SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES
EXCHANGE ACT OF 1934 for Quarter Ended June 30, 1998
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Commission File Number 0-16018
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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: 3,502,100 shares as of August
5, 1998.
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.
2
ABINGTON BANCORP, INC.
FORM 10-Q
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INDEX
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Page
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Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1998
(Unaudited) and December 31, 1997........................................ 4
Consolidated Statements of Operations (Unaudited) for the
Three and Six Months Ended June 30, 1998 and 1997........................ 5
Consolidated Statements of Changes in Stockholders'
Equity (Unaudited) for the Six Months Ended
June 30, 1998 and 1997................................................... 6
Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended June 30, 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............................ 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................ 33
Part II Other Information
Item 1. Legal Proceedings ....................................................... 34
Item 2. Change in Securities .................................................... 34
Item 3. Defaults upon Senior Securities.......................................... 34
Item 4. Submission of Matters to a Vote of Security Holders...................... 34
Item 5. Other Information........................................................ 34
Item 6. Exhibits and Reports on Form 8-K......................................... 34
Signature Page............................................................................. 39
Index to Exhibits......................................................................... 40
3
ABINGTON BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(Unaudited)
June 30, December 31,
1998 1997
---- ----
(In Thousands)
ASSETS
Cash and due from banks..................... $ 13,599 $ 13,312
Short-term investments...................... 215 163
------- ------
Total cash and cash equivalents........... 13,814 13,475
------- ------
Loans held for sale......................... 1,065 1,332
Securities:
Mortgage-backed investments - held for
investment - market value of $64,129
in 1997................................. - 64,021
Securities available for sale - at
market value............................ 162,512 101,031
Loans....................................... 344,049 331,740
Less:
Allowance for possible loan losses...... (2,652) (2,280)
--------- ---------
Loans, net.............................. 341,397 329,460
------- -------
Federal Home Loan Bank stock................ 9,205 8,151
Banking premises and equipment, net......... 7,540 6,294
Other real estate owned, net................ - 265
Intangible assets........................... 3,073 3,284
Other assets................................ 7,602 4,673
-------- ---------
$ 546,208 $ 531,986
-------- ---------
-------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits.................................... $ 345,838 $ 324,934
Short-term borrowings....................... 28,228 55,910
Long-term debt.............................. 120,500 110,000
Accrued taxes and expenses.................. 3,209 3,337
Other liabilities........................... 1,698 1,484
-------- --------
Total liabilities....................... 499,473 495,665
-------- --------
Guaranteed preferred beneficial interest in the Company's
junior subordinated debentures, net............... 11,956 -
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; 4,755,000 and 4,676,000
shares issued in 1998 and 1997, respectively 476 468
Additional paid-in capital................ 21,467 21,094
Retained earnings......................... 21,437 19,858
-------- -------
43,380 41,420
Treasury stock - 1,223,000 and 1,039,000 shares
for 1998 and 1997, respectively, at cost.. (9,629) (5,931)
Unearned compensation - ESOP.............. (190) (231)
Other accumulated comprehensive income -
Net unrealized gain on available for
sale securities, net of taxes........... 1,218 1,063
-------- ---------
Total stockholders' equity.............. 34,779 36,321
-------- ---------
$ 546,208 $ 531,986
-------- ---------
-------- ---------
See accompanying notes to unaudited consolidated financial statements.
4
ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
------- -------
1998 1997 1998 1997
---- ---- ---- ----
(In thousands, except per share data)
Interest and dividend income:
Interest and fees on loans.................................. $ 6,673 $6132 $ 13,181 $ 12,171
Interest on mortgage-backed investments..................... 1,901 2,324 3,999 4,554
Interest on bonds and obligations........................... 707 412 1,301 805
Dividend income............................................. 154 145 304 292
Interest on short-term investments.......................... 47 15 79 23
------ ---- ------ -------
Total interest and dividend income........................ 9,482 9,028 18,864 17,845
------ ----- ------- ------
Interest expense:
Interest on deposits......................................... 2,930 2,714 5,771 5,394
Interest on short-term borrowings............................ 587 636 1,191 1,453
Interest on long-term debt................................... 1,954 1,657 3,856 2,924
------ ----- ------- -----
Total interest expense.................................... 5,471 5,007 10,818 9,771
------ ----- ------- -----
Net interest income........................................... 4,011 4,021 8,046 8,074
Provision for possible loan losses............................ 190 157 380 315
------ ----- ------ ------
Net interest income, after provision for
Possible loan losses........................................ 3,821 3,864 7,666 7,759
------ ----- ------- -----
Non-interest income:..........................................
Loan servicing fees......................................... 124 119 239 262
Other customer service fees................................. 922 791 1,783 1,471
Gain on sales of securities, net............................ 657 108 1,022 218
Gain on sales of mortgage loans, net........................ 146 40 214 121
Gain on sales and write-down of
other real estate owned, net............................... 43 78 43 94
Other......................................................... 70 65 154 172
------ ----- ------ ------
Total non-interest income................................. 1,962 1,201 3,455 2,338
------ ----- ------ ------
Non-interest expense:
Salaries and employee benefits.............................. 1,910 1,577 3,663 3,197
Occupancy and equipment expenses............................ 636 604 1,312 1,184
Trust preferred securities expense (Note F)................. 66 - 66 -
Other non-interest expense.................................. 1,367 1,105 2,543 2,196
------ ----- ------ -----
Total non-interest expense................................ 3,979 3,286 7,584 6,577
------ ----- ------ -----
Income before provision for income
taxes................................................ 1,804 1,779 3,537 3,520
Provision for income taxes.................................... 650 683 1,247 1,372
------ ----- ------ -----
Net income ............................................... $ 1,154 $1,096 $ 2,290 $ 2,148
------ ----- ------ -----
------ ----- ------ -----
Earnings per share
Basic -
Net income per share................................ $ .32 $ .29 $ .64 $ .57
------ ----- ------ -----
------ ----- ------ -----
Weighted average common shares.. .................... 3,560,000 3,738,000 3,573,000 3,764,000
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted -
Net income per share....................................... $ .30 $ .28 $ . 60 $ .54
------ ----- ------ -----
------ ----- ------ -----
Weighted average common and common share and
share equivalents 3,803,000 3,974,000 3,828,000 3,994,000
--------- --------- --------- ---------
--------- --------- --------- ---------
Dividends per share....................................... $ .05 $ .05 $ .20 $ .10
--------- --------- --------- ---------
--------- --------- --------- ---------
See accompanying notes to unaudited consolidated financial statements.
