1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
----------------------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES
EXCHANGE ACT OF 1934 for Quarter Ended March 31, 1998
----------------------------------------
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)
536 Washington 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: 3,569,900 shares as of May 5,
1998.
2
Certain statements in this Form 10-Q constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. Further, any statements contained in this Form 10-Q that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "expect," "anticipate," "plan,"
"believe," "seek," "estimate," "internal" and similar words are intended to
identify expressions that may be forward-looking statements. Forward-looking
statements involve certain risks and uncertainties, and actual results may
differ materially from those contemplated by such statements. For example,
actual results may be adversely affected by the following possibilities: (1)
competitive pressure among depository institutions may increase; (2) changes in
interest rates may reduce banking interest margins; (3) general economic
conditions and real estate values may be less favorable than contemplated; (4)
adverse legislation or regulatory requirements may be adopted; and (5) the
impact of the Year 2000 issue may be more significant than currently
anticipated. Many of such factors are beyond the Company's ability to control or
predict. Readers of this Form 10-Q are accordingly cautioned not to place undue
reliance on forward-looking statements. The Company disclaims any intent or
obligation to update publicly any of the forward-looking statements herein,
whether in response to new information, future events or otherwise.
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ABINGTON BANCORP, INC.
FORM 10-Q
INDEX
Page
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998
(Unaudited) and December 31, 1997............................ 4
Consolidated Statements of Operations (Unaudited)
for the Three Months Ended March 31, 1998 and 1997........... 5
Consolidated Statements of Changes in Stockholders'
Equity (Unaudited) for the Three Months Ended
March 31, 1998 and 1997...................................... 6
Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended March 31, 1998 and 1997........... 7
Notes to Unaudited Consolidated Financial Statements......... 9
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations................ 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk... 26
Part II Other Information
Item 1. Legal Proceedings ........................................... 27
Item 2. Change in Securities ........................................ 27
Item 3. Defaults upon Senior Securities.............................. 27
Item 4. Submission of Matters to a Vote of Security Holders.......... 27
Item 5. Other Information............................................ 27
Item 6. Exhibits and Reports on Form 8-K............................. 27
Signature Page........................................................... 31
Index to Exhibits........................................................ 32
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ABINGTON BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
1998 1997
---------- -----------
(In Thousands)
ASSETS
Cash and due from banks..................... $ 10,185 $ 13,312
Short-term investments...................... 181 163
-------- ---------
Total cash and cash equivalents........... 10,366 13,475
-------- ---------
Loans held for sale......................... 1,131 1,332
Securities:
Mortgage-backed investments - held for
investment - market value of $ 63,894
in 1998 and $ 64,129 in 1997............ 63,602 64,021
Securities available for sale - at
market value............................ 107,648 101,031
Loans....................................... 342,719 331,740
Less:
Allowance for possible loan losses...... (2,470) (2,280)
-------- ---------
Loans, net.............................. 340,249 329,460
-------- ---------
Federal Home Loan Bank stock................ 8,793 8,151
Banking premises and equipment, net......... 7,143 6,294
Other real estate owned, net................ 265 265
Intangible assets........................... 3,166 3,284
Other assets................................ 7,475 4,673
-------- ---------
$ 549,838 $ 531,986
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits.................................... $ 333,210 $ 324,934
Short-term borrowings....................... 40,760 55,910
Long-term debt.............................. 135,500 110,000
Accrued taxes and expenses.................. 3,620 3,337
Other liabilities........................... 2,164 1,484
-------- ---------
Total liabilities....................... 515,254 495,665
---------- ---------
Commitments and contingencies
Stockholders' equity:
Serial preferred stock, $.10 par value,
3,000,000 shares authorized; none issued. - -
Common stock, $.10 par value 12,000,000
shares authorized; 4,747,000 and 4,676,000
shares issued in 1998 and 1997, respectively 475 468
Additional paid-in capital................ 21,367 21,094
Retained earnings......................... 20,458 19,858
-------- ---------
42,300 41,420
Treasury stock - 1,183,000 and 1,039,000 shares
for 1998 and 1997, respectively, at cost.. (8,884) (5,931)
Unearned compensation - ESOP.............. (210) (231)
Other accumulated comprehensive income -
Net unrealized gain on available for
sale securities, net of taxes........... 1,378 1,063
-------- --------
Total stockholders' equity.............. 34,584 36,321
-------- ---------
$ 549,838 $ 531,986
======== =========
See accompanying notes to unaudited consolidated financial statements.
