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 March 31, 1999
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Commission File Number 0-16018
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ABINGTON BANCORP, INC.
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(Exact name of Registrant as specified in its charter)
MASSACHUSETTS 04-3334127
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(State or Other Jurisdiction (I.R.S. Identification No.)
of Incorporation or Organization)
536 WASHINGTON STREET, ABINGTON, MASSACHUSETTS 02351
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 982-3200
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 3,256,000 shares as of May 7,
1999.
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.
ABINGTON BANCORP, INC.
FORM 10-Q
INDEX
PAGE
Part I Finanancial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1999
(Unaudited) and December 31, 1998................................................... 4
Consolidated Statements of Operations (Unaudited) for the
Three Months Ended March 31, 1999 and 1998.......................................... 5
Consolidated Statements of Changes in Stockholders'
Equity (Unaudited) for the Three Months Ended
March 31, 1999 and 1998............................................................. 6
Consolidated Statements of Comprehensive Income for the Three
Months Ended March 31, 1999 and 1998................................................ 7
Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended March 31, 1999 and 1998.................................. 8
Notes to Unaudited Consolidated Financial Statements................................ 10
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations................................ 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................ 28
Part II Other Information
Item 1. Legal Proceedings .................................................................... 29
Item 2. Change in Securities ................................................................. 29
Item 3. Defaults upon Senior Securities....................................................... 29
Item 4. Submission of Matters to a Vote of Security Holders................................... 29
Item 5. Other Information..................................................................... 29
Item 6. Exhibits and Reports on Form 8-K...................................................... 29
Signature Page................................................................................. 33
Index to Exhibits............................................................................. 34
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ABINGTON BANCORP, INC.
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CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
1999 1998
(In Thousands)
ASSETS
Cash and due from banks .............................................. $ 13,229 $ 15,424
Short-term investments ............................................... 220 4,293
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Total cash and cash equivalents .................................... 13,449 19,717
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Loans held for sale .................................................. 988 3,901
Securities available for sale - at
market value ..................................................... 197,934 181,346
Loans ................................................................ 361,428 359,911
Less:
Allowance for possible loan losses ............................... (3,243) (3,077)
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Loans, net ....................................................... 358,185 356,834
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Federal Home Loan Bank stock ......................................... 9,538 9,538
Banking premises and equipment, net .................................. 8,747 8,328
Other real estate owned, net ......................................... -- --
Intangible assets .................................................... 2,705 2,789
Other assets ......................................................... 8,435 8,698
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$ 599,981 $ 591,151
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits ............................................................. $ 367,700 $ 363,953
Short-term borrowings ................................................ 61,252 66,628
Long-term debt ....................................................... 120,500 110,500
Accrued taxes and expenses ........................................... 3,466 3,286
Other liabilities .................................................... 2,062 1,790
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Total liabilities ................................................ 554,980 546,157
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Guaranteed preferred beneficial interest in the Company's
junior subordinated debentures, net ................................ 11,952 11,934
Commitments and contingencies
Stockholders' equity:
Serial preferred stock, $.10 par value,
3,000,000 shares authorized; none issued ......................... -- --
Common stock, $.10 par value 12,000,000
shares authorized; 4,795,000 and 4,795,000
shares issued in 1999 and 1998, respectively ..................... 480 480
Additional paid-in capital ......................................... 21,844 21,830
Retained earnings .................................................. 23,573 23,182
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45,897 45,492
Treasury stock - 1,448,000 and 1,448,000 shares
for 1999 and 1998, respectively, at cost ........................... (13,283) (13,283)
Compensation plans ................................................. (74) (114)
Other accumulated comprehensive income -
Net unrealized gain on available for
sale securities, net of taxes .................................... 509 965
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Total stockholders' equity ....................................... 33,049 33,060
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$ 599,981 $ 591,151
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See accompanying notes to unaudited consolidated financial statements
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ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
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(Unaudited)
Three Months Ended
MARCH 31,
1999 1998
(In thousands, except per share data)
Interest and dividend income:
Interest and fees on loans ............... $ 6,782 $ 6,508
Interest on mortgage-backed investments .. 2,158 2,098
Interest on bonds and obligations ........ 846 594
Dividend income .......................... 169 150
Interest on short-term investments ....... 9 32
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Total interest and dividend income ..... 9,964 9,382
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Interest expense:
Interest on deposits ...................... 2,829 2,841
Interest on short-term borrowings ......... 828 604
Interest on long-term debt ................ 1,634 1,902
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Total interest expense ................. 5,291 5,347
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Net interest income ........................ 4,673 4,035
Provision for possible loan losses ......... 190 190
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Net interest income, after provision for
Possible loan losses ..................... 4,483 3,845
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Non-interest income:
Loan servicing fees ...................... 97 115
Other customer service fees .............. 947 861
Gain on sales of securities, net ......... 177 365
Gain on sales of mortgage loans, net ..... 163 68
Gain on sales and write-down of
other real estate owned, net ............ -- --
Other ...................................... 95 84
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Total non-interest income .............. 1,479 1,493
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Non-interest expense:
Salaries and employee benefits ........... 2,090 1,753
Occupancy and equipment expenses ......... 753 676
Trust preferred securities expense ....... 261 --
Other non-interest expense ............... 1,195 1,176
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Total non-interest expense ............. 4,299 3,605
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Income before provision for income
taxes ................................... 1,663 1,733
Provision for income taxes ................. 602 597
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Net income ............................. $ 1,061 $ 1,136
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Earnings per share
Basic -
Net income per share ................ $ .32 $ .32
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Weighted average common shares ...... 3,347,000 3,586,000
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Diluted -
Net income per share .................. $ .30 $ .30
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Weighted average common and common share and
share equivalents ........................ 3,537,000 3,852,000
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Dividends per share ........................ $ .20 $ .15
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See accompanying notes to unaudited consolidated financial statements.
