% in
the third quarter of 1997 in comparison to the same period in 1996. Customer
service fees, which were $834,000 for the quarter ended September 30, 1997 as
compared to $684,000 for 1996, for an increase of $150,000 or 21.9%, rose
primarily due to growth in deposit accounts, primarily NOW and checking account
portfolios. Loan servicing fees and gains on sales of mortgage loans were
$152,000 and $49,000, respectively, for the third quarter of 1997 as compared to
$132,000 and $55,000, respectively, for the same period in 1996, a combined
increase of $14,000 or 7.5%. This generally is reflective of timing in 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 $221,485,000 for the third quarter of 1997 as compared to
$240,676,000 in the corresponding period in 1996, a decline of 8.0%. Generally
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 with
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 third quarter of 1997 as compared to
$97,000 for 1996 generally due to a consistently strong market for equity
securities. Gains on sales of securities in both periods were offset by losses
taken on certain mortgage-backed securities sales during those quarters which
has helped increase the overall yield on that portfolio. Gains on sales of other
real estate owned declined in the third quarter of 1997 as compared to the same
period in 1996 as gains were $41,000 in 1996 due to better than expected sale
prices on a property sold during the quarter while there were no sales of other
real estate owned during the comparable quarter in 1997.
NON-INTEREST EXPENSES. Non-interest expenses for the quarter ended September 30,
1997 increased $79,000 or 2.4% compared to the same period in 1996. Salaries and
employee benefits increased 12.4% or $188,000 primarily due to increases in
health insurance costs and staffing levels in the Company's business banking and
retail areas, including the Bank's new supermarket branch in Cohasset which
opened during the third quarter of 1997. These increases correspond with the
Company's strategic focuses of increasing commercial loans and attracting core
deposits. Occupancy expenses increased $64,000 or 11.7% primarily due to
increased capital and operating expenditures related to the Cohasset branch, and
to the general inflationary and capital expenditure increases, particularly in
technology. Other non-interest expenses also decreased $173,000 or 14.8% for the
quarter ended September 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 and also due to the timing of various
marketing and legal expenditures.
15
18
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses was
$158,000 for the quarter ended September 30, 1997 as compared to $120,000 for
the same period in 1996. This increase of $38,000 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 September 30, 1997 was 38.0% compared to 37.4% for the quarter
ended September 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.
16
19
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
GENERAL. Net income for the nine months ended September 30, 1997 was $3,275,000
or $1.65 per share compared to a net income of $2,600,000 or $1.32 per share in
1996, an increase of 26.0% or $675,000. 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 $1,487,000
or 5.8% for the nine month period ended September 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 nine months ended September 30, 1997 was $470,042,000 as compared
to $451,306,000 for the same period in 1996, an increase of $18,736,000 or 4.2%.
The increase in earning assets was generally due to increases in average loan
balances which were $300,901,000 for the nine months ended September 30, 1997 as
compared to $277,316,000 for the same period in 1996, an increase of $23,585,000
or 8.5%. 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 the same for the nine months ended September 30, 1997 at 8.15% as
compared to 1996. These were 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 offset by continued growth in the Company's
commercial and commercial real estate loan portfolio which was 12.9% of the
Company's loan portfolio at September 30, 1997 (approximately $40,187,000) as
compared to 8.4% at September 30, 1996 (approximately $24,670,000). Average
balances of mortgage-backed and investment securities were $133,387,000 and
$23,097,000, respectively, for the nine months ended September 30, 1997 as
compared to $138,815,000 and $23,622,000, respectively in 1996. These balances
have declined in 1997 as the run-off from these portfolios 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
7.19%, respectively, for the nine month period ended September 30, 1997 as
compared to 6.70% and 6.35%, 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
through the first nine months of 1997.