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ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
------------------------------------
1998 1997
---------- -----------
(In thousands, except per share data)
Interest and dividend income:
Interest and fees on loans ....................... $ 6,508 $ 6,039
Interest on mortgage-backed investments .......... 2,098 2,230
Interest on bonds and obligations ................ 594 393
Dividend income .................................. 150 147
Interest on short-term investments ............... 32 8
---------- ----------
Total interest and dividend income ............. 9,382 8,817
---------- ----------
Interest expense:
Interest on deposits .............................. 2,841 2,680
Interest on short-term borrowings ................. 604 817
Interest on long-term debt ........................ 1,902 1,267
---------- ----------
Total interest expense ......................... 5,347 4,764
---------- ----------
Net interest income ................................ 4,035 4,053
Provision for possible loan losses ................. 190 158
---------- ----------
Net interest income, after provision for
Possible loan losses ............................. 3,845 3,895
---------- ----------
Non-interest income:
Loan servicing fees .............................. 115 143
Other customer service fees ...................... 861 680
Gain on sales of securities, net ................. 365 110
Gain on sales of mortgage loans, net ............. 68 81
Gain on sales and write-down of
other real estate owned, net .................... -- 16
Other .............................................. 84 107
---------- ----------
Total non-interest income ...................... 1,493 1,137
---------- ----------
Non-interest expense:
Salaries and employee benefits ................... 1,753 1,620
Occupancy and equipment expenses ................. 676 580
Other non-interest expense ....................... 1,176 1,091
---------- ----------
Total non-interest expense ..................... 3,605 3,291
---------- ----------
Income before provision for income
taxes ..................................... 1,733 1,741
Provision for income taxes ......................... 597 689
---------- ----------
Net income ..................................... $ 1,136 $ 1,052
========== ==========
Earnings per share
Basic -
Net income per share ........................ $ .32 $ .28
========== ==========
Weighted average common shares .............. 3,586,000 3,788,000
========== ==========
Diluted -
Net income per share .......................... $ .30 $ .26
========== ==========
Weighted average common shares and share equivalents 3,852,000 4,014,000
========== ==========
Dividends per share ................................ $ .15 $ .05
========== ==========
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, 1997 ......... $468 $ 21,094 $ 19,858 $(5,931) $ 1,063 $(231) $ 36,321
Net income ........................... -- -- 1,136 -- -- -- 1,136
Decrease in unearned compen-
sation - ESOP ...................... -- -- -- -- -- 21 21
Increase in unrealized gain on
available for sale securities,
net of taxes ....................... -- -- -- -- 315 -- 315
Issuance of stock .................... 7 273 -- -- -- -- 280
Repurchase of stock .................. -- -- -- (2,953) -- -- (2,953)
Dividends declared ($.15 per share) .. -- -- (536) -- -- -- (536)
---- -------- -------- ------- ------- ----- --------
Balance at March 31, 1998 ............ $475 $ 21,367 $ 20,458 $(8,884) $ 1,378 $(210) $ 34,584
==== ======== ======== ======= ======= ===== ========
Balance at December 31, 1996 ......... $233 $ 20,923 $ 16,455 $(3,703) $ ( 50) $(312) $ 33,546
Net income ........................... -- -- 1,052 -- -- -- 1,052
Decrease in unearned compen-
sation - ESOP ...................... -- -- -- -- -- 20 20
Issuance of stock .................... -- 8 -- -- -- -- 8
Increase in unrealized loss on
available for sale securities,
net of taxes ....................... -- -- -- -- (602) -- (602)
Dividends declared ($.05 per share) .. -- -- (189) -- -- -- (189)
---- -------- -------- ------- ------- ----- --------
Balance at March 31, 1997 ............ $233 $ 20,931 $ 17,318 $(3,703) $ (652) $(292) $ 33,835
==== ======== ======== ======= ======= ===== ========
See accompanying notes to unaudited consolidated financial statements.
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ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
1998 1997
---- ----
(In thousands)
Cash flows from operating activities:
Net income ............................................ $ 1,136 $ 1,052
Adjustments to reconcile net income to net
cash provided (used) by operating
activities:
Provision for loan losses ......................... 190 158
(Gain) loss on sales and write-down of
other real estate owned, net .................... -- (16)
Amortization, accretion and depreciation,
net ............................................. 545 447
Gain on sales of securities, net ....................... (365) (110)
Loans originated for sale in the
secondary market ................................... (7,308) (3,672)
Proceeds from sales of loans ........................ 7,509 6,608
Gain on sales of mortgage loans, net ................ (68) (81)
Other, net .......................................... (2,419) (106)
-------- --------
Net cash provided (used) by operating
activities ........................................ (780) $ 4,280
-------- --------
Cash flows from investing activities:
Purchase of held for investment
securities ........................................ (1,982) --
Proceeds from principal payments received
on held for investment securities ................. 2,363 1,443
Proceeds from sales of available for sale
securities ........................................... 7,045 7,836
Proceeds from principal payments on
available for sale securities ........................ 12,995 2,892
Purchase of available for sale securities ............. (25,762) (15,449)
Loans originated/purchased, net ....................... (10,911) (4,180)
Proceeds from sales of loans held in portfolio ........ -- --
Purchases of FHLB stock ............................... (642) --
See accompanying notes to unaudited consolidated financial statements
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ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Three Months Ended
March 31,
1998 1997
---- ----
(In thousands)
Purchase of banking premises and equipment
and improvements to other real estate
owned ............................................ $ (1,177) $ (174)
Proceeds from sales of other real estate
owned ............................................ -- 121
-------- --------
Net cash provided (used) by investing
activities ....................................... (18,071) (7,511)
Cash flows from financing activities:
Net increase in deposits .......................... 8,276 5,229
Net increase (decrease) in borrowings with original
maturities of three months or less ............... (20,150) (5,221)
Proceeds from short-term borrowings with
maturities in excess of three months ............. 10,000 --
Principal payments on short-term borrow-
ings with maturities in excess of
three months ..................................... (5,000) (7,000)
Proceeds from issuance of long-term debt .......... 30,000 18,000
Principal payments on long term debt .............. (4,500) (5,467)
Proceeds from exercise of stock options ........... 256 8
Purchase of treasury stock ......................... (2,953) --
Cash paid for dividends ............................ (187) (189)
-------- --------
Net cash provided from financing
activities ...................................... 15,742 5,360
-------- --------
Net increase (decrease)in cash and cash
equivalents ...................................... (3,109) 2,129
Cash and cash equivalents at beginning of
period ........................................... 13,475 $ 9,708
-------- --------
Cash and cash equivalents at end of period ......... $ 10,366 $ 11,837
======== ========
Supplemental cash flow information:
Interest paid on deposits ....................... $ 2,833 $ 2,680
Interest paid on borrowed funds ................. 2,491 2,074
Income taxes paid ............................... 355 1,011
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
March 31, 1998
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 March 31, 1998
and for the three months periods ended March 31, 1998 and 1997 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, 1997, 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
March 31, 1998
(continued)
B) DIVIDEND DECLARATION
The Board of Directors of Abington Bancorp., Inc. declared a cash
dividend of $.05 per share and a special cash dividend of $.10 per share
to holders of its common stock in March 1998. These dividends were
payable on April 23, 1998 to stockholders of record as of the close of
business on April 9, 1998.