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ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
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(Unaudited)
Net
Unrealized
Gain
(Loss) on
Additional Available
Common Paid-In Retained Treasury for Sale Compensa-
Stock Capital Earnings Stock Securities tion Plans Total
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(In thousands)
Balance at December 31, 1998..................... $ 480 $ 21,830 $ 23,182 $ (13,283) $ 965 $ (114) $33,060
Net income....................................... - - 1,061 - - - 1,061
Change in obligation related to directors deferred
stock plan..................................... - - - - - 19 19
Decrease in unearned compen-
sation - ESOP.................................. - - - - - 21 21
Decrease in unrealized gain on
available for sale securities,
net of taxes................................... - - - - (456) - (456)
Issuance of stock ............................... - 14 - - - - 14
Repurchase of stock............................. - - - - - - -
Dividends declared ($.20 per share).............. - - (670) - - - (670)
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Balance at March 31, 1999 ....................... $ 480 $ 21,844 $ 23,573 $ (13,283) $ 509 $ (74) $33,049
------ -------- -------- --------- ------ ------ -------
------ -------- -------- --------- ------ ------ -------
Balance at December 31, 1997..................... $ 468 $ 21,094 $ 19,858 $ (5,931) $1,063 $ (231) $36,321
Net income....................................... - - 1,136 - - - 1,136
Decrease in unearned compensation - ESOP......... - - - - - 21 21
Issuance of stock .............................. 7 273 - - - - 280
Increase in unrealized gain on
available for sale securities,
net of taxes................................... - - - - 315 - 315
Repurchase of stock.............................. - - - (2,953) - - (2,953)
Dividends declared ($.15 per share).............. - - (536) - - - (536)
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Balance at March 31, 1998........................ $ 475 $ 21,367 $ 20,458 $ (8,884) $1,378 $ (210) $34,584
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See accompanying notes to unaudited consolidated financial statements.
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ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
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Three Months Ended March 31, 1999 1998
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(Dollars in thousands)
Net income, as reported .............................. $ 1,061 $ 1,136
Unrealized gains/(losses) on securities, net of taxes (346) 541
Less: Reclassification adjustment for securities gains
included in net income, net of taxes ................ 110 226
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Comprehensive income ................................. 825 $ 1,451
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ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended
MARCH 31,
1999 1998
In thousands)
Cash flows from operating activities:
Net income .......................................................... $ 1,061 $ 1,136
Adjustments to reconcile net income to net
cash provided (used) by operating
activities
Provision for loan losses ....................................... 190 190
(Gain) loss on sales and write-down of
other real estate owned, net .................................. -- --
Amortization, accretion and depreciation,
net ........................................................... 428 545
Gain on sales of securities, net ..................................... (177) (365)
Loans originated for sale in the
secondary market ................................................. (7,529) (7,308)
Proceeds from sales of loans ...................................... 10,605 7,509
Gain on sales of mortgage loans, net .............................. (163) (68)
Other, net ........................................................ 516 (2,419)
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Net cash provided (used) by operating
activities ...................................................... 4,931 $ (780)
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Cash flows from investing activities:
Purchase of held for investment
securities ...................................................... -- (1,982)
Proceeds from principal payments received
on held for investment securities ............................... -- 2,363
Proceeds from sales of available for sale
securities ......................................................... 4,602 7,045
Proceeds from principal payments on
available for sale securities ...................................... 8,661 12,995
Purchase of available for sale securities ........................... (30,374) (25,762)
Loans (originated/purchased) paid, net .............................. (1,541) (10,911)
Purchases of FHLB stock .............................................. -- (642)
See accompanying notes to unaudited consolidated financial statements
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ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
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(Unaudited)
Three Months Ended
MARCH 31,
1999 1998
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(In thousands)
Purchase of banking premises and equipment
and improvements to other real estate
owned ............................................ $ (764) $ (1,177)
Proceeds from sales of other real estate
owned ............................................ -- --
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Net cash provided (used) by investing
activities ....................................... (19,416) (18,071)
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Cash flows from financing activities:
Net increase in deposits .......................... 3,747 8,276
Net increase (decrease) in borrowings with original
maturities of three months or less ............... (376) (20,150)
Proceeds from short-term borrowings with
maturities in excess of three months ............. 5,000 10,000
Principal payments on short-term borrow-
ings with maturities in excess of
three months ..................................... (10,000) (5,000)
Proceeds from issuance of long-term debt .......... 10,000 30,000
Principal payments on long term debt .............. -- (4,500)
Proceeds from issuance of stock ................... 14 256
Purchase of treasury stock ........................ -- (2,953)
Cash paid for dividends ............................ (168) (187)
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Net cash provided from financing
activities ...................................... 8,217 15,742
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Net increase (decrease)in cash and cash
equivalents ...................................... (6,268) (3,109)
Cash and cash equivalents at beginning of
period ........................................... 19,717 13,475
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Cash and cash equivalents at end of period ......... $ 13,449 $ 10,366
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Supplemental cash flow information:
Interest paid on deposits ....................... $ 2,838 $ 2,833
Interest paid on borrowed funds ................. 2,534 2,491
Income taxes paid ............................... 27 355
See accompanying notes to unaudited consolidated financial statements.
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ABINGTON BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENT
March 31 1999
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A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Abington Bancorp,
Inc. (the "Company") and its wholly-owned subsidiaries, Abington Savings Bank
(the "Bank") and Abington Bancorp Capital Trust. The 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, Abington Securities Corporation, which
invests primarily in obligations of the United States Government and its
agencies and equity securities and Old Colony Mortgage Corporation which
originates and sell primarily first lien residential mortgages.
Abington Bancorp, Inc. was reestablished as the Bank's holding company on
January 31, 1997. Previously, the Company's predecessor, also known as Abington
Bancorp, Inc., had served as the Bank's holding company from February 1988 until
its dissolution in December 1992. The Company's primary business is serving as
the holding company of the Bank.
