<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
File Nos. 333-52499
333-52499-01
PROSPECTUS
LOGO
1,100,000 PREFERRED SECURITIES
ABINGTON BANCORP CAPITAL TRUST
8.25% CUMULATIVE TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $10 PER PREFERRED SECURITY)
GUARANTEED, AS DESCRIBED HEREIN, BY
ABINGTON BANCORP, INC.
------------------------
$11,000,000 8.25% JUNIOR SUBORDINATED DEBENTURES OF
ABINGTON BANCORP, INC.
------------------------
The 8.25% Cumulative Trust Preferred Securities (the "Preferred
Securities") offered hereby represent preferred undivided beneficial interests
in the assets of Abington Bancorp Capital Trust, a statutory business trust
created under the
laws of the State of Delaware (the "Trust"). Abington Bancorp, Inc., a
Massachusetts corporation (the "Company"), will own all the common securities
(the "Common Securities" and, together with the Preferred Securities, the "Trust
Securities") representing undivided beneficial interests in the assets of the
Trust.
(Continued on next page)
The Preferred Securities have been approved for quotation on the Nasdaq
National Market under the Symbol "ABBKP".
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A BANK
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENTAL AGENCY AND INVOLVE INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC COMMISSION(1) TRUST(2)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Preferred Security................ $10.00 (2) $10.00
- -----------------------------------------------------------------------------------------------------------------
Total(3).............................. $11,000,000 (2) $11,000,000
=================================================================================================================
</TABLE>
(1) The Company and the Trust have agreed to indemnify the Underwriters against
certain liabilities, including certain liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) In view of the fact that the proceeds of the sale of the Preferred
Securities will be invested in the Junior Subordinated Debentures, the
Company, as issuer of the Junior Subordinated Debentures, has agreed to pay
the Underwriters, as compensation, $0.375 per Preferred Security or $412,500
in the aggregate ($474,375 if the over-allotment option is exercised in
full). See "Underwriting." The Company has also agreed to pay the expenses
of the offering estimated to be approximately $276,500.
(3) The Trust has granted the Underwriters a 30-day option to purchase up to a
maximum of 165,000 additional Preferred Securities to cover over-allotments,
if any. If such option is exercised in full the total Price to Public,
Underwriting Commission and Proceeds to Trust will be $12,650,000, $474,375
and $12,650,000, respectively. See "Underwriting."
------------------------
The Preferred Securities are being offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters and
subject to their right to reject orders in whole or in part. It is expected that
delivery of the Preferred Securities will be made on or about June 8, 1998.
TUCKER ANTHONY MCCONNELL, BUDD & DOWNES, INC.
INCORPORATED
The date of this Prospectus is June 3, 1998.
<PAGE> 2
(Continued from the previous page)
State Street Bank and Trust Company is the Property Trustee (as defined
herein) of the Trust. The Trust exists for the purpose of issuing the Preferred
Securities and investing the proceeds thereof in an equivalent amount of 8.25%
Junior Subordinated Debentures (the "Junior Subordinated Debentures") of the
Company. The Junior Subordinated Debentures will mature on June 30, 2029, which
date may be shortened to a date not earlier than June 30, 2003 if certain
conditions are met (including, in the case of shortening the Stated Maturity (as
defined herein), the Company having received prior approval of the Board of
Governors of the Federal Reserve System ("Federal Reserve") to do so if then
required under applicable capital guidelines or policies of the Federal
Reserve). The Preferred Securities will have a preference over the Common
Securities under certain circumstances with respect to cash distributions and
amounts payable on liquidation, redemption or otherwise. See "Description of the
Preferred Securities -- Subordination of the Common Securities."
Holders of Preferred Securities are entitled to receive preferential
cumulative cash distributions, at the annual rate of 8.25% of the liquidation
amount of $10 per Preferred Security (the "Liquidation Amount"), accumulating
from June 8, 1998, the date of original issuance, and payable quarterly in
arrears on the last day of March, June, September and December of each year,
commencing September 30, 1998 (the "Distributions"). The Company has the right,
so long as no Debenture Event of Default (as defined herein) has occurred and is
continuing, to defer payment of interest on the Junior Subordinated Debentures
at any time or from time to time for a period not to exceed 20 consecutive
quarters with respect to each deferral period (each, an "Extension Period");
provided that no Extension Period may extend beyond the Stated Maturity of the
Junior Subordinated Debentures. Upon the termination of any such Extension
Period and the payment of all amounts then due, the Company may elect to begin a
new Extension Period subject to the requirements set forth herein. If interest
payments on the Junior Subordinated Debentures are so deferred, Distributions on
the Preferred Securities will also be deferred, and the Company will not be
permitted, subject to certain exceptions described herein, to declare or pay any
cash distributions with respect to its capital stock or debt securities that
rank pari passu with or junior to the Junior Subordinated Debentures. DURING AN
EXTENSION PERIOD, INTEREST ON THE JUNIOR SUBORDINATED DEBENTURES WILL CONTINUE
TO ACCRUE (AND THE AMOUNT OF DISTRIBUTIONS TO WHICH HOLDERS OF THE PREFERRED
SECURITIES ARE ENTITLED WILL ACCUMULATE) AT THE RATE OF 8.25% PER ANNUM,
COMPOUNDED QUARTERLY, AND HOLDERS OF THE PREFERRED SECURITIES WILL BE REQUIRED
TO INCLUDE INTEREST INCOME IN THEIR GROSS INCOME FOR UNITED STATES FEDERAL
INCOME TAX PURPOSES IN ADVANCE OF RECEIPT OF THE CASH DISTRIBUTIONS WITH RESPECT
TO SUCH DEFERRED INTEREST PAYMENTS. UPON THE OCCURRENCE OF AN EXTENSION PERIOD,
A HOLDER OF PREFERRED SECURITIES THAT DISPOSES OF ITS PREFERRED SECURITIES
BETWEEN RECORD DATES FOR PAYMENTS OF DISTRIBUTIONS (AND CONSEQUENTLY DOES NOT
RECEIVE A DISTRIBUTION FROM THE TRUST FOR THE PERIOD PRIOR TO SUCH DISPOSITION)
WILL NEVERTHELESS BE REQUIRED TO INCLUDE ACCUMULATED BUT UNPAID INTEREST ON THE
JUNIOR SUBORDINATED DEBENTURES THROUGH THE DATE OF DISPOSITION IN INCOME AS
ORDINARY INCOME AND TO ADD SUCH AMOUNT TO ITS ADJUSTED TAX BASIS IN ITS PRO RATA
SHARE OF THE UNDERLYING JUNIOR SUBORDINATED DEBENTURES DEEMED DISPOSED OF. See
"Description of the Junior Subordinated Debentures -- Option to Extend Interest
Payment Period," "Certain Federal Income Tax Consequences -- Potential Extension
of Interest Payment Period and Original Issue Discount" and "-- Disposition of
Preferred Securities."
The Company and the Trust believe that, taken together, the obligations of
the Company under the Guarantee, the Trust Agreement, the Junior Subordinated
Debentures, the Indenture and the Expense Agreement (each as defined herein)
provide, in the aggregate, a full, irrevocable and unconditional guarantee, on a
subordinated basis, of all of the obligations of the Trust under the Preferred
Securities. See "Relationship Among the Preferred Securities, the Junior
Subordinated Debentures and the Guarantee -- Full and Unconditional Guarantee."
The Guarantee of the Company guarantees the payment of Distributions and
payments on liquidation or redemption of the Preferred Securities, but only in
each case to the extent of funds held by the Trust, as described herein. See
"Description of the Guarantee -- General." If the Company does not make interest
payments on the Junior Subordinated Debentures held by the Trust, the Trust will
have insufficient funds to pay Distributions on the Preferred Securities. The
Guarantee does not cover payments of Distributions when the Trust does not have
sufficient funds to pay such Distributions. In such event, a holder of Preferred
Securities may institute a legal proceeding directly against the Company
pursuant to the terms of the Indenture to enforce payments of amounts equal to
such Distributions to such holder. See "Description of
2
<PAGE> 3
the Junior Subordinated Debentures -- Enforcement of Certain Rights by Holders
of the Preferred Securities." The obligations of the Company under the Guarantee
and the Preferred Securities are subordinate and junior in right of payment to
all Senior Debt, Subordinated Debt and Additional Senior Obligations (each as
defined herein) of the Company. The Junior Subordinated Debentures are unsecured
obligations of the Company and are subordinated to all Senior Debt, Subordinated
Debt and Additional Senior Obligations of the Company.
The Preferred Securities are subject to mandatory redemption, in whole or
in part, upon repayment of the Junior Subordinated Debentures at maturity or
their earlier redemption. Subject to Federal Reserve approval, if then required
under applicable capital guidelines or policies of the Federal Reserve, the
Junior Subordinated Debentures are redeemable prior to maturity at the option of
the Company (i) on or after June 30, 2003, in whole at any time or in part from
time to time, or (ii) at any time, in whole (but not in part), within 180 days
following the occurrence of a Tax Event, a Capital Treatment Event or an
Investment Company Event (each as defined herein), in each case at a redemption
price equal to the accumulated and unpaid interest on the Junior Subordinated
Debentures so redeemed to the date fixed for redemption, plus 100% of the
principal amount thereof. See "Description of the Preferred
Securities -- Redemption or Exchange."
The Company intends to take the position that the Junior Subordinated
Debentures will be classified under current law as indebtedness of the Company
for United States federal income tax purposes and accordingly, the Company
intends to treat the interest payable by the Company on the Junior Subordinated
Debentures as deductible for United States federal income tax purposes. There is
no assurance that such position of the Company will not be challenged by the
Internal Revenue Service or, if challenged, that such a challenge will not be
successful. See "Risk Factors -- Proposed Tax Legislation."
The Company has the right at any time to dissolve the Trust, subject to the
Company having received prior approval of the Federal Reserve to do so if then
required under applicable capital guidelines or policies of the Federal Reserve.
In the event of the voluntary or involuntary dissolution of the Trust, after
satisfaction of liabilities to creditors of the Trust as required by applicable
law, the holders of Preferred Securities will be entitled to receive the
Liquidation Amount per Preferred Security, plus accumulated and unpaid
Distributions thereon to the date of payment, which may be in the form of a
Junior Subordinated Debenture having an aggregate principal amount equal to the
aggregate Liquidation Amount of such Preferred Securities (and carrying with it
accrued interest in an amount equal to the accumulated and unpaid Distributions
then due on such Preferred Securities), subject to certain exceptions. See
"Description of the Preferred Securities -- Redemption or Exchange" and
"-- Liquidation Distribution Upon Dissolution."
The Company will provide to the holders of the Preferred Securities
quarterly reports containing unaudited financial statements and annual reports
containing financial statements audited by the Company's independent auditors.
The Company will also furnish the Company's annual reports on Form 10-K and
quarterly reports on Form 10-Q free of charge to holders of the Preferred
Securities who so request in writing addressed to the Clerk of the Company.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE PREFERRED
SECURITIES OFFERED HEREBY, INCLUDING OVER-ALLOTMENTS, STABILIZING TRANSACTIONS,
SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. SUCH TRANSACTIONS, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE PREFERRED
SECURITIES OFFERED HEREBY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE
103 OF REGULATION M. SEE "UNDERWRITING."
3
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ABINGTON BANCORP, INC.
[MAP OF OPERATIONS -- COMPANY TO PROVIDE]
4
<PAGE> 5
SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial Statements
and Notes thereto, appearing elsewhere in this Prospectus or incorporated herein
by reference. The discussion in this Prospectus contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act") and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act") that involve risks and uncertainties. The
Company's actual results and the timing of certain events may differ materially
from the results discussed in the forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in "Risk Factors." As used herein, (i) the "Indenture" means the
Indenture, dated as of June 8, 1998, as amended and supplemented from time to
time, between the Company and State Street Bank and Trust Company, as Debenture
Trustee (the "Debenture Trustee"), relating to the Junior Subordinated
Debentures, (ii) the "Trust Agreement" means the Amended and Restated
Declaration of Trust relating to the Trust among the Company, as Depositor,
State Street Bank and Trust Company, as Property Trustee (the "Property
Trustee"), Wilmington Trust Company, as Delaware Trustee (the "Delaware
Trustee"), and the Administrative Trustees named therein (collectively, with the
Property Trustee and Delaware Trustee, the "Issuer Trustees") and (iii) the
"Guarantee" means the Guarantee Agreement relating to the Preferred Securities
between the Company and State Street Bank and Trust Company, as Guarantee
Trustee (the "Guarantee Trustee").
ABINGTON BANCORP, INC.
Abington Bancorp, Inc. (the "Company"), a Massachusetts corporation, is a
one-bank holding company doing business through a wholly-owned subsidiary,
Abington Savings Bank (the "Bank"). Abington Bancorp, Inc. was re-established 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 Bank operated as a Massachusetts-chartered mutual savings bank from its
incorporation in 1853 until June 1986 when the Bank converted from mutual to
stock form of ownership. From June 1986 to the present, the Bank has operated as
a stock savings bank.
The Bank is a community bank engaged principally in the business of
attracting deposits from the general public, borrowing funds and investing those
deposits and funds. In its investments, the Bank has emphasized various types of
residential and commercial real estate loans, residential construction loans,
consumer loans, and investments in securities. The Bank considers its principal
market area to be the towns in and around Plymouth County, Massachusetts.
The Company has grown to $549.8 million in assets and $333.2 million in
deposits at March 31, 1998 from $347.4 million in assets and $209.9 million in
deposits at December 31, 1993. Deposits are insured by the Bank Insurance Fund
of the Federal Deposit Insurance Corporation ("FDIC") up to FDIC limits
(generally $100,000 per depositor) and by the Depositors Insurance Fund of the
Mutual Savings Central Fund, Inc. (the "Depositors Insurance Fund" or "Central
Fund") for the portion of deposits in excess of that insured by the FDIC.
Acquisitions and branch openings are an important part of the Company's
ongoing strategy of planned growth which will enable the Company to have a
greater regional presence. On June 3, 1994, the Company acquired Hull
Co-Operative Bank by merger. On June 26, 1995, the Company acquired the deposits
and certain assets and other liabilities of the Holbrook branch of The First
National Bank of Boston. Additionally, in August 1997 and April 1998, the
Company opened the first two of three planned de novo supermarket branches, in
Cohasset and Randolph, with a branch in Hanson scheduled to open in the fall of
1998.
The Bank has three wholly-owned subsidiaries: Holt Park Place Development
Corporation and Norroway Pond Development Corporation, which own properties
being marketed for sale, and Abington Securities Corporation, which invests
primarily in United States Government obligations and obligations of related
agencies and equity securities.
5
<PAGE> 6
FINANCIAL SUMMARY
<TABLE>
<CAPTION>
AT OR FOR THE THREE
MONTHS ENDED
MARCH 31, AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets.................. $549,838 $492,058 $531,986 $486,958 $460,492 $421,833 $347,354
Deposits................ 333,210 305,674 324,934 300,445 280,070 246,843 209,911
Stockholders' equity.... 34,584 33,835 36,321 33,546 30,561 28,366 27,869
Pre-tax income.......... 1,733 1,741 7,057 5,672 2,447+ 4,329 4,085
Net income.............. 1,136 1,052 4,378 3,533 1,429+ 2,743 2,529*
Net yield on average
earning assets,
taxable equivalent.... 3.17% 3.50% 3.41% 3.26% 3.30% 3.45% 3.55%
Return on average
equity................ 12.85% 12.39% 12.59% 11.00% 4.68%+ 9.23% 9.33%*
Return on average total
assets................ .85% .86% .87% .74% .33%+ .70% .76%*
</TABLE>
- ---------------
+ Reflects sale in 1995 of approximately $9.2 million of loans, including
approximately $5.7 million of loans that were non-accrual at September 30,
1995, at a price approximately 64% of par. See Note 6 of Notes to Consolidated
Financial Statements in Appendix A to this Prospectus.
* Excludes the favorable impact of a $650,000 adjustment due to a change in
accounting for income taxes.
The Company has sought to consistently increase earnings per share and to
maximize return on equity through a combination of strategies, including:
Growth of Retail Deposit Franchise -- Management has demonstrated over the
past five years its desire and ability to grow the Company's retail deposit
franchise by acquiring other whole institutions or branches, broadening delivery
systems (supermarket branches) and introducing products that are attractive to
retail customers (such as Totally Free Checking, first offered in March 1995),
combined with designing targeted marketing campaigns. The Bank has increased the
number of checking accounts to approximately 31,400 at March 31, 1998 from 7,000
at December 31, 1994. Management currently intends to maintain these core
strategies for retail growth in the future as well as to develop or provide
access to other products and services to best serve the customers in its
community.
Expansion of Business Banking Activities -- Commencing in 1996, the Company
adopted a strategy to become a more active business lender and, as a result, to
achieve a greater diversification of assets on its balance sheet. Commercial and
commercial real estate loans are generally funded through deposit growth and/or
through runoff from the Company's investment portfolio. Since commercial and
commercial real estate loans typically carry a higher yield than investment
securities, it is anticipated that growth in these portfolios will enhance
overall levels of profitability. The Company's commercial and commercial real
estate portfolios totaled $49.4 million at March 31, 1998, compared to $29.2
million at December 31, 1996. While competition for good business credits has
intensified over the past six to 18 months, management believes that there is
still an opportunity to grow this aspect of the Company's franchise by providing
high-quality service to the small- to medium-sized businesses located in the
Company's market area.
Efficient Capital Management -- The Company has made progress in providing
a more attractive return on equity over the past few years primarily as a result
of growth of the Company's loan and deposit portfolios, increases in customer
service fees and controlled growth of non-interest expenses. Additionally, in
each of 1997 and 1998, the Company's Board of Directors authorized the Company
to repurchase shares of its outstanding common stock from time to time at
prevailing market prices, up to a maximum of 10% of the shares outstanding in
each year (approximately 722,000 shares in the aggregate). See Note 19 of Notes
to Consolidated Financial Statements. As of May 5, 1998, the Company had
repurchased approximately 309,000 shares in total under the repurchase program
at a cost of approximately $5,181,000. The Company expects that its stock
repurchase programs will contribute to enhanced return on equity.
6
<PAGE> 7
Strategic Acquisitions -- The Company will continue to consider
opportunities for expansion through selective acquisitions as a means for
increasing market penetration, providing diversified financial service, and
achieving greater economies of scale. Since 1993, the Company has acquired two
branches with total deposits at time of purchase of approximately $49.3 million.
The Company's technology, operations and product offerings are also being
evaluated in connection with the assessment of growth opportunities.
The principal executive office of the Company is located at 536 Washington
Street, Abington, Massachusetts 02351 and its telephone number is (781)
982-3200.
ABINGTON BANCORP CAPITAL TRUST
The Trust is a statutory business trust formed under Delaware law pursuant
to (i) a trust agreement, dated as of May 7, 1998, executed by the Company, as
depositor, and the trustees of the Trust (together with the Property Trustee,
the "Trustees"), and (ii) a certificate of trust filed with the Secretary of
State of the State of Delaware on May 7, 1998. The initial trust agreement will
be amended and restated in its entirety (as so amended and restated, the "Trust
Agreement") substantially in the form filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. The Trust Agreement will be
qualified as an indenture under the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). Upon issuance of the Preferred Securities, the
purchasers thereof will own all of the Preferred Securities. The Company will
acquire all of the Common Securities, which will represent an aggregate
liquidation amount equal to at least 3% of the total capital of the Trust. The
Common Securities will rank pari passu, and payments will be made thereon pro
rata, with the Preferred Securities, except that upon the occurrence and during
the continuance of an Event of Default (as defined herein) under the Trust
Agreement resulting from a Debenture Event of Default, the rights of the Company
as holder of the Common Securities to payment in respect of Distributions and
payments upon liquidation, redemption or otherwise will be subordinated to the
rights of the holders of the Preferred Securities. See "Description of the
Preferred Securities -- Subordination of Common Securities." The Trust exists
for the exclusive purposes of (i) issuing the Trust Securities representing
undivided beneficial interests in the assets of the Trust, (ii) investing the
gross proceeds of the Trust Securities in the Junior Subordinated Debentures
issued by the Company, and (iii) engaging in only those other activities
necessary, advisable, or incidental thereto. The Junior Subordinated Debentures
will be the only assets of the Trust and payments under the Junior Subordinated
Debentures will be the only revenue of the Trust. The Trust has a term of 55
years, but may dissolve earlier as provided in the Trust Agreement. The
principal executive office of the Trust is c/o Abington Bancorp, Inc., 536
Washington Street, Abington, Massachusetts 02351, and its telephone number is
(781) 982-3200.
7
<PAGE> 8
THE OFFERING
Securities Offered............ 1,100,000 Preferred Securities having a
Liquidation Amount of $10 per Preferred
Security. The Preferred Securities represent
preferred undivided beneficial interests in the
assets of the Trust, which will consist solely
of the Junior Subordinated Debentures and
payments thereunder. The Trust has granted the
Underwriters an option, exercisable within 30
days after the date of the Offering, to
purchase up to an additional 165,000 Preferred
Securities at the initial offering price,
solely to cover over-allotments, if any.
Offering Price................ $10 per Preferred Security (Liquidation Amount
$10).
Distributions................. The Distributions payable on each Preferred
Security will be fixed at a rate per annum of
8.25% of the Liquidation Amount of $10 per
Preferred Security, will be cumulative, will
accumulate from June 8, 1998, the date of
original issuance of the Preferred Securities,
and will be payable quarterly in arrears, on
March 31, June 30, September 30 and December 31
of each year, commencing September 30, 1998.
See "Description of the Preferred
Securities -- Distributions -- Payment of
Distributions."
Junior Subordinated
Debentures.................... The Trust will invest the proceeds from the
issuance of the Preferred Securities and Common
Securities in an equivalent amount of 8.25%
Junior Subordinated Debentures of the Company.
The Junior Subordinated Debentures will mature
on June 30, 2029. The Junior Subordinated
Debentures will rank subordinate and junior in
right of payment to all Senior Debt and
Subordinated Debt of the Company. In addition,
the Company's obligations under the Junior
Subordinated Debentures will be structurally
subordinated to all existing and future
liabilities and obligations of its
subsidiaries.
Option to Extend Interest
Payment Period.............. The Company has the right, at any time, so long
as no Debenture Event of Default has occurred
and is continuing, to defer payments of
interest on the Junior Subordinated Debentures
for a period not exceeding 20 consecutive
quarters; provided, that no Extension Period
may extend beyond the Stated Maturity of the
Junior Subordinated Debentures. As a
consequence of the extension by the Company of
the interest payment period, quarterly
Distributions on the Preferred Securities will
be deferred (though such Distributions will
continue to accumulate with interest thereon
compounded quarterly, since interest will
continue to accrue and compound on the Junior
Subordinated Debentures) during any such
Extension Period. During an Extension Period,
the Company will be prohibited, subject to
certain exceptions described herein, from
declaring or paying any cash distributions with
respect to its capital stock or debt securities
that rank pari passu with or junior to the
Junior Subordinated Debentures. Upon the
termination of any Extension Period and the
payment of all amounts then due, the Company
may commence a new Extension Period, subject to
the foregoing requirements. See "Description of
the Preferred
Securities -- Distributions -- Extension
Period" and "Description of the Junior
Subordinated Debentures -- Option to Extend
Interest Pay-
8
<PAGE> 9
ment Period." Should an Extension Period occur,
holders of Preferred Securities will be
required to include deferred interest income in
their gross income for United States federal
income tax purposes in advance of receipt of
the cash distributions with respect to such
deferred interest payments. See "Certain
Federal Income Tax Consequences -- Potential
Extension of Interest Payment Period and
Original Issue Discount."
Redemption.................... The Preferred Securities are subject to
mandatory redemption, in whole or in part, upon
repayment of the Junior Subordinated Debentures
at maturity or their earlier redemption.
Subject to Federal Reserve approval, if then
required under applicable capital guidelines or
policies of the Federal Reserve, the Junior
Subordinated Debentures are redeemable prior to
maturity at the option of the Company (i) on or
after June 30, 2003, in whole at any time or in
part from time to time, or (ii) at any time, in
whole (but not in part), within 180 days
following the occurrence of a Tax Event, a
Capital Treatment Event or an Investment
Company Event, in each case at a redemption
price equal to 100% of the principal amount of
the Junior Subordinated Debentures, together
with any accrued but unpaid interest on the
Junior Subordinated Debentures to the date
fixed for redemption. See "Description of the
Junior Subordinated Debentures -- Redemption or
Exchange."
Ranking....................... The Preferred Securities will rank pari passu,
and payments thereon will be made pro rata,
with the Common Securities except as described
under "Description of the Preferred
Securities -- Subordination of the Common
Securities." The Junior Subordinated Debentures
will rank pari passu with all other Junior
Subordinated Debentures (if any) issued by the
Company (the "Other Debentures"), which are
issued and sold (if at all) to other trusts
established by the Company (if any), in each
case similar to the Trust ("Other Trusts"), and
will constitute unsecured obligations of the
Company and will rank subordinate and junior in
right of payment to all Senior Indebtedness to
the extent and in the manner set forth in the
Indenture. See "Description of the Junior
Subordinated Debentures." The Guarantee will
rank pari passu with all other guarantees (if
any) issued by the Company with respect to
Preferred Securities (if any) issued by Other
Trusts ("Other Guarantees") and will constitute
an unsecured obligation of the Company and will
rank subordinate and junior in right of payment
to all Senior Indebtedness to the extent and in
the manner set forth in the Guarantee
Agreement. See "Description of the Guarantee."
In addition, because the Company is a holding
company, the Junior Subordinated Debentures and
the Guarantee will be effectively subordinated
to all existing and future liabilities of the
Company's subsidiaries, including the Bank's
deposit liabilities. See "Description of the
Junior Subordinated Debentures --
Subordination."
Distribution of Junior
Subordinated Debentures..... The Company has the right at any time to
dissolve the Trust and cause the Junior
Subordinated Debentures, after satisfaction of
liabilities to creditors of the Trust as
required by applicable law, to
9
<PAGE> 10
be distributed to holders of Preferred
Securities in liquidation of the Trust, subject
to the Company having received prior approval
of the Federal Reserve to do so if then
required under applicable capital guidelines or
policies of the Federal Reserve. See
"Description of the Preferred
Securities -- Redemption or Exchange" and
"Description of the Preferred
Securities -- Liquidation Distribution Upon
Dissolution."
Guarantee..................... The Company has guaranteed the payment of
Distributions and payments on liquidation or
redemption of the Preferred Securities, but
only in each case to the extent of funds held
by the Trust, as described herein. The Company
and the Trust believe that, taken together, the
obligations of the Company under the Guarantee,
the Trust Agreement, the Junior Subordinated
Debentures, the Indenture and the Expense
Agreement provide, in the aggregate, a full,
irrevocable and unconditional guarantee, on a
subordinated basis, of all of the obligations
of the Trust under the Preferred Securities.
The obligations of the Company under the
Guarantee and the Preferred Securities are
subordinate and junior in right of payment to
all Senior Debt, Subordinated Debt and
Additional Senior Obligations of the Company.
If the Company does not make principal or
interest payments on the Junior Subordinated
Debentures, the Trust will not have sufficient
funds to make distributions on the Preferred
Securities. In such event, the Guarantee will
not apply to such Distributions until the Trust
has sufficient funds available therefor. See
"Description of the Guarantee."
Voting Rights................. The holders of the Preferred Securities will
have no voting rights except in limited
circumstances. See "Description of the
Preferred Securities -- Voting Rights;
Amendment of Trust Agreement."
Use of Proceeds............... All of the proceeds from the sale of the Trust
Securities will be invested by the Trust in the
Junior Subordinated Debentures. The Company
intends to use the net proceeds from the sale
of the Junior Subordinated Debentures for
general corporate purposes, including the
repurchase of outstanding equity securities of
the Company, contributions to the Bank to fund
its operations and the financing of one or more
future acquisitions by the Company if and when
suitable opportunities arise. Initially, the
net proceeds may be used to make investments in
investment securities and/or to pay down
outstanding debt. See "Use of Proceeds."
Nasdaq National Market
Symbol........................ The Preferred Securities have been approved for
quotation on the Nasdaq National Market under
the symbol "ABBKP".
10
<PAGE> 11
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS
ENDED MARCH 31, AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------- ---------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED OPERATING RESULTS:
Net interest income.......................... $ 4,035 $ 4,053 $ 16,206 $ 14,815 $ 13,727 $ 12,733 $ 11,289
Provision for loan losses.................... 190 158 630 480 2,233 610 720
--------- --------- --------- --------- --------- --------- ---------
Net interest income after provision for
loan losses.............................. 3,845 3,895 15,576 14,335 11,494 12,123 10,569
Non-interest income.......................... 1,493 1,137 4,986 4,177 2,908 2,461 2,287
Non-interest expenses........................ 3,605 3,291 13,505 12,840 11,955 10,255 8,771
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes and cumulative
effect of accounting change................ 1,733 1,741 7,057 5,672 2,447 4,329 4,085
Provision for income taxes................... 597 689 2,679 2,139 1,018 1,586 1,556
--------- --------- --------- --------- --------- --------- ---------
Income before cumulative effect of accounting
change..................................... 1,136 1,052 4,378 3,533 1,429 2,743 2,529
Cumulative effect of accounting change....... -- -- -- -- -- -- 650
--------- --------- --------- --------- --------- --------- ---------
Net income................................... $ 1,136 $ 1,052 $ 4,378 $ 3,533 $ 1,429 $ 2,743 $ 3,179
========= ========= ========= ========= ========= ========= =========
Weighted average common shares outstanding,
basic...................................... 3,586,000 3,788,000 3,716,000 3,774,000 3,758,000 3,748,000 3,738,000
Weighted average common shares outstanding,
diluted.................................... 3,852,000 4,014,000 3,966,000 3,964,000 3,928,000 3,922,000 3,830,000
Net income per share before cumulative effect
of accounting change, basic(1)............. $ .32 $ .28 $ 1.18 $ .94 $ .38 $ .73 $ .68
Cumulative effect of accounting change....... -- -- -- -- -- -- .17
--------- --------- --------- --------- --------- --------- ---------
Basic earnings per share..................... $ .32 $ .28 $ 1.18 $ .94 $ .38 $ .73 $ .85
========= ========= ========= ========= ========= ========= =========
Net income per share before cumulative effect
of accounting change, diluted.............. $ .30 $ .26 $ 1.10 $ .89 $ .37 $ .70 $ .66
Cumulative effect of accounting change....... -- -- -- -- -- -- .17
--------- --------- --------- --------- --------- --------- ---------
Diluted earnings per share................... $ .30 $ .26 $ 1.10 $ .89 $ .37 $ .70 $ .83
========= ========= ========= ========= ========= ========= =========
Book value per common share.................. $ 9.70 $ 8.93 $ 9.99 $ 8.86 $ 8.11 $ 7.57 $ 7.45
========= ========= ========= ========= ========= ========= =========
Tangible book value per share(6)............. $ 8.82 $ 7.98 $ 9.08 $ 7.89 $ 7.05 $ 6.69 $ 7.23
========= ========= ========= ========= ========= ========= =========
CONSOLIDATED BALANCE SHEET DATA:
Total assets................................. $ 549,838 $ 492,058 $ 531,986 $ 486,958 $ 460,492 $ 421,833 $ 347,354
Total loans, net(2).......................... 341,380 300,137 330,792 298,970 260,585 235,614 199,807
Investment securities(3)..................... 50,406 33,337 47,187 31,950 33,343 28,328 15,915
Mortgage-backed investments.................. 129,637 132,180 126,016 131,184 138,937 133,882 113,052
Deposits..................................... 333,210 305,674 324,934 300,445 280,070 246,843 209,911
Borrowed funds............................... 176,260 147,836 165,910 147,524 145,609 134,155 106,921
Stockholders' equity......................... 34,584 33,835 36,321 33,546 30,561 28,366 27,869
PERFORMANCE RATIOS:
Net yield on average earning assets, taxable
equivalent................................. 3.17% 3.50% 3.41% 3.26% 3.30% 3.45% 3.55%
Average equity to average total assets....... 6.61% 6.96% 6.94% 6.69% 7.00% 7.61% 8.10%
Return on average stockholders' equity....... 12.85% 12.39% 12.59% 11.00% 4.68% 9.23% 11.73%
Return on average total assets............... .85% .86% .87% .74% .33% .70% .95%
Efficiency ratio(4).......................... 65.14% 63.12% 63.65% 66.95% 68.54% 65.43% 60.45%
NON-PERFORMING ASSETS AS A PERCENTAGE OF:
Total loans and real estate owned............ .23% .48% .29% .56% .68% 2.78% 3.84%
Total assets................................. .14% .30% .18% .34% .39% 1.58% 2.26%
ALLOWANCES FOR LOAN LOSSES AS A PERCENTAGE OF
NON-PERFORMING LOANS....................... 466.04% 182.29% 319.78% 154.52% 196.84% 52.67% 38.85%
NET LOAN CHARGE-OFFS AS A PERCENTAGE OF
AVERAGE OUTSTANDING LOANS.................. -- .03% .05% .04% 1.49% .18% .38%
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS
ENDED MARCH 31, AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------- ---------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CAPITAL RATIOS:
Leverage ratio............................... 5.46% 6.27% 6.01% 6.14% 5.77% 6.28% 7.80%
Total risk-based capital ratio............... 11.87% 13.57% 13.02% 13.65% 12.50% 13.53% 15.20%
RATIO OF EARNINGS TO FIXED CHARGES(5)
Including interest on deposits............... 1.32 1.36 1.35 1.29 1.13 1.30 1.33
Excluding interest on deposits............... 1.67 1.81 1.76 1.63 1.28 1.63 1.86
</TABLE>
- ---------------
(1) The Company declared a 2-for-1 stock split in the form of a dividend to
holders of record on November 14, 1997. All share and per-share amounts have
been adjusted to reflect the split.
(2) Total loans include loans held for sale.
(3) Includes Federal Home Loan Bank stock.
(4) Efficiency ratio equals non-interest expenses, exclusive of expenses
associated with other real estate owned, divided by the sum of net interest
income and non-interest income, net of gains or losses associated with other
real estate owned.
(5) For purposes of calculating the ratio of earnings to combined fixed charges,
earnings consist of income before taxes plus interest and rent expense.
Fixed charges consist of interest and rent expense.
(6) Tangible net book value equals stockholders' equity less intangible assets
divided by period ending common shares.
12
<PAGE> 13
RISK FACTORS
Prospective investors should carefully consider, together with the other
information contained and incorporated by reference in this Prospectus, the
following risk factors in evaluating the Company and its business and the Trust
before purchasing the Preferred Securities offered hereby. Prospective investors
should note, in particular, that certain statements contained or incorporated by
reference in this Prospectus, including, without limitation, statements
containing the words "believes," "anticipates," "intends," "expects" and words
of similar import, constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include the following: general economic and business conditions in those
areas in which the Company operates; demographic changes; competition;
fluctuations in interest rates; changes in business strategy or development
plans; changes in governmental regulation; credit quality; the availability of
capital to fund the expansion of the Company's business; and other factors
referenced in this Prospectus or incorporated by reference herein. Given these
uncertainties, prospective investors are cautioned not to place undue reliance
on such forward-looking statements. The Company disclaims any obligation to
update any such factors or to publicly announce the results of any revisions to
any of the forward-looking statements contained or incorporated by reference
herein to reflect future events or developments. The considerations listed below
represent certain important factors the Company believes could cause such
results to differ. These considerations are not intended to represent a complete
list of the general or specific risks that may affect the Company and the Trust.
It should be recognized that other risks may be significant, presently or in the
future, and the risks set forth below may affect the Company and the Trust to a
greater extent than indicated.
RISK FACTORS RELATING TO THE PREFERRED SECURITIES
ABILITY TO MAKE PAYMENTS ON THE PREFERRED SECURITIES AND JUNIOR SUBORDINATED
DEBENTURES
The Company is a legal entity separate and distinct from its subsidiaries,
including the Bank. The ability of the Trust to pay amounts due on the Preferred
Securities is solely dependent upon the Company making payments on the Junior
Subordinated Debentures as and when required. As a holding company without
significant assets other than its equity interest in the Bank, the Company's
ability to pay interest on the Junior Subordinated Debentures to the Trust (and
consequently, the Trust's ability to pay distributions on the Preferred
Securities and the Company's ability to pay its obligations under the Guarantee)
depends primarily on cash and liquid investments of the Company and upon cash
dividends the Company may receive in the future from the Bank. The Bank's
ability to pay dividends to the Company is restricted by Massachusetts state
law, which requires that retained earnings are available to pay such dividends.
At March 31, 1998, the Bank had retained earnings of $34.1 million, of which
approximately $16.3 million were unrestricted and available for dividend
payments to the Company. At March 31, 1998, the Company had cash and liquid
investments of approximately $0.8 million. See "Use of Proceeds."
RANKING OF SUBORDINATED OBLIGATIONS UNDER THE GUARANTEE AND THE JUNIOR
SUBORDINATED DEBENTURES
The obligations of the Company under the Guarantee issued for the benefit
of the holders of Preferred Securities and under the Junior Subordinated
Debentures are unsecured and rank subordinate and junior in right of payment to
all Senior Debt, Subordinated Debt and Additional Senior Obligations of the
Company, whether now existing or hereafter incurred. At March 31, 1998, the
Company had no outstanding Senior Debt, Subordinated Debt or Additional Senior
Obligations. Because the Company is a holding company, the right of the Company
to participate in any distribution of assets of the Bank upon the Bank's
liquidation or reorganization or otherwise (and thus the ability of holders of
the Preferred Securities to benefit indirectly from such distribution) is
subject to the prior claims of creditors of the Bank, except to the extent that
the Company may itself be recognized as a creditor of the Bank. The Junior
Subordinated Debentures, therefore, will be effectively subordinated to all
existing and future liabilities of the Bank and holders of Junior
13
<PAGE> 14
Subordinated Debentures and Preferred Securities should look only to the assets
of the Company for payments on the Junior Subordinated Debentures. Neither the
Indenture, the Guarantee nor the Trust Agreement places any limitation on the
amount of secured or unsecured debt, including Senior Debt, Subordinated Debt
and Additional Senior Obligations, that may be incurred by the Company. See
"Description of the Guarantee -- Status of the Guarantee" and "Description of
the Junior Subordinated Debentures -- Subordination."
The ability of the Trust to pay amounts due on the Preferred Securities is
solely dependent upon the Company making payments on the Junior Subordinated
Debentures as and when required.
OPTION TO EXTEND INTEREST PAYMENT PERIOD; TAX CONSEQUENCES; MARKET PRICE
CONSEQUENCES
The Company has the right under the Indenture, so long as no Debenture
Event of Default has occurred and is continuing, to defer the payment of
interest on the Junior Subordinated Debentures at any time or from time to time
for a period not exceeding 20 consecutive quarters with respect to each
Extension Period; provided that no Extension Period may extend beyond the Stated
Maturity of the Junior Subordinated Debentures. As a consequence of any such
deferral, quarterly Distributions on the Preferred Securities by the Trust will
be deferred (and the amount of Distributions to which holders of the Preferred
Securities are entitled will accumulate additional Distributions thereon at the
rate of 8.25% per annum, compounded quarterly from the relevant payment date for
such Distributions) during any such Extension Period. During any such Extension
Period, the Company may not (i) declare or pay any dividends or distributions
on, or redeem, purchase, acquire, or make a liquidation payment with respect to,
any of the Company's capital stock, (ii) make any payment of principal, interest
or premium, if any, on or repay, repurchase or redeem any debt securities of the
Company that rank pari passu with or junior in interest to the Junior
Subordinated Debentures or make any guarantee payments with respect to any
guarantee by the Company of the debt securities of any subsidiary of the Company
if such guarantee ranks pari passu with or junior in interest to the Junior
Subordinated Debentures (other than payments under the Guarantee), or (iii)
redeem, purchase or acquire less than all of the Junior Subordinated Debentures
or any of the Preferred Securities. Prior to the termination of any such
Extension Period, the Company may further defer the payment of interest;
provided, that no Extension Period may exceed 20 consecutive quarters or extend
beyond the Stated Maturity of the Junior Subordinated Debentures. Upon the
termination of any Extension Period and the payment of all interest then accrued
and unpaid (together with interest thereon at the annual rate of 8.25%
compounded quarterly, to the extent permitted by applicable law), the Company
may elect to begin a new Extension Period, subject to the above requirements.
Subject to the foregoing, there is no limitation on the number of times that the
Company may elect to begin an Extension Period. See "Description of the
Preferred Securities -- Distributions -- Extension Period" and "Description of
the Junior Subordinated Debentures -- Option to Extend Interest Payment Period."
Should an Extension Period occur, each holder of Preferred Securities will
be required to accrue and recognize income (in the form of original issue
discount ("OID")) in respect of its pro rata share of the interest accruing on
the Junior Subordinated Debentures held by the Trust for United States federal
income tax purposes. A holder of Preferred Securities must, as a result, include
such income in gross income for United States federal income tax purposes in
advance of the receipt of cash, and will not receive the cash related to such
income from the Trust if the holder disposes of the Preferred Securities prior
to the record date for the payment of the related Distributions. See "Certain
Federal Income Tax Consequences -- Potential Extension of Interest Payment
Period and Original Issue Discount."
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Junior
Subordinated Debentures. Should the Company elect, however, to exercise such
right in the future, the market price of the Preferred Securities is likely to
be adversely affected. A holder that disposes of its Preferred Securities during
an Extension Period, therefore, might not receive the same return on its
investment as a holder that continues to hold its Preferred Securities. As a
result of the existence of the Company's right to defer interest payments, the
market price of the Preferred Securities may be more volatile than the market
prices of other securities on which original issue discount accrues that are not
subject to such optional deferrals.
14
<PAGE> 15
REDEMPTION DUE TO TAX EVENT, CAPITAL TREATMENT EVENT OR INVESTMENT COMPANY EVENT
The Company has the right to redeem the Junior Subordinated Debentures in
whole (but not in part) within 180 days following the occurrence of a Tax Event,
a Capital Treatment Event or an Investment Company Event (whether occurring
before or after June 30, 2003), and, therefore, cause a mandatory redemption of
the Preferred Securities. The exercise of such right is subject to the Company
having received prior approval of the Federal Reserve to do so if then required
under applicable capital guidelines or policies of the Federal Reserve.
"Tax Event" means the receipt by the Trust of an opinion of counsel
experienced in such matters to the effect that, as a result of any amendment to,
or change (including any announced prospective change) in the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein, or as a result of any official
administrative pronouncement or judicial decision interpreting or applying such
laws or regulations, which amendment or change is effective or which
pronouncement or decision is announced on or after the date of issuance of the
Preferred Securities under the Trust Agreement, there is more than an
insubstantial risk that (i) the Trust is, or will be within 90 days of the date
of such opinion, subject to United States federal income tax with respect to
income received or accrued on the Junior Subordinated Debentures, (ii) interest
payable by the Company on the Junior Subordinated Debentures is not, or, within
90 days of such opinion, will not be, deductible by the Company, in whole or in
part, for United States federal income tax purposes, or (iii) the Trust is, or
will be within 90 days of the date of the opinion, subject to more than a de
minimis amount of other taxes, duties or other governmental charges. The Company
must request and receive an opinion with regard to such matters within a
reasonable period of time after it becomes aware of the possible occurrence of
any of the events described in clauses (i) through (iii) above. See "-- Risk
Factors Relating to the Preferred Securities -- Proposed Tax Legislation" for a
discussion of certain legislative proposals that, if adopted, could give rise to
a Tax Event, which may permit the Company to cause a redemption of the Preferred
Securities prior to June 30, 2003.
"Capital Treatment Event" means the receipt by the Trust of an opinion of
counsel experienced in such matters to the effect that, as a result of any
amendment to or any change (including any announced prospective change) in the
laws (or any regulations thereunder) of the United States or any political
subdivision thereof or therein, or as a result of any official administrative
pronouncement or judicial decision interpreting or applying such laws or
regulations, which amendment or change is effective or which proposed change,
pronouncement or decision is announced on or after the date of issuance of the
Preferred Securities under the Trust Agreement, there is more than an
insubstantial risk of impairment of the Company's ability to treat the aggregate
Liquidation Amount of the Preferred Securities (or any substantial portion
thereof) as "Tier 1 Capital" (or the then equivalent thereof) for purposes of
the capital adequacy guidelines of the Federal Reserve, as then applicable to
the Company; provided, however, that the inability of the Company to treat all
or any portion of the Liquidation Amount of the Preferred Securities as Tier 1
Capital shall not constitute the basis for a Capital Treatment Event if such
inability results from the Company having cumulative preferred capital in excess
of the amount which may qualify for treatment as Tier 1 Capital under applicable
capital adequacy guidelines of the Federal Reserve.
"Investment Company Event" means the receipt by the Trust of an opinion of
counsel experienced in such matters to the effect that, as a result of the
occurrence of a change in law or regulation or a change in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority, the Trust is or will be considered an
"investment company" that is required to be registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"), which change
becomes effective on or after the date of original issuance of the Preferred
Securities.
SHORTENING OF STATED MATURITY OF JUNIOR SUBORDINATED DEBENTURES
The Company has the right, at any time, to shorten the maturity of the
Junior Subordinated Debentures to a date not earlier than June 30, 2003. The
exercise of such right is subject to the Company having received prior approval
of the Federal Reserve if then required under applicable capital guidelines or
policies of the Federal Reserve. See "Description of the Junior Subordinated
Debentures -- General."