5
ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(Unaudited)
Net
Unrealized
Gain
(Loss) on
Additional Available
Common Paid-In Retained Treasury for Sale
Stock Capital Earnings Stock Securities
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands)
Balance at December 31, 1997..................................... $ 468 $ 21,094 $ 19,858 $ (5,931) $ 1,063
Net income ........................................................ -- -- 2,290 -- --
Decrease in unearned compen-
sation - ESOP ................................................... -- -- -- -- --
Effect of reclassification of securities from held-to-
maturity to available for sale, net of taxes .................... -- -- -- -- 245
Decrease in unrealized gain on
available for sale securities,
net of taxes .................................................... -- -- -- -- (90)
Issuance of stock ................................................. 8 373 -- -- --
Repurchase of stock ............................................... -- -- -- (3,698) --
Dividends declared ($.20 per share) ............................... -- -- (711) -- --
--------- -------- --------- --------- --------
Balance at June 30, 1998 .......................................... $ 476 $ 21,467 $ 21,437 $ (9,629) $ 1,218
--------- -------- --------- --------- --------
--------- -------- --------- --------- --------
Balance at December 31, 1996 ...................................... $ 467 $ 20,923 $ 16,221 $ (3,703) $ (50)
Net income ........................................................ -- -- 2,148 -- --
Decrease in unearned compen-
sation - ESOP ................................................... -- -- -- -- --
Issuance of stock ................................................. -- 16 -- -- --
Increase in unrealized gain on
available for sale securities,
net of taxes .................................................... -- -- -- -- 297
Repurchase of stock ............................................... -- -- -- (994) --
Dividends declared ($.10 per share) ............................... -- -- (373) -- --
--------- -------- --------- --------- --------
Balance at June 30, 1997 .......................................... $ 467 $ 20,939 $ 17,996 $ (4,697) $ 247
--------- -------- --------- --------- --------
--------- -------- --------- --------- --------
Unearned
Compensa-
tion-ESOP Total
-----------------
Balance at December 31, 1997..................................... $ (231) $ 36,321
Net income ........................................................ -- 2,290
Decrease in unearned compen-
sation - ESOP ................................................... 41 41
Effect of reclassification of securities from held-to-
maturity to available for sale, net of taxes .................... -- 245
Decrease in unrealized gain on
available for sale securities,
net of taxes .................................................... -- (90)
Issuance of stock ................................................. -- 381
Repurchase of stock ............................................... -- (3,698)
Dividends declared ($.20 per share) ............................... -- (711)
-------- ---------
Balance at June 30, 1998 .......................................... $ (190) $ 34,779
-------- ---------
-------- ---------
Balance at December 31, 1996 ...................................... $ (312) $ 33,546
Net income ........................................................ -- 2,148
Decrease in unearned compen-
sation - ESOP ................................................... 40 40
Issuance of stock ................................................. -- 16
Increase in unrealized gain on
available for sale securities,
net of taxes .................................................... -- 297
Repurchase of stock ............................................... -- (994)
Dividends declared ($.10 per share) ............................... -- (373)
-------- ---------
Balance at June 30, 1997 .......................................... $ (272) $ 34,680
-------- ---------
-------- ---------
See accompanying notes to unaudited consolidated financial statements
6
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ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
Six Months Ended
June 30,
1998 1997
---- ----
(In thousands)
Cash flows from operating activities:
Net income................................................... $ 2,290 $ 2,148
Adjustments to reconcile net income to net
cash provided (used) by operating
activities
Provision for loan losses................................ 380 315
(Gain) loss on sales and write-down of
other real estate owned, net........................... (43) (94)
Amortization, accretion and depreciation,
net.................................................... 1,030 948
Gain on sales of securities, net.............................. (1,022) (218)
Loans originated for sale in the
secondary market.......................................... (16,462) (9,098)
Proceeds from sales of loans............................... 16,943 11,286
Gain on sales of mortgage loans, net....................... (214) (121)
Other, net................................................. (3,021) (1,099)
---------- -------
Net cash provided (used) by operating
activities............................................... (119) $4,067
---------- -------
Cash flows from investing activities:
Purchase of held for investment
securities.............................................. (2,844) (2,067)
Proceeds from principal payments received
on held for investment securities........................ 5,562 3,099
Proceeds from sales of available for sale
securities.................................................. 29,575 17,280
Proceeds from principal payments on
available for sale securities............................... 21,461 5,549
Purchase of available for sale securities.................... (49,960) (36,188)
Loans originated/purchased, net.............................. (12,317) (3,797)
Purchases of FHLB stock....................................... (1,054) --
See accompanying notes to unaudited consolidated financial statements.
7
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ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
- --------------------------------------------------------------------------------
(Unaudited)
Six Months Ended
June 30,
1998 1997
---- ----
(In thousands)
Purchase of banking premises and equipment
and improvements to other real estate
owned ..................................................................... $ (1,869) $ (520)
Proceeds from sales of other real estate
owned ..................................................................... 308 594
-------- --------
Net cash provided (used) by investing
activities ................................................................ (11,138) (16,050)
Cash flows from financing activities:
Net increase in deposits ................................................... 20,904 10,179
Net increase (decrease) in borrowings with original
maturities of three months or less ........................................ (22,682) (1,188)
Proceeds from short-term borrowings with
maturities in excess of three months ...................................... 15,000 10,000
Principal payments on short-term borrow-
ings with maturities in excess of
three months .............................................................. (20,000) (32,000)
Proceeds from issuance of long-term debt ................................... 30,000 34,000
Principal payments on long term debt ....................................... (19,500) (6,958)
Proceeds from exercise of stock options..................................... 327 16
Net proceeds of issuance of guaranteed preferred beneficial interest
in junior subordinated debentures ......................................... 11,956 --
Purchase of treasury stock .................................................. (3,698) (994)
Cash paid for dividends ..................................................... (711) (376)
-------- --------
Net cash provided from financing
activities ............................................................... 11,596 12,679
-------- --------
Net increase (decrease)in cash and cash
equivalents ............................................................... 339 696
Cash and cash equivalents at beginning of
period .................................................................... 13,475 $ 9,708
-------- --------
Cash and cash equivalents at end of period .................................. $ 13,814 $ 10,404
======== ========
Supplemental cash flow information:
Interest paid on deposits ................................................ $ 5,758 $ 5,396
Interest paid on borrowed funds .......................................... 5,117 4,316
Income taxes paid ........................................................ 1,305 2,427
Transfers to other real estate owned,
net ..................................................................... 265 --
Transfers of securities from held-to-maturity to available for sale ....... 61,232 --
See accompanying notes to unaudited consolidated financial statements.
