<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20429
----------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31,1998
Commission File No. 0-16018
ABINGTON BANCORP, INC.
----------------------
(Exact name of Registrant as specified in its charter)
MASSACHUSETTS 04-3334127
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
536 WASHINGTON STREET, ABINGTON, MASSACHUSETTS 02351
- ---------------------------------------------- ------------
(Address of Principal Executive Offices) (Zip Code)
(617) 982-3200
--------------------------------
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Title of Class: Common Stock, par value $0.10 per share
Indicate by check mark whether the Registrant (together with its predecessor in
interest) (1) has filed all reports required to be filed by Section 13 or 15 (d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-K or any
amendment of this Form 10-K . [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing sales price for the Registrant's Common Stock
on March 5, 1999, as reported by the Nasdaq Stock Market, was $45,880,000.
The number of shares outstanding of the Registrant's Common Stock as of March 5,
1999: 3,347,300 shares.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Information required by Part II (Items 6, 7 and 8) of this Form is incorporated
by reference herein from the Registrant's Annual Report to Stockholders for the
year ended December 31, 1998 (the "Annual Report").
Information required by Part III (Items 10, 11 and 12) of this Form is
incorporated by reference herein from the Registrant's definitive proxy
statement (the "Proxy Statement") relating to the 1999 Annual Meeting of
Stockholders of the Registrant.
<PAGE>
When used in this Report, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project,"
"believe" or similar expressions are intended to identify "forward-looking
statements" within the meanings of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. The Company wishes to
caution readers that all forward-looking statements are necessarily speculative
and not to place undue reliance on any such forward-looking statements, which
speak only as of the date made, and to advise readers that various risks and
uncertainties, including regional and national economic conditions, changes in
the real estate market, changes in levels of market interest rates, credit risks
of lending activities, competitive and regulatory factors, and the so-called
Year 2000 issue, could affect the Company's financial performance and could
cause the Company's actual results for future periods to differ materially from
those anticipated or projected.
2
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
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 Bank operated as a Massachusetts-chartered mutual savings bank from its
incorporation in 1853 until June 1986 when the Bank converted from mutual to
stock form of ownership. From June 1986 to the present, the Bank has operated as
a stock-owned savings Bank.
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 has
invested the net proceeds in Junior Subordinated Deferrable interest debentures
("Subordinated Debentures") issued to the Trust by the Company. These
Subordinated Debentures are the sole assets of the Trust.
The Bank presently has three wholly-owned subsidiaries: Holt Park Place
Development Corporation and Norroway Pond Development Corporation, which own
properties being marketed for sale, and Abington Securities Corporation, which
invests primarily in United States Government obligations and obligations of
related agencies and equity securities. ABBK Corporation, which had previously
invested in real estate development limited partnerships engaged in qualified
housing projects, was dissolved in January 1997.
The Company is engaged principally in the business of attracting deposits
from the general public, borrowing funds and investing those deposits and funds.
In its investments, the Company has emphasized various types of residential and
commercial real estate loans, residential construction loans, consumer loans,
and investments in securities. The Company considers its principal market area
to be Plymouth County, Massachusetts; primarily Abington, Cohasset, Halifax,
Hanson, Holbrook, Hull, Kingston, Pembroke, Randolph and Whitman where it has
banking offices, and nearby Rockland, Duxbury, Scituate, Plympton, Brockton,
Hanover, East Bridgewater, Plymouth, Carver, Weymouth and Bridgewater.
3
<PAGE>
The Company has grown from $421.8 million in assets and $246.8 million in
deposits at December 31, 1994 to $591.2 million in assets and $364.0 million in
deposits at December 31, 1998. Deposits in the Company have been insured by the
Federal Deposit Insurance Corporation ("FDIC") since 1975. Deposits are insured
by the Bank Insurance Fund of the FDIC up to FDIC limits (generally $100,000 per
depositor) and by the Depositors Insurance Fund of the Mutual Savings Central
Fund, Inc. (the "Depositors Insurance Fund" or "Central Fund") for the portion
of deposits in excess of that insured by the FDIC.
On June 3, 1994, the Company acquired Hull Co-Operative Bank ("Hull") by
merger. On June 26, 1995, the Company acquired the deposits and certain assets
and other liabilities of the Holbrook branch of The First National Bank of
Boston ("Holbrook"). Additionally, in August of 1997, the Company opened, in
Cohasset, the first of three planned de novo supermarket branches, with the
Randolph and Hanson branches opening in April and September, 1998, respectively.
These acquisitions and branch openings are consistent with the Company's ongoing
strategy of planned growth which will enable the Company to have a greater
regional presence.
MARKET AREA AND OFFICES
The Company considers its primary service area to be Plymouth County,
Massachusetts; primarily the towns of Abington, Cohasset, Halifax, Hanson,
Holbrook, Hull, Kingston, Pembroke, Randolph and Whitman, where it has banking
offices, and nearby Rockland, Duxbury, Scituate, Plympton, Brockton, Hanover,
Bridgewater, Plymouth, Carver, Weymouth and Bridgewater. The Company has its
corporate headquarters in Abington, Massachusetts. The Company provides the full
range of its services at its offices. An Operations Center is also located in
Abington. The Company has an additional branch office at the Abington High
School which is open on a part-time basis.
LENDING ACTIVITIES
GENERAL. Loans currently originated and purchased for the Company's own
portfolio primarily have terms to maturity or repricing of 15 years or less,
such as residential construction loans and adjustable-rate and fixed-rate
mortgages on owner-occupied residential property. See "Item 7 - Management's
Discussion and Analysis of Consolidated Financial Condition and Results of
Operations -- Liquidity and Capital Resources" for discussion of the Company's
asset-liability strategy. The Company also originates one-year and three-year
adjustable-rate mortgages on non-owner-occupied residential property as well as
commercial and commercial real estate loans. Prior to 1996, commercial,
commercial real estate or commercial construction lending had not been a primary
source of loan originations. The Company began to emphasize such lending in the
latter part of 1996. The Company does anticipate a continued emphasis in 1999
and beyond for this type of loan origination. The Company has stressed the
origination or purchase of shorter-term 15-year fixed rate or adjustable
residential mortgage loans or seasoned 30-year fixed rate residential mortgage
loans for its own portfolio in connection with the asset/liability management.
(See "Lending Activities-Residential and Commercial Construction and Commercial
Real Estate Loans.") At December 31, 1998, the Company's loan portfolio included
$208.9 million in fixed-rate mortgage loans of which $3.9 million were held for
sale.
4
<PAGE>
The Company's net loan portfolio, including loans held for sale, totaled
$360.7 million at December 31, 1998, representing approximately 61.0% of its
total assets. The majority of the Company's loans are secured by real estate and
are made within Plymouth County, although the Company also purchases loans in
other areas of the United States. Generally, loans purchased outside of
Massachusetts are well collateralized and reflect an adequate payment history.
Approximately 34.5% of the Company's total loan portfolio represent
owner-occupied first mortgages located outside of Massachusetts. The two states
(other than Massachusetts) in which the Company has its largest concentrations
of residential loans were California and Rhode Island in which there were
$33,000,000 and $18,000,000, of loans, respectively. No other states had a 5% or
greater concentration.
The Company originated $30.1 million in commercial and commercial real
estate loans and $47.0 million in residential first mortgage loans during the
year ended December 31, 1998. Of the latter amount, loans aggregating $11.0
million were retained for the Company's own portfolio, of which approximately
$3.9 million were held for sale at December 31, 1998, and loans aggregating
$32.1 million were sold in the secondary market. As of December 31, 1998, loan
commitments to borrowers or potential borrowers of $25.3 million were
outstanding. These commitments included $2.6 million under existing construction
loans, $11.1 million in residential and commercial and commercial real estate
loans, $11.6 million under existing lines of credit (including home equity
loans). Additionally the Company had outstanding commitments to acquire
approximately $26.6 million of primarily 5 - and 7 - year adjustable residential
first mortgages.
RESIDENTIAL LOANS. The Company currently sells in the secondary market most
first mortgage loans originated on owner-occupied residential property. The
Company generally sells loans it has originated to investors on a non-recourse
basis. Prior to 1996, the Company had generally retained the servicing rights on
sold loans. Currently, the Company typically sells the servicing rights along
with the loans. The Company currently receives annual loan servicing fees, where
servicing was retained, generally ranging from .25% to .425% of the principal
balance of the loans plus all late charges on previous loan sales (generally
before 1996) where servicing rights were retained. At December 31, 1998, the
Company's loan servicing portfolio amounted to $153.2 million.
As of December 31, 1998, the outstanding balance of residential first
mortgage loans totaled $270.9 million or 73.8% of the gross loans in the
Company's loan portfolio. Residential first mortgage loans purchased or
originated are generally written in amounts up to 95% of value if the property
is owner-occupied. Borrowers on residential first mortgage loans with a
loan-to-value ratio in excess of 80% are required to carry private mortgage
insurance. Adjustable-rate mortgage loans to owner occupants of one- to
four-family residential property are subject to certain requirements and
limitations under guidelines issued by the Massachusetts Commissioner of Banks
(the "Commissioner"), including limitations on the amount and frequency of
changes in interest rates.
In most cases, the Company requires the residential first mortgage loans it
originates or purchases to meet Federal National Mortgage Association and
Federal Home Loan Mortgage Corporation standards in order to provide for the
flexibility to sell such loans in the secondary market.
5
<PAGE>
On March 8, 1999, the Company announced that the Bank had signed a
definitive purchase and sale agreement to acquire all of the outstanding capital
stock of Old Colony Mortgage Corporation ("Old Colony"). Headquartered in
Brockton, Massachusetts, Old Colony has offices in Plymouth, Fall River and
Auburn and originated over $125 million in residential mortgages in 1998. This
acquisition will enhance the Company's mortgage production capabilities in the
future and at the same time expands the products that the Company can offer
customers. Currently all of Old Colony's production is sold in the secondary
market on a servicing released basis.
HOME EQUITY AND SECOND MORTGAGE LOANS. The Company offers home equity
loans, which are revolving lines of credit secured by the equity in the
borrower's residence. The majority of home equity loans have interest rates that
adjust with movements in the prime lending rate although the Company does offer
fixed rate home equity loans. Home equity loans are currently written in amounts
from $7,500 to $100,000, but generally not more than the difference between 80%
of the appraised value of the property and the outstanding balance of the
existing first mortgage. However, home equity loans with higher loan-to-value
ratios up to 90% are available on a limited basis provided certain underwriting
criteria are met. Generally home equity loans must have a current appraisal of
the value of the mortgaged property at origination. At December 31, 1998, the
Company had in its portfolio approximately $20.3 million of outstanding home
equity and second mortgage loans and unused commitments amounting to $11.1
million.
RESIDENTIAL AND COMMERCIAL CONSTRUCTION AND COMMERCIAL AND COMMERCIAL REAL
ESTATE LOANS. The Company also originates residential construction loans and,
from time to time, commercial construction and other commercial real estate
loans. Most construction loans are for residential single-family dwellings. They
are usually made with construction terms of no more than one year (residential
construction-to-permanent financing loans are offered with a 30-year loan)
post-construction mortgage. The Company generally makes construction loans to
builders who have pre-sold the homes to the future occupants. In most cases,
permanent financing is arranged through the Company on properties for which the
Company has been the construction lender. It is the Company's policy to require
on-site inspections before releasing funds on construction loans. Inspections on
construction loans are generally performed by third-party inspectors. At
December 31, 1998, gross construction loans totaled $7.1 million, or 1.9% of the
Company's total loan portfolio.
Commercial real estate loans generally relate to properties which are
typically non-owner occupied, income producing such as shopping centers, small
apartment buildings and other types of commercial properties. Commercial real
estate loans are generally written for maximum terms of 5 years, and interest
rates on these loans generally are fixed. Currently, commercial real estate
loans are generally written in amounts up to $3,000,000 and are usually made in
Massachusetts counties of Plymouth, Norfolk, Bristol and Barnstable. At December
31, 1998, the Company had a total of $50.5 million of commercial real estate
loans, or 13.8% of the Company's total loan portfolio. The Company plans to
maintain its emphasis on commercial real estate lending into 1999 in an attempt
to further expand the portfolio, although commercial (business) loans as
described below are preferred.
6
<PAGE>
Commercial loans are generally provided to small-to-medium-sized businesses
located within the Company's market area. Commercial loans may be structured as
term loans or as revolving lines of credit. Commercial loans generally have a
repayment schedule of five years or less, with interest rates which float in
relation to the Wall Street Journal prime rate. The majority of commercial loans
are collateralized by equipment, machinery, receivables, inventory or other
corporate assets. In addition, the Bank generally obtains personal guarantees
from the principals of the borrower for virtually all of its commercial loans.
At December 31, 1998, the Company had approximately $9.5 million of commercial
(non-real estate) loans outstanding, up from $7.6 million at December 31, 1997.
The Company is emphasizing this type of lending as a continued key business
focus in the future.
Commercial, commercial construction and commercial real estate lending
entails greater risk than residential mortgage (including residential
construction) lending to owner occupants. Compared to residential mortgage loans
to owner occupants, the repayment of these types of loans is more dependent on
the underlying business and financial condition of the borrower and/or cash
flows from leases on the subject properties and, in the case of construction
loans, the economic viability of the project, and is more susceptible to adverse
future developments. Since 1996, the Company has emphasized commercial,
commercial real estate or commercial construction lending and intends to
continue to place an emphasis on commercial, commercial construction and
commercial real estate loan originations.
CONSUMER LOANS. The Company also makes a variety of consumer loans, such as
new and used automobile and boat loans, unsecured loans, education loans, and
passbook and stock-secured loans. Education loans are periodically sold in the
secondary market. The Company's consumer loans totaled $8.8 million at December
31, 1998, representing 2.4% of its total loan portfolio.