15
<PAGE> 16
RIGHTS UNDER THE GUARANTEE
The Guarantee guarantees to the holders of the Preferred Securities, to the
extent not paid by the Trust, (i) any accumulated and unpaid Distributions
required to be paid on the Preferred Securities, to the extent that the Trust
has funds available therefor at such time, (ii) the Redemption Price (as defined
herein) with respect to any Preferred Securities called for redemption, to the
extent that the Trust has funds available therefor at such time, and (iii) upon
a voluntary or involuntary dissolution, winding-up or liquidation of the Trust
(other than in connection with the distribution of Junior Subordinated
Debentures to the holders of Preferred Securities or a redemption of all of the
Preferred Securities), the lesser of (a) the amount of the Liquidation
Distribution (as defined herein), to the extent the Trust has funds available
therefor at such time, and (b) the amount of assets of the Trust remaining
available for distribution to holders of the Preferred Securities in liquidation
of the Trust. The holders of not less than a majority in Liquidation Amount of
the Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of the Guarantee or to direct the exercise of any trust power conferred
upon the Guarantee Trustee under the Guarantee. Any holder of the Preferred
Securities may institute a legal proceeding directly against the Company to
enforce its rights under the Guarantee without first instituting a legal
proceeding against the Trust, the Guarantee Trustee or any other Person (as
defined in the Guarantee). If the Company were to default on its obligation to
pay amounts payable under the Junior Subordinated Debentures, the Trust would
lack funds for the payment of Distributions or amounts payable on redemption of
the Preferred Securities or otherwise, and, in such event, holders of Preferred
Securities would not be able to rely upon the Guarantee for such amounts. In the
event, however, that a Debenture Event of Default has occurred and is continuing
and such event is attributable to the failure of the Company to pay interest on
or principal of the Junior Subordinated Debentures on the payment date on which
such payment is due and payable, then a holder of Preferred Securities may
institute a legal proceeding directly against the Company for enforcement of
payment to such holder of the principal of or interest on such Junior
Subordinated Debentures having a principal amount equal to the aggregate
Liquidation Amount of the Preferred Securities of such holder (a "Direct
Action"). The exercise by the Company of its right, as described herein, to
defer the payment of interest on the Junior Subordinated Debentures does not
constitute a Debenture Event of Default. In connection with such Direct Action,
the Company will have a right of set-off under the Indenture to the extent of
any payment made by the Company to such holder of Preferred Securities in the
Direct Action. Except as described herein, holders of Preferred Securities will
not be able to exercise directly any other remedy available to the holders of
the Junior Subordinated Debentures or assert directly any other rights in
respect of the Junior Subordinated Debentures. See "Description of the Junior
Subordinated Debentures -- Enforcement of Certain Rights by Holders of Preferred
Securities," "Description of the Junior Subordinated Debentures -- Debenture
Events of Default" and "Description of the Guarantee." The Trust Agreement
provides that each holder of Preferred Securities by acceptance thereof agrees
to the provisions of the Guarantee and the Indenture.
NO VOTING RIGHTS EXCEPT IN LIMITED CIRCUMSTANCES
Holders of Preferred Securities will have no voting rights except in
limited circumstances relating only to the modification of the Preferred
Securities and the exercise of the rights of the Trust as holder of the Junior
Subordinated Debentures and the Guarantee. Holders of Preferred Securities will
not be entitled to vote to appoint, remove or replace the Property Trustee or
the Delaware Trustee, as such voting rights are vested exclusively in the holder
of the Common Securities (except upon the occurrence of certain events described
herein). The Property Trustee, the Administrative Trustees and the Company may
amend the Trust Agreement without the consent of holders of Preferred Securities
to ensure that the Trust will be classified for United States federal income tax
purposes as a grantor trust even if such action adversely affects the interests
of such holders. See "Description of the Preferred Securities -- Voting Rights;
Amendment of Trust Agreement" and "Description of the Preferred
Securities -- Removal of the Trust Trustees."
16
<PAGE> 17
PROPOSED TAX LEGISLATION
In both 1996 and 1997 legislation was proposed that would, if enacted, have
adversely affected the tax treatment of the Preferred Securities. On March 19,
1996, President Clinton proposed certain tax law changes (the "1996 Proposed
Legislation") that would, among other things, generally deny corporate issuers a
deduction for interest in respect of certain debt obligations having a maximum
term in excess of 20 years and not shown as indebtedness on the issuer's
applicable consolidated balance sheet. Neither the 1996 Proposed Legislation or
similar legislation was enacted during the 104th Congress. On February 6, 1997,
President Clinton proposed in the administration's fiscal year 1998 budget
certain tax law changes (the "Administration's 1997 Tax Proposals") that would,
among other things, generally deny corporate issuers a deduction for interest or
OID in respect of certain debt obligations having a maximum term in excess of 15
years and not shown as indebtedness on the issuer's applicable consolidated
balance sheet. Neither the Administration's 1997 Tax Proposals nor similar
legislation was enacted by the 105th Congress. There can be no assurance,
however, that legislation enacted after the date hereof will not adversely
affect the ability of the Company to deduct the interest payable on the Junior
Subordinated Debentures or otherwise give rise to a Tax Event.
REDEMPTION; EXCHANGE OF PREFERRED SECURITIES FOR JUNIOR SUBORDINATED DEBENTURES
The Company has the right at any time to dissolve the Trust and cause the
Junior Subordinated Debentures, after satisfaction of liabilities to creditors
of the Trust, to be distributed to the holders of the Preferred Securities in
exchange therefor in liquidation of the Trust. The exercise of such right is
subject to the Company having received prior approval of the Federal Reserve if
then required under applicable capital guidelines or policies of the Federal
Reserve. The Company will have the right, in certain circumstances, to redeem
the Junior Subordinated Debentures in whole or in part, in lieu of a
distribution of the Junior Subordinated Debentures by the Trust, in which event
the Trust will redeem the Trust Securities on a pro rata basis to the same
extent as the Junior Subordinated Debentures are redeemed by the Company. Any
such distribution or redemption prior to the Stated Maturity will be subject to
prior approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve. See "Description of the Preferred
Securities -- Redemption or Exchange -- Tax Event Redemption, Capital Treatment
Event Redemption or Investment Company Event Redemption."
Under current United States federal income tax law, a distribution of
Junior Subordinated Debentures upon the dissolution of the Trust would not be a
taxable event to holders of the Preferred Securities. If, however, the Trust is
characterized as an association taxable as a corporation at the time of the
dissolution of the Trust, the distribution of the Junior Subordinated Debentures
may constitute a taxable event to holders of Preferred Securities. Moreover,
upon occurrence of a Tax Event, a dissolution of the Trust in which holders of
the Preferred Securities receive cash may be a taxable event to such holders.
See "Certain Federal Income Tax Consequences -- Receipt of Junior Subordinated
Debentures or Cash Upon Liquidation of the Trust."
There can be no assurance as to the market prices for the Preferred
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for Preferred Securities upon a dissolution or liquidation of the
Trust. The Preferred Securities or the Junior Subordinated Debentures may trade
at a discount to the price that the investor paid to purchase the Preferred
Securities offered hereby. Because holders of Preferred Securities may receive
Junior Subordinated Debentures, prospective purchasers of Preferred Securities
are also making an investment decision with regard to the Junior Subordinated
Debentures and should carefully review all the information regarding the Junior
Subordinated Debentures contained herein.
If the Junior Subordinated Debentures are distributed to the holders of
Preferred Securities upon the liquidation of the Trust, the Company will use its
best efforts to list the Junior Subordinated Debentures on the Nasdaq National
Market or such stock exchanges, if any, on which the Preferred Securities are
then listed.
LIMITED COVENANTS
The covenants in the Indenture are limited, and there are no covenants
relating to the company in the Trust Agreement. As a result, neither the
Indenture nor the Trust Agreement protects holders of Junior Subordinated
Debentures, or Preferred Securities, respectively, in the event of a material
adverse change in
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<PAGE> 18
the Company's financial condition or results of operations or limits the ability
of the Company or any subsidiary to incur additional indebtedness. Therefore,
the provisions of these governing instruments should not be considered a
significant factor in evaluating whether the Company will be able to comply with
its obligations under the Junior Subordinated Debentures or the Guarantee.
TRADING PRICE; ABSENCE OF PRIOR PUBLIC MARKET FOR THE PREFERRED SECURITIES
The Preferred Securities may trade at a price that does not accurately
reflect the value of accrued but unpaid interest (or OID if the Junior
Subordinated Debentures are treated as having been issued, or reissued, with
OID) with respect to the underlying Junior Subordinated Debentures. A holder who
disposes of his Preferred Securities will be required to include in ordinary
income (i) any portion of the amount realized that is attributable to such
accrued but unpaid interest to the extent not previously included in income, or
(ii) any amount of OID, in either case, that has accrued on his pro rata share
of the underlying Junior Subordinated Debentures during the taxable year of sale
through the date of disposition. Any such income inclusion will increase the
holder's adjusted tax basis in his Preferred Securities disposed of. To the
extent that the amount realized in the sale is less than the holder's adjusted
tax basis, a holder will recognize a capital loss. Subject to certain limited
exceptions, capital losses cannot be applied to offset ordinary income for
United States federal income tax purposes. See "Certain Federal Income Tax
Consequences -- Disposition of Preferred Securities."
There is no current public market for the Preferred Securities. Although
the Preferred Securities have been approved for quotation on the Nasdaq National
Market, there can be no assurance that an active public market will develop for
the Preferred Securities or that, if such market develops, the market price will
equal or exceed the public offering price set forth on the cover page of this
Prospectus. The public offering price for the Preferred Securities has been
determined through negotiations between the Company and the Underwriters. Prices
for the Preferred Securities will be determined in the marketplace and may be
influenced by many factors, including prevailing interest rates, the liquidity
of the market for the Preferred Securities, investor perceptions of the Company
and general industry and economic conditions.
POSSIBLE ADVERSE EFFECT ON MARKET PRICES
There can be no assurance as to the market prices for the Preferred
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for Preferred Securities if a termination of the Trust were to occur.
Accordingly, the Preferred Securities or the Junior Subordinated Debentures may
trade at a discount from the price that investors paid to purchase the Preferred
Securities offered hereby. Because holders of Preferred Securities may receive
Junior Subordinated Debentures in liquidation of the Trust and because
Distributions are otherwise limited to payments on the Junior Subordinated
Debentures, prospective purchasers of the Preferred Securities are also making
an investment decision with regard to the Junior Subordinated Debentures and
should carefully review all the information regarding the Junior Subordinated
Debentures contained herein. See "Description of the Junior Subordinated
Debentures."
PREFERRED SECURITIES ARE NOT INSURED
The Preferred Securities are not insured by the Bank Insurance Fund (the
"BIF") or the Savings Association Insurance Fund (the "SAIF") of the Federal
Deposit Insurance Corporation (the "FDIC"), by the Depositors Insurance Fund
("DIF") of the Mutual Savings Central Fund, Inc., or by any other governmental
agency.
RISK FACTORS RELATING TO THE COMPANY AND ITS INDUSTRY
SENSITIVITY TO FLUCTUATIONS IN INTEREST RATES
The Company's profitability, like that of most similarly situated financial
institutions, is dependent to a large extent upon the Bank's net interest
income, which is the difference between its interest income on interest-earning
assets, such as loans and investments, and its interest expense on
interest-bearing liabilities,
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<PAGE> 19
such as deposits and borrowings. Accordingly, the Company's results of
operations and financial condition are largely dependent on movements in market
interest rates and its ability to manage its assets in response to such
movements. The difference between the amount of the total interest-earning
assets and interest-bearing liabilities which reprice within a given time period
could have a negative effect on the Bank's net interest income depending on
whether such difference was positive or negative and the direction of movement
of interest rates.
Increases in interest rates may reduce demand for loans and, thus, the
amount of loan and commitment fees. In addition, fluctuations in interest rates
may also result in disintermediation, which is the flow of funds away from
depository institutions into direct investments which pay a higher rate of
return, and may affect the value of the Company's investment securities and
other interest earning assets. Given that the Bank's assets consist of a
substantial number of loans with interest rates which change in accordance with
changes in prevailing market rates, if interest rates rise sharply, many of the
Bank's borrowers would be required to make higher interest payments on their
loans. Thus, increases in interest rates may cause the Bank to experience an
increase in delinquent loans and defaults to the extent that borrowers are
unable to meet their increased debt servicing obligations. In addition, the Bank
has a substantial portfolio of fixed-rate loans that may be prepaid without
significant penalty, so that customers might prepay or refinance them in a
period of declining interest rates. That would alter the Bank's asset-liability
gap position and ultimately reduce the rates earned on those assets, as cash
flows from loan repayments would be re-invested at lower rates.
LENDING RISKS -- CREDIT QUALITY
A central focus of the Company's and the Bank's strategy is the continued
development and growth of a diversified loan portfolio, with emphasis on
residential real estate, commercial real estate, commercial loans, and second
mortgage and home equity loans. Certain risks are inherent in the lending
function, including a borrower's inability to pay, insufficient collateral
coverage and changes in interest rates. Repayment risk on commercial loans is
significantly affected by changing economic conditions in a particular
geographical area, business or industry which could impair future operating
performance. Risks associated with real estate loans and general business loans
include changes in general economic conditions which may affect the borrower's
ability to repay as well as underlying collateral values. Installment and other
consumer loans are subject to repayment risk.
Commercial real estate and multi-family residential loans are generally
viewed in the banking community as exposing the lender to greater credit risk
than 1-4 family residential real estate loans and typically involve higher loan
principal amounts. At March 31, 1998, the Bank's multi-family residential and
commercial real estate portfolios totaled $41.4 million, or 12.0% of total loans
and loans held for sale. Of that amount, less than 1.5% consisted of
multi-family residential loans.
The Bank currently originates loans secured by commercial real estate
properties. The Bank attempts to offset the risks associated with commercial
real estate lending by primarily lending to individuals who have proven
management experience and who will be actively involved in the management of the
property, and by making such loans with lower loan-to-value ratios than 1-4
family residential real estate loans. Economic events and government
regulations, which are outside the control of the borrower or lender, could
affect the value of the security for such loans or the future cash flow of the
affected properties.
At March 31, 1998, the Bank had $60,000 non-performing commercial real
estate and multi-family residential real estate loans. For the twelve months
ended December 31, 1997 and the three months ended March 31, 1998, the Bank
experienced charge-offs of $20,000 and $0, respectively, on commercial real
estate loans and multi-family residential real estate loans.
At March 31, 1998, 75.0% of the Bank's total loans and loans held for sale
were secured by first mortgages on 1-4 family residences, of which 27.6% were
adjustable rate mortgages ("ARMs"). Generally, ARMs pose credit risks different
from the risks inherent in fixed-rate loans because when interest rates rise the
borrower's payments rise, thereby increasing the potential for default. However,
long-term fixed-rate loans expose the Bank to higher interest-rate risk.
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<PAGE> 20
ALLOWANCE FOR LOAN LOSSES
The Bank has established an allowance for loan losses in accordance with
generally accepted accounting principles. The Company believes that the
allowance is adequate. Nevertheless, future additions to the allowance in the
form of the provision for loan losses may be necessary due to changes in
economic conditions and growth of the Bank's loan portfolio. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. An increase in the
Bank's provision for loan losses would negatively affect the Company's earnings.
COMPETITION
The Bank faces significant competition both in generating loans and in
attracting deposits. The eastern Massachusetts area is a highly competitive
market. The Bank faces direct competition from a significant number of financial
institutions operating in its market area, many with a state-wide or regional
presence and, in some cases, a national presence. Many of these financial
institutions are significantly larger and have greater financial resources than
the Bank. The Bank's competition for loans comes principally from commercial
banks, savings banks, mortgage banking companies, credit unions and insurance
companies. The Bank faces competition for deposits from savings and commercial
banks and credit unions. In addition, the Bank faces increasing competition for
deposits from non-bank institutions such as brokerage firms and insurance
companies in such instruments as short-term money market funds, corporate and
government securities funds, mutual funds and annuities. Competition may also
increase as a result of the lifting of restrictions on the interstate operations
of financial institutions.
SENSITIVITY TO LOCAL ECONOMY
Prevailing economic conditions, as well as government policies and
regulations concerning, among other things, monetary and fiscal affairs,
significantly affect the operations of financial institutions such as the Bank.
The New England region of the United States, including southeastern
Massachusetts (the Bank's primary market area) experienced a significant
economic decline which began in 1988 and outlasted the national recession. This
decline adversely affected employment, the real estate markets and the banking
industry in the Bank's market area. Any deterioration of economic conditions or
real estate markets in the Bank's market area could adversely affect the
financial condition and results of operations of the Bank in the future.
ECONOMIC CONDITIONS AND MONETARY POLICIES
Conditions beyond the Company's control may have a significant impact on
changes in net interest income from one period to another. Examples of such
conditions could include: (i) the strength of credit demands by customers; (ii)
fiscal and debt management policies of the federal government, including changes
in tax laws; (iii) the Federal Reserve's monetary policy, including the
percentage of deposits that must be held in the form of non-earning cash
reserves; (iv) the introduction and growth of new investment instruments and
transaction accounts by non-bank financial competitors; and (v) changes in rules
and regulations governing the payment of interest on deposit accounts.
LEGISLATIVE AND REGULATORY DEVELOPMENTS
The financial institutions industry is subject to significant regulation
which has materially affected the financial institutions industry in the past
and will do so in the future. Such regulations, which affect the Company on a
daily basis, may be changed at any time, and the interpretation of the relevant
law and regulations are also subject to change by the authorities who examine
the Company and the Bank and interpret those laws and regulations. There can be
no assurance that any present or future changes in the laws or regulations or in
their interpretation will not adversely and materially affect the Company.
POTENTIAL LIABILITY FOR UNDERCAPITALIZED SUBSIDIARY BANK
Under federal law, a bank holding company may be required to guarantee a
capital plan filed by an undercapitalized bank or thrift subsidiary with its
primary regulator. If the subsidiary defaults under the plan,
20
<PAGE> 21
the holding company may be required to contribute to the capital of the
subsidiary bank an amount equal to the lesser of 5% of the bank's assets at the
time it became undercapitalized or the amount necessary to bring the bank into
compliance with applicable capital standards. It is, therefore, possible that
the Company would be required to contribute capital to the Bank or any other
bank it may acquire in the event that the Bank or such other bank becomes
undercapitalized.
YEAR 2000 COMPLIANCE
During 1997 the Company completed an assessment of the majority of its
computer systems to identify the systems that could be affected by the "Year
2000" issue and developed an implementation plan to address the issue. The Year
2000 issue is the result of computer programs being written using two digits
rather than four to define the applicable year. Any of the Company's programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a major system failure or
miscalculations. The Company's various systems generally operate on software
which is provided and maintained by outside vendors, many of whom are larger,
well-established companies who 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 those 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 and also testing applications. The
Company has a Year 2000 Compliance Committee of its Board of Directors, charged
with supervising the plan and reporting to the full Board. There can be no
assurance that the systems of other companies on which the Company's systems
rely also will be converted in a timely manner or that any such failure to
convert by another company would not have an adverse effect on the Company's
systems.
ABINGTON BANCORP, INC.
Abington Bancorp, Inc. (the "Company"), a Massachusetts corporation, is a
one-bank holding company doing business through a wholly-owned subsidiary,
Abington Savings Bank (the "Bank"). Abington Bancorp, Inc. was re-established 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 Bank operated as a Massachusetts-chartered mutual savings bank from its
incorporation in 1853 until June 1986 when the Bank converted from mutual to
stock form of ownership. From June 1986 to the present, the Bank has operated as
a stock savings Bank.
The Bank is a community bank engaged principally in the business of
attracting deposits from the general public, borrowing funds and investing those
deposits and funds. In its investments, the Bank has emphasized various types of
residential and commercial real estate loans, residential construction loans,
consumer loans, and investments in securities. The Bank considers its principal
market area to be the towns in and around Plymouth County, Massachusetts.
The Company has grown to $549.8 million in assets and $333.2 million in
deposits at March 31, 1998 from $347.4 million in assets and $209.9 million in
deposits at December 31, 1993 . Deposits are insured by the Bank Insurance Fund
of the Federal Deposit Insurance Corporation ("FDIC") up to FDIC limits
(generally $100,000 per depositor) and by the Depositors Insurance Fund of the
Mutual Savings Central Fund, Inc. (the "Depositors Insurance Fund" or "Central
Fund") for the portion of deposits in excess of that insured by the FDIC.
On June 3, 1994, the Company acquired Hull Co-Operative Bank by merger. On
June 26, 1995, the Company acquired the deposits and certain assets and other
liabilities of the Holbrook branch of The First National Bank of Boston.
Additionally, in August 1997 and April 1988, the Company also opened the first
two of three planned de novo supermarket branches, in Cohasset and Randolph,
with a branch in Hanson scheduled to open in the fall of 1998. These
acquisitions and branch openings are consistent with the
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<PAGE> 22
Company's ongoing strategy of planned growth which will enable the Company to
have a greater regional presence.
The Bank has three wholly-owned subsidiaries: Holt Park Place Development
Corporation and Norroway Pond Development Corporation, which own properties
being marketed for sale, and Abington Securities Corporation, which invests
primarily in United States Government obligations and obligations of related
agencies and equity securities.
FINANCIAL SUMMARY
<TABLE>
<CAPTION>
AT OR FOR THE THREE
MONTHS ENDED
MARCH 31, AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets................. $549,838 $492,058 $531,986 $486,958 $460,492 $421,833 $347,354
Deposits............... 333,210 305,674 324,934 300,445 280,070 246,843 209,911
Stockholders' equity... 34,584 33,835 36,321 33,546 30,561 28,366 27,869
Pre-tax income......... 1,733 1,741 7,057 5,672 2,447+ 4,329 4,085
Net income............. 1,136 1,052 4,378 3,533 1,429+ 2,743 2,529*
Net yield on average
earning assets,
taxable equivalent... 3.17% 3.50% 3.41% 3.26% 3.30% 3.45% 3.55%
Return on average
equity............... 12.85% 12.39% 12.59% 11.00% 4.68%+ 9.23% 9.33%*
Return on average total
assets............... .85% .86% .87% .74% .33%+ .70% .76%*
</TABLE>
- ---------------
+ Reflects sale in 1995 of approximately $9.2 million of loans, including
approximately $5.7 million of loans that were non-accrual at September 30,
1995, at a price approximately 64% of par. See Note 6 of Notes to Consolidated
Financial Statements in Appendix A to this Prospectus.
* Excludes the favorable impact of a $650,000 adjustment due to a change in
accounting for income taxes.
The Company has sought to consistently increase earnings per share and to
maximize return on equity through a combination of strategies, including:
Growth of Retail Deposit Franchise -- Management has demonstrated over the
past five years its desire and ability to grow the Company's retail deposit
franchise by acquiring other whole institutions or branches, broadening delivery
systems (supermarket branches) and introducing products that are attractive to
retail customers (such as Totally Free Checking, first offered in March 1995),
combined with designing targeted marketing campaigns. The Bank has increased the
number of checking accounts to approximately 31,400 at March 31, 1998 from 7,000
at December 31, 1994. Management currently intends to maintain these core
strategies for retail growth in the future as well as to develop or provide
access to other products and services to best serve the customers in its
community.
Expansion of Business Banking Activities -- Commencing in 1996, the Company
adopted a strategy to become a more active business lender and, as a result, to
achieve a greater diversification of assets on its balance sheet. Commercial and
commercial real estate loans are generally funded through deposit growth and/or
through runoff from the Company's investment portfolio. Since commercial and
commercial real estate loans typically carry a higher yield than investment
securities, it is anticipated that growth in these portfolios will enhance
overall levels of profitability. The Company's commercial and commercial real
estate portfolios totaled $49.4 million at March 31, 1998, compared to $29.2
million at December 31, 1996. While competition for good business credits has
intensified over the past six to 18 months, management believes that there is
still an opportunity to grow this aspect of the Company's franchise by providing
high-quality service to the small- to medium-sized businesses located in the
Company's market area.
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<PAGE> 23
Efficient Capital Management -- The Company has made progress in providing
a more attractive return on equity over the past few years primarily as a result
of growth of the Company's loan and deposit portfolios, increases in customer
service fees and controlled growth of non-interest expenses. Additionally, in
each 1997 and 1998, the Company's Board of Directors authorized the Company to
repurchase its outstanding common stock from time to time at prevailing market
prices, up to a maximum of 10% of the shares outstanding in each year
(approximately 722,000 shares in the aggregate). See Note 19 of Notes to
Consolidated Financial Statements. As of May 5, 1998, the Company had
repurchased approximately 309,000 shares in total under the repurchase program
at a cost of approximately $5,181,000. The Company expects that stock repurchase
programs will contribute to enhance return on equity.
Strategic Acquisitions -- The Company will continue to consider
opportunities for expansion through selective acquisitions as a means for
increasing market penetration, providing diversified financial service, and
achieving greater economies of scale. Since 1993, the Company has acquired two
branches with total deposits at time of purchase of approximately $49.3 million.
The Company's technology, operations and product offerings are also being
evaluated in connection with the assessment of growth opportunities.
The principal executive office of the Company is located at 536 Washington
Street, Abington, Massachusetts 02351 and its telephone number is (781)
982-3200.
MANAGEMENT
The executive officers of the Company and the Bank and the principal
occupation and business experience during at least the last five years for each
are set forth below.
JAMES P. MCDONOUGH has been President and Chief Executive Officer of the
Company since its incorporation on October 15, 1996. Mr. McDonough has also
served as President and Chief Executive Officer of the Bank since August 1991.
Previously, he served as President and Chief Operating Officer of the Bank from
November 1990 to August 1991 and Senior Vice President -- Lending of the Bank
from December 1987 to November 1990. Mr. McDonough was also Vice
President -- Regional Manager of GEM Mortgage Corporation of North America from
1983 to 1987. Mr. McDonough is a graduate of Massasoit Community College and
Boston State College. Mr. McDonough is 47 years old.
EDWARD J. MERRITT has been Executive Vice President of the Bank since
September 1993. He was Treasurer of the Company since its incorporation on
October 15, 1996 until June 1997 and Executive Vice President and Chief
Financial Officer of the Bank from September 1993 until June 1997. Prior to that
date, he served as Senior Vice President and Chief Financial Officer of the Bank
from June 1991 to September 1993 and Treasurer and Chief Financial Officer of
the Bank from July 1986 to June 1991. Previously, he held various positions,
including Senior Accountant and Supervisor, at Wolf & Company of Massachusetts,
P.C., from 1983 to 1986. Mr. Merritt is a graduate of Salem State College and is
a Certified Public Accountant. Mr. Merritt is 38 years old.
MARIO M. BERLINGHIERI has been Senior Vice President -- Business Banking
Division of the Bank since January 29, 1996. Prior to that date, he served as
Program Manager of the Executive Office of Communities & Development for The
Commonwealth of Massachusetts in 1995; Vice President and Senior Risk Manager of
Fleet Bank of Massachusetts in charge of commercial portfolio approval from 1992
to 1994; and Regional Manager -- Boston Small Business Lending for Bank of New
England from 1990 to 1992. Mr. Berlinghieri is a graduate of Suffolk University
with a B.S.B.A. degree in Banking/Finance and an M.B.A. in Business
Administration. Mr. Berlinghieri is 48 years old.
JOHN R. SYLVA was named Senior Vice President -- Consumer Banking of the
Bank in May 1998. Prior to that date, he had been Vice President -- Private
Banking Division and also Senior Vice President -- Community Banking Division
with BayBank from 1985 to 1996. Prior to that he was Senior Vice President and
Marketing Director of BayBank from 1982 to 1985. Mr. Sylva has an MBA from
Suffolk University and an undergraduate degree from Boston College. Mr. Sylva is
49 years old.
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<PAGE> 24
ROBERT M. LALLO has been Treasurer of the Company and Senior Vice
President -- Treasurer and Chief Financial Officer of the Bank since June 1997.
Prior to that date, he served as Vice President and Treasurer since he joined
the Bank in October 1993 until June 1997. Previously, he held various positions,
including Audit Manager, with Arthur Andersen & Co., currently known as Arthur
Andersen LLP, from July 1986 to October 1993. Mr. Lallo is a graduate of Boston
College with degrees in both Accounting and Finance and is a Certified Public
Accountant. Mr. Lallo is 33 years old.
In addition to Mr. McDonough, the Directors of the Company are:
ROBERT J. ARMSTRONG has been President and General Manager of Armstrong
Construction Corporation, a home building firm, since 1952.
BRUCE G. ATWOOD has been Vice President -- Operations and Treasurer of Hyer
Industries, Inc., a manufacturer of industrial scales, since 1978.
WILLIAM F. BORHEK has been President of Wm. F. Borhek Insurance Agency,
Inc., a general insurance agency, since 1964.
RALPH B. CARVER, JR. has been President, Treasurer and a director of
Den-Lea Rental, Inc., a truck leasing company, since 1979.
JOEL S. GELLER is the owner-manager and a director of Abington Liquors
Corp., a retail liquor store.
RODNEY D. HENRIKSON has been Treasurer of Henrikson Realty Corp., a real
estate company, since 1986. He was Treasurer of Henrikson's Dairy, Inc., a food
processing and distribution company, from 1982 through 1984 and President from
1984 through 1986.
A. STANLEY LITTLEFIELD is an attorney in private practice in Rockland,
Massachusetts. He was formerly District Attorney of Plymouth County.
JAY TIMOTHY NOONAN has been with J. P. Noonan Trans., Inc., an interstate
hauler, in a management capacity since 1968 and is currently Chief Financial
Officer. Mr. Noonan was also President of Rourke Coal and Oil Co. from 1960 to
1989.
GORDON N. SANDERSON has been retired since 1991. From 1970 to 1991, he was
Vice President -- Sales of B & W Press, Inc., a specialty printing company.
JAMES J. SLATTERY has been President of J. H. Slattery Insurance Agency,
Inc., Abington, Massachusetts, an independent insurance agency, since 1958.
WAYNE P. SMITH is Treasurer and a director of Suburban Enterprises Inc.,
Abington, Massachusetts, a sales and marketing firm.
ABINGTON BANCORP CAPITAL TRUST
The Trust is a statutory business trust formed under Delaware law pursuant
to (i) a trust agreement, dated as of May 7, 1998, executed by the Company, as
depositor, and the trustees of the Trust, and (ii) a certificate of trust filed
with the Secretary of State of the State of Delaware on May 7, 1998. The initial
trust agreement will be amended and restated in its entirety (as so amended and
restated, the "Trust Agreement") substantially in the form filed as an exhibit
to the Registration Statement of which this Prospectus forms a part. The Trust
Agreement will be qualified as an indenture under the Trust Indenture Act. Upon
issuance of the Preferred Securities, the purchasers thereof will own all of the
Preferred Securities. The Company will acquire all of the Common Securities,
which will represent an aggregate liquidation amount equal to at least 3% of the
total capital of the Trust. The Common Securities will rank pari passu, and
payments will be made thereon pro rata, with the Preferred Securities, except
that upon the occurrence and during the continuance of an Event of Default (as
defined herein) under the Trust Agreement resulting from a Debenture Event of
Default, the rights of the Company as holder of the Common Securities to payment
in respect of Distributions and payments upon liquidation, redemption or
otherwise will be subordinated to the rights of the holders of the Preferred
Securities. See "Description of the Preferred Securities -- Subordination
24
<PAGE> 25
of Common Securities." The Trust exists for the exclusive purposes of (i)
issuing the Trust Securities representing undivided beneficial interests in the
assets of the Trust, (ii) investing the gross proceeds of the Trust Securities
in the Junior Subordinated Debentures issued by the Company, and (iii) engaging
in only those other activities necessary, advisable, or incidental thereto. The
Junior Subordinated Debentures and payments thereunder will be the only assets
of the Trust and payments under the Junior Subordinated Debentures will be the
only revenue of the Trust. The Trust has a term of 55 years, but may dissolve
earlier as provided in the Trust Agreement. The principal executive office of
the Trust is c/o Abington Bancorp, Inc., 536 Washington Street, Abington,
Massachusetts 02351, and its telephone number is (781) 982-3200.
The number of Trustees will, pursuant to the Trust Agreement, initially be
five. Three of the Trustees (the "Administrative Trustees") will be persons who
are employees or officers of, or who are affiliated with, the Company. The
fourth trustee will be a financial institution that is unaffiliated with the
Company, which trustee will serve as institutional trustee under the Trust
Agreement and as indenture trustee for the purposes of compliance with the
provisions of the Trust Indenture Act (the "Property Trustee"). State Street
Bank and Trust Company, a state chartered trust company organized under the laws
of the Commonwealth of Massachusetts, will be the Property Trustee until removed
or replaced by the holder of the Common Securities. For purposes of compliance
with the provisions of the Trust Indenture Act, State Street Bank and Trust
Company will also act as trustee (the "Guarantee Trustee") under the Guarantee
and as Debenture Trustee (as defined herein) under the Indenture. The fifth
trustee will be an entity that maintains its principal place of business in the
State of Delaware (the "Delaware Trustee"). Wilmington Trust Company, a Delaware
banking corporation, will act as Delaware Trustee.
The Property Trustee will hold title to the Junior Subordinated Debentures
for the benefit of the holders of the Trust Securities and in such capacity will
have the power to exercise all rights, powers and privileges under the
Indenture. The Property Trustee will also maintain exclusive control of a
segregated non-interest-bearing bank account (the "Property Account") to hold
all payments made in respect of the Junior Subordinated Debentures for the
benefit of the holders of the Trust Securities. The Property Trustee will make
payments of Distributions and payments on liquidation, redemption and otherwise
to the holders of the Trust Securities out of funds from the Property Account.
The Guarantee Trustee will hold the Guarantee for the benefit of the holders of
the Preferred Securities. The Company, as the holder of all the Common
Securities, will have the right to appoint, remove or replace any Trustee and to
increase or decrease the number of Trustees. The Company will pay all fees and
expenses related to the Trust and the offering of the Trust Securities.
The rights of the holders of the Preferred Securities, including economic
rights, rights to information and voting rights, are set forth in the Trust
Agreement, the Delaware Business Trust Act (the "Trust Act") and the Trust
Indenture Act. See "Description of the Preferred Securities."
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<PAGE> 26
USE OF PROCEEDS
The Trust will use the gross proceeds from the sale of the Preferred
Securities to purchase Junior Subordinated Debentures of the Company. The
Company intends to use the net proceeds of the sale of the Junior Subordinated
Debentures for general corporate purposes, including the repurchase of
outstanding equity securities of the Company, contributions to the Bank to fund
its operations and the financing of one or more future acquisitions by the
Company if and when suitable opportunities arise. Initially, the net proceeds
may be used to make investments in investment securities and/or to pay down
outstanding borrowings from the Federal Home Loan Bank pending its use for the
purposes described above.
The Federal Reserve has approved, subject to certain limitations as to
amount, the use of certain cumulative preferred stock instruments such as the
Preferred Securities as Tier 1 capital for bank holding companies such as the
Company. The Company has elected to issue the Preferred Securities because the
Company expects the Preferred Securities to qualify as Tier 1 capital and the
Distributions payable on the Preferred Securities to be a tax deductible expense
of the Company. The Company expects that, upon completion of the sale of the
Preferred Securities offered hereby (and assuming exercise of the over-allotment
option in full), Preferred Securities having an aggregate Liquidation Amount of
approximately $9.8 million will be eligible to qualify as Tier 1 capital under
the capital guidelines of the Federal Reserve. Preferred Securities representing
an aggregate Liquidation Amount in excess of that amount are expected to be
treated as Tier 2 capital until all or some of that excess is eligible to
qualify as Tier 1 capital under the capital guidelines of the Federal Reserve.
MARKET FOR THE PREFERRED SECURITIES
The Preferred Securities have been approved for quotation on the Nasdaq
National Market under the symbol ABBKP. Although the Underwriters have informed
the Company that they currently intend to make a market in the Preferred
Securities, there can be no assurance that an active and liquid trading market
will develop, or, if developed, that such a market will continue. The offering
price and distribution rate have been determined by negotiations among
representatives of the Company and the Underwriters, and the offering price of
the Preferred Securities may not be indicative of the market price following the
offering. See "Underwriting."
ACCOUNTING TREATMENT
The Trust will be treated, for financial reporting purposes, as a
subsidiary of the Company and, accordingly, the accounts of the Trust will be
included in the consolidated financial statements of the Company. The Preferred
Securities will be presented as a separate category in the consolidated balance
sheet of the Company under the caption "Guaranteed Preferred Beneficial
Interests in the Company's Junior Subordinated Debentures," and appropriate
disclosures about the Preferred Securities, the Guarantee and the Junior
Subordinated Debentures will be included in the notes to consolidated financial
statements. The Company will record Distributions payable on the Preferred
Securities as an expense in the consolidated statements of income for financial
reporting purposes.
All future reports of the Company filed under the Exchange Act will (a)
present the Trust Securities issued by the Trust on the balance sheet as a
separate category item entitled "Guaranteed Preferred Beneficial Interests in
the Company's Junior Subordinated Debentures," (b) include in a footnote to the
financial statements disclosure that the sole assets of the Trust are the Junior
Subordinated Debentures (including the outstanding principal amount, interest
rate and maturity date of such Junior Subordinated Debentures), and (c) include
in an audited footnote to the financial statements disclosure that the Company
owns all the Common Securities of the Trust, and that the back-up obligations,
in the aggregate, constitute a full and unconditional guarantee by the Company
of the obligations of the Trust under the Preferred Securities.
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<PAGE> 27
CAPITALIZATION
The following table sets forth (i) the consolidated capitalization of the
Company at March 31, 1998 and (ii) the consolidated capitalization of the
Company giving effect to the issuance of the Preferred Securities hereby offered
by the Trust and receipt by the Company of the net proceeds from the
corresponding sale of the Junior Subordinated Debentures to the Trust, as if the
sale of the Preferred Securities had been consummated on March 31, 1998 and
assuming the Underwriters' over-allotment option was not exercised.
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------
AS
ACTUAL ADJUSTED
--------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Guaranteed preferred beneficial interests in the Company's
Junior Subordinated Debentures............................ $ 0 $11,000(1)
STOCKHOLDERS' EQUITY:
Serial Preferred stock, par value $0.10 per share;
3,000,000 shares authorized; none issued............... -- --
Common stock, par value $0.10 per share; 12,000,000 shares
authorized; 4,747,000 shares issued and outstanding,
actual and as adjusted................................. 475 475
Additional paid-in capital................................ 21,367 21,367
Retained earnings......................................... 20,458 20,458
Treasury stock at cost.................................... (8,884) (8,884)
Unearned compensation -- ESOP............................. (210) (210)
Other Accumulated Comprehensive Income --
Net unrealized gain on securities available for sale, net
of taxes............................................... 1,378 1,378
------- -------
Total stockholders' equity........................ 34,584 34,584
------- -------
Total capitalization.............................. $34,584 $45,584
======= =======
CAPITAL RATIOS:
Stockholders' equity to total assets...................... 6.29% 6.17%
Leverage-based capital ratio(2)(3)(4)..................... 5.46% 6.98%
Risk-based capital ratios(3)(4):
Tier 1 capital to risk-weighted assets............ 10.97% 13.74%
Total risk-based capital to risk-weighted
assets........................................... 11.87% 15.03%
</TABLE>
- ---------------
(1) In connection with the issuance of the guaranteed preferred beneficial
interests in the Company's Junior Subordinated Debentures, the Company
estimates it will incur expenses of $688,997 (including Underwriters'
compensation of $412,500). The Junior Subordinated Debentures will mature on
June 30, 2029, which date may be shortened to a date not earlier than June
30, 2003, if certain conditions are met.
(2) The leverage ratio is Tier 1 capital divided by average quarterly assets,
after deducting intangible assets and deferred tax assets in excess of
regulatory maximum limits.
(3) The capital ratios, as adjusted, are computed including the total estimated
net proceeds from the sale of the Preferred Securities, in a manner
consistent with Federal Reserve guidelines, and assuming that no proceeds
will be used to pay down outstanding debt.
(4) Federal Reserve guidelines for calculation of Tier 1 capital to
risk-weighted assets limit the amount of cumulative preferred stock and
securities similar to the Preferred Securities which can be included in Tier
1 capital to 25% of total Tier 1 capital.
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<PAGE> 28
DESCRIPTION OF THE PREFERRED SECURITIES
The Preferred Securities will be issued pursuant to the terms of the Trust
Agreement. The Trust Agreement will be qualified as an indenture under the Trust
Indenture Act. The Property Trustee, State Street Bank and Trust Company, will
act as indenture trustee for the Preferred Securities under the Trust Agreement
for purposes of complying with the provisions of the Trust Indenture Act. The
terms of the Preferred Securities will include those stated in the Trust
Agreement and those made part of the Trust Agreement by the Trust Indenture Act.
The following summary of the material terms and provisions of the Preferred
Securities and the Trust Agreement does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the Trust
Agreement, Trust Act, and the Trust Indenture Act. Wherever particular defined
terms of the Trust Agreement are referred to, but not defined herein, such
defined terms are incorporated herein by reference. The form of the Trust
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part.
GENERAL
Pursuant to the terms of the Trust Agreement, the Trustees, on behalf of
the Trust, will issue the Trust Securities. All of the Common Securities will be
owned by the Company. The Preferred Securities will represent preferred
undivided beneficial interests in the assets of the Trust and the holders
thereof will be entitled to a preference over the Common Securities in certain
circumstances with respect to Distributions and amounts payable on redemption or
liquidation, as well as other benefits as described in the Trust Agreement. The
Trust Agreement does not permit the issuance by the Trust of any securities
other than the Trust Securities or the incurrence of any indebtedness by the
Trust.
The Preferred Securities will rank pari passu, and payments will be made
thereon pro rata with the Common Securities, except as described under
"-- Subordination of Common Securities." Legal title to the Junior Subordinated
Debentures will be held by the Property Trustee in trust for the benefit of the
holders of the Trust Securities. The Guarantee executed by the Company for the
benefit of the holders of the Preferred Securities will be a guarantee on a
subordinated basis with respect to the Preferred Securities, but will not
guarantee payment of Distributions or amounts payable on redemption or
liquidation of such Preferred Securities when the Trust does not have funds on
hand available to make such payments. State Street Bank and Trust Company, as
Guarantee Trustee, will hold the Guarantee for the benefit of the holders of the
Preferred Securities. See "Description of the Guarantee."
DISTRIBUTIONS
Payment of Distributions. Distributions on each Preferred Security will be
payable at the annual rate of 8.25% of the stated Liquidation Amount of $10,
payable quarterly in arrears on March 31, June 30, September 30 and December 31
of each year, to the holders of the Preferred Securities on the relevant record
dates (each date on which Distributions are payable in accordance with the
foregoing, a "Distribution Date"). The record date will be the fifteenth day of
the month in which the relevant Distribution Date occurs. Distributions will
accumulate from June 8, 1998, the date of original issuance. The first
Distribution Date for the Preferred Securities will be September 30, 1998. The
amount of Distributions payable for any period will be computed on the basis of
a 360-day year of twelve 30-day months. In the event that any date on which
Distributions are payable on the Preferred Securities is not a Business Day,
then payment of the Distributions payable on such date will be made on the next
succeeding day that is a Business Day (and without any additional Distributions,
interest or other payment in respect of any such delay) with the same force and
effect as if made on the date such payment was originally due and payable.
"Business Day" means any day other than a Saturday or a Sunday, a day on which
banking institutions in the City of Boston are authorized or required by law or
executive order to remain closed or a day on which the corporate trust office of
the Property Trustee or the Debenture Trustee is closed for business.
Extension Period. The Company has the right under the Indenture, so long
as no Debenture Event of Default has occurred and is continuing, to defer the
payment of interest on the Junior Subordinated Debentures at any time, or from
time to time (each, an "Extension Period"), which, if exercised, would defer
28
<PAGE> 29
quarterly Distributions on the Preferred Securities during any such Extension
Period. Distributions to which holders of the Preferred Securities are entitled
will accumulate additional Distributions thereon at the rate per annum of 8.25%
thereof, compounded quarterly from the relevant Distribution Date.
"Distributions," as used herein, includes any such additional Distributions. The
right to defer the payment of interest on the Junior Subordinated Debentures is
limited, however, to a period, in each instance, not exceeding 20 consecutive
quarters and no Extension Period may extend beyond the Stated Maturity of the
Junior Subordinated Debentures. During any such Extension Period, the Company
may not (i) declare or pay any dividends or distributions on, or redeem,
purchase, acquire or make a liquidation payment with respect to, any of the
Company's capital stock, (ii) make any payment of principal, interest or
premium, if any, on or repay, repurchase or redeem any debt securities of the
Company that rank pari passu with or junior in interest to the Junior
Subordinated Debentures or make any guarantee payments with respect to any
guarantee by the Company of the debt securities of any subsidiary of the Company
if such guarantee ranks pari passu with or junior in interest to the Junior
Subordinated Debentures (other than payments under the Guarantee), or (iii)
redeem, purchase or acquire less than all of the Junior Subordinated Debentures
or any of the Preferred Securities. Prior to the termination of any such
Extension Period, the Company may further defer the payment of interest;
provided, that such Extension Period may not exceed 20 consecutive quarters or
extend beyond the Stated Maturity of the Junior Subordinated Debentures. Upon
the termination of any such Extension Period and the payment of all amounts then
due, the Company may elect to begin a new Extension Period, subject to the above
requirements. Subject to the foregoing, there is no limitation on the number of
times that the Company may elect to begin an Extension Period.
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Junior
Subordinated Debentures.
Source of Distributions. The funds of the Trust available for distribution
to holders of its Preferred Securities will be limited to payments under the
Junior Subordinated Debentures in which the Trust will invest the proceeds from
the issuance and sale of its Trust Securities. See "Description of the Junior
Subordinated Debentures." Distributions will be paid through the Property
Trustee who will hold amounts received in respect of the Junior Subordinated
Debentures in the Property Account for the benefit of the holders of the Trust
Securities. If the Company does not make interest payments on the Junior
Subordinated Debentures, the Property Trustee will not have funds available to
pay Distributions on the Preferred Securities. The payment of Distributions (if
and to the extent the Trust has funds legally available for the payment of such
Distributions and cash sufficient to make such payments) is guaranteed by the
Company. See "Description of the Guarantee."
REDEMPTION OR EXCHANGE
General. The Junior Subordinated Debentures will mature on June 30, 2029.
The Company will have the right to redeem the Junior Subordinated Debentures (i)
on or after June 30, 2003, in whole at any time or in part from time to time, or
(ii) at any time, in whole (but not in part), within 180 days following the
occurrence of a Tax Event, a Capital Treatment Event or an Investment Company
Event, in each case subject to receipt of prior approval by the Federal Reserve
if then required under applicable capital guidelines or policies of the Federal
Reserve. The Company will not have the right to purchase the Junior Subordinated
Debentures, in whole or in part, from the Trust until after June 30, 2003. See
"Description of the Junior Subordinated Debentures -- General."