8
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ABINGTON BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
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A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Abington Bancorp, Inc. (the "Company") is a one-bank holding company
which owns all of the outstanding capital stock of Abington Savings
Bank ("the Bank"). Abington Bancorp, Inc., was reestablished as the
Bank's holding company on January 31, 1997. Previously, the Company's
predecessor, also known as Abington Bancorp, Inc., had served as the
Bank's holding company from February 1988 until its dissolution in
December 1992. The Company's primary business is serving as the holding
company of the Bank.
The accompanying consolidated financial statements as of June 30, 1998
and for the three and six month periods ended June 30, 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 subsidiaries, Abington Savings Bank
and Abington Bancorp Capital Trust ("the Trust"). For additional
information on the Trust, please see Note F. 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.
9
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ABINGTON BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(continued)
- --------------------------------------------------------------------------------
B) DIVIDEND DECLARATION
The Board of Directors of Abington Bancorp., Inc. declared a cash
dividend of $.05 per share to holders of its common stock in June 1998.
These dividends were payable on July 23, 1998 to stockholders of record
as of the close of business on July 9, 1998.
10
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ABINGTON BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 (continued)
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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 August 5, 1998, the Company had repurchased 379,300 shares of its common
stock under these plans at a total cost of approximately $6,507,000. 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) classify 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 is effective for the Company's financial
statements, 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 For the Six
Months Ended Months Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
Net income as reported $ 1,154 $ 1,096 $2,290 $2,148
Unrealized gains/(losses) on
securities, net of tax effects (10) 964 523 428
Less: Reclassification
Adjustment for securities
gains included in net
income, net of tax effects 395 65 613 131
Comprehensive income before
transfers of held-to-maturity ------- ------- ------- -------
securities 749 1,995 2,200 2,445
Add: Net unrealized gains on
securities transferred from held-
to-maturity to available for sale,
net of tax effects 245 -- 245 --
------- ------- ------- -------
$ 994 $ 1,995 $ 2,445 $ 2,445
------- ------- ------- -------
------- ------- ------- -------
11
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ABINGTON BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 and six months
ended June 30, 1998 and 1997 are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
(In thousands except per share and share data)
Net Income.................................... $ 1,154 $ 1,096 $ 2,290 2,148
--------- --------- --------- ---------
--------- --------- --------- ---------
EARNINGS PER SHARE:
Basic-
Earnings per share............... $ .32 $ .29 $ .64 $ .57
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common shares 3,560,000 3,738,000 3,573,000 3,764,000
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted-
Earnings per share $ .30 $ .28 $ .60 $ .54
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common shares
and share equivalents....................... 3,803,000 3,974,000 3,828,000 3,994,000
--------- --------- --------- ---------
--------- --------- --------- ---------
12
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ABINGTON BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 (continued)
- --------------------------------------------------------------------------------
F) Guaranteed Preferred Beneficial Interests in the Company's Junior
Subordinated Debentures
In May 1998, the Company formed a Delaware business trust, Abington Bancorp
Capital Trust (the "Trust"). All of the common securities of this special
purpose Trust are owned by the Company; the Trust exists solely to issue
capital securities. For financial reporting purposes, the Trust is reported
as a subsidiary and is consolidated into the financial statements of Abington
Bancorp, Inc. and subsidiaries. The capital securities are presented as a
separate line item on the consolidated balance sheet as a guaranteed
preferred beneficial interest in the Company's Junior Subordinated Debentures
(trust-preferred securities). The minority interest is shown as trust
preferred expenses on the accompanying consolidated statement of operations.
The Trust has issued trust preferred securities and invested the net proceeds
in junior subordinated deferrable interest debentures (subordinated
debentures) issued to the Trust by the Company. The subordinated debentures
are the sole assets of the Trust. The Company has the right to defer payment
of interest on the subordinated debentures at any time, or from time to time,
for periods not exceeding five years. If interest payments on the
subordinated debentures are deferred, the distributions on the trust
preferred securities are also deferred. Interest on the subordinated
debentures is cumulative. The Company, through guarantees and agreements, has
fully and unconditionally guaranteed all of the Trust's obligations under the
trust-preferred securities.
The Federal Reserve Bank has accorded the trust-preferred securities Tier 1
capital status. The ability to apply Tier 1 capital treatment, as well as to
deduct the expense of the subordinated debentures for income tax purposes,
provided the Company with a cost-effective way to raise regulatory capital. The
trust-preferred securities are not included as a component of total
shareholders' equity on the consolidated balance sheet.
The trust-preferred securities pay interest at a rate of 8.25% per annum with
quarterly distributions commencing on the last day of September 1998. The Trust
issued 1,265,000 shares of $10 per share liquidation value per preferred
security at a total cost of approximately $690,000 which has been deferred and
is netted against the outstanding value of the trust-preferred securities on the
accompanying balance sheet. Accrued and accumulated distributions of $66,000
relating to these trust preferred securities is reflected in non-interest
expense. These costs are being amortized over the life of the trust-preferred
securities, which will mature on June 30, 2009. The maturity date may be
shortened to a date not earlier than 2003 if certain conditions are met,
including obtaining approval from the Board of Governors of the Federal Reserve
System. The redemption price of the trust- preferred securities would equal the
liquidation value of each security.
13
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ABINGTON BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 (continued)
- --------------------------------------------------------------------------------
G. Transfer of Held-to-Maturity Securities
As of June 30, 1998, the Company has elected to transfer the balance of its
securities classified as held-to-maturity to available for sale in accordance
with the guidelines set forth by SFAS No. 115. This decision was made by the
Board of Directors and Management of the Company after a review of its policies
and practices of accounting for investments in light of recent economic changes
and given potential opportunities from an asset-liability perspective. At this
time there have been no sales or transfers of securities which would otherwise
necessitate this broad reclassification. However, the reclassification has been
made as of June 30, 1998 to more accurately reflect the Company's change in
intention with respect to securities previously classified as held-to-maturity.
