<PAGE>
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 September 30, 1998
----------------------------------------
Commission File Number 0-16018
ABINGTON BANCORP, INC.
----------------------------------------------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
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 (781) 982-3200
--------------
</TABLE>
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: 3,347,300 shares as of November
5, 1998.
<PAGE>
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.
<PAGE>
ABINGTON BANCORP, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998
(Unaudited) and December 31, 1997............................ 4
Consolidated Statements of Operations (Unaudited) for the
Three and Nine Months Ended September 30, 1998 and
1997......................................................... 5
Consolidated Statements of Changes in Stockholders'
Equity (Unaudited) for the Nine Months Ended
September 30, 1998 and 1997.................................. 6
Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended September 30, 1998 and 1997........ 7
Notes to Unaudited Consolidated Financial Statements......... 9
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations................ 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 34
Part II Other Information
Item 1. Legal Proceedings ........................................... 35
Item 2. Change in Securities ........................................ 35
Item 3. Defaults upon Senior Securities.............................. 35
Item 4. Submission of Matters to a Vote of Security Holders.......... 35
Item 5. Other Information............................................ 35
Item 6. Exhibits and Reports on Form 8-K............................. 35
Signature Page........................................................... 39
Index to Exhibits....................................................... 40
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
ABINGTON BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(In Thousands)
<S> <C> <C>
ASSETS
Cash and due from banks ................................. $ 12,872 $ 13,312
Short-term investments .................................. 216 163
--------- ---------
Total cash and cash equivalents ....................... 13,088 13,475
--------- ---------
Loans held for sale ..................................... 2,550 1,332
Securities:
Mortgage-backed investments - held for
investment - market value of $64,129
in 1997 ............................................. -- 64,021
Securities available for sale - at
market value ........................................ 190,551 101,031
Loans ................................................... 327,828 331,740
Less:
Allowance for possible loan losses .................. (2,908) (2,280)
--------- ---------
Loans, net .......................................... 324,920 329,460
--------- ---------
Federal Home Loan Bank stock ............................ 9,205 8,151
Banking premises and equipment, net ..................... 8,157 6,294
Other real estate owned, net ............................ -- 265
Intangible assets ....................................... 2,981 3,284
Other assets ............................................ 8,326 4,673
--------- ---------
$ 559,778 $ 531,986
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits ................................................ $ 348,792 $ 324,934
Short-term borrowings ................................... 27,657 55,910
Long-term debt .......................................... 130,500 110,000
Accrued taxes and expenses .............................. 4,567 3,337
Other liabilities ....................................... 2,071 1,484
--------- ---------
Total liabilities ................................... 513,587 495,665
--------- ---------
Guaranteed preferred beneficial interest in the Company's
junior subordinated debentures, net ................... 11,915 --
Commitments and contingencies
Stockholders' equity:
Serial preferred stock, $.10 par value,
3,000,000 shares authorized; none issued ............ -- --
Common stock, $.10 par value 12,000,000
shares authorized; 4,795,000 and 4,676,000
shares issued in 1998 and 1997, respectively ........ 480 468
Additional paid-in capital ............................ 21,833 21,094
Retained earnings ..................................... 22,333 19,858
--------- ---------
44,646 41,420
Treasury stock - 1,448,000 and 1,039,000 shares
for 1998 and 1997, respectively, at cost .............. (13,283) (5,931)
Unearned compensation - ESOP .......................... (170) (231)
Other accumulated comprehensive income -
Net unrealized gain on available for
sale securities, net of taxes ....................... 3,083 1,063
--------- ---------
Total stockholders' equity .......................... 34,276 36,321
--------- ---------
$ 559,778 $ 531,986
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
- --------------------------------------------------------------------------------
ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans ................ $ 6,521 $ 6,226 $ 19,702 $ 18,397
Interest on mortgage-backed investments ... 2,104 2,315 6,103 6,869
Interest on bonds and obligations ......... 865 440 2,166 1,245
Dividend income ........................... 161 147 465 439
Interest on short-term investments ........ 15 12 94 35
---------- ---------- ---------- ----------
Total interest and dividend income ...... 9,666 9,140 28,530 26,985
---------- ---------- ---------- ----------
Interest expense:
Interest on deposits ....................... 3,005 2,803 8,776 8,197
Interest on short-term borrowings .......... 423 499 1,614 1,952
Interest on long-term debt ................. 1,926 1,767 5,782 4,691
---------- ---------- ---------- ----------
Total interest expense .................. 5,354 5,069 16,172 14,840
---------- ---------- ---------- ----------
Net interest income ......................... 4,312 4,071 12,358 12,145
Provision for possible loan losses .......... 190 158 570 473
---------- ---------- ---------- ----------
Net interest income, after provision for
Possible loan losses ...................... 4,122 3,913 11,788 11,672
---------- ---------- ---------- ----------
Non-interest income:
Loan servicing fees ....................... 119 152 358 414
Other customer service fees ............... 972 834 2,755 2,305
Gain on sales of securities, net .......... 366 108 1,388 326
Gain on sales of mortgage loans, net ...... 128 49 342 170
Gain on sales and write-down of
other real estate owned, net ............. -- -- 43 94
Other ....................................... 115 69 269 241
---------- ---------- ---------- ----------
Total non-interest income ............... 1,700 1,212 5,155 3,550
---------- ---------- ---------- ----------
Non-interest expense:
Salaries and employee benefits ............ 2,103 1,701 5,766 4,898
Occupancy and equipment expenses .......... 747 612 2,059 1,796
Trust preferred securities expense (Note F) 259 -- 325 --
Other non-interest expense ................ 1,075 994 3,618 3,190
---------- ---------- ---------- ----------
Total non-interest expense .............. 4,184 3,307 11,768 9,884
---------- ---------- ---------- ----------
Income before provision for income
taxes .............................. 1,638 1,818 5,175 5,338
Provision for income taxes .................. 573 691 1,820 2,063
---------- ---------- ---------- ----------
Net income .............................. $ 1,065 $ 1,127 $ 3,355 $ 3,275
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per share
Basic -
Net income per share ................. $ .31 $ .31 $ .95 $ .88
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares ....... 3,470,000 3,686,000 3,539,000 3,736,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted -
Net income per share ..................... $ .29 $ .29 $ .89 $ .82
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common and common share and
share equivalents ........................ 3,687,000 3,946,000 3,781,000 3,978,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Dividends per share ........................ $ .05 $ .05 $ .25 $ .15
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
- --------------------------------------------------------------------------------
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 ............................. -- -- 3,355 -- -- -- 3,355
Decrease in unearned
compensation--ESOP .................... -- -- -- -- -- 61 61
Effect of reclassification of securities
from held-to-maturity to available for
sale, net of taxes .................... -- -- -- -- 245 -- 245
Increase in unrealized gain on
available for sale securities,
net of taxes ......................... -- -- -- -- 1,775 -- 1,775
Issuance of stock ...................... 12 739 -- -- -- -- 751
Repurchase of stock .................... -- -- -- (7,352) -- -- (7,352)
Dividends declared ($.25 per share) .... -- -- (880) -- -- -- (880)
-------- -------- -------- -------- -------- -------- --------
Balance at September 30, 1998 .......... $ 480 $ 21,833 $ 22,333 $(13,283) $ 3,083 $ (170) $ 34,276
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1996 ........... $ 467 $ 20,923 $ 16,221 $ (3,703) $ (50) $ (312) $ 33,546
Net income ............................. -- -- 3,275 -- -- -- 3,275
Decrease in unearned--
compensation--ESOP .................... -- -- -- -- -- 61 61
Issuance of stock ...................... 1 55 -- -- -- -- 56
Increase in unrealized gain on
available for sale securities,
net of taxes ......................... -- -- -- -- 819 -- 819
Repurchase of stock .................... -- -- -- (1,455) -- -- (1,455)
Dividends declared ($.15 per share) .... -- -- (558) -- -- -- (558)
-------- -------- -------- -------- -------- -------- --------
Balance at September 30, 1997 .......... $ 468 $ 20,978 $ 18,938 $ (5,158) $ 769 $ (251) $ 35,744
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE>
- --------------------------------------------------------------------------------
ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1998 1997
--------- ---------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income .................................. $ 3,355 $ 3,275
Adjustments to reconcile net income to net
cash provided (used) by operating
activities
Provision for loan losses ............... 570 473
(Gain) loss on sales and write-down of
other real estate owned, net .......... (43) (94)
Amortization, accretion and depreciation,
net ................................... 1,310 1,363
Gain on sales of securities, net ............. (1,388) (326)
Loans originated for sale in the
secondary market ......................... (23,988) (14,400)
Proceeds from sales of loans .............. 23,112 16,160
Gain on sales of mortgage loans, net ...... (342) (170)
Other, net ................................ (3,099) (426)
--------- ---------
Net cash provided (used) by operating
activities .............................. (513) $ 5,855
--------- ---------
Cash flows from investing activities:
Purchase of held for investment
securities .............................. (2,844) (2,067)
Proceeds from principal payments received
on held for investment securities ....... 5,562 5,556
Proceeds from sales of available for sale
securities ................................. 58,584 21,471
Proceeds from principal payments on
available for sale securities .............. 33,651 10,756
Purchase of available for sale securities ... (115,721) (39,949)
Loans (originated/purchased) paid, net ...... 3,970 (11,533)
Purchases of FHLB stock ...................... (1,054) --
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
7
<PAGE>
- --------------------------------------------------------------------------------
ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
- --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Purchase of banking premises and equipment
and improvements to other real estate
owned ............................................ $ (2,785) $ (982)
Proceeds from sales of other real estate
owned ............................................ 308 594
-------- --------
Net cash provided (used) by investing
activities ....................................... (29,329) (16,154)
-------- --------
Cash flows from financing activities:
Net increase in deposits .......................... 23,858 15,123
Net increase (decrease) in borrowings with original
maturities of three months or less ............... (33,253) (301)
Proceeds from short-term borrowings with
maturities in excess of three months ............. 25,000 15,000
Principal payments on short-term borrowings
with maturities in excess of three months ........ (20,000) (45,000)
Proceeds from issuance of long-term debt ........... 50,000 39,000
Principal payments on long term debt ............... (29,500) (11,353)
Proceeds from exercise of stock options ............ 667 56
Net proceeds of issuance of guaranteed preferred
beneficial interest
in junior subordinated debentures ................ 11,915 --
Purchase of treasury stock ......................... (7,352) (1,455)
Cash paid for dividends ............................ (880) (558)
-------- --------
Net cash provided from financing
activities ...................................... 20,455 10,512
-------- --------
Net increase (decrease)in cash and cash
equivalents ...................................... (387) 213
Cash and cash equivalents at beginning of
period ........................................... 13,475 $ 9,708
-------- --------
Cash and cash equivalents at end of period ......... $ 13,088 $ 9,921
-------- --------
-------- --------
Supplemental cash flow information:
Interest paid on deposits ....................... $ 8,753 $ 8,196
Interest paid on borrowed funds ................. 7,479 6,623
Income taxes paid ............................... 1,863 2,876
Transfers to other real estate owned,
net ............................................ 265 160
Transfers of securities from held-to-maturity to
available for sale ................................ 61,232 --
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
8
<PAGE>
- --------------------------------------------------------------------------------
ABINGTON BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 September 30, 1998
and for the three and nine month periods ended September 30, 1998 and 1997
have been prepared by the Company without audit, and reflect all
adjustments (consisting of normal recurring adjustments) which, in the
opinion of management, are necessary to reflect a fair statement of the
results of the interim periods presented. On January 31, 1997, in
connection with the holding company formation, each share of the Bank's
common stock previously outstanding was converted automatically into one
share of common stock of the Company, and the Bank became a wholly-owned
subsidiary of the Company. This reorganization had no impact on the
consolidated financial statements. Certain information and footnote
disclosures normally included in the annual consolidated financial
statements which are prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Accordingly, the
Company believes that although the disclosures are adequate to make the
information presented not misleading, these consolidated financial
statements should be read in conjunction with the footnotes contained in
the Bank's consolidated financial statements as of and for the year ended
December 31, 1997, which are included in the Company's Annual Report to
Stockholders. Interim results are not necessarily indicative of results to
be expected for the entire year.