7
<PAGE>
COMPOSITION OF LOAN PORTFOLIO. The following table shows the composition of
the Company's loan portfolio by type of loan.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------
1998 1997 1996
------------------- ---------------------- ----------------------
Percent Percent Percent
to Gross to Gross to Gross
Amount Loans Amount Loans Amount Loans
--------- ----- --------- ----- --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Conventional $ 270,887 73.8% $ 249,165 74.1% $ 236,635 77.7%
Second mortgages and home equity 20,339 5.5 20,392 6.1 17,368 5.7
Commercial real estate 50,493 13.8 39,341 11.7 24,718 8.1
Construction 7,109 1.9 7,681 2.3 5,956 2.0
--------- ----- --------- ----- --------- -----
Total mortgage loans 348,828 95.0 316,579 94.2 284,677 93.5
--------- ----- --------- ----- --------- -----
Less:
Due to borrowers on incomplete loans (2,557) (2,166) (2,758)
Net deferred loan fees and unearned
discounts (626) (813) (986)
--------- --------- ---------
Subtotal 345,645 313,600 280,933
Commercial loans:
Unsecured lines of credit 211 0.1 245 0.1 324 0.1
Secured and unsecured 9,262 2.5 7,399 2.2 4,210 1.4
--------- ----- --------- ----- --------- -----
Subtotal 9,473 2.6 7,644 2.3 4,534 1.5
--------- ----- --------- ----- --------- -----
Consumer loans:
Indirect automobile 158 -- 1,263 0.4 4,355 1.4
Personal 1,393 0.4 1,562 0.4 1,625 0.5
Education 62 -- 423 0.1 509 0.2
Passbook and stock secured 6,951 1.9 8,323 2.5 8,416 2.8
Home improvement 257 0.1 381 0.1 485 0.1
--------- ----- --------- ----- --------- -----
Total consumer loans 8,821 2.4 11,952 3.5 15,390 5.1
----- -----
Net deferred loan costs (fees) (127) (124) (76)
--------- --------- ---------
Subtotal 8,694 11,828 15,314
--------- --------- ---------
Total loans 363,812 333,072 300,781
Less allowance for loan losses (3,077) (2,280) (1,811)
--------- --------- ---------
Loans, net 360,735 330,792 298,970
--------- --------- ---------
Add (recapitulation):
Due to borrowers on incomplete loans 2,557 2,166 2,758
Net deferred loan fees and unearned
discounts 753 937 1,062
Allowance for loan loss 3,077 2,280 1,811
--------- --------- ---------
Loans, gross $ 367,122 100.0% $ 336,175 100.0% $ 304,601 100.0%
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
<CAPTION>
At December 31,
------------------------------------------------
1995 1994
---------------------- --------------------
Percent Percent
to Gross to Gross
Amount Loans Amount Loans
--------- ----- --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
Conventional $ 200,368 75.6% $158,607 65.6%
Second mortgages and home equity 18,027 6.8 19,756 8.2
Commercial real estate 17,622 6.6 26,961 11.1
Construction 6,805 2.5 7,017 2.9
--------- ----- --------- -----
Total mortgage loans 242,822 91.5 212,341 87.8
--------- ----- --------- -----
Less:
Due to borrowers on incomplete loans (2,499) (2,850)
Net deferred loan fees and unearned
discounts (940) (1,005)
--------- ---------
Subtotal 239,383 208,486
Commercial loans:
Unsecured lines of credit 477 0.2 677 0.2
Secured and unsecured 1,861 0.7 1,772 0.8
--------- ----- --------- -----
Subtotal 2,338 0.9 2,499 1
--------- ----- --------- -----
Consumer loans:
Indirect automobile 10,049 3.8 18,738 7.7
Personal 1,715 0.6 1,726 0.7
Education 728 0.3 746 0.3
Passbook and stock secured 6,980 2.6 5,320 2.2
Home improvement 675 0.3 599 0.3
--------- ----- --------- -----
Total consumer loans 20,147 7.6 27,129 11.2
----- -----
Net deferred loan costs (fees) 150 395
--------- ---------
Subtotal 20,297 27,524
--------- ---------
Total loans 262,018 238,459
Less allowance for loan losses (1,433) (2,845)
--------- ---------
Loans, net 260,585 233,614
--------- ---------
Add (recapitulation):
Due to borrowers on incomplete loans 2,499 2,850
Net deferred loan fees and unearned
discounts 790 610
Allowance for loan loss 1,433 2,845
--------- ---------
Loans, gross $ 265,307 100.0% $ 241,919 100.0%
--------- ----- --------- -----
--------- ----- --------- -----
</TABLE>
8
<PAGE>
ORIGINATION AND UNDERWRITING. Residential and consumer loan originations
are developed by the Company's officers and lending personnel from a number of
sources, including referrals from branches, realtors, builders, attorneys,
customers and Directors. The Company employs three retail loan representatives
who are paid a base salary plus incentives for consumer and residential loans
originated for the Company. Consumer loan services are also solicited by direct
mail to existing customers. Advertising media is also used to promote loans. The
Company currently receives origination fees on most new first mortgage loans
that it originates. Fees to cover the costs of appraisals and credit reports are
also collected. In addition, the Company collects late charges on real estate
loans.
Commercial and commercial real estate loan originations are developed by
the Company's officers and lending personnel from a number of sources, including
referrals from attorneys, CPAs, customers, realtors , direct solicitation and
Directors. The Company employs four commercial loan officers who are paid a
salary and performance bonus. Loans originated by these officers are maintained
in the commercial loan portfolio.
Applications for all types of loans offered by the Company are taken at all
of the Company's offices, and in some cases over the phone, and referred to the
Company's operations center or commercial loan division for processing. The
Company's loan underwriting process is performed in accordance with a policy
approved by the Board of Directors. The process includes but is not limited to
the use of credit applications, property appraisals, verification of an
applicant's credit history, and analysis of financial statements, employment and
banking relationships, and other measures management deems appropriate in the
circumstances.
All loans to Directors must be approved by the full Board of Directors
after review by management. Commercial loans are prohibited to Executive
officers, officers or employees of the Company or the Bank.
9
<PAGE>
The following table shows the Company's loans by maturity or repricing
interval at December 31, 1998.
<TABLE>
<CAPTION>
Within 1 - 5 Over 5
1 Year Years Years Total
------- ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Conventional mortgages ................... $ 61,457 $169,973 $ 38,831 $270,261
Commercial real estate loans ............. 14,159 36,334 -- 50,493
Second mortgages and home equity ......... 12,425 4,966 2,948 20,339
Construction, net ........................ 4,552 -- -- 4,552
Commercial loans ......................... 9,346 -- -- 9,346
Other loans .............................. 2,959 5,862 -- 8,821
-------- -------- -------- --------
Total ............................... $104,898 $217,135 $ 41,779 $363,812
-------- -------- -------- --------
-------- -------- -------- --------
Percent of total ......................... 28.8% 59.7% 11.5% 100.0%
</TABLE>
The following table shows the composition of fixed-rate and adjustable-rate
loans, excluding $8.9 million in other loans, as set forth above by maturity or
repricing interval at December 31, 1998.
<TABLE>
<CAPTION>
Within 1 - 5 Over 5
1 Year Years Years Total
------ ----- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Fixed-rate residential mortgages ....... $ 35,808 $129,965 $ 41,779 $207,552
Construction loans, net - all fixed .... 4,552 -- -- 4,552
Adjustable-rate residential mortgages 38,074 44,974 -- 83,048
Commercial real estate loans - all
fixed rate ............................. 14,159 36,334 -- 50,493
Commercial loans - all variable rate.... 9,346 -- -- 9,346
-------- -------- -------- --------
Total fixed and adjustable-rate loans... $101,939 $211,273 $ 41,779 $354,991
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
NON-PERFORMING ASSETS. The Company attempts to manage its loan portfolio so
as to recognize problem loans at an early point in order to manage each
situation and thereby minimize losses. Interest on loans is generally not
accrued when such interest is not paid for a three month period and/or in the
judgment of management, the collectibility of the principal or interest becomes
doubtful. When a loan is placed on a non-accrual status, all interest previously
accrued but not collected is reversed against interest income in the current
period. Interest income is sometimes subsequently recognized only to the extent
that cash payments are received. Those loans that continue to accrue interest
after reaching a three month
10
<PAGE>
delinquency status generally include only consumer loans, although, on occasion,
some residential mortgage loans have been included. Real estate acquired by
foreclosure and other real estate owned is stated at the lower of the carrying
value of the underlying loan or the estimated fair value less estimated selling
costs. For further discussion of non-performing assets, see "Item 7 -
Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations."
During 1995, the Company sold, at a discount, of a group of approximately
$9.2 million of non-performing and high maintenance loans. The loans consisted
of approximately $5.7 million of loans which were on non-accrual and certain
other loans which, although performing, were expected to require a higher than
average level of attention and out of pocket costs in order to maintain
performance and/or to potentially foreclose upon or workout. Those loans were
sold at approximately 64% of par. The loss associated with this sale was
reflected as a charge-off to the allowance for possible loan losses which
necessitated an additional provision for possible loan losses of $1,654,000 in
1995.
At December 31, 1998, non-performing assets were 0.12% of total assets,
compared with 0.18% and 0.34% at December 31, 1997 and 1996, respectively.
The following table sets forth non-performing assets at the dates
indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------
1998 1997 1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis-
impaired ......................................... $ 681 $ 622 $1,028 $ 485 $5,249
Accruing loans past due 90 days or more
as to principal or interest ...................... 50 91 144 243 153
------ ------ ------ ------ ------
Total non-performing loans ....................... 731 713 1,172 728 5,402
Real estate acquired by foreclosure and other real
estate owned ..................................... -- 265 500 1,070 1,272
------ ------ ------ ------ ------
Total non-performing assets ...................... $ 731 $ 978 $1,672 $1,798 $6,674
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
Impaired loans totaling $77,000 and $293,000, at December 31, 1998 and
1997, respectively, required an allocation of $20,000 and $45,000, respectively
of the allowance for possible loan losses. The remaining impaired loans did not
require any allocation of the reserve for possible loan losses.
11
<PAGE>
The average balance of impaired loans was approximately $622,000, $966,000
and $721,000 in 1998, 1997 and 1996, respectively. The total amount of interest
income recognized on impaired loans during 1998, 1997 and 1996 was approximately
$55,000, $50,000 and $48,500 respectively, which approximated the amount of cash
received for interest during that period. The Company has no commitments to lend
additional funds to borrowers whose loans have been deemed to be impaired.
Currently, in the single family home sector, prices are stable and
properties are not taking as long to sell. Additionally, Boston area vacancy
rates on commercial real estate properties have remained relatively low in
comparison to the early 1990's which has helped to support the market values of
those properties. The Company cannot predict the impact on future provisions for
possible loan losses that may result from future market conditions. While the
regional economy is stable and the local residential real estate market has been
strong over the past couple of years, it is difficult to predict to what extent
such stabilization and overall strong economic conditions will continue.
12
<PAGE>
ALLOWANCE FOR POSSIBLE LOAN LOSSES. The following table summarizes changes
in the allowance for possible loan losses and other selected statistics for the
years indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $2,280 $ 1,811 $1,433 $2,845 $ 2,051
Loans charged off:
Real estate - residential 18 100 48 1,090 245
Real estate - commercial - 20 - 2,496 88
Real estate - construction - - - - -
Commercial - - - 18 22
Consumer 206 246 247 273 66
-------- -------- -------- -------- --------
Total loans charged-off 224 366 295 3,877 421
-------- -------- -------- -------- --------
Loan recoveries:
Real estate - residential 7 5 17 32 -
Real estate - commercial 119 38 120 145 1
Real estate - construction - - - - 6
Consumer 135 162 56 55 16
Commercial - - - - 5
-------- -------- -------- -------- --------
Total recoveries 261 205 193 232 28
-------- -------- -------- -------- --------
Net charge-offs (recoveries) (37) 161 102 3,645 393
-------- -------- -------- -------- --------
Reserves acquired from Hull - - - - 577
Provision charged to operations 760 630 480 2,233 610
-------- -------- -------- -------- --------
Balance, end of year $3,077 $ 2,280 $ 1,811 $ 1,433 $ 2,845
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Average loans outstanding, net $335,871 $304,925 $282,530 $243,949 $222,313
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Ratio of net charge-offs (recoveries) to
average loans outstanding, net (.01)% .05% .04% 1.49% .18%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Ratio of allowance for possible loan
losses to gross loans at year end .85% .68% .60% .55 1.18%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Ratio of allowance for possible loan
losses to non-performing loans 420.9% 319.8% 154.5% 196.8% 52.7%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
13
<PAGE>
The following table summarizes the allocation of the allowance for possible loan
losses for the years indicated:
<TABLE>
<CAPTION>
At December 31,
1998 1997 1996 1995 1994
-----------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in category in category in category in category in category
to gross to gross to gross to gross to gross
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate - residential $ 899 79.3% $ 869 80.2% $ 854 83.5% $ 743 82.4% $ 863 73.8%
Real estate - commercial 479 13.8 372 11.7 224 8.1 226 6.6 713 11.1
Real estate - construction 71 1.9 77 2.3 60 1.9 68 2.5 70 2.9
Commercial 189 2.6 153 2.3 91 1.5 47 .9 25 1.0
Consumer 195 2.4 218 3.5 200 5.0 195 7.6 440 11.2
Unallocated 1,244 N/A 591 N/A 382 N/A 154 N/A 734 N/A
------- ----- ------ ----- ------- ----- ------ ----- ------ -----
Total $3,077 100.0% $2,280 100.0% $1,811 100.0% $1,433 100.0% $2,845 100.0%
------- ----- ------ ----- ------ ----- ------ ----- ------ -----
------- ----- ------ ----- ------ ----- ------ ----- ------ -----
</TABLE>
The Company uses two methodologies to establish ranges of exposure to
measure the adequacy of the allowance for possible loan losses. The first or
"base" methodology is the Specific Identification Method. This method relies
upon the Company's risk monitoring systems, timely identification of all
potential problem credits and an accurate evaluation of related specific loss
exposures. Additionally, this methodology employs the use of "normalized"
charge-off or loss histories by loan category in order to establish reserves for
those loans not specifically reviewed. The Company also utilizes a Risk Rating
Approach which uses "actual" loss histories to determine reserve levels on
"pass-rated" portions of its loan portfolios while utilizing regulatory reserve
percentages for adversely classified loans. The Company then uses a Migration
Approach which utilizes the Risk Rating Approach adjusted for potential
migration of non-pass rated credits to a more adverse category. This methodology
recognizes that no risk identification system has comprehensive knowledge at a
point in time and therefore, there is an inherent unidentified risk of loss
which is not accurately characterized or identified in the loan portfolio. As of
December 31, 1998, it was noted that the Specific Identification Methodology,
which was used for the compilation of the table above for consistency purposes,
demonstrates the lowest requirement. The Risk Rating/Migration methodologies
supported allocated reserve levels of up to $3,015,000 at December 31, 1998.
Therefore, the allowance for possible loan losses is within the range of
estimated exposures and is deemed adequate but not excessive by management.
The Company's provision for possible loan losses in 1998 was $760,000,
compared to $630,000 and $480,000 in 1997 and 1996, respectively. The provision
for 1998 exceeded 1997 levels as did 1997 levels over 1996 levels reflecting the
increased risk associated with the Company's emphasis of commercial and
commercial real estate lending activities as evidenced by the increase in "watch
assets" in the commercial loan portfolio during 1998.
14
<PAGE>
INVESTMENT ACTIVITIES
The Company's investment portfolio is currently managed in accordance with
an investment policy approved by the Board of Directors. The Company's
investments are subject to the laws of the Commonwealth of Massachusetts,
including regulations of the Commissioner, and certain provisions of the federal
law.