Per SEC guidelines, this reclassifications will prohibit the Company from
classifying securities as held-to-maturity for a period of at least two years.
14
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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
3.05% and 3.08% for the quarter and six months ended June 30, 1998, respectively
and 3.31% and 3.33% for the quarter and six months ended June 30, 1997,
respectively. The results for the first six months of 1998 includes
approximately $400,000 of accelerated premium amortization related to purchased
loan portfolios which had unusually high customer prepayment activity during the
six months ended June 30, 1998. This reflects the lower long term interest rates
which have existed through the latter portion of 1997 and through the second
quarter of 1998 which has caused generally lower yields on newly originated or
purchased loans and investment securities.
The level of nonaccrual (impaired) loans and other real estate owned can have an
impact on net interest income but has generally not been very material in
impacting the 1997 or 1998 results. At June 30, 1998, the Company had $744,000
in nonaccrual loans, and no other real estate owned, compared to $622,000 in
nonaccrual loans and $265,000 in other real estate owned as of December 31,
1997.
15
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The table below presents the components of interest income and expense for the
major categories of assets and liabilities for the periods indicated.
Three Months Ended Six Months Ended
June 30 June 30
------- -------
1998 1997 1998 1997
---- ---- ---- ----
Interest and dividend income:
Interest and fees on loans $ 6,673 $ 6,132 $13,181 $12,171
Interest on mortgage-backed investments 1,901 2,324 3,999 4,554
Interest on bonds and obligations 707 412 1,301 805
Dividend income 154 145 304 292
Interest on short-term investments 47 15 79 23
------- ------- ------- -------
Total interest and dividend income $ 9,482 $ 9,028 $18,864 17,845
------- ------- ------- -------
Interest expense:
Interest on deposits 2,930 2,714 5,771 5,394
Interest on short-term borrowings 587 636 1,191 1,453
Interest on long-term debt 1,954 1,657 3,856 2,924
------- ------- ------- -------
Total interest expense 5,471 5,007 10,818 9,771
------- ------- ------- -------
Net interest income $ 4,011 $ 4,021 $ 8,046 $ 8,074
======= ======= ======= =======
A breakdown of the components of the Company's net interest-rate spread is as
follows:
Three Months Ended Six Months Ended
June 30 June 30
------- -------
1998 1997 1998 1997
---- ---- ---- ----
Weighted average yield earned on:
Loans 7.84% 8.18% 7.82% 8.14%
Mortgage-backed investments 6.46 6.86 6.55 6.87
Bonds and obligations 7.06 7.10 7.02 7.20
Marketable and other equity securities 4.50 4.87 4.58 4.90
Short-term investments 5.36 11.17 17.69 5.15
Weighted average yield earned on
interest-earning assets 7.36 7.67 7.39 7.65
Weighted average rate paid on:
NOW and non-interest NOW deposits .89 .88 .85 .87
Savings deposits 2.17 2.23 2.20 2.27
Time deposits 5.67 5.64 5.63 5.69
Total deposits 3.49 3.54 3.49 3.57
Short-term borrowings 5.52 5.54 5.50 5.45
Long-term debt 6.02 6.18 6.02 6.02
Weighted average rate paid on
interest-bearing liabilities 4.31 4.36 4.31 4.32
Net interest-rate spread 3.05% 3.31% 3.08 3.33%
16
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
RATE/VOLUME ANALYSIS
The following tables present, for the periods indicated, the change in interest
income and the change in interest expense attributable to the change in interest
rates and the change in the volume of earning assets and interest-bearing
liabilities. The change attributable to both volume and rate has been allocated
proportionately to the change due to volume and the change due to rate.
Three Months Ended June 30
--------------------------
1998 vs. 1997
Increase (decrease)
-------------------
Due to
----------
Volume Rate Total
--------- ---------- ---------
(In thousands)
Interest and dividend income:
Loans.............................. $ 2,002 $ (1,461) $ 541
Mortgage-backed investments........ (293) (130) (423)
Bonds and obligations.............. 312 (17) 295
Equity securities.................. 65 (56) 9
Short-term investments............. 86 (54) 32
--------- ---------- ---------
Total interest and dividend
income........................ 2,172 (1,718) 454
--------- ---------- ---------
Interest expense:
NOW deposits....................... 31 1 32
Savings deposits................... 68 (68) --
Time deposits...................... 176 8 184
Short-term borrowings.............. (48) (1) (49)
Long-term debt..................... 564 (267) 297
--------- ---------- ---------
Total interest expense......... 791 (327) 464
--------- ---------- ---------
Net interest income.................. $ 1,381 $ (1,391) $ (10)
--------- ---------- ---------
--------- ---------- ---------
17
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
Six Months Ended June 30,
--------------------------
1998 vs. 1997
Increase (decrease)
-------------------
Due to
----------
Volume Rate Total
--------- ---------- ---------
(In thousands)
Interest and dividend income:
Loans ......................... $ 2,231 $(1,221) $ 1,010
Mortgage-backed investments ... (350) (205) (555)
Bonds and obligations ......... 557 (61) 496
Equity securities ............. 55 (43) 12
Short-term investments ........ -- 56 56
------- ------- -------
Total interest and dividend
income ................... 2,493 (1,474) 1,019
------- ------- -------
Interest expense:
NOW deposits .................. 67 (16) 51
Savings deposits .............. 53 (58) (5)
Time deposits ................. 443 (112) 331
Short-term borrowings ......... (304) 42 (262)
Long-term debt ................ 940 (8) 932
------- ------- -------
Total interest expense .... 1,199 (152) 1,047
------- ------- -------
Net interest income ............. $ 1,294 $(1,322) $ (28)
------- ------- -------
------- ------- -------
18
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
GENERAL. Net income for the quarter ended June 30, 1998 was $1,154,000 or $.30
per diluted share compared to a net income of $1,096,000 or $.28 per diluted
share in the corresponding period of 1997, a net increase of $58,000 or 5.3%.
The overall improvement in net income was mainly attributable to increases in
customer service fees and gains on sales of securities and mortgages.
INTEREST AND DIVIDEND INCOME. Interest and dividend income increased $454,000 or
5.0% during the three month period ended June 30, 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
June 30, 1998 was approximately $515,660,000 as compared to $470,967,000 for the
same period in 1997, an overall increase of $44,693,000 or 9.5%. The increase in
earning assets was generally due to increases in average loan balances which
were $340,646,000 for the three months ended June 30, 1998, as compared to
$299,730,000 for the same period in 1997, an increase of $40,916,000 or 13.7%.