The consolidated financial statements include the accounts of Abington
Bancorp, Inc. and its wholly-owned subsidiaries, Abington Savings Bank and
Abington Bancorp Capital Trust ("the Trust"). For additional information on
the Trust, please see Note F. Abington Savings Bank also includes its
wholly-owned subsidiaries, Holt Park Place Development Corporation and
Norroway Pond Development Corporation, each typically owning properties
being marketed for sale; ABBK Corporation, which invested in real estate
limited partnerships and was dissolved in January 1997; and Abington
Securities Corporation, which invests primarily in obligations of the
United States Government and its agencies and equity securities. All
significant intercompany balances and transactions have been eliminated in
consolidation.
9
<PAGE>
- --------------------------------------------------------------------------------
ABINGTON BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(continued)
- --------------------------------------------------------------------------------
B) DIVIDEND DECLARATION
The Board of Directors of Abington Bancorp., Inc. declared a cash dividend
of $.05 per share to holders of its common stock in September 1998. These
dividends were payable on October 22, 1998 to stockholders of record as of
the close of business on October 8, 1998.
10
<PAGE>
- --------------------------------------------------------------------------------
ABINGTON BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 the Company 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 November 5, 1998, the Company had repurchased 574,100 shares of its
common stock under these plans at a total cost of approximately $9,581,000.
All of the repurchases were subsequent to March 31, 1997.
D) Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses). Components of comprehensive income are net income and all other
non-owner changes in equity. This statement requires that an enterprise (a)
classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive
income separate from retained earnings and additional paid-in capital in
the equity section of a statement of financial position. This statement is
effective for the Company's financial statements, for the fiscal year
ending December 31, 1998. Reclassification of financial statements for
earlier periods provided for comparative purposes is required.
Below is comprehensive income of the Company reported in accordance with
SFAS No. 130 (dollars in 000's):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------- ----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income as reported ................. $1,065 $1,127 $3,355 $3,275
Unrealized gains/(losses) on
securities, net of tax effects ....... 2,085 587 2,608 1,015
Less: Reclassification
Adjustment for securities
gains included in net
income, net of tax effects ......... 220 65 833 196
------ ------ ------ ------
Comprehensive income before transfers
of held-to-maturity securities ....... 2,930 1,649 5,130 4,094
Add: Net unrealized gains on
securities transferred from held-
to-maturity to available for sale,
net of tax effects ................... -- -- 245 --
$2,930 $1,649 $5,375 $4,094
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
11
<PAGE>
- --------------------------------------------------------------------------------
ABINGTON BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(continued)
- --------------------------------------------------------------------------------
E) Earnings Per Share Calculation
The Company computes earnings per share in accordance with SFAS No. 128.
This Statement supersedes APB No. 15 regarding the presentation of earnings
per share ("EPS") on the face of the income statement. SFAS No. 128
replaced the presentation of Primary EPS with a Basic EPS calculation that
excludes the dilutive effect of common stock equivalents. The Statement
requires a dual presentation of Basic and Diluted EPS, which is computed
similarly to Fully Diluted EPS pursuant to APB No. 15, for all entities
with complex capital structures. This Statement was effective for fiscal
years ending after December 15, 1997 and requires restatement of all prior
period EPS data presented, including quarterly information. The Company's
common stock equivalents consist primarily of dilutive outstanding stock
options computed under the treasury stock method. Basic and Diluted EPS
computations for the three and nine months ended September 30, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(In thousands except per share and share data)
<S> <C> <C> <C> <C>
Net Income ..................... $ 1,065 $ 1,127 $ 3,355 3,275
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
EARNINGS PER SHARE:
Basic-
Earnings per share ........... $ .31 $ .31 $ .95 $ .88
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares 3,470,000 3,686,000 3,539,000 3,736,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted-
Earnings per share ........... $ .29 $ .29 $ .89 $ .82
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares
and share equivalents ........ 3,687,000 3,946,000 3,781,000 3,978,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
12
<PAGE>
- --------------------------------------------------------------------------------
ABINGTON BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(continued)
- --------------------------------------------------------------------------------
F) Guaranteed Preferred Beneficial Interests in the Company's Junior
Subordinated Debentures
In May 1998, the Company formed a Delaware business trust, Abington Bancorp
Capital Trust (the "Trust"). All of the common securities of this special
purpose Trust are owned by the Company ; the Trust exists solely to issue
capital securities. For financial reporting purposes, the Trust is reported
as a subsidiary and is consolidated into the financial statements of
Abington Bancorp, Inc. and subsidiaries. The capital securities are
presented as a separate line item on the consolidated balance sheet as a
guaranteed preferred beneficial interest in the Company's Junior
Subordinated Debentures (trust-preferred securities). The Trust has issued
trust preferred securities and invested the net proceeds in junior
subordinated deferrable interest debentures (subordinated debentures)
issued to the Trust by the Company. The subordinated debentures are the
sole assets of the Trust. The Company has the right to defer payment of
interest on the subordinated debentures at any time, or from time to time,
for periods not exceeding five years. If interest payments on the
subordinated debentures are deferred, the distributions on the trust
preferred securities are also deferred. Interest on the subordinated
debentures is cumulative. The Company, through guarantees and agreements,
has fully and unconditionally guaranteed all of the Trust's obligations
under the trust-preferred securities.
The Federal Reserve Bank has accorded the trust-preferred securities Tier 1
capital status. The ability to apply Tier 1 capital treatment, as well as
to deduct the expense of the subordinated debentures for income tax
purposes, provided the Company with a cost-effective way to raise
regulatory capital. The trust-preferred securities are not included as a
component of total shareholders' equity on the consolidated balance sheet.
The trust-preferred securities pay interest at a rate of 8.25% per annum
with quarterly distributions commencing on the last day of September 1998.
The Trust issued 1,265,000 shares of $10 per share liquidation value per
preferred security at a total cost of approximately $735,000 which has been
deferred and is netted against the outstanding value of the trust-preferred
securities on the accompanying balance sheet. The offering costs are being
amortized over the life of the trust-preferred securities, which will
mature on June 30, 2029. Distributions, including those accrued and
accumulated, of $325,000 relating to these trust preferred securities is
reflected in non-interest expense. The maturity date may be shortened to a
date not earlier than 2003 if certain conditions are met, including
obtaining approval from the Board of Governors of the Federal Reserve
System. The redemption price of the trust- preferred securities would equal
the liquidation value of each security.
13
<PAGE>
- --------------------------------------------------------------------------------
ABINGTON BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(continued)
- --------------------------------------------------------------------------------
G. Transfer of Held-to-Maturity Securities
As of June 30, 1998, the Company elected to transfer the balance of its
securities classified as held-to-maturity to available for sale in
accordance with the guidelines set forth by SFAS No. 115. This decision was
made by the Board of Directors and Management of the Company after a review
of its policies and practices of accounting for investments in light of
recent economic changes and given potential opportunities from an
asset-liability management perspective. At this time there have been no
sales or transfers of securities which would otherwise necessitate this
broad reclassification. However, the reclassification was made as of June
30, 1998 to more accurately reflect the Company's change in intention with
respect to securities previously classified as held-to-maturity. Per SEC
guidelines, this reclassification prohibits the Company from classifying
securities as held-to-maturity for a period of at least two years.
14
<PAGE>
- --------------------------------------------------------------------------------
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 prepayment speeds, loan demand and savings flows, as well as the
effect of competition for deposits and loans. The Company's net interest income
is also affected by the performance of its loan portfolio, amortization or
accretion of premiums or discounts on purchased loans and mortgage - backed
securities, and the level of non-earning assets. Revenues from loan fees and
other banking services depend upon the volume of new transactions and the market
level of prices for competitive products and services. Non-interest expenses
depend upon the efficiency of the Company's internal operations and general
market and economic conditions.
NET INTEREST INCOME
Net interest income is affected by the mix and volume of assets and liabilities,
the movement and level of interest rates, and interest spread, which is the
difference between the average yield received on earning assets and the average
rate paid on deposits and borrowings. The Company's net interest rate spread was
3.20% and 3.10% for the quarter and nine months ended September 30, 1998,
respectively and 3.29% and 3.31% for the quarter and nine months ended September
30, 1997, respectively. The results for the first nine months of 1998 includes
approximately $400,000 of accelerated premium amortization related to purchased
loan portfolios which had unusually high customer prepayment activity during the
first six months of 1998. This reflects the lower long term interest rates which
have existed through the latter portion of 1997 and through the third quarter of
1998 which has caused generally lower yields on newly originated or purchased
loans and investment securities.
The level of nonaccrual (impaired) loans and other real estate owned can have an
impact on net interest income but has generally been immaterial in 1997 or 1998.
At September 30, 1998, the Company had $588,000 in nonaccrual loans, and no
other real estate owned, compared to $622,000 in nonaccrual loans and $265,000
in other real estate owned as of December 31, 1997.