The following table sets forth certain information regarding the carrying
value of the Company's investment portfolio, excluding mortgage-backed
securities and Federal Home Loan Bank stock:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Short-term investments ........................... $ 143 $ 88 $ 77
Federal funds sold ............................... 4,150 75 75
------- ------- -------
Total ............................................ $ 4,293 $ 163 $ 152
------- ------- -------
------- ------- -------
Percent of total assets .......................... .73% .03% .03%
Investment securities:
U. S. Government and federal agency obligations,
at market ........................................ $26,629 $30,890 $18,498
Other bonds and obligations, at market ........... 20,221 3,120 1,138
------- ------- -------
Subtotal ......................................... 46,850 34,010 19,636
Marketable equity securities, at market .......... 4,796 5,027 4,411
------- ------- -------
Total investment securities ...................... $51,646 $39,037 $24,047
------- ------- -------
------- ------- -------
Percent of total assets .......................... 8.7% 7.3% 4.9 %
</TABLE>
A schedule of the maturity distribution of investment securities held by
the Company, other than equity securities and FHLB stock, and the related
weighted average yield, at December 31, 1998 follows:
15
<PAGE>
<TABLE>
<CAPTION>
Within one After one but After five but After ten
year within five years within ten years years
--------------- ------------------ ------------------ -------------------
Amor- Weighted Amor- Weighted Amor- Weighted Amor- Weighted
tized Average tized Average tized Average tized Average
Cost Yield Cost Yield Cost Yield Cost Yield
---- --- ------- ---- ------- ---- ------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Government and federal
agency obligations ......... $-- --% $ 3,700 7.04% $21,929 6.88% $ 1,000 6.75%
Other bonds and obligations... -- -- 1,102 7.56% -- -- 19,119 7.15
--- --- ------- ---- ------- ---- ------- ----
Total $-- --% $ 4,802 7.16% $21,929 6.88% $20,119 7.13%
--- --- ------- ---- ------- ---- ------- ----
--- --- ------- ---- ------- ---- ------- ----
</TABLE>
At December 31, 1998, the Company had six mortgage backed securities and
two corporate bonds which had a total amortized cost of $39,942,385, each of
which individually had a book value in excess of ten percent of stockholders'
equity, and were not obligations of the U. S. Government or federal agencies.
SOURCES OF FUNDS
GENERAL. Deposits and borrowings are the Company's primary sources of funds
for investment. The Company also derives funds from operations, amortization and
prepayments of loans and sales of assets. Deposit flows vary significantly and
are influenced by prevailing interest rates, money market conditions, economic
conditions, location of Company offices and competition.
DEPOSITS. Most of the Company's deposits are derived from customers who
work or reside in the Company's primary service area. The Company's deposits
consist of passbook savings accounts, special notice accounts, NOW accounts,
money market deposit accounts, club accounts, money market certificates,
negotiated rate certificates and term deposit certificates. The Company also
offers Individual Retirement Accounts, which currently include a one-year
variable rate account with monthly interest rate adjustments, a 2.5 year
fixed-rate account, or a 3- or 4-year fixed-rate account. In addition, the
Company currently offers non-interest NOW accounts for commercial customers and
individuals. Although in previous years the Company has solicited brokered
deposits, at December 31, 1998 there were no such deposits.
At December 31, 1998, the Company's outstanding certificates of deposit
with balances in excess of $100,000 are scheduled to mature as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Three months or less $ 9,847
Over three to six months 7,949
Over six to twelve months 7,015
Over twelve months 7,576
-------
$32,387
-------
-------
</TABLE>
16
<PAGE>
For information regarding the average amounts of and rates paid on deposit
liabilities, see "Item 7 - Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations--Liquidity and Capital Resources."
BORROWINGS. For a discussion of borrowings, see "Item 8 - Notes 9 and 10 to
the Consolidated Financial Statements" and "Item 7 - Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations-Liquidity
and Capital Resources".
INTEREST RATE HEDGE STRATEGY. For a discussion of the Company's interest
rate hedge strategy, see "Item 8 - Note 5 to the Consolidated Financial
Statements".
OTHER ACTIVITIES
SAVINGS BANK LIFE INSURANCE. The Company sells savings bank life insurance
as an agent but not as an issuer and receives a commission on the sale.
OTHER. The Company also offers safe deposit box services, an automated
teller machine and drive-up banking services. The Company also provides its
borrowers the opportunity to purchase life, accident and disability insurance.
The Company offered investment services (including annuities) to its customers
in 1998 through a third-party broker-dealer, and its insurance agency affiliate.
The third-party paid rent to the Company for the space it occupied, and also
paid fees to the Company based upon referrals of the Company's customers to
purchase alternative investments, regardless of whether or not a sale was made
to the customer. In January 1999, the Company entered into a new third-party
contract relating to the sale of non-deposit investment products to the
Company's customers. The new contract replaces the original third-party
arrangement. Under the new contract, the Company will receive, as compensation,
a percentage of the sales of investment products to the Company's customers.
SUPERVISION AND REGULATION
As an FDIC-insured, state-chartered bank, the Bank is subject to
supervision and regulation by the Commissioner and the FDIC and is subject to
periodic examination. The Company is subject to regulation and supervision of
the Federal Reserve as a bank holding company.
COMPETITION
The Company faces substantial competition both in attracting deposits and
in originating loans.
Competition in originating loans comes generally from other thrift
institutions, commercial banks, credit unions, finance companies, insurance
companies, other institutional lenders and mortgage companies. The Company
competes for loans principally on the basis of interest rates and loan fees, the
types of loans originated, service and geographic location.
17
<PAGE>
In attracting deposits, the Company's primary competitors are other savings
banks, commercial banks and co-operative banks, credit unions, and mutual funds.
Other competition for deposits comes from government securities as investments.
The Company's attraction and retention of deposits depends on its ability to
provide investment opportunities that satisfy the requirements of investors with
respect to rate of return, liquidity, risk and other factors. The Company
attracts a significant amount of its deposits from the communities in which its
offices are located, and, accordingly, competition for these deposits comes
principally from other thrift institutions and commercial banks located in the
same geographic areas. The Company competes for these deposits by attempting to
offer competitive rates, convenient branch locations, and convenient business
hours and by attempting to build an active, civic-spirited image in these
communities.
Financial institutions that are not now located within the Company's market
area may find entry in the Company's market area attractive. Such entry could
have an adverse effect on the Company's growth or profitability. The Company's
potential competitors may have substantially greater financial and other
resources than the Company. In addition, increased competition for deposits has
had an impact on the rates which the Company pays on certificates of deposit.
EMPLOYEES
As of December 31, 1998, the Bank had 197 full-time employees, consisting
of 25 full-time officers and 115 full-time non-officers, as well as 57 part-time
employees. None of the Company's employees is represented by a union or other
labor organization. The Company provides its employees with a comprehensive
range of employee benefit programs. Management believes that its employee
relations are good.
18
<PAGE>
ITEM 2. PROPERTIES.
The following table sets forth certain information relating to real estate
owned or leased by the Company at December 31, 1998.
<TABLE>
<CAPTION>
Original Lease
Year Owned Lease Renewal
Opened or Leased Term Option
------ --------- ---- ------
<S> <C> <C> <C> <C>
Main Office:
533 Washington St.
Abington, MA 1929 Owned -- --
Branches:
319 Monponsett Street
Halifax, MA 1975 Owned -- --
584 Washington St.
Whitman, MA 1992 Owned -- --
157 Summer Street
Kingston, MA 1995 Leased 20 years 10 years
175 Center Street
Pembroke, MA 1992 Owned -- --
523 Nantasket Ave.
Hull, MA 1994 Leased 15 years --
778 S. Franklin St.
Holbrook MA 1995 Leased 10 years 2-5 years
739 Chief Justice Cushing Way
Cohasset, MA 02025 1997 Leased 5 years 2-5 years
121 Memorial Parkway
Randolph, MA 02368 1998 Leased 5 years 2-5 years
430 Liberty Street
Hanson, MA 02341 1998 Leased 5 years 2-5 years
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Original Lease
Year Owned Lease Renewal
Opened or Leased Term Option
------ --------- ---- ------
<S> <C> <C> <C> <C>
Operation Center/Corporate Office
536 Washington St.
Abington, MA 1989 Owned -- --
Administrative Offices:
538 Bedford St.
Abington, MA 1995 Leased 2 Years 18 months
</TABLE>
20
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in various legal matters, none of which is
believed by management to be material to the consolidated financial
statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
21
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDER MATTERS.
The common stock of the Company is currently listed on the Nasdaq Stock
Market National Market System (NMS) under the symbol "ABBK".
The table below sets forth the range of high and low sales prices for the
stock of the Company for the quarters indicated. Market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not necessarily represent actual transactions.
Transactions through January 31, 1997 are for common stock of the Bank.
Transactions after that date are for common stock of the Company.
<TABLE>
<CAPTION>
Price Dividends
High Low Declared
---- --- --------
<S> <C> <C> <C>
1999
(through March 5, 1999) $ 15 1/8 $ 12 3/4 $ --
1998
----
4th quarter 17 12 $.05
3rd quarter 19 1/2 12 1/2 $.05
2nd quarter 22 3/4 17 1/2 $.05
1st quarter 22 1/2 18 3/4 $.15
1997
----
4th quarter 23 1/2 15 5/8 $.05
3rd quarter 17 12 3/4 $.05
2nd quarter 13 10 1/4 $.05
1st quarter 11 5/8 9 1/2 $.05
1996
----
4th quarter 10 7/8 8 7/16 $.05
3rd quarter 9 7 3/4 $.05
2nd quarter 8 1/8 7 1/4 $.05
1st quarter 8 7/8 7 23/32 $.05
</TABLE>
22
<PAGE>
As of March 6,1999, the Company had approximately 803 stockholders of
record who held 3,347,300 outstanding shares of the Company's Common Stock. The
number of stockholders indicated does not reflect the number of persons or
entities who hold their common stock in nominee or "street" name through various
brokerage firms. If all of such persons are included, the Company believes that
there are approximately 1,100 beneficial owners of the Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
Information required by Item 6 of this Form is incorporated by reference
herein from the section of the Company's Annual Report entitled "Financial
Highlights."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information required by Item 7 of this Form is incorporated by reference
herein from the section of the Company's Annual Report entitled "Management's
Discussion and Analysis". Certain Guide 3 information which is required by Item
7 is included in Item 1 of this Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information required by Item 7A of this Form is incorporated by reference
herein from the section of the Company's Annual Report entitled "Management's
Discussion and Analysis."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by Item 8 of this Form is incorporated by reference
from the sections of the Company's Annual Report entitled Report of Independent
Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Comprehensive Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
23
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS OR ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
24
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by Item 10 of this Form is incorporated by reference
herein from the Company's Proxy Statement relating to the 1999 Annual Meeting of
Stockholders of the Company.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Item 11 of this Form is incorporated by reference
herein from the Company's Proxy Statement relating to the 1999 Annual Meeting of
Stockholders of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by Item 12 of this Form is incorporated by reference
herein from the Company's Proxy Statement relating to the 1999 Annual Meeting of
Stockholders of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by Item 13 of this Form is incorporated by reference
here in from the Company's Proxy Statement related to the 1999 Annual Meeting of
Stockholders of the Company.
7 PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Contents
1) Financial Statements. See Part II Item 8 of this Report.
2) Financial Statement Schedules. All financial statement
schedules have been omitted because they are not applicable, the data
is not significant or the required information is shown elsewhere in
this report.
25
<PAGE>
3) Exhibits
2.1 Plan of Reorganization and Acquisition dated as of
October 15, 1996 between the Company and Abington
Savings Bank incorporated by reference to the Company's
Registration Statement on Form 8-A, effective January
13, 1997.
3.1 Articles of Organization of the Company incorporated by
reference to the Company's Registration Statement on
Form 8-A, effective January 13, 1997.
3.2 By-Laws of the Company, incorporated by reference to the
Company's Registration Statement on Form 8-A, effective
January 13, 1997.
4.1 Specimen stock certificate for the Company's Common
Stock incorporated by reference to the Company's
Registration Statement on Form 8-A, effective January
31, 1997.
4.2 Form of Indenture between Abington Bancorp, Inc. and
State Street Bank and Trust Company incorporated by
reference to Exhibit 4.1 of the Registration Statement
on Form S-2 of the Company and Abington Bancorp Capital
Trust, filed on May 12, 1998.
4.3 Form of Junior Subordinated Debenture incorporated by
reference to Exhibit 4.2 of the Registration Statement
on Form S-2 of the Company and Abington Bancorp Capital
Trust, filed on May 12, 1998.
4.4 Form of Amended and Restated Trust Agreement by and
among the Company, State Street Bank and Trust Company,
Wilmington Trust Company and the Administrative Trustees
of the Trust incorporated by reference to Exhibit 4.4 of
the Registration Statement on Form S-2 of the Company
and Abington Bancorp Capital Trust, filed on May 12,
1998.
4.5 Form of Preferred Securities Guarantee Agreement by and
between the Company and State Street Bank and Trust
Company incorporated by reference to Exhibit 4.6 of the
Registration Statement on Form S-2 of the Company and
Abington Bancorp Capital Trust, filed on May 12, 1998.
*10.1 (a) Amended and Restated Special Termination Agreement
dated as of January 1997 among the Company, the Bank and
James P. McDonough incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996 filed on March 31, 1997.
26
<PAGE>
*(b) Amendment to Amended and Restated Special
Termination Agreement, dated as of July 1, 1997 among
the Company, the Bank and James P. McDonough,
incorporated by reference to the Company's quarterly
report on Form 10-Q for the second quarter of 1997,
filed on August 13, 1997.
*10.2 Special Termination Agreement dated as of November 2,
1998 among the Company, the Bank and Kevin M. Tierney,
incorporated by reference to the Company's quarterly
report on Form 10-Q for the third quarter of 1998,
filed on November 12, 1998.
*10.3 Special Termination Agreement dated as of May 28, 1998
among the Company, the Bank and John R. Sylva,
incorporated by reference to the Company's quarterly
report on Form 10-Q for the second quarter of 1998,
filed on August 10, 1998.
*10.4 (a) Amended and Restated Special Termination Agreement
dated as of January 31, 1997 among the Company, the Bank
and Mario A. Berlinghieri incorporated by reference to
the Company's Annual Report for the year ended December
31, 1996 on Form 10-K filed on March 31, 1997.
(b) Amendment to Amended and Restated Special
Termination Agreement, dated as of July 1, 1997 among
the Company, the Bank and Mario A. Berlinghieri,
incorporated by reference to the Company's quarterly
report on Form 10-Q for the second quarter of 1997,
filed on August 13, 1997.
(c) Amendment No. 2 to Amended and Restated Special
Termination Agreement, dated as of April 16, 1998, by
and among the Company, the Bank and Mario A.
Berlinghieri, incorporated by reference to the Company's
quarterly report on Form 10-Q for the first quarter of
1998, filed on May 8, 1998.
*10.5 Abington Bancorp, Inc. Incentive and Nonqualified Stock
Option Plan, as amended and restated to reflect holding
company formation incorporated by reference to the
Company's Annual Report for the year ended December 31,
1996 on Form 10-K filed on March 31, 1997.
*10.6 Management Incentive Compensation Program dated March
1997, incorporated by reference to the Company's
quarterly report on Form 10-Q for the second quarter of
1997, filed on August 13, 1997.
*10.7 Long Term Performance Incentive Plan dated July 1997,
incorporated by reference to the Company's quarterly
report on Form 10-Q for the second quarter of 1997,
filed on August 13, 1997.
27
<PAGE>
10.8 (a) Lease for office space located at 538 Bedford
Street, Abington, Massachusetts ("lease"), used for the
Bank's principal and administrative offices dated
January 1, 1996 incorporated by reference to the
Company's Annual Report for the year ended December 31,
1996 on Form 10-K filed on March 31, 1997. Northeast
Terminal Associates, Limited owns the property. Dennis
E. Barry and Joseph L. Barry, Jr., who beneficially own
more than 5% of the Company's Common Stock, are the
principal beneficial owners of Northeast Terminal
Associates, Limited.