The accompanying consolidated financial statements as of March 31, 1999 and for
the three month period ended March 31, 1999 and 1998 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.
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
Company's consolidated financial statements as of and for the year ended
December 31, 1998, 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. All significant intercompany balances and
transactions have been eliminated in consolidation.
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ABINGTON BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 (continued)
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B) DIVIDEND DECLARATION
The Board of Directors of Abington Bancorp., Inc. declared a cash dividend
of $.05 per share and a special cash dividend of $.15 per share to holders of
its common stock in March, 1999. These dividends were payable on April 29, 1999
to stockholders of record as of the close of business on April 15, 1999.
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ABINGTON BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 (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. On February 24, 1998, the Company announced that its Board of
Directors had authorized the Company to repurchase an additional 10%
(347,000) of its outstanding common stock, as adjusted for amounts remaining
to be repurchased as under the March 1997 plan. On March 25, 1999, the Board
of Directors authorized the Company to repurchase an additional 10% (320,000)
of its outstanding common stock, as adjusted for amounts remaining to be
purchased under the previously authorized plans. The Board delegated to the
discretion of the Company's senior management the authority to determine the
timing of the repurchase program's commencement, subsequent purchases and the
prices at which the repurchases will be made.
As of May 7, 1999, the Company had repurchased 665,400 shares of its common
stock under these plans at a total cost of approximately $10,901,000. All of the
repurchases were subsequent to March 31, 1997.
D) Acquisition of Old Colony Mortgage
On April 1, 1999, the Company acquired all of the outstanding common stock of
Old Colony Mortgage Corporation (OCM) for $1.3 million in cash. OCM is
headquartered in Brockton, Massachusetts and has loan production offices in
Plymouth, Fall River and Auburn, Massachusetts. OCM originated over $125 million
in new home mortgages and refinancings in 1998. OCM primarily originates
residential first-lien mortgages which are subsequently sold on a servicing
released basis to investors, which include a number of banks and mortgage
companies.
As of April 1, 1999 OCM has approximately $4.1 million in assets, which were
primarily loans held for sale, and liabilities of approximately $3.3 million,
most of which were borrowings outstanding on a warehouse line with an
independent third party. This transaction will be accounted for under the
purchase method of accounting.
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ABINGTON BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 (continued)
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E) Business Segments
March 31, 1999:
Community Banking Other Consolidated
Securities, available for sale and held to maturity $197,934 $ -- $197,934
Net loans ......................................... 359,173 -- 359,173
Net assets ........................................ 599,743 238 599,981
Total deposits .................................... 367,700 -- 367,700
Total borrowings .................................. 181,752 -- 181,752
Total liabilities ................................. $554,742 $ 238 $554,980
Total interest income ............................. 9,964 -- 9,964
Total interest expense ............................ 5,291 -- 5,291
Net interest income ............................... 4,673 -- 4,673
Provisions for possible loan losses ............... 190 -- 190
Total non-interest income ......................... 1,479 -- 1,479
Total non-interest expense ........................ 3,985 314 4,299
Net income ........................................ $ 1,269 $ (208) $ 1,061
March 31, 1998:
Securities, available for sale and held to maturity $171,250 $ -- $171,250
Net loans ......................................... 341,380 -- 341,380
Net assets ........................................ 549,708 130 549,838
Total deposits .................................... 333,210 -- 333,210
Total borrowings .................................. 176,260 -- 176,260
Total liabilities ................................. $515,060 $ 194 $515,254
Total interest income ............................. $ 9,382 $ -- $ 9,382
Total interest expense ............................ 5,347 -- 5,347
Net interest income ............................... 4,035 -- 4,035
Provisions for possible loan losses ............... 190 -- 190
Total non-interest income ......................... 1,493 -- 1,493
Total non-interest expense ........................ 3,550 55 3,605
Net income ........................................ $ 1,172 $ (36) $ 1,136
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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GENERAL
The Company's results of operations depend primarily on its net interest income
after provision for possible loan losses, its revenue from other banking
services and non-interest expenses. The Company's net interest income depends
upon the net interest rate spread between the yield on the Company's loan and
investment portfolios and the cost of funds, consisting primarily of interest
expense on deposits and Federal Home Loan Bank advances. The interest rate
spread is affected by the match between the maturities or repricing intervals of
the Company's assets and liabilities, the mix and composition of interest
sensitive assets and liabilities, economic factors influencing general interest
rates, loan prepayment speeds, 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
3.27% for the quarter ended March 31, 1999 and 3.06% for the quarter ended March
31, 1998. The results for the first quarter of 1998 included approximately
$250,000 of accelerated premium amortization related to purchased loan
portfolios which experienced unusually high customer prepayment activity during
the first three months of 1998. This reflects the lower long term interest rates
which existed in 1998 and into 1999 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 been immaterial in 1998 and
1999. At March 31, 1999, the Company had $697,000 in nonaccrual loans, and no
other real estate owned, compared to $681,000 in nonaccrual loans and no other
real estate owned as of December 31, 1998.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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The table below presents the components of interest income and expense for the
major categories of assets and liabilities for the periods indicated.