15
<PAGE>
- --------------------------------------------------------------------------------
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 Nine Months Ended
September 30 September 30
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans................. $ 6,521 $ 6,226 $ 19,702 $ 18,397
Interest on mortgage-backed investments.... 2,104 2,315 6,103 6,869
Interest on bonds and obligations.......... 865 440 2,166 1,245
Dividend income............................ 161 147 465 439
Interest on short-term investments......... 15 12 94 35
------- -------- --------- --------
Total interest and dividend income........ $ 9,666 $ 9,140 $ 28,530 26,985
------- -------- --------- --------
Interest expense:
Interest on deposits....................... 3,005 2,803 8,776 8,197
Interest on short-term borrowings.......... 423 499 1,614 1,952
Interest on long-term debt................. 1,926 1,767 5,782 4,691
------- -------- --------- --------
Total interest expense.................... 5,354 5,069 16,172 14,840
------- -------- --------- --------
Net interest income......................... $ 4,312 $ 4,071 $ 12,358 $ 12,145
------- -------- --------- --------
------- -------- --------- --------
</TABLE>
A breakdown of the components of the Company's net interest-rate spread is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------- -- ------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average yield earned on:
Loans..................................... 7.85% 8.17% 7.83% 8.15%
Mortgage-backed investments............... 6.81 6.87 6.64 6.87
Bonds and obligations..................... 7.22 7.16 7.09 7.19
Marketable and other equity securities.... 4.55 4.94 4.57 4.91
Short-term investments.................... 6.57 6.88 5.90 6.30
Weighted average yield earned on
interest-earning assets.................... 7.45 7.67 7.39 7.65
Weighted average rate paid on:
NOW and non-interest NOW deposits.......... .85 .87 .85 .87
Savings deposits......................... 2.24 2.17 2.22 2.24
Time deposits............................. 5.62 5.77 5.63 5.72
Total deposits............................ 3.47 3.57 3.48 3.58
Short-term borrowings..................... 5.57 5.62 5.53 5.50
Long-term debt............................ 6.08 6.21 6.04 6.09
Weighted average rate paid on
interest-bearing liabilities.............. 4.25 4.38 4.29 4.34
Net interest-rate spread..................... 3.20% 3.29% 3.10% 3.31%
</TABLE>
16
<PAGE>
- --------------------------------------------------------------------------------
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 September
---------------------------------
1998 vs. 1997
Increase (decrease)
-------------------
Due to
---------------------------------
Volume Rate Total
------ ---- -----
(In thousands)
<S> <C> <C> <C>
Interest and dividend income:
Loans.............................. $ 1,587 $ (1,292) $ 295
Mortgage-backed investments........ (191) (20) (211)
Bonds and obligations.............. 422 3 425
Equity securities.................. 76 (62) 14
Short-term investments............. 30 (27) 3
-------- -------- ------
Total interest and dividend
income........................ 1,924 (1,398) 526
-------- -------- ------
Interest expense:
NOW deposits....................... 55 (29) 26
Savings deposits................... 32 17 49
Time deposits...................... 439 (312) 127
Short-term borrowings.............. (72) (4) (76)
Long-term debt..................... 381 (222) 159
-------- -------- ------
Total interest expense......... 835 (550) 285
-------- -------- ------
Net interest income.................. $ 1,089 $ (848) $ 241
-------- -------- ------
</TABLE>
17
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------
1998 vs. 1997
Increase (decrease)
-------------------
Due to
------------------------------------
Volume Rate Total
------ ---- -----
(In thousands)
<S> <C> <C> <C>
Interest and dividend income:
Loans.............................. $ 2,410 $(1,105) $ 1,305
Mortgage-backed investments........ (541) (225) (766)
Bonds and obligations.............. 949 (28) 921
Equity securities.................. 72 (46) 26
Short-term investments............. 63 (4) 59
------- ------- -------
Total interest and dividend
income....................... 2,953 (1,408) 1,545
------- ------- -------
Interest expense:
NOW deposits....................... 93 (16) 77
Savings deposits................... 76 (30) 46
Time deposits...................... 609 (153) 456
Short-term borrowings.............. (354) 16 (338)
Long-term debt..................... 1,156 (65) 1,091
------- ------- -------
Total interest expense......... 1,580 (248) 1,332
------- ------- -------
Net interest income.................. $ 1,373 $(1,160) $ 213
------- ------- -------
</TABLE>
18
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
GENERAL. Net income for the quarter ended September 30, 1998 was $1,065,000 or
$.29 per diluted share compared to a net income of $1,127,000 or $.29 per
diluted share in the corresponding period of 1997, a net decrease of $62,000 or
5.5%. The overall decline in net income was mainly attributable to lower net
interest rate spreads and increases in non-interest expenses offset in part by
increases in customer service fees and gains on sales of securities and
mortgages.
INTEREST AND DIVIDEND INCOME. Interest and dividend income increased $526,000 or
5.8% during the three month period ended September 30, 1998, as compared to the
same period in 1997. The increase was attributable to increases in earning
assets, particularly loans, offset in part by reductions in the yield earned on
those assets. The balance of average earning assets for the three month period
ended September 30, 1998 was approximately $518,986,000 as compared to
$476,366,000 for the same period in 1997, an overall increase of $42,620,000 or
8.2%. The increase in earning assets was generally due to increases in average
loan balances which were $332,355,000 for the three months ended September 30,
1998, as compared to $304,649,000 for the same period in 1997, an increase of
$27,706,000 or 9.1%. This increase was generally caused by larger volumes of
commercial loan originations in 1997 and into 1998 as well as higher residential
loan balances which were the result of the steady volume of loan originations
and purchases throughout 1997 and into 1998. See "Liquidity and Capital
Resources" and "Asset/Liability Management" for further discussion of the
Company's investment strategies.
The average yield earned on loans decreased for the third quarter of 1998 as
compared to 1997 primarily due to the effect of higher prepayments on higher
yielding residential loans and lower rates earned on newer originations or
purchases, particularly over the past nine 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 September 30, 1998 was
7.85% as compared to 8.17% for the same period in 1997. Given the current
relatively low long term interest rates and relatively strong economy, similar
yield declines could occur in the future. Yields on loans were positively
affected by growth in the Company's commercial loan portfolio which has grown to
approximately $59,500,000 at September 30, 1998 from $45,800,000 at September
30, 1997, an increase of $13,700,000 or 29.9%. Commercial loans typically carry
a higher yield than residential mortgages.
Average balances of mortgage-backed investments and investment securities were
$123,600,000 and $47,954,000, respectively, for the three months ended September
30, 1998 as compared to $134,819,000 and $24,565,000, respectively, for the
corresponding period in 1997. These balances, when combined, increased
$12,170,000 or 7.6%. The yield on mortgage-backed investments decreased to 6.81%
in the third quarter of 1998, as compared to 6.87% 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 securities in the mortgage-backed
investment portfolio, the proceeds of which were reinvested at lower rates.
19
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
The yield on investment securities increased to 7.22% in the third quarter of
1998 as compared to 7.16% in 1997 generally due to a greater proportion of this
portfolio being comprised of corporate securities, which tend to carry a higher
yield than government guaranteed securities due to greater credit risk. The
Company tends to purchase corporate securities related to those corporations
with investment grade credit ratings.
INTEREST EXPENSE. Interest expense for the quarter ended September 30, 1998
increased $285,000 or 5.6% compared to the same period in 1997, generally due to
increases in deposit and borrowed fund balances, which was partially offset by
decreases in the average rates paid on deposits and borrowed funds. The blended
weighted average rate paid on deposits and borrowed funds was 4.25% for the
three months ended September 30, 1998 as compared to 4.38% for the same period
in 1997. The weighted average rates paid on deposits was 3.47% for the quarter
ended September 30, 1998 as compared to 3.57% for the same period in 1997. The
overall cost of deposits has declined in the third quarter of 1998 as compared
to the same period in 1997, generally due to the continued success of
promotional efforts to attract core deposits (NOW accounts, demand deposits,
savings and money markets), which typically have a lower cost of funds than time
deposits and borrowings. The average balance of core and time deposits rose to
$186,911,000 and $159,930,000, respectively, for the third quarter of 1998 as
compared to $166,682,000 and $146,969,000, respectively, for the corresponding
period in 1997, for increases of 12.1% and 8.8%, respectively. The Company will
continue to closely manage its cost of deposits by continuing to seek methods of
acquiring new core deposits and maintaining its current core deposits while
prudently adding time deposits at reasonable rates in comparison to local
markets and other funding alternatives, including borrowings. The average
balances of borrowed funds increased overall, during the third quarter of 1998
as compared to 1997, to $156,993,000 from $149,281,000, an increase of 5.2%.
This increase generally relates to the funding of certain loan portfolio
purchases in the fourth quarter of 1997 and the first half of 1998. The overall
weighted average rates paid on borrowed funds decreased to approximately 5.98%
for the quarter ended September 30, 1998 from 6.07% in 1997. This decrease
represents the renewal of certain borrowings which came due in 1998 at lower
rates than they had been obtained for previously. It is anticipated at this time
that the Federal Reserve's recent decisions to drop the inter-bank borrowing
rate by 50 basis points may have a further positive effect on the refinancing of
borrowed funds in future periods. The Company will continue to evaluate the use
of borrowing as an alternative funding source for asset growth in future
periods. See "Asset/Liability Management" for further discussion of the
competitive market for deposits and overall strategies for uses of borrowed
funds.
NON-INTEREST INCOME. Total non-interest income increased $488,000 or 40% in the
third quarter of 1998 in comparison to the same period in 1997. Customer service
fees, which were $972,000 for the quarter ended September 30, 1998 as compared
to $834,000 for 1997, for an increase of $138,000 or 16.6%, rose primarily due
to growth in deposit accounts, primarily NOW and checking account portfolios.
Loan servicing fees and gains on sales of mortgage loans were $119,000 and
$128,000, respectively, for the third quarter of 1998 as compared to $152,000
and $49,000, respectively, for the same period in 1997, a combined increase of
$46,000 or 18.6%. This generally is reflective of the favorable refinancing
market for residential loans in 1998 which has resulted in increased saleable
loan production compared to the same period in 1997. Gains on sales of
securities were $366,000 for the
20
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
third quarter of 1998 as compared to $108,000 for 1997 for an increase of
$258,000 or 238.9%. These gains are reflective of a consistently strong market
for equity securities.