Mandatory Redemption. Upon the repayment or redemption, in whole or in
part, of any Junior Subordinated Debentures, whether at Stated Maturity or upon
earlier redemption as provided in the Indenture, the proceeds from such
repayment or redemption will be applied by the Property Trustee to redeem a Like
Amount (as defined herein) of the Trust Securities, upon not less than 30 nor
more than 60 days notice, at a redemption price (the "Redemption Price") equal
to the aggregate Liquidation Amount of such Trust Securities plus accumulated
but unpaid Distributions thereon to the date of redemption (the "Redemption
Date"). See "Description of the Junior Subordinated Debentures -- Redemption or
Exchange." If less than all of the Junior Subordinated Debentures are to be
repaid or redeemed on a Redemption
29
<PAGE> 30
Date, then the proceeds from such repayment or redemption will be allocated to
the redemption of the Trust Securities pro rata.
Distribution of Junior Subordinated Debentures. Subject to the Company
having received prior approval of the Federal Reserve if so required under
applicable capital guidelines or policies of the Federal Reserve, the Company
will have the right at any time to dissolve the Trust and, after satisfaction of
the liabilities of creditors of the Trust as provided by applicable law, cause
the Junior Subordinated Debentures to be distributed to the holders of Trust
Securities in liquidation of the Trust. See "-- Liquidation Distribution Upon
Dissolution."
Tax Event Redemption, Capital Treatment Event Redemption or Investment
Company Event Redemption. If a Tax Event, a Capital Treatment Event or an
Investment Company Event in respect of the Trust Securities occurs and is
continuing, the Company has the right to redeem the Junior Subordinated
Debentures in whole (but not in part) and thereby cause a mandatory redemption
of such Trust Securities in whole (but not in part) at the Redemption Price
within 180 days following the occurrence of such Tax Event, Capital Treatment
Event or Investment Company Event. In the event a Tax Event, a Capital Treatment
Event or an Investment Company Event has occurred with respect to the Trust
Securities and the Company does not elect to redeem the Junior Subordinated
Debentures and thereby cause a mandatory redemption of such Trust Securities or
to liquidate the Trust and cause the Junior Subordinated Debentures to be
distributed to holders of such Trust Securities in liquidation of the Trust as
described below under "-- Liquidation Distribution Upon Dissolution," such
Preferred Securities will remain outstanding and Additional Interest (as defined
herein) may be payable on the Junior Subordinated Debentures. "Additional
Interest" means the additional amounts as may be necessary in order that the
amount of Distributions then due and payable by the Trust on the outstanding
Trust Securities will not be reduced as a result of any additional taxes, duties
and other governmental charges to which the Trust has become subject as a result
of a Tax Event.
"Like Amount" means (i) with respect to a redemption of Trust Securities,
Trust Securities having a Liquidation Amount equal to that portion of the
principal amount of Junior Subordinated Debentures to be contemporaneously
redeemed in accordance with the Indenture, which will be used to pay the
Redemption Price of such Trust Securities, and (ii) with respect to a
distribution of Junior Subordinated Debentures to holders of Trust Securities in
connection with a dissolution or liquidation of the Trust, Junior Subordinated
Debentures having a principal amount equal to the Liquidation Amount of the
Trust Securities of the holder to whom such Junior Subordinated Debentures are
distributed. Each Junior Subordinated Debenture distributed pursuant to clause
(ii) above will carry with it accumulated interest in an amount equal to the
accumulated and unpaid interest then due on such Junior Subordinated Debenture.
"Liquidation Amount" means the stated amount of $10 per Trust Security.
After the liquidation date fixed for any distribution of Junior
Subordinated Debentures for Preferred Securities (i) such Preferred Securities
will no longer be deemed to be outstanding, and (ii) any certificates
representing Preferred Securities will be deemed to represent the Junior
Subordinated Debentures having a principal amount equal to the Liquidation
Amount of such Preferred Securities, and bearing accrued and unpaid interest in
an amount equal to the accumulated and unpaid Distributions on the Preferred
Securities until such certificates are presented to the Administrative Trustees
or their agent for transfer or reissuance.
There can be no assurance as to the market prices for the Preferred
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for Preferred Securities if a dissolution and liquidation of the Trust
were to occur. The Preferred Securities that an investor may purchase, or the
Junior Subordinated Debentures that an investor may receive on dissolution and
liquidation of the Trust, may, therefore, trade at a discount to the price that
the investor paid to purchase the Preferred Securities offered hereby.
REDEMPTION PROCEDURES
Preferred Securities redeemed on each Redemption Date will be redeemed at
the Redemption Price with the applicable proceeds from the contemporaneous
redemption of the Junior Subordinated Debentures. Redemptions of the Preferred
Securities will be made and the Redemption Price will be payable on each
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<PAGE> 31
Redemption Date only to the extent that the Trust has funds on hand available
for the payment of such Redemption Price. See "-- Subordination of the Common
Securities."
If the Trust gives a notice of redemption in respect of its Preferred
Securities, then, by 12:00 noon, New York time, on the Redemption Date, to the
extent funds are available, the Property Trustee will irrevocably deposit with
the paying agent for the Preferred Securities funds sufficient to pay the
aggregate Redemption Price and will give the paying agent for the Preferred
Securities irrevocable instructions and authority to pay the Redemption Price to
the holders thereof upon surrender of their certificates evidencing such
Preferred Securities. Notwithstanding the foregoing, Distributions payable on or
prior to the Redemption Date for any Preferred Securities called for redemption
will be payable to the holders of such Preferred Securities on the relevant
record dates for the related Distribution Dates. If notice of redemption will
have been given and funds deposited as required, then upon the date of such
deposit, all rights of the holders of such Preferred Securities so called for
redemption will cease, except the right of the holders of such Preferred
Securities to receive the Redemption Price and any Distribution payable on or
before the Redemption Date, but without interest on such Redemption Price or
Distribution, and such Preferred Securities will cease to be outstanding. In the
event that any date fixed for redemption of Preferred Securities is not a
Business Day, then payment of the Redemption Price payable on such date will be
made on the next succeeding day which is a Business Day (and without any
additional Distribution, interest or other payment in respect of any such delay)
with the same force and effect as if made on such date. In the event that
payment of the Redemption Price in respect of Preferred Securities called for
redemption is improperly withheld or refused and not paid either by the Trust,
or by the Company pursuant to the Guarantee, Distributions on such Preferred
Securities will continue to accumulate at the then applicable rate, from the
Redemption Date originally established by the Trust for such Preferred
Securities to the date such Redemption Price is actually paid, in which case the
actual payment date will be considered the date fixed for redemption for
purposes of calculating the Redemption Price. See "Description of the
Guarantee."
Subject to applicable law (including, without limitation, United States
federal securities law), and, further provided that the Company does not and is
not continuing to exercise its right to defer interest payments on the Junior
Subordinated Debentures, the Company or its subsidiaries may at any time and
from time to time purchase outstanding Preferred Securities by tender, in the
open market or by private agreement.
Payment of the Redemption Price on the Preferred Securities and any
distribution of Junior Subordinated Debentures to holders of Preferred
Securities will be made to the applicable record holders thereof as they appear
on the register for the Preferred Securities on the relevant record date, which
date will be the date 15 days prior to the Redemption Date or liquidation date,
as applicable.
If less than all of the Trust Securities are to be redeemed on a Redemption
Date, then the aggregate Liquidation Amount of such Trust Securities to be
redeemed will be allocated pro rata to the Trust Securities based upon the
relative Liquidation Amounts of such classes. The particular Preferred
Securities to be redeemed will be selected by the Property Trustee from the
outstanding Preferred Securities not previously called for redemption, by such
method as the Property Trustee deems fair and appropriate and which may provide
for the selection for redemption of portions (equal to $10 or an integral
multiple of $10 in excess thereof) of the Liquidation Amount of Preferred
Securities of a denomination larger than $10. The Property Trustee will promptly
notify the registrar for the Preferred Securities in writing of the Preferred
Securities selected for redemption and, in the case of any Preferred Securities
selected for partial redemption, the Liquidation Amount thereof to be redeemed.
For all purposes of the Trust Agreement, unless the context otherwise requires,
all provisions relating to the redemption of Preferred Securities will relate to
the portion of the aggregate Liquidation Amount of Preferred Securities which
has been or is to be redeemed.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each holder of Trust Securities to be
redeemed at its registered address. Unless the Company defaults in payment of
the redemption price on the Junior Subordinated Debentures, on and after the
Redemption Date interest will cease to accrue on such Junior Subordinated
Debentures or portions thereof (and Distributions will cease to accumulate on
the related Preferred Securities or portions thereof) called for redemption.
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<PAGE> 32
SUBORDINATION OF THE COMMON SECURITIES
Payment of Distributions on, and the Redemption Price of, the Preferred
Securities and Common Securities, as applicable, will be made pro rata based on
the Liquidation Amount of the Preferred Securities and Common Securities;
provided, however, that if on any Distribution Date or Redemption Date a
Debenture Event of Default has occurred and is continuing, no payment of any
Distribution on, or Redemption Price of, any of the Common Securities, and no
other payment on account of the redemption, liquidation or other acquisition of
such Common Securities, will be made unless payment in full in cash of all
accumulated and unpaid Distributions on all of the outstanding Preferred
Securities for all Distribution periods terminating on or prior thereto, or in
the case of payment of the Redemption Price the full amount of such Redemption
Price on all of the outstanding Preferred Securities then called for redemption,
will have been made or provided for, and all funds available to the Property
Trustee will first be applied to the payment in full in cash of all
Distributions on, or Redemption Price of, the Preferred Securities then due and
payable.
In the case of any Event of Default resulting from a Debenture Event of
Default, the Company as holder of the Common Securities will be deemed to have
waived any right to act with respect to any such Event of Default under the
Trust Agreement until the effect of such Events of Default with respect to the
Preferred Securities have been cured, waived or otherwise eliminated. Until any
such Event of Default under the Trust Agreement with respect to the Preferred
Securities has been so cured, waived or otherwise eliminated, the Property
Trustee will act solely on behalf of the holders of the Preferred Securities and
not on behalf of the Company, as holder of the Common Securities, and only the
holders of the Preferred Securities will have the right to direct the Property
Trustee to act on their behalf.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
The Company will have the right at any time to dissolve the Trust and cause
the Junior Subordinated Debentures, after satisfaction of liabilities to
creditors of the Trust, to be distributed to the holders of the Preferred
Securities. Such right is subject, however, to the Company having received prior
approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve.
Pursuant to the Trust Agreement, the Trust will automatically dissolve upon
expiration of its term and will dissolve earlier on the first to occur of (i)
certain events of bankruptcy, dissolution or liquidation of the Company, (ii)
the Company, as depositor, giving written direction to the Property Trustee to
dissolve the Trust (which direction is optional and wholly within the discretion
of the Company, as depositor), (iii) redemption of all of the Preferred
Securities as described under "Redemption or Exchange -- Mandatory Redemption,"
or (iv) the entry of an order for the dissolution of the Trust by a court of
competent jurisdiction.
If an early dissolution occurs as described in clause (i), (ii) or (iv) of
the preceding paragraph, the Trust will be liquidated by the Trustees as
expeditiously as the Trustees determine to be possible by distributing, after
satisfaction of liabilities to creditors of the Trust as provided by applicable
law, to the holders of such Trust Securities a Like Amount of the Junior
Subordinated Debentures, unless such distribution is determined by the Property
Trustee not to be practical, in which event such holders will be entitled to
receive out of the assets of the Trust available for distribution to holders,
after satisfaction of liabilities to creditors of the Trust as provided by
applicable law, an amount equal to, in the case of holders of Preferred
Securities, the aggregate of the Liquidation Amount plus accumulated but unpaid
Distributions thereon to the date of payment (such amount being the "Liquidation
Distribution"). If such Liquidation Distribution can be paid only in part
because the Trust has insufficient assets available to pay in full the aggregate
Liquidation Distribution, then the amounts payable directly by the Trust on the
Preferred Securities will be paid on a pro rata basis. The Company, as the
holder of the Common Securities, will be entitled to receive distributions upon
any such liquidation pro rata with the holders of the Preferred Securities,
except that, if a Debenture Event of Default has occurred and is continuing, the
Preferred Securities will have a priority over the Common Securities. See
"-- Subordination of Common Securities."
Under current United States federal income tax law and interpretations and
assuming, as expected, that the Trust is treated as a grantor trust, a
distribution of the Junior Subordinated Debentures should not be a taxable event
to holders of the Preferred Securities. Should there be a change in law, a
change in legal
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<PAGE> 33
interpretation, a Tax Event or other circumstances, however, the distribution
could be a taxable event to holders of the Preferred Securities. See "Certain
Federal Income Tax Consequences -- Receipt of Junior Subordinated Debentures or
Cash Upon Liquidation of the Trust." If the Company elects neither to redeem the
Junior Subordinated Debentures prior to maturity nor to liquidate the Trust and
distribute the Junior Subordinated Debentures to holders of the Preferred
Securities, the Preferred Securities will remain outstanding until the repayment
of the Junior Subordinated Debentures.
If the Company elects to dissolve the Trust and thereby causes the Junior
Subordinated Debentures to be distributed to holders of the Preferred Securities
in liquidation of the Trust, the Company will continue to have the right to
shorten or extend the maturity of such Junior Subordinated Debentures, subject
to certain conditions. See "Description of the Junior Subordinated
Debentures -- General."
LIQUIDATION VALUE
The amount of the Liquidation Distribution payable on the Preferred
Securities in the event of any liquidation of the Trust is $10 per Preferred
Security plus accumulated but unpaid Distributions thereon to the date of
payment, which may be in the form of a distribution of such amount in Junior
Subordinated Debentures, subject to certain exceptions. See "-- Liquidation
Distribution Upon Dissolution."
EVENTS OF DEFAULT; NOTICE
Any one of the following events constitutes an event of default under the
Trust Agreement (an "Event of Default") with respect to the Preferred Securities
(whatever the reason for such Event of Default and whether voluntary or
involuntary or effected by operation of law or pursuant to any judgment, decree
or order of any court or any order, rule or regulation of any administrative or
governmental body):
(i) the occurrence of a Debenture Event of Default (see "Description
of the Junior Subordinated Debentures -- Debenture Events of Default"); or
(ii) default by the Trust or the Property Trustee in the payment of
any Distribution when it becomes due and payable, and continuation of such
default for a period of 30 days; or
(iii) default by the Trust or the Property Trustee in the payment of
any Redemption Price of any Trust Security when it becomes due and payable;
or
(iv) default in the performance, or breach, in any material respect,
of any covenant or warranty of the Trustees in the Trust Agreement (other
than a covenant or warranty a default in the performance of which or the
breach of which is dealt with in clauses (ii) or (iii) above), and
continuation of such default or breach for a period of 60 days after there
has been given, by registered or certified mail, to the Trustee(s) by the
holders of at least 25% in aggregate Liquidation Amount of the outstanding
Preferred Securities, a written notice specifying such default or breach
and requiring it to be remedied and stating that such notice is a "Notice
of Default" under the Trust Agreement; or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Property Trustee and the failure by the Company to appoint a
successor Property Trustee within 60 days thereof.
Within five Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee will transmit
notice of such Event of Default to the holders of the Preferred Securities, the
Administrative Trustees and the Company, as depositor, unless such Event of
Default has been cured or waived. The Company, as depositor, and the
Administrative Trustees are required to file annually with the Property Trustee
a certificate as to whether or not they are in compliance with all the
conditions and covenants applicable to them under the Trust Agreement.
If a Debenture Event of Default has occurred and is continuing, the
Preferred Securities will have a preference over the Common Securities upon
dissolution of the Trust. See "-- Liquidation Distribution Upon Dissolution."
The existence of an Event of Default does not entitle the holders of Preferred
Securities to accelerate the maturity thereof.
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REMOVAL OF THE TRUST TRUSTEES
Unless a Debenture Event of Default has occurred and is continuing, any
Trustee may be removed at any time by the holder of the Common Securities. If a
Debenture Event of Default has occurred and is continuing, the Property Trustee
and the Delaware Trustee may be removed at such time by the holders of a
majority in Liquidation Amount of the outstanding Preferred Securities. In no
event, however, will the holders of the Preferred Securities have the right to
vote to appoint, remove or replace the Administrative Trustees, which voting
rights are vested exclusively in the Company as the holder of the Common
Securities. No resignation or removal of a Trustee and no appointment of a
successor trustee will be effective until the acceptance of appointment by the
successor trustee in accordance with the provisions of the Trust Agreement.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless an Event of Default has occurred and is continuing, at any time or
times, for the purpose of meeting the legal requirements of the Trust Indenture
Act or of any jurisdiction in which any part of the Trust Property (as defined
in the Trust Agreement) may at the time be located, the Company, as the holder
of the Common Securities, will have power to appoint one or more Persons (as
defined in the Trust Agreement) either to act as a co-trustee, jointly with the
Property Trustee, of all or any part of such Trust Property, or to act as
separate trustee of any such Trust Property, in either case with such powers as
may be provided in the instrument of appointment, and to vest in such Person or
Persons in such capacity any property, title, right or power deemed necessary or
desirable, subject to the provisions of the Trust Agreement. In case a Debenture
Event of Default has occurred and is continuing, the Property Trustee alone will
have power to make such appointment.
MERGER OR CONSOLIDATION OF TRUSTEES
Any Person into which the Property Trustee, the Delaware Trustee or any
Administrative Trustee that is not a natural person may be merged or converted
or with which it may be consolidated, or any Person resulting from any merger,
conversion or consolidation to which such Trustee is a party, or any Person
succeeding to all or substantially all the corporate trust business of such
Trustee, will be the successor of such Trustee under the Trust Agreement,
provided such Person is otherwise qualified and eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST
The Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, except as described below. The Trust
may, at the request of the Company, with the consent of the Administrative
Trustees and without the consent of the holders of the Preferred Securities, the
Property Trustee or the Delaware Trustee, merge with or into, consolidate,
amalgamate, or be replaced by or convey, transfer or lease its properties and
assets substantially as an entirety to a trust organized as such under the laws
of any State; provided, that (i) such successor entity either (a) expressly
assumes all of the obligations of the Trust with respect to the Preferred
Securities, or (b) substitutes for the Preferred Securities other securities
having substantially the same terms as the Preferred Securities (the "Successor
Securities") so long as the Successor Securities rank the same as the Preferred
Securities rank in priority with respect to distributions and payments upon
liquidation, redemption and otherwise, (ii) the Company expressly appoints a
trustee of such successor entity possessing the same powers and duties as the
Property Trustee in its capacity as the holder of the Junior Subordinated
Debentures, (iii) the Successor Securities are listed, or any Successor
Securities will be listed upon notification of issuance, on any national
securities exchange or other organization on which the Preferred Securities are
then listed (including, if applicable, the Nasdaq National Market), if any, (iv)
such merger, consolidation, amalgamation, replacement, conveyance, transfer or
lease does not adversely affect the rights, preferences and privileges of the
holders of the Preferred Securities (including any Successor Securities) in any
material respect, (v) prior to such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, the Company has received an opinion
from independent counsel to the effect that (a) such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not adversely
affect the rights, preferences and privileges of the holders of the Preferred
Securities (including any Successor Securities) in any material
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respect, and (b) following such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, neither the Trust nor such successor
entity will be required to register as an "investment company" under the
Investment Company Act, and (vi) the Company owns all of the common securities
of such successor entity and guarantees the obligations of such successor entity
under the Successor Securities at least to the extent provided by the Guarantee,
the Indenture, the Junior Subordinated Debentures, the Trust Agreement and the
Expense Agreement. Notwithstanding the foregoing, the Trust will not, except
with the consent of holders of 100% in Liquidation Amount of the Preferred
Securities, consolidate, amalgamate, merge with or into, or be replaced by or
convey, transfer or lease its properties and assets substantially as an entirety
to any other Person or permit any other Person to consolidate, amalgamate, merge
with or into, or replace it if such consolidation, amalgamation, merger,
replacement, conveyance, transfer or lease would cause the Trust or the
successor entity to be classified as other than a grantor trust for United
States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF TRUST AGREEMENT
Except as provided below and under "Description of the
Guarantee -- Amendments and Assignment" and as otherwise required by the Trust
Act and the Trust Agreement, the holders of the Preferred Securities will have
no voting rights.
The Trust Agreement may be amended from time to time by the Company, the
Property Trustee and the Administrative Trustees, without the consent of the
holders of the Preferred Securities (i) with respect to acceptance of
appointment by a successor trustee, (ii) to cure any ambiguity, correct or
supplement any provisions in such Trust Agreement that may be inconsistent with
any other provision, or to make any other provisions with respect to matters or
questions arising under the Trust Agreement (provided such amendment is not
inconsistent with the other provisions of the Trust Agreement), or (iii) to
modify, eliminate or add to any provisions of the Trust Agreement to such extent
as is necessary to ensure that the Trust will be classified for United States
federal income tax purposes as a grantor trust at all times that any Trust
Securities are outstanding or to ensure that the Trust will not be required to
register as an "investment company" under the Investment Company Act; or (iv) to
reduce or increase the Liquidation Amount per Trust Security and simultaneously
to increase or reduce the number of Trust Securities issued and outstanding
solely for the purpose of maintaining the eligibility of the Preferred
Securities for listing or quotation on any national securities exchange or other
organization on which the Preferred Securities are then listed or quoted
(including, if applicable, the Nasdaq National Market); provided, however, that
in the case of clause (ii), such action may not adversely affect in any material
respect the interests of any holder of Trust Securities, and that, in the case
of clause (iv), the aggregate Liquidation Amount of the Trust Securities
outstanding upon completion of any such reduction or increase, must be the same
as the aggregate Liquidation Amount of the Trust Securities outstanding
immediately prior to any such reduction or increase, and any amendments of such
Trust Agreement will become effective when notice thereof is given to the
holders of Trust Securities (or, in the case of an amendment pursuant to clause
(iv), as of the date specified in the notice). The Trust Agreement may be
amended by the Trustees and the Company with (i) the consent of holders
representing not less than a majority in the aggregate Liquidation Amount of the
outstanding Trust Securities, and (ii) receipt by the Trustees of an opinion of
counsel to the effect that such amendment or the exercise of any power granted
to the Trustees in accordance with such amendment will not affect the Trust's
status as a grantor trust for United States federal income tax purposes or the
Trust's exemption from status as an "investment company" under the Investment
Company Act. Notwithstanding anything in this paragraph to the contrary, without
the consent of each holder of Trust Securities, the Trust Agreement may not be
amended to (a) change the amount or timing of any Distribution on the Trust
Securities or otherwise adversely affect the amount of any Distribution required
to be made in respect of the Trust Securities as of a specified date, or (b)
restrict the right of a holder of Trust Securities to institute suit for the
enforcement of any such payment on or after such date.
The Trustees will not, so long as any Junior Subordinated Debentures are
held by the Property Trustee, (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee, or
executing any trust or power conferred on the Property Trustee with respect to
the Junior
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Subordinated Debentures, (ii) waive any past default that is waivable under the
Indenture, (iii) exercise any right to rescind or annul a declaration that the
principal of all the Junior Subordinated Debentures will be due and payable, or
(iv) consent to any amendment, modification or termination of the Indenture or
the Junior Subordinated Debentures, where such consent is required, without, in
each case, obtaining the prior approval of the holders of a majority in
aggregate Liquidation Amount of all outstanding Preferred Securities; provided,
however, that where a consent under the Indenture requires the consent of each
holder of Junior Subordinated Debentures affected thereby, no such consent will
be given by the Property Trustee without the prior consent of each holder of the
Preferred Securities. The Trustees may not revoke any action previously
authorized or approved by a vote of the holders of the Preferred Securities
except by subsequent vote of the holders of the Preferred Securities. The
Property Trustee will notify each holder of Preferred Securities of any notice
of default with respect to the Junior Subordinated Debentures. In addition to
obtaining the foregoing approvals of the holders of the Preferred Securities,
prior to taking any of the foregoing actions, the Trustees must obtain an
opinion of counsel experienced in such matters to the effect that the Trust will
not be classified as an association taxable as a corporation for United States
federal income tax purposes on account of such action.
Any required approval of holders of Preferred Securities may be given at a
meeting of holders of Preferred Securities convened for such purpose or pursuant
to written consent. The Property Trustee will cause a notice of any meeting at
which holders of Preferred Securities are entitled to vote, or of any matter
upon which action by written consent of such holders is to be taken, to be given
to each holder of record of Preferred Securities in the manner set forth in the
Trust Agreement.
No vote or consent of the holders of Preferred Securities will be required
for the Trust to redeem and cancel its Preferred Securities in accordance with
the Trust Agreement.
Notwithstanding the fact that holders of Preferred Securities are entitled
to vote or consent under any of the circumstances described above, any of the
Preferred Securities that are owned by the Company, the Trustees or any
affiliate of the Company or any Trustee, will, for purposes of such vote or
consent, be treated as if they were not outstanding.
PAYMENT AND PAYING AGENCY
Payments in respect of the Preferred Securities will be made by check
mailed to the address of the holder entitled thereto as such address will appear
on the register of holders of the Preferred Securities. The paying agent for the
Preferred Securities will initially be the Property Trustee and any co-paying
agent chosen by the Property Trustee and acceptable to the Administrative
Trustees and the Company. The paying agent for the Preferred Securities may
resign as paying agent upon 30 days' written notice to the Property Trustee and
the Company. In the event that the Property Trustee no longer is the paying
agent for the Preferred Securities, the Administrative Trustees will appoint a
successor (which must be a bank or trust company acceptable to the
Administrative Trustees and the Company) to act as paying agent.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as the registrar and the transfer agent for
the Preferred Securities. Registration of transfers of Preferred Securities will
be effected without charge by or on behalf of the Trust, but upon payment of any
tax or other governmental charges that may be imposed in connection with any
transfer or exchange. The Trust will not be required to register or cause to be
registered the transfer of Preferred Securities after such Preferred Securities
have been called for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than upon the occurrence and during the
continuance of an Event of Default, undertakes to perform only such duties as
are specifically set forth in the Trust Agreement and, upon the occurrence and
during the continuance of an Event of Default, must exercise the same degree of
care and skill as a prudent person would exercise or use in the conduct of his
or her own affairs. Subject to this provision, the Property Trustee is under no
obligation to exercise any of the powers vested in it by the Trust Agreement at
the request of any holder of Preferred Securities unless it is offered
reasonable indemnity against the costs,
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expenses and liabilities that might be incurred thereby. If no Event of Default
has occurred and is continuing and the Property Trustee is required to decide
between alternative causes of action, construe ambiguous provisions in the Trust
Agreement or is unsure of the application of any provision of the Trust
Agreement, and the matter is not one on which holders of Preferred Securities
are entitled under the Trust Agreement to vote, then the Property Trustee will
take such action as is directed by the Company and if not so directed, will take
such action as it deems advisable and in the best interests of the holders of
the Trust Securities and will have no liability except for its own bad faith,
negligence or willful misconduct.
MISCELLANEOUS
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate the Trust in such a way that the Trust will not be
deemed to be an "investment company" required to be registered under the
Investment Company Act or classified as an association taxable as a corporation
for United States federal income tax purposes and so that the Junior
Subordinated Debentures will be treated as indebtedness of the Company for
United States federal income tax purposes. The Company and the Administrative
Trustees are authorized, in this connection, to take any action, not
inconsistent with applicable law, the certificate of trust of the Trust or the
Trust Agreement, that the Company and the Administrative Trustees determine in
their discretion to be necessary or desirable for such purposes.
Holders of the Preferred Securities have no preemptive or similar rights.
The Trust Agreement and the Preferred Securities will be governed by, and
construed in accordance with, the internal laws of the State of Delaware.
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DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
Concurrently with the issuance of the Preferred Securities, the Trust will
invest the proceeds thereof, together with the consideration paid by the Company
for the Common Securities, in the Junior Subordinated Debentures issued by the
Company. The Junior Subordinated Debentures will be issued as unsecured debt
under the Indenture, to be dated as of June 8, 1998 (the "Indenture"), between
the Company and State Street Bank and Trust Company, as trustee (the "Debenture
Trustee"). The Indenture will be qualified as an indenture under the Trust
Indenture Act. The following summary of the material terms and provisions of the
Junior Subordinated Debentures and the Indenture does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, the
Indenture and to the Trust Indenture Act. Wherever particular defined terms of
the Indenture are referred to, but not defined herein, such defined terms are
incorporated herein by reference. The form of the Indenture has been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part.
GENERAL
The Junior Subordinated Debentures will be limited in aggregate principal
amount to approximately $11,340,210 (or $13,041,250 if the Underwriters'
over-allotment option is exercised), the sum of the aggregate stated Liquidation
Amount of the Trust Securities. The Junior Subordinated Debentures will bear
interest at the annual rate of 8.25% of the principal amount thereof, payable
quarterly in arrears on March 31, June 30, September 30, and December 31 of each
year (each, an "Interest Payment Date") beginning September 30, 1998, to the
Person (as defined in the Indenture) in whose name each Subordinated Debenture
is registered, subject to certain exceptions, at the close of business on the
fifteenth day of the last month of the calendar quarter. It is anticipated that,
until the liquidation of the Trust, the Junior Subordinated Debentures will be
held in the name of the Property Trustee in trust for the benefit of the holders
of the Preferred Securities. The amount of interest payable for any period will
be computed on the basis of a 360-day year of twelve 30-day months. In the event
that any date on which interest is payable on the Junior Subordinated Debentures
is not a Business Day, then payment of the interest payable on such date will be
made on the next succeeding day that is a Business Day (and without any interest
or other payment in respect of any such delay), with the same force and effect
as if made on the date such payment was originally payable. Accrued interest
that is not paid on the applicable Interest Payment Date will bear additional
interest on the amount thereof (to the extent permitted by law) at the rate per
annum of 8.25% thereof, compounded quarterly. The term "interest," as used
herein, includes quarterly interest payments, interest on quarterly interest
payments not paid on the applicable Interest Payment Date and Additional
Interest, as applicable.
The Junior Subordinated Debentures will mature on June 30, 2029 (such date,
as it may be shortened or extended as hereinafter described, the "Stated
Maturity"). Such date may be shortened at any time by the Company to any date
not earlier than June 30, 2003, subject to the Company having received prior
approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve. In the event that the Company
elects to shorten or extend the Stated Maturity of the Junior Subordinated
Debentures, it will give notice thereof to the Debenture Trustee, the Trust and
to the holders of the Junior Subordinated Debentures no more than 180 days and
no less than 90 days prior to the effectiveness thereof. The Company will not
have the right to purchase the Junior Subordinated Debentures, in whole or in
part, from the Trust until on or after June 30, 2003, except if a Tax Event, a
Capital Treatment Event or an Investment Company Event has occurred and is
continuing.
The Junior Subordinated Debentures will be unsecured and will rank junior
and be subordinate in right of payment to all Senior Debt, Subordinated Debt and
Additional Senior Obligations of the Company. Because the Company is a holding
company, the right of the Company to participate in any distribution of assets
of the Bank, upon the Bank's liquidation or reorganization or otherwise (and
thus the ability of holders of the Junior Subordinated Debentures to benefit
indirectly from such distribution), is subject to the prior claim of creditors
of the Bank, except to the extent that the Company may itself be recognized as a
creditor of the Bank. The Junior Subordinated Debentures will, therefore, be
effectively subordinated to all existing and future liabilities of the Bank, and
holders of Junior Subordinated Debentures should look only to the assets of the
Company for payments on the Junior Subordinated Debentures. The Indenture does
not limit the incurrence or issuance of
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other secured or unsecured debt of the Company, including Senior Debt,
Subordinated Debt and Additional Senior Obligations, whether under the Indenture
or any existing indenture or other indenture that the Company may enter into in
the future or otherwise. See "-- Subordination."
The Indenture does not contain provisions that afford holders of the Junior
Subordinated Debentures protection in the event of a highly leveraged
transaction or other similar transaction involving the Company that may
adversely affect such holders.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
The Company has the right under the Indenture at any time during the term
of the Junior Subordinated Debentures, so long as no Debenture Event of Default
has occurred and is continuing, to defer the payment of interest at any time, or
from time to time (each, an "Extension Period"). The right to defer the payment
of interest on the Junior Subordinated Debentures is limited, however, to a
period, in each instance, not exceeding 20 consecutive quarters and no Extension
Period may extend beyond the Stated Maturity of the Junior Subordinated
Debentures. At the end of each Extension Period, the Company must pay all
interest then accrued and unpaid (together with interest thereon at the annual
rate of 8.25%, compounded quarterly, to the extent permitted by applicable law).
During an Extension Period, interest will continue to accrue and holders of
Junior Subordinated Debentures (or the holders of Preferred Securities if such
securities are then outstanding) will be required to accrue and recognize income
for United States federal income tax purposes. See "Certain Federal Income Tax
Consequences -- Potential Extension of Interest Payment Period and Original
Issue Discount."
During any such Extension Period, the Company may not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Company's capital stock, (ii)
make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank pari passu
with or junior in interest to the Junior Subordinated Debentures or make any
guarantee payments with respect to any guarantee by the Company of the debt
securities of any subsidiary of the Company if such guarantee ranks pari passu
or junior in interest to the Junior Subordinated Debentures (other than payments
under the Guarantee), or (iii) redeem, purchase or acquire less than all of the
Junior Subordinated Debentures or any of the Preferred Securities. Prior to the
termination of any such Extension Period, the Company may further defer the
payment of interest; provided, that no Extension Period may exceed 20
consecutive quarters or extend beyond the Stated Maturity of the Junior
Subordinated Debentures. Upon the termination of any such Extension Period and
the payment of all amounts then due on any Interest Payment Date, the Company
may elect to begin a new Extension Period subject to the above requirements. No
interest will be due and payable during an Extension Period, except at the end
thereof. The Company has no present intention of exercising its rights to defer
payments of interest on the Junior Subordinated Debentures. The Company must
give the Property Trustee, the Administrative Trustees and the Debenture Trustee
notice of its election of such Extension Period at least two Business Days prior
to the earlier of (i) the next succeeding date on which Distributions on the
Trust Securities would have been payable except for the election to begin such
Extension Period, or (ii) the date the Trust is required to give notice of the
record date, or the date such Distributions are payable, to the Nasdaq National
Market (or other applicable self-regulatory organization) or to holders of the
Preferred Securities, but in any event at least one Business Day before such
record date. Subject to the foregoing, there is no limitation on the number of
times that the Company may elect to begin an Extension Period.
ADDITIONAL SUMS
If the Trust or the Property Trustee is required to pay any additional
taxes, duties or other governmental charges as a result of the occurrence of a
Tax Event, the Company will pay to the holders of the Junior Subordinated
Debentures as additional amounts (referred to herein as "Additional Interest")
on the Junior Subordinated Debentures such additional amounts as may be required
so that the net amounts received and retained by the Trust after paying any such
additional taxes, duties or other governmental charges will not be
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less than the amounts the Trust would have received had such additional taxes,
duties or other governmental charges not been imposed.
REDEMPTION OR EXCHANGE
The Company will have the right to redeem the Junior Subordinated
Debentures prior to maturity (i) on or after June 30, 2003, in whole at any time
or in part from time to time, or (ii) at any time in whole (but not in part),
within 180 days following the occurrence of a Tax Event, a Capital Treatment
Event or an Investment Company Event, in each case at a redemption price equal
to the accrued and unpaid interest on the Junior Subordinated Debentures so
redeemed to the date fixed for redemption, plus 100% of the principal amount
thereof. Any such redemption prior to the Stated Maturity will be subject to
prior approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve.
"Tax Event" means the receipt by the Trust of an opinion of counsel
experienced in such matters to the effect that, as a result of any amendment to,
or change (including any announced prospective change) in, the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein, or as a result of any official
administrative pronouncement or judicial decision interpreting or applying such
laws or regulations, which amendment or change is effective or which
pronouncement or decision is announced on or after the date of issuance of the
Preferred Securities under the Trust Agreement, there is more than an
insubstantial risk that (i) the Trust is, or will be within 90 days after the
date of such opinion of counsel, subject to United States federal income tax
with respect to income received or accrued on the Junior Subordinated
Debentures, (ii) interest payable by the Company on the Junior Subordinated
Debentures is not, or within 90 days of the date of such opinion will not be,
deductible by the Company, in whole or in part, for United States federal income
tax purposes, or (iii) the Trust is, or will be within 90 days after the date of
such opinion of counsel, subject to more than a de minimis amount of other
taxes, duties, assessments or other governmental charges. The Company must
request and receive an opinion with regard to such matters within a reasonable
period of time after it becomes aware of the possible occurrence of any of the
events described in clauses (i) through (iii) above.
"Capital Treatment Event" means the receipt by the Trust of an opinion of
counsel experienced in such matters to the effect that, as a result of any
amendment to or any change (including any announced prospective change) in the
laws (or any regulations thereunder) of the United States or any political
subdivision thereof or therein, or as a result of any official administrative
pronouncement or judicial decision interpreting or applying such laws or
regulations, which amendment or change is effective or which proposed change,
pronouncement or decision is announced on or after the date of issuance of the
Preferred Securities under the Trust Agreement, there is more than an
insubstantial risk of impairment of the Company's ability to treat the aggregate
Liquidation Amount of the Preferred Securities (or any substantial portion
thereof) as "Tier 1 Capital" (or the then equivalent thereof) for purposes of
the capital adequacy guidelines of the Federal Reserve, as then applicable to
the Company; provided, however, that the inability of the Company to treat all
or any portion of the Liquidation Amount of the Preferred Securities as Tier 1
Capital shall not constitute the basis for a Capital Treatment Event if such
inability results from the Company having cumulative preferred capital in excess
of the amount which may qualify for treatment as Tier 1 Capital under applicable
capital adequacy guidelines of the Federal Reserve.
"Investment Company Event" means the receipt by the Trust of an opinion of
counsel experienced in such matters to the effect that, as a result of the
occurrence of a change in law or regulation or a change in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority, the Trust is or will be considered an
"investment company" that is required to be registered under the Investment
Company Act, which change becomes effective on or after the date of original
issuance of the Preferred Securities.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of Junior Subordinated
Debentures to be redeemed at its registered address. Unless the Company defaults
in payment of the redemption price for the Junior Subordinated Debentures, on
and after
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the redemption date interest ceases to accrue on such Junior Subordinated
Debentures or portions thereof called for redemption.
The Junior Subordinated Debentures will not be subject to any sinking fund.
DISTRIBUTION UPON LIQUIDATION
As described under "Description of the Preferred Securities -- Liquidation
Distribution Upon Dissolution," under certain circumstances involving the
dissolution of the Trust, the Junior Subordinated Debentures may be distributed
to the holders of the Preferred Securities in liquidation of the Trust after
satisfaction of liabilities to creditors of the Trust as provided by applicable
law. Any such distribution will be subject to receipt of prior approval by the
Federal Reserve if then required under applicable policies or guidelines of the
Federal Reserve. If the Junior Subordinated Debentures are distributed to the
holders of Preferred Securities upon the dissolution of the Trust, the Company
will use its best efforts to list the Junior Subordinated Debentures on the
Nasdaq National Market or such stock exchanges, if any, on which the Preferred
Securities are then listed. There can be no assurance as to the market price of
any Junior Subordinated Debentures that may be distributed to the holders of
Preferred Securities.
RESTRICTIONS ON CERTAIN PAYMENTS
If at any time (i) there has occurred a Debenture Event of Default, (ii)
the Company is in default with respect to its obligations under the Guarantee or
(iii) the Company has given notice of its election of an Extension Period as
provided in the Indenture with respect to the Junior Subordinated Debentures and
has not rescinded such notice, or such Extension Period, or any extension
thereof, is continuing, the Company will not (1) declare or pay any dividends or
distributions on, or redeem, purchase, acquire, or make a liquidation payment
with respect to, any of the Company's capital stock, (2) make any payment of
principal, interest or premium, if any, on or repay or repurchase or redeem any
debt securities of the Company that rank pari passu with or junior in interest
to the Junior Subordinated Debentures or make any guarantee payments with
respect to any guarantee by the Company of the debt securities of any subsidiary
of the Company if such guarantee ranks pari passu or junior in interest to the
Junior Subordinated Debentures (other than payments under the Guarantee), or (3)
redeem, purchase or acquire less than all of the Junior Subordinated Debentures
or any of the Preferred Securities.
SUBORDINATION
The Indenture provides that the Junior Subordinated Debentures are
subordinated and junior in right of payment to all Senior Debt, Subordinated
Debt and Additional Senior Obligations of the Company. Upon any payment or
distribution of assets to creditors upon any liquidation, dissolution, winding
up, reorganization, assignment for the benefit of creditors, marshaling of
assets or any bankruptcy, insolvency, debt restructuring or similar proceedings
in connection with any insolvency or bankruptcy proceedings of the Company, the
holders of Senior Debt, Subordinated Debt and Additional Senior Obligations of
the Company will first be entitled to receive payment in full of principal of
(and premium on, if any) and interest on, if any, such Senior Debt, Subordinated
Debt and Additional Senior Obligations of the Company before the holders of
Junior Subordinated Debentures will be entitled to receive or retain any payment
in respect of the principal of or interest on the Junior Subordinated
Debentures.
In the event of the acceleration of the maturity of any Junior Subordinated
Debentures, the holders of all Senior Debt, Subordinated Debt and Additional
Senior Obligations of the Company outstanding at the time of such acceleration
will first be entitled to receive payment in full of all amounts due thereon
(including any amounts due upon acceleration) before the holders of the Junior
Subordinated Debentures will be entitled to receive or retain any payment in
respect of the principal of or interest on the Junior Subordinated Debentures.
No payments on account of principal or interest in respect of the Junior
Subordinated Debentures may be made if there has occurred and is continuing a
default in any payment with respect to Senior Debt, Subordinated Debt or
Additional Senior Obligations of the Company or an event of default with respect
to any
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Senior Debt, Subordinated Debt or Additional Senior Obligations of the Company
resulting in the acceleration of the maturity thereof, or if any judicial
proceeding is pending with respect to any such default.
"Debt" means, with respect to any Person, whether recourse is to all or a
portion of the assets of such Person and whether or not contingent, (i) every
obligation of such Person for money borrowed, (ii) every obligation of such
Person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses, (iii) every reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person, (iv) every obligation of such Person issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business), (v) every capital lease obligation of such Person, and (vi) every
obligation of the type referred to in clauses (i) through (v) of another Person
and all dividends of another Person the payment of which, in either case, such
Person has guaranteed or is responsible or liable, directly or indirectly, as
obligor or otherwise.
"Senior Debt" means, with respect to the Company, the principal of (and
premium, if any) and interest, if any (including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization relating to the
Company whether or not such claim for post-petition interest is allowed in such
proceeding), on Debt, whether incurred on or prior to the date of the Indenture
or thereafter incurred, unless, in the instrument creating or evidencing the
same or pursuant to which the same is outstanding, it is provided that such
obligations are not superior in right of payment to the Junior Subordinated
Debentures or to other Debt which is pari passu with, or subordinated to, the
Junior Subordinated Debentures; provided, however, that Senior Debt will not be
deemed to include (i) any Debt of the Company which when incurred and without
respect to any election under section 1111(b) of the United States Bankruptcy
Code of 1978, as amended, was without recourse to the Company, (ii) any Debt of
the Company to any of its subsidiaries, (iii) any Debt to any employee of the
Company, (iv) any Debt which by its terms is subordinated to trade accounts
payable or accrued liabilities arising in the ordinary course of business to the
extent that payments made to the holders of such Debt by the holders of the
Junior Subordinated Debentures as a result of the subordination provisions of
the Indenture would be greater than they otherwise would have been as a result
of any obligation of such holders to pay amounts over to the obligees on such
trade accounts payable or accrued liabilities arising in the ordinary course of
business as a result of subordination provisions to which such Debt is subject,
and (v) Debt which constitutes Subordinated Debt.
"Subordinated Debt" means, with respect to the Company, the principal of
(and premium, if any) and interest, if any (including interest accruing on or
after the filing of any petition in bankruptcy or for reorganization relating to
the Company whether or not such claim for post-petition interest is allowed in
such proceeding), on Debt, whether incurred on or prior to the date of the
Indenture or thereafter incurred, which is by its terms expressly provided to be
junior and subordinate to other Debt of the Company (other than the Junior
Subordinated Debentures).
"Additional Senior Obligations" means, with respect to the Company, all
indebtedness, whether incurred on or prior to the date of the Indenture or
thereafter incurred, for claims in respect of derivative products such as
interest and foreign exchange rate contracts, commodity contracts and similar
arrangements; provided, however, that Additional Senior Obligations do not
include claims in respect of Senior Debt or Subordinated Debt or obligations
which, by their terms, are expressly stated to be not superior in right of
payment to the Junior Subordinated Debentures or to rank pari passu in right of
payment with the Junior Subordinated Debentures. "Claim," as used herein, has
the meaning assigned thereto in Section 101(4) of the United States Bankruptcy
Code of 1978, as amended.
The Indenture places no limitation on the amount of additional Senior Debt,
Subordinated Debt or Additional Senior Obligations that may be incurred by the
Company. The Company expects from time to time to incur additional indebtedness
constituting Senior Debt, Subordinated Debt and Additional Senior Obligations.
As of June 1, 1998, the Company had no outstanding Senior Debt, Subordinated
Debt or Additional Senior Obligations. Because the Company is a holding company,
the Junior Subordinated
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Debentures are effectively subordinated to all existing and future liabilities
of the Company's subsidiaries, including obligations to depositors of the Bank.
PAYMENT AND PAYING AGENTS
Payment of principal of and any interest on the Junior Subordinated
Debentures will be made at the office of the Debenture Trustee in Boston,
Massachusetts, except that, at the option of the Company, payment of any
interest may be made (i) by check mailed to the address of the Person entitled
thereto as such address appears in the register of holders of the Junior
Subordinated Debentures, or (ii) by transfer to an account maintained by the
Person entitled thereto as specified in the register of holders of the Junior
Subordinated Debentures, provided that proper transfer instructions have been
received by the regular record date. Payment of any interest on Junior
Subordinated Debentures will be made to the Person in whose name such
Subordinated Debenture is registered at the close of business on the regular
record date for such interest, except in the case of defaulted interest. The
Company may at any time designate additional paying agents for the Junior
Subordinated Debentures or rescind the designation of any paying agent for the
Junior Subordinated Debentures; however, the Company will at all times be
required to maintain a paying agent in Boston, Massachusetts and each place of
payment for the Junior Subordinated Debentures.