(b) Amendment to Lease dated December 31, 1997,
incorporated by reference to the Company's Annual Report
for the year ended December 31, 1997 on Form 10-K filed
on March 25, 1998.
10.9 Dividend reinvestment and Stock Purchase Plan is
incorporated by reference herein to the Company's
Registration Statement on Form S-3, effective January
31, 1997.
*10.10 Abington Bancorp, Inc. 1997 Incentive and Nonqualified
Stock Option Plan, incorporated by reference herein to
Appendix A to the Company's proxy statement relating to
its special meeting in lieu of annual meeting held on
June 17, 1997, filed with the Commission on April 29,
1997.
*10.11 (a) Special Termination Agreement dated as of July 1,
1997 among the Company, the Bank and Robert M. Lallo,
incorporated by reference to the Company's quarterly
report on Form 10-Q for the second quarter of 1997,
filed on August 13, 1997.
(b) Amendment No. 1 to Special Termination Agreement,
dated April 16, 1998, by and among the Company, the Bank
and Robert M. Lallo, incorporated by reference to the
Company's quarterly report on Form 10-Q for the first
quarter of 1998, filed on May 8, 1998.
*10.12 Merger Severance Benefit Program dated as of August 28,
1997, incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the third quarter of
1997, filed on November 15, 1997.
*10.13 Supplemental Executive Retirement Agreement between the
Bank and James P. McDonough dated as of March 26, 1998,
incorporated by reference to the Company's quarterly
report on Form 10-Q for the first quarter of 1998, filed
on May 8, 1998.
28
<PAGE>
*10.14 Deferred Stock Compensation Plan for Directors,
effective July 1, 1998 incorporated by reference to
Appendix A to the Company's proxy statement (schedule
14A) for its 1998 Annual Meeting, filed with the
Commission on April 13, 1998.
11.1 A statement regarding the computation of earnings per
share is included in Item 8 of this Report.
13.1 Annual Report to Stockholders for the Year Ended
December 31, 1998 which is furnished for the information
of the Securities and Exchange Commission only and is
not deemed to be "filed" as part of this Report except
to the extent expressly incorporated by reference
herein.
21.1 Subsidiaries of the Company.
23.1 Consent of Accountants.
24.1 Power of Attorney is included on signature page
27.1 Financial Data Schedule, December 31, 1998
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the fourth quarter of
1998.
-------
* Management contract or compensatory plan or arrangement.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 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.
Date: March 25, 1999
By: /S/ JAMES P. MCDONOUGH
-----------------------------------------
James P. McDonough
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each individual whose signature appears
below constitutes and appoints James P. McDonough, his true and lawful
attorney-in-fact and agent with full power of substitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Form 10-K, and to file the same,
will all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
which he may deem necessary or advisable to be done in connection with this Form
10-K, as fully to all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said attorney-in-fact and agent, or any
substitute may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
behalf of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/S/ JAMES P. MCDONOUGH President and March 25, 1999
- ------------------------------ Chief Executive Officer;
James P. McDonough Director (Principal
Executive Officer)
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/S/ ROBERT M. LALLO Chief Financial Officer & Treasurer March 25, 1999
- -------------------------- (Principal Financial Officer)
Robert M. Lallo
/S/ BRUCE G. ATWOOD Director March 25, 1999
- --------------------------
Bruce G. Atwood
/S/ WILLIAM F. BORHEK Director March 25, 1999
- ---------------------------
William F. Borhek
/S/ RALPH B. CARVER, JR. Director March 25, 1999
- ---------------------------
Ralph B. Carver, Jr.
/S/ JOEL S. GELLER Director March 25, 1999
- ------------------------------
Joel S. Geller
/S/ RODNEY D. HENRIKSON Director March 25, 1999
- -------------------------
Rodney D. Henrikson
/S/ A. STANLEY LITTLEFIELD Director March 25, 1999
- ----------------------------
A. Stanley Littlefield
/S/ JAY TIMOTHY NOONAN Director March 25, 1999
- ------------------------
Jay Timothy Noonan
/S/ GORDON N. SANDERSON Director March 25, 1999
- -------------------------
Gordon N. Sanderson
/S/ JAMES J. SLATTERY Director March 25, 1999
- ------------------------------
James J. Slattery
/S/ WAYNE P. SMITH Director March 25, 1999
- ----------------------------
Wayne P. Smith
</TABLE>
31
<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 on Form 10-K for the year ended December 31, 1996 filed
on March 31, 1997.
32
<PAGE>
*(b) Amendment to Amended and Restated Special Termination
Agreement, dated as of July 1, 1997 among the Company, the Bank
and James P. McDonough, incorporated by reference to the
Company's quarterly report on Form 10-Q for the second quarter
of 1997, filed on August 13, 1997.
*10.2 Special Termination Agreement dated as of November 2, 1998 among
the Company, the Bank and Kevin M. Tierney, incorporated by
reference to the Company's quarterly report on Form 10-Q for
the third quarter of 1998, filed on November 12, 1998.
*10.3 Special Termination Agreement dated as of May 28, 1998 among the
Company, the Bank and John R. Sylva, incorporated by reference
to the Company's quarterly report on Form 10-Q for the second
quarter of 1998, filed on August 10, 1998.
*10.4 (a) Amended and Restated Special Termination Agreement dated as
of January 31, 1997 among the Company, the Bank and Mario A.
Berlinghieri incorporated by reference to the Company's Annual
Report for the year ended December 31, 1996 on Form 10-K filed
on March 31, 1997.
(b) Amendment to Amended and Restated Special Termination
Agreement, dated as of July 1, 1997 among the Company, the Bank
and Mario A. Berlinghieri, incorporated by reference to the
Company's quarterly report on Form 10-Q for the second quarter
of 1997, filed on August 13, 1997.
(c) Amendment No. 2 to Amended and Restated Special Termination
Agreement, dated as of April 16, 1998, by and among the Company,
the Bank and Mario A. Berlinghieri, incorporated by reference to
the Company's quarterly report on form 10-Q for the first
quarter of 1998, filed on May 8, 1998.
*10.5 Abington Bancorp, Inc. Incentive and Nonqualified Stock Option
Plan, as amended and restated to reflect holding company
formation incorporated by reference to the Company's Annual
Report for the year ended December 31, 1996 on Form 10-K filed
on March 31, 1997.
*10.6 Management Incentive Compensation Program dated March 1997,
incorporated by reference to the Company's quarterly report on
Form 10-Q for the second quarter of 1997, filed on August 13,
1997.
33
<PAGE>
*10.7 Long Term Performance Incentive Plan dated July 1997,
incorporated by reference to the Company's quarterly report on
Form 10-Q for the second quarter of 1997, filed on August 13,
1997.
10.8 (a) Lease for office space located at 538 Bedford Street,
Abington, Massachusetts ("Lease"), used for the Bank's principal
and administrative offices dated January 1, 1996 incorporated by
reference to the Company's Annual Report for the year ended
December 31, 1996 on Form 10-K filed on March 31, 1997.
Northeast Terminal Associates, Limited owns the property. Dennis
E. Barry and Joseph L. Barry, Jr., who beneficially own more
than 5% of the Company's Common Stock, are the principal
beneficial owners of Northeast Terminal Associates, Limited.
(b) Amendment to Lease dated December 31, 1997, incorporated by
reference to the Company's Annual Report for the year ended
December 31, 1997 on Form 10-K filed on March 25, 1998.
10.9 Dividend reinvestment and Stock Purchase Plan is incorporated by
reference herein to the Company's Registration Statement on Form
S-3, effective January 31, 1997.
*10.10 Abington Bancorp, Inc. 1997 Incentive and Nonqualified Stock
Option Plan, incorporated by reference herein to Appendix A to
the Company's proxy statement relating to its special meeting in
lieu of annual meeting held on June 17, 1997, filed with the
Commission on April 29, 1997.
*10.11 (a) Special Termination Agreement dated as of July 1, 1997 among
the Company, the Bank and Robert M. Lallo, incorporated by
reference to the Company's quarterly report on Form 10-Q for the
second quarter of 1997, filed on August 13, 1997.
(b) Amendment No. 1 to Special Termination Agreement, dated 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.
34
<PAGE>
*10.13 Supplemental Executive Retirement Agreement between the Bank and
James P. McDonough dated as of March 26, 1998, incorporated by
reference to the Company's quarterly report on Form 10-Q for the
first quarter of 1998, filed on May 8, 1998.
*10.14 Deferred Stock Compensation Plan for Directors, effective July
1, 1998 incorporated by reference to Appendix A to the Company's
proxy statement (schedule 14A) for its 1998 Annual Meeting,
filed with the Commission on April 13, 1998.
11.1 A statement regarding the computation of earnings per share is
included in Item 8 of this Report.
13.1 Annual Report to Stockholders for the Year Ended December 31,
1998 which is furnished for the information of the Securities
and Exchange Commission only and is not deemed to be "filed" as
part of this Report except to the extent expressly incorporated
by reference herein.
21.1 Subsidiaries of the Company.
23.1 Consent of Accountants.
24.1 Power of Attorney is included on signature page.
27.1 Financial Data Schedule, December 31, 1998
- ------------------------------------------------------
* Management contract or compensatory plan or arrangement.
35
<PAGE>
Present vision. Future sites.
ABINGTON BANCORP
1998 annual report
<PAGE>
mission statement
We will deliver such extraordinary service and value that our employees
and customers will tell their friends and associates about us.
contents
1 President's Message
10 Financial Highlights
12 Management's Discussion and Analysis
22 Report of Independent Public Accountants
23 Consolidated Balance Sheets
24 Consolidated Statements of Operations
25 Consolidated Statements of Changes in Stockholders' Equity
26 Consolidated Statements of Comprehensive Income
27 Consolidated Statements of Cash Flows
29 Notes to Consolidated Financial Statements
51 Stockholder Information
52 Corporate Information and Bank Directors & Officers
Inside Back Cover Corporate Profile
Back Cover Bank Office Locations
<PAGE>
[PHOTO]
A MESSAGE FROM THE PRESIDENT
- -------------------------------------------------------------------------------
DEAR FELLOW SHAREHOLDERS:
I am pleased to report to you that Abington Bancorp made considerable progress
in 1998 toward fulfilling our vision of becoming the provider of choice for a
comprehensive selection of financial services for consumers and businesses. We
believe this transformation, in addition to the strong commitment to customer
service that comes with being a community bank, will place our company in a
strong competitive position and significantly increase the long-term value of
our organization.
We are confident that the consolidation and convergence taking place in the
financial services industry has created a profitable niche for community banks
offering a wide range of products along with the type of personalized service
that is highly valued by customers yet difficult for larger banks to duplicate.
We believe this customer-oriented approach and the dynamic retail culture we
have developed gives us a great advantage over these larger banks. At the same
time, our ability to successfully and efficiently integrate new products and
services gives us a competitive edge over smaller institutions that may find
this strategy unfeasible.
1
<PAGE>
ONCE AGAIN, HEALTHY DEPOSIT GROWTH
- -------------------------------------------------------------------------------
Deposits
reached $363.9
- --------------------------
DEPOSIT GROWTH (DOLLARS IN MILLIONS)
1995: $33.2
1996: $20.4
1997: $24.5
1998: $39.0
Since the introduction
of High Performance
Checking in 1995,
deposits have grown
by 47%.
Deposits increased 12% by year-end 1998 over 1997. While this accomplishment is
solid for any bank in this competitive market, it is really secondary to other
underlying accomplishments in this area. Deposit balances can be achieved
through a variety of means, including paying above-market interest rates to
attract deposits. A more valid measurement of a bank's franchise value is
growth of core deposits. We are pleased to have finished in the top 8% among all
Massachusetts banks, including major regional institutions, in total dollars of
growth in this area. This is a remarkable achievement for a bank of our size.
This kind of deposit growth helped reduce our overall cost of deposits to 3.87%
in 1998 from 3.95% in 1997.
In addition to deposit dollar growth, we continued to enjoy tremendous success
in obtaining new checking account relationships in 1998 through the High
Performance Checking program. These accounts grew from 31,000 in 1997 to over
36,000 in 1998, an increase of over 15%. This growth not only provides us with a
solid customer base for cross-selling products and services, but also produced a
16.5% increase in customer service fees for the year.
SOLID EARNINGS DESPITE A CHALLENGING ECONOMY
- -------------------------------------------------------------------------------
Net income for 1998 was $4,371,000 or $1.17 per diluted share in 1998, as
compared to $4,378,000 or $1.10 per diluted share in 1997. These results were
affected by falling interest rates and the resulting prepayment environment that
tightened spreads and net interest margins overall. Also impacting 1998 results
was our recent investment in supermarket banking, which decreased 1998 net
income by approximately $.09 per share. Excluding the effect of this investment,
earnings per share would have grown approximately 15% in 1998 over 1997 levels,
which would be considered solid in any interest rate environment.
2
<PAGE>
In 1998, we opened supermarket branches in Randolph and Hanson, giving us three
new branches opened in the 18 months prior to year's end. We are confident our
retail strategies and product lines combined with innovative supermarket banking
methodologies should enhance core earnings and franchise values in future
periods. As evidence of this, our first supermarket branch, opened in Cohasset
in August 1997, continued to exceed our internal financial forecasts as of its
one-year anniversary. This early, measurable success provides us with even
greater optimism that we will enjoy success from these endeavors in future
years.
STEADY LENDING GROWTH
- -------------------------------------------------------------------------------
Business Banking
ended the year at $60.0
- ---------------------------------------
Business Banking (dollars in millions)
Our business banking
portfolio grew by
approximately 28% in 1998.
Our Business Banking division once again posted significant gains in both
commercial loan balances and customer relationships in 1998. Our business
banking portfolio grew 28% to reach approximately $60 million. This growth was
achieved despite strong pricing pressures in our market area for business and
commercial real estate loans. We also obtained more non-transaction-oriented
business loans over the past year. These borrowers are more focused on
developing a business relationship with their bank, which tends to produce more
stable loan balances and provides deposit relationships as well.
Residential lending also performed extremely well in 1998. Loan originations
grew to approximately $47 million in 1998, compared to $20 million a year ago.
This growth reflected 1998's strong refinance market as well as the on-going
economic expansion occurring in Southeastern Massachusetts thanks, in large
part, to the return of commuter rail service to our region.
Year End
Delinquency Rate .36%
- ---------------------------------------
DELINQUENCY RATE
Our delinquency rate
is one of the lowest
among 80 Northeastern
banking companies
tracked by a leading
bank analyst firm.
3
<PAGE>
RENEWED VISION
WE WILL SET OUR SIGHTS ON NEW IDEAS, FOCUS ON OUR TECHNOLOGY AND
CONCENTRATE ON SERVICE.
ASSET QUALITY
With the economic good times we have enjoyed in the United States and our region
over the past few years, credit problems are a distant memory for many of us. We
know, however, that at times like these, the temptation can be great to lower
credit standards to keep loan growth at strong levels. We are pleased to note
that our current asset quality is at a very high level, with non-performing
loans at a near all time low of $731,000 at year's end and delinquencies below
.5% throughout the year. Our seasoned and experienced lenders have not let
desires for greater loan growth, particularly in the business banking area,
overcome our sound underwriting practices and good credit culture. This type of
discipline is critical to achieving long-term success for our shareholders.