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
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 second 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 or
purchases, particularly 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 June 30, 1998 was 7.84% as compared to
8.18% for the same period in 1997. Management estimates that excluding the
effect of higher than anticipated prepayment adjustments during the second
quarter of 1998, the yield on loans would have been approximately 8.01% or
$150,000 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 $54,000,000
at June 30, 1998 from $38,000,000 at June 30, 1997, an increase of $16,000,000
or 42.1%. Commercial loans typically carry a higher yield than residential
mortgages.
Average balances of mortgage-backed investments and investment securities were
$117,754,000 and $40,054,000, respectively, for the three months ended June 30,
1998 as compared to $135,588,000 and $23,202,000, respectively, for the
corresponding period in 1997. These balances, when combined, remained relatively
flat. The yield on mortgage-backed investments and investment securities
decreased to 6.46% and 7.06%, respectively, in the second quarter of 1998 as
compared to 6.86% and 7.10%, 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
19
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
prepayments on the Company's higher yielding securities in the mortgage-backed
investment portfolio, the proceeds of which were invested at lower rates.
INTEREST EXPENSE. Interest expense for the quarter ended June 30, 1998 increased
$464,000 or 9.3% compared to the same period in 1997, generally due to increases
in deposit and borrowed fund 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 June 30, 1998
as compared to 4.36% for the same period in 1997. The weighted average rates
paid on deposits was 3.49% for the quarter ended June 30, 1998 as compared to
3.54% for the same period in 1997. The overall cost of deposits has declined in
the second 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. The average balance of
core and time deposits rose to $179,905,000 and $155,935,000, respectively, for
the second quarter of 1998 as compared to $162,951,000 and $143,528,000,
respectively, for the corresponding period in 1997, increases of 10.4% and 8.6%,
respectively. The weighted average rate paid on time deposits increased slightly
to 5.67% for the second quarter of 1998, as compared to 5.64% in 1997. This
change reflects the competition for time deposits in light of recent returns
generally provided by mutual funds and equity securities portfolios as well as
some rate increases related to the Cohasset (August 1997) and Randolph (April
1998) supermarket branch openings. 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 second quarter of 1998 as compared to 1997, to
$172,236,000 from $153,186,000, an increase of 12.4%. This increase generally
relates to the funding of certain loan portfolio purchases in the fourth quarter
of 1997 and the first half of 1998. The overall weighted average rates paid on
borrowed funds decreased to approximately 5.98% for the quarter ended June 30,
1998 from 5.99% in 1997. This decrease represents the renewal of certain
borrowing which comes due in the first six months of 1998 at lower rates than
they had been obtained for previously. 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 $761,000 or 63.4% in
the second quarter of 1998 in comparison to the same period in 1997. Customer
service fees, which were $922,000 for the quarter ended June 30, 1998 as
compared to $791,000 for 1997, for an increase of $131,000 or 16.6%, 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
$124,000 and $146,000, respectively, for the second quarter of 1998 as compared
to $119,000 and $40,000, respectively, for the same period in 1997, a combined
increase of $111,000 or 69.8%. This generally is reflective of the favorable
refinancing market for residential loans in 1998 which has resulted in increased
saleable loan production compared to the same period in 1997. Gains on sales of
securities were $657,000 for the second quarter of 1998 as compared to $108,000
for 1997 for an increase of $549,000 or 508.3%. These gains are reflective of a
consistently strong market for equity securities.
20
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
NON-INTEREST EXPENSES. Non-interest expenses for the quarter ended June 30, 1998
increased $693,000 or 21.1% compared to the same period in 1997. Salaries and
employee benefits increased 21.1% or $333,000 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 branches in Cohasset, which
opened during the third quarter of 1997, and Randolph, which opened in April
1998. These increases correspond with the Company's strategic focuses of
increasing commercial loans and attracting core deposits. Occupancy expenses
increased $32,000 or 5.3% primarily due to increased capital and operating
expenditures related to the Cohasset and Randolph branches, and to the general
inflationary and capital expenditure increases, particularly in technology.
Other non-interest expenses, including trust preferred expenses, also increased
$328,000 or 29.7% for the quarter ended June 30, 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. Additionally, approximately $66,000
of the aforementioned increases relates to accrued expenses related to trust
preferred securities which were issued in June 1998. See "Liquidity and Capital
Resources" for additional discussion of trust preferred securities.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses was
$190,000 for the quarter ended June 30, 1998 as compared to $157,000 for the
same period in 1997. This increase of $33,000 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 June 30, 1998 was 36.0% compared to 38.4% for the quarter ended
June 30, 1997. The lower effective tax rate in comparison to statutory rates for
both periods is reflective of income earned by certain non- bank subsidiaries
which are taxed, for state tax purposes, at lower rates. 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 second quarter of 1997.
21
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
GENERAL. Net income for the six months ended June 30, 1998 was $2,290,000 or
$.60 per diluted share compared to a net income of $2,148,000 or $.54 per
diluted share in the corresponding period of 1997, a net increase of $142,000 or
6.6%. 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 $1,019,000
or 5.7% during the six month period ended June 30, 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 six month period ended
June 30, 1998 was approximately $510,392,000 as compared to $466,829,000 for the
same period in 1997, an overall increase of $43,563,000 or 9.3%. The increase in
earning assets was generally due to increases in average loan balances which
were $337,020,000 for the six months ended June 30, 1998, as compared to
$298,996,000 for the same period in 1997, an increase of $38,024,000 or 12.7%.
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 six months ended June 30,
1998 as compared to the same period in 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 six months ended June 30, 1998
was 7.82% as compared to 8.14% for the same period in 1997. Management estimates
that, excluding the unusual prepayment adjustments during the second quarter of
1998, the yield on loans would have been approximately 8.06% or $400,000 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 $54,000,000 at June 30, 1998
from $38,000,000 at June 30, 1997, an increase of $16,000,000 or 42.1%.
Commercial loans typically carry a higher yield than residential mortgages.