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ABINGTON BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998 (continued)
C) Stock Repurchase Program
On March 27, 1997, the Company announced that its Board of Directors had
authorized the Company to repurchase up to 10% (375,000 shares) of its currently
outstanding Common stock from time to time at prevailing market prices.
Additionally, on February 24, 1998, the Company announced that its Board of
Directors had authorized to purchase an additional 10% (347,000) of its
outstanding Common stock, as adjusted for amounts remaining to be repurchased as
under the March 1997 plan. 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 May 5, 1998, the Company had repurchased 309,000 shares of its common
stock under these plans at a total cost of approximately $5,181,000. All of the
repurchases were subsequent to March 31, 1997.
D) Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses). Components of
comprehensive income are net income and all other non-owner changes in equity.
This statement requires that an enterprise (a) classified items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separate from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. This statement will be effective for the Company's financial
statements, issued for the fiscal year ending December 31, 1998.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
Below is comprehensive income of the Company reported in accordance with SFAS
No. 130 (dollars in 000's):
For the Three
Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
Net income as reported $1,136 $ 1,052
Unrealized gains/(losses) on
securities, net of tax effects . 461 (646)
Less: Reclassification
Adjustment for securities
gains included in net effects
income, net of tax 146 44
------ -------
$1,451 $ 450
====== =======
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ABINGTON BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998 (continued)
E) Earnings Per Share Calculation
The Company computes earnings per share in accordance with SFAS No. 128. This
Statement supersedes APB No. 15 regarding the presentation of earnings per share
("EPS") on the face of the income statement. SFAS No. 128 replaced the
presentation of Primary EPS with a Basic EPS calculation that excludes the
dilutive effect of common stock equivalents. The Statement requires a dual
presentation of Basic and Diluted EPS, which is computed similarly to Fully
Diluted EPS pursuant to APB No. 15, for all entities with complex capital
structures. This Statement was effective for fiscal years ending after December
15, 1997 and requires restatement of all prior period EPS data presented,
including quarterly information. The Company's common stock equivalents consist
primarily of dilutive outstanding stock options computed under the treasury
stock method. Basic and Diluted EPS computations for the three months ended
March 31, 1998 and 1997 are as follows:
1998 1997
---- ----
(Dollars in thousands, except share and per share amounts)
Basic earnings per share computation:
Numerator:
Net income ..................... $ 1,136 $ 1,052
Denominator:
Average shares outstanding ..... 3,586,000 3,788,000
Basic earnings per share ........... .32 .28
Diluted earnings per share computation:
Numerator:
Net income ..................... 1,136 1,052
Denominator:
Average shares outstanding ..... 3,586,000 3,788,000
Dilutive stock options ......... 266,000 226,000
---------- ----------
Average diluted shares outstanding . 3,852,000 4,014,000
---------- ----------
Diluted earnings per share ............ .30 .26
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, amortization or accretion of premiums or
discounts on purchased loans and mortgage - backed securities, 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
3.06% for the quarter ended March 31, 1998 and 3.36% for the quarter ended March
31, 1997. The first quarter results of 1998 includes approximately $250,000 of
accelerated premium amortization related to purchased loan portfolios which had
unusually high customer prepayment activity during the three months ended March
31, 1998. This reflects the lower long term interest rates which have existed
through the latter portion of 1997 and through the first quarter of 1998 which
has caused generally lower yields on newly originated or purchased loans and
investment securities. Excluding these yield adjustments, the resulting net
interest rate spread would have been approximately 3.26%.
The level of nonaccrual (impaired) loans and other real estate owned also has an
impact on net interest income. At March 31, 1998, the Company had $475,000 in
nonaccrual loans, and $265,000 in other real estate owned, compared to $622,000
in nonaccrual loans and $265,000 in other real estate owned as of December 31,
1997.
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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
March 31
1998 1997
------ ------
Interest and dividend income:
Interest and fees on loans ............ $6,508 $6,039
Interest on mortgage-backed investments 2,098 2,230
Interest on bonds and obligations ..... 594 393
Dividend income ....................... 150 147
Interest on short-term investments .... 32 8
------ ------
Total interest and dividend income ... $9,382 9,382
------ ------
Interest expense:
Interest on deposits .................. 2,841 2,680
Interest on short-term borrowings ..... 604 817
Interest on long-term debt ............ 1,902 1,267
------ ------
Total interest expense ............... 5,347 4,764
------ ------
Net interest income .................... $4,035 $4,053
====== ======
A breakdown of the components of the Company's net interest-rate spread is as
follows:
Three Months Ended
March 31
1998 1997
------ ------
Weighted average yield earned on:
Loans ................................ 7.81% 8.10%
Mortgage-backed investments .......... 6.63 6.88
Bonds and obligations ................ 6.98 7.32
Marketable and other equity securities 4.68 4.92
Short-term investments ............... 5.69 2.55
Weighted average yield earned on
interest-earning assets .............. 7.37 7.62
Weighted average rate paid on:
NOW and non-interest NOW deposits .... .81 .86
Savings deposits ................... 2.24 2.29
Time deposits ...................... 5.60 5.66
Total deposits ..................... 3.49 3.58
Short-term borrowings .............. 5.48 5.38
Long-term debt ..................... 6.01 5.84
Weighted average rate paid on
interest-bearing liabilities ......... 4.31 4.26
Net interest-rate spread ................ 3.06 3.36%
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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 March 31
-------------------------------------
1998 vs. 1997
Increase (decrease)
-------------------------------------
Due to
-------------------------------------
Volume Rate Total
-------------------------------------
(In thousands)
Interest and dividend income:
Loans ......................... $ 1,688 $(1,219) $ 469
Mortgage-backed investments ... (53) (79) (132)
Bonds and obligations ......... 321 (120) 201
Equity securities ............. 36 (33) 3
Short-term investments ........ 9 15 24
------- ------- -----
Total interest and dividend
income ................... 2,001 (1,436) 565
------- ------- -----
Interest expense:
NOW deposits .................. 59 (41) 18
Savings deposits .............. 37 (42) (5)
Time deposits ................. 286 (138) 148
Short-term borrowings ......... (319) 106 (213)
Long-term debt ................ 596 39 635
------- ------- -----
Total interest expense .... 659 77 583
------- ------- -----
Net interest income ............. $ 1,342 (1,359) $ (18)
======= ======= =====
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
GENERAL. Net income for the quarter ended March 31, 1998 was $1,136,000 or $.30
per diluted share compared to a net income of $1,052,000 or $.26 per diluted
share in the corresponding period of 1997, a net increase of $84,000 or 8.0%.