Any moneys deposited with the Debenture Trustee or any paying agent for the
Junior Subordinated Debentures, or then held by the Company in trust, for the
payment of the principal of or interest on the Junior Subordinated Debentures
and remaining unclaimed for two years after such principal or interest has
become due and payable will be repaid to the Company on May 31 of each year or
(if then held in trust by the Company) will be discharged from such trust and
the holder of such Junior Subordinated Debenture will thereafter look, as a
general unsecured creditor, only to the Company for payment thereof.
REGISTRAR AND TRANSFER AGENT
The Debenture Trustee will act as the registrar and the transfer agent for
the Junior Subordinated Debentures. Junior Subordinated Debentures may be
presented for registration of transfer (with the form of transfer endorsed
thereon, or a satisfactory written instrument of transfer, duly executed), in
Boston, Massachusetts or at the office of the registrar in Boston,
Massachusetts. The Company may at any time rescind the designation of any such
transfer agent or approve a change in the location through which any such
transfer agent acts. The Company may at any time designate additional transfer
agents with respect to the Junior Subordinated Debentures. In the event of any
redemption, neither the Company nor the Debenture Trustee will be required to
(i) issue, register the transfer of or exchange Junior Subordinated Debentures
during a period beginning at the opening of business 15 days before the day of
selection for redemption of Junior Subordinated Debentures and ending at the
close of business on the day of mailing of the relevant notice of redemption, or
(ii) transfer or exchange any Junior Subordinated Debentures so selected for
redemption, except, in the case of any Junior Subordinated Debentures being
redeemed in part, any portion thereof not to be redeemed.
MODIFICATION OF INDENTURE
The Company and the Debenture Trustee may, from time to time without the
consent of the holders of the Junior Subordinated Debentures, amend, waive or
supplement the Indenture for specified purposes, including, among other things,
curing ambiguities, defects or inconsistencies and qualifying, or maintaining
the qualification of, the Indenture under the Trust Indenture Act. The Indenture
contains provisions permitting the Company and the Debenture Trustee, with the
consent of the holders of not less than a majority in principal amount of the
outstanding Junior Subordinated Debentures, to modify the Indenture; provided,
that no such modification may, without the consent of the holder of each
outstanding Subordinated Debenture affected by such proposed modification, (i)
extend the fixed maturity of the Junior Subordinated Debentures, or reduce the
principal amount thereof, or reduce the rate or extend the time of payment of
interest thereon, or (ii) reduce the percentage of principal amount of Junior
Subordinated Debentures, the holders of which are required to consent to any
such modification of the Indenture; provided that so long as any of the
Preferred Securities remain outstanding, no such modification may be made that
requires the consent of the holders of
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the Junior Subordinated Debentures, and no termination of the Indenture may
occur, and no waiver of any Debenture Event of Default may be effective, without
the prior consent of the holders of at least a majority of the aggregate
Liquidation Amount of the Preferred Securities and that if the consent of the
holder of each Subordinated Debenture is required, such modification will not be
effective until each holder of Trust Securities has consented thereto.
DEBENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to the Junior Subordinated Debentures that has occurred and
is continuing constitutes an event of default (each, a "Debenture Event of
Default") with respect to the Junior Subordinated Debentures:
(i) failure for 30 days to pay any interest on the Junior Subordinated
Debentures, when due (subject to the deferral of any due date in the case
of an Extension Period); or
(ii) failure to pay any principal on the Junior Subordinated
Debentures when due whether at maturity, upon redemption by declaration or
otherwise; or
(iii) failure to observe or perform in any material respect certain
other covenants contained in the Indenture for 90 days after written notice
to the Company from the Debenture Trustee or the holders of at least 25% in
aggregate outstanding principal amount of the Junior Subordinated
Debentures; or
(iv) certain events in bankruptcy, insolvency or reorganization of the
Company.
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Debenture
Trustee. The Debenture Trustee, or the holders of not less than 25% in aggregate
outstanding principal amount of the Junior Subordinated Debentures, may declare
the principal due and payable immediately upon a Debenture Event of Default. The
holders of a majority in aggregate outstanding principal amount of the Junior
Subordinated Debentures may annul such declaration and waive the default if the
default (other than the non-payment of the principal of the Junior Subordinated
Debentures which has become due solely by such acceleration) has been cured and
a sum sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the Debenture Trustee.
Should the holders of the Junior Subordinated Debentures fail to annul such
declaration and waive such default, the holders of a majority in aggregate
Liquidation Amount of the Preferred Securities will have such right.
The Company is required to file annually with the Debenture Trustee a
certificate as to whether or not the Company is in compliance with all the
conditions and covenants applicable to it under the Indenture.
If a Debenture Event of Default has occurred and is continuing, the
Property Trustee will have the right to declare the principal of and the
interest on such Junior Subordinated Debentures, and any other amounts payable
under the Indenture, to be forthwith due and payable and to enforce its other
rights as a creditor with respect to such Junior Subordinated Debentures.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF THE PREFERRED SECURITIES
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay interest on or
principal of the Junior Subordinated Debentures on the payment date on which
such payment is due and payable, then a holder of Preferred Securities may
institute a legal proceeding directly against the Company for enforcement of
payment to such holder of the principal of or interest on such Junior
Subordinated Debentures having a principal amount equal to the aggregate
Liquidation Amount of the Preferred Securities of such holder (a "Direct
Action"). In connection with such Direct Action, the Company will have a right
of set-off under the Indenture to the extent of any payment made by the Company
to such holder of Preferred Securities in the Direct Action. The Company may not
amend the Indenture to remove the foregoing right to bring a Direct Action
without the prior written consent of the holders of all of the Preferred
Securities. If the right to bring a Direct Action is removed, the Trust may
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become subject to the reporting obligations under the Exchange Act. The Company
has the right under the Indenture to set-off any payment made to such holder of
Preferred Securities by the Company in connection with a Direct Action.
The holders of the Preferred Securities will not be able to exercise
directly any remedies, other than those set forth in the preceding paragraph,
available to the holders of the Junior Subordinated Debentures unless there has
been an Event of Default under the Trust Agreement. See "Description of the
Preferred Securities -- Events of Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Company may not consolidate with or merge into any other Person or
convey or transfer its properties and assets substantially as an entirety to any
Person, and no Person may consolidate with or merge into the Company or sell,
convey, transfer or otherwise dispose of its properties and assets substantially
as an entirety to the Company, unless (i) in the event the Company consolidates
with or merges into another Person or conveys or transfers its properties and
assets substantially as an entirety to any Person, the successor Person is
organized under the laws of the United States or any State or the District of
Columbia, and such successor Person expressly assumes by supplemental indenture
the Company obligations on the Junior Subordinated Debentures, (ii) immediately
after giving effect thereto, no Debenture Event of Default, and no event which,
after notice or lapse of time or both, would become a Debenture Event of
Default, has occurred and is continuing, and (iii) certain other conditions
prescribed in the Indenture are met.
SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect (except as to the
Company's obligations to pay certain sums due pursuant to the Indenture and to
provide certain officers' certificates and opinions of counsel described
therein) and the Company will be deemed to have satisfied and discharged the
Indenture when, among other things, all Junior Subordinated Debentures not
previously delivered to the Debenture Trustee for cancellation (i) have become
due and payable, or (ii) will become due and payable at their Stated Maturity
within one year or are to be called for redemption within one year, and the
Company deposits or causes to be deposited with the Debenture Trustee funds, in
trust, for the purpose and in an amount sufficient to pay and discharge the
entire indebtedness on the Junior Subordinated Debentures not previously
delivered to the Debenture Trustee for cancellation, for the principal and
interest to the date of the deposit or to the Stated Maturity or redemption
date, as the case may be.
GOVERNING LAW
The Indenture and the Junior Subordinated Debentures will be governed by
and construed in accordance with the laws of The Commonwealth of Massachusetts.
INFORMATION CONCERNING THE DEBENTURE TRUSTEE
The Debenture Trustee has and is subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Debenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of Junior Subordinated Debentures, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby. The Debenture Trustee is not required to expend
or risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the Debenture Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
MISCELLANEOUS
The Company has agreed, pursuant to the Indenture, for so long as Trust
Securities remain outstanding, (i) to maintain directly or indirectly 100%
ownership of the Common Securities of the Trust (provided that certain
successors which are permitted pursuant to the Indenture may succeed to the
Company's ownership of the Common Securities), (ii) not to voluntarily dissolve
the Trust, except upon prior approval of the Federal
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Reserve if then so required under applicable capital guidelines or policies of
the Federal Reserve, and (a) in connection with a distribution of Junior
Subordinated Debentures to the holders of the Preferred Securities in
liquidation of the Trust, or (b) in connection with certain mergers,
consolidations or amalgamations permitted by the Trust Agreement, and (iii) to
use its reasonable efforts, consistent with the terms and provisions of the
Trust Agreement, to cause the Trust to remain classified as a grantor trust and
not as an association taxable as a corporation for United States federal income
tax purposes.
DESCRIPTION OF THE GUARANTEE
The Preferred Securities Guarantee Agreement (the "Guarantee") will be
executed and delivered by the Company concurrently with the issuance of the
Preferred Securities for the benefit of the holders of the Preferred Securities.
The Guarantee will be qualified as an indenture under the Trust Indenture Act.
The Guarantee Trustee will act as indenture trustee under the Guarantee for
purposes of complying with the provisions of the Trust Indenture Act. The
Guarantee Trustee, State Street Bank and Trust Company, will hold the Guarantee
for the benefit of the holders of the Preferred Securities. The following
summary of the material terms and provisions of the Guarantee does not purport
to be complete and is subject to, and qualified in its entirety by reference to,
all of the provisions of the Guarantee and the Trust Indenture Act. Wherever
particular defined terms of the Guarantee are referred to, but not defined
herein, such defined terms are incorporated herein by reference. The form of the
Guarantee has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part.
GENERAL
The Company will, pursuant to the Guarantee, irrevocably agree to pay in
full on a subordinated basis, to the extent set forth therein, the Guarantee
Payments (as defined below) to the holders of the Preferred Securities, as and
when due, regardless of any defense, right of set-off or counterclaim that the
Trust may have or assert other than the defense of payment. The following
payments with respect to the Preferred Securities, to the extent not paid by or
on behalf of the Trust (the "Guarantee Payments"), will be subject to the
Guarantee: (i) any accumulated and unpaid Distributions required to be paid on
the Preferred Securities, to the extent that the Trust has funds available
therefor at such time, (ii) the Redemption Price with respect to any Preferred
Securities called for redemption to the extent that the Trust has funds
available therefor at such time, and (iii) upon a voluntary or involuntary
dissolution, winding up or liquidation of the Trust (other than in connection
with the distribution of Junior Subordinated Debentures to the holders of
Preferred Securities or a redemption of all of the Preferred Securities), the
lesser of (a) the amount of the Liquidation Distribution, to the extent the
Trust has funds available therefor at such time, and (b) the amount of assets of
the Trust remaining available for distribution to holders of Preferred
Securities in liquidation of the Trust. The obligation of the Company to make a
Guarantee Payment may be satisfied by direct payment of the required amounts by
the Company to the holders of the Preferred Securities or by causing the Trust
to pay such amounts to such holders.
The Guarantee will not apply to any payment of Distributions except to the
extent the Trust has funds available therefor. If the Company does not make
interest payments on the Junior Subordinated Debentures held by the Trust, the
Trust will not pay Distributions on the Preferred Securities and will not have
funds legally available therefor.
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of the Company and
will rank subordinate and junior in right of payment to all Senior Debt,
Subordinated Debt and Additional Senior Obligations of the Company in the same
manner as the Junior Subordinated Debentures. The Guarantee does not place a
limitation on the amount of additional Senior Debt, Subordinated Debt or
Additional Senior Obligations that may be incurred by the Company. The Company
expects from time to time to incur additional indebtedness constituting Senior
Debt, Subordinated Debt and Additional Senior Obligations.
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The Guarantee will constitute a guarantee of payment and not of collection
(that is, the guaranteed party may institute a legal proceeding directly against
the Company to enforce its rights under the Guarantee without first instituting
a legal proceeding against any other Person). The Guarantee will not be
discharged except by payment of the Guarantee Payments in full to the extent not
paid by the Trust or upon distribution of the Junior Subordinated Debentures to
the holders of the Preferred Securities. Because the Company is a holding
company, the right of the Company to participate in any distribution of assets
of the Bank upon the Bank's liquidation or reorganization or otherwise is
subject to the prior claims of creditors of the Bank, except to the extent the
Company may itself be recognized as a creditor of the Bank. The Company's
obligations under the Guarantee, therefore, will be effectively subordinated to
all existing and future liabilities of the Company's subsidiaries, and claimants
should look only to the assets of the Company for payments thereunder.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not materially adversely affect
the rights of holders of the Preferred Securities (in which case no vote will be
required), the Guarantee may not be amended without the prior approval of the
holders of not less than a majority of the aggregate Liquidation Amount of the
outstanding Preferred Securities. See "Description of the Preferred
Securities -- Voting Rights; Amendment of Trust Agreement." All guarantees and
agreements contained in the Guarantee will bind the successors, assigns,
receivers, trustees and representatives of the Company and will inure to the
benefit of the holders of the Preferred Securities then outstanding.
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of the
Company to perform any of its payment or other obligations thereunder. The
holders of not less than a majority in aggregate Liquidation Amount of the
Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of the Guarantee or to direct the exercise of any trust or power
conferred upon the Guarantee Trustee under the Guarantee.
Any holder of Preferred Securities may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Trust, the Guarantee Trustee or
any other Person.
The Company, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether or not the Company is in compliance with all
the conditions and covenants applicable to it under the Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance of
a default by the Company in performance of the Guarantee, undertakes to perform
only such duties as are specifically set forth in the Guarantee and, after
default with respect to the Guarantee, must exercise the same degree of care and
skill as a prudent person would exercise or use in the conduct of his or her own
affairs. Subject to such provisions, the Guarantee Trustee is under no
obligation to exercise any of the powers vested in it by the Guarantee at the
request of any holder of any Preferred Securities, unless it is offered
reasonable indemnity against the costs, expenses and liabilities that might be
incurred thereby.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force and effect upon (a)
full payment of the Redemption Price of the Preferred Securities, (b) full
payment of the amounts payable upon liquidation of the Trust, or (c)
distribution of the Junior Subordinated Debentures to the holders of the
Preferred Securities. The Guarantee will continue to be effective or will be
reinstated, as the case may be, if at any time any holder of the Preferred
Securities must restore payment of any sums paid under such Preferred Securities
or the Guarantee.
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GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the laws
of The Commonwealth of Massachusetts.
EXPENSE AGREEMENT
The Company will, pursuant to the Agreement as to Expenses and Liabilities
entered into by it under the Trust Agreement (the "Expense Agreement"),
irrevocably and unconditionally guarantee to each person or entity to whom the
Trust becomes indebted or liable, the full payment of any costs, expenses or
liabilities of the Trust, other than obligations of the Trust to pay to the
holders of the Preferred Securities or other similar interests in the Trust of
the amounts due such holders pursuant to the terms of the Preferred Securities
or such other similar interests, as the case may be. Third party creditors of
the Trust may proceed directly against the Company under the Expense Agreement,
regardless of whether such creditors had notice of the Expense Agreement.
RELATIONSHIP AMONG THE PREFERRED SECURITIES,
THE JUNIOR SUBORDINATED DEBENTURES AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the Preferred Securities
(to the extent the Trust has funds available for the payment of such
Distributions) are irrevocably guaranteed by the Company as and to the extent
set forth under "Description of the Guarantee." The Company and the Trust
believe that, taken together, the obligations of the Company under the Junior
Subordinated Debentures, the Indenture, the Trust Agreement, the Expense
Agreement, and the Guarantee provide, in the aggregate, a full, irrevocable and
unconditional guarantee, on a subordinated basis, of payment of Distributions
and other amounts due on the Preferred Securities. No single document standing
alone or operating in conjunction with fewer than all of the other documents
constitutes such guarantee. It is only the combined operation of these documents
that has the effect of providing a full, irrevocable and unconditional guarantee
of the obligations of the Trust under the Preferred Securities. If and to the
extent that the Company does not make payments on the Junior Subordinated
Debentures, the Trust will not pay Distributions or other amounts due on the
Preferred Securities. The Guarantee does not cover payment of Distributions when
the Trust does not have sufficient funds to pay such Distributions. In such
event, the remedy of a holder of Preferred Securities is to institute a legal
proceeding directly against the Company for enforcement of payment of such
Distributions to such holder. The obligations of the Company under the Guarantee
are subordinate and junior in right of payment to all Senior Debt, Subordinated
Debt and Additional Senior Obligations of the Company.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on the
Junior Subordinated Debentures, such payments will be sufficient to cover
Distributions and other payments due on the Preferred Securities, primarily
because (i) the aggregate principal amount of the Junior Subordinated Debentures
will be equal to the sum of the aggregate stated Liquidation Amount of the Trust
Securities, (ii) the interest rate and interest and other payment dates on the
Junior Subordinated Debentures will match the Distribution rate and Distribution
and other payment dates for the Preferred Securities, (iii) the Company will pay
for all and any costs, expenses and liabilities of the Trust (except the
obligations of the Trust to holders of the Preferred Securities), and (iv) the
Trust Agreement further provides that the Trust will not engage in any activity
that is not consistent with the limited purposes of the Trust.
ENFORCEMENT RIGHTS OF HOLDERS OF PREFERRED SECURITIES
A holder of any Preferred Security may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Guarantee
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Trustee, the Trust or any other Person. A default or event of default under any
Senior Debt, Subordinated Debt or Additional Senior Obligations of the Company
would not constitute a default or Event of Default. In the event, however, of
payment defaults under, or acceleration of, Senior Debt, Subordinated Debt or
Additional Senior Obligations of the Company, the subordination provisions of
the Indenture provide that no payments may be made in respect of the Junior
Subordinated Debentures until such Senior Debt, Subordinated Debt or Additional
Senior Obligations has been paid in full or any payment default thereunder has
been cured or waived. Failure to make required payments on the Junior
Subordinated Debentures would constitute an Event of Default.
LIMITED PURPOSE OF THE TRUST
The Preferred Securities evidence a preferred undivided beneficial interest
in the assets of the Trust. The Trust exists for the exclusive purposes of (i)
issuing the Trust Securities representing undivided beneficial interests in the
assets of the Trust, (ii) investing the gross proceeds of the Trust Securities
in the Junior Subordinated Debentures issued by the Company, and (iii) engaging
in only those other activities necessary, advisable, or incidental thereto. A
principal difference between the rights of a holder of a Preferred Security and
the rights of a holder of a Subordinated Debenture is that a holder of a
Subordinated Debenture is entitled to receive from the Company the principal
amount of and interest accrued on Junior Subordinated Debentures held, while a
holder of Preferred Securities is entitled to receive Distributions from the
Trust (or from the Company under the Guarantee) if and to the extent the Trust
has funds available for the payment of such Distributions.
RIGHTS UPON DISSOLUTION
Upon any voluntary or involuntary dissolution of the Trust involving the
liquidation of the Junior Subordinated Debentures, the holders of the Preferred
Securities will be entitled to receive, out of assets held by the Trust, the
Liquidation Distribution in cash. See "Description of the Preferred
Securities -- Liquidation Distribution Upon Dissolution." Upon any voluntary or
involuntary liquidation or bankruptcy of the Company, the Property Trustee, as
holder of the Junior Subordinated Debentures, would be a subordinated creditor
of the Company, subordinated in right of payment to all Senior Debt,
Subordinated Debt and Additional Senior Obligations of the Company (as set forth
in the Indenture), but entitled to receive payment in full of principal and
interest before any shareholders of the Company receive payments or
distributions. Since the Company is the guarantor under the Guarantee and has
agreed to pay for all costs, expenses and liabilities of the Trust (other than
the obligations of the Trust to the holders of its Preferred Securities), the
positions of a holder of the Preferred Securities and a holder of the Junior
Subordinated Debentures relative to other creditors and to shareholders of the
Company in the event of liquidation or bankruptcy of the Company are expected to
be substantially the same.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a summary of the principal United States federal income
tax consequences of the purchase, ownership and disposition of Preferred
Securities which has been passed upon by Foley, Hoag & Eliot LLP, counsel to the
Company and the Trust insofar as it relates to matters of law and legal
conclusions. The discussion only addresses the tax consequences to a person that
acquires Preferred Securities on their original issue at their original offering
price and that is (i) an individual citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States or any state thereof or the District of Columbia or (iii) an estate or
trust the income of which is subject to United States federal income tax
regardless of source. This discussion does not attempt to discuss all tax
consequences that may be applicable to a holder of Preferred Securities, nor
does it address the tax consequences to (i) persons who are not United States
Persons, (ii) persons that may be subject to special tax treatment under United
States federal income tax law, such as banks, insurance companies, thrift
institutions, real estate investment trusts, regulated investment companies,
tax-exempt organizations, and dealers in securities or currencies, (iii) persons
that will hold the Preferred Securities as part of a position in a "straddle,"
as part of a "hedge or "synthetic security," as part of a "conversion
transaction" or other integrated investment transaction for federal income tax
purposes, or as other than a capital asset, or (iv) persons whose functional
currency is not the United States dollar. Further, it does not include any
description of any alternative minimum tax consequences or the tax laws of any
state or local government or of any foreign government that may be applicable to
the Preferred Securities.
The summary is based on current provisions of the Internal Revenue Code of
1986, as amended (the "Code"), Treasury regulations thereunder and
administrative and judicial interpretations thereof, all of which are subject to
change, with possible retroactive effect. Subsequent changes may cause tax
consequences to vary substantially from the consequences described below.
Furthermore, the authorities on which this summary is based are subject to
various interpretations, and it is therefore possible that the federal income
tax treatment of the purchase, ownership and disposition of Preferred Securities
may differ from the treatment described below.
CLASSIFICATION OF THE TRUST
Under current law and assuming full compliance with the terms of the Trust
Agreement and Indenture (and certain other documents described herein), the
Trust will be classified for United States federal income tax purposes as a
grantor trust and not as an association taxable as a corporation. As a result,
each holder of Preferred Securities generally will be considered the owner of an
undivided beneficial interest in the Junior Subordinated Debentures.
Accordingly, for United States federal income tax purposes, each holder of
Preferred Securities will be required to include in its gross income any
interest, including original issue discount, paid or accrued with respect to its
allocable share of the Junior Subordinated Debentures whether or not cash is
actually distributed to such holder.
CLASSIFICATION OF THE JUNIOR SUBORDINATED DEBENTURES
The Company intends to take the position that the Junior Subordinated
Debentures will be classified for United States federal income tax purposes as
indebtedness of the Company under current law and each holder of Preferred
Securities will be treated as owning an indirect beneficial interest in the
Junior Subordinated Debentures. No ruling is being requested from the Internal
Revenue Service and there is no direct authority addressing the characterization
of the Junior Subordinated Debentures. No assurance can be given that such
position of the Company will not be challenged by the Internal Revenue Service
or, if challenged that such a challenge will not be successful. The remainder of
this discussion assumes that the Junior Subordinated Debentures will be
classified for United States federal income tax purposes as indebtedness of the
Company.
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POTENTIAL EXTENSION OF INTEREST PAYMENT PERIOD AND ORIGINAL ISSUE DISCOUNT
Under recently issued Treasury regulations (the "Regulations"), a debt
instrument will be deemed to be issued with original issue discount ("OID") if
there is more than a "remote" contingency that periodic stated interest payments
due on the instrument will not be timely paid. Because the exercise by the
Company of its option to defer the payment of stated interest on the Junior
Subordinated Debentures would prevent the Company from declaring dividends on
any class of equity, the Company believes that the likelihood of its exercising
the option is "remote" within the meaning of the Regulations. As a result, the
Company intends to take the position that the Junior Subordinated Debentures
will not be considered to be issued with OID. Accordingly, based on this
position, stated interest on the Junior Subordinated Debentures will be
includible in the ordinary income of a holder at the time that such payments are
paid or accrued in accordance with such holder's regular method of tax
accounting. Because the Regulations have not yet been addressed in any published
rulings or other published interpretations issued by the Internal Revenue
Service, it is possible that the Internal Revenue Service could take a position
contrary to the position taken by the Company.
Under the Regulations, if the Company were to exercise its option to defer
the payment of stated interest on the Junior Subordinated Debentures, the Junior
Subordinated Debentures would at that time be treated as issued with OID and all
stated interest on the Junior Subordinated Debentures would thereafter be
treated as OID as long as the Junior Subordinated Debentures remain outstanding.
In such event, a holder of the Junior Subordinated Debentures would be required
to include OID in ordinary income, on a current basis, over the period that the
instrument is held even though the Company would not be making any actual cash
payments during the extended interest payment period. The amount of interest
income includible in the taxable income of a holder of the Junior Subordinated
Debentures would be determined on the basis of a constant yield method over the
remaining term of the instrument and the actual receipt of future payments of
stated interest on the Junior Subordinated Debentures would no longer be
separately reported as taxable income. The amount of OID that would accrue, in
the aggregate, during the extended interest payment period would be
approximately equal to the amount of the cash payment due at the end of such
period. Any OID included in income would increase the holder's adjusted tax
basis in the Junior Subordinated Debentures and the holder's actual receipt of
interest payments would reduce such basis.
Because income on the Preferred Securities will constitute interest or OID,
corporate holders of Preferred Securities will not be entitled to a
dividends-received deduction with respect to any income recognized with respect
to the Preferred Securities.
MARKET DISCOUNT AND ACQUISITION PREMIUM
Holders of Preferred Securities other than a holder who purchased the
Preferred Securities upon original issuance may be considered to have acquired
their undivided interest in the Junior Subordinated Debentures with "market
discount' or acquisition premium" as such phrases are defined for United States
federal income tax purposes. Such holders are advised to consult their tax
advisors as to the income tax consequences of the acquisition, ownership and
disposition of the Preferred Securities.
RECEIPT OF JUNIOR SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF THE TRUST
Under certain circumstances, as described herein (see "Description of the
Preferred Securities -- Redemption or Exchange" and "Description of the
Preferred Securities -- Liquidation Distribution Upon Dissolution"), the Junior
Subordinated Debentures may be distributed to holders of Preferred Securities
upon a liquidation of the Trust. Under current United States federal income tax
law, such a distribution would be treated as a nontaxable event to each such
holder and would result in such holder having an adjusted tax basis in the
Junior Subordinated Debentures received in the liquidation equal to such
holder's adjusted tax basis in the Preferred Securities immediately before the
distribution. A holder's holding period in the Junior Subordinated Debentures so
received in liquidation of the Trust would include the period for which such
holder held the Preferred Securities. If, however, the Trust is characterized
for United States federal income tax purposes as an association taxable as a
corporation at the time of its dissolution, the distribution of the Junior
Subordinated Debentures may constitute a taxable event to holders of Preferred
Securities.
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Under certain circumstances described herein, the Junior Subordinated
Debentures may be redeemed for cash and the proceeds of such redemption
distributed to holders in redemption of their Preferred Securities. Under
current law, such a redemption would, for United States federal income tax
purposes, constitute a taxable disposition of the redeemed Preferred Securities,
and a holder would recognize gain or loss as if the holder sold such Preferred
Securities for cash. See "Description of the Preferred Securities -- Redemption
or Exchange" and "Description of the Preferred Securities -- Liquidation
Distribution Upon Dissolution."
DISPOSITION OF PREFERRED SECURITIES
Upon the sale of the Preferred Securities, a holder will recognize gain or
loss in an amount equal to the difference between its adjusted tax basis in the
Preferred Securities and the amount realized in the sale (except to the extent
of any amount received in respect of accrued but unpaid interest not previously
included in income). A holder's adjusted tax basis in the Preferred Securities
generally will be its initial purchase price increased by the amount of OID
accrued and decreased by payments (if any) received on the Preferred Securities
in respect of OID (if any) to the date of disposition. Such gain or loss
generally will be a capital gain or loss and generally will be long-term capital
gain or loss if the Preferred Securities have been held for more than one year
at the time of sale. Amounts attributable to accrued interest with respect to a
holder's share of the Junior Subordinated Debentures not previously included in
income will be taxable as ordinary income.
Should the Corporation exercise its option to defer any payment of interest
on the Junior Subordinated Debentures, the Preferred Securities may trade at a
price that does not accurately reflect the value of accrued but unpaid interest
with respect to the underlying Junior Subordinated Debentures (or OID if the
Junior Subordinated Debentures are treated as having been issued with OID). In
the event of such a deferral, a holder who disposes of its Preferred Securities
will be required to include in ordinary income (i) any portion of the amount
realized that is attributable to such accrued but unpaid interest to the extent
not previously included in income, or (ii) any amount of OID, in either case,
that has accrued on its pro rata share of the underlying Junior Subordinated
Debentures during the taxable year of sale through the date of disposition. Any
such income inclusion will increase the holder's adjusted tax basis in the
Preferred Securities disposed of. To the extent that the amount realized in the
sale is less than the holder's adjusted tax basis, a holder will recognize a
capital loss. Subject to certain limited exceptions, capital losses cannot be
applied to offset ordinary income for United States federal income tax purposes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
The amount of interest paid and any OID accrued on the Preferred Securities
held of record by individual citizens or residents of the United States, or
certain trusts, estates, and partnerships, will be reported to the Internal
Revenue Service on Forms 1099, which forms should be mailed to such holders of
Preferred Securities by January 31 following each calendar year. Payments of
interest may be subject to a "backup" withholding tax at a rate of 31% unless
the holder complies with certain identification and other requirements. Payment
of the proceeds from the sale of Preferred Securities may also be subject to
information reporting and backup withholding. Any amounts withheld under the
backup withholding rules will be allowed as a credit against the holder's United
States federal income tax liability, provided the required information is
furnished to the Internal Revenue Service.
EFFECT OF PROPOSED CHANGES IN TAX LAWS
In both 1996 and 1997 legislation was proposed that would, if enacted, have
adversely affected the tax treatment of the Preferred Securities. On March 19,
1996, President Clinton proposed certain tax law changes (the "1996 Proposed
Legislation") that would, among other things, generally deny corporate issuers a
deduction for interest in respect of certain debt obligations having a maximum
term in excess of 20 years and not shown as indebtedness on the issuer's
applicable consolidated balance sheet. Neither the 1996 Proposed Legislation or
similar legislation was enacted during the 104th Congress. On February 6, 1997,
President Clinton proposed in the administration's fiscal year 1998 budget
certain tax law changes (the "Administration's 1997 Tax Proposals") that would,
among other things, generally deny corporate issuers a deduction for
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<PAGE> 53
interest or OID in respect of certain debt obligations having a maximum term in
excess of 15 years and not shown as indebtedness on the issuer's applicable
consolidated balance sheet. Neither the Administration's 1997 Tax Proposals nor
similar legislation was enacted by the 105th Congress. There can be no
assurance, however, that legislation enacted after the date hereof will not
adversely affect the ability of the Company to deduct the interest payable on
the Junior Subordinated Debentures or otherwise give rise to a Tax Event.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE MAY NOT BE
APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD
CONSULT THEIR TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED SECURITIES, INCLUDING THE
TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN THE UNITED STATES FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Employee benefit plans that are subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or Section 4975 of the Code
("Plans"), generally may purchase Preferred Securities, subject to the investing
fiduciary's determination that the investment in Preferred Securities satisfies
ERISA's fiduciary standards and other requirements applicable to investments by
the Plan.
In any case, the Company and/or any of its affiliates may be considered a
"party in interest" (within the meaning of ERISA) or a "disqualified person"
(within the meaning of Section 4975 of the Code) with respect to certain plans
(generally, Plans maintained or sponsored by, or contributed to by, any such
persons with respect to which the Company or an affiliate is a fiduciary or
Plans for which the Company or an affiliate provides services). The acquisition
and ownership of Preferred Securities by a Plan (or by an individual retirement
arrangement or other Plans described in Section 4975(e)(1) of the Code) with
respect to which the Company or any of its affiliates is considered a party in
interest or a disqualified person may constitute or result in a prohibited
transaction under ERISA or Section 4975 of the Code, unless such Preferred
Securities are acquired pursuant to and in accordance with an applicable
exemption.
As a result, Plans with respect to which the Company or any of its
affiliates is a party in interest or a disqualified person should not acquire
Preferred Securities unless such Preferred Securities are acquired pursuant to
and in accordance with an applicable exemption. Any other Plans or other
entities whose assets include Plan assets subject to ERISA or Section 4975 of
the code proposing to acquire Preferred Securities should consult with their own
counsel.
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<PAGE> 54
UNDERWRITING
The Underwriters named below, represented by Tucker Anthony Incorporated
(the "Representative"), have severally agreed, subject to the terms and
conditions set forth in the Underwriting Agreement, the form of which is filed
as an exhibit to the Registration Statement of which this Prospectus forms a
part, to purchase from the Trust the number of Preferred Securities set forth
opposite their respective names below. The several Underwriters have agreed in
the Underwriting Agreement, subject to the terms and conditions set forth
therein, to purchase all the Preferred Securities offered hereby if any of the
Preferred Securities are purchased. In the event of default by an Underwriter,
the Underwriting Agreement provides that, in certain circumstances, purchase
commitments of the nondefaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER PREFERRED SECURITIES
----------- --------------------
<S> <C>
Tucker Anthony Incorporated................................. 880,000
McConnell, Budd & Downes, Inc. ............................. 220,000
---------
Total............................................. 1,100,000
=========
</TABLE>
The Representative has advised the Trust that it proposes initially to
offer the Preferred Securities to the public at the public offering price set
forth on the cover page of this Prospectus, and to certain dealers at such price
less a concession not in excess of $0.20 per Preferred Security. The
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $0.10 per Preferred Security to certain other dealers. After the initial
public offering, the public offering price, concession and discount may be
changed.
In view of the fact that the proceeds of the sale of the Preferred
Securities will be used to purchase the Junior Subordinated Debentures of the
Company, the Underwriting Agreement provides that the Company will pay as
compensation to the Underwriters arranging the investment therein of such
proceeds, an amount in immediately available funds of $0.375 per Preferred
Security (or $412,500 in the aggregate) for the accounts of the several
Underwriters.
The Trust has granted the Underwriters an option to purchase up to an
additional 165,000 Preferred Securities at the public offering price. Such
option, which expires 30 days from the date of this Prospectus, may be exercised
solely to cover over-allotments. To the extent that the Underwriters exercise
such option, each of the Underwriters will have a firm commitment, subject to
certain conditions, to purchase approximately the same percentage of the
additional Preferred Securities that the number of Preferred Securities to be
purchased initially by the Underwriter is of the 1,100,000 Preferred Securities
initially purchased by the Underwriters.
To the extent that the Underwriters exercise their option to purchase
additional Preferred Securities, the Trust will issue and sell to the Company
additional Common Securities in such aggregate Liquidation Amount as is required
for the Company to continue to hold Common Securities in an aggregate
Liquidation Amount equal to at least 3% of the total capital of the Trust and
the Company will issue and sell to the Trust Junior Subordinated Debentures in
an aggregate principal amount equal to the total aggregate Liquidation Amount of
the additional Preferred Securities being purchased pursuant to the option and
the additional Common Securities.
In connection with the offering of the Preferred Securities, the
Underwriters and any selling group members and their respective affiliates may
engage in transactions effected in accordance with Rule 104 of the Securities
and Exchange Commission's Regulation M that are intended to stabilize, maintain
or otherwise affect the market price of the Preferred Securities. Such
transactions may include over-allotment transactions in which the Underwriters
create a short position for their own account by selling more Preferred
Securities than they are committed to purchase from the Trust. In such case, to
cover all or part of the short position, the Underwriters may exercise the
over-allotment option described above or may purchase Preferred Securities in
the open market following completion of the initial offering of the Preferred
Securities. The Underwriters also may engage in stabilizing transactions in
which they bid for and purchase Preferred Securities at a level above that which
might otherwise prevail in the open market for the purpose of preventing or
retarding a decline in the market price of the Preferred Securities. The
Underwriters also may reclaim any selling concessions
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<PAGE> 55
allowed to an Underwriter or dealer if the Underwriters repurchase shares
distributed by that Underwriter or dealer. Any of the foregoing transactions may
result in the maintenance of a price for the Preferred Securities at a level
above that which might otherwise prevail in the open market. Neither the Company
nor any of the Underwriters makes any representation or prediction as to the
direction or magnitude of any effect that the transactions described above may
have on the price of the Preferred Securities. The Underwriters are not required
to engage in any of the foregoing transactions and, if commenced, such
transactions may be discontinued at any time without notice.
During a period of 180 days from the date of this Prospectus, neither the
Trust nor the Company will, subject to certain exceptions, without the prior
written consent of the Representative, directly or indirectly, sell, offer to
sell, grant any option for sale of, or otherwise dispose of, any Preferred
Securities, any security convertible into or exchangeable into or exercisable
for Preferred Securities or Junior Subordinated Debentures or any debt
securities substantially similar to the Junior Subordinated Debentures or equity
securities substantially similar to the Preferred Securities (except for Junior
Subordinated Debentures and the Preferred Securities offered hereby).
Because the National Association of Securities Dealers, Inc. ("NASD") is
expected to view the Preferred Securities as interests in a direct participation
program, the offering of the Preferred Securities is being made in compliance
with the applicable provisions of Rule 2810 of the NASD's Conduct Rules.
The Preferred Securities have been approved for quotation on the Nasdaq
National Market. The Representative has advised the Trust that it presently
intends to make a market in the Preferred Securities after the commencement of
trading on the Nasdaq National Market, but no assurances can be made as to the
liquidity of such Preferred Securities or that an active and liquid trading
market will develop or, if developed, that it will continue. The offering price
and distribution rate have been determined by negotiations among representatives
of the Company and the Underwriters, and the offering price of the Preferred
Securities may not be indicative of the market price following the Offering. The
Representative will have no obligation to make a market in the Preferred
Securities, however, and may cease market-making activities, if commenced, at
any time.
The Trust and the Company have agreed to indemnify the Underwriters
against, or contribute to payments that the Underwriters may be required to make
in respect of, certain liabilities, including liabilities under the Securities
Act.
LEGAL MATTERS
Certain matters of Delaware law relating to the validity of the Preferred
Securities, the enforceability of the Trust Agreement and the formation of the
Trust, will be passed upon by Morris, Nichols, Arsht & Tunnell, Wilmington,
Delaware, special Delaware counsel to the Company and the Trust. Certain legal
matters for the Company and the Trust, including matters relating to United
States federal income tax considerations and the validity of the Guarantee and
the Junior Subordinated Debentures, will be passed upon for the Company and the
Trust by Foley, Hoag & Eliot LLP, Boston, Massachusetts, counsel to the Company
and the Trust. Certain legal matters will be passed upon for the Underwriters by
Goodwin, Procter & Hoar LLP, Boston, Massachusetts. Foley, Hoag & Eliot LLP will
rely on the opinion of Morris, Nichols, Arsht & Tunnell as to matters of
Delaware law.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1997 and 1996, and for each of the years in the three-year period ended December
31, 1997, appearing in the 1997 Annual Report of the Company to its shareholders
and incorporated by reference in the Annual Report on Form 10-K for the year
ended December 31, 1997, have been incorporated by reference in this Prospectus
and in the Registration Statement of which this Prospectus forms a part, in
reliance upon the report of Arthur Andersen LLP, independent public accountants,
incorporated by reference herein, whose report thereon appears therein, and upon
the authority of said firm as experts in accounting and auditing.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated into this Prospectus by reference:
1. The Company's Annual Report on Form 10-K for the year ended
December 31, 1997; and
2. The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998 (attached hereto as Appendix B).
The following portions of the Company's 1997 Annual Report to Shareholders
(attached hereto as Appendix A) are incorporated into this Prospectus by
reference:
1. Management's Discussion and Analysis of Financial Condition and
Result of Operations; and
2. Selected Consolidated Financial Data, Consolidated Balance Sheets,
Consolidated Statements of Income, Consolidated Statements of Changes in
Shareholders' Equity, Consolidated Statements of Cash Flows, and Notes to
Consolidated Financial Statements.
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
THE COMPANY WILL PROVIDE WITHOUT CHARGE TO ANY PERSON TO WHOM THIS
PROSPECTUS IS DELIVERED, ON THE WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY
OF ANY OR ALL OF THE FOREGOING DOCUMENTS INCORPORATED BY REFERENCE HEREIN (OTHER
THAN EXHIBITS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE
IN SUCH DOCUMENTS). REQUESTS FOR SUCH DOCUMENTS SHOULD BE DIRECTED TO: ABINGTON
BANCORP, INC., 536 WASHINGTON STREET, ABINGTON, MASSACHUSETTS 02351, ATTN: CHIEF
FINANCIAL OFFICER (TELEPHONE (781) 982-3200).
As used herein, the terms "Prospectus" and "herein" mean this Prospectus,
including the documents incorporated or deemed to be incorporated herein by
reference, as the same may be amended, supplemented or otherwise modified from
time to time. Statements contained in this Prospectus as to the contents of any
contract or other document referred to herein do not purport to be complete, and
where reference is made to the particular provisions of such contract or other
document, such provisions are qualified in all respects by reference to all of
the provisions of such contract or other document.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Commission's regional offices at 7 World Trade Center, 13th Floor, Suite
1300, New York, New York 10048 and Suite 1400, Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60661. Copies of such material may also be obtained by
mail from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates. If available, such information
also may be accessed through the Commission's electronic data gathering,
analysis and retrieval system ("EDGAR") via electronic means, including the
Commission's home page on the Internet (http://www.sec.gov). The Company's
common stock is traded on the Nasdaq National Market. Such reports, proxy
statements and other information concerning the Company also may be inspected at
the offices of the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-2 (the "Registration Statement") pursuant to the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the securities offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules relating thereto as
permitted by the rules and regulations of the
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<PAGE> 57
Commission. For further information pertaining to the Company and the securities
offered hereby, reference is made to the Registration Statement and the exhibits
thereto. Items of information omitted from this Prospectus, but contained in the
Registration Statement, may be obtained at prescribed rates or inspected without
charge at the offices of the Commission set forth above. Any statements
contained herein concerning the provisions of any document are not necessarily
complete, and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement or otherwise filed with the
Commission. Each such statement is qualified in its entirety by such reference.
No separate financial statements of the Trust have been included herein.
The Company does not consider that such financial statements would be material
to holders of the Preferred Securities because (i) all of the voting securities
of the Trust will be owned by the Company, a reporting company under the
Exchange Act, (ii) the Trust has no independent operations but exists for the
sole purpose of issuing securities representing undivided beneficial interest in
the assets of the Trust and investing the proceeds thereof in the Junior
Subordinated Debentures issued by the Company, and (iii) the obligations of the
Company described herein to provide certain indemnities in respect of and be
responsible for certain costs, expenses, debts and liabilities of the Trust
under the Indenture and pursuant to the Trust Agreement, the guarantee issued by
the Company with respect to the Preferred Securities, and the Junior
Subordinated Debentures purchased by the Trust and the related Indenture, taken
together, constitute, in the belief of the Company and the Trust, a full and
unconditional guarantee of payments due on the Preferred Securities. See
"Description of the Junior Subordinated Debentures" and "Description of the
Guarantee."
The Trust is not currently subject to the information reporting
requirements of the Exchange Act. The Trust will become subject to such
requirements upon the effectiveness of the Registration Statement, although it
intends to seek and expects to receive an exemption therefrom.
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[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 59
APPENDIX A - THE COMPANY'S
1997 ANNUAL REPORT TO SHAREHOLDERS
<PAGE> 60
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 61
APPENDIX A
<PAGE> 62
[ABINGTON BANCORP APPLE PICTURE]
===========================
ABINGTON BANCORP
----------------------
1997 ANNUAL REPORT
===========================
<PAGE> 63
[ABINGTON BANCORP LEAF PICTURE] 1997
- ----------------------------------------------
A VERY SUCCESSFUL YEAR
---------------------------------------------------
1 | President's Message
9 | Financial Highlights
11 | Management's Discussion and Analysis
21 | Report of Independent Public Accountants
22 | Consolidated Balance Sheets
23 | Consolidated Statements of Operations
24 | Consolidated Statements of Changes in Stockholders' Equity
25 | Consolidated Statements of Cash Flows
27 | Notes to Consolidated Financial Statements
46 | Stockholder Information
47 | Bank Directors & Officers
Inside Back Cover | Corporate Information
Back Cover | Bank Locations
<PAGE> 64
CORPORATE PROFILE
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.
The Bank operated as a Massachusetts chartered mutual savings bank from its
incorporation in 1853 until June 1986 when the Bank converted from mutual to
stock form of ownership. From December 1992 to the present, the Bank has
operated as a stock-owned savings bank.
The Bank is engaged principally in the business of attracting deposits from
the general public, borrowing funds, and investing those deposits and funds. In
its investments, the Bank has emphasized various types of residential and
commercial real estate loans, residential construction loans, consumer loans,
and investments in securities. The Bank considers its principal market area to
be Plymouth County, Massachusetts, primarily Abington, Cohasset, Halifax,
Holbrook, Kingston, Whitman, Hull, and Pembroke where it has banking offices,
and nearby Rockland, Duxbury, Plympton, Brockton, Hanover, East Bridgewater,
Plymouth, Carver, Weymouth, Bridgewater, and Hanson.
The Bank's deposits are insured by the Federal Deposit Insurance
Corporation (the "FDIC") up to FDIC limits (generally $100,000 per depositor)
and by the Depositors Insurance Fund for deposits in excess of FDIC limits.
MISSION STATEMENT WE WILL PROVIDE SUCH EXTRAORDINARY SERVICE AND VALUE
THAT OUR CUSTOMERS WILL TELL THEIR FRIENDS AND
ASSOCIATES ABOUT US [ABINGTON BANCORP ASSOCIATES PICTURE]
<PAGE> 65
A MESSAGE FROM THE PRESIDENT
DEAR FELLOW SHAREHOLDERS:
[ABINGTON BANCORP PRESIDENT PHOTO]
Last year was a rewarding one for Abington Bancorp. Throughout 1997, we
enjoyed the fruit of the key business strategies we have aggressively pursued
since 1994. I am pleased with our overall results, but I am particularly proud
to be able to report to you, our stockholders, that a 24% increase in net income
and a 115.4% appreciation in stock price were among the significant benefits we
realized in 1997 from the value-building initiatives undertaken over the past
three years.