Average balances of mortgage-backed investments and investment securities were
$122,146,000 and $37,071,000, respectively, for the six months ended June 30,
1998 as compared to $132,660,000 and $22,350,000, respectively, for the
corresponding period in 1997. These balances, when combined, increased by
approximately $4,207,000 or 2.7%. The yield on mortgage-backed investments and
investment securities decreased to 6.55% and 7.02%, respectively, in the second
quarter of 1998 as compared to 6.87% and 7.20%, 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
22
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
effects of increased prepayments on the Company's higher yielding securities in
the mortgage-backed investment portfolio, the proceeds of which were invested at
lower rates.
INTEREST EXPENSE. Interest expense for the six months ended June 30, 1998
increased $1,047,000 or 10.7% compared to the same period in 1997, generally due
to increases in deposit and borrowed fund 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 six months ended June
30, 1998 as compared to 4.32% for the same period in 1997. The weighted average
rates paid on deposits was 3.49% for the six months ended June 30, 1998 as
compared to 3.57% for the same period in 1997. The overall cost of deposits has
declined in the first six months 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 $176,243,000 and $154,419,000,
respectively, for the six months ended June 30, 1998 as compared to $160,647,000
and $141,261,000, respectively, for the corresponding period in 1997, increases
of 9.7% and 9.3%, respectively. Additionally, the weighted average rate paid on
time deposits declined to 5.63% for the first six months of 1998, as compared to
5.69% 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 despite competition for time deposit
accounts which has kept rates at higher levels in 1998 as compared to general
economic rates. 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
six month period ending June 30, 1998 as compared to 1997, to $171,440,000 from
$150,418,000, an increase of 14.0%. 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 5.89% for the six months ended June 30, 1998
from 5.82% 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 $1,117,000 or 47.8% in
the first six months of 1998 in comparison to the same period in 1997. Customer
service fees, which were $1,783,000 for the six months ended June 30, 1998 as
compared to $1,471,000 for the same period in 1997, for an increase of $312,000
or 21.2%, 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 $239,000 and $214,000, respectively, for the first six months of 1998
as compared to $262,000 and $121,000, respectively, for the same period in 1997,
a combined increase of $70,000
23
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
or 18.3%. This generally is reflective of the favorable refinancing market for
residential loans in 1998 which has resulted in increased saleable volumes as
compared to the same period in 1997. Gains on sales of securities were
$1,022,000 for the first six months of 1998 as compared to $218,000 for 1997 for
an increase of $804,000 or 368.8%. These gains are reflective of a consistently
strong market for equity securities.
NON-INTEREST EXPENSES. Non-interest expenses for the six months ended June 30,
1998 increased $1,007,000 or 15.3% compared to the same period in 1997. Salaries
and employee benefits increased 14.6% or $466,000 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 branches in Cohasset (August
1997) and Randolph (April 1998). These increases correspond with the Company's
strategic focuses of increasing commercial loans and attracting core deposits.
Occupancy expenses increased $128,000 or 10.8% primarily due to increased
capital and operating expenditures related to the supermarket branches, and to
the general inflationary and capital expenditure increases, particularly in
technology. Other non-interest expenses, including trust preferred securities
expense, also increased $413,000 or 18.8% for the six months ended June 30, 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.
Additionally, approximately $66,000 of the aforementioned increase related to
accrued expenses related to trust preferred securities which were issued in June
1998. See "Liquidity and Capital Resources" for additional discussion of trust
preferred securities.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses was
$380,000 for the six months ended June 30, 1998 as compared to $315,000 for the
same period in 1997. This increase of $65,000 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 six
months ended June 30, 1998 was 35.3% compared to 39.0% for the six months ended
June 30, 1997. The lower effective tax rate in comparison to statutory rates for
both periods is reflective of income earned by certain non- bank subsidiaries
which are taxed, for state tax purposes, at lower rates. 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 same period in 1997.
24
- --------------------------------------------------------------------------------
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 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 (1.7)%
-200 (1.9)%
25
- --------------------------------------------------------------------------------
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 (8)%
-200 (19)%
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 June 30, 1998, the Company was
liability sensitive with rate sensitive assets at 47% 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, 3-year and 5-year adjustable rate mortgages and shorter
term (generally 15-year or seasoned 30-year) fixed rate mortgages. Residential
mortgage loans currently originated by the Company are primarily sold in the
secondary market.
The Company also emphasizes loans with terms to maturity or repricing of 3 years
or less, such as certain adjustable rate residential mortgage loans, commercial
mortgages, business loans, residential construction loans, second mortgages and
home equity loans.
Management desires to expand its interest earning asset base in future periods
primarily through growth in the Company's loan portfolio. Loans comprised
approximately 66% of the average interest earning assets for the first six
months of 1998. In the future, the Company intends to be competitive in
26
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
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 six
months of 1998 and 1997, the Company acquired approximately $43,000,000 and
$11,400,000, 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 to continue to focus its efforts on attracting core,
retail deposit relationships.
The Company is also a voluntary member of the Federal Home Loan Bank ("FHLB") of
Boston. This borrowing capacity assists the Company in managing its
asset/liability growth because, at times, the Company considers it more
advantageous to borrow money from the FHLB of Boston than to raise money through
non-core deposits (i.e., certificates of deposit). Borrowed funds totaled
$148,728,000 at June 30, 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.
Additionally, the Company has recently obtained funding through the issuance of
trust preferred securities which carry a higher interest rate than similar FHLB
borrowings but at the same time are included as capital, without diluting
earnings per share and are tax deductible. See "Liquidity and Capital Resources"
for further discussion.
The following table sets forth maturity and repricing information relating to
interest sensitive assets and liabilities at June 30, 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
27
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
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.
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.