The overall improvement in net income was mainly attributable to increases in
customer service fees and gains on sales of securities.
INTEREST AND DIVIDEND INCOME. Interest and dividend income increased $565,000 or
6.4% during the three month period ended March 31, 1998 as compared to the same
period in 1997. The increase was attributable to increases in earning assets,
particularly loans, offset in part by reductions in the yield earned on those
assets. The balance of average earning assets for the three month period ended
March 31, 1998 was approximately $509,084,000 as compared to $462,640,000 for
the same period in 1997, an overall increase of $46,444,000 or 10.0%. The
increase in earning assets was generally due to increases in average loan
balances which were $333,375,000 for the three months ended March 31, 1998, as
compared to $298,254,000 for the same period in 1997, an increase of $35,121,000
or 11.8%. This increase was generally caused by larger volumes of commercial
loan originations in 1997 and into 1998 as well as higher residential loan
balances which were the result of the steady volume of loan originations and
purchases in this area throughout 1997 and into 1998. See "Liquidity and Capital
Resources" and "Asset-Liability Management" for further discussion of the
Company's investment strategies.
The average yield earned on loans decreased for the first quarter of 1998 as
compared to 1997 primarily due to the effect of higher prepayments on higher
yielding residential loans and lower rates earned on newer originations on
purchases over the past six months. Additionally, loan yields were negatively
affected by yield adjustments on loan pools which had been acquired at a premium
purchase price, which were the result of unusually heavy prepayment activity on
those pools associated with the favorable refinancing market. The yield on loans
for the three-months ended March 31, 1998 was 7.81% as compared to 8.10% for the
same period in 1997. Management estimates that excluding the unusual prepayment
adjustments during the first quarter of 1998, the yield on loans would have been
approximately 8.11% or $250,000 higher than reported. Given the current
relatively low long term interest rates and relatively strong economy similar
yield adjustments could occur in the future. Yields on loans were positively
affected by growth in the Company's commercial loan portfolio which has grown to
approximately $53,800,000 at March 31, 1998 from $38,400,000 at March 31, 1997,
an increase of $15,400,000 or 40%. Commercial loans typically carry a higher
yield than residential mortgages.
Average balances of mortgage-backed investments and investment securities were
$126,587,000 and $34,051,000, respectively, for the three months ended March 31,
1998 as compared to $129,699,000 and $21,486,000, respectively, for the
corresponding period in 1997. These balances, when combined increased by
approximately $9,453,000 or 6.3%. The yield on mortgage-backed investments and
investment securities decreased to 6.63% and 6.98%, respectively, in the first
quarter of 1998 as compared to 6.88% and 7.32%, respectively, in the same period
in 1997. The declines in these yields reflects the lower interest rate
environment for investment opportunities since mid-1997 as well as the effects
of increased prepayments on the Company's higher yielding
16
17
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
securities in the mortgage-backed investment portfolio, the proceeds of which
were invested at lower rates.
INTEREST EXPENSE. Interest expense for the quarter ended March 31, 1998
increased $583,000 or 12.2% compared to the same period in 1997, generally due
to increases in deposit balances, which was partially offset by decreases in the
average rates paid on deposits. The blended weighted average rate paid on
deposits and borrowed funds was 4.31% for the three months ended March 31, 1998
as compared to 4.26% for the same period in 1997. The weighted average rates
paid on deposits was 3.49% for the quarter ended March 31, 1998 as compared to
3.58% for the same period in 1997. The overall cost of deposits has declined in
the first quarter of 1998 as compared to the same period in 1997, generally due
to the continued success of promotional efforts to attract core deposits (NOW
accounts, demand deposits, 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 $172,722,000 and $152,886,000, respectively, for
the first quarter of 1998 as compared to $158,968,000 and $140,755,000,
respectively, for the corresponding period in 1997, increases of 8.7% and 8.6%,
respectively. Additionally, the weighted average rate paid on time deposits
declined to 5.60% for the first quarter of 1998, as compared to 5.66% in 1997.
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, to a
lesser extent, the result of the generally declining rate environment which has
existed over the past year. The Company will continue to closely manage its cost
of deposits by continuing to seek methods of acquiring new core deposits and
maintaining its current core deposits while prudently adding time deposits at
reasonable rates in comparison to local markets and other funding alternatives,
including borrowings. The average balances of borrowed funds increased overall,
during the first quarter of 1998 as compared to 1997, to $170,636,000 from
$147,618,000, an increase of 15.6%. This increase generally relates to the
funding of certain loan portfolio purchases in the fourth quarter of 1997 and
the first quarter of 1998. The overall weighted average rates paid on borrowed
funds increased to approximately 5.87% for the quarter ended March 31, 1998 from
5.65% in 1997. 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 of 1997 to
provide further protection against potential interest rate increases. The
Company will continue to evaluate the use of borrowing as an alternative funding
source for asset growth in future periods. See "Asset-Liability Management" for
further discussion of the competitive market for deposits and overall strategies
for uses of borrowed funds.