17
20
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
INTEREST EXPENSE. Interest expense for the nine months ended September 30, 1997
increased $240,000 or 1.6% compared to the same period in 1996 generally due to
increases in deposit balances and rates paid on borrowed funds, 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 $162,249,000 and $143,184,000, respectively, for the nine
month period ended September 30, 1997 as compared to $152,292,000 and
$134,887,000, respectively, in 1996, for increases of 6.5% and 6.2%,
respectively. The weighted average rates paid on deposits decreased to 3.58% for
the nine months ended September 30, 1997 from 3.70% 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 5.72%
for the nine month period ended September 30, 1997 as compared to 5.82% 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. Average balances of borrowed funds decreased slightly from
$152,822,000 for the nine months ended September 30, 1996 to $150,035,000 for
the same period in 1997, a decline of 1.8%. The overall weighted average cost of
borrowed funds increased slightly to 5.90% for the nine months ended September
30, 1997 from 5.79% for 1996 generally due to economic rate increases since the
beginning of the third 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 $357,000 or 11.2% in
the first nine months of 1997 in comparison to 1996. Customer service fees,
which were $2,305,000 for the nine months ended September 30, 1997 as compared
to $1,873,000 for an increase of $432,000 or 23.1%, 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 nine months ended September 30,
1997 and $41,000 for the same period in 1996, an increase of $53,000. Loan
servicing fees and gains on sales of mortgage loans have declined to $414,000
and $170,000, respectively, for the first nine months of 1997 as compared to
$478,000 and $252,000, 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 $228,236,000 for the nine months ended September 30, 1997 as
compared to $245,881,000 in the corresponding period in 1996, a decline of 7.2%.
The loan servicing income for the first nine months of 1997 was further
negatively impacted by accelerated amortization of certain mortgage servicing
rights (approximately $70,000) 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 with 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 were lower at $326,000 for the first nine months of
1997 as compared to $362,000 for the corresponding period in 1996, a decline of
$36,000 or 9.9%. Both periods reflect a consistently strong market for equity
securities. Gains on sales securities were somewhat less in 1997 as compared to
1996 due to a higher volume of losses taken on certain mortgage-backed
securities sales in the nine month period ended September 30, 1997 which has
helped increase the overall yield in that portfolio.
19
22
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
NON INTEREST EXPENSES. Non interest expenses for the nine months ended September
30, 1997 increased $316,000 or 3.3% compared to the same period in 1996.
Salaries and employee benefits increased 10.0% or $447,000 primarily due to
increases in health insurance costs and staffing levels which correspond with
the Company's business banking and retail areas, which include the Bank's
Cohasset supermarket branch which was staffed at the beginning of the third
quarter of 1997. These increases correspond with the Company's strategic focuses
of increasing commercial loans and attracting core deposits. Occupancy expenses
increased $52,000 or 3.0% primarily due to the opening of the Cohasset branch.
Other non-interest expenses decreased $183,000 or 5.4% for the nine months ended
September 30, 1997 in comparison to the same period in 1996, generally due to
the timing of certain advertising expenses in 1997 and also due to lower legal
and other professional service expenses as compared to the same period in 1996.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses was
$473,000 for the nine months ended September 30, 1997 as compared to $360,000
for the same period in 1996. This increase of $113,000 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 nine
months ended September 30, 1997 was 38.7% compared to 37.5% for the nine months
ended September 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 received a fixed rate of interest of 5.35% and
paid interest based on the 6-month floating LIBOR rate which reset semi-annually
(February and August). The notional amount of this swap was initially
$15,000,000. This amount amortized 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)
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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 was 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
terminated 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.
Management desires to expand its interest earning asset base in future periods
primarily through growth in the Bank's loan portfolio. Loans comprised
approximately 64.0% of the average interest earning assets in the first nine
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.
The Bank also has remained, and expects to remain, active in pursuing wholesale
opportunities to purchase loans. During the first nine months of 1997 and 1996,
the Bank acquired approximately $29,000,000 and $27,000,000, 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
22
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
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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.
Borrowed funds totaled $144,870,000 at September 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.