28
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
At June 30, 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........ $ 215 $ - $ - $ - $ - $ - $ 215
Bonds and obligations......... 6,850 5,998 2,998 1,063 6,013 16,830 39,752
Mortgage-backed investments... 29,646 13,029 14,734 12,747 18,616 27,460 116,232
Mortgage loans subject to
rate review ................. 33,489 15,756 21,358 32,079 27,707 - 130,388
Fixed-rate mortgage loans..... 29,397 24,538 38,006 28,729 34,039 42,289 196,997
Commercial and other loans..... 7,728 3,165 2,422 1,851 2,562 - 17,728
---------- --------- --------- --------- --------- --------- ----------
Total..................... $ 107,325 $ 62,485 $ 79,518 $ 76,469 $ 88,937 $ 86,579 $ 501,312
---------- --------- --------- --------- --------- --------- ----------
Liabilities subject to interest
rate adjustment:
Money market deposit accounts 14,327 - - - - - 14,327
Savings deposits - term
certificates................. 70,371 44,300 31,550 8,608 4,094 - 158,923
Other savings accounts........ 131,543 - - - - - 131,543
Borrowed funds................ 79,228 19,000 28,000 22,000 - 500 148,728
---------- --------- --------- --------- --------- --------- ----------
Total........................... 295,469 63,300 59,550 30,608 4,094 500 453,521
---------- --------- --------- --------- --------- --------- ----------
Guaranteed preferred beneficial
interest in junior subordinated
debentures...................... $ - $ - $ - $ - $ - $ 11,956 $ 11,956
Excess (deficiency) of rate-
sensitive assets over rate-
---------- --------- --------- --------- --------- --------- ----------
sensitive liabilities.......... $(188,144) $ (815) $ 19,968 $ 45,861 $ 84,843 $ 74,123 $ 35,835
---------- --------- --------- --------- --------- --------- ----------
Cumulative excess (deficiency)
of rate-sensitive assets over
rate sensitive liabilities..... $(188,144) $(188,959) $(168,992) $(123,130) $(38,288) $ 35,835
---------- --------- --------- --------- --------- --------- ----------
---------- --------- --------- --------- --------- --------- ----------
Rate-sensitive assets as a
percent of rate-sensitive
liabilities (1)................ 36.3% 47.3% 59.6% 72.6% 91.5% 107.7%
(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.
29
- --------------------------------------------------------------------------------
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 June 30, 1998, the Company had
approximately $115,000,000 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 $750,000 at June 30, 1998, compared to $978,000 at
December 31, 1997, a decrease of $228,000 or 23.3%. The Company's ratio of
delinquent loans to total loans was .33% at June 30, 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 six months 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 six months of 1998 or 1997. The balance of the other
real estate owned reserves at June 30, 1998 was approximately $60,000.
30
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
There continues to be uncertainties regarding future events, particularly in
both the New England real estate market and the general economy. These events
could result in additional charge-offs, write-offs, changes in the level of the
allowance for loan or OREO losses and/or in the level of loans on non-accrual or
in foreclosure.
At June 30, 1998, the Company had outstanding commitments to originate and sell
residential mortgage loans in the secondary market amounting to $6,737,000 and
$1,065,000, respectively. The Company also has outstanding commitments to grant
advances under existing home equity lines of credit amounting to $11,742,000.
Unadvanced commitments under outstanding commercial and construction loans
totaled $8,589,000 as of June 30, 1998. The Company believes it has adequate
sources of liquidity to fund these commitments.
The Company's total stockholders' equity was $34,779,000 or 6.4% of total assets
at June 30, 1998, compared with $36,321,000 or 6.8% of total assets at December
31, 1997. The decrease in total stockholders' equity of approximately $1,542,000
or 4.3% 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.
As previously discussed, the Company issued $11,956,000 of trust preferred
securities in June 1998, net of issuance costs. Under current regulatory
guidelines, trust preferred securities may represent up to 25% of the Company's
Tier 1 capital with any excess amounts available as Tier 2 capital. As of June
30, 1998, approximately $10,162,000 of these securities was included in Tier 1
capital.
Bank regulatory authorities have established a capital measurement tool
called "Tier 1" leverage capital. A 4.00% ratio of Tier 1 capital to assets
now constitutes the minimum capital standard for most banking organizations
and a 5.00% Tier 1 leverage capital ratio is required for a
"well-capitalized" classification. At June 30, 1998, the Company's Tier 1
leverage capital ratio was approximately 7.44%. 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 June 30, 1998, the
Company's Tier 1 and total risk-based capital ratios were approximately
14.47% and 16.05%, 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 June 30, 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
31
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
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 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
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
32
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
Company's financial statements for the fiscal year ending December 31, 1998 and
requires the restatement of previously reported segment information for all
periods presented.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This Statement does not change the
recognition or measurement associated with pension or postretirement plans. It
standardizes certain disclosures, requires additional information about changes
in the benefit obligations and about change in the fair value of plan assets to
facilitate analysis, and it eliminates certain disclosures that were not deemed
useful. This Statement is effective for financial statements issued for periods
beginning after December 15, 1997. These disclosure requirements will have no
material impact on the Company's financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments and hedging activities. The
Statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. The Company does not expect that the adoption of this Statement
will have a material impact on the Company's financial position or results of
operation.
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."
33
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
During the quarter ended June 30, 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.
(c) The following is a brief description of the matters voted upon
at the Annual Meeting, including the tabulation of votes.
1. Election of four directors, each for a three-year term
Votes For Votes Withheld
--------- --------------
Bruce G. Atwood 3,099,918 36,220
Ralph B. Carver, Jr. 3,098,035 38,103
Joel S. Geller 3,096,191 39,947
Jay Timothy Noonan 3,097,878 38,260
2. Deferred Stock Compensation Plan for Directors. The Plan permits
non-employee Directors of the Company or any of its subsidiaries
to elect to defer payment of compensation for service as a
Director.
Votes For Votes Against Abstentions Broker Non-Votes
--------- ------------- ----------- ----------------
2,706,953 389,731 35,940 0
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
34
a. Exhibits
2.1 Plan of Reorganization and Acquisition dated as of October 15,
1996 between the Company and Abington Savings Bank incorporated
by reference to the Company's Registration Statement on Form
8-A, effective January 13, 1997.
3.1 Articles of Organization of the Company incorporated by
reference to the Company's Registration Statement on Form 8-A,
effective January 13, 1997.
3.2 By-Laws of the Company, incorporated by reference to the
Company's Registration Statement on Form 8-A, effective January
13, 1997.
4.1 Specimen stock certificate for the Company's Common Stock
incorporated by reference to the Company's Registration
Statement on Form 8-A, effective January 31, 1997.
4.2 Form of Indenture between Abington Bancorp, Inc. and State
Street Bank and Trust Company incorporated by reference to
Exhibit 4.1 of the Registration Statement on Form S-2 of the
Company and Abington Bancorp Capital Trust, filed on May 12,
1998.
4.3 Form of Junior Subordinated Debenture incorporated by reference
to Exhibit 4.2 of the Registration Statement on Form S-2 of the
Company and Abington Bancorp Capital Trust, filed on May 12,
1998.