NON-INTEREST INCOME. Total non-interest income increased $355,000 or 31.2% in
the first quarter of 1998 in comparison to the same period in 1997. Customer
service fees, which were $861,000 for the quarter ended March 31, 1998 as
compared to $680,000 for 1997, for an increase of $181,000 or 26.6%, 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
$115,000 and $68,000, respectively, for the first quarter of 1998 as compared to
$143,000 and $81,000, respectively, for the same period in 1997, a combined
decrease of $41,000 or 18.3%. This generally is reflective of timing in the
amortization of previously capitalized servicing rights, lower balances
17
18
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
of loans serviced for others, and also due to fewer loans being sold to date in
1998. The average balances of loans serviced for others declined to $202,145,000
for the first quarter of 1998 as compared to $234,358,000 in the corresponding
period in 1997, a decline of 13.7%. 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 were $365,000 for the first quarter of 1998 as
compared to $110,000 for 1997 for an increase of $255,000 or 231.8%. These gains
are reflective of a consistently strong market for equity securities. Gains on
sales of other real estate owned declined in the first quarter of 1998 as
compared to the same period in 1997 as gains were $16,000 in 1997 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 1998.
NON-INTEREST EXPENSES. Non-interest expenses for the quarter ended March 31,
1998 increased $314,000 or 9.5% compared to the same period in 1997. Salaries
and employee benefits increased 8.2% or $133,000 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 $96,000 or 16.6% 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 increased $85,000 or 7.8% for the
quarter ended March 31, 1998 in comparison to the same period in 1997, generally
due to increased costs associated with statement rendering and item processing
as well as other operating costs associated with servicing an expanded retail
customer base.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses was
$190,000 for the quarter ended March 31, 1998 as compared to $158,000 for the
same period in 1997. This increase of $32,000 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 increased risk
associated with these loans as compared to residential real estate.
PROVISION FOR INCOME TAXES. The Company's effective income tax rate for the
quarter ended March 31, 1998 was 34.5% compared to 39.6% for the quarter ended
March 31, 1997. 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.
Additionally, the overall effective tax rate is influenced by the proportion of
income generated by non-bank subsidiaries. In 1998 more income was generated
through non-bank subsidiaries as compared to the first quarter of 1997.
18
19
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
ASSET/LIABILITY MANAGEMENT
The objective of asset/liability management is to ensure that liquidity, capital
and market risk are prudently managed. Asset/liability management is governed by
policies reviewed and approved annually by the Company's Board of Directors
(Board). The Board delegates responsibility for asset/liability management to
the corporate Asset/Liability Management Committee (ALCO). ALCO sets strategic
directives that guide the day-to-day asset/liability management activities of
the Company. ALCO also reviews and approves all major funding, capital and
market risk-management programs. ALCO is comprised of members of management and
executive management of the Company and the Bank.
Interest rate risk is the sensitivity of income to variations in interest rates
over both short-term and long-term time horizons. The primary objective of
interest rate risk management is to control this risk within limits approved by
the Board and by ALCO. These limits and guidelines reflect the Company's
tolerance for interest rate risk. The Company's attempts to control interest
rate risk by identifying potential exposures and developing tactical plans to
address such potential exposures. The Company quantifies its interest rate risk
exposures using sophisticated simulation and valuation models, as well as a more
simple gap analysis. The Company manages its interest rate exposures by
generally using on-balance sheet strategies, which is most easily accomplished
through the management of the durations and rate sensitivities of the Company's
investments, including mortgage-backed securities portfolios, and by extending
or shortening maturities of borrowed funds. Additionally, pricing strategies,
asset sales and, in some cases, hedge strategies are also considered in the
evaluation and management of interest rate risk exposures.
The Company uses simulation analysis to measure the exposure of net interest
income to changes in interest rates over a 1 to 5 year time horizon. Simulation
analysis involves projecting future interest income and expense from the
Company's assets, liabilities, and off-balance sheet positions under various
interest rate scenarios.
The Company's limits on interest rate risk specify that if interest rates were
to ramp up or down 200 basis points over a 12 month period, estimated net
interest income for the next 12 months should decline by less than 10%. The
following table reflects the Company's estimated exposure, as a percentage of
estimated net interest income for the next 12 months, which does not materially
differ from the impact on net income, on the above basis:
Rate Change Estimated Exposure as a
(Basis Points) % of Net Interest Income
+200 3.50%
-200 (2.70%)
19
20
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The Company uses valuation analysis to provide insight into the exposure of
earnings and equity to changes in interest rates based on the balance sheet
position of the Company at a set point in time without regard to potential
future strategic changes. Valuation analysis involves projecting future cash
flows from the Company's assets, liabilities and off-balance sheet positions and
then discounting such cash flows at appropriate interest rates. The Company's
economic value of equity is the estimated net present value of its assets,
liabilities and off-balance sheet positions.
The Company's limits on interest rate risk specify that if interest rates were
to shift immediately up or down 200 basis points, the estimated economic value
of equity should decline by less than 25%. The following table reflects the
Company's estimated exposure as a percentage of estimated economic value of
equity assuming an immediate shift in interest rates:
Rate Change Estimated Exposure as a
(Basis Points) % of Economic Value
+200 (5.7%)
-200 (16.7%)
Interest rate gap analysis provides a static view of the maturity and repricing
characteristics of the on-balance sheet and off-balance sheet positions. The
interest rate gap analysis is prepared by scheduling all assets, liabilities and
off-balance sheet positions according to scheduled repricing or maturity.