NON-INTEREST EXPENSES. Non-interest expenses for the quarter ended September 30,
1998 increased $877,000 or 26.5% compared to the same period in 1997. Salaries
and employee benefits increased 23.6% or $402,000 primarily due to increases in
health insurance costs and staffing levels in the Company's business banking and
retail areas, including the Bank's new supermarket branches in Cohasset, which
opened during the third quarter of 1997, Randolph, which opened in April 1998,
and Hanson, which opened in September 1998. These increases correspond with the
Company's strategic focuses of increasing commercial loans and attracting core
deposits. Occupancy expenses increased $135,000 or 22.1% primarily due to
increased capital and operating expenditures related to the Cohasset, Randolph
and Hanson branches, and to the general inflationary and capital expenditure
increases, particularly in technology. Other non-interest expenses, including
trust preferred expenses, also increased $340,000 or 34.2% for the quarter ended
September 30, 1998 in comparison to the same period in 1997, generally due to
increased costs associated with statement rendering and item processing as well
as other operating costs associated with servicing an expanded retail customer
base. Additionally, approximately $259,000 of the aforementioned increases
relates to expenses related to trust preferred securities which were issued in
June 1998. See "Liquidity and Capital Resources" for additional discussion of
trust preferred securities.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses was
$190,000 for the quarter ended September 30, 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 September 30, 1998 was 35.0% compared to 38.0% for the quarter
ended September 30, 1997. The lower effective tax rate in comparison to
statutory rates for both periods is reflective of income earned by certain
non-bank subsidiaries which are taxed, for state tax purposes, at lower rates.
Additionally, the overall effective tax rate is influenced by the proportion of
income generated by non-bank subsidiaries. In 1998, a greater portion of income
was generated through non-bank subsidiaries as compared to the third quarter of
1997.
21
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
GENERAL. Net income for the nine months ended September 30, 1998 was $3,355,000
or $.89 per diluted share compared to a net income of $3,275,000 or $.82 per
diluted share in the corresponding period of 1997, a net increase of $80,000 or
2.4%. The overall improvement in net income was mainly attributable to increases
in customer service fees and gains on sales of securities offset in part by
lower net interest margins and higher non-interest expenses.
INTEREST AND DIVIDEND INCOME. Interest and dividend income increased $1,545,000
or 5.7% during the nine month period ended September 30, 1998 as compared to the
same period in 1997. The increase was attributable to increases in earning
assets, particularly loans, offset in part by reductions in the yield earned on
those assets. The balance of average earning assets for the nine month period
ended September 30, 1998 was approximately $514,511,000 as compared to
$470,042,000 for the same period in 1997, an overall increase of $44,469,000 or
9.5%. The increase in earning assets was generally due to increases in average
loan balances which were $335,448,000 for the nine months ended September 30,
1998, as compared to $300,901,000 for the same period in 1997, an increase of
$34,547,000 or 11.5%. This increase was generally caused by larger volumes of
commercial loan originations in 1997 and into 1998 as well as higher residential
loan balances which were the result of the steady volume of loan originations
and purchases throughout 1997 and into 1998. See "Liquidity and Capital
Resources" and "Asset/Liability Management" for further discussion of the
Company's investment strategies.
The average yield earned on loans decreased for the nine months ended September
30, 1998 as compared to the same period in 1997, primarily due to the effect of
higher prepayments on higher yielding residential loans and lower rates earned
on newer originations on purchases over the past nine 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 nine months ended September 30,
1998 was 7.83% as compared to 8.15% for the same period in 1997. Management
estimates that, excluding the unusual prepayment adjustments realized during the
first half of 1998, the yield on loans would have been approximately 7.99% or
$400,000 higher than reported. Given the current relatively low long term
interest rates and relatively strong economy, similar yield adjustments could
occur in the future. Yields on loans were positively affected by growth in the
Company's commercial loan portfolio, which has grown to approximately
$59,500,000 at September 30, 1998 from $45,800,000 at September 30, 1997, an
increase of $13,700,000 or 29.9%. Commercial loans typically carry a higher
yield than residential mortgages.
Average balances of mortgage-backed investments and investment securities were
$122,636,000 and $40,738,000, respectively, for the nine months ended September
30, 1998 as compared to $133,387,000 and $23,097,000, respectively, for the
corresponding period in 1997. These balances, when combined, increased by
approximately $6,890,000 or 4.4%. The yield on mortgage-backed investments and
investment securities decreased to 6.64% and 7.09%, respectively, in the first
nine months of 1998 as compared to 6.87% and 7.19%, respectively, in the same
period in 1997. The
22
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
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 securities in the mortgage-backed
investment portfolio, the proceeds of which were invested at lower rates.
INTEREST EXPENSE. Interest expense for the nine months ended September 30, 1998
increased $1,332,000 or 9.0% compared to the same period in 1997, generally due
to increases in deposit and borrowed fund balances, which was partially offset
by decreases in the average rates paid on deposits. The blended weighted average
rate paid on deposits and borrowed funds was 4.29% for the nine months ended
September 30, 1998 as compared to 4.34% for the same period in 1997. The
weighted average rates paid on deposits was 3.48% for the nine months ended
September 30, 1998 as compared to 3.58% for the same period in 1997. The overall
cost of deposits has declined in the first nine months of 1998 as compared to
the same period in 1997, generally due to the continued success of promotional
efforts to attract core deposits (NOW accounts, demand deposits, savings and
money markets), which typically have a lower cost of funds than time deposits
and borrowings, as well as due to overall declines in the cost of funds related
to time deposits. The average balance of core and time deposits rose to
$179,896,000 and $156,276,000, respectively, for the nine months ended September
30, 1998 as compared to $162,249,000 and $143,184,000, respectively, for the
corresponding period in 1997, increases of 10.9% and 9.1%, respectively.
Additionally, the weighted average rate paid on time deposits declined to 5.63%
for the first nine months of 1998, as compared to 5.72% in 1997. This change
reflects the re-financing of various certificates as they have matured at lower
rates than they had been paying in previous periods and, to a lesser extent, the
result of the generally declining rate environment which has existed over the
past year despite competition for time deposit accounts which has kept rates at
higher levels in 1998 as compared to general economic rates. The Company will
continue to closely manage its cost of deposits by continuing to seek methods of
acquiring new core deposits and maintaining its current core deposits while
prudently adding time deposits at reasonable rates in comparison to local
markets and other funding alternatives, including borrowings. The average
balances of borrowed funds increased overall, during the nine month period
ending September 30, 1998 as compared to 1997, to $166,571,000 from
$150,035,000, an increase of 11.0%. This increase generally relates to the
funding of certain loan portfolio purchases in the fourth quarter of 1997 and
the first quarter of 1998. The overall weighted average rates paid on borrowed
funds increased to approximately 5.92% for the nine months ended September 30,
1998 from 5.90% 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. It is anticipated at this time that the Federal Reserve's recent
decisions to drop the inter-bank borrowing rate by 50 basis points may have a
further positive effect on the refinancing of borrowed funds in future periods.
The Company will continue to evaluate the use of borrowing as an alternative
funding source for asset growth in future periods. See "Asset/Liability
Management" for further discussion of the competitive market for deposits and
overall strategies for uses of borrowed funds.
NON-INTEREST INCOME. Total non-interest income increased $1,605,000 or 45.2% in
the first nine months of 1998 in comparison to the same period in 1997. Customer
service fees, which were $2,755,000 for the nine months ended September 30, 1998
as compared to $2,305,000 for the same
23
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
period in 1997, for an increase of $450,000 or 19.5%, 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 $358,000 and $342,000,
respectively, for the first nine months of 1998 as compared to $414,000 and
$170,000, respectively, for the same period in 1997, a combined increase of
$116,000 or 19.9%. This generally is reflective of the favorable refinancing
market for residential loans in 1998 which has resulted in increased saleable
volumes as compared to the same period in 1997. Gains on sales of securities
were $1,388,000 for the first nine months of 1998 as compared to $326,000 for
1997 for an increase of $1,062,000 or 325.8%. These gains are generally
reflective of a consistently strong market for equity securities.
NON-INTEREST EXPENSES. Non-interest expenses for the nine months ended September
30, 1998 increased $1,884,000 or 19.1% compared to the same period in 1997.
Salaries and employee benefits increased 17.7% or $868,000 primarily due to
increases in health insurance costs and staffing levels in the Company's
business banking and retail areas, including the Bank's new supermarket branches
in Cohasset (August 1997), Randolph (April 1998) and Hanson (September 1998).
These increases correspond with the Company's strategic focuses of increasing
commercial loans and attracting core deposits. Occupancy expenses increased
$263,000 or 14.6% primarily due to increased capital and operating expenditures
related to the supermarket branches, and to the general inflationary and capital
expenditure increases, particularly in technology. Other non-interest expenses,
including trust preferred securities expense, also increased $753,000 or 23.6%
for the nine months ended September 30, 1998 in comparison to the same period in
1997, generally due to increased costs associated with statement rendering and
item processing as well as other operating costs associated with servicing an
expanded retail customer base. Additionally, approximately $325,000 of the
aforementioned increase represents expenses related to trust preferred
securities which were issued in June 1998. See "Liquidity and Capital Resources"
for additional discussion of trust preferred securities.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses was
$570,000 for the nine months ended September 30, 1998 as compared to $473,000
for the same period in 1997. This increase of $97,000, 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 nine
months ended September 30, 1998 was 35% compared to 39% for the nine months
ended September 30, 1997. The lower effective tax rate in comparison to
statutory rates for both periods is reflective of income earned by certain
non-bank subsidiaries which are taxed, for state tax purposes, at lower rates.
Additionally, the overall effective tax rate is influenced by the proportion of
income generated by non-bank subsidiaries. In 1998, a greater portion of income
was generated through non-bank subsidiaries as compared to the same period in
1997.
24
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
ASSET/LIABILITY MANAGEMENT
The objective of asset/liability management is to ensure that liquidity, capital
and market risk are prudently managed. Asset/liability management is governed by
policies reviewed and approved annually by the Company's Board of Directors
(Board). The Board delegates responsibility for asset/liability management to
the corporate Asset/Liability Management Committee (ALCO). ALCO sets strategic
directives that guide the day-to-day asset/liability management activities of
the Company. ALCO also reviews and approves all major funding, capital and
market risk-management programs. ALCO is comprised of members of management and
executive management of the Company and the Bank.
Interest rate risk is the sensitivity of income to variations in interest rates
over both short-term and long-term time horizons. The primary objective of
interest rate risk management is to control this risk within limits approved by
the Board and by ALCO. These limits and guidelines reflect the Company's
tolerance for interest rate risk. The Company attempts to control interest rate
risk by identifying potential exposures and developing tactical plans to address
such potential exposures. The Company quantifies its interest rate risk
exposures using sophisticated simulation and valuation models, as well as a more
simple gap analysis. The Company manages its interest rate exposures by
generally using on-balance sheet strategies, which is most easily accomplished
through the management of the durations and rate sensitivities of the Company's
investments, including mortgage-backed securities portfolios, and by extending
or shortening maturities of borrowed funds. Additionally, pricing strategies,
asset sales and, in some cases, hedge strategies are also considered in the
evaluation and management of interest rate risk exposures.
The Company uses simulation analysis to measure the exposure of net interest
income to changes in interest rates over a 1 to 5 year time horizon. Simulation
analysis involves projecting future interest income and expense from the
Company's assets, liabilities, and off-balance sheet positions under various
interest rate scenarios.