4.4 Form of Amended and Restated Trust Agreement by and among the
Company, State Street Bank and Trust Company, Wilmington Trust
Company and the Administrative Trustees of the Trust
incorporated by reference to Exhibit 4.4 of the Registration
Statement on Form S-2 of the Company and Abington Bancorp
Capital Trust, filed on May 12, 1998.
4.5 Form of Preferred Securities Guarantee Agreement by and between
the Company and State Street Bank and Trust Company incorporated
by reference to Exhibit 4.6 of the Registration Statement on
Form S-2 of the Company and Abington Bancorp Capital Trust,
filed on May 12, 1998.
*10.1 (a) Amended and Restated Special Termination Agreement dated as
of January 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
35
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 Special Termination Agreement dated as of May 28, 1998 among the
Company, the Bank and John R. Sylva.
*10.4 (a) Amended and Restated Special Termination Agreement dated as
of January 31, 1997 among the Company, the Bank and Mario A.
Berlinghieri incorporated by reference to the Company's Annual
Report for the year ended December 31, 1996 on Form 10-K filed
on March 31, 1997.
(b) Amendment to Amended and Restated Special Termination
Agreement, dated as of July 1, 1997 among the Company, the Bank
and Mario A Berlinghieri, incorporated by reference to the
Company's quarterly report on Form 10-Q for the second quarter
of 1997, filed on August 13, 1997.
(c) Amendment No. 2 to Amended and Restated Special Termination
Agreement, dated as of April 16, 1998, by and among the Company,
the Bank and Mario A. Berlinghieri, incorporated by reference to
the Company's quarterly report on Form 10-Q for the first
quarter of 1998, filed on May 8, 1998.
*10.5 Abington Bancorp, Inc. Incentive and Nonqualified Stock Option
Plan, as amended and restated to reflect holding company
formation, incorporated by reference to the Company's Annual
Report for the year ended December 31, 1996 on Form 10-K, filed
on March 31, 1997.
*10.6 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
36
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, incorporated by reference to the Company's quarterly
report on Form 10-Q for the first quarter of 1998, filed on May
8, 1998.
*10.12 Merger Severance Benefit Program dated as of August 28, 1997,
incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the third quarter of 1997, filed on November 15,
1997.
*10.13 Supplemental Executive Retirement Agreement between the Bank and
James P. McDonough dated as of March 26, 1998, incorporated by
reference to the Company's quarterly report on Form 10-Q for the
first quarter of 1998, filed on May 8, 1998.
*10.14 Deferred Stock Compensation Plan for Directors, effective July
1, 1998, incorporated by reference to Annex A to the Company's
Proxy Statement for its 1998 Annual Meeting, filed on April 13,
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, June 30, 1998.
37
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the first
quarter of 1998.
- ----------------------------------------
* Management Compensatory Plan
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ABINGTON BANCORP, INC.
----------------------
(Company)
Date: August 10, 1998 By /S/James P. McDonough
-----------------------
James P. McDonough
President and Chief
Executive Officer
Date: August 10, 1998 By /S/Robert M. Lallo
---------------------
Robert M. Lallo
Treasurer
(Principal Financial Officer)
39
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.
4.2 Form of Indenture between Abington Bancorp, Inc. and State
Street Bank and Trust Company incorporated by reference to
Exhibit 4.1 of the Registration Statement on Form S-2 of the
Company and Abington Bancorp Capital Trust, filed on May 12,
1998.
4.3 Form of Junior Subordinated Debenture incorporated by reference
to Exhibit 4.2 of the Registration Statement on Form S-2 of the
Company and Abington Bancorp Capital Trust, filed on May 12,
1998.
4.4 Form of Amended and Restated Trust Agreement by and among the
Company, State Street Bank and Trust Company, Wilmington Trust
Company and the Administrative Trustees of the Trust
incorporated by reference to Exhibit 4.4 of the Registration
Statement on Form S-2 of the Company and Abington Bancorp
Capital Trust, filed on May 12, 1998.
4.5 Form of Preferred Securities Guarantee Agreement by and between
the Company and State Street Bank and Trust Company incorporated
by reference to Exhibit 4.6 of the Registration Statement on
Form S-2 of the Company and Abington Bancorp Capital Trust,
filed on May 12, 1998.
*10.1 (a) Amended and Restated Special Termination Agreement dated as
of January 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.
40
*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 Special Termination Agreement dated as of May 28, 1998 among the
Company, the Bank and John R. Sylva.
*10.4 (a) Amended and Restated Special Termination Agreement dated as
of January 31, 1997 among the Company, the Bank and Mario A.
Berlinghieri incorporated by reference to the Company's Annual
Report for the year ended December 31, 1996 on Form 10-K filed
on March 31, 1997.
(b) Amendment to Amended and Restated Special Termination
Agreement, dated as of July 1, 1997 among the Company, the Bank
and Mario A. Berlinghieri, incorporated by reference to the
Company's quarterly report on Form 10-Q for the second quarter
of 1997, filed on August 13, 1997.
(c) Amendment No. 2 to Amended and Restated Special Termination
Agreement, dated as of April 16, 1998, by and among the Company,
the Bank and Mario A. Berlinghieri, incorporated by reference to
the Company's quarterly report on form 10-Q for the first
quarter of 1998, filed on May 8, 1998.
*10.5 Abington Bancorp, Inc. Incentive and Nonqualified Stock Option
Plan, as amended and restated to reflect holding company
formation incorporated by reference to the Company's Annual
Report for the year ended December 31, 1996 on Form 10-K filed
on March 31, 1997.
*10.6 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
41
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 as
of April 16, 1998, by and among the Company, the Bank and Robert
M. Lallo, incorporated by reference to the Company's quarterly
report on Form 10-Q for the first quarter of 1998, filed on May
8, 1998.
*10.12 Merger Severance Benefit Program dated as of August 28, 1997,
incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the third quarter of 1997, filed on November 15,
1997.
*10.13 Supplemental Executive Retirement Agreement between the Bank and
James P. McDonough dated as of March 26, 1998, incorporated by
reference to the Company's quarterly report on Form 10-Q for the
first quarter of 1998, filed on May 8, 1998.
*10.14 Deferred Stock Compensation Plan for Directors, effective July
1, 1998, incorporated by reference to Annex A to the Company's
Proxy Statement for its 1998 Annual Meeting, filed on April 13,
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, June 30, 1998
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* Management Compensatory Plan