This solid performance is the outcome of many factors, including, of
course, the generally strong economy enjoyed by our market area last year. In
today's highly competitive banking industry, however, a good economy alone is
not enough to produce the positive results that brought us recognition from
several market indexes as one of the very top performers in stock appreciation
among Massachusetts banks. This accomplishment required skillful strategic
guidance from our Board of Directors and an outstanding effort from employees at
all levels. My sincere thanks goes to every individual who played a role in
making 1997 such a strong year for our institution.
Looking ahead, we are confident our increasingly diverse package of
financial products and services, along with our dedication to top-notch service,
will enable us to continue to serve our expanding customer base well. Equally
important, our healthy financial performance will allow us to bring enhanced
value to our community, both as an institution that supports business growth and
as a responsible corporate citizen. Our commitment to working in partnership
with our community remains unwavering, and we are pleased to be well positioned
to play a leading role in the growth and well-being of the towns we serve.
SOLID FINANCIAL PERFORMANCE
HIGHLIGHTS 1997
Here are some notable details of the Bank's strong financial performance in
1997. As already mentioned, our earnings strength was marked by a 24% increase
in net income, which rose to $4,378,000. Taking into account the 2-for-1 stock
split that was declared on November 14, 1997, this substantial rise in net
income resulted in diluted earnings per share of $1.10, compared to $.89 per
diluted share for 1996.
These excellent results were due primarily to our continued strong focus on
building our transaction accounts and using the deposit growth this generates to
increase our business loans. As deposits grew by 8%, rising from $300 million to
$325 million during the year, the Bank benefited in two ways. First, the overall
cost of funds on deposit and borrowed funds was brought down from 4.41% in 1996
to 4.35% in 1997. Second, customer service fees grew by 36%, reaching $3,276,000
for the year; this figure is particularly noteworthy because it indicates that
our emphasis on attracting new customers through our High Performance Checking
Program, which began in 1995, continues to produce extremely strong results.
Abington Bancorp ended the year with assets of $532 million, up from $487
million, or 9%, from 1996. This reflected strong commercial loan activity
throughout the year, which saw our business loan portfolio grow by $18 million,
a 61% increase. While we have experienced substantial growth in our
1
<PAGE> 66
portfolio over the past two years, we have also worked hard to assure the
quality of these assets. During 1997, non-performing assets dropped by 41.5% to
stand at $978,000 at year's end. Both this figure and our delinquency rate of
.42% mean that our current asset quality is outstanding by any measure.
The growth of our business loan portfolio helped produce a 9% rise in our
interest income, which reached $16,206,000. Also contributing to this increase
was a restructuring of our securities portfolio. This process, which began in
the second half of 1996 and continued during the first nine months of 1997,
involved selling various lower yielding securities and reinvesting those funds
in higher yielding securities. We were disciplined and extended out the maturity
on approximately $30 million of borrowed funds during the first quarter of 1997
to achieve better interest rate balance and stability.
Our return on equity for 1997 was 12.59%, up from 11% in 1996. This
represented the highest return on equity since Abington Savings Bank converted
from a mutual savings bank to stock form of ownership in 1986. This was a good
achievement for us in 1997 compared to historical results, and we hope to build
on it in the future.
All of the factors mentioned above, as well as our continued strong
emphasis on expense management, combined to produce the robust stock
appreciation of 115% mentioned earlier. From December 31, 1996, to December 31,
1997, taking into account the 2-for-1 stock split, the Company's stock price
rose from $9.75 to $21. In addition to building shareholder value through the
stock split, the Board of Directors approved the repurchase of up to 10% of
outstanding common stock in March of 1997. As of February 1998, the Company had
repurchased 295,500 shares out of a total of 375,000 authorized under the
Company's initial stock repurchase plan. At its February 1998 meeting, the Board
authorized the repurchase of an additional 10% of shares.
ASB OPENS ITS FIRST SUPERMARKET BRANCH OFFICE
In August, Abington Savings Bank opened the first of three planned supermarket
branches. Located in a new shopping plaza along busy Rte. 3A in Cohasset, the
branch, which is open seven days a week, met with immediate success and easily
achieved its year end deposit target.
YEAR END STOCK PRICE PER SHARE
Our solid performance continues to favorably impact our stock price
[YEAR END STOCK PHOTO]
1992: $ 4.25
1993: $ 5.75
1994: $ 6.00
1995: $ 8.63
1996: $ 9.75
1997: $21.00
Net Overhead
Our net overhead continues to decrease [NET OVERHEAD PHOTO]
1992: 2.37%
1993: 2.31%
1994: 2.18%
1995: 2.05%
1996: 1.88%
1997: 1.81%
2
<PAGE> 67
OUR BUSINESS BANKING
DIVISION HAS TAKEN
A LARGE BITE OUT OF THE
SOUTH SHORE'S BUSINESSES.
[ABINGTON APPLE (#2) PHOTO]
<PAGE> 68
GROWING THE FRANCHISE
One of the most exciting developments for Abington Savings Bank in 1997 was
the launch of our first supermarket branch which opened in Cohasset in August.
Two more supermarket branches will follow in 1998, in Hanson and Randolph. We
are extremely pleased to be working on this new initiative with Shaw's
Supermarkets, an organization with a strong reputation for quality and value.
These supermarket branches are an important and highly efficient mechanism
for extending our franchise to give us a greater presence throughout the South
Shore. Equally important, they are a natural tie-in with our strategy to
increase our core retail deposit relationships. Highly cost-effective, these
branches enable us to deliver a full array of services at a place and with hours
that are extremely convenient to customers. We've received a positive reception
in Cohasset and anticipate equal success with the additional supermarket
branches set to open this year.
Just as the supermarket branches are designed to provide the type of
one-stop shopping experience that consumers increasingly demand these days, the
reorganization of our Consumer Lending Department last year also provided an
important convenience to customers. While our Loan Center in Whitman continues
to serve as a processing center, we now have loan specialists working in each
branch, bringing these important services closer to our customers. Placing the
loan specialists in the branches also gives rise to more opportunities for
efficient cross-selling, thereby reinforcing the sales culture we have worked
hard to build over the past few years.
As a result of this reorganization, our retail lending operation
experienced strong profitability and exceeded its lending targets. Throughout
the year, many homeowners sought to take advantage of the prevailing low
interest rates to refinance their mortgages. We anticipate this market will
remain strong in 1998, and we expect the market for first mortgages to grow as
interest in South Shore housing continues to build, thanks in part to the return
of the commuter rail which runs through the heart of our market area.
At the same time we are reaching out to a broader customer base with
supermarket branches and more convenient loan service locations, more and more
customers are taking advantage of our growing range of 24-hour telebanking
services. Last year, our telebanking system averaged 30,000 calls per month, a
remarkable increase from the 6,000 calls per month we were receiving just two
years ago. Significant numbers of people are taking advantage of our telebanking
capabilities by opening deposit and checking accounts or initiating loans via
this fast, efficient and highly convenient method. In 1998, we will make yet
another technological advance by offering remote access banking via personal
computers to our business customers.
All of these positive developments in our retail banking operation--
especially the tremendous success of our High Performance Checking Program,
which has produced a 129% increase in the number of checking accounts since the
program was introduced in March 1995--have lead to a need to expand and renovate
our branch facilities to serve this constantly growing customer base. Much of
this work has already been accomplished over the past two years and more will
come during the next 12 to 18 months when we will be expanding our banking
offices and facilities to provide faster and more efficient customer service.
NON-PERFORMING ASSETS (dollars in thousands)
Our non-performing assets have decreased which is indicative of our asset
quality [NON-PERFORMING ASSETS PHOTO]
1992: $10,828
1993: $ 7,840
1994: $ 6,674
1995: $ 1,798
1996: $ 1,672
1997: $ 978
4
<PAGE> 69
OUR PIECE OF THE
RETAIL BANKING PIE HAS
GREATLY INCREASED.
[BANKING PIE PHOTO]
<PAGE> 70
BUSINESS BANKING SUCCESS CONTINUES
In 1997, the talented Business Banking team we put in place in 1996
continued to increase the presence and reputation of Abington Savings Bank
throughout our market's business community. The previously mentioned 61%
increase in our business lending portfolio was the very favorable result of
their efforts. Equally important, despite the highly competitive lending
environment that prevailed in the region in 1997, we continued to place loans of
high quality with good yields, a direct result of the extensive experience of
our lending staff.
Looking ahead, we will work to continue the expansion of Business Banking
at Abington Savings Bank, with the growth in our lending portfolio continuing to
be funded by core deposit growth. We will work to improve the margin between
loan cost and yield, although we expect this to be more challenging in 1998. At
the same time that the competition for good quality lending opportunities
continues to increase in our region, the yield curve has dramatically flattened.
However, we are confident that our strong focus on providing top-quality service
to businesses seeking financing will continue to enable us to compete
effectively.
ON THE HORIZON
As always, risk management continues to be a primary focus of our efforts
at Abington Savings Bank. Along with the rest of the business world, we took
steps in 1997 to begin to address any potential software problems related to the
so-called "year 2000 problem." Based on an extensive review of our internal
systems, we believe our analysis and reporting mechanisms are sound, and we have
a plan in place to deal with remaining issues involving the companies that
provide us with software.
As we continue to build on the successful business strategies that
accounted for the strong year we experienced in 1997, we also will pay
considerable attention to the need to move beyond traditional banking to offer
customers greater convenience and value through one-stop shopping for a full
range of financial services. This truly is the wave of the future, and Abington
Savings Bank intends to be a strong competitor by expanding into new,
complimentary areas, which may include mutual funds, property and casualty
insurance, and trust and financial planning services.
BENEFIT FOR CARDINAL CUSHING SCHOOL
The proceeds of our highly successful 2nd Annual St. Patrick's Day Dance to
benefit the Cardinal Cushing School and Training Center in Hanover enabled the
graduating class to enjoy a visit to Disney World. We are extremely proud of
this important community partnership and take great joy from the support we're
able to give to these wonderful children.
TOTAL ASSETS (dollars in thousands)
Our total assets continue to grow [TOTAL ASSETS PHOTO]
1992: $315,048
1993: $347,354
1994: $421,833
1995: $460,492
1996: $486,958
1997: $531,986
NET-INTEREST INCOME (dollars in thousands)
Our net-interest income continues to increase
1992: $ 9,648 [NET INTEREST INCOME PHOTO]
1993: $11,289
1994: $12,733
1995: $13,727
1996: $14,815
1997: $16,206
6
<PAGE> 71
Thanks to the strength of the customer base that High Performance Checking
has enabled us to build over the past two years, we are extremely well
positioned to take advantage of the numerous cross-selling opportunities that an
expansion of our products and services will provide. By improving our ability to
analyze the extensive customer data to which we now have access, we will be able
to efficiently develop and market new products and services that will strengthen
our customer relationships and improve our financial results still further over
the long term.
Finally, in 1998 we will continue to take an active interest in the broader
well-being of the communities we serve. We are especially pleased that in 1997,
our employees donated $15,000 through payroll deductions to the Cardinal Cushing
School and Training Center, which is the focus of a major partnership for the
Bank. We also hosted our 2nd Annual St. Patrick's Day Dance fund-raiser for the
school, an event that made it possible for the school to send the graduating
class of 22 exceptional children on the trip of a lifetime to Disney World.
This relationship is a significant unifying influence for our staff, our
customers and our business partners, and along with the many other community
donations we make, serves to remind us of the importance of giving back to the
people who live in the towns we serve.
I would be remiss if I did not note that 1997 marked the final full year of
service for an outstanding Board member, Robert J. Armstrong. He will step down
from the Board at our 1998 Annual Meeting, having reached the mandatory
retirement age. Bob has served this organization since 1971, longer than any
other current director. Throughout this lengthy tenure, he has always taken his
responsibility to shareholders extremely seriously, as shown by his excellent
preparation for meetings and his willingness to regularly challenge management,
as a good director should. As a successful business person and a great family
man, Bob has also been a tremendous role model for everyone at Abington Savings
Bank. On behalf of my fellow Board members, I wish to express our gratitude for
his unstinting dedication through the years.
As always, I also wish to thank all the rest of the Board of Directors and
all of our employees for helping to make 1997 a successful year on many fronts
for our organization. I am confident that, working together, we will continue to
build on this success in 1998.
Respectfully submitted,
/s/ James P. McDonough
James P. McDonough
President and Chief Executive Officer
LOANS (dollars in thousands)
High sales in home equity and business loans [LOANS PHOTO]
1992: $186,520
1993: $199,807
1994: $235,614
1995: $260,585
1996: $298,970
1997: $330,792
DEPOSITS (dollars in thousands)
Deposits are up due to totally free checking [DEPOSITS PHOTO]
1992: $202,105
1993: $209,911
1994: $246,843
1995: $280,070
1996: $300,445
1997: $324,934
7
<PAGE> 72
The Bank considers its
principal market area to be
Plymouth County,
Massachusetts,
primarily
Hull,
Cohassett,
Holbrook,
Abington,
Whitman,
Pembroke,
Halifax, and
Kingston,
where it has
banking offices.
[MAP OF BOSTON WITH ARROWS TO THE TOWNS OF HULL, COHASSET, HOLBROOK,
ABINGTON, WHITMAN, PEMBROKE, HALIFAX, KINGSTON]
8
<PAGE> 73
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
At December 31, 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets $531,986 $486,958 $460,492 $421,833 $347,354
Total loans, net 330,792 298,970 260,585 235,614 199,807
Investment securities (1) 47,187 31,950 33,343 28,328 15,915
Mortgage-backed investments 126,016 131,184 138,937 133,882 113,052
Deposits 324,934 300,445 280,070 246,843 209,911
Borrowed funds 165,910 147,524 145,609 134,155 106,921
Stockholders' equity 36,321 33,546 30,561 28,366 27,869
Book value per share (2) 9.99 8.86 8.11 7.57 7.45
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data) (2)
<S> <C> <C> <C> <C> <C>
Operating Data:
Interest and dividend income $ 36,297 $34,332 $ 31,949 $ 27,082 $ 23,591
Interest expense 20,091 19,517 18,222 14,349 12,302
-------- -------- -------- -------- --------
Net interest income 16,206 14,815 13,727 12,733 11,289
Provision for possible loan losses 630 480 2,233 610 720
-------- -------- -------- -------- --------
Non-interest income:
Loan servicing fees 558 646 713 646 617
Customer service fees 3,276 2,412 1,644 1,050 759
Gain (loss) on sales of securities 540 495 181 322 459
Gain on sales of loans, net 236 315 453 389 890
Write-down of limited partnership - - (110) - -
Net gain (loss) on sales and write-down
of other real estate owned 109 67 (92) (2) (478)
Other 267 242 119 56 40
-------- -------- -------- -------- --------
Total non-interest income 4,986 4,177 2,908 2,461 2,287
-------- -------- -------- -------- --------
Non-interest expenses 13,505 12,840 11,955 10,255 8,771
-------- -------- -------- -------- --------
Income before income taxes and cumulative
effect of accounting change 7,057 5,672 2,447 4,329 4,085
Provision for income taxes 2,679 2,139 1,018 1,586 1,556
-------- -------- -------- -------- --------
Income before cumulative effect
of accounting change 4,378 3,533 1,429 2,743 2,529
Cumulative effect of accounting change - - - - 650
-------- -------- -------- -------- --------
Net income $ 4,378 $ 3,533 $ 1,429 $ 2,743 $ 3,179
======== ======== ======== ======== ========
Basic:
Earnings per share before cumulative
effect of accounting change $ 1.18 $ .94 $ .38 $ .73 $ .68
Cumulative effect of accounting change - - - - .17
-------- -------- -------- -------- --------
Basic earnings per share $ 1.18 $ .94 $ .38 $ .73 $ .85
======== ======== ======== ======== ========
Diluted:
Earnings per share before cumulative
effect of accounting change $ 1.10 $ .89 $ .37 $ .70 $ .66
Cumulative effect of accounting change - - - - .17
-------- -------- -------- -------- --------
Diluted earnings per share $ 1.10 $ .89 $ .37 $ .70 $ .83
======== ======== ======== ======== ========
Dividends per share $ .20 $ .20 $ .20 $ .20 $ -
======== ======== ======== ======== ========
</TABLE>
ABINGTON BANCORP, INC. 9 1997 ANNUAL REPORT
<PAGE> 74
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Ratios:
Return on average total assets .87% .74% .33% .70% .95%
Interest rate spread 3.29 3.14 3.14 3.32 3.37
Return on average equity 12.59 11.00 4.68 9.23 11.73
Dividend payout ratio 16.90 21.34 52.62 27.34 -
Average equity to average total assets 6.94 6.69 7.00 7.61 8.10
</TABLE>
(1) Includes Federal Home Loan Bank stock.
(2) The Company declared a 2-for-1 stock split in the form of a dividend to
holders of record on November 14, 1997. All share and per share data have
been adjusted to reflect this transaction.
ABINGTON BANCORP, INC. 10 1997 ANNUAL REPORT
<PAGE> 75
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
Abington Bancorp, Inc. (the "Company"), became the one-bank holding company for
the Abington Savings Bank (the "Bank") on January 31, 1997. The Company's
primary business is serving as the holding company of the Bank. The holding
company did not conduct any business in fiscal 1996.
The Company's results of operations depend primarily on its net interest income
after provision for possible loan losses, its revenue from loan fees and sales
and 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, economic factors
influencing general interest rates, prepayment on loans and mortgage-backed
investments, loan demand and savings flows, as well as the effect of competition
for deposits and loans. The Company's net interest income is also affected by
the performance of its loan portfolio and in particular, 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.
On June 26, 1995, the Company acquired a branch in Holbrook ("Holbrook") from
the Bank of Boston. Additionally, in August 1997, the Company also opened, in
Cohasset, the first of three planned de novo supermarket branches, with Randolph
and Hanson scheduled to open in 1998. This acquisition and expansion into
supermarket banking is consistent with the Company's strategy of controlled
growth with a focus on core retail deposit relationships and will enable the
Company to have a greater regional presence.
NET INTEREST INCOME
Net interest income is affected by the mix and volume of assets and liabilities,
and levels of prepayment primarily on loans and mortgage-backed investments, the
movement and level of interest rates, and interest spread, which is the
difference between the average yield received on earning assets and the average
rate paid on deposits and borrowings. The Company's net interest rate spread was
3.29% and 3.14% for the years ended December 31, 1997 and 1996.
The level of non-accrual loans and other real estate owned also has an impact on
net interest income. At December 31, 1997, the Company had $622,000 in
non-accrual loans and $265,000 in other real estate owned compared to $1,028,000
in non-accrual loans and $500,000 in other real estate owned as of December 31,
1996.
The Company's cost of funds remained essentially flat in 1997 from 1996 levels,
as total cost of funds was 4.65% in 1997 as compared to 4.68% in 1996. The
relatively low rates paid on deposit accounts by banks in general, compared with
generally historically high returns received in the equity market and from
non-bank competitors, such as mutual funds, continue to make deposit growth an
increasing challenge as some customers began to seek these alternate, higher
yielding investment sources. Management continues to re-evaluate other funding
alternatives and also the rates paid, compared to market, on time deposits and
other deposit gathering strategies. These conditions, in part, caused an
increase in borrowed funds in 1997 as compared to 1996 but have not had an
adverse impact on overall cost of funds as generally the Company has not paid a
premium rate to attract time deposits. Management believes that prudent deposit
growth will continue to be a challenge in the future and may adversely impact
cost of funds in the future.
The table on the following page presents average balances, interest income and
expense and yields earned or rates paid on the major categories of assets and
liabilities for the years indicated.
ABINGTON BANCORP, INC. 11 1997 ANNUAL REPORT
<PAGE> 76
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Earning assets:
Federal funds sold $ 544 $ 34 6.25% $ 614 $ 37 6.03% $ 621 $ 42 6.76%
Other short-term investments 221 16 7.24 75 4 5.33 434 25 5.76
Bonds and obligations (2) 25,025 1,775 7.09 23,489 1,512 6.44 23,774 1,536 6.46
Equity securities (1) 11,987 589 4.91 10,966 556 5.07 10,300 574 5.57
Mortgage-backed investments (2) 132,721 9,045 6.82 137,166 9,245 6.74 137,007 8,984 6.56
Loans (3) 304,925 24,838 8.15 282,530 22,978 8.13 243,949 20,788 8.52
-------- ------- -------- ------- -------- -------
Total earning assets 475,423 36,297 7.64 454,840 34,332 7.55 416,085 31,949 7.68
-------- ------- -------- ------- -------- -------
Cash and due from banks 9,786 8,348 7,028
Other assets 16,227 16,891 13,746
-------- -------- --------
Total assets $501,436 $480,079 $436,859
======== ======== ========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
NOW deposits $ 37,256 $ 577 1.55% $ 33,392 $ 516 1.55% $ 26,083 $ 402 1.54%
Savings deposits 97,786 2,168 2.22 95,661 2,287 2.39 94,328 2,301 2.44
Time deposits 145,152 8,312 5.73 136,541 7,939 5.81 121,126 6,978 5.76
-------- ------- -------- ------- -------- -------
Total interest-bearing deposits 280,194 11,057 3.95 265,594 10,742 4.04 241,537 9,681 4.01
Short-term borrowings 45,833 2,557 5.58 66,790 3,733 5.59 73,719 4,546 6.17
Long-term debt 105,950 6,477 6.11 84,977 5,042 5.93 66,614 3,995 6.00
-------- ------- -------- ------- -------- -------
Total interest-bearing liabilities 431,977 20,091 4.65 417,361 19,517 4.68 381,870 18,222 4.77
------- -------- --------
Non-interest-bearing deposits 29,447 25,223 19,584
-------- -------- --------
Total deposits and
borrowed funds 461,424 4.35 442,584 4.41 401,454 4.54
Other liabilities 5,239 5,385 4,847
-------- -------- --------
Total liabilities 466,663 447,969 406,301
Stockholders' equity 34,773 32,110 30,558
-------- -------- --------
Total liabilities and
stockholders' equity $501,436 $480,079 $436,859
======== ======== ========
Net interest income $16,206 $14,815 $13,727
======= ======= =======
Interest rate spread (4) 3.29% 3.14% 3.14%
==== ==== ====
Net yield on earning assets (5) 3.41% 3.26% 3.30%
==== ==== ====
</TABLE>
(1) Includes Federal Home Loan Bank stock, investments held for investment and
available for sale (at amortized cost).
(2) Includes investments available for sale (at amortized cost).
(3) Non-accrual loans net of reserve for possible loan losses and loans held
for sale are included in average loan balances.
(4) Interest rate spread equals the yield on average earning assets minus the
yield on average deposits and borrowed funds.
(5) Net yield on earning assets equals net interest income divided by total
average earning assets.
ABINGTON BANCORP, INC. 12 1997 ANNUAL REPORT
<PAGE> 77
RATE/VOLUME ANALYSIS
The following table presents, for the periods indicated, the changes in interest
income and 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 attribute able to both volume and rate has been allocated proportionately
to the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 vs 1996 1996 vs 1995
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Increase (decrease) Increase (decrease)
Due to Due to Due to Due to
Volume Rate Total Volume Rate Total
--------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest and dividend income:
Loans $ 1,824 $ 36 $ 1,860 $3,171 $(981) $2,190
Bonds and obligations 103 160 263 (18) (6) (24)
Equity securities 51 (18) 33 36 (54) (18)
Mortgage-backed
investments (302) 102 (200) 10 251 261
Federal funds sold (4) 1 (3) - (5) (5)
Interest-bearing deposits
in banks 10 2 12 (19) (2) (21)
------- ----- ------- ------ ----- ------
Total interest and
dividend income 1,682 283 1,965 3,180 (797) 2,383
------- ----- ------- ------ ----- ------
Interest expense:
NOW deposits 60 1 61 113 1 114
Savings deposits 50 (169) (119) 32 (46) (14)
Time deposits 495 (122) 373 896 65 961
Short-term borrowings (1,170) (6) (1,176) (407) (406) (813)
Long-term debt 1,278 157 1,435 1,090 (43) 1,047
------- ----- ------- ------ ----- ------
Total interest expense 713 (139) 574 1,724 (429) 1,295
------- ----- ------- ------ ----- ------
Net interest income $ 969 $ 422 $ 1,391 $1,456 $(368) $1,088
======= ===== ======= ====== ===== ======
</TABLE>
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996
GENERAL
Net income for the year ended December 31, 1997 was $4,378,000 or $1.10 per
diluted share compared to $3,533,000 or $.89 per diluted share in 1996, an
increase of $845,000 or 23.9%. The growth in earnings is generally attributable
to increased net interest income, increases in customer service fee revenues and
controlled growth in non-interest expenses.
INTEREST AND DIVIDEND INCOME
Interest and dividend income increased $1,965,000 or 5.7% during 1997 as
compared to 1996. This increase was attributable to increases in earning assets,
particularly loans, and increases in the rates earned on investment securities,
including mortgage-backed investments and loans. The balance of average earning
assets was $475,423,000 in 1997 as compared to $454,840,000 in 1996, an increase
of $20,583,000 or 4.5%. This increase was generally caused by growth in the
Company's commercial loan portfolio in 1997 which had an average balance of
approximately $37,543,000 in 1997 as compared to $22,515,000 in 1996, an
increase of $15,028,000 or 66.7%. This increase is consistent with management's
strategy of diversifying the Company's asset-mix by increasing loan growth,
particularly higher yielding commercial loans. The remaining asset growth was
generated from residential loan purchases and originations partially offset by
decreases in the Company's investment and mortgage-backed securities portfolios.
The combined average balance of investments, including equity and
mortgage-backed securities, decreased to $169,733,000 in 1997, a decrease of
approximately $1,888,000 or 1.1% from 1996 average levels of $171,621,000. See
"Liquidity and Capital Resources" and "Asset/Liability Management" for a further
discussion of the Company's investment strategies. As a result of this strategy,
the average yield on interest earning assets increased in 1997 to 7.64% from
7.55% in 1996. Yields on loans increased slightly to 8.15% in 1997 from 8.13% in
1996. Increases due to greater concentrations of commercial loans generally
offset the declining interest rates on residential mortgage loans originated/
purchased over the second half of 1997 as well as declining yields on those
portfolios as the result of customer refinancings into lower yielding loans. The
yields on investment, excluding equities, and mortgage-backed securities
portfolios were 7.09% and 6.82%, respectively, as compared to 6.44% and 6.74%,
respectively, in 1996. This increase in yield, despite the generally declining
long-term interest rate environment, was achieved through the sale of various
lower yielding securities held by the Company in its portfo-
ABINGTON BANCORP, INC. 13 1997 ANNUAL REPORT
<PAGE> 78
MANAGEMENT'S DISCUSSION AND ANALYSIS
lio of securities available for sale and the acquisition of securities at higher
yields, primarily during the second half of 1996 and the first 9 months of 1997.
INTEREST EXPENSE
Interest expense in 1997 increased $574,000 or 2.9% as compared to 1996
generally due to increases in deposit balances and higher rates paid on borrowed
funds. This increase was partially offset by decreases in the average rates paid
on deposits. The average balance of core deposits (NOW accounts, savings and
money markets) and time deposits rose to $164,489,000 and $145,152,000,
respectively, in 1997 as compared to $154,276,000 and $136,541,000,
respectively, in 1996 for increases of $10,213,000 (or 6.6%) and $8,611,000 (or
6.3%), respectively. These increases reflect the success of management's
strategy to attract retail, core deposit relationships and increasing deposit
balances. The overall cost of interest bearing deposits decreased to 3.95% in
1997 from 4.04% in 1996 despite a continued competitive market for deposit
relationships. This is generally attributable to the Company's continued growth
in less expensive core deposit accounts as well as decreases in overall rates
paid on time deposits. While rates paid on time deposits have generally remained
flat for most of 1997, the overall cost has declined due to customers shifting
to shorter-maturity time deposits. The trend of shorter-term time deposits is
expected to continue in future periods should the current rate environment
continue with longer-term interest rates remaining relatively low in comparison
to short-term rates. The Company will manage its cost of deposits by continuing
to seek new methods of acquiring core deposits, by maintaining its current core
deposits at reasonable rates in comparison to local markets and by utilizing
funding alternatives, including borrowings.
Average balances of borrowed funds remained flat at $151,783,000 in 1997 as
compared to $151,767,000 in 1996. The overall weighted cost of borrowed funds
increased to 5.95% in 1997 from 5.78% in 1996. This increase in cost of borrowed
funds was generally due to management's decision to extend approximately
$28,000,000 of borrowings from short-term to longer-term maturities at the end
of the first quarter of 1997. This strategy in part offset the trend of growth
in shorter-term maturity time deposits, as noted above, and provided further
protection against potential rising interest rates. The Company will continue to
evaluate the use of borrowings as an alternative funding source for asset growth
in future periods. See "Asset/Liability Management" for further discussion of
the competitive market for deposits and overall strategies for uses of borrowed
funds.
NON-INTEREST INCOME
Total non-interest income increased $809,000 or 19.4% in 1997 as compared to
1996. Customer service fees, which were $3,276,000 in 1997 as compared to
$2,412,000 in 1996, increased $864,000 or 35.8%. This increase is consistent
with increases in core deposit accounts, particularly NOW and checking accounts.
Non-interest income was also favorably impacted by the sales of various other
real estate owned properties at better than anticipated prices. Income related
to the sales of other real estate owned was $109,000 in 1997 and $67,000 in
1996.
Gains on securities were $540,000 in 1997, an increase of $45,000 or 9.1% over
1996 levels. These gains were reflective of the strong equity markets
experienced over the past 2 years.
Gains on sales of mortgages and loan servicing income decreased during 1997 to
$236,000 and $558,000, respectively, from $315,000 and $646,000, respectively,
in 1996. This reflects management's decision in 1996 to sell most of its
residential loan production on a servicing released basis, as well as fewer
loans being originated for sale in 1997. The average balances of loans serviced
for others declined to $224,450,000 in 1997 from $235,949,000 in 1996, a decline
of 4.9%. The loan servicing income for 1997 was further negatively impacted by
the accelerated amortization of mortgage servicing rights (approximately
$76,000) given the acceleration of estimated prepayments on the related loan
servicing pools. Declining trends in loan servicing income are expected to
continue due to the Company's current strategy of selling wholesale mortgage
production on a servicing released basis.
NON-INTEREST EXPENSE
Non-interest expense for 1997 increased $665,000 or 5.2% over 1996 levels.
Salaries and employee benefits increased 9.6% or $585,000 generally due to
increases in health insurance costs and staffing levels of the Company's
business banking and retail areas, including the Cohasset supermarket branch.
Additionally, costs associated with the Company's employee stock plan and other
incentive compensation expenses increased by approximately $280,000 over 1996
levels as the result of the increase in the Company's stock price during 1997
and also because certain performance-related incentives were met as a result of
the improved financial performance of the Company in 1997.
Occupancy and equipment expenses increased $46,000 or 1.9% primarily due to the
opening of the Cohasset branch and other minor inflationary increases. Other
non-interest expenses increased $34,000 or .8%, primarily as the result of
increased advertising expenses and other costs associated with the Company's
retail banking efforts and the opening of the Cohasset branch.
PROVISION FOR POSSIBLE LOAN LOSS
The provision for possible loan losses was $630,000 for 1997 as compared to
$480,000 for 1996. This increase of $150,000 primarily reflects the increased
risk associated with increases in the Company's commercial loan portfolio as
compared to residential lending.
PROVISION FOR INCOME TAXES
The Company's effective income tax rate for 1997 was 38.0% compared to 37.7% for
1996. The lower effective tax rate in comparison to statutory rates for both
periods is reflective of the levels of income earned by certain non-bank
subsidiaries which are taxed, for state tax purposes, at lower rates.
ABINGTON BANCORP, INC. 14 1997 ANNUAL REPORT
<PAGE> 79
MANAGEMENT'S DISCUSSION AND ANALYSIS
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995
GENERAL
Net income for the year ended December 31, 1996 was $3,533,000 or $.89 per
diluted share compared to $1,429,000 or $.37 per diluted share in 1995, an
increase of $2,104,000 or 147.2%. The key factor impacting the level of earnings
for 1995 was management's decision to aggressively dispose of a significant
portion of the Company's non-accrual and certain "high maintenance" loans which
resulted in a special provision for loan losses of $1,654,000 and increases in
other non-interest expenses of $150,000 due to other related costs during 1995.
The overall improvement in net income from core operating activities in 1996 as
compared to 1995 was mainly attributable to increases in customer service fees
and net interest income.
INTEREST AND DIVIDEND INCOME
Interest and dividend income increased $2,383,000 or 7.5% during 1996 as
compared to 1995. This increase was attributable to increases in earning assets
that were partially offset by general decreases in the rates earned on those
assets. The balance of average earning assets was $454,840,000 in 1996 as
compared to $416,085,000 in 1995, an increase of $38,755,000 or 9.3%. The
increase in average earning assets was primarily due to increases in the
Company's loan portfolio which grew from an average balance of $243,949,000 in
1995 to $282,530,000 in 1996, an increase of $38,581,000 or 15.8%. This increase
was primarily due to the acquisition of various residential loan pools made
throughout the year. See "Liquidity and Capital Resources" and "Asset/Liability
Management" for further discussion of the Company's investment strategies. The
average yield on interest earning assets declined in 1996 to 7.55% as compared
to 7.68% in 1995 due to overall declines in the yields on loans originated and
purchased. The yield on loans for 1996 was 8.13% as compared to 8.52% in 1995.
These declines were generally caused by continued declines in interest rates
from 1995 through the first 4 months of 1996, which impacted new
purchases/originations as well as generating higher prepayments on higher
yielding loans held in the Company's portfolio over the same period. Yields on
mortgage-backed securities increased from 6.56% in 1995 to 6.74% in 1996 due to
a combination of favorable yield adjustments on adjustable rate mortgage-backed
securities as well as the result of higher yields obtained due to certain
investment purchases which took place in the third quarter of 1996 which
replaced lower yielding securities which were sold in the same period.
INTEREST EXPENSE
Interest expense in 1996 increased $1,295,000 or 7.1% as compared to 1995
generally due to increases in the average balances of time deposits and
borrowings and overall growth in the Company's core deposit portfolio. The
average balances of deposits and borrowed funds were $290,817,000 and
$151,767,000, respectively, in 1996 as compared to $261,121,000 and
$140,333,000, respectively, in 1995. The increases in average deposit balances
was primarily due to the acquisition of the Holbrook branch in June 1995
(represents approximately $8 million of the increase in average balances) and
other general deposit growth which reflected management's continued focus on
expanding the Company's core deposit base. The average balances of interest
bearing NOW and non-interest bearing deposits accounts increased $12,948,000 or
28.4% in 1996 (of which approximately $2 million related to Holbrook). This was
generally reflective of the Company's success in its focused promotion
activities to attract checking accounts in 1996. Also, the average balances of
time deposits increased 12.7% or $15,415,000 in 1996 as compared to 1995 which
was generally reflective of customers' desire to attain higher yields than were
being offered by banks' core deposit rates in the Company's market area. Also,
the weighted average of borrowings increased $11,434,000 in 1996 as compared to
1995 generally due to the timing of various loan purchases in 1995 and 1996.
Overall balances of borrowings outstanding at December 31, 1996 were
$147,524,000 which was relatively consistent with the $145,609,000 outstanding
at December 31, 1995.
The weighted average rate paid on interest-bearing liabilities was 4.68% in 1996
as compared to 4.77% in 1995. The weighted average rate paid on interest-bearing
deposits was 4.04% in 1996 as compared to 4.01% in 1995. This increase was
generally attributable to increases in the weighted average rate paid on time
deposits in 1996 as compared to 1995, and the fact that the 1996 average rate
reflects the full year impact of the shift of approximately $10 million of core
deposits to certificates of deposit during the first half of 1995. This shift
was representative of customers' desire, given the market's unwillingness to
increase the rates paid on core deposits, to find higher yields for their
deposits. While rates paid on certificates of deposit declined somewhat from
early 1995 to the end of 1996, the potential impact of such rate changes had not
been fully reflected in the Company's cost of funds in 1996 given that the rates
paid on certificates of deposit are generally fixed for the duration of the
contract.
As of December 31, 1996, the weighted average rate paid on certificates of
deposit with a remaining term of 1 year or less (totaling approximately
$89,073,000) was approximately 5.49%. If those certificates had rolled over for
similar remaining terms at the rates offered as of December 31, 1996, the
weighted average paid on such deposits would decline to approximately 4.86%. See
"Asset/Liability Management" for further discussion of the competitive market
for deposits.
The weighted average rate paid on borrowings decreased to 5.78% in 1996 from
6.09% in 1995. This decrease generally coincided with decreases in rates
established by the Federal Reserve in early 1996. See "Liquidity and Capital
Resources" for further discussion of the Company's borrowed funds.
NON-INTEREST INCOME
Total non-interest income increased $1,269,000 or 43.6% in 1996 as compared to
1995. Customer service fees, which were $2,412,000 in 1996 as compared to
$1,644,000 in 1995, increased $768,000 or 46.7%. This increase was primarily
attributable to growth in core deposit accounts, particularly NOW and checking
account portfolios in 1996. The Company also realized net gains on sales of
other real estate owned of $67,000 in 1996 as compared to net losses of $92,000
in 1995. This was reflective of improved market conditions for properties held
in other real estate owned in 1996 as compared to 1995 and the overall reduced
risk on the valuation of properties that the Company held in other real estate
owned in 1996 as compared to 1995. Additionally, the Company wrote-off a real
estate limited partnership investment, in full, in 1995 for which there was no
corresponding write-down in 1996.
The growth in non-interest income was also affected by increases in gains on
sales of securities which were $495,000 in 1996 as compared to $181,000 in 1995.
These gains were generally reflective of the strong equity market in 1996 and
were also net of losses taken on sales of lower yielding mortgage-backed
securities which was done as part of an effort to increase future yields on that
portfolio. Non-interest income was adversely impacted by decreases in gains on
sales of mortgages from $453,000 in 1995 to $315,000 in 1996. The results for
1995 were favorably impacted by a gain of approximately $175,000 on the sale of
approximately $7,200,000 of seasoned 20-year and 30-year fixed rate mortgages.
Excluding the impact of
ABINGTON BANCORP, INC. 15 1997 ANNUAL REPORT
<PAGE> 80
MANAGEMENT'S DISCUSSION AND ANALYSIS
this sale, the gains on sales of mortgages were actually $37,000 less in 1995
than those levels in 1996. This was in part due to the Company's prospective
adoption of FASB No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS No.
122") as of January 1, 1996. See Note 1 to the Consolidated Financial Statements
for further discussion. Loan servicing fees also declined $67,000 or 9.4% in
1996 as compared to 1995 due to general declines in the balances of loans
serviced for others which were $252,940,000 at December 31, 1995 as compared to
$235,949,000 at December 31, 1996.
NON-INTEREST EXPENSE
Non-interest expense increased by $885,000 or 7.4% in 1996 as compared to 1995.
Salaries and employee benefits increased 7.8% or $440,000 primarily due to the
acquisition of the Holbrook branch in June 1995 and other cost of living or
inflationary increases for salaries of employees and other related costs.
Occupancy expense increased $364,000 or 18.1% primarily due to costs associated
with additional investments in and higher maintenance costs associated with the
Company's computer system and the acquisition of the Holbrook branch. Other
non-interest expenses also increased $81,000 or 1.88%, generally due to
increased marketing efforts associated with Holbrook and other checking account
promotions which were partially offset by decreases of approximately $150,000 in
other costs which were incurred in 1995 related to the Company's sale of certain
non-accrual and "high maintenance" loans. The Company also benefited from
declines in the FDIC assessment rate in 1996 as compared to 1995. In 1996, the
Bank paid FDIC assessments at the minimum rate available of $2,000 per year. In
1995, the Bank also paid the lowest available rate; however, the rate of
assessment was $.23 per $100 of deposits for the first 6 months of 1995 and $.04
per $100 of deposits per annum for the second half of 1995.
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses was $480,000 for 1996 as compared to
$2,233,000 for 1995. The decrease of $1,753,000 primarily reflects provisions
taken in connection with the Company's sale of certain non-performing and "high
maintenance" loans at a discounted price in the third quarter of 1995 for which
there was no corresponding provision in 1996.
PROVISION FOR INCOME TAX
The Company's effective tax rate for 1996 was 37.7% as compared to 41.6% in
1995. The decrease in the effective tax rate from 1995 was due to certain
statutory tax limitations associated with the state tax benefits related to the
loss on sales of loans and the effect of estimated tax recapture associated with
management's write-off of a real estate limited partnership investment during
1995. The decrease in the effective tax rate for 1996 in comparison to statutory
rates is generally reflective of the levels of income earned by certain non-bank
subsidiaries which are taxed for state tax purposes at lower rates.
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 1.8%
-200 .3%
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 (6.5)%
-200 (17.5)%
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.
ABINGTON BANCORP, INC. 16 1997 ANNUAL REPORT
<PAGE> 81
MANAGEMENT'S DISCUSSION AND 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 December 31, 1997, the Company
was liability sensitive with rate sensitive assets at 61.8% of rate sensitive
liabilities at the 1-year gap.
The Company's policy is to match, as well as possible, the interest rate
sensitivities of its assets and liabilities. Residential mortgage loans, which
the Company currently originates or purchases for the Company's own portfolio,
are primarily 1-year and 3-year adjustable rate mortgages. Fixed rate
residential mortgage loans originated by the Company are primarily sold in the
secondary market, although in each year since 1989 the Bank has originated or
purchased approximately $30,000,000 primarily in shorter-term fixed rate
mortgage loans (generally 10-years to 15-years) to be held in portfolio in order
to provide a hedge against the Company's asset sensitivity.
The Company also emphasizes loans with terms to maturity or repricing of 3 years
or less, such as certain adjustable rate residential mortgage loans, commercial
mortgages, business loans, residential construction loans, second mortgages and
home equity loans.
In addition, to help manage interest rate sensitivity, in July 1994, the Company
entered into an interest rate swap agreement with an international investment
banking firm whereby the Company received a fixed rate of interest of 5.35% and
paid interest based on the 6 month floating LIBOR rate which reset semi-annually
(February and August). The notional amount of this swap was initially
$15,000,000. This amount amortized down at a rate consistent with the
amortization and prepayments of a referenced pool of residential mortgages as
specified in the agreement. In addition to the fixed rate of interest, the
Company also received a discount of $300,000 from the investment banking firm in
cash upon execution of this agreement. This discount was accreted to income over
the life of the swap agreement at a rate consistent with the payment and
prepayment levels of the referenced pool of mortgages. The resulting yield
received by the Company including the impact of this accretion was approximately
6.25%. This agreement expired on August 25, 1997. The Company had entered into
this agreement as a micro-hedge against its 1-year adjustable rate mortgage
portfolio (including those held as mortgage-backed securities). Interest income
(expense) associated with this swap was recognized generally by the accrual
method with monthly settlements. Management did not renew this interest rate
swap.
Management desires to expand its interest-earning asset base in future periods
primarily through growth in the Company's loan portfolio. Loans comprised
approximately 64.1% of the average interest earning assets in 1997. In the
future, the Company intends to be competitive in the residential mortgage market
but plans to place greater emphasis on consumer and commercial loans. The
Company also has been, and expects to remain, active in pursuing wholesale
opportunities to purchase loans. During 1997 and 1996, the Company acquired
approximately $57,800,000 and $36,200,000, 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 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 finding strategies and alternatives
accordingly as well as continuing to focus its efforts on attracting core,
retail deposit relationships.
The Company is also a voluntary member of the Federal Home Loan Bank ("FHLB") of
Boston. This borrowing capacity assists the Company in managing its
asset/liability growth because, at times, the Company considers it more
advantageous to borrow money from the FHLB of Boston than to raise money through
non-core deposits (i.e., certificates of deposit). Borrowed funds totaled
$165,910,000 at December 31, 1997 compared to $147,524,000 at December 31, 1996.
These borrowings are primarily comprised of FHLB of Boston advances and have
primarily funded residential loan originations and purchases as well as
mortgage-backed investments and investment securities.
The following table sets forth maturity and repricing information relating to
interest sensitive assets and liabilities at December 31, 1997. The balance of
such accounts has been allocated among the various periods based upon the terms
and repricing intervals of the particular assets and liabilities. For example,
fixed rate mortgage loans and mortgage-backed securities, regardless of held 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.
ABINGTON BANCORP, INC. 17 1997 ANNUAL REPORT
<PAGE> 82
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
Repricing/Maturity Interval
- ----------------------------------------------------------------------------------------------------------------------------------
At December 31, 1997 0-6 Mos. 6-12 Mos. 1-2 Yrs. 2-3 Yrs. 3-5 Yrs. Over 5 Total Total
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets subject to interest rate
adjustment:
Short-term investments $ 163 $ - $ - $ - $ - $ - $ 163
Bonds and obligations 3,683 4,181 3,997 2,068 3,000 16,961 33,890
Mortgage-backed investments 32,254 27,009 10,529 9,258 15,556 30,692 125,298
Mortgage loans subject to rate
review 40,671 17,961 22,826 30,938 16,365 - 128,761
Fixed rate mortgage loans 45,759 34,761 51,350 27,907 20,846 4,216 184,839
Commercial and other loans
contractual maturity 8,483 3,143 2,978 2,180 2,688 - 19,472
--------- --------- -------- -------- -------- ------- --------
Total 131,013 87,055 91,680 72,351 58,455 51,869 492,423
--------- --------- -------- -------- -------- ------- --------
Liabilities subject to interest
rate adjustment:
Money market deposit accounts 15,477 - - - - - 15,477
Savings deposits - term
certificates 57,039 45,642 25,214 18,632 5,804 - 152,331
Other savings accounts 123,201 - - - - - 123,201
Borrowed funds 81,410 30,000 19,000 18,000 17,000 500 165,910
--------- --------- -------- -------- -------- ------- --------
Total 277,127 75,642 44,214 36,632 22,804 500 456,919
--------- --------- -------- -------- -------- ------- --------
Excess (deficiency) of rate
sensitive assets over rate
sensitive liabilities (146,114) 11,413 47,466 35,719 35,651 51,369 35,504
--------- --------- -------- -------- -------- ------- --------
Cumulative excess (deficiency) of
rate sensitive assets over rate
sensitive liabilities (1) $(146,114) $(134,701) $(87,235) $(51,516) $(15,865) $35,504
========= ========= ======== ======== ======== =======
Rate sensitive assets as a percent
of rate sensitive liabilities 47.3% 61.8% 78.0% 88.1% 96.5% 107.8%
</TABLE>
(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.