Three Months Ended
MARCH 31
--------
1999 1998
---- ----
Interest and dividend income:
Interest and fees on loans ............ $6,782 $6,508
Interest on mortgage-backed investments 2,158 2,098
Interest on bonds and obligations ..... 846 594
Dividend income ....................... 169 150
Interest on short-term investments .... 9 32
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Total interest and dividend income ... $9,964 $9,382
------ ------
Interest expense:
Interest on deposits .................. 2,829 2,841
Interest on short-term borrowings ..... 828 604
Interest on long-term debt ............ 1,634 1,902
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Total interest expense ............... 5,291 5,347
------ ------
Net interest income .................... $4,673 $4,035
------ ------
------ ------
A breakdown of the components of the Company's net interest-rate spread is as
follows:
Three Months Ended
MARCH 31
1999 1998
---- ----
Weighted average yield earned on:
Loans ................................ 7.58% 7.81%
Mortgage-backed investments .......... 6.66 6.63
Bonds and obligations ................ 6.62 6.98
Marketable and other equity securities 4.37 4.68
Short-term investments ............... 5.35 5.69
Weighted average yield earned on
interest-earning assets .............. 7.19 7.37
Weighted average rate paid on:
NOW and non-interest NOW deposits .... .53 .81
Savings deposits ................... 2.15 2.24
Time deposits ...................... 5.22 5.60
Total deposits ..................... 3.13 3.49
Short-term borrowings .............. 5.01 5.48
Long-term debt ..................... 5.79 6.01
Weighted average rate paid on
interest-bearing liabilities ......... 3.91 4.31
Net interest-rate spread ................ 3.28% 3.06%
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
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RATE/VOLUME ANALYSIS
The following tables present, for the periods indicated, the change in interest
income and the change in interest expense attributable to the change in interest
rates and the change in the volume of earning assets and interest-bearing
liabilities. The change attributable to both volume and rate has been allocated
proportionately to the change due to volume and the change due to rate.
THREE MONTHS ENDED MARCH
------------------------
1999 vs. 1998
INCREASE (DECREASE)
-------------------
DUE TO
----------------------------------
VOLUME RATE TOTAL
------ ---- -----
(In thousands)
Interest and dividend income:
Loans ......................... $ 1,282 $(1,008) $ 274
Mortgage-backed investments ... 50 10 60
Bonds and obligations ......... 451 (199) 252
Equity securities ............. 75 (56) 19
Short-term investments ........ (21) (2) (23)
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Total interest and dividend
income ................... 1,837 (1,255) 582
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Interest expense:
NOW deposits .................. 148 (179) (31)
Savings deposits .............. 151 (116) 35
Time deposits ................. 558 (574) (16)
Short-term borrowings ......... 546 (322) 224
Long-term debt ................ (201) (67) (268)
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Total interest expense .... 1,202 (1,258) (56)
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Net interest income ............. $ 635 $ 3 $ 638
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
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COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
GENERAL. Net income for the quarter ended March 31, 1999 was $1,061,000 or $.30
per diluted share compared to a net income of $1,136,000 or $.30 per diluted
share in the corresponding period of 1998, a net decrease of $75,000 or 6.6%.
The overall decline in net income was mainly attributable to lower gains on
sales of securities and increases in non-interest expenses, including trust
preferred securities, offset in part by increases in net interest income,
customer service fees and gains on sales of mortgages.
INTEREST AND DIVIDEND INCOME. Interest and dividend income increased $582,000 or
6.2% during the three month period ended March 31, 1999, as compared to the same
period in 1998. The increase was attributable to increases in earning assets,
particularly loans, offset in part by reductions in the yield earned on those
assets. The balance of average earning assets for the three month period ended
March 31, 1999 was approximately $554,704,000 as compared to $509,084,000 for
the same period in 1998, an overall increase of $45,620,000 or 9.0%. The
increase in earning assets was generally due to increases in average loan
balances which were $357,833,000 for the three months ended March 31, 1999, as
compared to $333,375,000 for the same period in 1998, an increase of $24,458,000
or 7.3%. This increase was generally caused by larger volumes of commercial loan
originations in 1998 and into 1999 as well as higher residential loan balances
which were the result of the steady volume of loan originations and purchases
throughout 1998 and into 1999. See "Liquidity and Capital Resources" and
"Asset/Liability Management" for further discussion of the Company's investment
strategies.
The average yield earned on loans decreased for the first quarter of 1999 as
compared to 1998 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 three months. The yield on loans for the
three months ended March 31, 1999 was 7.58% as compared to 7.81% for the same
period in 1998. Loan yields in 1999 have been affected by consistently high
levels of prepayment activity experienced throughout 1998 into 1999 on higher
yielding residential loans which were in turn replaced by lower yielding loans
due to the lower interest rate environment. Loan yields for the first quarter of
1998 had been adversely affected by approximately $250,000 of unfavorable yield
adjustments or higher yielding loans which had been purchased at a premium which
was caused by unusually high prepayment activity. Given the current relatively
low long term interest rates and relatively strong economy, similar yield
declines 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 $61,500,000 at March 31, 1999 from $49,300,000 at March 31, 1998,
an increase of $12,200,000 or 24.7%. Commercial loans typically carry a higher
yield than residential mortgages.
Average balances of mortgage-backed investments and investment securities were
$129,581,000 and $51,135,000, respectively, for the three months ended March 31,
1999 as compared to $126,587,000 and $34,051,000, respectively, for the
corresponding period in 1998. These balances, when combined, increased
$20,078,000 or 12.5%. The yield on mortgage-backed investments remained
relatively flat at 6.66% in the first quarter of 1999, as compared to 6.63% in
the same period in 1998. The yield on this portfolio did not materially decline
despite the decreasing yield environment due to management's plan to
sell some of the Company's more interest rate sensitive securities and to
purchase more securities which were less sensitive to rate declines.
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
The yield on investment securities decreased to 6.62% in the first quarter of
1999 as compared to 6.98% in 1998 generally due to some of the Company's higher
yielding bonds being called by the issuers with proceeds being reinvested at
lower rates.