SETTING SIGHTS ON FUTURE VALUE
- ---------------------------------------
Total
Supermarket Branches 5
- ---------------------------------------
SUPERMARKET BRANCHES
Supermarket branches in
Randolph and Hanson
opened in 1998; they will
be followed in 1999 by
branches in West Brockton and Canton.
As I've already alluded to, much effort at Abington Bancorp in 1998 was directed
to preparing our organization to compete as a total financial services provider
to mid-market consumers and businesses. In 1999 we plan to open two more
supermarket branches in West Brockton and Canton. When these two branches open,
we will have 12 offices spread throughout Plymouth County and reaching into
Norfolk County. This increases our market penetration considerably from a year
ago.
4
<PAGE>
In addition to this market expansion, Abington Bancorp is embracing the trend
toward alternative service delivery channels. In 1999, we will launch an
interactive, world-class web site that will enable our customers to obtain
product information and enjoy the convenience of banking from their homes or
offices. We are excited about the potential of this new market channel to
support our objectives of enhancing our retail franchise and our business
banking relationships.
We also recently announced the acquisition of a well-established and highly
regarded mortgage company, Old Colony Mortgage, another undertaking conceived in
1998. This acquisition expands our service area as far west as Auburn, MA, and
provides more complete coverage of the South Shore.
Old Colony Mortgage's experienced and quality mortgage company management team
and seasoned production staff, when combined with our mortgage personnel, will
create a formidable mortgage origination network offering a full array of
mortgage-related products to our customers and providing us with even greater
sales opportunities. In addition, this expansion in mortgage banking will
provide us with another source of non-interest income. We anticipate that
production levels in our mortgage area for 1999 will exceed $150 million.
In addition, we have recently introduced Personal Bankers into each branch.
These trained, service-oriented individuals will build upon the success of High
Performance Checking by increasing our ability to cross-sell products and
services to our retail customers, and, when applicable, business products as
well. Our objective is to build an aggressive retail referral program that will
result in new business and strengthen existing customer relationships. We
already enjoy an extremely loyal customer base and are confident that the
increased service provided by the Personal Banker model will strengthen the bond
our customers have with our institution.
These initiatives further support our belief that our future growth will be
driven by a passion for selling. We have taken successful first steps toward
building this "sales culture" with the enormous success of High Performance
Checking and its related cross sales effort along with our early success at
supermarket banking. As we look to the future, we plan on fostering a sales
culture that optimizes the benefit of each and every customer's relationship
with the bank.
5
<PAGE>
RETRAINING IN THE WORKPLACE
ENHANCING THE KNOWLEDGE AND SKILLS OF OUR WORKFORCE HAS A POSITIVE IMPACT ON OUR
ABILITY TO PREPARE FOR THE FUTURE.
OLD VALUES/NEW PERSPECTIVES
As we make progress in the exciting new directions I've described so far, we
retain a strong dedication to superior levels of service. A major key to
assuring our ability to maintain this focus is enhancing the knowledge and
skills of our workforce. We are working hard through improved training to make
sure we provide that all-important personal touch valued so much by the many
people who still prefer to do business with their local bank.
As we broaden our services and product offering and simultaneously expand our
market reach, the ability of our senior management team to make good strategic
decisions to support this growth is critical to our staying on track toward our
vision. In the second quarter, John R. Sylva, who has 25 years of experience in
retail banking, joined us as Senior Vice President with responsibility for all
consumer banking activities. Also, near year's end we gained a new senior
operations officer as Kevin M. Tierney, Sr., joined us as Executive Vice
President. With nearly 20 years' experience in financial services, Kevin is a
recognized leader in marketing and technology aimed at maximizing efficiency and
supporting aggressive growth and market penetration strategies. These two
additions give our senior management team experience that has already had a
positive impact on our ability to prepare for a new future.
6
<PAGE>
YEAR 2000 PREPAREDNESS
- -------------------------------------------------------------------------------
Closely following FDIC guidelines for all United States financial institutions,
Abington Savings Bank focused considerable effort in 1998 to assure that all
issues related to the year 2000 computer problem will be resolved well in
advance of the end of 1999. We are confident that we will be ready to greet the
new millennium with well-tested systems and contingency plans that will provide
uninterrupted service to our customers. Our task force continues to be very
active, and we have a customer awareness program in place to inform and reassure
our customers about our Y2K readiness.
We're well
prepared for Y2K
- ---------------------------------------
READY FOR Y2K
12/97: Task force established; action plan approved by Board of
Directors.
12/98: Assessment completed; testing of mission critical systems
completed.
06/99: All systems Y2K ready.
7
<PAGE>
SPECIAL RELATIONSHIPS
OUR COMMITMENT TOWARDS OUR COMMUNITY CONTINUES TO GROW...
SUPPORTING OUR COMMUNITY
In 1998 we continued to support the well-being of the communities we serve, with
a special emphasis on providing financial aid and other assistance to
organizations focusing on children. Our special relationship with the Cardinal
Cushing School and Training Center continued to blossom as our third annual St.
Patrick's Day fundraiser raised over $50,000. Among other things, this money was
used to send the graduating class of 22 exceptional children to Disney World.
Also at year's end, I had the great privilege of presenting the school with a
$15,000 donation raised through employee payroll deductions.
Our employees' strong commitment to the Cardinal Cushing students is part of
what makes Abington Savings Bank a special place to work. As we continue our
transformation into a larger, more competitive organization, one reason I am
confident of our ability to retain the community banking values that are the
foundation of our success is the dedication of our work force. Nowhere is this
dedication more obvious than in the energy and enthusiasm our people bring to
our community relations efforts.
I want to thank all members of our team for their hard work in 1998 and renew my
commitment to fostering an organization that sets high performance standards
while also providing appropriate rewards for the people whom achieve and exceed
those expectations. By making this a great place to work, we help ensure that it
is also a great place for our customers to do business.
8
<PAGE>
Finally, I wish to thank the Board of Directors and our staff for their many
efforts in 1998 to safeguard our company's future and well being and to thank
our shareholders and customers for their continued support. Everyone at Abington
Bancorp is dedicated to repaying your loyalty by building an outstanding
financial services organization that enters the new millennium with renewed
strength and vitality. We remain optimistic about the future of community banks
and are confident our organization is well on its way to becoming the premier
provider of financial services in our marketplace.
Respectfully submitted,
/s/ James P. McDonough
James P. McDonough
President and Chief Executive Officer
- -------------------------------------------------------------------------------
The Bank considers its principal market area to be Plymouth County,
Massachusetts, primarily Abington, Cohassett,Halifax, Hanson, Holbrook, Hull,
Kingston, Pembroke, Randolph, and Whitman, where it has banking offices.
Boston [MAP]
Hull
- ---------------------------------------------
Cohasset
- ---------------------------------------------
Canton (Opening in `99)
- ---------------------------------------------
Randolph
- ---------------------------------------------
Holbrook
- ---------------------------------------------
Abington
- ---------------------------------------------
Brockton (Opening in `99)
- ---------------------------------------------
Whitman
- ---------------------------------------------
Pembroke
- ---------------------------------------------
Hanson
- ---------------------------------------------
Halifax
- ---------------------------------------------
Kingston
- ---------------------------------------------
9
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998 1997 1996 1995 1994
- ------------------------ -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets $591,151 $531,986 $486,958 $460,492 $421,833
Total loans, net 360,735 330,792 298,970 260,585 235,614
Investment securities (1) 61,184 47,187 31,950 33,343 28,328
Mortgage-backed securities 129,700 126,016 131,184 138,937 133,882
Deposits 363,953 324,934 300,445 280,070 246,843
Borrowed funds 177,128 165,910 147,524 145,609 134,155
Preferred beneficial interest in junior
subordinated debentures, net (3) 11,934 -- -- -- --
Stockholders' equity 33,060 36,321 33,546 30,561 28,366
Book value per share (2) 9.88 9.99 8.86 8.11 7.57
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996 1995 1994
- ------------------------ -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (2)
<S> <C> <C> <C> <C> <C>
Operating Data:
Interest and dividend income $ 38,442 $ 36,297 $ 34,332 $ 31,949 $ 27,082
Interest expense 21,585 20,091 19,517 18,222 14,349
-------- -------- -------- -------- --------
Net interest income 16,857 16,206 14,815 13,727 12,733
Provision for possible loan losses 760 630 480 2,233 610
-------- -------- -------- -------- --------
Net interest income after
provision for possible loan losses 16,097 15,576 14,335 11,494 12,123
-------- -------- -------- -------- --------
Non-interest income:
Loan servicing fees 469 558 646 713 646
Customer service fees 3,816 3,276 2,412 1,644 1,050
Gain on sales of securities 1,731 540 495 181 322
Gain on sales of loans, net 492 236 315 453 389
Write-down of limited partnership -- -- -- (110) --
Net gain (loss) on sales and write-down
of other real estate owned 43 109 67 (92) (2)
Other 358 267 242 119 56
-------- -------- -------- -------- --------
Total non-interest income 6,909 4,986 4,177 2,908 2,461
-------- -------- -------- -------- --------
Non-interest expenses 16,267 13,505 12,840 11,955 10,255
-------- -------- -------- -------- --------
Income before income taxes 6,739 7,057 5,672 2,447 4,329
Provision for income taxes 2,368 2,679 2,139 1,018 1,586
-------- -------- -------- -------- --------
Net income $ 4,371 $ 4,378 $ 3,533 $ 1,429 $ 2,743
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Basic earnings per share $ 1.25 $ 1.18 $ .94 $ .38 $ .73
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Diluted earnings per share $ 1.17 $ 1.10 $ .89 $ .37 $ .70
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Dividends per share (4) $ .30 $ .20 $ .20 $ .20 $ .20
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996 1995 1994
- ------------------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Selected Ratios:
Return on average total assets .79% .87% .74% .33% .70%
Interest rate spread 3.13 3.29 3.14 3.14 3.32
Return on average equity 12.68 12.59 11.00 4.68 9.23
Dividend payout ratio 23.95 16.90 21.34 52.62 27.34
Average equity to average total assets 6.26 6.94 6.69 7.00 7.61
</TABLE>
(1) Includes Federal Home Loan Bank stock.
(2) The Company declared a 2-for-1 stock split in the form of a dividend to
holders of record on November 14, 1997. All share and per share data have
been adjusted to reflect this transaction.
(3) In June 1998, the Company issued $12.6 million of guaranteed preferred
beneficial interests in junior subordinated debentures.
(4) Includes a $.10 per share special dividend declared in March 1998.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
Abington Bancorp, Inc. (the "Company"), became the one-bank holding company for
the Abington Savings Bank (the "Bank") on January 31, 1997. The Company's
primary business is serving as the holding company of the Bank. The holding
company did not conduct any business in fiscal 1996.
The Company's results of operations depend primarily on its net interest income
after provision for possible loan losses, its revenue from 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, prepayment on loans and mortgage-backed investments, loan demand and
savings flows, as well as the effect of competition for deposits and loans. The
Company's net interest income is also affected by the performance of its loan
portfolio, amortization on accretion of premiums or discounts on purchased loans
or 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.
In August 1997, the Company opened, in Cohasset, the first of three planned de
novo supermarket branches, with the Randolph and Hanson branches opening in
April and September of 1998, respectively. This expansion into supermarket
banking is consistent with the Company's strategy of controlled growth with a
focus on core retail deposit relationships and will enable the Company to have a
greater regional presence.
FORWARD-LOOKING STATEMENTS
When used in this report, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project,"
"believe" or similar expressions are intended to identify "forward-looking
statements" within the meanings of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. The Company wishes to
caution readers that all forward-looking statements are necessarily speculative
and not to place undue reliance on any such forward-looking statements, which
speak only as of the date made, and to advise readers that various risks and
uncertainties, including regional and national economic conditions, changes in
the real estate 14 market, changes in levels of market interest rates, credit
risks of lending activities, competitive and regulatory factors, and the
so-called Year 2000 issue, could affect the Company's financial performance and
could cause the Company's actual results for future periods to differ materially
from those anticipated or projected.
NET INTEREST INCOME
Net interest income is affected by the mix and volume of assets and liabilities,
and levels of prepayment primarily on loans and mortgage-backed investments, the
movement and level of interest rates, and interest spread, which is the
difference between the average yield received on earning assets and the average
rate paid on deposits and borrowings. The Company's net interest rate spread was
3.13% and 3.29% for the years ended December 31, 1998 and 1997.
The level of non-accrual loans and other real estate owned also has an impact on
net interest income. At December 31, 1998, the Company had $681,000 in
non-accrual loans and no other real estate owned compared to $622,000 in
non-accrual loans and $265,000 in other real estate owned as of December 31,
1997.
The table on the following page presents average balances, interest income and
expense and yields earned or rates paid on the major categories of assets and
liabilities for the years indicated.
12
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997
----------------------------------- ------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
--------- --------- -------- --------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets
Earning assets:
Federal funds sold $ 1,032 $ 59 5.72% $ 544 $ 34 6.25%
Other short-term investments 1,027 55 5.36 221 16 7.24
Bonds and obligations (2) 43,034 3,027 7.03 25,025 1,775 7.09
Equity securities (1) 13,758 627 4.56 11,987 589 4.91
Mortgage-backed investments (2) 126,031 8,393 6.66 132,721 9,045 6.82
Loans (3) 335,871 26,281 7.82 304,925 24,838 8.15
-------- -------- -------- --------
Total earning assets 520,753 38,442 7.38 475,423 36,297 7.64
-------- -------- -------- --------
Cash and due from banks 12,407 9,786
Other assets 17,435 16,227
-------- --------
Total assets $550,595 $501,436
-------- --------
-------- --------
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
NOW deposits $ 43,938 $ 652 1.48% $ 37,256 $ 577 1.55%
Savings deposits 102,022 2,281 2.24 97,786 2,168 2.22
Time deposits 157,858 8,818 5.59 145,152 8,312 5.73
-------- -------- -------- --------
Total interest-bearing deposits 303,818 11,751 3.87 280,194 11,057 3.95
Short-term borrowings 42,039 2,279 5.42 45,833 2,557 5.58
Long-term debt 125,521 7,555 6.02 105,950 6,477 6.11
-------- -------- -------- --------
Total interest-bearing liabilities 471,378 21,585 4.58 431,977 20,091 4.65
-------- --------
Non-interest-bearing deposits 37,080 29,447
-------- --------
Total deposits and
borrowed funds 508,458 4.25 461,424 4.35
Other liabilities 7,656 5,239
-------- --------
Total liabilities 516,114 466,663
Stockholders' equity 34,481 34,773
-------- --------
Total liabilities and
stockholders' equity $550,595 $501,436
-------- --------
-------- --------
Net interest income $ 16,857 $ 16,206
-------- --------
-------- --------
Interest rate spread (4) 3.13% 3.29%
------ -----
------ -----
Net yield on earning assets (5) 3.24% 3.41%
------ -----
------ -----
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31, 1996
--------------------------------
Average Yield/
Balance Interest Rate
-------- --------- ---------
<S> <C> <C> <C>
Assets
Earning assets:
Federal funds sold $ 614 $ 37 6.03%
Other short-term investments 75 4 5.33
Bonds and obligations (2) 23,489 1,512 6.44
Equity securities (1) 10,966 556 5.07
Mortgage-backed investments (2) 137,166 9,245 6.74
Loans (3) 282,530 22,978 8.13
-------- --------
Total earning assets 454,840 34,332 7.55
-------- --------
Cash and due from banks 8,348
Other assets 16,891
--------
Total assets $480,079
--------
--------
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
NOW deposits $ 33,392 $ 516 1.55%
Savings deposits 95,661 2,287 2.39
Time deposits 136,541 7,939 5.81
-------- --------
Total interest-bearing deposits 265,594 10,742 4.04
Short-term borrowings 66,790 3,733 5.59
Long-term debt 84,977 5,042 5.93
-------- --------
Total interest-bearing liabilities 417,361 19,517 4.68
--------
Non-interest-bearing deposits 25,223
--------
Total deposits and
borrowed funds 442,584 4.41
Other liabilities 5,385
--------
Total liabilities 447,969
Stockholders' equity 32,110
--------
Total liabilities and
stockholders' equity $ 480,079
--------
--------
Net interest income $ 14,815
---------
---------
Interest rate spread (4) 3.14%
-----
-----
Net yield on earning assets (5) 3.26%
-----
-----
</TABLE>
(1) Includes Federal Home Loan Bank stock, investments held for investment and
available for sale (at amortized cost).