ABINGTON BANCORP, INC. 18 1997 ANNUAL REPORT
<PAGE> 83
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 December 31, 1997, the Company had
approximately $80,000,000 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 $978,000 at December 31, 1997,
compared to $1,672,000 at December 31, 1996, a decrease of $694,000 or 41.5%.
The Bank's ratio of delinquent loans to total loans was .42% at December 31,
1997, as compared to .72% at December 31, 1996. Management believes that overall
trends in delinquencies and non-performing assets will continue to be favorable
in 1998.
During 1997, 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 1997.
The balance of the general other real estate owned reserves at December 31, 1997
was approximately $60,000 compared to $159,400 at December 31, 1996.
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 December 31, 1997, the Company had outstanding commitments to originate and
sell residential mortgage loans in the secondary market amounting to $2,003,000
and $1,415,000, respectively. The Company also has outstanding commitments to
grant advances under existing home equity lines of credit amounting to
$11,230,000. Unadvanced commitments under outstanding commercial and
construction loans totaled $10,764,000 as of December 31, 1997. The Company
believes it has adequate sources of liquidity to fund these commitments.
The Company's total stockholders' equity was $36,321,000 or 6.8% of total assets
at December 31, 1997, compared with $33,546,000 or 6.9% of total assets at
December 31, 1996. The increase in total stockholders' equity of approximately
$2,776,000 or 8.3% primarily resulted from earnings of the Company and increases
in the market value of its portfolio of available for sale securities, net of
applicable taxes, offset, in part, by dividends paid and the effect of the
Company's stock repurchase program. In accordance with current guidelines, the
net unrealized gain on available for sale securities has not been included in
regulatory capital calculations.
Bank regulatory authorities have established a capital measurement tool called
"Tier 1" leverage capital. A 4.00% ratio of Tier 1 capital to assets now
constitutes the minimum capital standard for most banking organizations and a
5.00% Tier 1 leverage capital ratio is required for a "well-capitalized"
classification. At December 31, 1997, the Company's Tier 1 leverage capital
ratio was approximately 6.01%. 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 December 31, 1997, the Company's Tier 1 and total
risk-based capital ratios were approximately 12.15% and 13.02%, 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 December 31, 1997.
IMPACT OF THE YEAR 2000
The year 2000 problem, which is common to most companies, concerns the inability
of information systems, primarily computer software programs, to properly
recognize and process date sensitive information as the year 2000 approaches.
The Company has completed an assessment of the majority of its systems to
identify the systems that could be affected by the year 2000 issue and is in the
process of developing 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 whom are larger, well-established
companies who 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 and also testing applications. 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
ABINGTON BANCORP, INC. 19 1997 ANNUAL REPORT
<PAGE> 84
MANAGEMENT'S DISCUSSION AND ANALYSIS
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
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 will be effective for the Company's financial
statements issued for the fiscal year ending December 31, 1998. Reclassification
of financial statements for earlier periods provided for comparative purposes is
required.
SEGMENT INFORMATION
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." This statement establishes standards for
reporting information about segments in annual and interim financial statements.
SFAS No. 131 introduces a new model for segment reporting, called the
"management approach."
The management approach is based on the way the chief operating decision-maker
organizes segments within a company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography,
legal structure, management structure - any manner in which management
disaggregates a company. This statement is effective and will be adopted for the
Company's financial statements for the fiscal year ending December 31, 1998 and
requires the restatement of previously reported segment information for all
periods presented.
ABINGTON BANCORP, INC. 20 1997 ANNUAL REPORT
<PAGE> 85
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF ABINGTON BANCORP, INC.:
- --------------------------------------------------------------------------------
We have audited the accompanying consolidated balance sheets of Abington
Bancorp, Inc. and subsidiary ("the Company") as of December 31, 1997 and 1996,
and the related statements of operations, changes in stockholders' equity and
cash flows for each of the 3 years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
mis-statement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Abington Bancorp, Inc. and
subsidiary as of December 31, 1997 and 1996 and the results of their operations
and their cash flows for each of the 3 years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Boston, Massachusetts
January 16, 1998 (except with respect to the third paragraph of
Note 19, as to which the date is February 24, 1998)
ABINGTON BANCORP, INC. 21 1997 ANNUAL REPORT
<PAGE> 86
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
December 31, 1997 1996
- ---------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and due from banks (Note 18) $ 13,312 $ 9,556
Short-term investments 163 152
-------- --------
Total cash and cash equivalents 13,475 9,708
-------- --------
Loans held for sale (Note 6) 1,332 3,176
Securities (Notes 4, 9 and 10):
Held for investment - at cost (market value
of $64,129 in 1997 and $62,456 in 1996) 64,021 63,670
Available for sale - at market value 101,031 91,561
-------- --------
Total securities 165,052 155,231
-------- --------
Loans (Notes 6, 9 and 10) 332,677 298,667
Less: Allowance for possible loan losses (2,280) (1,811)
Unearned income (937) (1,062)
-------- --------
Loans, net 329,460 295,794
-------- --------
Federal Home Loan Bank stock 8,151 7,903
Banking premises and equipment, net (Note 7) 6,294 6,346
Other real estate owned, net (Note 6) 265 500
Intangible assets (Notes 1 and 2) 3,284 3,685
Other assets (Note 11) 4,673 4,615
-------- --------
$531,986 $486,958
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 8) $324,934 $300,445
Short-term borrowings (Note 9) 55,910 63,171
Long-term debt (Note 10) 110,000 84,353
Accrued taxes and expenses (Notes 11 and 14) 3,337 3,447
Other liabilities 1,484 1,996
-------- --------
Total liabilities 495,665 453,412
-------- --------
Commitments and contingencies (Note 12)
Stockholders' equity (Notes 3, 4, 13, 16, 17, and 19):
Serial preferred stock, $.10 par value, 3,000,000
shares authorized; none issued -- --
Common stock, $.10 par value, 12,000,000 shares
authorized; 4,676,000 shares issued in 1997
and 4,660,000 shares issued in 1996 468 467
Additional paid-in capital 21,094 20,923
Retained earnings 19,858 16,221
-------- --------
41,420 37,611
Treasury stock - 1,039,000 and 874,000 shares
in 1997 and 1996, at cost (5,931) (3,703)
Unearned compensation - ESOP (231) (312)
Net unrealized gain/(loss), on available for sale
securities, net of taxes 1,063 (50)
-------- --------
Total stockholders' equity 36,321 33,546
-------- --------
$531,986 $486,958
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
ABINGTON BANCORP, INC. 22 1997 ANNUAL REPORT
<PAGE> 87
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans (Notes 1, 5 and 6) $ 24,838 $ 22,978 $ 20,788
Interest on mortgage-backed investments 9,045 9,245 8,984
Interest on bonds and obligations 1,775 1,512 1,536
Dividend income 589 556 556574
Interest on short-term investments 50 41 67
---------- ---------- ----------
Total interest and dividend income 36,297 34,332 31,949
---------- ---------- ----------
Interest expense:
Interest on deposits (Note 8) 11,057 10,742 9,681
Interest on short-term borrowings (Note 9) 2,557 3,733 4,546
Interest on long-term debt (Note 10) 6,477 5,042 3,995
---------- ---------- ----------
Total interest expense 20,091 19,517 18,222
---------- ---------- ----------
Net interest income 16,206 14,815 13,727
Provision for possible loan losses (Note 6) 630 480 2,233
---------- ---------- ----------
Net interest income, after provision for
possible loan losses 15,576 14,335 11,494
---------- ---------- ----------
Non-interest income (charges):
Loan servicing fees (Note 6) 558 646 713
Other customer service fees 3,276 2,412 1,644
Gain on sales of securities, net 540 495 181
Gain on sales of mortgage loans, net 236 315 453
Write-down of investment in limited partnership - - (110)
Net gain (loss) on sales and write-down of other
real estate owned 109 67 (92)
Other 267 242 119
---------- ---------- ----------
Total non-interest income 4,986 4,177 2,908
---------- ---------- ----------
Non-interest expense:
Salaries and employee benefits (Notes 12, 14 and 17) 6,660 6,075 5,635
Occupancy and equipment expenses (Notes 7 and 12) 2,420 2,374 2,010
Other non-interest expenses (Note 15) 4,425 4,391 4,310
---------- ---------- ----------
Total non-interest expense 13,505 12,840 11,955
---------- ---------- ----------
Income before income taxes 7,057 5,672 2,447
Provision for income taxes (Note 11) 2,679 2,139 1,018
---------- ---------- ----------
Net income $ 4,378 $ 3,533 $ 1,429
========== ========== ==========
Earnings per share (Note 1):
Basic -
Net income per share $ 1.18 $ .94 $ .38
========== ========== ==========
Weighted average common shares 3,716,000 3,774,000 3,758,000
========== ========== ==========
Diluted -
Net income per share $ 1.10 $ .89 $ .37
========== ========== ==========
Weighted average common shares
and share equivalents 3,966,000 3,964,000 3,928,000
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
ABINGTON BANCORP, INC. 23 1997 ANNUAL REPORT
<PAGE> 88
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss)
Additional on Available Unearned
Common Paid-in Retained Treasury for Sale Compensation
(Dollars in thousands) Stock Capital Earnings Stock Securities ESOP Total
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 $465 $20,721 $12,765 $(3,703) $(1,407) $(475) $28,366
- ------------------------------------------------------------------------------------------------------------------------------------
Net income - - 1,429 - - - 1,429
Issuance of stock 1 90 - - - - 91
Amortization of unearned compensation -
ESOP - - - - - 82 82
Dividends declared ($.20 per share) - - (752) - - - (752)
Changes in unrealized loss on available
for sale securities as a result of
transfers from held for investment,
net of tax effects - - - - (169) - (169)
Change in market value on
available for sale securities, net of taxes - - - - 1,514 - 1,514
---- ------- ------- ------- ------- ----- -------
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 466 20,811 13,442 (3,703) (62) (393) 30,561
- ------------------------------------------------------------------------------------------------------------------------------------
Net income - - 3,533 - - - 3,533
Issuance of stock 1 112 - - - - 113
Amortization of unearned compensation -
ESOP - - - - - 81 81
Dividends declared ($.20 per share) - - (754) - - - (754)
Change in market value on
available for sale securities, net of taxes - - - - 12 - 12
---- ------- ------- ------- ------- ----- -------
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 467 20,923 16,221 (3,703) (50) (312) 33,546
- ------------------------------------------------------------------------------------------------------------------------------------
Net income - - 4,378 - - - 4,378
Issuance of stock 1 171 - - - - 172
Amortization of unearned compensation-
ESOP - - - - - 81 81
Dividends declared ($.20 per share) - - (741) - - - (741)
Repurchase of common stock - - - (2,228) - - (2,228)
Change in market value on
available for sale securities, net of taxes - - - - 1,113 - 1,113
---- ------- ------- ------- ------- ----- -------
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $468 $21,094 $19,858 $(5,931) $ 1,063 $(231) $36,321
- ------------------------------------------------------------------------------------------------------------------------------------
==== ======= ======= ======= ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
ABINGTON BANCORP, INC. 24 1997 ANNUAL REPORT
<PAGE> 89
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,378 $ 3,533 $ 1,429
Adjustments to reconcile net income to net cash
from operating activities:
Provision for possible loan losses 630 480 2,233
Net (gain) loss on sales and write-down of other real
estate owned and investment in limited partnership (109) (67) 202
Amortization, accretion and depreciation, net 1,798 1,784 1,478
Provision for deferred taxes (166) 131 379
Gain on sales of securities, net (540) (495) (181)
Gain on sales of mortgage loans, net (236) (315) (453)
Loans originated for sale in the secondary market (17,688) (18,344) (40,192)
Proceeds from sales of loans 19,768 18,440 37,762
Other, net (1,101) 1,922 (9,593)
-------- -------- --------
Net cash provided by (used in) operating activities 6,734 7,069 (6,936)
-------- -------- --------
Cash flows from investing activities:
Net cash received in acquisitions - - 14,875
Maturities of held for investment securities - - 1,748
Purchase of held for investment securities (8,968) (3,633) (25,186)
Proceeds from principal payments received
and redemptions of held for investment securities 8,571 8,734 49,469
Proceeds from sales of available for sale securities 32,126 36,665 11,891
Proceeds from principal payments on and maturities
of available for sale securities 19,041 15,517 8,294
Purchase of available for sale securities (58,323) (47,244) (13,965)
Loans originated/purchased, net of amortization and payoffs (34,721) (41,746) (38,699)
Proceeds from sales of loans held in portfolio - 3,038 13,548
Purchases of FHLB stock (248) (504) -
Purchase of banking premises and equipment and
improvements to other real estate owned (1,192) (972) (1,914)
Proceeds from sales of other real estate owned 769 564 1,000
Investments and advances made to low income housing
limited partnerships - (40) -
-------- -------- --------
Net cash used in investing activities (42,945) (29,621) (18,939)
-------- -------- --------
Cash flows from financing activities:
Net increase in deposits 24,489 20,375 16,908
Net increase (decrease) in borrowings with
maturities of 3 months or less 19,739 11,363 (6,244)
Proceeds from issuance of short-term borrowings
with maturities in excess of 3 months 20,000 37,000 29,500
Principal payments on short-term borrowings with
maturities in excess of 3 months (47,000) (46,500) (20,000)
Proceeds from issuance of long-term debt 49,500 37,000 36,000
Principal payments on long-term debt (23,853) (36,948) (27,802)
Payment of cash dividends (741) (754) (753)
Purchase of treasury stock (2,228) - -
Proceeds from the exercise of stock options 72 113 91
-------- -------- --------
Net cash provided by financing activities 39,978 21,649 27,700
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 3,767 (903) 1,825
Cash and cash equivalents at beginning of year 9,708 10,611 8,786
-------- -------- --------
Cash and cash equivalents at end of year $ 13,475 $ 9,708 $ 10,611
======== ======== ========
</TABLE>
ABINGTON BANCORP, INC. 25 1997 ANNUAL REPORT
<PAGE> 90
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Supplemental cash flow information:
Interest paid on deposits $11,063 $10,741 $ 9,676
Interest paid on borrowed funds 8,935 8,891 8,219
Income taxes paid 3,717 379 1,098
Transfers of loans to other real estate owned 425 62 848
Transfers of securities to available for sale
from held for investment - - 66,692
Transfer of securities from available for sale to
held for investment - - 8,485
Acquisitions: (Note 2)
Liabilities assumed $ - $ - $16,534
Less: Assets purchased - - 472
Premium paid - - 1,187
------- ------- -------
Net cash received $ - $ - $14,875
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
ABINGTON BANCORP, INC. 26 1997 ANNUAL REPORT
<PAGE> 91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements include the accounts of Abington Bancorp,
Inc. (the "Company") and its wholly-owned subsidiary, Abington Savings Bank (the
"Bank"). 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,
and Abington Securities Corporation, which invests primarily in obligations of
the United States Government and its agencies and equity securities.
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.
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 1 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. All significant intercompany balances and
transactions have been eliminated in consolidation.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of income and expenses during the reporting periods.
Operating results in the future could vary from the amounts derived from
management's estimates and assumptions.
RECLASSIFICATIONS
Certain amounts in the 1996 and 1995 consolidated financial statements have been
reclassified to conform to the 1997 presentation.
CASH EQUIVALENTS
Cash equivalents include amounts due from banks, short-term investments with
original maturities of less than 3 months and federal funds sold on a daily
basis.
SECURITIES
Investment securities are classified in 1 of 3 categories and are accounted for
as follows:
* Debt securities that the Company has the positive intent and ability to
hold to maturity are classified as "held for investment" securities and
reported at amortized cost.
* Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as "trading
securities" and reported at fair value, with unrealized gains and losses
included in earnings.
* Debt and equity securities not classified as either held for investment or
trading are classified as "available for sale" and reported at market value
with unrealized gains and losses excluded from earnings and reported in a
separate component of stockholders' equity, net of applicable income tax
effects.
The Company had no securities classified as trading securities at December 31,
1997 and 1996.
Mortgage-backed investments, held for investment, are stated at amortized cost
reduced by principal payments with discounts and premiums being recognized in
income by the interest method over the expected maturity of the investments.
Gains and losses on the disposition of securities are computed using the
specific identification method. Unrealized losses which are deemed to be other
than temporary declines in value are charged to operations.
LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Company grants mortgage, commercial and consumer loans to customers. A
substantial portion of the loan portfolio consists of mortgage loans in the
southeastern Massachusetts area. The ability of the Company's debtors to honor
their contracts is generally dependent upon the stability of real estate and the
general economic conditions in the Company's market area.
Of the total loan portfolio at December 31, 1997, approximately 25% represent
owner-occupied first mortgages located throughout the United States. Of this
portion of the portfolio, there are no concentrations in a single state
exceeding 5% of the Company's total loans.
Loan origination and commitment fees and certain direct loan origination costs,
as defined, are deferred and amortized as a yield adjustment over the
contractual life of the related loans under the interest method. Premiums and
discounts on purchased residential loans are also amortized as a yield
adjustment by the interest method over the estimated duration of the
investments. Unearned discounts are amortized under the interest method over the
term of the related loans. All other interest on loans is recognized on a simple
interest basis.
Interest on loans is generally not accrued when the principal or interest on the
loan becomes delinquent in excess of 90 days, and/or in the judgment of
management the collectibility of the principal or interest becomes doubtful.
When a loan is placed on a non-accrual status, all interest previously accrued
but not collected is reversed against interest income in the current period.
Interest income is subsequently recognized only to the extent cash payments are
received.
The allowance for possible loan losses is based on management's evaluation of
the level of the allowance required in relation to the estimated loss exposure
in the loan portfolio. Procedures employed in considering the allowance
requirements include, among other factors, management's ongoing review of
individual loans, an evaluation of results of examinations by regulatory
authorities and analyses of historical trends in charge-offs and delinquencies.
Loans are charged-off to the allowance for loan losses when, in the opinion of
management, such loans are deemed to be uncollectible. The allowance is an
estimate, and ultimate losses may vary from current estimates. As adjustments
become necessary, they are reported in earnings during the periods in which they
become known.
The allowance for possible loan losses as of December 31, 1997 is based on
management's estimate of the amount required to absorb future losses in the loan
portfolio based on known current circumstances and real estate market
conditions. However, some degree of uncertainty exists as to future trends in
the local economy and real estate market which, if there is significant
deterioration, could
ABINGTON BANCORP, INC. 27 1997 ANNUAL REPORT
<PAGE> 92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
result in the Company experiencing increases in non-performing loans, additional
provisions for loan losses and increased lost interest income on non-accrual
loans.
Funds for lending are partially derived from selling participating and whole
interests in mortgage loans. Loans designated as held for sale are accounted for
at the lower of their aggregate cost or market value. Gains or losses on sales
of loans are recognized at the time of the sale and are adjusted when the
average interest rate on the loans sold, after normal servicing fees, differs
from the agreed yield to the buyer.
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 114, ("SFAS No. 114"), "Accounting by Creditors for
Impairment of a Loan," which the Company adopted on January 1, 1995. SFAS No.
114 requires, among other things, that creditors measure impaired loans at the
present value of expected future cash flows, discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable market
price or the fair value of the underlying collateral if the loan is collateral
dependent.
The Company has determined, after a review of its policies and procedures
related to credit quality and an analysis of the loans outstanding at January 1
and December 31, 1995, 1996 and 1997, that loans recognized by the Company as
non-accrual are equivalent to "impaired loans" as defined in SFAS No. 114. The
Company has also determined that the reserve for possible loan losses at January
1, 1995 did not require an additional loan loss provision as a result of the
adoption of this standard.
MORTGAGE SERVICING RIGHTS
On January 1, 1996, the Company adopted SFAS No. 122, "Accounting for Mortgage
Servicing Rights." This statement, which was superseded in June 1996 upon the
issuance of SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities," requires the recognition of a
separate asset for the rights to service mortgage loans for others regardless of
how those servicing rights were created. SFAS No. 125 impacts the Company to the
extent fixed rate loan originations having terms in excess of 15 years are sold
in the secondary mortgage market with servicing of the related loan retained by
the Company. In such cases, the Company is required to allocate a portion of the
cost of the loan to the mortgage servicing rights based on the relative fair
values of such servicing rights and the loan. The value of such servicing rights
is to be periodically assessed for impairment based on the fair value of those
rights. During 1996, the Company capitalized approximately $103,000 of mortgage
servicing rights which resulted in a corresponding increase in gains on sales of
mortgages. No mortgage servicing rights were capitalized in 1997 as
substantially all loan sales on the secondary market were made on a servicing
released basis. All previously capitalized mortgage servicing rights were
written-off in 1997 as the result of higher than anticipated prepayment
experience on the related loan portfolios.
OTHER REAL ESTATE OWNED
Real estate acquired by foreclosure and acquired by deed in lieu of foreclosure
are classified as other real estate owned and initially recorded at the lower of
cost or fair value less estimated selling costs. In the event of subsequent
declines in value, other real estate owned is adjusted to fair market value
through a charge to non-interest income.
The fair value for these assets is based on periodic analysis of the real estate
by management. Factors considered include, but are not limited to, general
economic and market conditions, geographic location, the composition of the real
estate holdings and property conditions.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of."
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The statement also requires that certain long-lived
assets and identifiable intangibles to be disposed of be reported at the lower
of the carrying amount or fair value less cost to sell. The implementation of
this statement did not have any impact on the results of operations or financial
condition of the Company.
BANKING PREMISES AND EQUIPMENT
Land is carried at cost. Buildings, leasehold improvements and equipment are
carried at cost, less accumulated depreciation computed on the straight-line
method over the estimated useful lives of the assets, or the terms of the
leases, if shorter. The cost of maintenance and repairs are expensed as
incurred; major expenditures for betterments are capitalized and depreciated.
INVESTMENT IN REAL ESTATE LIMITED PARTNERSHIP
The Company has an investment in a real estate limited partnership which is
accounted for on the cost recovery method and is included in other assets. The
carrying value of this investment is periodically evaluated by management as to
its expected future recoverability and write-downs are recorded once impairment
in value is identified and quantified.
INTANGIBLE ASSETS
Core deposit intangibles are being amortized on a straight-line basis over their
estimated lives of 7 to 10 years. Goodwill is being amortized on a straight-line
basis over 10 to 15 years. Organization costs are amortized on a straight-line
basis over 5 years. The carrying value of these assets is periodically evaluated
by management as to their expected future recoverability and write-downs are
recorded once an impairment in value is identified and quantified.
INCOME TAXES
Tax assets and liabilities are reflected at currently enacted income tax rates.
As changes in tax laws and rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
EARNINGS PER SHARE
In 1997, the Company adopted the provisions of SFAS No. 128, "Earnings Per
Share." This statement was issued in March 1997 and establishes standards for
computing and presenting earnings per share (EPS) and applies to entities with
publicly held common stock. This statement replaces the presentation of primary
EPS with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerators and
denominators of the basic and diluted EPS computations. This statement also
requires a restatement of all prior-period EPS data presented. The only
reconciling difference between the Company's computation of basic and diluted
earnings per share is the diluitive effect of stock options issued and
unexercised (see Note 16 for stock options). At December 31, 1997, all options
and warrants which were unexercised were excercisable and included in diluted
EPS calculations.
Additionally, on October 30, 1997, the Board of Directors of Abington Bancorp,
Inc. approved a split of its common stock on a 2-for-1 basis in the form of a
stock dividend payable on December 12, 1997, to share-
ABINGTON BANCORP, INC. 28 1997 ANNUAL REPORT
<PAGE> 93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
holders of record as of November 14, 1997. All share and per share data
presented in these consolidated financial statements has been retroactively
restated for this event.
The effect of this new pronouncement on previously reported earnings per share
is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
December 31, 1996 1995 1994
- ------------------------------------------------------------------
<S> <C> <C> <C>
EPS as reported, affected for
stock split $.89 $.37 $.70
Effect of SFAS No. 128 .05 .01 .03
---- ---- ----
Basic EPS as restated $.94 $.38 $.73
==== ==== ====
EPS as reported, affected for
stock split $.89 $.37 $.70
Effect of SFAS No. 128 - - -
---- ---- ----
Diluted EPS as restated $.89 $.37 $.70
==== ==== ====
</TABLE>
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 will be effective for the Company's financial
statements issued for the fiscal year ending December 31, 1998. Reclassification
of financial statements for earlier periods provided for comparative purposes is
required.
SEGMENT INFORMATION
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." This statement establishes standards for
reporting information about segments in annual and interim financial statements.
SFAS No. 131 introduces a new model for segment reporting, called the
"management approach."
The management approach is based on the way the chief operating decision-maker
organizes segments within a company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography,
legal structure, management structure - any manner in which management
disaggregates a company. This statement is effective and will be adopted for the
Company's financial statements for the fiscal year ending December 31, 1998 and
requires the restatement of previously reported segment information for all
periods presented.
STOCK BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25), and related interpretations in accounting
for its stock-based compensation plans (Note 16). Accordingly, no accounting
recognition is given to options granted at fair market value until they are
exercised. Upon exercise, net proceeds, including tax benefits realized, if any,
are credited to equity.
Effective in 1995, the Company adopted the disclosure option of SFAS No. 123,
"Accounting for Stock Based Compensation." SFAS No. 123 defines a fair value
based method of accounting for an employee stock option or similar equity
instrument and encourages all entities to adopt that method of accounting for
their employee stock compensation plans. This statement requires that entities
which do not choose to account for stock-based compensation as prescribed by
this statement shall continue to account for these plans under APB 25 and
disclose the pro forma effects on earnings and earnings per share as if SFAS No.
123 had been adopted.
2. ACQUISITIONS
- --------------------------------------------------------------------------------
On June 26, 1995, the Company acquired certain assets and assumed certain
liabilities of a branch of the First National Bank of Boston located in
Holbrook, Massachusetts ("Holbrook"). In connection with the assumption of
approximately $16,319,000 of deposit liabilities, the Company received
$14,875,000 in cash and $472,000 in property and other assets. The resultant
core deposit premium and other intangible assets of $1,187,000 are being
amortized over their estimated life of 10 years.
ABINGTON BANCORP, INC. 29 1997 ANNUAL REPORT
<PAGE> 94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. REGULATORY MATTERS
- --------------------------------------------------------------------------------
The Company and the Bank are subject to various regulatory requirements
administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory -
and possibly additional discretionary - actions by regulators that, if
undertaken, could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and Bank must meet specific capital
guidelines that involve quantitative measures of the Company's and the Bank's
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company's and the Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk-weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes as of December 31,
1997, that the Company and the Bank met all capital adequacy requirements to
which they are subject.
As of December 31, 1997 and 1996 (Bank only), the Company and the Bank were
well-capitalized under the regulatory framework for prompt corrective action. To
be categorized as well-capitalized, an insured depository institution must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Company's or the Bank's
category. The Company's and the Bank's actual capital amounts and ratios are
presented in the following table.
<TABLE>
<CAPTION>
To be Well-
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
- ---------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
As of December 31, 1997:
<S> <C> <C> <C> <C> <C> <C>
Company
Total Capital (to risk-weighted assets ) $34,254 13.02% $21,053 8.00% N/A N/A
Tier 1 capital (to risk-weighted assets) $31,974 12.15% $10,526 4.00% N/A N/A
Tier 1 capital (to average assets) $31,974 6.01% $21,279 4.00% N/A N/A
Bank
Total Capital (to risk-weighted assets ) $32,982 12.54% $21,047 8.00% $26,309 10.00%
Tier 1 capital (to risk-weighted assets) $30,702 11.67% $10,524 4.00% $15,785 6.00%
Tier 1 capital (to average assets) $30,702 5.72% $21,279 4.00% $26,845 5.00%
As of December 31, 1996:
Bank
Total Capital (to risk-weighted assets ) $31,824 13.65% $18,648 8.00% $23,314 10.00%
Tier 1 capital (to risk-weighted assets) $30,013 12.88% $ 9,324 4.00% $13,981 6.00%
Tier 1 capital (to average assets) $30,013 6.14% $19,565 4.00% $24,456 5.00%
</TABLE>
ABINGTON BANCORP, INC. 30 1997 ANNUAL REPORT
<PAGE> 95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. SECURITIES
- --------------------------------------------------------------------------------
The amortized cost and market value of securities classified as held for
investment at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------------
At December 31, 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Federal Home Loan
Mortgage Corporation $16,502 $ 62 $197 $ 16,367 $19,173 $ 40 $ 549 $18,664
Federal National
Mortgage Association 28,624 358 212 28,770 29,152 115 785 28,482
Government National
Mortgage Association 1,434 4 - 1,438 - - - -
Other 17,461 147 54 17,554 15,345 17 52 15,310
------- ------ ---- -------- ------- ---- ------ -------
Total mortgage-backed securities $64,021 $ 571 $463 $ 64,129 $63,670 $172 $1,386 $62,456
======= ====== ==== ======== ======= ==== ====== =======
</TABLE>
The amortized cost and estimated market value of securities classified as
available for sale at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------------
At December 31, 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. Government obligations $ 683 $ - $ - $ 683 $ 713 $ 7 $ - $ 720
Federal agency obligations 30,112 143 48 30,207 17,966 90 278 17,778
Other bonds and obligations 3,095 28 3 3,120 1,116 22 - 1,138
------- ------ ---- -------- ------- ---- ------ -------
Total investment securities 33,890 171 51 34,010 19,795 119 278 19,636
------- ------ ---- -------- ------- ---- ------ -------
Marketable equity securities 4,137 996 106 5,027 4,044 445 78 4,411
Mortgage-backed securities:
Federal Home Loan
Mortgage Corporation 12,906 186 30 13,062 23,058 84 352 22,790
Federal National
Mortgage Association 29,660 586 71 30,175 44,751 338 365 44,724
Government National
Mortgage Association 9,476 - 44 9,432 - - - -
Other 9,235 90 - 9,325 - - - -
------- ------ ---- -------- ------- ---- ------ -------
Total mortgage-backed securities 61,277 862 145 61,994 67,809 422 717 67,514
------- ------ ---- -------- ------- ---- ------ -------
$99,304 $2,029 $302 $101,031 $91,648 $986 $1,073 $91,561
======= ====== ==== ======== ======= ==== ====== =======
</TABLE>
The market value and amortized cost of investments and mortgage-backed
securities, respectively, at December 31, 1997 by contractual maturity follows.
Expected maturities or cash flows from securities will differ from contractual
maturities because the issuer may have the right to call or repay obligations
with or without call or prepayment penalties. Projected payments and prepayments
for mortgage-backed securities have not been considered for purposes of this
presentation.
ABINGTON BANCORP, INC. 31 1997 ANNUAL REPORT
<PAGE> 96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENT SECURITIES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
Amortized Cost % to Total Market Value
- ------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Within 1 year $ 35 .1% $ 35
Over 1 year to 5 years 9,059 23.6 9,139
Over 5 years to 10 years 21,112 62.3 21,170
Over 10 years 3,684 14.0 3,666
------- ----- -------
$33,890 100.0% $34,010
======= ===== =======
</TABLE>
MORTGAGE-BACKED SECURITIES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Held for Investment Available for Sale
- -----------------------------------------------------------------------------------
(Dollars in thousands)
Amortized Market Amortized Market
Cost Value Cost Value
---------------------- ------------------------
<S> <C> <C> <C> <C>
Within 1 year $ - $ - $ - $ -
Over 1 year to 5 years 1,434 1,438 3,107 3,077
Over 5 years to 10 years 746 796 380 383
Over 10 years 61,841 61,895 57,790 58,534
------- ------- ------- -------
$64,021 $64,129 $61,277 $61,994
======= ======= ======= =======
</TABLE>
Gross gains on sales of marketable equity securities were $687,000, $407,000 and
$68,000 for 1997, 1996 and 1995, respectively. There were no losses on sales of
equity securities in 1997, 1996 or 1995.
Gross gains on sales of investment securities were $0, $30,000 and $77,000 for
1997, 1996 and 1995, respectively. Gross losses on sales of investment
securities were $54,000, $54,000 and $4,000 for 1997, 1996 and 1995,
respectively.
Proceeds from sales of mortgage-backed investments classified as available for
sale during 1997, 1996 and 1995 were $26,402,000, $17,082,000 and $6,109,000,
respectively. Gross gains of $142,000, $130,000 and $69,000 in 1997, 1996 and
1995, respectively, were realized on those sales. Gross losses of $235,000,
$18,000 and $29,000 were realized in 1997, 1996 and 1995, respectively.
A U.S. agency obligation security with a carrying value of $1,165,000 was
pledged to collateralize treasury, tax and loan obligations.
All agency and mortgage-backed securities also serve as collateral for FHLB
borrowings as part of a blanket collateral agreement as further described in
Note 9.
5. INTEREST RATE SWAP AGREEMENT
- --------------------------------------------------------------------------------
To help manage interest rate sensitivity on the Company's adjustable rate
mortgage loan portfolio, the Company entered into an interest rate swap
agreement in July 1994 for a period of 36 months with an international
investment banking firm. Under this agreement, the Company received a fixed rate
of interest of 5.35% on the notional amount and paid interest based on the 6
month floating LIBOR rate on the notional amount which reset semi-annually
(February and August). The notional amount of this swap was initially
$15,000,000. This amount amortized at a rate consistent with the amortization
and prepayment of a reference pool of residential mortgages as specified in the
agreement. In addition to the fixed rate of interest, the Company also received
$300,000 in cash upon execution of this agreement. This amount was accreted to
income over the life of the agreement at a rate consistent with the
aforementioned reference pool of mortgages. The resulting yield received by the
Company, including the impact of the accretion, was approximately 6.25% in 1997.
This agreement expired on August 15, 1997.
Net interest income (expense) associated with this swap was recognized based on
the accrual method. The net interest income (expense) recognized by the Bank
during 1997, 1996 and 1995 as a result of this agreement was $34,000, $77,000
and $(26,000), respectively.
ABINGTON BANCORP, INC. 32 1997 ANNUAL REPORT
<PAGE> 97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LOANS AND OTHER REAL ESTATE OWNED
- --------------------------------------------------------------------------------
A summary of the loan portfolio follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31, 1997 1996
- --------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Mortgage loans:
Residential $249,165 $236,635
Second mortgages and home equity 20,392 17,368
Construction 7,681 5,956
Commercial 39,341 24,718
-------- --------
316,579 284,677
Less: Due to borrowers on incomplete loans (2,166) (2,758)
Net deferred loan fees (813) (986)
-------- --------
Total mortgage loans 313,600 280,933
Commercial loans:
Unsecured lines of credit 245 324
Secured and unsecured 7,399 4,210
-------- --------
7,644 4,534
Net deferred loan fees (124) (76)
-------- --------
Total commercial loans 7,520 4,458
Other loans:
Indirect automobile 1,263 4,355
Personal 1,562 1,625
Education 423 509
Passbook and other secured 8,323 8,416
Home improvement 381 485
-------- --------
Total other loans 11,952 15,390
-------- --------
Total loans 333,072 300,781
Less allowance for possible loan losses (2,280) (1,811)
-------- --------
Loans and loans held for sale, net $330,792 $298,970
======== ========
</TABLE>
Included in residential real estate mortgages at December 31, 1997 and 1996,
respectively, are approximately $1,332,000 and $3,176,000 of loans held for
sale. At December 31, 1997 and 1996, the estimated market values of loans held
for sale was in excess of their carrying value. The Company was servicing
mortgage loans sold under non-recourse agreements amounting to approximately
$208,073,000 and $235,949,000 at December 31, 1997 and 1996, respectively.
During October 1995, the Company's management and Board of Directors evaluated
the feasibility of a sale, at a discount, of a group of approximately $9.2
million of loans. This pool consisted of approximately $5.7 million of loans
which were on non-accrual at September 30, 1995 and certain other loans which,
although performing, were expected to require a higher than average level of
management attention and out-of-pocket costs to maintain performance or to
potentially foreclose upon or workout.
The transaction was reflected in the third quarter results for 1995. These loans
were sold at approximately 64% of par. The loss associated with this sale was
reflected as a charge-off to the allowance for possible loan losses.
In the ordinary course of business, the Company has granted loans to certain of
its officers and directors and their affiliates. All transactions are on
substantially the same terms as those prevailing at the same time for
individuals not affiliated with the Bank and do not involve more than the normal
risk of collectibility. The total amount of such loans which exceeded $60,000 in
aggregate amount to any related party amounted to $1,714,000 at December 31,
1997, and $2,569,000 at December 31, 1996. During the year ended December 31,
1997, total principal additions were $1,000 and total principal reductions were
$856,000.
The following analysis summarizes the Company's non-performing assets at
December 31, 1997 and 1996.
ABINGTON BANCORP, INC. 33 1997 ANNUAL REPORT
<PAGE> 98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Years Ended December 31, 1997 1996
- --------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Impaired loans or loans accounted for
on a non-accrual basis $622 $1,028
Accruing loans past due 90 days or more
as to principal or interest 91 144
---- ------
Total non-performing loans 713 1,172
Other real estate owned, net 265 500
---- ------
Total non-performing assets $978 $1,672
==== ======
</TABLE>
Impaired loans totaling $293,000 and $314,000, at December 31, 1997 and 1996,
respectively, required an allocation of $45,000 and $97,000, respectively, of
the allowance for possible loan losses. The remaining impaired loans did not
require any allocation of the reserve for possible loan losses. The average
balance of impaired loans was approximately $966,000 and $721,000 in 1997 and
1996, respectively. The total amount of interest income recognized on impaired
loans during 1997 and 1996 was approximately $50,000 and $48,500, respectively,
which approximated the amount of cash received for interest during those
periods. The Company has no commitments to lend additional funds to borrowers
whose loans have been deemed to be impaired. An analysis of the allowance for
possible loan losses follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Years Ended December 31, 1997 1996
- --------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of year $1,811 $1,433
Provision 630 480
Recoveries 205 193
------ ------
2,646 2,106
Loans charged-off (366) (295)
------ ------
Balance at end of year $2,280 $1,811
====== ======
</TABLE>
An analysis of the general allowance for possible losses on other real estate
owned follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Years Ended December 31, 1997 1996
- --------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of year $ 160 $ 104
Provision - 75
Charge-offs (100) (19)
----- -----
$ 60 $ 160
===== =====
</TABLE>
7. BANKING PREMISES AND EQUIPMENT
- --------------------------------------------------------------------------------
A summary of the cost and accumulated depreciation of banking premises and
equipment and their estimated useful lives is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
December 31, 1997 1996 Estimated Useful Lives
- ------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Banking premises:
Land $ 671 $ 671
Buildings and improvements 5,000 4,911 10-25 years
Leasehold improvements 637 514 10-15 years
Equipment 8,219 7,240 3-10 years
------ -------
14,527 13,336
Less accumulated depreciation (8,233) (6,990)
------ -------
$6,294 $ 6,346
====== =======
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1996 and 1995
amounted to $1,243,000, $1,154,000 and $941,000, respectively.
ABINGTON BANCORP, INC. 34 1997 ANNUAL REPORT
<PAGE> 99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. DEPOSITS
- --------------------------------------------------------------------------------
A summary of deposit balances, by type, is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31, 1997 1996
- --------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Non-interest NOW $ 33,925 $ 27,912
NOW 41,278 35,812
Other savings 81,923 79,470
Money market deposits 15,477 16,527
-------- --------
Total non-certificate accounts 172,603 159,721
Term certificate accounts 125,661 117,419
Certificates of deposit greater than $100 26,670 23,305
-------- --------
Total certificate accounts 152,331 140,724
-------- --------
Total deposits $324,934 $300,445
======== ========
</TABLE>
A summary of certificate accounts by maturity is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
December 31, 1997 1996
- ---------------------------------------------------------------------------------
(Dollars in thousands)
Weighted Weighted
Amount Average Rate Amount Average Rate
----------------------- -----------------------
<S> <C> <C> <C> <C>
Within 1 year $102,681 5.53% $ 89,073 5.49%
Over 1 year to 3 years 43,846 6.26 33,757 6.13
Over 3 years to 5 years 5,804 5.67 17,894 6.65
-------- --------
$152,331 5.74% $140,724 5.79%
======== ========
</TABLE>
9. SHORT-TERM BORROWINGS
- --------------------------------------------------------------------------------
Short-term borrowings consist primarily of Federal Home Loan Bank advances with
original maturities of 1 year or less. All borrowings from the Federal Home Loan
Bank of Boston are secured under a blanket lien by certain qualified collateral
defined principally as 85% to 90% of the carrying value of U.S. Government and
agency obligations, including mortgage-backed securities, and 75% of the
carrying value of residential mortgage loans. Information relating to activity
and rates paid under these borrowing agreements is presented below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Maximum amount of borrowings outstanding during the year $94,506 $78,300 $108,700
Average month-end borrowings outstanding during the year $45,833 $66,790 $ 73,719
Average interest rate during the year 5.58% 5.59% 6.17%
Unused line of credit at Federal Home Loan Bank of Boston $ 4,780 $ 8,767 $ 6,689
Amount outstanding at end of year $55,910 $63,171 $ 61,308
Weighted average interest rate at end of year 5.68% 5.68% 5.75%
</TABLE>
ABINGTON BANCORP, INC. 35 1997 ANNUAL REPORT
<PAGE> 100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. LONG-TERM DEBT
- --------------------------------------------------------------------------------
A summary of long-term debt, consisting of FHLB advances with an original
maturity of greater than 1 year is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Maturity Date Interest rate December 31, 1997 December 31, 1996
- -----------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
March 25, 1997 5.25% $ - $ 4,000
May 5, 1997** 6.12 - 1,799
July 15, 1997** 6.32 - 1,554
August 18, 1997 6.94 - 4,000
October 27, 1997 5.83 - 5,000
November 24, 1997* 5.82 - 16,000
December 19, 1997 5.81 - 7,500
February 4, 1998 5.30 4,500 4,500
July 20, 1998 5.78 5,000 -
September 30, 1998 6.22 5,000 5,000
November 9, 1998 5.80 15,000 15,000
November 13, 1998 5.90 5,000 5,000
May 4, 1999*** 5.99 5,000 5,000
May 13, 1999 6.38 4,000 -
September 16, 1999 6.66 5,000 5,000
October 20, 1999 6.06 5,000 -
November 1, 1999 6.23 5,000 5,000
February 24, 2000 5.79 16,000 -
March 6, 2000 6.51 4,000 -
March 20, 2000 6.61 5,000 -
April 11, 2000 6.82 4,000 -
October 20, 2000 6.21 5,000 -
March 6, 2001 6.66 4,000 -
March 19, 2001 6.77 5,000 -
April 11, 2001 6.98 4,000 -
May 14, 2001 6.74 4,000 -
December 9, 2017 5.66 500 -
-------- -------
$110,000 $84,353
======== =======
</TABLE>
* Variable rate advance with quarterly resets; with prepayment option at
reset dates without penalty
** Amortizing advance
*** LIBOR floating advance with a monthly reset
11. INCOME TAXES
- --------------------------------------------------------------------------------
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Current: Federal $2,509 $1,704 $ 595
State 336 304 44
------ ------ ------
2,845 2,008 639
Deferred: Federal (121) 110 264
State (45) 21 115
------ ------ ------
(166) 131 379
------ ------ ------
Total $2,679 $2,139 $1,018
====== ====== ======
</TABLE>
The reason for the differences between the effective tax rates and the statutory
tax rates are summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
State taxes, net of federal benefit 2.7 3.8 4.3
Effect of amortization of non-deductible goodwill .6 .7 3.1
Other, net .7 (.8) .2
---- ---- ----
38.0% 37.7% 41.6%
==== ==== ====
</TABLE>
ABINGTON BANCORP, INC. 36 1997 ANNUAL REPORT
<PAGE> 101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of net deferred taxes as recorded as of December 31, 1997 and
1996 are as follows (assets/(liabilities)):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Years Ended December 31, 1997 1996
- --------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Loan loss reserves $ 827 $ 582
Loan fee income 40 79
Dividends on deposits not yet deducted
for tax purposes 74 114
Pension expense 194 200
Equity in partnership losses (1,391) (1,273)
Core deposit intangible (312) (227)
Other, net 76 (41)
------- -------
(492) (566)
Deferred tax assets applicable to unrealized
(gains) losses on securities (597) 34
------- -------
Net deferred tax assets (liabilities) included
in other assets (other liabilities) $(1,089) $ (532)
======= =======
</TABLE>
In August of 1996, Congress passed the Small Business Job Protection Act of
1996. Included in this bill was the repeal of IRC Section 593, which allowed
thrift institutions special provisions in calculating bad debt deductions for
income tax purposes. Thrift institutions now will be viewed as commercial banks
for income tax purposes. The repeal is effective for tax years beginning after
December 31, 1995.
One effect of this legislative change is to suspend the Bank's bad debt reserve
for income tax purposes as of its base year (October 31, 1988). Any bad debt
reserve in excess of the base year amount is subject to recapture over a 6 year
time period. The suspended (i.e., base year) amount is subject to recapture upon
the occurrence of certain events, such as complete or partial redemption of the
Bank's stock or if the Bank ceases to qualify as a bank for income tax purposes.
At December 31, 1997, the Bank's surplus includes approximately $1,960,000 of
bad debt deductions for which income taxes have not been provided. As the Bank
does not intend to use the reserve for purposes other than to absorb loan
losses, deferred taxes of approximately $820,000 have not been provided on this
amount.
12. COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
In the normal course of business, there are outstanding commitments and
contingencies which are not reflected in the consolidated financial statements.
LITIGATION
On or about April 10, 1996, a civil action entitled Merrill Lynch Mortgage
Capital, Inc. v. Abington Savings Bank, Spires Financial, L.P. and Geoffrey
Lawes, Docket No. MRS-L-1169-96, was filed in the Law Division of the Superior
Court of New Jersey, venued in Morris County. The complaint named the Bank as a
defendant, along with the Bank's alleged financial broker, Spires Financial,
L.P. ("Spires") and an employee of Spires, Geoffrey Lawes ("Lawes").
The complaint alleged, among other things, that (1) Spires and/or Lawes, as
agent for the Bank, entered into a binding agreement with the plaintiff on
February 28, 1996 under which the Bank agreed to purchase from the plaintiff a
pool of conventional adjustable rate mortgage loans having an unpaid principal
balance of approximately $34,000,000 as of March 1, 1996 and (2) the Bank
subsequently refused to close on the alleged contract. Plaintiff originally
sought damages of no less than $530,000 against the Bank on the grounds that the
Bank breached its alleged contract. The Bank settled its portion of the
plaintiff's claim in December 1997 for $100,000.