Interest rate gap analysis can be viewed as a short-hand complement to
simulation and valuation analysis.
The Company's limits on interest rate risk specify that rate sensitive assets be
maintained at at least 40% of rate sensitive liabilities at the cumulative
1-year gap, as presented on a basis consistent with methods prescribed by
generally accepted accounting principles. As of March 31, 1998, the Company was
liability sensitive with rate sensitive assets at 57% of rate sensitive
liabilities at the 1-year gap.
The Company's policy is to match, as well as possible, the interest rate
sensitivities of its assets and liabilities. Residential mortgage loans, which
the Company currently originates or purchases for the Company's own portfolio,
are primarily 1-year and 3-year adjustable rate mortgages. Fixed rate
residential mortgage loans originated by the Company are primarily sold in the
secondary market, although in each year since 1989 the Company has originated or
purchased approximately $30,000,000 primarily in shorter-term fixed rate
mortgage loans (generally 10-years to 15-years) to be held in portfolio in order
to provide a hedge against the Company's asset sensitivity.
The Company also emphasizes loans with terms to maturity or repricing of 3 years
or less, such as certain adjustable rate residential mortgage loans, commercial
mortgages, business loans, residential construction loans, second mortgages and
home equity loans.
Management desires to expand its interest earning asset base in future periods
primarily through growth in the Company's loan portfolio. Loans comprised
approximately 65.5% of the average
20
21
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
interest earning assets for the first quarter of 1998. In the future, the
Company intends to be competitive in the residential mortgage market but plans
to place greater emphasis on consumer and commercial loans. The Company also has
been, and expects to remain, active in pursuing wholesale opportunities to
purchase loans. During the first quarter of 1998 and 1997, the Company acquired
approximately $26,000,000 and $7,700,000, respectively, of residential first
mortgages.
The Company has also used mortgage-backed investments (typically with weighted
average lives of 5 to 7 years) as a vehicle for fixed and adjustable rate
investment and as an overall asset/liability tool. These securities have been
highly liquid given current levels of prepayments in the underlying mortgage
pools and, as a result, have provided the Company with greater reinvestment
flexibility.
The level of the Company's liquid assets and the mix of its investments may
vary, depending upon management's judgment as to market trends, the quality of
specific investment opportunities and the relative attractiveness of their
maturities and yields. Management has been aggressively promoting the Company's
core deposit products since the first quarter of 1995, particularly checking and
NOW accounts. The success of this program has favorably impacted the overall
deposit growth to date, despite interest rate and general market pressures, and
has helped the Company to increase its customer base.
However, given the strong performance of money market mutual funds and the
equity markets in general, the Company and many of its peers have begun to see
lower levels of growth in time deposits as compared to prior years as customers
reflect their desire to increase their returns on investment. This pressure has
been exacerbated currently by the historically low long-term economic interest
rates. Management believes that the markets for future time deposit growth,
particularly with terms in excess of 2 years, will remain highly competitive.
Management will continue to evaluate future funding strategies and alternatives
accordingly as well as continuing to focus its efforts on attracting core,
retail deposit relationships.
The Company is also a voluntary member of the Federal Home Loan Bank ("FHLB") of
Boston. This borrowing capacity assists the Company in managing its
asset/liability growth because, at times, the Company considers it more
advantageous to borrow money from the FHLB of Boston than to raise money through
non-core deposits (i.e., certificates of deposit). Borrowed funds totaled
$176,260,000 at March 31, 1998 compared to $165,910,000 at December 31,1997.
These borrowings are primarily comprised of FHLB of Boston advances and have
primarily funded residential loan originations and purchases as well as
mortgage-backed investments and investment securities.
The following table sets forth maturity and repricing information relating to
interest sensitive assets and liabilities at March 31, 1998. 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 in
portfolio 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.
21
22
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Adjustable rate loans and securities are allocated to the period in which the
rates would be next adjusted. The following table does not reflect partial or
full prepayment of certain types of loans and investment securities prior to
scheduled contractual maturity. Since regular passbook savings and NOW accounts
are subject to immediate withdrawal, such accounts have been included in the
"Other Savings Accounts" category and are assumed to mature within 6 months.
This table does not include non-interest bearing deposits.
While this table presents a cumulative negative gap position in the 6 month to 5
year horizon, the Company considers its earning assets to be more sensitive to
interest rate movements than its liabilities. In general, assets are tied to
increases that are immediately impacted by interest rate movements while deposit
rates are generally driven by market area and demand which tend to be less
sensitive to general interest rate changes. In addition, other savings accounts
and money market accounts are substantially stable core deposits, although
subject to rate changes. A substantial core balance in these type of accounts is
anticipated to be maintained over time.
22
23
At March 31, 1998
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 ....................... $ 181 $ -- $ -- $ -- $ -- $ -- $ 181
Bonds and obligations ........................ 7,676 5,178 6,996 1,063 4,014 10,827 35,754
Mortgage-backed investments .................. 28,536 24,010 12,205 10,718 17,620 35,541 128,630
Mortgage loans subject to
rate review ................................. 34,368 18,430 20,565 31,681 18,315 -- 123,359
Fixed-rate mortgage loans .................... 35,076 48,980 58,314 28,115 23,655 7,430 201,570
Commercial and other loans ................... 8,064 3,516 2,730 2,081 2,530 -- 18,921
--------- --------- --------- -------- -------- ------- --------
Total .................................... $ 113,901 $ 100,114 $ 100,810 $ 73,658 $ 66,134 $53,798 $508,415
--------- --------- --------- -------- -------- ------- --------
Liabilities subject to interest rate adjustment:
Money market deposit accounts ................ 15,457 -- -- -- -- -- 15,547
Savings deposits - term
certificates ................................ 62,393 50,784 23,479 11,730 4,830 -- 153,216
Other savings accounts ....................... 128,304 -- -- -- -- -- 128,304
Borrowed funds ............................... 86,760 35,000 28,000 18,000 8,000 500 176,260
--------- --------- --------- -------- -------- ------- --------
Total .......................................... 292,914 85,784 51,479 29,730 12,830 500 473,237
--------- --------- --------- -------- -------- ------- --------
Excess (deficiency) of rate-
sensitive assets over rate-
sensitive liabilities ......................... $(179,013) $ 14,330 $ 49,331 $ 43,928 $ 53,304 $53,298 $ 35,178
--------- --------- --------- -------- -------- ------- --------
Cumulative excess (deficiency)
of rate-sensitive assets over
rate sensitive liabilities .................... $(179,013) $(164,683) $(115,352) $(71,424) $(18,120) $35,178
========= ========= ========= ======== ======== =======
Rate-sensitive assets as a
percent of rate-sensitive
liabilities (1) ............................... 38.9% 56.5% 73.2% 84.5% 96.2% 107.4%
(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.