The Company's limits on interest rate risk specify that if interest rates were
to ramp up or down 200 basis points over a 12 month period, estimated net
interest income for the next 12 months should decline by less than 10%. The
following table reflects the Company's estimated exposure, as a percentage of
estimated net interest income for the next 12 months, which does not materially
differ from the impact on net income, on the above basis:
<TABLE>
<CAPTION>
Rate Change Estimated Exposure as a
(Basis Points) % of Net Interest Income
- -------------- ------------------------
<S> <C>
+200 4.2%
-200 --
</TABLE>
25
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
The Company uses valuation analysis to provide insight into the potential
exposure of earnings and equity to changes in interest rates based on the
balance sheet position of the Company at a set point in time without regard to
potential future strategic changes. Valuation analysis involves projecting
future cash flows from the Company's assets, liabilities and off-balance sheet
positions and then discounting such cash flows at appropriate interest rates.
The Company's economic value of equity is the estimated net present value of its
assets, liabilities and off-balance sheet positions.
The following table reflects the Company's estimated exposure as a percentage of
estimated economic value of equity assuming an immediate shift in interest
rates:
<TABLE>
<CAPTION>
Rate Change Estimated Exposure as a
(Basis Points) % of Economic Value
- -------------- -----------------------
<S> <C>
+200 (7)%
-200 (27)%
</TABLE>
This estimated exposure from an economic value of equity in management's opinion
does not put the Company at undue interest rate risk given evaluations of other
factors including interest rate simulation results and the overall interest rate
GAP position as described below.
Interest rate gap analysis provides a static view of the maturity and repricing
characteristics of the on-balance sheet and off-balance sheet positions. The
interest rate gap analysis is prepared by scheduling all assets, liabilities and
off-balance sheet positions according to scheduled repricing or maturity.
Interest rate gap analysis can be viewed as a short-hand complement to
simulation and valuation analysis.
The Company's limits on interest rate risk specify that rate sensitive assets be
maintained at at least 40% of rate sensitive liabilities at the cumulative
1-year gap, as presented on a basis consistent with methods prescribed by
generally accepted accounting principles. As of September 30, 1998, the Company
was liability sensitive with rate sensitive assets at 49.9% of rate sensitive
liabilities at the 1-year gap.
The Company's policy is to match, as well as possible, the interest rate
sensitivities of its assets and liabilities. Residential mortgage loans, which
the Company currently originates or purchases for the Company's own portfolio,
are primarily 1-year, 3-year and 5-year adjustable rate mortgages and shorter
term (generally 15-year or seasoned 30-year) fixed rate mortgages. Residential
mortgage loans currently originated by the Company are primarily sold in the
secondary market.
The Company also emphasizes loans with terms to maturity or repricing of 3 years
or less, such as certain adjustable rate residential mortgage loans, commercial
mortgages, business loans, residential construction loans, second mortgages and
home equity loans.
26
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- -------------------------------------------------------------------------------
Management desires to expand its interest earning asset base in future periods
primarily through growth in the Company's loan portfolio. Loans comprised
approximately 65.2% of the average interest earning assets for the first nine
months 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 nine months
of 1998 and 1997, the Company acquired approximately $46,500,000 and
$29,000,000, respectively, of residential first mortgages.
The Company has also used mortgage-backed investments (typically with weighted
average lives of 5 to 7 years) as a vehicle for fixed and adjustable rate
investments and as an overall asset/liability tool. These securities have been
highly liquid given current levels of prepayments in the underlying mortgage
pools and, as a result, have provided the Company with greater reinvestment
flexibility.
The level of the Company's liquid assets and the mix of its investments may
vary, depending upon management's judgment as to market trends, the quality of
specific investment opportunities and the relative attractiveness of their
maturities and yields. Management has been aggressively promoting the Company's
core deposit products since the first quarter of 1995, particularly checking and
NOW accounts. The success of this program has favorably impacted the overall
deposit growth to date, despite interest rate and general market pressures, and
has helped the Company to increase its customer base.
However, given the strong performance of money market mutual funds and the
equity markets in general, the Company and many of its peers have begun to see
lower levels of growth in time deposits as compared to prior years as customers
reflect their desire to increase their returns on investment. This pressure has
been exacerbated currently by the historically low long-term economic interest
rates. Management believes that the markets for future time deposit growth,
particularly with terms in excess of 2 years, will remain highly competitive.
Management will continue to evaluate future funding strategies and alternatives
accordingly as well as to continue to focus its efforts on attracting core,
retail deposit relationships.
The Company is also a voluntary member of the Federal Home Loan Bank ("FHLB") of
Boston. This borrowing capacity assists the Company in managing its
asset/liability growth because, at times, the Company considers it more
advantageous to borrow money from the FHLB of Boston than to raise money through
non-core deposits (i.e., certificates of deposit). Borrowed funds totaled
$158,157,000 at September 30, 1998 compared to $165,910,000 at December 31,
1997. These borrowings are primarily comprised of FHLB of Boston advances and
have primarily funded residential loan originations and purchases as well as
mortgage-backed investments and investment securities.
Additionally, the Company has recently obtained funding through the issuance of
trust preferred securities which carry a higher interest rate than similar FHLB
borrowings but at the same time are included as capital, without diluting
earnings per share and are tax deductible. See "Liquidity and Capital Resources"
for further discussion.
27
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
The following table sets forth maturity and repricing information relating to
interest sensitive assets and liabilities at September 30, 1998. The balance of
such accounts has been allocated among the various periods based upon the terms
and repricing intervals of the particular assets and liabilities. For example,
fixed rate mortgage loans and mortgage-backed securities, regardless of held in
portfolio or available for sale classification, are shown in the table in the
time periods corresponding to projected principal amortization computed based on
their respective weighted average maturities and weighted average rates using
prepayment data available from the secondary mortgage market.
Adjustable rate loans and securities are allocated to the period in which the
rates would be next adjusted. The following table does not reflect partial or
full prepayment of certain types of loans and investment securities prior to
scheduled contractual maturity. Since regular passbook savings and NOW accounts
are subject to immediate withdrawal, such accounts have been included in the
"Other Savings Accounts" category and are assumed to mature within 6 months.
This table does not include non-interest bearing deposits.
While this table presents a cumulative negative gap position in the 6 month to 5
year horizon, the Company considers its earning assets to be more sensitive to
interest rate movements than its liabilities. In general, assets are tied to
increases that are immediately impacted by interest rate movements while deposit
rates are generally driven by market area and demand which tend to be less
sensitive to general interest rate changes. In addition, other savings accounts
and money market accounts are substantially stable core deposits, although
subject to rate changes. A substantial core balance in these type of accounts is
anticipated to be maintained over time.
28
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At September 30, 1998
---------------------
Repricing/Maturity Interval
---------------------------------------------------------------------------------------
(1) (2) (3) (4) (5) (6)
Over
0-6 Mos. 6-12 Mos. 1-2 Yrs. 2-3 Yrs. 3-5 Yrs. 5 Yrs. Total
---------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets subject to interest rate
adjustment:
Short-term investments........ $ 216 $ -- $ -- $ -- $ -- $ -- $ 216
Bonds and obligations......... 17,175 6,999 7,973 8,118 11,735 2,308 54,308
Mortgage-backed investments... 30,746 15,794 16,335 13,064 19,014 29,912 124,865
Mortgage loans subject to
rate review ................ 33,242 18,066 26,470 17,425 29,784 -- 124,987
Fixed-rate mortgage loans..... 24,076 26,912 47,696 37,077 29,409 16,956 182,126
Commercial and other loans.... 10,736 2,939 5,032 1,728 2,830 -- 23,265
--------- --------- --------- --------- --------- --------- ---------
Total....................... $ 116,191 $ 70,710 $ 103,506 $ 77,412 $ 92,772 $ 49,176 $ 509,767
--------- --------- --------- --------- --------- --------- ---------
Liabilities subject to interest
rate adjustment:
Money market deposit accounts 15,070 -- -- -- -- -- 15,070
Savings deposits - term
certificates................ 75,440 43,439 30,248 7,998 4,496 -- 161,621
Other savings accounts........ 132,977 -- -- -- -- -- 132,977
Borrowed funds................ 83,657 24,000 28,000 22,000 -- 500 158,157
--------- --------- --------- --------- --------- --------- ---------
Total............................. 307,144 67,439 58,248 29,998 4,496 500 467,825
--------- --------- --------- --------- --------- --------- ---------
Guaranteed preferred beneficial
interest in junior subordinated
debentures....................... $ -- $ -- $ -- $ -- $ -- $ 11,915 $ 11,915
--------- --------- --------- --------- --------- --------- ---------
Excess (deficiency) of rate-
sensitive assets over rate-
sensitive liabilities............ $(190,953) 3,271 $ 45,258 $ 47,414 $ 88,276 $ 36,761 $ 30,027
--------- --------- --------- --------- --------- --------- ---------
Cumulative excess (deficiency)
of rate-sensitive assets over
rate sensitive liabilities....... $(190,953) $(187,682) $(142,424) $ (95,010) $ (6,734) $ 30,027
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Rate-sensitive assets as a
percent of rate-sensitive
liabilities (1).................. 37.8% 49.9% 67.1% 79.5% 98.6% 106.3%
</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.
29
<PAGE>
- --------------------------------------------------------------------------------
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 September 30, 1998, the Company had
approximately $120,000,000 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 $610,000 at September 30, 1998, compared to $978,000
at December 31, 1997, a decrease of $368,000 or 37.6%. The Company's ratio of
delinquent loans to total loans was .51% at September 30, 1998, as compared to
.42% at December 31, 1997. Management believes that overall low levels of
delinquencies and non-performing assets will continue to be favorable for the
foreseeable future.
During the first nine months of 1998, the Company maintained a general reserve
for other real estate owned in light of the level of foreclosures, softness of
the local real estate market (particularly commercial) and costs associated with
selling properties. No provisions were made for possible losses on other real
estate owned in the first nine months of 1998 or 1997. The balance of the other
real estate owned reserves at September 30, 1998 was approximately $60,000.
30
<PAGE>
- --------------------------------------------------------------------------------
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 September 30, 1998, the Company had outstanding commitments to originate and
sell residential mortgage loans in the secondary market amounting to $3,301,000
and $2,578,000, respectively. The Company also has outstanding commitments to
grant advances under existing home equity lines of credit amounting to
$11,893,000. Unadvanced commitments under outstanding commercial and
construction loans totaled $18,411,000 as of September 30, 1998. The Company
believes it has adequate sources of liquidity to fund these commitments.