The Company is a defendant in various other legal claims incident to its
business, none of which is believed by management, based on the advice of legal
counsel, to be material to the consolidated financial statements.
SPECIAL TERMINATION AGREEMENTS
The Company has entered into Special Termination Agreements with five officers
which provide for a lump-sum severance payment within a 3 year period following
a "change in control," as defined in the agreements.
LOAN AND GENERAL COMMITMENTS
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments principally include commitments to extend credit and
advance funds on outstanding lines of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheet. The contract amounts or unpaid principal
balance of those instruments reflect the extent of involvement the Company has
in these particular classes of financial instruments. The Company's exposure to
credit loss is represented by the contractual amount or unpaid principal balance
of those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for financial instruments
reflected on the balance sheet. Financial instruments which represent credit
risk at December 31, 1997 and 1996 are as follows:
ABINGTON BANCORP, INC. 37 1997 ANNUAL REPORT
<PAGE> 102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
At December 31, 1997 1996
- --------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Contract amount of:
Commitments to grant loans $ 8,359 $ 6,355
Commitments to sell loans 1,415 2,516
Unadvanced funds on home equity lines of credit 11,230 10,679
Unadvanced funds on other lines of credit 2,242 1,949
Commitments to advance funds under
construction loan agreements 2,166 2,758
</TABLE>
Commitments to grant loans are agreements to lend to a customer as long as there
is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The commitments for lines of credit may expire without
being drawn upon. Therefore, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The Company has an investment in a limited
partnership with a book value of $57,000 at December 31, 1997. This partnership
was established for the rehabilitation and management of low income housing
projects. Credit risk, which is limited to funds previously advanced and tax
credits subject to recapture, arises from the possible financial insolvency of
the project and the ultimate ability of the partnership to survive as a going
concern. In this case, the Company's investment in these projects would not be
fully recoverable in the normal course of business, and previously earned tax
credits may be recaptured.
LEASE COMMITMENTS
Pursuant to the terms of non-cancelable lease agreements in effect, future
minimum rent commitments for the next 5 years and thereafter are as follows at
December 31, 1997:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Amount
- --------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C>
1998 $ 277
1999 251
2000 212
2001 157
2002 161
2003 and thereafter 1,365
------
$2,423
======
</TABLE>
Certain leases also contain renewal options (up to 10 years) and real estate tax
escalation clauses. Rent expense for the years ended December 31, 1997, 1996 and
1995 amounted to approximately $238,000, $235,000 and $156,000, respectively.
13. STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
At the time of the conversion from mutual to stock form in 1986, the Bank
established a liquidation account in the amount of $7,478,000. In accordance
with Massachusetts statutes, the liquidation account will be maintained for the
benefit of eligible account holders who continue to maintain their accounts in
the Bank after the conversion. The liquidation account will be reduced annually
to the extent that eligible account holders have reduced their qualifying
deposit. Subsequent increases will not restore an eligible account holder's
interest in the liquidation account. In the event of a complete liquidation of
the Bank, each eligible account holder will be entitled to receive a
distribution in an amount equal to their current adjusted liquidation account
balances to the extent that funds are available.
Federal and state banking regulations place certain restrictions on dividends
paid and loans or advances made by the Company. The total amount of dividends
which may be paid at any date is generally limited to the undivided profits of
the Company. Undivided profits at the Company totaled $19,858,000 at December
31, 1997. Additionally, future dividends, if any, will depend on the earnings of
the Company and its subsidiary, its need for funds, its financial condition, and
other factors, including applicable government regulations. (See Note 3.)
14. EMPLOYEE BENEFIT PLAN
- --------------------------------------------------------------------------------
The Bank provides basic pension benefits for eligible employees through the
Savings Bank's Employees Retirement Associations ("SBERA") Pension Plan. Each
employee reaching the age of 21 and having completed at least 1,000 hours of
service in a consecutive 12 month period beginning with such employee's date of
employment automatically becomes a participant in the pension plan. All
participants are fully vested after being credited with 3 years of service or at
age 62, if earlier. Net periodic pension expense for the plan years ended
October 31, 1997, 1996 and 1995, consisted of the following:
ABINGTON BANCORP, INC. 38 1997 ANNUAL REPORT
<PAGE> 103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Years Ended October 31, 1997 1996 1995
- --------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Service cost benefits earned during the year $ 247 $ 247 $ 184
Interest cost on projected benefits 189 180 163
Actual return on plan assets (409) (347) (326)
Net amortization and deferral 163 151 176
----- ----- -----
$ 190 $ 231 $ 197
===== ===== =====
</TABLE>
According to SBERA's actuary, a reconciliation of the funded status of the plan
at October 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
At October 31, 1997 1996
- ----------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Plan assets at fair value, primarily bonds, common stock,
and short-term money market investments $ 3,215 $ 2,709
Projected benefit obligation (3,171) (2,527)
------- -------
(Excess) deficit of projected benefit obligation over plan assets 44 182
Unrecognized net surplus at adoption (86) (93)
Unrecognized net gain (398) (563)
------- -------
Accrued pension liability included on balance sheet $ (440) $ (474)
======= =======
</TABLE>
The accumulated benefit obligation (substantially all vested) at October 31,
1997 and 1996 amounted to $1,896,000 and $1,805,000, respectively, which is less
than the plan assets at fair value.
For the plan years ended October 31, 1997, 1996 and 1995, actuarial assumptions
include an assumed discount rate on benefit obligations of 7.25%, 7.50% and
7.00%, respectively, and an expected long-term rate of return on plan assets of
8.00%. An annual salary increase of 6% was utilized for all years.
The Bank has adopted a management incentive plan (the "Plan") whereby all
officers and supervisors are eligible to receive a bonus, proportionate to their
respective salary, if the Bank meets or exceeds certain base standards of
profitability and net worth levels for its fiscal year. The structure of the
Plan is reviewed on an annual basis by the Board of Directors. The incentive
bonus expense in 1997, 1996 and 1995 was approximately $310,000, $175,000 and
$150,000, respectively.
15. OTHER NON-INTEREST EXPENSE
- --------------------------------------------------------------------------------
Other non-interest expense consisted of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Professional services $1,144 $1,252 $ 865
Item processing and statement rendering 368 371 259
Advertising 746 647 598
Deposit insurance 67 16 324
Real estate in foreclosure and other real estate owned 86 169 491
Amortization of intangible assets 387 423 355
Other 1,627 1,513 1,418
------ ------ ------
$4,425 $4,391 $4,310
====== ====== ======
</TABLE>
Professional services include amounts paid for legal services, audits and
regulatory examinations.
16. STOCK OPTION PLAN
- --------------------------------------------------------------------------------
The Bank adopted a stock option plan, the 1986 Incentive and Nonqualified Stock
Option Plan (the "1986 Stock Option Plan"), in connection with its conversion
from mutual to stock form in 1986. On the effective date of the Holding Company
Plan, the 1986 Stock Option Plan became the Stock Option Plan of the Company. By
its terms, the 1986 Stock Option Plan has expired, and new options may no longer
be granted. The Company has adopted the Abington Bancorp, Inc. 1997 Incentive
and Nonqualified Stock Option Plan ("the 1997 Stock Option Plan") to replace the
1986 Stock Option Plan.
The 1997 Stock Option Plan authorizes the grant of (i) options to purchase
common stock intended to qualify as incentive stock options
ABINGTON BANCORP, INC. 39 1997 ANNUAL REPORT
<PAGE> 104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
("Incentive Options") as defined in Section 422 of the Code, and (ii) options
that do not so qualify ("Nonqualified Options"). Up to 300,000 shares of common
stock (subject to adjustment upon certain changes in the capitalization of the
Company) may be issued pursuant to awards granted under the 1997 Stock Option
Plan. The 1997 Stock Option Plan is administered by the Company's Compensation
Committee (the "Compensation Committee"). The Compensation Committee recommends
to the full Board of Directors the individuals to whom awards are granted and
determines the terms of each award, subject to the provisions of the 1997 Stock
Option Plan. Incentive Options may be granted under the 1997 Stock Option Plan
only to officers and other employees of the Company or its subsidiary.
Nonqualified Options may be granted under the 1997 Stock Option Plan to officers
or other employees of the Company or its subsidiaries, and to members of the
Board of Directors and consultants or other persons who render services to the
Company.
Each option shall expire on the date specified in the option agreement, which
date shall not, in the case of an Incentive Option, extend for more than 10
years from the date of grant (5 years in the case of an optionee who owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company or any subsidiary ("greater-than-ten-percent-
stockholder")). The exercise price of each option shall be determined by the
Compensation Committee at the time the option is granted, provided, however,
that the option price of any Incentive Option granted under the 1997 Stock
Option Plan must be at least equal to the fair market value of the common stock
on the date of grant (110% of fair market value in the case of a
greater-than-ten-percent-stockholder). The aggregate fair market value
(determined at the time of grant) of shares issuable pursuant to Incentive
Options which first become exercisable by an employee or officer in any calendar
year may not exceed one hundred thousand dollars ($100,000). Options are
non-transferable except by will or by the laws of descent or distribution and
are exercisable, during the optionee's lifetime, only by the optionee.
Options generally may not be exercised (i) after termination of the optionee's
employment with the Company or any of its subsidiaries, or directorship with the
Company, for cause or by reason of such optionee's voluntary resignation, (ii)
30 days after termination of the optionee's employment with the Company or its
subsidiary, or directorship with the Company, without cause or by reason of
retirement in accordance with the Company's (or the applicable subsidiary's)
retirement policies, (iii) 90 days after termination of the optionee's
employment with the Company or its subsidiary, or directorship with the Company,
by reason of disability, and (iv) 180 days after termination of the optionee's
employment with the Company, its subsidiary, or directorship with the Company,
by reason of death. In all cases, however, the Board has the discretion to
extend the exercise date. Payment of the exercise price of the shares subject to
the option may be made (i) in cash in an amount, or by check, bank draft or
postal or express money order payable in an amount, equal to the aggregate
exercise price for such shares, (ii) with the consent of the Compensation
Committee, in the form of shares of common stock having a fair market value
equal to the exercise price of such shares, (iii) with the consent of the
Compensation Committee, by reducing the number of option shares otherwise
issuable to the optionee upon exercise of the option by a number of shares
having a fair market value equal to the aggregate exercise price of such shares,
(iv) with the consent of the Compensation Committee, by delivering such other
consideration that is acceptable to the Compensation Committee and that has a
fair market value, as determined by the Compensation Committee, equal to the
aggregate exercise price of such shares, including any broker-directed cashless
exercise/resale procedure adopted by the Compensation Committee, or (v) with the
consent of the Compensation Committee, any combination of the foregoing.
At the discretion of the Company, options granted under the 1997 Stock Option
Plan may include a so-called "reload" feature pursuant to which an optionee
exercising an option by the delivery of a number of shares of common stock would
automatically be granted an additional option (with an exercise price equal to
the fair market value of the common stock on the date the additional option is
granted and with the same expiration date as the original option being
exercised, and with such other terms as the Compensation Committee may provide)
to purchase that number of shares of common stock equal to the number delivered
to exercise the original option.
In the event of a change of control, as defined in the 1997 Stock Option Plan,
(i) the time for exercise of all unexercised and unexpired awards will be
automatically accelerated, effective as of the effective time of the change of
control (or such earlier date as may be specified by the Board) and (ii) after
the effective time of the change of control, all unexercised awards will remain
outstanding and will be exercisable in full for shares of common stock or, if
applicable, for shares of such securities, cash or property as the holders of
shares of common stock received in connection with the change of control.
The per share exercise prices of the options granted by the 1986 and 1997 Option
Plan range from $1.50 to $15.50 and equaled the fair market value of the shares
on the date the options were granted. Stock Option activity for the years ended
December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Number of Weighted Avg. Number of Weighted Avg. Number of Weighted Avg.
Options Exercise Price Options Exercise Price Options Exercise Price
-------------------------- -------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 398,824 $ 4.40 367,824 $3.92 318,924 $3.40
Granted 46,500 15.50 50,500 8.50 70,500 6.81
Exercised (15,300) 4.75 (19,000) 5.93 (17,600) 5.17
Canceled - - (500) 8.03 (4,000) 8.03
------- ------ ------- ----- ------- -----
Outstanding at end of year 430,024 $ 5.59 398,824 $4.40 367,824 $3.92
======= ====== ======= ===== ======= =====
Exercisable at end of year 430,024 $ 5.59 358,324 $4.12 327,324 $3.56
======= ====== ======= ===== ======= =====
Option price per share $1.50-$15.50 $1.50-$8.50 $1.50-$8.03
Weighted average fair value of
options granted during the year $5.09 $3.35 $3.00
</TABLE>
ABINGTON BANCORP, INC. 40 1997 ANNUAL REPORT
<PAGE> 105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In conjunction with the Company's aforementioned Stock Option Plans, the Company
adopted a Long Term Performance Incentive Plan to encourage executive management
and members of the Board of Directors to build long-term shareholder value. The
plan was a 3 year program which provided a mechanism for granting options under
the Company's Stock Option Plan. Options to purchase approximately 40,500 to
46,500 shares of common stock for each of the 1994, 1995 and 1996 fiscal years
were granted to members of the Board of Directors and certain principal
officers. All options granted under this plan are included in the preceding
table. The options are granted based on achievement of strategic goals such as
acquisitions and asset purchases. The exercise price would be at least equaled
to the fair market value of the common stock on the date of grant. The options
become exercisable upon a change of control of the Company or after the average
market price of the common stock exceeds 120-140% of the exercise price for
periods of 5 to 180 days depending on the qualifications set for each issuance.
As of December 31, 1997, all previously issued options under this plan were
exercisable.
All options granted become fully vested no later than at the end of the ninth
year after issuance. The maximum amount of options which can become exercisable
in any 1 year is limited to $100,000 based on grant prices except in the event
of a change of control, in which case all options become exercisable.
As discussed in Note 1, the Bank applies APB 25 in accounting for its
stock-based compensation plans under which no compensation cost has been
recognized. Had compensation cost for awards in 1997 and 1996 under the Bank's
stock-based compensation plans been determined based on the fair value at the
grant dates consistent with the method set forth under SFAS No. 123, the effect
on the Bank's net income and earnings per share would have been as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
(Dollars in thousands, except in share amounts)
<S> <C> <C> <C>
Net income:
As reported $4,378 $3,533 $1,429
Pro forma 4,236 3,428 1,309
Earnings per share:
As reported -
Basic 1.18 .94 .38
Diluted 1.10 .89 .37
Pro forma -
Basic 1.14 .91 .35
Diluted 1.07 .86 .33
</TABLE>
The initial impact of applying SFAS No. 123 on pro forma net income may not be
indicative of future amounts when the method prescribed by SFAS No. 123 will
apply to all outstanding awards because compensation expense for options granted
prior to January 1, 1995 is not reflected in the pro forma amounts above.
The fair value of each option grant is estimated on the grant date using the
Black-Scholes option-pricing model using the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------
<S> <C> <C> <C>
Expected volatility 21.10% 34.05% 34.05%
Risk-free interest rate 6.17% 5.71% 7.57%
Term of options 7.0 yrs. 9.2 yrs. 9.4yrs.
Expected dividend yield 1.40% 2.35% 2.93%
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
17. EMPLOYEES' STOCK OWNERSHIP PLAN
- --------------------------------------------------------------------------------
The Company has established an Employees' Stock Ownership Plan ("ESOP") which is
being funded by the Company's contributions made in cash (which generally will
be invested in common stock) or common stock. Benefits may be paid in shares of
common stock or in cash, subject to the employees' right to demand shares.
In November 1993, the Company loaned the ESOP $570,000 to acquire additional
shares for participants on the open market. The loan is to be repaid over 7
years with principal and interest (at a rate equal to 85% of the prevailing
prime rate) payable quarterly. The loan is secured by the unallocated shares
acquired by the ESOP.
The Company's ESOP expense for the years ended December 31, 1997, 1996 and 1995
amounted to $181,000, $81,000 and $82,000, respectively.
In the event that the stock price of the Company fluctuates materially at the
point that shares vest with participants from the cost of shares acquired by the
ESOP (at prices which range from $5.63 - $6.13 per share) the Company's
statement of operations could be adversely (if increasing stock price) or
favorably (decreasing stock price) affected. However, in all instances there
will be no negative impact on the Company's capital. During 1997, the impact of
such price variations increased the Company's ESOP expense by $100,000 in
addition to normal amortization expense associated with the participants' earn
out of the shares allocated. There was no material impact related to changes in
the market price in 1996 and 1995.
ABINGTON BANCORP, INC. 41 1997 ANNUAL REPORT
<PAGE> 106
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. RESTRICTION ON CASH AND DUE FROM BANKS
- --------------------------------------------------------------------------------
At December 31, 1997 and 1996, cash and due from banks included $3,618,000 and
$2,203,000, respectively, to satisfy the reserve requirements of the Federal
Reserve Bank.
19. 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. 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 December 31, 1997, the Company had repurchased 165,000 shares of its
common stock under this plan at a total cost of approximately $2,228,000. All of
the repurchases were subsequent to March 31, 1997.
On February 24, 1998 the Company's Board of Directors authorized the Company to
repurchase up to 347,000 shares of its then outstanding common stock
(representing 10% of the then outstanding stock, net of the remaining shares to
be repurchased under the previously authorized repurchase program). The Company
had repurchased approximately 295,500 shares in total under the March 27, 1997
repurchase program at a cost of approximately $4,896,000.
20. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate that
value. Fair value estimates which were derived from discounted cash flows or
broker quotes cannot be substantiated by comparison to independent markets and,
in many cases, could not be realized in immediate settlement of the instrument.
CASH, FEDERAL FUNDS SOLD AND SHORT-TERM INVESTMENTS
For these short-term instruments, the carrying amount is a reasonable estimate
of fair value.
INVESTMENT SECURITIES, ASSETS HELD FOR SALE AND MORTGAGE-BACKED INVESTMENTS
For investment securities, assets held for sale (typically loans) and
mortgage-backed derivative investments, fair values are based on quoted market
prices or dealer quotes.
LOANS
For certain homogeneous categories of loans, such as residential mortgages, home
equity and indirect automobile loans, fair value is estimated using the quoted
market prices for securities backed by similar loans adjusted for differences in
loan characteristics or dealer quotes. The fair value of other types of loans
was estimated by discounting anticipated future cash flows using current rates
at which similar loans would be made to borrowers with similar credit ratings
and for the same remaining maturities.
DEPOSIT LIABILITIES
The fair value of non-certificate deposit accounts is the amount payable on
demand at the reporting date. The fair value of fixed maturity certificates of
deposit is estimated by discounting the anticipated future cash payments using
the rates currently offered for deposits of similar remaining maturities.
SHORT-TERM AND LONG-TERM BORROWINGS
The fair value of borrowings was determined by discounting the anticipated
future cash payments by using the rates currently available to the Company for
debt with similar terms and remaining maturities.
COMMITMENTS TO EXTEND CREDIT/SELL LOANS
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of customers. For fixed rate loan
commitments and obligations to deliver fixed rate loans, fair value also
considers the difference between committed rates and current levels of interest
rates.
VALUES NOT DETERMINED
SFAS No. 107 excludes certain financial instruments from its disclosure
requirements including, among others, real estate included in banking premises
and equipment, the intangible value of the Bank's portfolio of loans serviced
(both for itself and for others) and related servicing network and the
intangible value inherent in the Bank's deposit relationships (i.e., core
deposits). Accordingly, the aggregate fair value amounts presented are not
intended to represent the underlying value of the Bank.
The carrying amount and estimated fair values of the Bank's financial
instruments at December 31, 1997 and 1996 are represented as follows:
ABINGTON BANCORP, INC. 42 1997 ANNUAL REPORT
<PAGE> 107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
At December 31, 1997 1996
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands)
Carrying Carrying
or Notional Fair or Notional Fair
Amount Value Amount Value
------------------------- ------------------------
<S> <C> <C> <C> <C>
Financial instrument assets:
Cash and cash equivalents $ 13,475 $ 13,475 $ 9,708 $ 9,708
Securities 165,052 165,160 155,231 154,017
Loans, including held for sale, net 330,792 343,984 298,970 304,669
Mortgage servicing rights 26 26 56 56
Financial instrument liabilities:
Deposits $324,934 $327,563 $300,445 $302,149
Short-term borrowings 55,910 55,934 63,171 63,194
Long-term debt 110,000 109,241 84,353 83,155
Off-balance sheet financial instruments:
Commitments to grant loans $ 8,359 $ 8,359 $ 6,355 $ 6,355
Commitments to sell loans 1,415 1,415 2,516 2,516
Unadvanced funds on home equity
lines of credit 11,230 11,230 10,679 10,679
Commitments to advance funds under
construction loan agreements 2,242 2,242 2,758 2,758
Unadvanced funds on other lines of
credit 2,166 2,166 1,949 1,949
Interest rate swap agreement - - 12,964 12,984
</TABLE>
ABINGTON BANCORP, INC. 43 1997 ANNUAL REPORT
<PAGE> 108
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. PARENT COMPANY FINANCIAL STATEMENTS - ABINGTON BANCORP, INC. (PARENT
COMPANY ONLY)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
BALANCE SHEETS December 31, 1997
- ----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C>
Assets:
Cash and cash equivalents $ 1,186
Investment in Bank ASB 35,765
Other assets 216
-------
Total assets $37,167
=======
Liabilities and stockholders' equity:
Liabilities:
Accrued expenses and other liabilities $ 845
-------
Total liabilities 845
-------
Total stockholders' equity 36,322
-------
Total liabilities and stockholders' equity $37,167
=======
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
STATEMENTS OF INCOME Eleven Months December 31, 1997
- ----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C>
Operating income:
Dividends from Bank $4,000
Interest income 13
------
Total operating income 4,013
Operating expenses 307
------
Income before income taxes and equity in undistributed earnings of subsidiaries 3,706
Income tax benefit (85)
------
Income before equity in undistributed earnings of subsidiaries 3,791
Equity in undistributed earnings of Bank 233
------
Net Income $4,024
======
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Statements of Cash Flows December 31, 1997
- ----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C>
Cash flows from operating activities:
Net income $ 4,024
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of bank subsidiaries (233)
Other, net 59
-------
Net cash provided by operating activities 3,850
Cash flows from investing activities:
Net cash used in investing activities -
Cash flows from financing activities:
Proceeds from issuance of treasury and common stock 72
Dividends on common stock (559)
Repurchase of common stock (2,228)
-------
Net cash used in financing activities (2,715)
Net increase in cash and cash equivalents 1,135
Cash and cash equivalents at beginning of year 51
-------
Cash and cash equivalents at end of year $ 1,186
=======
</TABLE>
ABINGTON BANCORP, INC. 44 1997 ANNUAL REPORT
<PAGE> 109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. QUARTERLY DATA (UNAUDITED)
- --------------------------------------------------------------------------------
Operating results on a quarterly basis for the years ended December 31, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996
- --------------------------------------------------------------------------------------------------------------------
(Dollars and outstanding shares in thousands, except per share data)
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and dividend income $9,312 $9,140 $9,028 $8,817 $8,833 $8,684 $8,471 $8,344
Interest expense 5,251 5,069 5,007 4,764 4,916 4,928 4,856 4,817
------ ------ ------ ------ ------ ------ ------ ------
Net interest income 4,061 4,071 4,021 4,053 3,917 3,756 3,615 3,527
Provision for possible loan losses 157 158 157 158 120 120 120 120
------ ------ ------ ------ ------ ------ ------ ------
Net interest income, after provision
for possible loan losses 3,904 3,913 3,864 3,895 3,797 3,636 3,495 3,407
Non-interest income 1,436 1,212 1,201 1,137 984 1,062 1,057 1,074
Non-interest expenses 3,621 3,307 3,286 3,291 3,272 3,228 3,212 3,128
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes 1,719 1,818 1,779 1,741 1,509 1,470 1,340 1,353
Provision for income taxes 616 691 683 689 576 550 494 519
------ ------ ------ ------ ------ ------ ------ ------
Net income $1,103 $1,127 $1,096 $1,052 $ 933 $ 920 $ 846 $ 834
====== ====== ====== ====== ====== ====== ====== ======
Basic earnings per share $ .30 $ .31 $ .29 $ .28 $ .25 $ .24 $ .22 $ .22
====== ====== ====== ====== ====== ====== ====== ======
Diluted earnings per share $ .28 $ .29 $ .28 $ .26 $ .23 $ .23 $ .21 $ .21
====== ====== ====== ====== ====== ====== ====== ======
Weighted average common
shares outstanding 3,654 3,686 3,738 3,788 3,786 3,774 3,770 3,768
====== ====== ====== ====== ====== ====== ====== ======
Weighted average common
shares and share equivalents
outstanding 3,933 3,946 3,974 4,014 3,996 3,958 3,946 3,954
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
ABINGTON BANCORP, INC. 45 1997 ANNUAL REPORT
<PAGE> 110
STOCKHOLDER INFORMATION
STOCK MARKET DATA
The common stock of the Company is currently listed on the NASDAQ National
Market System (NMS) under the symbol "ABBK." The table below sets forth the
range of high and low sales prices for the stock for the quarters indicated.
Market quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission, and may not necessarily represent actual transactions.
Transactions through January 31, 1997 are for the common stock of the Bank.
Transactions on and after that date are for the common stock of the Company.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Price High Low Dividends Declared
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
1st quarter (through March 6, 1998) 22 19 $ -
1997
4th quarter 23 1/2 15 5/8 $.05
3rd quarter 17 12 3/4 $.05
2nd quarter 13 10 1/4 $.05
1st quarter 11 5/8 9 1/2 $.05
1996
4th quarter 10 7/8 8 7/16 $.05
3rd quarter 9 7 3/4 $.05
2nd quarter 8 1/8 7 1/4 $.05
1st quarter 8 7/8 7 23/32 $.05
1995
4th quarter 9 1/2 7 3/4 $.05
3rd quarter 8 1/2 6 3/4 $.05
2nd quarter 7 9/16 6 1/4 $.05
1st quarter 7 1/2 6 $.05
</TABLE>
As of March 6, 1998, the Company had approximately 801 stockholders of record
who held 3,565,800 outstanding shares of the Company's common stock. The number
of stockholders indicated does not reflect the number of persons or entities who
hold their common stock in nominee or "street" name through various brokerage
firms. If all such persons are included, the Company believes there are
approximately 1,100 beneficial owners of common stock.
ANNUAL REPORT ON FORM 10-K
A copy of the Company's Annual Report on Form 10-K for the year ended December
31, 1997 as filed with the Securities Exchange Commission, is available to
stockholders without charge upon written request to:
Investor Relations
Abington Bancorp, Inc.
536 Washington Street
Abington, MA 02351
INQUIRIES
Robert M. Lallo
Senior Vice President and Treasurer
Abington Bancorp, Inc.
ABINGTON BANCORP, INC. 46 1997 ANNUAL REPORT
<PAGE> 111
<TABLE>
<CAPTION>
BANK DIRECTORS & OFFICERS
- --------------------------------------------------------------------------------
DIRECTORS BANK OFFICERS
<S> <C>
JAMES P. MCDONOUGH 1 JAMES P. MCDONOUGH 3
President and CEO President and CEO
Abington Bancorp, Inc.
President and CEO EDWARD J. MERRITT
Abington Savings Bank Executive Vice President - Operations
ROBERT J. ARMSTRONG MARIO A. BERLINGHIERI
President and General Manager Senior Vice President - Business Banking
Armstrong Construction Corp.
ROBERT M. LALLO 3
BRUCE G. ATWOOD 1 Senior Vice President - Treasurer & CFO
Vice President Operations
Hyer Industries, Inc. DONNA L. THAXTER
Senior Vice President - Consumer Banking
WILLIAM F. BORHEK 2
President DAVID J. AMES
William F. Borhek Associates Vice President - Business Banking
RALPH B. CARVER, JR. PAUL D. AMATO
President and Treasurer Assistant Vice President - Controller
Den-Lea Rental, Inc.
MARY E. BOOTHBY
JOEL S. GELLER 1 Credit Officer
Owner-Manager and Director
Abington Liquors Corp. RUTH E. COOK
Human Resources Officer
RODNEY HENRIKSON 2
Treasurer and Director ELAINE CROSSLAND
Henrikson Realty Corp. Branch Officer
A. STANLEY LITTLEFIELD 1 STEPHANIE DUNN
Attorney Vice President - Management Information Systems
Private Practice
IDA C. FRAZIER
JAY TIMOTHY NOONAN 2 Vice President - Compliance
Manager
J. P. Noonan Trans., Inc. MARY E. HAGEN
Assistant Vice President - Branch Administration
GORDON N. SANDERSON
Retired JULIE JENKINS
Vice President - Loan Operations
JAMES J. SLATTERY 1
President BETH LAPPEN
J. H. Slattery Insurance Assistant Vice President - Business Banking
Agency, Inc.
WILLIAM D. LEWIS
WAYNE P. SMITH Vice President - Business Banking
Treasurer and Director
Suburban Enterprises, Inc. STEPHEN K. LUCITT
Vice President - Business Banking
1: Member of Executive Committee
2: Member of Audit Committee BARBARA M. MANNING 3
Clerk of the Bank
DAVID J. MCCARTHY
Assistant Vice President
DEBORAH J. MINIER
Vice President - Loan Origination/Underwriting
LEWIS J. PARAGONA
Vice President - Human Resources
RAYMOND J. QUIGLEY
Assistant Vice President
EVELYNE A. RICO
Branch Officer
DIANNE ROWAN MCBRIDE
Assistant Vice President
CAROL M. SHARPLESS
Assistant Vice President
3: Officer of Bancorp
</TABLE>
ABINGTON BANCORP, INC. 47 1997 ANNUAL REPORT
<PAGE> 112
[CORPORATE INFORMATION PICTURE]
CORPORATE INFORMATION
- ---------------------
Corporate Office
Abington Bancorp, Inc.
536 Washington Street
Abington, MA 02351
(781) 982-3200
Independent Public Accountants
Arthur Andersen LLP
225 Franklin Street
Boston, MA 02110
(617) 330-4000
Legal Counsel
Foley, Hoag & Eliot LLP
One Post Office Square
Boston, MA 02109
(617) 832-1000
Transfer Agent and Registrar
Registrar & Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3572
(800) 368-2548 x7760
<PAGE> 113
BANK OFFICES
ABINGTON
533 Washington Street
Abington, MA 02351
COHASSET
Shaw's Supermarket
Route 3A
Cohasset, MA 02025
HALIFAX
319 Monponsett Street
Halifax, MA 02338
HOLBROOK
778 South Franklin Street
Holbrook, MA 02343
HULL
523 Nantasket Avenue
Hull, MA 02045
KINGSTON
157 Summer Street
Kingston, MA 02364
PEMBROKE
175 Center Street
Pembroke, MA 02359
WHITMAN
584 Washington Street
Whitman, MA 02382
ADMINISTRATIVE OFFICES
538 Bedford Street
Abington, MA 02351
[APPLE LOGO]
(C) 1998 Abington Bancorp, Inc. Design by Red Leaf, Inc.
<PAGE> 114
APPENDIX B
<PAGE> 115
APPENDIX B - THE COMPANY'S QUARTERLY REPORT
ON FORM 10-Q FOR THE QUARTER
ENDED MARCH 31, 1998
<PAGE> 116
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
----------------------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES
EXCHANGE ACT OF 1934 for Quarter Ended March 31, 1998
----------------------------------------
Commission File Number 0-16018
ABINGTON BANCORP, INC.
(Exact name of Registrant as specified in its charter)
Massachusetts 04-3334127
- --------------------------------- ---------------------------
(State or Other Jurisdiction (I.R.S. Identification No.)
of Incorporation or Organization)
536 Washington Street, Abington, Massachusetts 02351
- ----------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 982-3200
-------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
--- ---
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 3,569,900 shares as of May 5,
1998.
<PAGE> 117
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
<PAGE> 118
ABINGTON BANCORP, INC.
FORM 10-Q
INDEX
Page
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998
(Unaudited) and December 31, 1997............................ 4
Consolidated Statements of Operations (Unaudited)
for the Three Months Ended March 31, 1998 and 1997........... 5
Consolidated Statements of Changes in Stockholders'
Equity (Unaudited) for the Three Months Ended
March 31, 1998 and 1997...................................... 6
Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended March 31, 1998 and 1997........... 7
Notes to Unaudited Consolidated Financial Statements......... 9
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations................ 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk... 26
Part II Other Information
Item 1. Legal Proceedings ........................................... 27
Item 2. Change in Securities ........................................ 27
Item 3. Defaults upon Senior Securities.............................. 27
Item 4. Submission of Matters to a Vote of Security Holders.......... 27
Item 5. Other Information............................................ 27
Item 6. Exhibits and Reports on Form 8-K............................. 27
Signature Page........................................................... 31
Index to Exhibits........................................................ 32
3
<PAGE> 119
ABINGTON BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1998 1997
---------- -----------
(In Thousands)
ASSETS
<S> <C> <C>
Cash and due from banks..................... $ 10,185 $ 13,312
Short-term investments...................... 181 163
-------- ---------
Total cash and cash equivalents........... 10,366 13,475
-------- ---------
Loans held for sale......................... 1,131 1,332
Securities:
Mortgage-backed investments - held for
investment - market value of $ 63,894
in 1998 and $ 64,129 in 1997............ 63,602 64,021
Securities available for sale - at
market value............................ 107,648 101,031
Loans....................................... 342,719 331,740
Less:
Allowance for possible loan losses...... (2,470) (2,280)
-------- ---------
Loans, net.............................. 340,249 329,460
-------- ---------
Federal Home Loan Bank stock................ 8,793 8,151
Banking premises and equipment, net......... 7,143 6,294
Other real estate owned, net................ 265 265
Intangible assets........................... 3,166 3,284
Other assets................................ 7,475 4,673
-------- ---------
$ 549,838 $ 531,986
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits.................................... $ 333,210 $ 324,934
Short-term borrowings....................... 40,760 55,910
Long-term debt.............................. 135,500 110,000
Accrued taxes and expenses.................. 3,620 3,337
Other liabilities........................... 2,164 1,484
-------- ---------
Total liabilities....................... 515,254 495,665
---------- ---------
Commitments and contingencies
Stockholders' equity:
Serial preferred stock, $.10 par value,
3,000,000 shares authorized; none issued. - -
Common stock, $.10 par value 12,000,000
shares authorized; 4,747,000 and 4,676,000
shares issued in 1998 and 1997, respectively 475 468
Additional paid-in capital................ 21,367 21,094
Retained earnings......................... 20,458 19,858
-------- ---------
42,300 41,420
Treasury stock - 1,183,000 and 1,039,000 shares
for 1998 and 1997, respectively, at cost.. (8,884) (5,931)
Unearned compensation - ESOP.............. (210) (231)
Other accumulated comprehensive income -
Net unrealized gain on available for
sale securities, net of taxes........... 1,378 1,063
-------- --------
Total stockholders' equity.............. 34,584 36,321
-------- ---------
$ 549,838 $ 531,986
======== =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 120
ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------------
1998 1997
---------- -----------
(In thousands, except per share data)
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans ....................... $ 6,508 $ 6,039
Interest on mortgage-backed investments .......... 2,098 2,230
Interest on bonds and obligations ................ 594 393
Dividend income .................................. 150 147
Interest on short-term investments ............... 32 8
---------- ----------
Total interest and dividend income ............. 9,382 8,817
---------- ----------
Interest expense:
Interest on deposits .............................. 2,841 2,680
Interest on short-term borrowings ................. 604 817
Interest on long-term debt ........................ 1,902 1,267
---------- ----------
Total interest expense ......................... 5,347 4,764
---------- ----------
Net interest income ................................ 4,035 4,053
Provision for possible loan losses ................. 190 158
---------- ----------
Net interest income, after provision for
Possible loan losses ............................. 3,845 3,895
---------- ----------
Non-interest income:
Loan servicing fees .............................. 115 143
Other customer service fees ...................... 861 680
Gain on sales of securities, net ................. 365 110
Gain on sales of mortgage loans, net ............. 68 81
Gain on sales and write-down of
other real estate owned, net .................... -- 16
Other .............................................. 84 107
---------- ----------
Total non-interest income ...................... 1,493 1,137
---------- ----------
Non-interest expense:
Salaries and employee benefits ................... 1,753 1,620
Occupancy and equipment expenses ................. 676 580
Other non-interest expense ....................... 1,176 1,091
---------- ----------
Total non-interest expense ..................... 3,605 3,291
---------- ----------
Income before provision for income
taxes ..................................... 1,733 1,741
Provision for income taxes ......................... 597 689
---------- ----------
Net income ..................................... $ 1,136 $ 1,052
========== ==========
Earnings per share
Basic -
Net income per share ........................ $ .32 $ .28
========== ==========
Weighted average common shares .............. 3,586,000 3,788,000
========== ==========
Diluted -
Net income per share .......................... $ .30 $ .26
========== ==========
Weighted average common shares and share equivalents 3,852,000 4,014,000
========== ==========
Dividends per share ................................ $ .15 $ .05
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
5
<PAGE> 121
ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Net
Unrealized
Gain
(Loss) on
Additional Available Unearned
Common Paid-In Retained Treasury for Sale Compensa-
Stock Capital Earnings Stock Securities tion-ESOP Total
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 ......... $468 $ 21,094 $ 19,858 $(5,931) $ 1,063 $(231) $ 36,321
Net income ........................... -- -- 1,136 -- -- -- 1,136
Decrease in unearned compen-
sation - ESOP ...................... -- -- -- -- -- 21 21
Increase in unrealized gain on
available for sale securities,
net of taxes ....................... -- -- -- -- 315 -- 315
Issuance of stock .................... 7 273 -- -- -- -- 280
Repurchase of stock .................. -- -- -- (2,953) -- -- (2,953)
Dividends declared ($.15 per share) .. -- -- (536) -- -- -- (536)
---- -------- -------- ------- ------- ----- --------
Balance at March 31, 1998 ............ $475 $ 21,367 $ 20,458 $(8,884) $ 1,378 $(210) $ 34,584
==== ======== ======== ======= ======= ===== ========
Balance at December 31, 1996 ......... $233 $ 20,923 $ 16,455 $(3,703) $ ( 50) $(312) $ 33,546
Net income ........................... -- -- 1,052 -- -- -- 1,052
Decrease in unearned compen-
sation - ESOP ...................... -- -- -- -- -- 20 20
Issuance of stock .................... -- 8 -- -- -- -- 8
Increase in unrealized loss on
available for sale securities,
net of taxes ....................... -- -- -- -- (602) -- (602)
Dividends declared ($.05 per share) .. -- -- (189) -- -- -- (189)
---- -------- -------- ------- ------- ----- --------
Balance at March 31, 1997 ............ $233 $ 20,931 $ 17,318 $(3,703) $ (652) $(292) $ 33,835
==== ======== ======== ======= ======= ===== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 122
ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................ $ 1,136 $ 1,052
Adjustments to reconcile net income to net
cash provided (used) by operating
activities:
Provision for loan losses ......................... 190 158
(Gain) loss on sales and write-down of
other real estate owned, net .................... -- (16)
Amortization, accretion and depreciation,
net ............................................. 545 447
Gain on sales of securities, net ....................... (365) (110)
Loans originated for sale in the
secondary market ................................... (7,308) (3,672)
Proceeds from sales of loans ........................ 7,509 6,608
Gain on sales of mortgage loans, net ................ (68) (81)
Other, net .......................................... (2,419) (106)
-------- --------
Net cash provided (used) by operating
activities ........................................ (780) $ 4,280
-------- --------
Cash flows from investing activities:
Purchase of held for investment
securities ........................................ (1,982) --
Proceeds from principal payments received
on held for investment securities ................. 2,363 1,443
Proceeds from sales of available for sale
securities ........................................... 7,045 7,836
Proceeds from principal payments on
available for sale securities ........................ 12,995 2,892
Purchase of available for sale securities ............. (25,762) (15,449)
Loans originated/purchased, net ....................... (10,911) (4,180)
Proceeds from sales of loans held in portfolio ........ -- --
Purchases of FHLB stock ............................... (642) --
</TABLE>
See accompanying notes to unaudited consolidated financial statements
7
<PAGE> 123
ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
March 31,
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Purchase of banking premises and equipment
and improvements to other real estate
owned ............................................ $ (1,177) $ (174)
Proceeds from sales of other real estate
owned ............................................ -- 121
-------- --------
Net cash provided (used) by investing
activities ....................................... (18,071) (7,511)
Cash flows from financing activities:
Net increase in deposits .......................... 8,276 5,229
Net increase (decrease) in borrowings with original
maturities of three months or less ............... (20,150) (5,221)
Proceeds from short-term borrowings with
maturities in excess of three months ............. 10,000 --
Principal payments on short-term borrow-
ings with maturities in excess of
three months ..................................... (5,000) (7,000)
Proceeds from issuance of long-term debt .......... 30,000 18,000
Principal payments on long term debt .............. (4,500) (5,467)
Proceeds from exercise of stock options ........... 256 8
Purchase of treasury stock ......................... (2,953) --
Cash paid for dividends ............................ (187) (189)
-------- --------
Net cash provided from financing
activities ...................................... 15,742 5,360
-------- --------
Net increase (decrease)in cash and cash
equivalents ...................................... (3,109) 2,129
Cash and cash equivalents at beginning of
period ........................................... 13,475 $ 9,708
-------- --------
Cash and cash equivalents at end of period ......... $ 10,366 $ 11,837
======== ========
Supplemental cash flow information:
Interest paid on deposits ....................... $ 2,833 $ 2,680
Interest paid on borrowed funds ................. 2,491 2,074
Income taxes paid ............................... 355 1,011
Transfers to other real estate owned,
net ............................................ -- --
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
8
<PAGE> 124
ABINGTON BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Abington Bancorp, Inc. (the "Company") is a one-bank holding company
which owns all of the outstanding capital stock of Abington Savings
Bank ("the Bank"). Abington Bancorp, Inc., was reestablished as the
Bank's holding company on January 31, 1997. Previously, the Company's
predecessor, also known as Abington Bancorp, Inc., had served as the
Bank's holding company from February 1988 until its dissolution in
December 1992. The Company's primary business is serving as the holding
company of the Bank.
The accompanying consolidated financial statements as of March 31, 1998
and for the three months periods ended March 31, 1998 and 1997 have
been prepared by the Company without audit, and reflect all adjustments
(consisting of normal recurring adjustments) which, in the opinion of
management, are necessary to reflect a fair statement of the results of
the interim periods presented. On January 31, 1997, in connection with
the holding company formation, each share of the Bank's common stock
previously outstanding was converted automatically into one share of
common stock of the Company, and the Bank became a wholly-owned
subsidiary of the Company. This reorganization had no impact on the
consolidated financial statements. Certain information and footnote
disclosures normally included in the annual consolidated financial
statements which are prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Accordingly, the
Company believes that although the disclosures are adequate to make the
information presented not misleading, these consolidated financial
statements should be read in conjunction with the footnotes contained
in the Bank's consolidated financial statements as of and for the year
ended December 31, 1997, which are included in the Company's Annual
Report to Stockholders. Interim results are not necessarily indicative
of results to be expected for the entire year.
The consolidated financial statements include the accounts of Abington
Bancorp, Inc. and its wholly-owned subsidiary, Abington Savings Bank.
Abington Savings Bank also includes its wholly-owned subsidiaries, Holt
Park Place Development Corporation and Norroway Pond Development
Corporation each typically owning properties being marketed for sale,
ABBK Corporation, which invested in real estate limited partnerships
and was dissolved in January 1997, and Abington Securities Corporation,
which invests primarily in obligations of the United States Government
and its agencies and equity securities. All significant intercompany
balances and transactions have been eliminated in consolidation.
9
<PAGE> 125
ABINGTON BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(continued)
B) DIVIDEND DECLARATION
The Board of Directors of Abington Bancorp., Inc. declared a cash
dividend of $.05 per share and a special cash dividend of $.10 per share
to holders of its common stock in March 1998. These dividends were
payable on April 23, 1998 to stockholders of record as of the close of
business on April 9, 1998.
10
<PAGE> 126
ABINGTON BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998 (continued)
C) Stock Repurchase Program
On March 27, 1997, the Company announced that its Board of Directors had
authorized the Company to repurchase up to 10% (375,000 shares) of its currently
outstanding Common stock from time to time at prevailing market prices.
Additionally, on February 24, 1998, the Company announced that its Board of
Directors had authorized to purchase an additional 10% (347,000) of its
outstanding Common stock, as adjusted for amounts remaining to be repurchased as
under the March 1997 plan. The Board delegated to the discretion of the
Company's senior management the authority to determine the timing of the
repurchase program's commencement, subsequent purchases and the prices at which
the repurchases will be made.
As of May 5, 1998, the Company had repurchased 309,000 shares of its common
stock under these plans at a total cost of approximately $5,181,000. All of the
repurchases were subsequent to March 31, 1997.
D) Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses). Components of
comprehensive income are net income and all other non-owner changes in equity.