INTEREST EXPENSE. Interest expense for the quarter ended March 31, 1999
decreased $56,000 or 1.1% compared to the same period in 1998, generally due to
decreases in the rates paid on deposit and borrowed funds, which was partially
offset by increases in the average balances of deposits and borrowed funds. The
blended weighted average rate paid on deposits and borrowed funds was 3.91% for
the three months ended March 31, 1999 as compared to 4.31% for the same period
in 1998. The weighted average rates paid on deposits was 3.13% for the quarter
ended March 31, 1999 as compared to 3.49% for the same period in 1998. The
overall cost of deposits has declined in the first quarter of 1999 as compared
to the same period in 1998, 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
$199,176,000 and $162,754,000, respectively, for the first quarter of 1999 as
compared to $172,722,000 and $152,886,000, respectively, for the corresponding
period in 1998, for increases of 15.3% and 6.5%, respectively. The Company will
continue to closely manage its cost of deposits by continuing to seek methods of
acquiring new core deposits and maintaining its current core deposits while
prudently adding time deposits at reasonable rates in comparison to local
markets and other funding alternatives, including borrowings. The average
balances of borrowed funds increased overall, during the first quarter of 1999
as compared to 1998, to $178,923,000 from $170,636,000, an increase of 4.9%.
This increase generally relates to the funding of certain loan portfolio
purchases in the fourth quarter of 1998 and the first quarter of 1999. The
overall weighted average rates paid on borrowed funds decreased to approximately
5.50% for the quarter ended March 31, 1999 from 5.87% in 1998. This decrease
represents the renewal of certain borrowings which came due in 1998 at lower
rates than they had been obtained for previously. It is anticipated at this time
that the Federal Reserve's decisions to drop the inter-bank borrowing rate by 75
basis points in the third and fourth quarter of 1998 may have a further positive
effect on the refinancing of borrowed funds in future periods. 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 decreased $14,000 or .9% in the
first quarter of 1999 in comparison to the same period in 1998. Customer service
fees, which were $947,000 for the quarter ended March 31, 1999 as compared to
$861,000 for 1998, for an increase of $86,000 or 10.0%, 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 $97,000 and $ 163,000,
respectively, for the first quarter of 1999 as compared to $115,000 and $68,000,
respectively, for the same period in 1998, a combined increase of $77,000 or
42.1%. This generally is reflective of the favorable refinancing market for
residential loans in 1999 which has resulted in increased saleable loan
production compared to the same period in 1998. As the Company has been selling
loans generally on a servicing released basis since 1996, the portfolio of loans
serviced for others has declined which has caused the continued drop in loan
servicing income.
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
Gains on sales of securities were $177,000 for the first quarter of 1999 as
compared to $365,000 for 1998 for a decrease of $188,000 or 51.5%. While the
equity markets remained relatively strong through the first quarter of 1999,
management elected to sell fewer holdings.
NON-INTEREST EXPENSES. Non-interest expenses for the quarter ended March 31,
1999 increased $694,000 or 19.3% compared to the same period in 1998. Salaries
and employee benefits increased 19.2% or $337,000 primarily due to increases in
health insurance costs and staffing levels in the Company's retail banking area,
including the Bank's new supermarket branches in Randolph, which opened in April
1998, and Hanson, which opened in September 1998. These increases correspond
with the Company's strategic focus of attracting core deposits and new customer
relationships. Occupancy expenses increased $77,000 or 11.4% primarily due to
increased capital and operating expenditures related to the Randolph and Hanson
branches, and to the general inflationary and capital expenditure increases,
particularly in technology. Other non-interest expenses, including trust
preferred expenses, also increased $280,000 or 23.8% for the quarter ended March
31, 1999 in comparison to the same period in 1998. Of this amount, approximately
$261,000 of the aforementioned increases relates to 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 each of the quarters ended March 31, 1999 and March 31, 1998. This
continued provision primarily reflects management's estimate of general
increased risk associated with increases in the Company's commercial loan
portfolios over the past year, considering the increased risk associated with
these loans as compared to residential real estate.
PROVISION FOR INCOME TAXES. The Company's effective income tax rate for the
quarter ended March 31, 1999 was 36.2% compared to 34.5% for the quarter ended
March 31, 1998. 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, a greater portion of income was generated
through non-bank subsidiaries as compared to the first quarter of 1999.
- --------------------------------------------------------------------------------
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 (4.8%)
-200 1.5%
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
The Company uses valuation analysis to provide insight into the potential
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 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 (21.6)%
-200 (16.4)%
This estimated exposure from an economic value of equity, in management's
opinion, does not put the Company at undue interest rate risk given evaluations
of other factors including interest rate simulation results and the overall
interest rate gap position as described below.
Interest rate gap analysis provides a static view of the maturity and repricing
characteristics of the on-balance sheet and off-balance sheet positions. The
interest rate gap analysis is prepared by scheduling all assets, liabilities and
off-balance sheet positions according to scheduled repricing or maturity.
Interest rate gap analysis can be viewed as a short-hand complement to
simulation and valuation analysis.
The Company's limits on interest rate risk specify that rate sensitive assets be
maintained at at least 40% of rate sensitive liabilities at the cumulative
1-year gap, as presented on a basis consistent with methods prescribed by
generally accepted accounting principles. As of March 31, 1999, 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 that the
Company currently originates or purchases for the Company's own portfolio are
primarily 1-year, 3-year and 5-year adjustable rate mortgages and shorter term
(generally 15-year or seasoned 30-year) fixed rate mortgages. Residential
mortgage loans currently originated by the Company are primarily sold in the
secondary market.
The Company also emphasizes loans with terms to maturity or repricing of 3 years
or less, such as certain adjustable rate residential mortgage loans, commercial
mortgages, business loans, residential construction loans, second mortgages and
home equity loans.
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
Management desires to expand its interest earning asset base in future periods
primarily through growth in the Company's loan portfolio. Loans comprised
approximately 64.5% of the average interest earning assets for the first three
months of 1999. In the future, the Company intends to continue to be competitive
in the residential mortgage market but plans to place greater emphasis on
consumer and commercial loans. The Company also has been, and expects to remain,
active in pursuing wholesale opportunities to purchase loans. During the first
quarter of 1999 and 1998, the Company acquired approximately $25,800,000 and
$26,000,000, 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
investments and as an overall asset/liability tool. These securities have been
highly liquid given current levels of prepayments in the underlying mortgage
pools and, as a result, have provided the Company with greater reinvestment
flexibility.