The Company's total stockholders' equity was $34,276,000 or 6.1% of total assets
at September 30, 1998, compared with $36,321,000 or 6.8% of total assets at
December 31, 1997. The decrease in total stockholders' equity of approximately
$2,045,000 or 5.6% primarily resulted from dividends paid and the effect of the
Company's stock repurchase program, offset in part by earnings of the Company
and increases in the market value of its portfolio of available for sale
securities, net of applicable taxes. In accordance with current guidelines, the
net unrealized gain on available for sale securities has not been included in
regulatory capital calculations.
As previously discussed, the Company issued, $11,915,000 of trust preferred
securities in June 1998, net of issuance costs. Under current regulatory
guidelines, trust preferred securities may represent up to 25% of the Company's
Tier 1 capital with any excess amounts available as Tier 2 capital. As of June
30, 1998, approximately $10,465,000 of these securities was included in Tier 1.
Bank regulatory authorities have established a capital measurement tool called
"Tier 1" leverage capital. A 4.00% ratio of Tier 1 capital to assets now
constitutes the minimum capital standard for most banking organizations and a
5.00% Tier 1 leverage capital ratio is required for a "well-capitalized"
classification. At September 30, 1998, the Company's Tier 1 leverage capital
ratio was approximately 6.89%. 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 September 30, 1998, the Company's Tier 1 and total
risk-based capital ratios were approximately 12.52% and 13.93%, 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 September 30, 1998.
Impact of the Year 2000
The Year 2000 problem, which is common to most companies, concerns the inability
of information systems, primarily (but not exclusively) computer software
programs, to properly recognize and process date-sensitive information as the
Year 2000 approaches.
31
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
The mission critical information systems of the Company are generally processed
in-house using programs or software provided by third party vendors. Thus, the
direct effort to correct Year 2000 issues will generally be undertaken by larger
companies outside of the Company's control. The Company expects that it will
bring its' mission critical systems into compliance with Year 2000 generally
through software upgrades and releases, covered generally through pre-existing
maintenance contracts on such software, or, for some limited exceptions, through
the acquisition and installation of compliant alternative solutions.
Bank regulators have recently issued additional guidance under which they are
assessing Year 2000 readiness. The failure of a financial institution, such as
the Company, to address deficiencies in the Year 2000 management process may
result in enforcement actions which could have a material adverse effect on such
institution, result in the imposition of civil money penalties or result in the
delay (or receipt of an unfavorable or critical evaluation of management of a
financial institution in connection with regulatory review) of applications
seeking to expand the institutions activities or to acquire other entities.
The Company has had a Year 2000 Task Force (the "Task Force") comprised of
middle and senior management personnel starting in 1997. The managers on this
Task Force represent all operating areas of the Company including those who have
limited responsibilities for internal system applications but may have Year 2000
exposure resulting from vendor or correspondent relationships. A formal Year
2000 Action Plan has been developed and was approved by the Board of Directors
in 1997. The Task Force has had regularly scheduled monthly meetings since its
formation with bi-weekly meetings since March 1998 and provides updates to the
full Board of Directors on a monthly basis. The Company also established a Year
2000 Committee in June 1998 comprised of the Chief Executive Officer, Chief
Information Officer, Director of Management Information Systems and three
outside Directors of the Company. This group has reviewed all Year 2000 plans
and the Company's progress against the detailed plans and objectives established
in the Year 2000 Action Plan. This Committee meets quarterly. The Task Force has
completed an assessment, identifying mission critical systems, and has initiated
formal communications with all third party vendors, including correspondent
financial institutions, to determine the compliance status of all systems
utilized by the Company. Mission critical systems include hardware, software,
program interfaces, operating systems and network. Based upon the results of the
assessment, the Company has not determined a need to replace significant
portions of existing hardware or software systems. As previously stated, many of
the Company's software programs, include, have included or will include future
upgrades which encompass many other functional changes along with Year 2000
modifications. In most cases these upgrades were covered through pre-existing
maintenance contracts which are customarily purchased to cover potential
maintenance or functionality issues on acquired software or systems.
The Company's plan to resolve the Year 2000 issue was developed along the five
phases ((i) awareness; (ii) assessment; (iii) renovation; (iv) validation; and
(v) implementation) project management process outlined in the Federal Financial
Institutions Examination Council (FFIEC) Year 2000 statement of May 5, 1997. The
awareness phase has generally been completed. The assessment phase has consisted
of assessing and documenting the Company's business risk, information systems,
third party vendors, including those who are not software and hardware or
operating system providers.
32
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
This phase also included a full assessment of the Company's exposure to
additional credit risk as a result of Year 2000 issues with its customers,
particularly for commercial and commercial real estate loans and also for large
depositors. At this point in time, after the completion of such assessment,
management does not believe that there is a material risk or exposure in these
specific areas to credit losses or liquidity problems as a result of Year 2000.
Although credit risk associated with Year 2000 appears to be low for the Company
based upon current assessments, it is not possible to fully evaluate the true
magnitude of increased credit risk associated with Year 2000 at this point in
time. The impact that Year 2000 has on borrowers could result in increases in
problem loans and credit losses in future years. Management will continue,
however, to monitor developments in these areas. The overall assessment phase
has certain elements, including outside vendors, which are currently ongoing.
The majority of the assessment phase is otherwise complete with no critical
issues noted.
The renovation phase, which includes actual testing of software, hardware,
network, telecom and programming applications is in process. Thus far, there
have not been any material issues or developments as a result of such testing.
Nonetheless, management cannot yet conclude on the results of testing until all
applications, dates and key testing cycles are complete. All testing of mission
critical systems is expected to be completed by December 31, 1998.
The Company is also in the process of developing contingency plans to ensure
that critical operations continue in the event that its information systems or
other vendors are unable to achieve Year 2000 requirements. The contingency
plans will be further initiated if a vendor misses its target date or is not
considered Year 2000 compliant by December 31, 1998.
The chief components of the Company's Year 2000 exposure are generally relating
to the costs of acquiring testing systems, independent auditors and consultants
to assist the Task Force and management in assessing the adequacy of its plan,
testing of its systems, and propriety of its conclusions and, in some instances,
minor programming for system interfaces and the purchase of non-mission critical
software replacements which were necessitated as a result of management's Year
2000 risk assessment and/or testing. It is estimated that the Company has
directly incurred an additional $80,000 in expenses in 1998 related to Year 2000
and estimates that approximately $200,000 to $300,000 in additional expenses
will be incurred in 1999. Costs of the project, however, are based on current
estimates and actual results could vary significantly from such estimates once
detailed testing is completed.
Impact of Inflation
The Consolidated Financial Statements of the Company and related Financial Data
presented herein have been prepared in accordance with generally accepted
accounting principles which generally require the measurement of financial
condition and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The primary impact of inflation on operations of the Company is
reflected in increased operating costs. Unlike most industrial companies, almost
all the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates have a more significant impact on a
financial
33
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the price of goods and services.
Proposed Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." This statement establishes standards for
reporting information about segments in annual and interim financial statements.
SFAS No. 131 introduces a new model for segment reporting, called the
"management approach."
The management approach is based on the way the chief operating decision-maker
organizes segments within a company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography,
legal structure, management structure - any manner in which management
disaggregates a company. This statement is effective and will be adopted for the
Company's financial statements for the fiscal year ending December 31, 1998 and
requires the restatement of previously reported segment information for all
periods presented.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Post-retirement Benefits." This Statement does not change the
recognition or measurement associated with pension or post-retirement plans. It
standardizes certain disclosures, requires additional information about changes
in the benefit obligations and about change in the fair value of plan assets to
facilitate analysis, and it eliminates certain disclosures that were not deemed
useful. This Statement is effective for financial statements issued for periods
beginning after December 15, 1997. These disclosure requirements will have no
material impact on the Company's financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments and hedging activities. The
Statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. The Company does not expect that the adoption of this Statement
will have a material impact on the Company's financial position or results of
operation.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information required by this Item 3 is included in Item 2 of Part I of this Form
10-Q, entitled "Management's Discussion and Analysis - Asset/Liability
Management."
34
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
During the quarter ended September 30, 1998 there were no new legal proceedings
and no material developments to items reported in Part I, Item 3 of the
Company's Annual Report for the year ended December 31, 1997 on Form 10-K filed
with the Securities and Exchange Commission on March 25, 1998.
Item 2. Changes in Securities.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
2.1 Plan of Reorganization and Acquisition dated as
of October 15, 1996 between the Company and
Abington Savings Bank incorporated by reference
to the Company's Registration Statement on Form
8-A, effective January 13, 1997.
3.1 Articles of Organization of the Company
incorporated by reference to the Company's
Registration Statement on Form 8-A, effective
January 13, 1997.
3.2 By-Laws of the Company, incorporated by reference
to the Company's Registration Statement on Form
8-A, effective January 13, 1997.
4.1 Specimen stock certificate for the Company's
Common Stock incorporated by reference to the
Company's Registration Statement on Form
8-A, effective January 31, 1997.
35
<PAGE>
4.2 Form of Indenture between Abington Bancorp, Inc.
and State Street Bank and Trust Company
incorporated by reference to Exhibit 4.1 of the
Registration Statement on Form S-2 of the Company
and Abington Bancorp Capital Trust, filed on
May 12, 1998.
4.3 Form of Junior Subordinated Debenture
incorporated by reference to Exhibit 4.2 of the
Registration Statement on Form S-2 of the
Company and Abington Bancorp Capital Trust, filed
on May 12, 1998.
4.4 Form of Amended and Restated Trust Agreement by
and among the Company, State Street Bank and
Trust Company, Wilmington Trust Company and the
Administrative Trustees of the Trust incorporated
by reference to Exhibit 4.4 of the Registration
Statement on Form S-2 of the Company and Abington
Bancorp Capital Trust, filed on May 12, 1998.
4.5 Form of Preferred Securities Guarantee Agreement
by and between the Company and State Street Bank
and Trust Company incorporated by reference to
Exhibit 4.6 of the Registration Statement on Form
S-2 of the Company and Abington Bancorp Capital
Trust, filed on May 12, 1998.
*10.1 (a) Amended and Restated Special Termination
Agreement dated as of January 31, 1997 among the
Company, the Bank and James P. McDonough
incorporated by reference to the Company's
Annual Report for the year ended December 31,
1996 on Form 10-K filed on March 31, 1997.
(b) Amendment to Amended and Restated Special
Termination Agreement, dated as of July 1, 1997
among the Company, the Bank and James P.
McDonough, incorporated by reference to the
Company's quarterly report on Form 10-Q for the
second quarter of 1997, filed on August 13,
1997.
*10.2 Special Termination Agreement dated as of
November 2, 1998 among the Company, the Bank and
Kevin M. Tierney.
*10.3 Special Termination Agreement dated as of May
28, 1998 among the Company, the Bank and John
R. Sylva, incorporated by reference to the
Company's quarterly report on Form 10-Q for the
second quarter of 1998, filed on August 10,
1998.