23
24
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Liquidity and Capital Resources
Payments and prepayments on the Company's loan and mortgage-backed investment
portfolios, sales of fixed rate residential loans, increases in deposits,
borrowed funds and maturities of various investments comprise the Company's
primary sources of liquidity. The Company is also a voluntary member of the FHLB
of Boston and, as such, is entitled to borrow an amount up to the value of its
qualified collateral that has not been pledged to outside sources. Qualified
collateral generally consists of residential first mortgage loans, securities
issued, insured or guaranteed by the U.S. Government or its agencies, and funds
on deposit at the FHLB of Boston. Short-term advances may be used for any sound
business purpose, while long-term advances may be used only for the purpose of
providing funds to finance housing. At March 31, 1998, the Company had
approximately $70,000,000 in unused borrowing capacity that is contingent upon
the purchase of additional FHLB of Boston stock. Use of this borrowing capacity
is also impacted by capital adequacy considerations.
The Company's short-term borrowing position consists primarily of FHLB of Boston
advances with original maturities of approximately 1 to 3 months. The Company
utilizes borrowed funds as a primary vehicle to manage interest rate risk, due
to the ability to easily extend or shorten maturities as needed. This enables
the Company to adjust its cash needs to the increased prepayment activity in its
loan and mortgage-backed investment portfolios, as well as to quickly extend
maturities when the need to further balance the Company's GAP position arises.
The Company regularly monitors its asset quality to determine the level of its
loan loss reserves through periodic credit reviews by members of the Company's
Management Credit Committee. The Management Credit Committee, which reports to
the Executive Committee of the Company's Board of Directors, also works on the
collection of non-accrual loans and disposition of real estate acquired by
foreclosure. The 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 $795,000 at March 31, 1998, compared to $978,000 at
December 31, 1997, a decrease of $183,000 or 18.7%. The Company's ratio of
delinquent loans to total loans was .24% at March 31, 1998, as compared to .42%
at December 31, 1997. Management believes that overall trends in delinquencies
and non-performing assets will continue to be favorable in 1998.
During the first quarter of 1998, the Company maintained a general reserve for
other real estate owned, in light of the level of foreclosures, softness of the
local real estate market (particularly commercial) and costs associated with
selling properties. No provisions were made for possible losses on other real
estate owned in the first quarters of 1998 or 1997. The balance of the general
other real estate owned reserves at March 31, 1998 was approximately $60,000.
24
25
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 March 31, 1998, the Company had outstanding commitments to originate and sell
residential mortgage loans in the secondary market amounting to $4,263,000 and
$5,092,000, respectively. The Company also has outstanding commitments to grant
advances under existing home equity lines of credit amounting to $16,602,000.
Unadvanced commitments under outstanding commercial and construction loans
totaled $8,506,000 as of March 31, 1998. The Company believes it has adequate
sources of liquidity to fund these commitments.
The Company's total stockholders' equity was $34,584,000 or 6.3% of total assets
at March 31, 1998, compared with $36,321,000 or 6.8% of total assets at December
31, 1997. The decrease in total stockholders' equity of approximately $1,737,000
or 4.8% primarily resulted from dividends paid and the effect of the Company's
stock repurchase program, offset in part by earnings of the Company and
increases in the market value of its portfolio of available for sale securities,
net of applicable taxes. In accordance with current guidelines, the net
unrealized gain 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 and a
5.00% Tier 1 leverage capital ratio is required for a "well-capitalized"
classification. At March 31, 1998, the Company's Tier 1 leverage capital ratio
was approximately 5.46%. In addition, regulatory authorities have also
implemented risk-based capital guidelines requiring a minimum ratio of Tier 1
capital to risk-weighted assets of 4.00% (6.00% for "well-capitalized") and a
minimum ratio of total capital to risk-weighted assets of 8.00% (10.00% for
"well-capitalized"). At March 31, 1998, the Company's Tier 1 and total
risk-based capital ratios were approximately 10.97% and 11.87%, respectively.
The Company is categorized as "well-capitalized" under the Federal Deposit
Insurance Corporation Improvement Act of 1991 (F.D.I.C.I.A.). The Bank is also
categorized as "well-capitalized" as of March 31, 1998.
Impact of the Year 2000
The year 2000 problem, which is common to most companies, concerns the inability
of information systems, primarily computer software programs, to properly
recognize and process date sensitive information as the year 2000 approaches.