(2) Includes investments available for sale (at amortized cost).
(3) Non-accrual loans net of reserve for possible loan losses and loans held
for sale are included in average loan balances.
(4) Interest rate spread equals the yield on average earning assets minus the
yield on average deposits and borrowed funds.
(5) Net yield on earning assets equals net interest income divided by total
average earning assets.
13
<PAGE>
RATE/VOLUME ANALYSIS
The following table presents, for the periods indicated, the changes in interest
income and in interest expense attributable to the change in interest rates and
the change in the volume of earning assets and interest-bearing liabilities. The
change attributable to both volume and rate has been allocated proportionately
to the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 vs 1997 1997 vs 1996
(DOLLARS IN THOUSANDS) INCREASE (DECREASE) INCREASE (DECREASE)
Due to Due to Due to Due to
Volume Rate Total Volume Rate Total
------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest and dividend income:
Loans $ 2,449 $(1,006) $ 1,443 $ 1,824 $ 36 $ 1,860
Bonds and obligations 1,267 (15) 1,252 103 160 263
Equity securities 83 (45) 38 51 (18) 33
Mortgage-backed
securities (449) (203) (652) (302) 102 (200)
Federal funds sold 28 (3) 25 (4) 1 (3)
Interest-bearing deposits
in banks 44 (5) 39 10 2 12
------- -------- ------- ------- ------- -------
Total interest and
dividend income 3,422 (1,277) 2,145 1,682 283 1,965
------- -------- ------- ------- ------- -------
Interest expense:
NOW deposits 100 (25) 75 60 1 61
Savings deposits 95 18 113 50 (169) (119)
Time deposits 714 (208) 506 495 (122) 373
Short-term borrowings (207) (71) (278) (1,170) (6) (1,176)
Long-term debt 1,178 (100) 1,078 1,278 157 1,435
------- -------- ------- ------- ------- -------
Total interest expense 1,880 (386) 1,494 713 (139) 574
------- -------- ------- ------- ------- -------
Net interest income $ 1,542 $ (891) $ 651 $ 969 $ 422 $ 1,391
------- -------- ------- ------- ------- -------
------- -------- ------- ------- ------- -------
</TABLE>
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997
GENERAL
Net income for 1998 was $4,371,000 or $1.17 per diluted share compared to a net
income of $4,378,000 or $1.10 per diluted share in 1997, a net decrease of
$7,000 or .2%. Earnings, on a per diluted share basis, increased in 1998 over
1997 as a result of the Company's repurchase of shares under current buy back
plans. The results in 1998, as compared to 1997, include increases in net
interest income, customer service fees and gains on sales of securities and
mortgages offset by an increase in non-interest expense related primarily to
three newly opened supermarket branches, Year 2000 testing expenses and expenses
associated with guaranteed preferred beneficial interest in junior subordinated
debentures ("Trust Preferred Securities").
INTEREST AND DIVIDEND INCOME
Interest and dividend income increased $2,145,000 or 5.9% in 1998 as compared to
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 1998 was approximately $520,753,000 as
compared to $475,423,000 for 1997, an overall increase of $45,330,000 or 9.5%.
The increase in earning assets was generally due to increases in average loan
balances which were $335,871,000 in 1998, as compared to $304,925,000 in 1997,
an increase of $30,946,000 or 10.2%. 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 1998 as compared to 1997,
primarily due to the effect of faster prepayments on higher yielding residential
loans and lower rates earned on newer loan originations or purchases over the
past year. Additionally, loan yields were negatively affected by yield
adjustments on loan pools which had been acquired at a premium purchase price,
which was the result of unusually heavy prepayment activity on those pools
associated with the favorable refinancing market which caused an acceleration of
premium amortization. The yield on loans for 1998 was 7.82% as compared to 8.15%
for 1997. Management estimates that, excluding the unusual prepayment
adjustments realized during the first half of 1998, the yield on loans would
have been approximately 7.94% or $400,000 higher than reported. Given the
current relatively low long-term interest rates and relatively
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 $59,800,000 at December 31, 1998
from $46,900,000 at December 31, 1997, an increase of $12,900,000 or 27.5%.
Commercial loans typically carry a higher yield than residential
mortgages.
Average balances of mortgage-backed investments and investment securities were
$126,031,000 and $43,034,000, respectively, for 1998 as compared to $132,721,000
and $25,025,000, respectively, for 1997. These 20 balances, when combined,
increased by approximately $11,319,000 or 7.2%. The yield on mortgage-backed
investments and investment securities decreased to 6.66% and 7.03%,
respectively, in 1998 as compared to 6.82% and 7.09%, respectively, 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 invested at lower rates.
INTEREST EXPENSE
Interest expense for 1998 increased $1,494,000 or 7.4% compared to 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
4.58% for 1998 as compared to 4.65% for the same period in 1997. The weighted
average rates paid on interest bearing deposits was 3.87% for 1998 as compared
to 3.95% in 1997. The overall cost of deposits has declined in 1998 as compared
to 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 rates paid on time
deposits. The average balance of core and time deposits rose to $183,040,000 and
$157,858,000, respectively, for 1998 as compared to $164,489,000 and
$145,152,000, respectively, in 1997, for increases of 11.3% and 8.8%,
respectively. Additionally, the weighted average rate paid on time deposits
declined to 5.59% for 1998, as compared to 5.73% in 1997. This change reflects
the refinancing 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,
although competition for time deposit accounts 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 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 1998 as compared to 1997, to $167,560,000 from
$151,783,000, an increase of 10.4%. This increase generally relates to the
funding of certain loan portfolio purchases during 1998. The overall weighted
average rates paid on borrowed funds decreased to approximately 5.87% for 1998
from 5.95% in 1997. This increase was generally due to the Federal Reserve's
decisions to drop the inter-bank borrowing rate by 75 basis points in the latter
portion of 1998. This rate change 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 $1,923,000 or 38.6% in 1998 in comparison to
1997. Customer service fees, which were $3,816,000 in 1998 as compared to
$3,276,000 for the same period in 1997, for an increase of $540,000 or 16.5%,
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 $469,000 and $492,000, respectively, in 1998 as compared to $558,000 and
$236,000, respectively, in 1997, a combined increase of $167,000 or 21.0%. This
generally is reflective of the favorable refinancing market for residential
loans in 1998 which has resulted in increased saleable volumes and related gains
on sales as compared to the same period in 1997. Loan servicing fees have
declined as that portfolio has paid down in the current refinance market, as
well as in part due to the fact that the Company has been selling mortgage loans
servicing released since 1996. Gains on sales of securities were $1,731,000 in
1998 as compared to $540,000 for 1997 for an increase of $1,191,000 or 220.6%.
These gains are generally reflective of a consistently strong market for equity
securities.
NON-INTEREST EXPENSE
Non-interest expense for 1998 increased $2,762,000 or 20.5% compared to 1997.
Salaries and employee benefits increased 17.6% or $1,172,000 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
business banking relationships and attracting core deposits. Occupancy expenses
increased $259,000 or 10.7% 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 $1,331,000 or 30.0% for 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. This increased expense also includes
approximately $150,000 of expenses related to the Company's efforts to address
the Year 2000 issue (see "Impact of Year 2000" for further discussion).
Additionally, approximately $586,000 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 LOSS
The provision for possible loan losses was $760,000 in 1998 as compared to
$630,000 for the same period in 1997. This increase of $130,000 primarily
reflects management's estimate of increased risk associated with increases in
the Company's commercial loan portfolios over the past year as compared to
residential real estate loans.
PROVISION FOR INCOME TAXES
The Company's effective income tax rate for 1998 was 35.1% compared to 38.0% for
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 1997.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996
GENERAL
Net income for the year ended December 31, 1997 was $4,378,000 or $1.10 per
diluted share compared to $3,533,000 or $.89 per diluted share in 1996, an
increase of $845,000 or 23.9%. The growth in earnings is generally attributable
to increased net interest income, increases in customer service fee revenues
and controlled growth in non-interest expenses.
INTEREST AND DIVIDEND INCOME
Interest and dividend income increased $1,965,000 or 5.7% during 1997 as
compared to 1996. This increase was attributable to increases in earning assets,
particularly loans, and increases in the rates earned on investment securities,
including mortgage-backed investments and loans. The balance of average earning
assets was $475,423,000 in 1997 as compared to $454,840,000 in 1996, an increase
of $20,583,000 or 4.5%. This increase was generally caused by growth in the
Company's commercial loan portfolio in 1997 which had an average balance of
approximately $37,543,000 in 1997 as compared to $22,515,000 in 1996, an
increase of $15,028,000 or 66.7%. This increase is consistent with management's
strategy of diversifying the Company's asset-mix by increasing loan growth,
particularly higher yielding commercial loans. The remaining asset growth was
generated from residential loan purchases and originations partially offset by
decreases in the Company's investment and mortgage-backed securities portfolios.
The combined average balance of investments, including equity and
mortgage-backed securities, decreased to $169,733,000 in 1997, a decrease of
approximately $1,888,000 or 1.1% from 1996 average levels of $171,621,000. See
"Liquidity and Capital Resources" and "Asset/Liability Management" for a further
discussion of the Company's investment strategies. As a result of this strategy,
the average yield on interest earning assets increased in 1997 to 7.64% from
7.55% in 1996. Yields on loans increased slightly to 8.15% in 1997 from 8.13% in
1996. Increases due to greater concentrations of commercial loans generally
offset the declining interest rates on residential mortgage loans
originated/purchased over the second half of 1997 as well as declining yields
on those portfolios as the result of customer refinancings into lower yielding
loans. The yields on investment, excluding equities, and mortgage-backed
securities portfolios in 1997 were 7.09% and 6.82%, respectively, as compared to
6.44% and 6.74%, respectively, in 1996. This increase in yield, despite the
generally declining long-term interest rate environment, was achieved through
the sale of various lower yielding securities held by the Company in its
portfolio of securities available for sale and the acquisition of securities at
higher yields, primarily during the second half of 1996 and the first 9 months
of 1997.
INTEREST EXPENSE
Interest expense in 1997 increased $574,000 or 2.9% as compared to 1996
generally due to increases in deposit balances and higher rates paid on borrowed
funds. This increase was partially offset by decreases in the average rates paid
on deposits. The average balance of core deposits (NOW accounts, savings and
money markets) and time deposits rose to $164,489,000 and $145,152,000,
respectively, in 1997 as compared to $154,276,000 and $136,541,000,
respectively, in 1996 for increases of $10,213,000 or 6.6%, and $8,611,000 or
6.3%, respectively. These increases reflect the success of management's strategy
to attract retail, core deposit relationships and increasing deposit balances.
The overall cost of interest bearing deposits decreased to 3.95% in 1997 from
4.04% in 1996 despite a continued competitive market for deposit relationships.
This is generally attributable to the Company's continued growth in less
expensive core deposit accounts as well as decreases in overall rates paid on
time deposits. While rates paid on time deposits have generally remained flat
for most of 1997, the overall cost has declined due to customers shifting to
shorter-term maturity time deposits.
Average balances of borrowed funds remained flat at $151,783,000 in 1997 as
compared to $151,767,000 in 1996. The overall weighted cost of borrowed funds
increased to 5.95% in 1997 from 5.78% in 1996. This increase in cost of borrowed
funds was generally due to management's decision to extend approximately
$28,000,000 of borrowings from short-term to longer-term maturities at the end
of the first quarter of 1997. This strategy in part offset the trend of growth
in shorter-term maturity time deposits, as noted above, and provided further
protection against potential rising interest rates. See "Asset/Liability
Management" for further discussion of the competitive market for deposits and
overall strategies for uses of borrowed funds.
NON-INTEREST INCOME
Total non-interest income increased $809,000 or 19.4% in 1997 as compared to
1996. Customer service fees, which were $3,276,000 in 1997 as compared to
$2,412,000 in 1996, increased $864,000 or 35.8%. This increase is consistent
with increases in core deposit accounts, particularly NOW and checking accounts.
Non-interest income was also favorably impacted by the sales of various other
real estate owned properties at better than anticipated prices. Income related
to the sales of other real estate owned was $109,000 in 1997 and $67,000 in
1996.
Gains on securities were $540,000 in 1997, an increase of $45,000 or 9.1% over
1996 levels. These gains were reflective of the strong equity markets
experienced over the past 2 years.
Gains on sales of mortgages and loan servicing income decreased during 1997 to
$236,000 and $558,000, respectively, from $315,000 and $646,000, respectively,
in 1996. This reflects management's decision in 1996 to sell most of its
residential loan production on a servicing released basis, as well as fewer
loans being originated for sale in 1997. The loan servicing income for 1997 was
further negatively impacted by the accelerated amortization of mortgage
servicing rights (approximately $76,000) given the acceleration of estimated
prepayments on the related loan servicing pools.
NON-INTEREST EXPENSE
Non-interest expense for 1997 increased $665,000 or 5.2% over 1996 levels.
Salaries and employee benefits increased 9.6% or $585,000 generally 22 due to
increases in health insurance costs and staffing levels of the Company's
business banking and retail areas, including the Cohasset supermarket branch.
Additionally, costs associated with the Company's employee stock plan and other
incentive compensation expenses increased by approximately $280,000 over 1996
levels as the result of the increase in the Company's stock price during 1997
and also because certain performance-related incentives were met as a result of
the improved financial performance of the Company in 1997.
Occupancy and equipment expenses increased $46,000 or 1.9% primarily due to the
opening of the Cohasset branch and other minor inflationary increases. Other
non-interest expenses increased $34,000 or .8%, primarily as the result of
increased advertising expenses and other costs associated with the Company's
retail banking efforts and the opening of the Cohasset branch.
PROVISION FOR POSSIBLE LOAN LOSS
The provision for possible loan losses was $630,000 for 1997 as compared to
$480,000 for 1996. This increase of $150,000 primarily
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
reflects the increased risk associated with increases in the Company's
commercial loan portfolio as compared to residential lending.
PROVISION FOR INCOME TAXES
The Company's effective income tax rate for 1997 was 38.0% compared to 37.7% for
1996. The lower effective tax rate in comparison to statutory rates for both
periods is reflective of the levels of income earned by certain non-bank
subsidiaries which are taxed, for state tax purposes, at lower rates.