*10.4 (a) Amended and Restated Special Termination
Agreement dated as of January 31, 1997 among
the Company, the Bank and Mario A. Berlinghieri
incorporated by reference to the Company's
Annual Report for the year ended December 31,
1996 on Form 10-K filed on March 31, 1997.
(b) Amendment to Amended and Restated Special
Termination Agreement, dated as of July 1, 1997
among the Company, the Bank and Mario A
Berlinghieri, incorporated by reference to the
Company's quarterly report on Form 10-Q for the
second quarter of 1997, filed on August 13,
1997.
36
<PAGE>
(c) Amendment No. 2 to Amended and Restated
Special Termination Agreement, dated as of
April 16, 1998, by and among the Company, the
Bank and Mario A. Berlinghieri, incorporated by
reference to the Company's quarterly report on
Form 10-Q for the first quarter of 1998, filed
on May 8, 1998.
*10.5 Abington Bancorp, Inc. Incentive and
Nonqualified Stock Option Plan, as amended and
restated to reflect holding company formation,
incorporated by reference to the Company's
Annual Report for the year ended December 31,
1996 on Form 10-K, filed on March 31, 1997.
*10.6 Management Incentive Compensation Program dated
March 1997, incorporated by reference to the
Company's quarterly report on Form 10-Q for the
second quarter of 1997, filed on August 13,
1997.
*10.7 Long Term Performance Incentive Plan dated July
1997, incorporated by reference to the
Company's quarterly report on Form 10-Q for the
second quarter of 1997, filed on August 13,
1997.
10.8 (a) Lease for office space located at 538
Bedford Street, Abington, Massachusetts
("lease"), used for the Bank's administrative
offices dated January 1, 1996 incorporated by
reference to the Company's Annual Report for
the year ended December 31, 1996 on Form 10-K
filed on March 31, 1997. Northeast Terminal
Associates, Limited owns the property. Dennis
E. Barry and Joseph L. Barry, Jr., who
beneficially own more than 5% of the Company's
Common Stock, are the principal beneficial
owners of Northeast Terminal Associates,
Limited.
(b) Amendment to Lease dated December 31, 1997,
incorporated by reference to the Company's
Annual Report for the year ended December 31,
1997 on Form 10-K filed on March 25, 1998.
10.9 Dividend Reinvestment and Stock Purchase Plan
is incorporated by reference herein to the
Company's Registration Statement on Form S-3,
effective January 31, 1997.
*10.10 Abington Bancorp, Inc. 1997 Incentive and
Nonqualified Stock Option Plan, incorporated by
reference herein to Appendix A to the Company's
proxy statement relating to its special meeting
in lieu of annual meeting held on June 17,
1997, filed with the Commission on April 29,
1997.
*10.11 (a) Special Termination Agreement dated as of
July 1, 1997 among the Company, the Bank and
Robert M. Lallo, incorporated by reference to
the Company's quarterly report on Form 10-Q for
the second quarter of 1997, filed on August 13,
1997.
(b) Amendment No. 1 to Special Termination
Agreement, dated April 16, 1998, by and among the
Company, the Bank and Robert M. Lallo,
incorporated by reference to the Company's
quarterly report on Form 10-Q for the first
quarter of 1998, filed on May 8, 1998.
37
<PAGE>
*10.12 Merger Severance Benefit Program dated as
of August 28, 1997, incorporated by reference
to the Company's Quarterly Report on Form 10-Q
for the third quarter of 1997, filed on
November 15, 1997.
*10.13 Supplemental Executive Retirement Agreement
between the Bank and James P. McDonough dated as
of March 26, 1998, incorporated by reference to
the Company's quarterly report on Form 10-Q for
the first quarter of 1998, filed on May 8, 1998.
*10.14 Deferred Stock Compensation Plan for Directors,
effective July 1, 1998, incorporated by reference
to Annex A to the Company's Proxy Statement for
its 1998 Annual Meeting, filed on April 13, 1998.
11.1 A statement regarding the computation of earnings
per share is included in Item 1 (Note E to Notes
to Unaudited Consolidated Financial Statements)
of this Report.
27.1 Financial Data Schedule, September 30, 1998.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during
the third quarter of 1998.
- ----------------------------------------
* Management Compensatory Plan
38
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ABINGTON BANCORP, INC.
----------------------
(Company)
Date: November 12, 1998 By /S/James P. McDonough
-----------------------
James P. McDonough
President and Chief
Executive Officer
Date: November 12, 1998 By /S/Robert M. Lallo
---------------------
Robert M. Lallo
Treasurer
(Principal Financial Officer)
39
<PAGE>
INDEX TO EXHIBITS
2.1 Plan of Reorganization and Acquisition dated as
of October 15, 1996 between the Company and
Abington Savings Bank incorporated by reference
to the Company's Registration Statement on Form
8-A, effective January 13, 1997.
3.1 Articles of Organization of the Company
incorporated by reference to the Company's
Registration Statement on Form 8-A, effective
January 13, 1997.
3.2 By-Laws of the Company, incorporated by reference
to the Company's Registration Statement on Form
8-A, effective January 13, 1997.
4.1 Specimen stock certificate for the Company's
Common Stock incorporated by reference to the
Company's Registration Statement on Form
8-A, effective January 31, 1997.
4.2 Form of Indenture between Abington Bancorp, Inc.
and State Street Bank and Trust Company
incorporated by reference to Exhibit 4.1 of the
Registration Statement on Form S-2 of the Company
and Abington Bancorp Capital Trust, filed on May
12, 1998.
4.3 Form of Junior Subordinated Debenture
incorporated by reference to Exhibit 4.2 of the
Registration Statement on Form S-2 of the
Company and Abington Bancorp Capital Trust, filed
on May 12, 1998.
4.4 Form of Amended and Restated Trust Agreement by
and among the Company, State Street Bank and
Trust Company, Wilmington Trust Company and the
Administrative Trustees of the Trust incorporated
by reference to Exhibit 4.4 of the Registration
Statement on Form S-2 of the Company and
Abington Bancorp Capital Trust, filed on May 12,
1998.
4.5 Form of Preferred Securities Guarantee Agreement
by and between the Company and State Street Bank
and Trust Company incorporated by reference to
Exhibit 4.6 of the Registration Statement on Form
S-2 of the Company and Abington Bancorp Capital
Trust, filed on May 12, 1998.
*10.1 (a) Amended and Restated Special Termination
Agreement dated as of January 31, 1997 among the
Company, the Bank and James P. McDonough
incorporated by reference to the Company's
Annual Report for the year ended December 31,
1996 on Form 10-K filed on March 31, 1997.
(b) Amendment to Amended and Restated Special
Termination Agreement, dated as of July 1, 1997
among the Company, the Bank and James P.
McDonough, incorporated by reference to the
Company's quarterly report on Form 10-Q for the
second quarter of 1997, filed on August 13,
1997.
40
<PAGE>
*10.2 Special Termination Agreement dated as of
November 2, 1998 among the Company, the Bank and
Kevin M. Tierney.
*10.3 Special Termination Agreement dated as of May
28, 1998 among the Company, the Bank and John
R. Sylva, incorporated by reference to the
Company's quarterly report on Form 10-Q for the
second quarter of 1998, filed on August 10,
1998.
*10.4 (a) Amended and Restated Special Termination
Agreement dated as of January 31, 1997 among
the Company, the Bank and Mario A. Berlinghieri
incorporated by reference to the Company's
Annual Report for the year ended December 31,
1996 on Form 10-K filed on March 31, 1997.
(b) Amendment to Amended and Restated Special
Termination Agreement, dated as of July 1, 1997
among the Company, the Bank and Mario A.
Berlinghieri, incorporated by reference to the
Company's quarterly report on Form 10-Q for the
second quarter of 1997, filed on August 13,
1997.
(c) Amendment No. 2 to Amended and Restated
Special Termination Agreement, dated as of
April 16, 1998, by and among the Company, the
Bank and Mario A. Berlinghieri, incorporated by
reference to the Company's quarterly report on
form 10-Q for the first quarter of 1998, filed
on May 8, 1998.
*10.5 Abington Bancorp, Inc. Incentive and
Nonqualified Stock Option Plan, as amended and
restated to reflect holding company formation
incorporated by reference to the Company's
Annual Report for the year ended December 31,
1996 on Form 10-K filed on March 31, 1997.
*10.6 Management Incentive Compensation Program dated
March 1997, incorporated by reference to the
Company's quarterly report on Form 10-Q for the
second quarter of 1997, filed on August 13,
1997.
*10.7 Long Term Performance Incentive Plan dated July
1997, incorporated by reference to the
Company's quarterly report on Form 10-Q for the
second quarter of 1997, filed on August 13,
1997.
10.8 (a) Lease for office space located at 538
Bedford Street, Abington, Massachusetts
("Lease"), used for the Bank's 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.
41
<PAGE>
(b) Amendment to Lease dated December 31, 1997,
incorporated by reference to the Company's Annual
Report for the year ended December 31, 1997 on
Form 10-K filed on March 25, 1998.
10.9 Dividend Reinvestment and Stock Purchase Plan
is incorporated by reference herein to the
Company's Registration Statement on Form S-3,
effective January 31, 1997.
*10.10 Abington Bancorp, Inc. 1997 Incentive and
Nonqualified Stock Option Plan, incorporated by
reference herein to Appendix A to the Company's
proxy statement relating to its special meeting
in lieu of annual meeting held on June 17,
1997, filed with the Commission on April 29,
1997.
*10.11 (a) Special Termination Agreement dated as of
July 1, 1997 among the Company, the Bank and
Robert M. Lallo, incorporated by reference to
the Company's quarterly report on Form 10-Q for
the second quarter of 1997, filed on August 13,
1997.
(b) Amendment No. 1 to Special Termination
Agreement, dated as of April 16, 1998, by and
among the Company, the Bank and Robert M. Lallo,
incorporated by reference to the Company's
quarterly report on Form 10-Q for the first
quarter of 1998, filed on May 8, 1998.
*10.12 Merger Severance Benefit Program dated as of
August 28, 1997, incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the
third quarter of 1997, filed on November 15,
1997.
*10.13 Supplemental Executive Retirement Agreement
between the Bank and James P. McDonough dated as
of March 26, 1998, incorporated by reference to
the Company's quarterly report on Form 10-Q for
the first quarter of 1998, filed on May 8, 1998.
*10.14 Deferred Stock Compensation Plan for Directors,
effective July 1, 1998.