The level of the Company's liquid assets and the mix of its investments may
vary, depending upon management's judgment as to market trends, the quality of
specific investment opportunities and the relative attractiveness of their
maturities and yields. Management has been aggressively promoting the Company's
core deposit products since the 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
$181,752,000 at March 31, 1999 compared to $177,128,000 at December 31, 1998.
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.
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
The following table sets forth maturity and repricing information relating to
interest sensitive assets and liabilities at March 31, 1999. The balance of such
accounts has been allocated among the various periods based upon the terms and
repricing intervals of the particular assets and liabilities. For example, fixed
rate mortgage loans and mortgage-backed securities, regardless of "available for
sale" classification, are shown in the table in the time periods corresponding
to projected principal amortization computed based on their respective weighted
average maturities and weighted average rates using prepayment data available
from the secondary mortgage market.
Adjustable rate loans and securities are allocated to the period in which the
rates would be next adjusted. The following table does not reflect partial or
full prepayment of certain types of loans and investment securities prior to
scheduled contractual maturity. Additionally, all securities or borrowings which
are callable at the option of the issuer or lender are reflected in the
following table based upon the likelihood of call options being exercised by the
issuer on certain investments or borrowings in a most likely interest rate
environment. Since regular passbook savings and NOW accounts are subject to
immediate withdrawal, such accounts have been included in the "Other Savings
Accounts" category and are assumed to mature within 6 months. This table does
not include non-interest bearing deposits.
While this table presents a cumulative negative gap position in the 6 month to 5
year horizon, the Company considers its earning assets to be more sensitive to
interest rate movements than its liabilities. In general, assets are tied to
increases that are immediately impacted by interest rate movements while deposit
rates are generally driven by market area and demand which tend to be less
sensitive to general interest rate changes. In addition, other savings accounts
and money market accounts are substantially stable core deposits, although
subject to rate changes. A substantial core balance in these type of accounts is
anticipated to be maintained over time.
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
AT MARCH 31, 1999
---------------------------
REPRICING/MATURITY INTERVAL
---------------------------
(1) (2) (3) (4) (5)
Over
0-6 MOS. 6-12 MOS. 1-2 YRS. 2-3 YRS. 3-5 YRS.
------------------------------------------------------------------------
(Dollars in thousands)
Assets subject to interest rate adjustment:
Short-term investments ....................... $ 220 $ -- $ -- $ -- $ --
Bonds and obligations ........................ 24,906 4,314 10,131 2,986 11,721
Mortgage-backed investments .................. 32,537 12,104 16,735 14,533 22,814
Mortgage loans subject to
rate review ................................. 27,576 7,039 19,681 7,492 28,069
Fixed-rate mortgage loans .................... 35,542 25,920 38,309 46,545 62,378
Commercial and other loans ................... 10,355 2,720 1,938 1,481 2,935
--------- --------- --------- ---------
Total .................................... $ 131,136 $ 52,097 $ 86,794 $ 73,037 $ 127,917
--------- --------- --------- ---------
Liabilities subject to interest rate adjustment:
Money market deposit accounts ................ 16,206 -- -- -- --
Savings deposits - term
certificates ................................ 79,458 39,917 32,465 5,876 4,869
Other savings accounts ....................... 145,524 -- -- -- --
Borrowed funds ............................... 91,252 19,000 33,000 8,000 --
--------- --------- --------- ---------
Total .......................................... 332,440 58,917 65,465 13,876 4,869
--------- --------- --------- ---------
Guaranteed preferred beneficial
interest in junior subordinated
debentures ..................................... $ -- $ -- $ -- $ -- $ --
--------- --------- --------- ---------
Excess (deficiency) of rate-
sensitive assets over rate-
sensitive liabilities ......................... $(201,304) $ (6,820) $ 21,329 $ 59,161 $ 123,048
--------- --------- --------- ---------
Cumulative excess (deficiency)
of rate-sensitive assets over
rate sensitive liabilities .................... $(201,304) $(208,124) $(186,795) $(127,634) $ (4,586)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Rate-sensitive assets as a
percent of rate-sensitive
liabilities (1) ............................... 39.4% 46.8% 59.1% 72.9% 99.0%
AT MARCH 31, 1999
REPRICING/MATURITY INTERVAL
(6)
5 YRS. TOTAL
------ ------
Assets subject to interest rate adjustment:
Short-term investments ....................... $ -- $ 220
Bonds and obligations ........................ 2,051 56,109
Mortgage-backed investments .................. 36,164 134,887
Mortgage loans subject to
rate review ................................. -- 89,857
Fixed-rate mortgage loans .................... 44,279 252,973
Commercial and other loans ................... 61 19,490
--------- ---------
Total .................................... $ 82,555 $ 553,536
--------- ---------
Liabilities subject to interest rate adjustment:
Money market deposit accounts ................ -- 16,206
Savings deposits - term
certificates ................................ -- 162,585
Other savings accounts ....................... -- 145,524
Borrowed funds ............................... 30,500 181,752
--------- ---------
Total .......................................... 30,500 506,067
--------- ---------
Guaranteed preferred beneficial
interest in junior subordinated
debentures ..................................... $ 11,953 $ 11,953
--------- ---------
Excess (deficiency) of rate-
sensitive assets over rate-
sensitive liabilities ......................... $ 40,102 $ 35,516
--------- ---------
Cumulative excess (deficiency)
of rate-sensitive assets over
rate sensitive liabilities .................... $ 35,516
---------
---------
Rate-sensitive assets as a
percent of rate-sensitive
liabilities (1) ............................... 106.9%
(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.