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 4.4%
-200 2.1%
</TABLE>
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 (11)%
-200 (29)%
</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 December 31, 1998, the Company
was liability sensitive with rate sensitive assets at 44% of rate sensitive
liabilities at the 1-year gap.
The Company's policy is to match, as well as possible, the interest rate
sensitivities of its assets and liabilities. Residential mortgage loans, which
the Company currently originates or purchases for the Company's own portfolio,
are primarily 1-year, 3-year and 5-year adjustable rate mortgages and shorter
term (generally 15-year or seasoned 30-year) fixed rate mortgages. Residential
mortgage loans currently originated by the Company are primarily sold in the
secondary market.
The Company also emphasizes loans with terms to maturity or repricing of 3 years
or less, such as certain adjustable rate residential mortgage loans, commercial
mortgages, business loans, residential construction loans, second mortgages and
home equity loans.
Management desires to expand its interest earning asset base in future periods
primarily through growth in the Company's loan portfolio. Loans comprised
approximately 64.5% of the average interest earning assets in 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 1998 and 1997, the Company acquired
approximately $95,600,000 and $57,800,000, 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
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
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
$177,128,000 at December 31, 1998 compared to $165,910,000 at December 31, 1997.
These borrowings are primarily comprised of FHLB of Boston advances and have
primarily funded residential loan originations and purchases as well as
mortgage-backed investments and investment securities.
Additionally, the Company has recently obtained funding through the issuance of
Trust Preferred Securities which carry a higher interest rate than similar FHLB
borrowings, but at the same time are included as capital, without diluting
earnings per share and are tax deductible. See "Liquidity and Capital Resources"
for further discussion.
The following table sets forth maturity and repricing information relating to
interest sensitive assets and liabilities at December 31, 1998. The balance of
such accounts has been allocated among the various periods based upon the terms
and repricing intervals of the particular assets and liabilities. For example,
fixed rate mortgage loans and mortgage-backed securities, regardless of held in
portfolio or available for sale classification, are shown in the table in the
time periods corresponding to projected principal amortization computed based on
their respective weighted average maturities and weighted average rates using
prepayment data available from the secondary mortgage market.
Adjustable rate loans and securities are allocated to the period in which the
rates would be next adjusted. The following table does not reflect partial or
full prepayment of certain types of loans and investment securities prior to
scheduled contractual maturity. Additionally, all securities or borrowings which
are callable at the option of the issuer or lender are reflected in the
following table based upon the likelihood of call options being exercised by the
issuer on certain investments or borrowings in a most likely interest rate
environment. Since regular passbook savings and NOW accounts are subject to
immediate withdrawal, such accounts have been included in the "Other Savings
Accounts" category and are assumed to mature within 6 months. This table does
not include non-interest bearing deposits.
While this table presents a cumulative negative gap position in the 6 month to 5
year horizon, the Company considers its earning assets to be more sensitive to
interest rate movements than its liabilities. In general, assets are tied to
increases that are immediately impacted by interest rate movements while deposit
rates are generally driven by market area and demand which tend to be less
sensitive to general interest rate changes. In addition, other savings accounts
and money market accounts are substantially stable core deposits, although
subject to rate changes. A substantial core balance in these type of accounts is
anticipated to be maintained over time.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
Repricing/Maturity/Internal
AT DECEMBER 31, 1998 0-6 Mos. 6-12 Mos. 1-2 Yrs. 2-3 Yrs. 3-5 Yrs. Over 5 Yrs. Total
- -------------------- --------- --------- --------- --------- --------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets subject to interest rate
adjustment:
Short-term investments $ 4,293 $ -- $ -- $ -- $ -- $ -- $ 4,293
Bonds and obligations 14,424 3,998 8,049 7,071 11,738 2,013 47,293
Mortgage-backed investments 27,710 16,268 16,076 12,756 21,131 34,165 128,106
Mortgage loans subject to rate
review 26,355 11,719 19,804 5,582 19,588 -- 83,048
Fixed rate mortgage loans 33,561 20,959 42,789 52,096 71,413 41,779 262,597
Commercial and other loans
contractual maturity 9,534 2,771 2,123 1,588 2,151 -- 18,167
--------- --------- --------- --------- --------- --------- -------
Total 115,877 55,715 88,841 79,093 126,021 77,957 543,504
--------- --------- --------- --------- --------- --------- -------
Liabilities subject to interest
rate adjustment:
Money market deposit accounts 14,995 -- -- -- -- -- 14,995
Savings deposits - term
certificates 82,006 38,191 31,421 7,465 4,609 -- 163,692
Other savings accounts 141,392 -- -- -- -- -- 141,392
Borrowed funds 91,628 15,000 23,000 17,000 -- 30,500 177,128
--------- --------- --------- --------- --------- --------- -------
Total 330,021 53,191 54,421 24,465 4,609 30,500 497,207
--------- --------- --------- --------- --------- --------- -------
Guaranteed preferred beneficial
interest in junior subordinated
debentures -- -- -- -- -- 11,934 11,934
--------- --------- --------- --------- --------- --------- -------
Excess (deficiency) of rate
sensitive assets over rate
sensitive liabilities (214,144) 2,523 34,420 54,628 121,412 35,523 34,363
--------- --------- --------- --------- --------- --------- -------
Cumulative excess (deficiency) of
rate sensitive assets over rate
sensitive liabilities (1) $(214,144) $(211,620) $(177,200) $(122,572) $ (1,160) $ 34,363
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Rate sensitive assets as a
percent of rate sensitive
liabilities (cumulative) 35.1% 44.8% 59.5% 73.5% 99.8% 106.7%
</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.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES
Payments and prepayments on the Company's loan and mortgage-backed investment
portfolios, sales of fixed rate residential loans, increases in deposits,
borrowed funds and maturities of various investments comprise the Company's
primary sources of liquidity. The Company is also a voluntary member of the FHLB
of Boston and, as such, is entitled to borrow an amount up to the value of its
qualified collateral that has not been pledged to outside sources. Qualified
collateral generally consists of residential first mortgage loans, securities
issued, insured or guaranteed by the U.S. Government or its agencies, and funds
on deposit at the FHLB of Boston. Short-term advances may be used for any sound
business purpose, while long-term advances may be used only for the purpose of
providing funds to finance housing. At December 31, 1998, the Company had
approximately $121,000,000 in unused borrowing capacity that is contingent upon
the purchase of additional FHLB of Boston stock. Use of this borrowing capacity
is also impacted by capital adequacy considerations.
The Company's short-term borrowing position consists primarily of FHLB of Boston
advances with original maturities of approximately 1 to 3 months. The Company
utilizes borrowed funds as a primary vehicle to manage interest rate risk, due
to the ability to easily extend or shorten maturities as needed. This enables
the Company to adjust its cash needs to the increased prepayment activity in its
loan and mortgage-backed investment portfolios, as well as to quickly extend
maturities when the need to further balance the Company's gap position arises.
The Company regularly monitors its asset quality to determine the level of its
loan loss reserves through periodic credit reviews by members of the Company's
Management Credit Committee. The Management Credit Committee, which reports to
the Executive Committee of the Company's Board of Directors, also works on the
collection of non-accrual loans and disposition of real estate acquired by
foreclosure. The allowance for possible loan losses is determined by the
Management Credit Committee after consideration of several key factors
including, without limitation: potential risk in the current portfolio, levels
and types of non-performing assets and delinquency, levels of potential problem
loans on the watched asset reports and the impact that they may have on loan
collateral and repayment. Workout approach and financial condition of borrowers
are also key considerations to the evaluation of non-performing loans.
Non-performing assets were $731,000 at December 31, 1998, compared to $978,000
at December 31, 1997, a decrease of $247,000 or 25.3%. The Company's ratio of
delinquent loans to total loans was .36% at December 31, 1998, as compared to
.42% at December 31, 1997. Management believes that while delinquency rates and
non-performing assets remain at relatively low levels at December 31, 1998, it
is likely that at some point in the near future some degree of economic slow
down is likely which in turn may result in future increases in problem assets
and loan loss provisions. Management continues to monitor the overall economic
environment and its potential effects on future credit quality on an ongoing
basis.
At December 31, 1998, the Company had outstanding commitments to originate,
purchase and sell residential mortgage loans in the secondary market amounting
to $2,498,000, $26,580,000 and $3,428,000, respectively. The Company also has
outstanding commitments to grant advances under existing home equity lines of
credit amounting to $11,085,000. Unadvanced commitments under outstanding
commercial and construction loans totaled $11,130,000 as of December 31, 1998.
The Company believes it has adequate sources of liquidity to fund these
commitments.
The Company's total stockholders' equity was $33,060,000 or 5.6% of total assets
at December 31, 1998, compared with $36,321,000 or 6.8% of total assets at
December 31, 1997. The decrease in total stockholders' equity of approximately
$3,261,000 or 9.0% primarily resulted from dividends paid and the effect of the
Company's stock repurchase programs, offset in part by earnings of the Company.
As previously discussed, the Company issued $12,650,000 of 8.25% Trust Preferred
Securities in June 1998. Under current regulatory guidelines, trust preferred
securities are allowed to represent up to generally 25% of the Company's Tier 1
capital with any excess amounts available as Tier 2 capital. As of December 31,
1998, approximately $10,686,000 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 December 31, 1998, the Company's Tier 1 leverage capital
ratio was approximately 7.27%. In addition, regulatory authorities have also
implemented risk-based capital guidelines requiring a minimum ratio of Tier 1
capital to risk-weighted assets of 4.00% (6.00% for "well-capitalized") and a
minimum ratio of total capital to risk-weighted assets of 8.00% (10.00% for
"well-capitalized"). At December 31, 1998, the Company's Tier 1 and total
risk-based capital ratios were approximately 12.49% and 13.86%, respectively.
The Company is categorized as "well-capitalized" under the Federal Deposit
Insurance Corporation Improvement Act of 1991 (F.D.I.C.I.A.). The Bank is also
categorized as "well-capitalized" as of December 31, 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. The following constitutes the Company's Year 2000
readiness disclosure under the Year 2000 Information and Readiness Disclosure
Act.
The mission critical information systems of the Company are generally processed
in-house using programs or software provided by third party vendors. Thus, the
direct effort to correct Year 2000 issues will generally be undertaken by larger
companies outside of the Company's control. The Company expects that it will
bring its mission critical systems into compliance with Year 2000 generally
through software upgrades and releases, covered primarily through pre-existing
maintenance contracts on such software or, for some limited exceptions, through
the acquisition and installation of compliant alternative solutions.
Bank regulators have recently issued additional guidance under which they are
assessing Year 2000 readiness. The failure of a financial institution, such as
the Company, to address deficiencies in the Year 2000 management process may
result in enforcement actions which could have a material adverse effect on such
institution, result in the imposition of civil money penalties or result in the
delay (or receipt of 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
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
represent all operating areas of the Company including those who have limited
responsibilities for internal system applications but may have Year 2000
exposure resulting from vendor or correspondent relationships. A formal Year
2000 Action Plan has been developed and was approved by the Board of Directors
in 1997. The Task Force has had regularly scheduled monthly meetings since its
formation with bi-weekly meetings since March 1998 and provides updates to the
full Board of Directors on a monthly basis. The Company also established a Year
2000 Committee in June 1998 comprised of the Chief Executive Officer, Chief
Operations Officer, Director of Management Information Systems and three outside
Directors of the Company. This group has reviewed all Year 2000 plans and the
Company's progress against the detailed plans and objectives established in the
Year 2000 Action Plan. This Committee meets quarterly. The Task Force has
completed an assessment, identifying mission critical systems, and has initiated
formal communications with all third party vendors, including correspondent
financial institutions, to determine the compliance status of all systems
utilized by the Company. Mission critical systems include hardware, software,
program interfaces, operating systems and network. Based upon the results of the
assessment, the Company 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 address the Year 2000 issue was developed along the
five-phase project management process outlined in the Federal Financial
Institutions Examination Council (FFIEC) Year 2000 statement of May 5, 1997 ((i)
awareness; (ii) assessment; (iii) renovation; (iv) validation; and (v)
implementation). The awareness phase has generally been completed. The
assessment phase has consisted of assessing and documenting the Company's
business risk, information systems, and third party vendors, including those who
are not software and hardware or operating system providers.
This phase also included an assessment of the 29 Company's exposure to
additional credit risk as a result of Year 2000 issues with its customers,
particularly for commercial and commercial real estate loans and also for large
depositors. At this point in time, after the completion of such assessment,
management does not believe that there is a material risk or exposure in these
specific areas to credit losses or liquidity problems as a result of Year 2000.
Although credit risk associated with Year 2000 appears to be low for the Company
based upon current assessments, it is not possible to fully evaluate the true
magnitude of increased credit risk associated with Year 2000 at this point in
time. The impact that Year 2000 has on borrowers could result in increases in
problem loans and credit losses in future years. Management will continue,
however, to monitor developments in these areas. The overall assessment phase
has certain elements, including impact of reliance upon outside vendors, which
are currently ongoing. The majority of the assessment phase is otherwise
complete with no critical issues noted.
The validation phase, which includes actual testing of software, hardware,
network, telecom and programming applications, is in process. Thus far, there
have not been any material issues or developments as a result of such testing.
The only testing that remains to be performed is on the internal network. This
testing is expected to be completed by March 31, 1999.
The Company is also in the process of developing contingency plans to ensure
that critical operations continue in the event that its information systems or
other vendors are unable to achieve Year 2000 requirements. At this point, the
Company has not identified any mission critical vendors who have missed target
dates or appear to be at material risk of not achieving Year 2000 requirements.
The chief components of the Company's Year 2000 expenses are generally relating
to the costs of acquiring testing systems, independent auditors and consultants
to assist the Task Force and management in assessing the adequacy of its plan,
testing of its systems, and propriety of its conclusions and, in some instances,
minor programming for system interfaces and the purchase of non-mission critical
software replacements which were necessitated as a result of management's Year
2000 risk assessment and/or testing. It is estimated that the Company has
directly incurred an additional $150,000 in expenses in 1998 related to Year
2000 and management conservatively estimates that approximately $150,000 to
$250,000 in additional expenses may be incurred in 1999. Costs of the project,
however, are based on current estimates and actual results could vary
significantly from such estimates once detailed testing is completed.
IMPACT OF INFLATION
The Consolidated Financial Statements of the Company and related Financial Data
presented herein have been prepared in accordance with generally accepted
accounting principles which generally require the measurement of financial
condition and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The primary impact of inflation on operations of the Company is
reflected in increased operating costs. Unlike most industrial companies, almost
all the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates have a more significant impact on a
financial institution's performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as the price of goods and services.
PROPOSED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments and hedging activities. The
Statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. The Company does not expect that the adoption of this Statement
will have a material impact on the Company's financial position or results of
operation.