The Company has completed an assessment of the majority of its systems to
identify the systems that could be affected by the year 2000 issue and has
developed an implementation plan to address this issue. The Company's various
systems generally operate on software which is provided and maintained by
outside vendors, many of which are larger, well-established companies that are
well-known and established in the banking industry. At this time, the Company
does not anticipate incurring significant costs related to the year 2000 problem
as currently the Company is highly reliant on the efforts of these outside
vendors. The Company does, however, anticipate an increase in the amount of time
management and staff will devote to closely
25
26
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
monitor the progress of these vendors, testing applications and developing
operating contingency plans. To the extent that costs are incurred related to
the year 2000 problem, they will be expensed. The Company currently believes it
will be able to modify or replace its affected systems in time to minimize any
detrimental effects on operations. While it is not possible, at present, to give
an accurate estimate of the cost of this work, the Company does not expect that
such costs will be material to the Company's results of operations in one or
more fiscal quarters or years or have a material adverse impact on the long-term
results of operations, liquidity or consolidated financial position of the
Company. However, there can be no assurance that the systems of other companies
on which the Company's systems rely also will be timely converted or that any
such failure to convert by another company would not have an adverse effect on
the Company's systems.
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.
Proposed Accounting Pronouncements
Segment Information
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." This statement establishes standards for
reporting information about segments in annual and interim financial statements.
SFAS No. 131 introduces a new model for segment reporting, called the
"management approach."
The management approach is based on the way the chief operating decision-maker
organizes segments within a company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography,
legal structure, management structure - any manner in which management
disaggregates a company. This statement is effective and will be adopted for the
Company's financial statements for the fiscal year ending December 31, 1998 and
requires the restatement of previously reported segment information for all
periods presented.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information required by this Item 3 is included in Item 2 of Part I of this Form
10-Q, entitled "Management's Discussion and Analysis."
26
27
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
During the quarter ended March 31, 1998 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, 1997 on Form 10-K filed with the
Securities and Exchange Commission on March 25, 1998.
Item 2. Changes in Securities.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
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
13, 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
27
28
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.
(c) Amendment No. 2 to Amended and Restated Special
Termination Agreement, dated as of April 16, 1998, by
and among the Company, the Bank and Mario A.
Berlinghieri.
*10.5 Abington Bancorp, Inc. Incentive and Nonqualified
Stock Option Plan, as amended and restated to reflect
holding company formation,
28
29
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 (a) Lease for office space located at 538 Bedford
Street, Abington, Massachusetts ("lease"), used for
the Bank's principal and administrative offices dated
January 1, 1996 incorporated by reference to the
Company's Annual Report for the year ended December
31, 1996 on Form 10-K filed on March 31, 1997.
Northeast Terminal Associates, Limited owns the
property. Dennis E. Barry and Joseph L. Barry, Jr.,
who beneficially own more than 5% of the Company's
Common Stock, are the principal beneficial owners of
Northeast Terminal Associates, Limited.
(b) Amendment to Lease dated December 31, 1997,
incorporated by reference to the Company's Annual
Report for the year ended December 31, 1997 on Form
10-K filed on March 25, 1998.
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 (a) Special Termination Agreement dated as of July 1,
1997 among the Company, the Bank and Robert M. Lallo,
incorporated by reference to the Company's quarterly
report on Form 10-Q for the second quarter of 1997,
filed on August 13, 1997.
(b) Amendment No. 1 to Special Termination Agreement,
dated April 16, 1998, by and among the Company, the
Bank and Robert M. Lallo.
*10.12 Merger Severance Benefit Program dated as of August
28, 1997, incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the third quarter
of 1997, filed on November 15, 1997.
*10.13 Supplemental Executive Retirement Agreement between
the Bank and James P. McDonough dated as of March 26,
1998.
11.1 A statement regarding the computation of earnings per
share is included in Item 1 (Note E to Notes to
Unaudited Consolidated Financial Statements) of this
Report.
29
30
27.1 Financial Data Schedule, March 31, 1998.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K
during the first quarter of 1998.
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* Management Compensatory Plan
30
31
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: May 8, 1998 By /S/James P. McDonough
-----------------------
James P. McDonough
President and Chief
Executive Officer
Date: May 8, 1998 By /S/Robert M. Lallo
---------------------
Robert M. Lallo
Treasurer
(Principal Financial Officer)
31
32
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.
32
33
(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.
(c) Amendment No. 2 to Amended and Restated Special
Termination Agreement, dated as of April 16, 1998, by
and among the Company, the Bank and Mario A.
Berlinghieri.
*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 (a) Lease for office space located at 538 Bedford
Street, Abington, Massachusetts ("Lease"), used for
the Bank's principal and administrative offices dated
January 1, 1996 incorporated by reference to the
Company's Annual Report for the year ended December
31, 1996 on Form 10-K filed on March 31, 1997.
Northeast Terminal Associates, Limited owns the
property. Dennis E. Barry and Joseph L. Barry, Jr.,
who beneficially own more than 5% of the Company's
Common Stock, are the principal beneficial owners of
Northeast Terminal Associates, Limited.
(b) Amendment to Lease dated December 31, 1997,
incorporated by reference to the Company's Annual
Report for the year ended December 31, 1997 on Form
10-K filed on March 25, 1998.
33
34
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 (a) Special Termination Agreement dated as of July 1,
1997 among the Company, the Bank and Robert M. Lallo,
incorporated by reference to the Company's quarterly
report on Form 10-Q for the second quarter of 1997,
filed on August 13, 1997.
(b) Amendment No. 1 to Special Termination Agreement,
dated as of April 16, 1998, by and among the Company,
the Bank and Robert M. Lallo.
*10.12 Merger Severance Benefit Program dated as of August
28, 1997, incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the third quarter
of 1997, filed on November 15, 1997.
*10.13 Supplemental Executive Retirement Agreement between
the Bank and James P. McDonough dated as of March 26,
1998.
11.1 A statement regarding the computation of earnings per
share is included in Item 1 (Note E to Notes to
Unaudited Consolidated Financial Statements) of this
Report.
27.1 Financial Data Schedule, March 31, 1998.
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* Management Compensatory Plan
34