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, September 30, 1998
- ------------------------------------------
* Management Compensatory Plan
42
<PAGE>
Exhibit 10.2
Execution Copy
SPECIAL TERMINATION AGREEMENT
THIS AGREEMENT is dated as of the 2nd day of November, 1998 by
and among Abington Bancorp, Inc., a Massachusetts corporation (the "Company"),
its subsidiary, Abington Savings Bank, a Massachusetts savings bank with its
main office in Abington, Massachusetts (the "Bank"; the Company and Bank are
sometimes collectively referred to herein as the "Employers"), and Kevin M.
Tierney, an individual currently employed by the Bank in the capacity of
Executive Vice President, Operations (the "Executive").
1. Purpose. In order to allow the Executive to consider the
prospect of a Change in Control (as defined in Section 2) in an objective manner
and in consideration of the services rendered and to be rendered by the
Executive to the Employers, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged by the Employers, the
Employers are willing to provide, subject to the terms of this Agreement,
certain severance benefits to protect the Executive from the consequences of a
Terminating Event (as defined in Section 3) occurring subsequent to a Change in
Control.
2. Change in Control. A "Change in Control" shall be deemed to
have occurred in any of the following events:
(i) if there has occurred a change in control which the Company
would be required to report in response to Item 1 of Form 8-K promulgated under
the Securities Exchange Act of 1934, as amended (the "1934 Act"), or, if such
Form is no longer in effect in its present form, any Form or regulation
promulgated by the Securities and Exchange Commission pursuant to the 1934 Act
which is intended to serve similar purposes; or
(ii) when any "person" (as such term is used in Sections 13(d)
and 14(d)(2) of the 1934 Act) becomes a "beneficial owner" (as such term is
defined in Rule 13d-3 promulgated under the 1934 Act), directly or indirectly,
of securities of the Company or the Bank representing twenty-five percent (25%)
or more of the total number of votes that may be cast for the election of
directors of the Company or the Bank; or
(iii) if during any period of two consecutive years (not
including any period prior to the execution of this Agreement), individuals who
are Continuing Directors (as herein defined) cease for any reason to constitute
at least a majority of the Board of Directors of the Company. For this purpose,
a "Continuing Director" shall mean (a) an individual who was a director of the
Company at the beginning of such period or (b) any new director (other than a
director designated by a person who has entered into any agreement with the
Company to effect a transaction described in clause (i) or (ii) of this Section
2 whose election by the Board or nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at the beginning
<PAGE>
of such period or whose election or nomination for election was previously so
approved; or
(iv) the stockholders of the Company approve a merger or
consolidation of the Company with any other bank or corporation, other than (a)
a merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 80% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation, or (b) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction) in which no
"person" (as defined above) acquires more than 30% of the combined voting power
of the Company's then outstanding securities; or
(v) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of its assets.
3. Terminating Event. A "Terminating Event" shall mean either of
the following:
(a) termination by either of the Employers of the employment of
the Executive as Executive Vice President of the Bank for any reason other than
(i) death, (ii) deliberate dishonesty of the Executive with respect to the
Company or the Bank or any subsidiary or affiliate thereof, or (iii) conviction
of the Executive of a crime involving moral turpitude, or
(b) resignation of the Executive from the employ of the Company
or the Bank, while the Executive is not receiving payments or benefits from the
Company or the Bank by reason of the Executive's disability, subsequent to the
occurrence of any of the following events:
(i) a significant change in the nature or scope of the
Executive's responsibilities, authorities, powers, functions or
duties from the responsibilities, authorities, powers, functions or
duties exercised by the Executive at the Company or the Bank
immediately prior to the Change in Control; or
(ii) a reasonable determination by the Executive that, as a
result of a Change in Control, he is unable to exercise the
responsibilities, authorities, powers, functions or duties exercised
by the Executive at the Company or the Bank immediately prior to
such Change in Control; or
(iii) a decrease in the total annual compensation payable by
the Company or the Bank to the Executive other than as a result of a
salary reduction similarly affecting the Executive and all other
executive officers of the Company or the Bank on the basis of the
Company's or the Bank's financial performance; or
(iv) the failure by the Company or the Bank to continue
in effect any material compensation, incentive, bonus or benefit
plan in which the Executive participates immediately prior to the
Change in Control, unless an equitable arrangement (embodied
2
<PAGE>
in an ongoing substitute or alternative plan) has been made with
respect to such plan, or the failure by the Company or the Bank to
continue the Executive's participation therein (or in such
substitute or alternative plan) on a basis not materially less
favorable, both in terms of the amount of benefits provided and the
level of the Executive's participation relative to other
participants, than the basis when existed at the time of the Change
of Control; or
(v) the failure of the Company or the Bank to obtain a
satisfactory agreement from any successor to assume and agree to
perform this Agreement.
4. Severance Payment. In the event a Terminating Event occurs
within three (3) years after a Change in Control, the Employers shall pay to the
Executive an amount equal to (x) three times the "base amount" (as defined in
Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the
"Code")) applicable to the Executive, less (y) One Dollar ($1.00), payable in
one lump-sum payment on the date of termination.
5. Limitation on Benefits.
(a) It is the intention of the Executive and of the Employers
that no payments by the Employers to or for the benefit of the Executive under
this Agreement or any other agreement or plan pursuant to which he is entitled
to receive payments or benefits shall be non-deductible to the Employers by
reason of the operation of Section 280G of the Code relating to parachute
payments. Accordingly, and notwithstanding any other provision of this Agreement
or any such agreement or plan, if by reason of the operation of said Section
280G, any such payments exceed the amount which can be deducted by the
Employers, such payments shall be reduced to the maximum amount which can be
deducted by the Employers. To the extent that payments exceeding such maximum
deductible amount have been made to or for the benefit of the Executive, such
excess payments shall be refunded to the Employers with interest thereon at the
applicable Federal Rate determined under Section 1274(d) of the Code, compounded
annually, or at such other rate as may be required in order that no such
payments shall be non-deductible to the Employers by reason of the operation of
said Section 280G. To the extent that there is more than one method of reducing
the payments to bring them within the limitations of said Section 280G, the
Executive shall determine which method shall be followed, provided that if the
Executive fails to make such determination within forty-five days after the
Employers have sent him written notice of the need for such reduction, the
Employers may determine the method of such reduction in their sole discretion.
(b) If any dispute between the Employers and the Executive as to
any of the amounts to be determined under this Section 5 or the method of
calculating such amounts cannot be resolved by the Employers and the Executive,
either party after giving three days written notice to the other, may refer the
dispute to a partner in a Massachusetts office of a firm of independent
certified public accountants selected jointly by the Employers and the
Executive. The determination of such partner as to the amounts to be determined
under Section 5(a) and the method of calculating such amounts shall be final and
binding on both the Employers and the Executive. The Employers shall bear the
costs of any such determination.
3
<PAGE>
(c) The Executive confirms that he is aware of the fact that the
Federal Deposit Insurance Corporation has the power to preclude the Bank from
making payments to the Executive under this Agreement under certain
circumstances. The Executive agrees that the Bank shall not be deemed to be in
breach of this Agreement if it is precluded from making a payment otherwise
payable hereunder by reason of regulatory requirements binding on the Bank.
6. Employment Status. This Agreement is not an agreement for the
employment of the Executive and shall confer no rights on the Executive except
as herein expressly provided.
7. Term. This Agreement shall take effect on the date first
written above, and shall terminate upon the earlier of (a) the termination by
the Employers of the employment of the Executive because of death, deliberate
dishonesty of the Executive with respect to the Company or the Bank or any
subsidiary or affiliate thereof, or conviction of the Executive of a crime
involving moral turpitude, (b) the resignation or termination of employment with
the Company or the Bank by the Executive for any reason prior to a Change in
Control, or (c) the resignation from employment of the Executive after a Change
in Control for any reason other than the occurrence of any of the events
enumerated in Section 3(b) of this Agreement.
8. Withholding. All payments made by the Employers under this
Agreement shall be paid net of, and after deduction of, any tax or other amounts
required to be withheld by the Employers under applicable law.
9. Assignment. Neither the Employers nor the Executive may make
any assignment of this Agreement or any interest herein, by operation of law or
otherwise, without the prior written consent of the other party. This Agreement
shall inure to the benefit of, and be binding upon, the Employers and the
Executive, and their respective heirs, legal representatives, successors and
permitted assigns. In the event of the Executive's death prior to the completion
by the Employers of all payments due him under this Agreement, the Employers
shall continue such payments to the Executive's beneficiary designated in
writing to the Employers prior to his death (or to his estate, if he fails to
make such designation).
10. Enforceability. If any portion or provision of this Agreement
shall to any extent be declared illegal or unenforceable by a court of competent
jurisdiction, then the remainder of this Agreement, or the application of such
portion or provision in circumstances other than those as to which it is so
declared illegal or unenforceable, shall not be affected thereby, and each
portion and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.
11. Waiver. No waiver of any provision hereof shall be effective
unless made in writing and signed by the waiving party. The failure of either
party to require the performance of any term or obligation of this Agreement, or
the waiver by either party of any breach of this Agreement, shall not prevent
any subsequent enforcement of such term or obligation or be deemed a waiver of
any subsequent breach.
4
<PAGE>
12. Notices. Any notices, requests, demands and other
communications provided for by this Agreement shall be sufficient if in writing
and delivered in person or sent by registered or certified mail, postage
prepaid, to the Executive at 12 Hussey Ave., Danvers, Massachusetts 01923, or to
such other address as the Executive has filed in writing with the Employers or,
in the case of the Employers, at their main office, attention of the Clerk or
the Secretary.
13. Effect on Other Agreements. An election by the Executive to
resign after a Change in Control under the provisions of this Agreement shall
not constitute a breach by the Executive of any employment agreement between the
Employers and the Executive and shall not be deemed a voluntary termination of
employment by the Executive for the purpose of interpreting the provisions of
any of the Employer's benefit plans, programs or policies. Nothing in this
Agreement shall be construed to limit the rights of the Executive under any
employment agreement he may then have with the Employers.
13. Amendment. This Agreement may be amended or modified only by
a written instrument signed by the Executive and by a duly authorized
representative of the Executive Committee of the Board of Directors of each of
the Employers.
14. Governing Law. This Agreement shall be governed by, and
construed and enforced in accordance with, the substantive laws of The
Commonwealth of Massachusetts without regard for its principles of conflicts of
laws.
* * * *
5
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as a sealed
instrument by the Bank, by its duly authorized officer, and by the Executive, as
of the date first above written.
ATTEST: ABINGTON BANCORP, INC.
- ------------------------------- By:
Clerk -----------------------------
Title:
--------------------------
[Seal]
WITNESS:
ATTEST: ABINGTON SAVINGS BANK
- ------------------------------- By:
Clerk -----------------------------
Title:
--------------------------
[Seal]
WITNESS:
- ------------------------------- --------------------------------
Kevin M. Tierney
6
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