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
Payments and prepayments on the Company's loan and mortgage-backed investment
portfolios, sales of fixed rate residential loans, increases in deposits,
borrowed funds and maturities of various investments comprise the Company's
primary sources of liquidity. The Company is also a voluntary member of the FHLB
of Boston and, as such, is entitled to borrow an amount up to the value of its
qualified collateral that has not been pledged to outside sources. Qualified
collateral generally consists of residential first mortgage loans, securities
issued, insured or guaranteed by the U.S. Government or its agencies, and funds
on deposit at the FHLB of Boston. Short-term advances may be used for any sound
business purpose, while long-term advances may be used only for the purpose of
providing funds to finance housing. At March 31, 1999, the Company had
approximately $130,000,000 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, levels of potential problem
loans on the watched asset reports and the impact that they may have on loan
collateral and repayment. Workout approach and financial condition of borrowers
are also key considerations to the evaluation of non-performing loans.
Non-performing assets were $765,000 at March 31, 1999, compared to $731,000 at
December 31, 1998, a increase of $34,000 or 4.7%. The Company's ratio of
delinquent loans to total loans was .19% at March 31, 1999, as compared to .36%
at December 31, 1998. Management believes that while delinquency rates and
non-performing assets remain at relatively low levels at March 31, 1999, it is
likely that at some point in the near future some degree of economic slow down
is likely which in turn may result in future increases in problem assets and
loan loss provisions. Management continues to monitor the overall economic
environment and its potential effects on future credit quality on an ongoing
basis.
At March 31, 1999, the Company had outstanding commitments to originate,
purchase and sell residential mortgage loans in the secondary market amounting
to $2,065,000, $8,680,000 and $988,000 respectively. The Company also has
outstanding commitments to grant advances under existing home
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
equity lines of credit amounting to $11,201,000. Unadvanced commitments under
outstanding commercial and construction loans totaled $8,789,000 as of March 31,
1999. The Company believes it has adequate sources of liquidity to fund these
commitments.
The Company's total stockholders' equity was $33,049,000 or 5.5% of total assets
at March 31, 1999, compared with $33,060,000 or 5.6% of total assets at December
31, 1998. The decrease in total stockholders' equity of approximately $11,000 or
.03% primarily resulted from dividends paid, offset in part by earnings of the
Company and decreases in the market value of available for sale securities, net
of taxes.
The Company issued $12,650,000 of 8.25% Trust Preferred Securities in June 1998.
Under current regulatory guidelines, trust preferred securities are allowed to
represent up to approximately 25% of the Company's Tier 1 capital with any
excess amounts available as Tier 2 capital. As of March 31, 1999, approximately
$10,846,000 of these securities was included in Tier 1.
Bank regulatory authorities have established a capital measurement tool called
"Tier 1" leverage capital. A 4.00% ratio of Tier 1 capital to assets now
constitutes the minimum capital standard for most banking organizations and a
5.00% Tier 1 leverage capital ratio is required for a "well-capitalized"
classification. At March 31, 1999, the Company's Tier 1 leverage capital ratio
was approximately 6.78%. In addition, regulatory authorities have also
implemented risk-based capital guidelines requiring a minimum ratio of Tier 1
capital to risk-weighted assets of 4.00% (6.00% for "well-capitalized") and a
minimum ratio of total capital to risk-weighted assets of 8.00% (10.00% for
"well-capitalized"). At March 31, 1999, the Company's Tier 1 and total
risk-based capital ratios were approximately 12.47% and 13.88%, respectively.
The Company is categorized as "well-capitalized" under the Federal Deposit
Insurance Corporation Improvement Act of 1991 (F.D.I.C.I.A.). The Bank is also
categorized as "well-capitalized" as of March 31, 1999.
Impact of the Year 2000
The Year 2000 problem, which is common to most companies, concerns the inability
of information systems, primarily (but not exclusively) computer software
programs, to properly recognize and process date-sensitive information as the
Year 2000 approaches. The following constitutes the Company's Year 2000
readiness disclosure under the Year 2000 Information and Readiness Disclosure
Act.
The mission critical information systems of the Company are generally processed
in-house using programs or software provided by third party vendors. Thus, the
direct effort to correct Year 2000 issues will generally be undertaken by larger
companies outside of the Company's control. The Company believes that it will
bring its mission critical systems into compliance with Year 2000 generally
through software upgrades and releases, covered primarily through pre-existing
maintenance contracts on such software or, for some limited exceptions, through
the acquisition and installation of compliant alternative solutions.
Bank regulators have recently issued additional guidance under which they are
assessing Year 2000 readiness. The failure of a financial institution, such as
the Company, to address deficiencies in the Year 2000 management process may
result in enforcement actions which could have a material adverse effect on such
institution, result in the imposition of civil money penalties or result in the
delay (or receipt of
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
an unfavorable or critical evaluation of management of a financial institution
in connection with regulatory review) of applications seeking to expand the
institutions activities or to acquire other entities.
The Company has had a Year 2000 Task Force (the "Task Force") comprised of
middle and senior management personnel starting in 1997. The managers on this
Task Force represent all operating areas of the Company including those who have
limited responsibilities for internal system applications but may have Year 2000
exposure resulting from vendor or correspondent relationships. A formal Year
2000 Action Plan has been developed and was approved by the Board of Directors
in 1997. The Task Force has had regularly scheduled monthly meetings since its
formation with bi-weekly meetings since March 1998 and provides updates to the
full Board of Directors on a monthly basis. The Company also established a Year
2000 Committee in June 1998 comprised of the Chief Executive Officer, Chief
Operations Officer, Director of Management Information Systems and three outside
Directors of the Company. This group has reviewed all Year 2000 plans and the
Company's progress against the detailed plans and objectives established in the
Year 2000 Action Plan. This Committee meets quarterly. The Task Force has
completed an assessment, identifying mission critical systems, and has initiated
formal communications with all third party vendors, including correspondent
financial institutions, to determine the compliance status of all systems
utilized by the Company. Mission critical systems include hardware, software,
program interfaces, operating systems and network. Based upon the results of the
assessment, the Company did not determine a need to replace significant portions
of existing hardware or software systems.