23
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
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The following table sets forth maturity and repricing information relating to
interest-sensitive assets and liabilities at September 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 September 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 26,436 140,533
Mortgage loans subject to
rate review ................ 47,372 19,346 21,668 8,040 18,246 -- 114,672
Fixed-rate mortgage loans ... 20,320 11,562 35,303 31,681 31,682 46,683 177,231
Commercial and other loans .. 7,165 3,318 3,346 2,365 2,376 -- 18,570
--------- --------- --------- -------- -------- -------- --------
Total ................... $ 110,098 $ 63,024 $ 80,059 $ 60,619 $ 75,552 $ 85,232 $474,584
--------- --------- --------- -------- -------- -------- --------
Liabilities subject to interest
rate adjustment:
Money market deposit accounts 15,668 -- -- -- -- -- 15,668
Savings deposits - term
certificates ............... 59,793 35,967 27,290 19,250 7,956 -- 150,256
Other savings accounts ...... 119,135 -- -- -- -- -- 119,135
Borrowed funds .............. 70,870 10,000 29,000 18,000 17,000 -- 144,870
--------- --------- --------- -------- -------- -------- --------
Total ......................... 265,466 45,967 56,290 37,250 24,956 -- 429,929
--------- --------- --------- -------- -------- -------- --------
Excess (deficiency) of rate-
sensitive assets over rate-
sensitive liabilities ........ $(155,368) $ 17,057 $ 23,769 $ 23,369 $ 50,596 $ 85,232 $ 44,655
--------- --------- --------- -------- -------- -------- --------
Cumulative excess (deficiency)
of rate-sensitive assets over
rate sensitive liabilities ... $(155,368) $(138,311) $(114,542) $(91,173) $(40,557) $(44,655)
========= ========= ========= ======== ======== ========
Rate-sensitive assets as a
percent of rate-sensitive
liabilities (1) .............. 41.5% 55.6% 68.9% 77.5% 90.6% 110.4%
(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
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 September 30, 1997 the Bank had
approximately $90,000,000 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 $813,000 at September 30, 1997
compared to $1,672,000 at December 31, 1996, a decrease of $859,000 or 51.4%.
The Bank's ratio of delinquent loans to total loans was .90% at September 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
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 September 30, 1997, the Bank had outstanding commitments to originate and
sell residential mortgage loans in the secondary market amounting to $2,402,000
and $1,299,000, respectively. The Bank also has outstanding commitments to grant
advances under existing home equity lines of credit amounting to $11,083,000.
Commercial and construction loans totaling $10,254,000 have been committed to
and remain outstanding as of September 30, 1997. The Bank believes it has
adequate sources of liquidity to fund these commitments.
The Company's total stockholders' equity was $35,744,000 or 7.1% of total assets
at September 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 $2,198,000 or 6.6%.
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
September 30, 1997, the Company's Tier 1 leverage capital ratio was
approximately 6.30%. 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 September 30, 1997, the Company's Tier 1 and
total risk-based capital ratios were approximately 12.70% and 13.58%,
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 September 30, 1997.
27
30
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 September 30, 1997 there were no new legal proceedings
and 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) 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 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.
29
32
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, 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 (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, incorporated by reference to the Company's quarterly report on
Form 10-Q for the second quarter of 1997, filed on August 13, 1997.
*10.3 (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, incorporated by reference to the Company's quarterly report on
Form 10-Q for the second quarter of 1997, filed on August 13, 1997.
*10.4 (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.
30
33
*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 Management Incentive Compensation Program dated March 1997,
incorporated by reference to the Company's quarterly report on
Form 10-Q for the second quarter of 1997, filed on August 13,
1997.
*10.7 Long Term Performance Incentive Plan dated July 1997, incorporated
by reference to the Company's quarterly report on Form 10-Q for
the second quarter of 1997, filed on August 13, 1997.
10.8 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, incorporated by reference to the
Company's quarterly report on Form 10-Q for the second quarter of 1997,
filed on August 13, 1997.
*10.12 Merger Severance Benefit Program dated as of August 28, 1997.
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.
- ----------------------------------------
* Management Compensatory Plan
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: November 12, 1997 By: /s/James P. Mcdonough
-----------------------
James P. McDonough
President and Chief
Executive Officer
Date: November 12, 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, 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 (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, incorporated by reference to the Company's quarterly report on
form 10-Q for the second quarter of 1997 filed on August 13, 1997.
*10.3 (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, incorporated by reference to the Company's quarterly report on
Form 10-Q for the second quarter of 1997, filed on August 13, 1997.
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,
incorporated by reference to the Company's quarterly report on Form 10-Q
for the second quarter of 1997, filed on August 13, 1997.
*10.5 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, incorporated by
reference to the Company's quarterly report on Form 10-Q for the second
quarter of 1997, filed on August 13, 1997.
*10.7 Long Term Performance Incentive Plan dated July 1997, incorporated
by reference to the Company's quarterly report on Form 10-Q for
the second quarter of 1997, filed on August 13, 1997.
10.8 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 of Stockholders held on June 17, 1997, filed with the Commission
on April 19,.
*10.11 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.
*10.12 Merger Severance Benefit Program dated as of August 28, 1997.
11.1 A statement regarding the computation of earnings per share is included
in Item 1 of this Report.
27.1 Financial Data Schedule.
- ------------------------------------------
* Management Compensatory Plan
34