This statement requires that an enterprise (a) classified items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separate from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. This statement will be effective for the Company's financial
statements, issued for the fiscal year ending December 31, 1998.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
Below is comprehensive income of the Company reported in accordance with SFAS
No. 130 (dollars in 000's):
<TABLE>
<CAPTION>
For the Three
Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Net income as reported $1,136 $ 1,052
Unrealized gains/(losses) on
securities, net of tax effects . 461 (646)
Less: Reclassification
Adjustment for securities
gains included in net effects
income, net of tax 146 44
------ -------
$1,451 $ 450
====== =======
</TABLE>
11
<PAGE> 127
ABINGTON BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998 (continued)
E) Earnings Per Share Calculation
The Company computes earnings per share in accordance with SFAS No. 128. This
Statement supersedes APB No. 15 regarding the presentation of earnings per share
("EPS") on the face of the income statement. SFAS No. 128 replaced the
presentation of Primary EPS with a Basic EPS calculation that excludes the
dilutive effect of common stock equivalents. The Statement requires a dual
presentation of Basic and Diluted EPS, which is computed similarly to Fully
Diluted EPS pursuant to APB No. 15, for all entities with complex capital
structures. This Statement was effective for fiscal years ending after December
15, 1997 and requires restatement of all prior period EPS data presented,
including quarterly information. The Company's common stock equivalents consist
primarily of dilutive outstanding stock options computed under the treasury
stock method. Basic and Diluted EPS computations for the three months ended
March 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(Dollars in thousands, except share and per share amounts)
<S> <C> <C>
Basic earnings per share computation:
Numerator:
Net income ..................... $ 1,136 $ 1,052
Denominator:
Average shares outstanding ..... 3,586,000 3,788,000
Basic earnings per share ........... .32 .28
Diluted earnings per share computation:
Numerator:
Net income ..................... 1,136 1,052
Denominator:
Average shares outstanding ..... 3,586,000 3,788,000
Dilutive stock options ......... 266,000 226,000
---------- ----------
Average diluted shares outstanding . 3,852,000 4,014,000
---------- ----------
Diluted earnings per share ............ .30 .26
</TABLE>
12
<PAGE> 128
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's results of operations depend primarily on its net interest income
after provision for possible loan losses, its revenue from other banking
services and non-interest expenses. The Company's net interest income depends
upon the net interest rate spread between the yield on the Company's loan and
investment portfolios and the cost of funds, consisting primarily of interest
expense on deposits and Federal Home Loan Bank advances. The interest rate
spread is affected by the match between the maturities or repricing intervals of
the Company's assets and liabilities, the mix and composition of interest
sensitive assets and liabilities, economic factors influencing general interest
rates, loan demand and savings flows, as well as the effect of competition for
deposits and loans. The Company's net interest income is also affected by the
performance of its loan portfolio, amortization or accretion of premiums or
discounts on purchased loans and mortgage - backed securities, and the level of
non-earning assets. Revenues from loan fees and other banking services depend
upon the volume of new transactions and the market level of prices for
competitive products and services. Non-interest expenses depend upon the
efficiency of the Company's internal operations and general market and economic
conditions.
NET INTEREST INCOME
Net interest income is affected by the mix and volume of assets and liabilities,
the movement and level of interest rates, and interest spread, which is the
difference between the average yield received on earning assets and the average
rate paid on deposits and borrowings. The Company's net interest rate spread was
3.06% for the quarter ended March 31, 1998 and 3.36% for the quarter ended March
31, 1997. The first quarter results of 1998 includes approximately $250,000 of
accelerated premium amortization related to purchased loan portfolios which had
unusually high customer prepayment activity during the three months ended March
31, 1998. This reflects the lower long term interest rates which have existed
through the latter portion of 1997 and through the first quarter of 1998 which
has caused generally lower yields on newly originated or purchased loans and
investment securities. Excluding these yield adjustments, the resulting net
interest rate spread would have been approximately 3.26%.
The level of nonaccrual (impaired) loans and other real estate owned also has an
impact on net interest income. At March 31, 1998, the Company had $475,000 in
nonaccrual loans, and $265,000 in other real estate owned, compared to $622,000
in nonaccrual loans and $265,000 in other real estate owned as of December 31,
1997.
13
<PAGE> 129
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.
<TABLE>
<CAPTION>
Three Months Ended
March 31
1998 1997
------ ------
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans ............ $6,508 $6,039
Interest on mortgage-backed investments 2,098 2,230
Interest on bonds and obligations ..... 594 393
Dividend income ....................... 150 147
Interest on short-term investments .... 32 8
------ ------
Total interest and dividend income ... $9,382 9,382
------ ------
Interest expense:
Interest on deposits .................. 2,841 2,680
Interest on short-term borrowings ..... 604 817
Interest on long-term debt ............ 1,902 1,267
------ ------
Total interest expense ............... 5,347 4,764
------ ------
Net interest income .................... $4,035 $4,053
====== ======
</TABLE>
A breakdown of the components of the Company's net interest-rate spread is as
follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31
1998 1997
------ ------
<S> <C> <C>
Weighted average yield earned on:
Loans ................................ 7.81% 8.10%
Mortgage-backed investments .......... 6.63 6.88
Bonds and obligations ................ 6.98 7.32
Marketable and other equity securities 4.68 4.92
Short-term investments ............... 5.69 2.55
Weighted average yield earned on
interest-earning assets .............. 7.37 7.62
Weighted average rate paid on:
NOW and non-interest NOW deposits .... .81 .86
Savings deposits ................... 2.24 2.29
Time deposits ...................... 5.60 5.66
Total deposits ..................... 3.49 3.58
Short-term borrowings .............. 5.48 5.38
Long-term debt ..................... 6.01 5.84
Weighted average rate paid on
interest-bearing liabilities ......... 4.31 4.26
Net interest-rate spread ................ 3.06 3.36%
</TABLE>
14
<PAGE> 130
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.
<TABLE>
<CAPTION>
Three Months Ended March 31
-------------------------------------
1998 vs. 1997
Increase (decrease)
-------------------------------------
Due to
-------------------------------------
Volume Rate Total
-------------------------------------
(In thousands)
<S> <C> <C> <C>
Interest and dividend income:
Loans ......................... $ 1,688 $(1,219) $ 469
Mortgage-backed investments ... (53) (79) (132)
Bonds and obligations ......... 321 (120) 201
Equity securities ............. 36 (33) 3
Short-term investments ........ 9 15 24
------- ------- -----
Total interest and dividend
income ................... 2,001 (1,436) 565
------- ------- -----
Interest expense:
NOW deposits .................. 59 (41) 18
Savings deposits .............. 37 (42) (5)
Time deposits ................. 286 (138) 148
Short-term borrowings ......... (319) 106 (213)
Long-term debt ................ 596 39 635
------- ------- -----
Total interest expense .... 659 77 583
------- ------- -----
Net interest income ............. $ 1,342 (1,359) $ (18)
======= ======= =====
</TABLE>
15
<PAGE> 131
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
GENERAL. Net income for the quarter ended March 31, 1998 was $1,136,000 or $.30
per diluted share compared to a net income of $1,052,000 or $.26 per diluted
share in the corresponding period of 1997, a net increase of $84,000 or 8.0%.
The overall improvement in net income was mainly attributable to increases in
customer service fees and gains on sales of securities.
INTEREST AND DIVIDEND INCOME. Interest and dividend income increased $565,000 or
6.4% during the three month period ended March 31, 1998 as compared to the same
period in 1997. The increase was attributable to increases in earning assets,
particularly loans, offset in part by reductions in the yield earned on those
assets. The balance of average earning assets for the three month period ended
March 31, 1998 was approximately $509,084,000 as compared to $462,640,000 for
the same period in 1997, an overall increase of $46,444,000 or 10.0%. The
increase in earning assets was generally due to increases in average loan
balances which were $333,375,000 for the three months ended March 31, 1998, as
compared to $298,254,000 for the same period in 1997, an increase of $35,121,000
or 11.8%. This increase was generally caused by larger volumes of commercial
loan originations in 1997 and into 1998 as well as higher residential loan
balances which were the result of the steady volume of loan originations and
purchases in this area throughout 1997 and into 1998. See "Liquidity and Capital
Resources" and "Asset-Liability Management" for further discussion of the
Company's investment strategies.
The average yield earned on loans decreased for the first quarter of 1998 as
compared to 1997 primarily due to the effect of higher prepayments on higher
yielding residential loans and lower rates earned on newer originations on
purchases over the past six months. Additionally, loan yields were negatively
affected by yield adjustments on loan pools which had been acquired at a premium
purchase price, which were the result of unusually heavy prepayment activity on
those pools associated with the favorable refinancing market. The yield on loans
for the three-months ended March 31, 1998 was 7.81% as compared to 8.10% for the
same period in 1997. Management estimates that excluding the unusual prepayment
adjustments during the first quarter of 1998, the yield on loans would have been
approximately 8.11% or $250,000 higher than reported. Given the current
relatively low long term interest rates and relatively strong economy similar
yield adjustments could occur in the future. Yields on loans were positively
affected by growth in the Company's commercial loan portfolio which has grown to
approximately $53,800,000 at March 31, 1998 from $38,400,000 at March 31, 1997,
an increase of $15,400,000 or 40%. Commercial loans typically carry a higher
yield than residential mortgages.
Average balances of mortgage-backed investments and investment securities were
$126,587,000 and $34,051,000, respectively, for the three months ended March 31,
1998 as compared to $129,699,000 and $21,486,000, respectively, for the
corresponding period in 1997. These balances, when combined increased by
approximately $9,453,000 or 6.3%. The yield on mortgage-backed investments and
investment securities decreased to 6.63% and 6.98%, respectively, in the first
quarter of 1998 as compared to 6.88% and 7.32%, respectively, in the same period
in 1997. The declines in these yields reflects the lower interest rate
environment for investment opportunities since mid-1997 as well as the effects
of increased prepayments on the Company's higher yielding
16
<PAGE> 132
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
securities in the mortgage-backed investment portfolio, the proceeds of which
were invested at lower rates.
INTEREST EXPENSE. Interest expense for the quarter ended March 31, 1998
increased $583,000 or 12.2% compared to the same period in 1997, generally due
to increases in deposit balances, which was partially offset by decreases in the
average rates paid on deposits. The blended weighted average rate paid on
deposits and borrowed funds was 4.31% for the three months ended March 31, 1998
as compared to 4.26% for the same period in 1997. The weighted average rates
paid on deposits was 3.49% for the quarter ended March 31, 1998 as compared to
3.58% for the same period in 1997. The overall cost of deposits has declined in
the first quarter of 1998 as compared to the same period in 1997, generally due
to the continued success of promotional efforts to attract core deposits (NOW
accounts, demand deposits, savings and money markets), which typically have a
lower cost of funds than time deposits and borrowings, as well as due to overall
declines in the cost of funds related to time deposits. The average balance of
core and time deposits rose to $172,722,000 and $152,886,000, respectively, for
the first quarter of 1998 as compared to $158,968,000 and $140,755,000,
respectively, for the corresponding period in 1997, increases of 8.7% and 8.6%,
respectively. Additionally, the weighted average rate paid on time deposits
declined to 5.60% for the first quarter of 1998, as compared to 5.66% in 1997.
This change reflects the re-financing of various certificates as they have
matured at lower rates than they had been paying in previous periods and, to a
lesser extent, the result of the generally declining rate environment which has
existed over the past year. The Company will continue to closely manage its cost
of deposits by continuing to seek methods of acquiring new core deposits and
maintaining its current core deposits while prudently adding time deposits at
reasonable rates in comparison to local markets and other funding alternatives,
including borrowings. The average balances of borrowed funds increased overall,
during the first quarter of 1998 as compared to 1997, to $170,636,000 from
$147,618,000, an increase of 15.6%. This increase generally relates to the
funding of certain loan portfolio purchases in the fourth quarter of 1997 and
the first quarter of 1998. The overall weighted average rates paid on borrowed
funds increased to approximately 5.87% for the quarter ended March 31, 1998 from
5.65% in 1997. This increase was generally due to economic rate increases in
March 1997 as well as a result of management's decision to extend approximately
$28 million in borrowings from short term to long term (generally refinanced out
3 and 4 years) at the end of the first and into the second quarter of 1997 to
provide further protection against potential interest rate increases. The
Company will continue to evaluate the use of borrowing as an alternative funding
source for asset growth in future periods. See "Asset-Liability Management" for
further discussion of the competitive market for deposits and overall strategies
for uses of borrowed funds.
NON-INTEREST INCOME. Total non-interest income increased $355,000 or 31.2% in
the first quarter of 1998 in comparison to the same period in 1997. Customer
service fees, which were $861,000 for the quarter ended March 31, 1998 as
compared to $680,000 for 1997, for an increase of $181,000 or 26.6%, rose
primarily due to growth in deposit accounts, primarily NOW and checking account
portfolios. Loan servicing fees and gains on sales of mortgage loans were
$115,000 and $68,000, respectively, for the first quarter of 1998 as compared to
$143,000 and $81,000, respectively, for the same period in 1997, a combined
decrease of $41,000 or 18.3%. This generally is reflective of timing in the
amortization of previously capitalized servicing rights, lower balances
17
<PAGE> 133
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
of loans serviced for others, and also due to fewer loans being sold to date in
1998. The average balances of loans serviced for others declined to $202,145,000
for the first quarter of 1998 as compared to $234,358,000 in the corresponding
period in 1997, a decline of 13.7%. Generally declining trends in servicing
income are expected to continue due to the Company's strategic change of selling
wholesale mortgage production on a servicing released basis and also due to
accounting changes for loans sold with servicing retained prescribed by FASB No.
122-"Accounting for Mortgage Servicing Rights" and FASB No. 125-"Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities".
Gains on sales of securities were $365,000 for the first quarter of 1998 as
compared to $110,000 for 1997 for an increase of $255,000 or 231.8%. These gains
are reflective of a consistently strong market for equity securities. Gains on
sales of other real estate owned declined in the first quarter of 1998 as
compared to the same period in 1997 as gains were $16,000 in 1997 due to better
than expected sale prices on a property sold during the quarter while there were
no sales of other real estate owned during the comparable quarter in 1998.
NON-INTEREST EXPENSES. Non-interest expenses for the quarter ended March 31,
1998 increased $314,000 or 9.5% compared to the same period in 1997. Salaries
and employee benefits increased 8.2% or $133,000 primarily due to increases in
health insurance costs and staffing levels in the Company's business banking and
retail areas, including the Bank's new supermarket branch in Cohasset which
opened during the third quarter of 1997. These increases correspond with the
Company's strategic focuses of increasing commercial loans and attracting core
deposits. Occupancy expenses increased $96,000 or 16.6% primarily due to
increased capital and operating expenditures related to the Cohasset branch, and
to the general inflationary and capital expenditure increases, particularly in
technology. Other non-interest expenses also increased $85,000 or 7.8% for the
quarter ended March 31, 1998 in comparison to the same period in 1997, generally
due to increased costs associated with statement rendering and item processing
as well as other operating costs associated with servicing an expanded retail
customer base.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses was
$190,000 for the quarter ended March 31, 1998 as compared to $158,000 for the
same period in 1997. This increase of $32,000 primarily reflects management's
estimate of general increased risk associated with increases in the Company's
commercial loan portfolios over the past year, considering the increased risk
associated with these loans as compared to residential real estate.
PROVISION FOR INCOME TAXES. The Company's effective income tax rate for the
quarter ended March 31, 1998 was 34.5% compared to 39.6% for the quarter ended
March 31, 1997. The lower effective tax rate in comparison to statutory rates
for both periods is reflective of the levels of income earned by certain non-
bank subsidiaries which are taxed, for state tax purposes, at lower rates.
Additionally, the overall effective tax rate is influenced by the proportion of
income generated by non-bank subsidiaries. In 1998 more income was generated
through non-bank subsidiaries as compared to the first quarter of 1997.
18
<PAGE> 134
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
ASSET/LIABILITY MANAGEMENT
The objective of asset/liability management is to ensure that liquidity, capital
and market risk are prudently managed. Asset/liability management is governed by
policies reviewed and approved annually by the Company's Board of Directors
(Board). The Board delegates responsibility for asset/liability management to
the corporate Asset/Liability Management Committee (ALCO). ALCO sets strategic
directives that guide the day-to-day asset/liability management activities of
the Company. ALCO also reviews and approves all major funding, capital and
market risk-management programs. ALCO is comprised of members of management and
executive management of the Company and the Bank.
Interest rate risk is the sensitivity of income to variations in interest rates
over both short-term and long-term time horizons. The primary objective of
interest rate risk management is to control this risk within limits approved by
the Board and by ALCO. These limits and guidelines reflect the Company's
tolerance for interest rate risk. The Company's attempts to control interest
rate risk by identifying potential exposures and developing tactical plans to
address such potential exposures. The Company quantifies its interest rate risk
exposures using sophisticated simulation and valuation models, as well as a more
simple gap analysis. The Company manages its interest rate exposures by
generally using on-balance sheet strategies, which is most easily accomplished
through the management of the durations and rate sensitivities of the Company's
investments, including mortgage-backed securities portfolios, and by extending
or shortening maturities of borrowed funds. Additionally, pricing strategies,
asset sales and, in some cases, hedge strategies are also considered in the
evaluation and management of interest rate risk exposures.
The Company uses simulation analysis to measure the exposure of net interest
income to changes in interest rates over a 1 to 5 year time horizon. Simulation
analysis involves projecting future interest income and expense from the
Company's assets, liabilities, and off-balance sheet positions under various
interest rate scenarios.
The Company's limits on interest rate risk specify that if interest rates were
to ramp up or down 200 basis points over a 12 month period, estimated net
interest income for the next 12 months should decline by less than 10%. The
following table reflects the Company's estimated exposure, as a percentage of
estimated net interest income for the next 12 months, which does not materially
differ from the impact on net income, on the above basis:
Rate Change Estimated Exposure as a
(Basis Points) % of Net Interest Income
+200 3.50%
-200 (2.70%)
19
<PAGE> 135
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The Company uses valuation analysis to provide insight into the exposure of
earnings and equity to changes in interest rates based on the balance sheet
position of the Company at a set point in time without regard to potential
future strategic changes. Valuation analysis involves projecting future cash
flows from the Company's assets, liabilities and off-balance sheet positions and
then discounting such cash flows at appropriate interest rates. The Company's
economic value of equity is the estimated net present value of its assets,
liabilities and off-balance sheet positions.
The Company's limits on interest rate risk specify that if interest rates were
to shift immediately up or down 200 basis points, the estimated economic value
of equity should decline by less than 25%. The following table reflects the
Company's estimated exposure as a percentage of estimated economic value of
equity assuming an immediate shift in interest rates:
Rate Change Estimated Exposure as a
(Basis Points) % of Economic Value
+200 (5.7%)
-200 (16.7%)
Interest rate gap analysis provides a static view of the maturity and repricing
characteristics of the on-balance sheet and off-balance sheet positions. The
interest rate gap analysis is prepared by scheduling all assets, liabilities and
off-balance sheet positions according to scheduled repricing or maturity.
Interest rate gap analysis can be viewed as a short-hand complement to
simulation and valuation analysis.
The Company's limits on interest rate risk specify that rate sensitive assets be
maintained at at least 40% of rate sensitive liabilities at the cumulative
1-year gap, as presented on a basis consistent with methods prescribed by
generally accepted accounting principles. As of March 31, 1998, the Company was
liability sensitive with rate sensitive assets at 57% of rate sensitive
liabilities at the 1-year gap.
The Company's policy is to match, as well as possible, the interest rate
sensitivities of its assets and liabilities. Residential mortgage loans, which
the Company currently originates or purchases for the Company's own portfolio,
are primarily 1-year and 3-year adjustable rate mortgages. Fixed rate
residential mortgage loans originated by the Company are primarily sold in the
secondary market, although in each year since 1989 the Company has originated or
purchased approximately $30,000,000 primarily in shorter-term fixed rate
mortgage loans (generally 10-years to 15-years) to be held in portfolio in order
to provide a hedge against the Company's asset sensitivity.
The Company also emphasizes loans with terms to maturity or repricing of 3 years
or less, such as certain adjustable rate residential mortgage loans, commercial
mortgages, business loans, residential construction loans, second mortgages and
home equity loans.
Management desires to expand its interest earning asset base in future periods
primarily through growth in the Company's loan portfolio. Loans comprised
approximately 65.5% of the average
20
<PAGE> 136
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
interest earning assets for the first quarter of 1998. In the future, the
Company intends to be competitive in the residential mortgage market but plans
to place greater emphasis on consumer and commercial loans. The Company also has
been, and expects to remain, active in pursuing wholesale opportunities to
purchase loans. During the first quarter of 1998 and 1997, the Company acquired
approximately $26,000,000 and $7,700,000, respectively, of residential first
mortgages.
The Company has also used mortgage-backed investments (typically with weighted
average lives of 5 to 7 years) as a vehicle for fixed and adjustable rate
investment and as an overall asset/liability tool. These securities have been
highly liquid given current levels of prepayments in the underlying mortgage
pools and, as a result, have provided the Company with greater reinvestment
flexibility.
The level of the Company's liquid assets and the mix of its investments may
vary, depending upon management's judgment as to market trends, the quality of
specific investment opportunities and the relative attractiveness of their
maturities and yields. Management has been aggressively promoting the Company's
core deposit products since the first quarter of 1995, particularly checking and
NOW accounts. The success of this program has favorably impacted the overall
deposit growth to date, despite interest rate and general market pressures, and
has helped the Company to increase its customer base.
However, given the strong performance of money market mutual funds and the
equity markets in general, the Company and many of its peers have begun to see
lower levels of growth in time deposits as compared to prior years as customers
reflect their desire to increase their returns on investment. This pressure has
been exacerbated currently by the historically low long-term economic interest
rates. Management believes that the markets for future time deposit growth,
particularly with terms in excess of 2 years, will remain highly competitive.
Management will continue to evaluate future funding strategies and alternatives
accordingly as well as continuing to focus its efforts on attracting core,
retail deposit relationships.
The Company is also a voluntary member of the Federal Home Loan Bank ("FHLB") of
Boston. This borrowing capacity assists the Company in managing its
asset/liability growth because, at times, the Company considers it more
advantageous to borrow money from the FHLB of Boston than to raise money through
non-core deposits (i.e., certificates of deposit). Borrowed funds totaled
$176,260,000 at March 31, 1998 compared to $165,910,000 at December 31,1997.
These borrowings are primarily comprised of FHLB of Boston advances and have
primarily funded residential loan originations and purchases as well as
mortgage-backed investments and investment securities.
The following table sets forth maturity and repricing information relating to
interest sensitive assets and liabilities at March 31, 1998. The balance of such
accounts has been allocated among the various periods based upon the terms and
repricing intervals of the particular assets and liabilities. For example, fixed
rate mortgage loans and mortgage-backed securities, regardless of held in
portfolio or available for sale classification, are shown in the table in the
time periods corresponding to projected principal amortization computed based on
their respective weighted average maturities and weighted average rates using
prepayment data available from the secondary mortgage market.
21
<PAGE> 137
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Adjustable rate loans and securities are allocated to the period in which the
rates would be next adjusted. The following table does not reflect partial or
full prepayment of certain types of loans and investment securities prior to
scheduled contractual maturity. Since regular passbook savings and NOW accounts
are subject to immediate withdrawal, such accounts have been included in the
"Other Savings Accounts" category and are assumed to mature within 6 months.
This table does not include non-interest bearing deposits.
While this table presents a cumulative negative gap position in the 6 month to 5
year horizon, the Company considers its earning assets to be more sensitive to
interest rate movements than its liabilities. In general, assets are tied to
increases that are immediately impacted by interest rate movements while deposit
rates are generally driven by market area and demand which tend to be less
sensitive to general interest rate changes. In addition, other savings accounts
and money market accounts are substantially stable core deposits, although
subject to rate changes. A substantial core balance in these type of accounts is
anticipated to be maintained over time.
22
<PAGE> 138
<TABLE>
<CAPTION>
At March 31, 1998
Repricing/Maturity Interval
(1) (2) (3) (4) (5) (6)
Over
0-6 Mos. 6-12 Mos. 1-2 Yrs. 2-3 Yrs. 3-5 Yrs. 5 Yrs. Total
--------- --------- --------- -------- -------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets subject to interest rate adjustment:
Short-term investments ....................... $ 181 $ -- $ -- $ -- $ -- $ -- $ 181
Bonds and obligations ........................ 7,676 5,178 6,996 1,063 4,014 10,827 35,754
Mortgage-backed investments .................. 28,536 24,010 12,205 10,718 17,620 35,541 128,630
Mortgage loans subject to
rate review ................................. 34,368 18,430 20,565 31,681 18,315 -- 123,359
Fixed-rate mortgage loans .................... 35,076 48,980 58,314 28,115 23,655 7,430 201,570
Commercial and other loans ................... 8,064 3,516 2,730 2,081 2,530 -- 18,921
--------- --------- --------- -------- -------- ------- --------
Total .................................... $ 113,901 $ 100,114 $ 100,810 $ 73,658 $ 66,134 $53,798 $508,415
--------- --------- --------- -------- -------- ------- --------
Liabilities subject to interest rate adjustment:
Money market deposit accounts ................ 15,457 -- -- -- -- -- 15,547
Savings deposits - term
certificates ................................ 62,393 50,784 23,479 11,730 4,830 -- 153,216
Other savings accounts ....................... 128,304 -- -- -- -- -- 128,304
Borrowed funds ............................... 86,760 35,000 28,000 18,000 8,000 500 176,260
--------- --------- --------- -------- -------- ------- --------
Total .......................................... 292,914 85,784 51,479 29,730 12,830 500 473,237
--------- --------- --------- -------- -------- ------- --------
Excess (deficiency) of rate-
sensitive assets over rate-
sensitive liabilities ......................... $(179,013) $ 14,330 $ 49,331 $ 43,928 $ 53,304 $53,298 $ 35,178
--------- --------- --------- -------- -------- ------- --------
Cumulative excess (deficiency)
of rate-sensitive assets over
rate sensitive liabilities .................... $(179,013) $(164,683) $(115,352) $(71,424) $(18,120) $35,178
========= ========= ========= ======== ======== =======
Rate-sensitive assets as a
percent of rate-sensitive
liabilities (1) ............................... 38.9% 56.5% 73.2% 84.5% 96.2% 107.4%
</TABLE>
(1) Cumulative as to the amounts previously repriced or matured. Assets
held for sale are reflected in the period in which sales are expected
to take place. Securities classified as available for sale are shown at
repricing/maturity intervals as if they are to be held to maturity as
there is no definitive plan of disposition. They are also shown at
amortized cost.
23
<PAGE> 139
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Liquidity and Capital Resources
Payments and prepayments on the Company's loan and mortgage-backed investment
portfolios, sales of fixed rate residential loans, increases in deposits,
borrowed funds and maturities of various investments comprise the Company's
primary sources of liquidity. The Company is also a voluntary member of the FHLB
of Boston and, as such, is entitled to borrow an amount up to the value of its
qualified collateral that has not been pledged to outside sources. Qualified
collateral generally consists of residential first mortgage loans, securities
issued, insured or guaranteed by the U.S. Government or its agencies, and funds
on deposit at the FHLB of Boston. Short-term advances may be used for any sound
business purpose, while long-term advances may be used only for the purpose of
providing funds to finance housing. At March 31, 1998, the Company had
approximately $70,000,000 in unused borrowing capacity that is contingent upon
the purchase of additional FHLB of Boston stock. Use of this borrowing capacity
is also impacted by capital adequacy considerations.
The Company's short-term borrowing position consists primarily of FHLB of Boston
advances with original maturities of approximately 1 to 3 months. The Company
utilizes borrowed funds as a primary vehicle to manage interest rate risk, due
to the ability to easily extend or shorten maturities as needed. This enables
the Company to adjust its cash needs to the increased prepayment activity in its
loan and mortgage-backed investment portfolios, as well as to quickly extend
maturities when the need to further balance the Company's GAP position arises.
The Company regularly monitors its asset quality to determine the level of its
loan loss reserves through periodic credit reviews by members of the Company's
Management Credit Committee. The Management Credit Committee, which reports to
the Executive Committee of the Company's Board of Directors, also works on the
collection of non-accrual loans and disposition of real estate acquired by
foreclosure. The allowance for possible loan losses is determined by the
Management Credit Committee after consideration of several key factors
including, without limitation: potential risk in the current portfolio, levels
and types of non-performing assets and delinquency, and the expectations for the
future state of the regional economy and the potential impact that it may have
on loan collateral and future delinquencies. Workout approach and financial
condition of borrowers are also key considerations to the evaluation of
non-performing loans.
Non-performing assets were $795,000 at March 31, 1998, compared to $978,000 at
December 31, 1997, a decrease of $183,000 or 18.7%. The Company's ratio of
delinquent loans to total loans was .24% at March 31, 1998, as compared to .42%
at December 31, 1997. Management believes that overall trends in delinquencies
and non-performing assets will continue to be favorable in 1998.
During the first quarter of 1998, the Company maintained a general reserve for
other real estate owned, in light of the level of foreclosures, softness of the
local real estate market (particularly commercial) and costs associated with
selling properties. No provisions were made for possible losses on other real
estate owned in the first quarters of 1998 or 1997. The balance of the general
other real estate owned reserves at March 31, 1998 was approximately $60,000.
24
<PAGE> 140
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
There continues to be uncertainties regarding future events, particularly in
both the New England real estate market and the general economy. These events
could result in additional charge-offs, write-offs, changes in the level of the
allowance for loan or OREO losses and/or in the level of loans on non-accrual or
in foreclosure.
At March 31, 1998, the Company had outstanding commitments to originate and sell
residential mortgage loans in the secondary market amounting to $4,263,000 and
$5,092,000, respectively. The Company also has outstanding commitments to grant
advances under existing home equity lines of credit amounting to $16,602,000.
Unadvanced commitments under outstanding commercial and construction loans
totaled $8,506,000 as of March 31, 1998. The Company believes it has adequate
sources of liquidity to fund these commitments.
The Company's total stockholders' equity was $34,584,000 or 6.3% of total assets
at March 31, 1998, compared with $36,321,000 or 6.8% of total assets at December
31, 1997. The decrease in total stockholders' equity of approximately $1,737,000
or 4.8% primarily resulted from dividends paid and the effect of the Company's
stock repurchase program, offset in part by earnings of the Company and
increases in the market value of its portfolio of available for sale securities,
net of applicable taxes. In accordance with current guidelines, the net
unrealized gain on available for sale securities has not been included in
regulatory capital calculations.
Bank regulatory authorities have established a capital measurement tool called
"Tier 1" leverage capital. A 4.00% ratio of Tier 1 capital to assets now
constitutes the minimum capital standard for most banking organizations and a
5.00% Tier 1 leverage capital ratio is required for a "well-capitalized"
classification. At March 31, 1998, the Company's Tier 1 leverage capital ratio
was approximately 5.46%. In addition, regulatory authorities have also
implemented risk-based capital guidelines requiring a minimum ratio of Tier 1
capital to risk-weighted assets of 4.00% (6.00% for "well-capitalized") and a
minimum ratio of total capital to risk-weighted assets of 8.00% (10.00% for
"well-capitalized"). At March 31, 1998, the Company's Tier 1 and total
risk-based capital ratios were approximately 10.97% and 11.87%, respectively.
The Company is categorized as "well-capitalized" under the Federal Deposit
Insurance Corporation Improvement Act of 1991 (F.D.I.C.I.A.). The Bank is also
categorized as "well-capitalized" as of March 31, 1998.
Impact of the Year 2000
The year 2000 problem, which is common to most companies, concerns the inability
of information systems, primarily computer software programs, to properly
recognize and process date sensitive information as the year 2000 approaches.
The Company has completed an assessment of the majority of its systems to
identify the systems that could be affected by the year 2000 issue and has
developed an implementation plan to address this issue. The Company's various
systems generally operate on software which is provided and maintained by
outside vendors, many of which are larger, well-established companies that are
well-known and established in the banking industry. At this time, the Company
does not anticipate incurring significant costs related to the year 2000 problem
as currently the Company is highly reliant on the efforts of these outside
vendors. The Company does, however, anticipate an increase in the amount of time
management and staff will devote to closely
25
<PAGE> 141
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
monitor the progress of these vendors, testing applications and developing
operating contingency plans. To the extent that costs are incurred related to
the year 2000 problem, they will be expensed. The Company currently believes it
will be able to modify or replace its affected systems in time to minimize any
detrimental effects on operations. While it is not possible, at present, to give
an accurate estimate of the cost of this work, the Company does not expect that
such costs will be material to the Company's results of operations in one or
more fiscal quarters or years or have a material adverse impact on the long-term
results of operations, liquidity or consolidated financial position of the
Company. However, there can be no assurance that the systems of other companies
on which the Company's systems rely also will be timely converted or that any
such failure to convert by another company would not have an adverse effect on
the Company's systems.
Impact of Inflation
The Consolidated Financial Statements of the Company and related Financial Data
presented herein have been prepared in accordance with generally accepted
accounting principles which generally require the measurement of financial
condition and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The primary impact of inflation on operations of the Company is
reflected in increased operating costs. Unlike most industrial companies, almost
all the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates have a more significant impact on a
financial institution's performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as the price of goods and services.
Proposed Accounting Pronouncements
Segment Information
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." This statement establishes standards for
reporting information about segments in annual and interim financial statements.
SFAS No. 131 introduces a new model for segment reporting, called the
"management approach."
The management approach is based on the way the chief operating decision-maker
organizes segments within a company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography,
legal structure, management structure - any manner in which management
disaggregates a company. This statement is effective and will be adopted for the
Company's financial statements for the fiscal year ending December 31, 1998 and
requires the restatement of previously reported segment information for all
periods presented.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information required by this Item 3 is included in Item 2 of Part I of this Form
10-Q, entitled "Management's Discussion and Analysis."
26
<PAGE> 142
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
During the quarter ended March 31, 1998 there were no new legal proceedings and
no material developments to items reported in Part I, Item 3 of the Company's
Annual Report for the year ended December 31, 1997 on Form 10-K filed with the
Securities and Exchange Commission on March 25, 1998.
Item 2. Changes in Securities.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
2.1 Plan of Reorganization and Acquisition dated as of
October 15, 1996 between the Company and Abington
Savings Bank incorporated by reference to the
Company's Registration Statement on Form 8-A,
effective January 13, 1997.
3.1 Articles of Organization of the Company incorporated
by reference to the Company's Registration Statement
on Form 8-A, effective January 13, 1997.
3.2 By-Laws of the Company, incorporated by reference to
the Company's Registration Statement on Form 8-A,
effective January 13, 1997.
4.1 Specimen stock certificate for the Company's Common
Stock incorporated by reference to the Company's
Registration Statement on Form 8-A, effective January
13, 1997.
*10.1 (a) Amended and Restated Special Termination
Agreement dated as of January 31, 1997 among the
Company, the Bank and James P. McDonough incorporated
by reference to the Company's Annual Report
27
<PAGE> 143
for the year ended December 31, 1996 on Form 10-K
filed on March 31, 1997.
(b) Amendment to Amended and Restated Special
Termination Agreement, dated as of July 1, 1997 among
the Company, the Bank and James P. McDonough,
incorporated by reference to the Company's quarterly
report on Form 10-Q for the second quarter of 1997,
filed on August 13, 1997.
*10.2 (a) Amended and Restated Special Termination
Agreement dated as of January 31, 1997 among the
Company, the Bank and Edward J. Merritt incorporated
by reference to the Company's Annual Report for the
year ended December 31, 1996 on Form 10-K filed on
March 31, 1997.
(b) Amendment to Amended and Restated Special
Termination Agreement, dated as of July 1, 1997 among
the Company, the Bank and Edward J. Merritt,
incorporated by reference to the Company's quarterly
report on Form 10-Q for the second quarter of 1997,
filed on August 13, 1997.
*10.3 (a) Amended and Restated Special Termination
Agreement dated as of January 31, 1997 among the
Company, the Bank and Donna L. Thaxter incorporated
by reference to the Company's Annual Report for the
year ended December 31, 1996 on Form 10-K filed on
March 31, 1997.
(b) Amendment to Amended and Restated Special
Termination Agreement, dated as of July 1, 1997 among
the Company, the Bank and Donna L. Thaxter,
incorporated by reference to the Company's quarterly
report on Form 10-Q for the second quarter of 1997,
filed on August 13, 1997.
*10.4 (a) Amended and Restated Special Termination
Agreement dated as of January 31, 1997 among the
Company, the Bank and Mario A. Berlinghieri
incorporated by reference to the Company's Annual
Report for the year ended December 31, 1996 on Form
10-K filed on March 31, 1997.
(b) Amendment to Amended and Restated Special
Termination Agreement, dated as of July 1, 1997 among
the Company, the Bank and Mario A Berlinghieri,
incorporated by reference to the Company's quarterly
report on Form 10-Q for the second quarter of 1997,
filed on August 13, 1997.
(c) Amendment No. 2 to Amended and Restated Special
Termination Agreement, dated as of April 16, 1998, by
and among the Company, the Bank and Mario A.
Berlinghieri.
*10.5 Abington Bancorp, Inc. Incentive and Nonqualified
Stock Option Plan, as amended and restated to reflect
holding company formation,
28
<PAGE> 144
incorporated by reference to the Company's Annual
Report for the year ended December 31, 1996 on Form
10-K, filed on March 31, 1997.
*10.6 Management Incentive Compensation Program dated March
1997, incorporated by reference to the Company's
quarterly report on Form 10-Q for the second quarter
of 1997, filed on August 13, 1997.
*10.7 Long Term Performance Incentive Plan dated July 1997,
incorporated by reference to the Company's quarterly
report on Form 10-Q for the second quarter of 1997,
filed on August 13, 1997.
10.8 (a) Lease for office space located at 538 Bedford
Street, Abington, Massachusetts ("lease"), used for
the Bank's principal and administrative offices dated
January 1, 1996 incorporated by reference to the
Company's Annual Report for the year ended December
31, 1996 on Form 10-K filed on March 31, 1997.
Northeast Terminal Associates, Limited owns the
property. Dennis E. Barry and Joseph L. Barry, Jr.,
who beneficially own more than 5% of the Company's
Common Stock, are the principal beneficial owners of
Northeast Terminal Associates, Limited.
(b) Amendment to Lease dated December 31, 1997,
incorporated by reference to the Company's Annual
Report for the year ended December 31, 1997 on Form
10-K filed on March 25, 1998.
10.9 Dividend reinvestment and Stock Purchase Plan is
incorporated by reference herein to the Company's
Registration Statement on Form S-3, effective January
31, 1997.
*10.10 Abington Bancorp, Inc. 1997 Incentive and
Nonqualified Stock Option Plan, incorporated by
reference herein to Appendix A to the Company's proxy
statement relating to its special meeting in lieu of
annual meeting held on June 17, 1997, filed with the
Commission on April 29, 1997.
*10.11 (a) Special Termination Agreement dated as of July 1,
1997 among the Company, the Bank and Robert M. Lallo,
incorporated by reference to the Company's quarterly
report on Form 10-Q for the second quarter of 1997,
filed on August 13, 1997.
(b) Amendment No. 1 to Special Termination Agreement,
dated April 16, 1998, by and among the Company, the
Bank and Robert M. Lallo.
*10.12 Merger Severance Benefit Program dated as of August
28, 1997, incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the third quarter
of 1997, filed on November 15, 1997.
*10.13 Supplemental Executive Retirement Agreement between
the Bank and James P. McDonough dated as of March 26,
1998.
11.1 A statement regarding the computation of earnings per
share is included in Item 1 (Note E to Notes to
Unaudited Consolidated Financial Statements) of this
Report.
29
<PAGE> 145
27.1 Financial Data Schedule, March 31, 1998.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K
during the first quarter of 1998.
- ---------------
* Management Compensatory Plan
30
<PAGE> 146
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ABINGTON BANCORP, INC.
-----------------------
(Company)
Date: May 8, 1998 By /S/James P. McDonough
-----------------------
James P. McDonough
President and Chief
Executive Officer
Date: May 8, 1998 By /S/Robert M. Lallo
---------------------
Robert M. Lallo
Treasurer
(Principal Financial Officer)
31
<PAGE> 147
INDEX TO EXHIBITS
2.1 Plan of Reorganization and Acquisition dated as of
October 15, 1996 between the Company and Abington
Savings Bank incorporated by reference to the
Company's Registration Statement on Form 8-A,
effective January 13, 1997.
3.1 Articles of Organization of the Company incorporated
by reference to the Company's Registration Statement
on Form 8-A, effective January 13, 1997.
3.2 By-Laws of the Company, incorporated by reference to
the Company's Registration Statement on Form 8-A,
effective January 13, 1997.
4.1 Specimen stock certificate for the Company's Common
Stock incorporated by reference to the Company's
Registration Statement on Form 8-A, effective January
31, 1997.
*10.1 (a) Amended and Restated Special Termination
Agreement dated as of January 31, 1997 among the
Company, the Bank and James P. McDonough incorporated
by reference to the Company's Annual Report for the
year ended December 31, 1996 on Form 10-K filed on
March 31, 1997.
(b) Amendment to Amended and Restated Special
Termination Agreement, dated as of July 1, 1997 among
the Company, the Bank and James P. McDonough,
incorporated by reference to the Company's quarterly
report on Form 10-Q for the second quarter of 1997,
filed on August 13, 1997.
*10.2 (a) Amended and Restated Special Termination
Agreement dated as of January 31, 1997 among the
Company, the Bank and Edward J. Merritt incorporated
by reference to the Company's Annual Report for the
year ended December 31, 1996 on Form 10-K filed on
March 31, 1997.
(b) Amendment to Amended and Restated Special
Termination Agreement, dated as of July 1, 1997 among
the Company, the Bank and Edward J. Merritt,
incorporated by reference to the Company's quarterly
report on Form 10-Q for the second quarter of 1997,
filed on August 13, 1997.
*10.3 (a) Amended and Restated Special Termination
Agreement dated as of January 31, 1997 among the
Company, the Bank and Donna L. Thaxter incorporated
by reference to the Company's Annual Report for the
year ended December 31, 1996 on Form 10-K filed on
March 31, 1997.
32
<PAGE> 148
(b) Amendment to Amended and Restated Special
Termination Agreement, dated as of July 1, 1997 among
the Company, the Bank and Donna L. Thaxter,
incorporated by reference to the Company's quarterly
report on Form 10-Q for the second quarter of 1997,
filed on August 13, 1997.
*10.4 (a) Amended and Restated Special Termination
Agreement dated as of January 31, 1997 among the
Company, the Bank and Mario A. Berlinghieri
incorporated by reference to the Company's Annual
Report for the year ended December 31, 1996 on Form
10-K filed on March 31, 1997.
(b) Amendment to Amended and Restated Special
Termination Agreement, dated as of July 1, 1997 among
the Company, the Bank and Mario A. Berlinghieri,
incorporated by reference to the Company's quarterly
report on Form 10-Q for the second quarter of 1997,
filed on August 13, 1997.
(c) Amendment No. 2 to Amended and Restated Special
Termination Agreement, dated as of April 16, 1998, by
and among the Company, the Bank and Mario A.
Berlinghieri.
*10.5 Abington Bancorp, Inc. Incentive and Nonqualified
Stock Option Plan, as amended and restated to reflect
holding company formation incorporated by reference
to the Company's Annual Report for the year ended
December 31, 1996 on Form 10-K filed on March 31,
1997.
*10.6 Management Incentive Compensation Program dated March
1997, incorporated by reference to the Company's
quarterly report on Form 10-Q for the second quarter
of 1997, filed on August 13, 1997.
*10.7 Long Term Performance Incentive Plan dated July 1997,
incorporated by reference to the Company's quarterly
report on Form 10-Q for the second quarter of 1997,
filed on August 13, 1997.
10.8 (a) Lease for office space located at 538 Bedford
Street, Abington, Massachusetts ("Lease"), used for
the Bank's principal and administrative offices dated
January 1, 1996 incorporated by reference to the
Company's Annual Report for the year ended December
31, 1996 on Form 10-K filed on March 31, 1997.
Northeast Terminal Associates, Limited owns the
property. Dennis E. Barry and Joseph L. Barry, Jr.,
who beneficially own more than 5% of the Company's
Common Stock, are the principal beneficial owners of
Northeast Terminal Associates, Limited.
(b) Amendment to Lease dated December 31, 1997,
incorporated by reference to the Company's Annual
Report for the year ended December 31, 1997 on Form
10-K filed on March 25, 1998.
33
<PAGE> 149
10.9 Dividend reinvestment and Stock Purchase Plan is
incorporated by reference herein to the Company's
Registration Statement on Form S-3, effective January
31, 1997.
*10.10 Abington Bancorp, Inc. 1997 Incentive and
Nonqualified Stock Option Plan, incorporated by
reference herein to Appendix A to the Company's proxy
statement relating to its special meeting in lieu of
annual meeting held on June 17, 1997, filed with the
Commission on April 29, 1997.
*10.11 (a) Special Termination Agreement dated as of July 1,
1997 among the Company, the Bank and Robert M. Lallo,
incorporated by reference to the Company's quarterly
report on Form 10-Q for the second quarter of 1997,
filed on August 13, 1997.
(b) Amendment No. 1 to Special Termination Agreement,
dated as of April 16, 1998, by and among the Company,
the Bank and Robert M. Lallo.
*10.12 Merger Severance Benefit Program dated as of August
28, 1997, incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the third quarter
of 1997, filed on November 15, 1997.
*10.13 Supplemental Executive Retirement Agreement between
the Bank and James P. McDonough dated as of March 26,
1998.
11.1 A statement regarding the computation of earnings per
share is included in Item 1 (Note E to Notes to
Unaudited Consolidated Financial Statements) of this
Report.
27.1 Financial Data Schedule, March 31, 1998.
- ------------------------------------------
* Management Compensatory Plan
34
<PAGE> 150
================================================================================
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary............................... 5
Selected Consolidated Financial
Data................................ 11
Risk Factors.......................... 13
Abington Bancorp, Inc................. 21
Management............................ 23
Abington Bancorp Capital Trust........ 24
Use of Proceeds....................... 26
Market for the Preferred Securities... 26
Accounting Treatment.................. 26
Capitalization........................ 27
Description of the Preferred
Securities.......................... 28
Description of the Junior Subordinated
Debentures.......................... 38
Description of the Guarantee.......... 46
Expense Agreement..................... 48
Relationship Among the Preferred
Securities, the Junior Subordinated
Debentures and the Guarantee........ 48
Certain Federal Income Tax
Consequences........................ 50
ERISA Considerations.................. 53
Underwriting.......................... 54
Legal Matters......................... 55
Experts............................... 55
Incorporation of Certain Documents by
Reference........................... 56
Available Information................. 56
Appendix A -- The Company's 1997
Annual Report to Shareholders
Appendix B -- The Company's Quarterly
Report on Form 10-Q for the quarter
ended March 31, 1998
</TABLE>
------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE PREFERRED SECURITIES IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR THE AFFAIRS OF
THE COMPANY SINCE THE DATE HEREOF.
================================================================================
================================================================================
1,100,000 PREFERRED SECURITIES
ABINGTON BANCORP
CAPITAL TRUST
8.25% CUMULATIVE TRUST
PREFERRED SECURITIES
(LIQUIDATION AMOUNT $10 PER
PREFERRED SECURITY)
GUARANTEED, AS DESCRIBED HEREIN, BY
LOGO
ABINGTON BANCORP, INC.
$11,000,000
8.25% JUNIOR SUBORDINATED
DEBENTURES OF
ABINGTON BANCORP, INC.
------------------------
PROSPECTUS
------------------------
JUNE 3, 1998
TUCKER ANTHONY
INCORPORATED
MCCONNELL, BUDD & DOWNES, INC.
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