The Company's plan to address the Year 2000 issue was developed along the
five-phase project management process outlined in the Federal Financial
Institutions Examination Council (FFIEC) Year 2000 statement of May 5, 1997 ((i)
awareness; (ii) assessment; (iii) renovation; (iv) validation; and (v)
implementation). The awareness phase has generally been completed. The
assessment phase has consisted of assessing and documenting the Company's
business risk, information systems, and third party vendors, including those who
are not software and hardware or operating system providers.
This phase also included an assessment of the Company's exposure to additional
credit risk as a result of Year 2000 issues with its customers, particularly for
commercial and commercial real estate loans and also for large depositors. At
this point in time, after the completion of such assessment, management does not
believe that there is a material risk or exposure in these specific areas to
credit losses or liquidity problems as a result of Year 2000. Although credit
risk associated with Year 2000 appears to be low for the Company based upon
current assessments, it is not possible to fully evaluate the true magnitude of
increased credit risk associated with Year 2000 at this point in time. The
impact that Year 2000 has on borrowers could result in increases in problem
loans and credit losses in future years. Management will continue, however, to
monitor developments in these areas. The overall assessment phase has certain
elements, including impact of reliance upon outside vendors, which are currently
ongoing. The majority of the assessment phase is otherwise complete with no
critical issues noted.
The validation phase, which includes actual testing of software, hardware,
network, telecom and programming applications, is substantially complete. There
have not been any material issues or developments as a result of such testing.
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
The Company is also in the process of developing contingency plans to ensure
that critical operations continue in the event that its information systems or
other vendors are unable to achieve Year 2000 requirements. At this point, the
Company has not identified any mission critical vendors who have missed target
dates or appear to be at material risk of not achieving Year 2000 requirements.
The chief components of the Company's Year 2000 expenses are generally relating
to the costs of acquiring testing systems, independent auditors and consultants
to assist the Task Force and management in assessing the adequacy of its plan,
testing of its systems, and propriety of its conclusions and, in some instances,
minor programming for system interfaces and the purchase of non-mission critical
software replacements which were necessitated as a result of management's Year
2000 risk assessment and/or testing. It is estimated that the Company directly
incurred $150,000 in expenses in 1998 related to Year 2000 and management
conservatively estimates that approximately $100,000 to $150,000 in additional
expenses may be incurred in 1999. Costs of the project, however, are based on
current estimates and actual results could vary significantly from such
estimates once detailed testing and contingency planning is completed.
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 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 - Asset/Liability
Management."
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is a defendant in various legal matters, more of which is believed
by management to be material to the consolidated financial statements.
Item 2. Changes in Securities.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
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 1997 among the Company, the Bank and James P.
McDonough incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 filed
on March 31, 1997.
*(b) Amendment to Amended and Restated Special Termination
Agreement, dated as of July 1, 1997 among the Company, the Bank
and James P. McDonough, incorporated by reference to the
Company's quarterly report on Form 10-Q for the second quarter
of 1997, filed on August 13, 1997.
*10.2 Special Termination Agreement dated as of November 2, 1998 among
the Company, the Bank and Kevin M. Tierney, incorporated by
reference to the Company's quarterly report on Form 10-Q for the
third quarter of 1998, filed on November 12, 1998.
*10.3 Special Termination Agreement dated as of May 28, 1998 among the
Company, the Bank and John R. Sylva, incorporated by reference
to the Company's quarterly report on Form 10-Q for the second
quarter of 1998, filed on August 10, 1998.
*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 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 Appendix A to the Company's
proxy statement (schedule 14A) for its 1998 Annual Meeting,
filed with the Commission on April 13, 1998.
11.1 A statement regarding the computation of earnings per share is
included in Item 8 of this Report.
27.1 Financial Data Schedule, March 31, 1999
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the first quarter of
1999.
- ---------------------------------------------------
* Management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ABINGTON BANCORP, INC.
----------------------
(Company)
Date: May 13, 1999 BY /s/JAMES P. MCDONOUGH
-----------------------------------
James P. McDonough
President and Chief Executive Officer
Date: May 13, 1999 BY /s/ROBERT M. LALLO
-----------------------------------
Robert M. Lallo
Treasurer
(Principal Financial Officer)
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 on Form 10-K
for the year ended December 31, 1996 filed on March 31, 1997.
*(b) Amendment to Amended and Restated Special Termination Agreement,
dated as of July 1, 1997 among the Company, the Bank and James P.
McDonough, incorporated by reference to the Company's quarterly report
on Form 10-Q for the second quarter of 1997, filed on August 13, 1997.
*10.2 Special Termination Agreement dated as of November 2, 1998 among the
Company, the Bank and Kevin M. Tierney, incorporated by reference to the
Company's quarterly report on Form 10-Q for the third quarter of 1998,
filed on November 12, 1998.
*10.3 Special Termination Agreement dated as of May 28, 1998 among the
Company, the Bank and John R. Sylva, incorporated by reference to the
Company's quarterly report on Form 10-Q for the second quarter of 1998,
filed on August 10, 1998.
*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 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 Appendix A to the Company's proxy statement
(schedule 14A) for its 1998 Annual Meeting, filed with the Commission on
April 13, 1998.
11.1 A statement regarding the computation of earnings per share is included
in Item 8 of this Report.
27.1 Financial Data Schedule, March 31, 1999.
- -----------------------------------------------------
* Management contract or compensatory plan or arrangement.