21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF ABINGTON BANCORP, INC.:
We have audited the accompanying consolidated balance sheets of Abington
Bancorp, Inc. and subsidiaries ("the Company") as of December 31, 1998 and
1997, and the related statements of operations, changes in stockholders' equity,
comprehensive income and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Abington Bancorp, Inc. and
subsidiaries as of December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Boston, Massachusetts
January 13, 1999
22
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- ------------ --------- ---------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and due from banks (Note 18) $ 15,424 $ 13,312
Short-term investments 4,293 163
--------- ---------
Total cash and cash equivalents 19,717 13,475
--------- ---------
Loans held for sale (Note 6) 3,901 1,332
Securities (Notes 1, 4, 9 and 10):
Held for investment - at cost (fair value
of $64,129 in 1997) -- 64,021
Available for sale - at fair value 181,346 101,031
--------- ---------
Total securities 181,346 165,052
--------- ---------
Loans (Notes 6, 9 and 10) 360,665 332,677
Less: Allowance for possible loan losses (3,077) (2,280)
Unearned income (754) (937)
--------- ---------
Loans, net 356,834 329,460
--------- ---------
Federal Home Loan Bank stock 9,538 8,151
Banking premises and equipment, net (Note 7) 8,328 6,294
Other real estate owned, net (Note 6) -- 265
Intangible assets (Notes 1 and 2) 2,789 3,284
Other assets (Notes 11 and 20) 8,698 4,673
--------- ---------
$ 591,151 $ 531,986
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 8) $ 363,953 $ 324,934
Short-term borrowings (Note 9) 66,628 55,910
Long-term debt (Note 10) 110,500 110,000
Accrued taxes and expenses (Notes 11 and 14) 3,286 3,337
Other liabilities 1,790 1,484
--------- ---------
Total liabilities 546,157 495,665
--------- ---------
Guaranteed preferred beneficial interests in the
Company's junior subordinated debentures (Note 2) 11,934 --
Commitments and contingencies (Note 12)
Stockholders' equity (Notes 3, 4, 13, 16, 17, and 19):
Serial preferred stock, $.10 par value, 3,000,000
shares authorized; none issued -- --
Common stock, $.10 par value, 12,000,000 shares
authorized; 4,795,000 shares issued in 1998
and 4,676,000 shares issued in 1997 480 468
Additional paid-in capital 21,830 21,094
Retained earnings 23,182 19,858
--------- ---------
45,492 41,420
Treasury stock - 1,448,000 and 1,039,000 shares
in 1998 and 1997, at cost (13,283) (5,931)
Compensation plans (114) (231)
Net unrealized gain on available for sale
securities, net of taxes 965 1,063
--------- ---------
Total stockholders' equity 33,060 36,321
--------- ---------
$ 591,151 $ 531,986
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------ --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans (Notes 1, 5 and 6) $ 26,281 $ 24,838 $ 22,978
Interest on mortgage-backed investments 8,393 9,045 9,245
Interest on bonds and obligations 3,027 1,775 1,512
Dividend income 627 589 556
Interest on short-term investments 114 50 41
--------- --------- ---------
Total interest and dividend income 38,442 36,297 34,332
--------- --------- ---------
Interest expense:
Interest on deposits (Note 8) 11,751 11,057 10,742
Interest on short-term borrowings (Note 9) 2,279 2,557 3,733
Interest on long-term debt (Note 10) 7,555 6,477 5,042
--------- --------- ---------
Total interest expense 21,585 20,091 19,517
--------- --------- ---------
Net interest income 16,857 16,206 14,815
Provision for possible loan losses (Note 6) 760 630 480
--------- --------- ---------
Net interest income, after provision for
possible loan losses 16,097 15,576 14,335
--------- --------- ---------
Non-interest income:
Loan servicing fees (Note 6) 469 558 646
Other customer service fees 3,816 3,276 2,412
Gain on sales of securities, net 1,731 540 495
Gain on sales of mortgage loans, net 492 236 315
Net gain on sales and write-down of other
real estate owned 43 109 67
Other 358 267 242
--------- --------- ---------
Total non-interest income 6,909 4,986 4,177
--------- --------- ---------
Non-interest expense:
Salaries and employee benefits (Notes 12, 14 and 17) 7,832 6,660 6,075
Occupancy and equipment expenses (Notes 7 and 12) 2,679 2,420 2,374
Trust preferred securities expense (Note 2) 586 -- --
Other non-interest expenses (Note 15) 5,170 4,425 4,391
--------- --------- ---------
Total non-interest expense 16,267 13,505 12,840
--------- --------- ---------
Income before income taxes 6,739 7,057 5,672
Provision for income taxes (Note 11) 2,368 2,679 2,139
--------- --------- ---------
Net income $ 4,371 $ 4,378 $ 3,533
--------- --------- ---------
--------- --------- ---------
Earnings per share (Note 1):
Basic -
Net income per share $ 1.25 $ 1.18 $ .94
--------- --------- ---------
--------- --------- ---------
Weighted average common shares 3,491,000 3,716,000 3,774,000
--------- --------- ---------
--------- --------- ---------
Diluted -
Net income per share $ 1.17 $ 1.10 $ .89
--------- --------- ---------
--------- --------- ---------
Weighted average common shares
and share equivalents 3,722,000 3,966,000 3,964,000
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGE IN STOCKHOLDERS' EQUITY
Net
Unrealized
Gain (Loss)
Additional on Available
Common Paid-in Retained Treasury for Sale Compensation
(DOLLARS IN THOUSANDS) Stock Capital Earnings Stock Securities Plans Total
- ---------------------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 466 $ 20,811 $ 13,442 $ (3,703) $ (62) $ (393) $ 30,561
Net income -- -- 3,533 -- -- -- 3,533
Issuance of stock 1 112 -- -- -- -- 113
Amortization of unearned compensation -
ESOP -- -- -- -- -- 81 81
Dividends declared ($.20 per share) -- -- (754) -- -- -- (754)
Change in market value on
available for sale securities, net of taxes -- -- -- -- 12 -- 12
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1996 $ 467 $ 20,923 $ 16,221 $ (3,703) $ (50) $ (312) $ 33,546
Net income -- -- 4,378 -- -- -- 4,378
Issuance of stock 1 171 -- -- -- -- 172
Amortization of unearned compensation -
ESOP -- -- -- -- -- 81 81
Dividends declared ($.20 per share) -- -- (741) -- -- -- (741)
Repurchase of common stock -- -- -- (2,228) -- -- (2,228)
Change in market value on
available for sale securities, net of taxes -- -- -- -- 1,113 -- 1,113
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1997 $ 468 $ 21,094 $ 19,858 $ (5,931) $ 1,063 $ (231) $ 36,321
Net income -- -- 4,371 -- -- -- 4,371
Issuance of stock 12 736 -- -- -- -- 748
Amortization of unearned compensation -
ESOP -- -- -- -- -- 81 81
Obligation related to directors'
deferred stock plan -- -- -- -- -- 36 36
Dividends declared ($.30 per share) -- -- (1,047) -- -- -- (1,047)
Repurchase of common stock -- -- -- (7,352) -- -- (7,352)
Effect of reclassification of securities from
held-to-maturity to available for sale,
net of taxes -- -- -- -- 245 -- 245
Change in market value on
available for sale securities, net of taxes -- -- -- -- (343) -- (343)
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1998 $ 480 $ 21,830 $ 23,182 $(13,283) $ 965 $ (114) $ 33,060
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 1998 1997 1996
------ ------ -------
(Dollars in thousands)
<S> <C> <C> <C>
Net income, as reported $4,371 $4,378 $3,533
Unrealized gains on securities, net of taxes 782 1,448 320
Less: Reclassification adjustment for securities gains
included in net income, net of taxes 1,125 335 308
------ ------ -------
Comprehensive income before transfers of
held-to-maturity securities 4,028 5,491 3,545
Add: Net unrealized gains on securities transferred
from held-to-maturity to available for sale, net of taxes 245 -- --
------ ------ -------
Comprehensive income $4,273 $5,491 $3,545
------ ------ -------
------ ------ -------
</TABLE>
26
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------ --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,371 $ 4,378 $ 3,533
Adjustments to reconcile net income to net cash
from operating activities:
Provision for possible loan losses 760 630 480
Net gain on sales and write-down of other real
estate owned and investment in limited partnership (43) (109) (67)
Amortization, accretion and depreciation, net 1,800 1,798 1,784
Provision for (prepaid) deferred taxes (66) (166) 131
Gain on sales of securities, net (1,731) (495)
Gain on sales of mortgage loans, net (492) (236) (315)
Loans originated for sale in the secondary market (34,481) (17,688) (18,344)
Proceeds from sales of loans 32,404 19,768 18,440
Other, net (3,505) (1,101) 1,922
--------- --------- ---------
Net cash (used in) provided by operating activities (983) 6,734 7,069
--------- --------- ---------
Cash flows from investing activities:
Purchase of held for investment securities (2,844) (8,968) (3,633)
Proceeds from principal payments received
and redemptions of held for investment securities 5,562 8,571 8,734
Proceeds from sales of available for sale securities 74,624 32,126 36,665
Proceeds from principal payments on and maturities
of available for sale securities 49,979 19,041 15,517
Purchase of available for sale securities (142,019) (58,323) (47,244)
Loans originated/purchased, net of amortization and payoffs (28,134) (34,721) (41,746)
Proceeds from sales of loans held in portfolio -- -- 3,038
Purchases of FHLB stock (1,387) (248) (504)
Purchase of banking premises and equipment and
improvements to other real estate owned (3,269) (1,192) (972)
Proceeds from sales of other real estate owned 308 769 564
Investments and advances made to low income housing
limited partnerships -- -- (40)
--------- --------- ---------
Net cash used in investing activities (47,180) (42,945) (29,621)
--------- --------- ---------
Cash flows from financing activities:
Net increase in deposits 39,019 24,489 20,375
Net increase (decrease) in borrowings with
maturities of 3 months or less (14,282) 19,739 11,363
Proceeds from issuance of short-term borrowings
with maturities in excess of 3 months 45,000 20,000 37,000
Principal payments on short-term borrowings with
maturities in excess of 3 months (20,000) (47,000) (46,500)
Proceeds from issuance of long-term debt 50,000 49,500 37,000
Principal payments on long-term debt (49,500) (23,853) (36,948)
Net proceeds on issuance of guaranteed preferred
beneficial interests in junior subordinated debentures 11,915 -- --
Payment of cash dividends (1,062) (741) (754)
Purchase of treasury stock (7,352) (2,228) --
Proceeds from the exercise of stock options 667 72 113
--------- --------- ---------
Net cash provided by financing activities 54,405 39,978 21,649
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 6,242 3,767 (903)
Cash and cash equivalents at beginning of year 13,475 9,708 10,611
--------- --------- ---------
Cash and cash equivalents at end of year $ 19,717 $ 13,475 $ 9,708
--------- --------- ---------
--------- --------- ---------
</TABLE>
27
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------ ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Supplemental cash flow information:
Interest paid on deposits $11,718 $11,063 $10,741
Interest paid on borrowed funds 9,807 8,935 8,891
Income taxes paid 3,154 3,717 379
Transfers of loans to other real estate owned -- 425 62
Transfers of securities to available for sale
from held for investment 61,232 -- --
</TABLE>
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements include the accounts of Abington Bancorp,
Inc. (the "Company") and its wholly-owned subsidiaries, Abington Savings Bank
(the "Bank") and Abington Bancorp Capital Trust (See Note 2). The Bank also
includes its wholly-owned subsidiaries, Holt Park Place Development Corporation
and Norroway Pond Development Corporation, each typically owning properties
being marketed for sale, ABBK Corporation, which invested in real estate limited
partnerships and was dissolved in January 1997, and Abington Securities
Corporation, which invests primarily in obligations of the United States
Government and its agencies and equity securities.
Abington Bancorp, Inc. was reestablished as the Bank's holding company on
January 31, 1997. Previously, the Company's predecessor, also known as Abington
Bancorp, Inc., had served as the Bank's holding company from February 1988 until
its dissolution in December 1992. The Company's primary business is serving as
the holding company of the Bank.
On January 31, 1997, in connection with the holding company formation, each
share of the Bank's common stock previously outstanding was converted
automatically into one share of common stock of the Company, and the Bank became
a wholly-owned subsidiary of the Company. This 37 reorganization had no impact
on the consolidated financial statements. All significant intercompany balances
and transactions have been eliminated in consolidation.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of income and expenses during the reporting periods.
Operating results in the future could vary from the amounts derived from
management's estimates and assumptions.
RECLASSIFICATIONS
Certain amounts in the 1997 and 1996 consolidated financial statements have been
reclassified to conform to the 1998 presentation.
CASH EQUIVALENTS
Cash equivalents include amounts due from banks, short-term investments with
original maturities of less than 3 months and federal funds sold on a daily
basis.
SECURITIES
Investment securities are classified in 1 of 3 categories and are accounted for
as follows:
- - Debt securities that the Company has the positive intent and ability to
hold to maturity are classified as "held for investment" securities and
reported at amortized cost.
- - Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as "trading
securities" and reported at fair value, with unrealized gains and losses
included in earnings.
- - Debt and equity securities not classified as either held for investment or
trading are classified as "available for sale" and reported at fair value
with unrealized gains and losses excluded from earnings and reported in a
separate component of stockholders' equity, net of applicable income tax
effects.
The Company had no securities classified as trading securities at December 31,
1998 and 1997.
Mortgage-backed investments, held for investment, are stated at amortized cost
reduced by principal payments with discounts and premiums being recognized in
income by the interest method over the expected maturity of the investments.
Gains and losses on the disposition of securities are computed using the
specific identification method. Unrealized losses which are deemed to be other
than temporary declines in value are charged to operations.
As of June 30, 1998, the Company elected to transfer the balance of its
securities classified as held for investment to available for sale in accordance
with the guidelines set forth by Statement of Financial Accounting Standards
(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 the time of
transfer there had 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 for
investment. Under Securities Exchange Commission guidelines, this
reclassification prohibits the Company from classifying securities as held for
investment for a period of at least 2 years.
LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Company grants mortgage, commercial and consumer loans to customers. A
substantial portion of the loan portfolio consists of mortgage loans in the
southeastern Massachusetts area. The ability of the Company's debtors to honor
their contracts is generally dependent upon the stability of real estate market
and the general economic conditions in the Company's market area.
Of the total loan portfolio at December 31, 1998, approximately 34% represent
owner-occupied first mortgages located throughout the United States. In the
purchased loan portfolio, the Company owns approximately $33,000,000 and
$18,000,000 of loans collateralized by residential properties located in
California and Rhode Island, respectively. No other concentrations in any other
states, except for Massachusetts, exceed 3% of total 38 loans.
Loan origination and commitment fees and certain direct loan origination costs,
as defined, are deferred and amortized as a yield adjustment over the
contractual life of the related loans under the interest method. Premiums and
discounts on purchased residential loans are also amortized as a yield
adjustment by the interest method over the estimated duration of the
investments. Unearned discounts are amortized under the interest method over the
term of the related loans. All other interest on loans is recognized on a simple
interest basis.
Interest on loans is generally not accrued when the principal or interest on the
loan becomes delinquent in excess of 90 days, and/or in the judgment of
management the collectibility of the principal or interest becomes doubtful.
When a loan is placed on a non-accrual status, all interest previously accrued
but not collected is reversed against interest income in the current period.
Interest income is subsequently recognized only to the extent cash payments are
received.
The allowance for possible loan losses is based on management's evaluation of
the
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
level of the allowance required in relation to the estimated loss exposure in
the loan portfolio. Procedures employed in considering the allowance
requirements include, among other factors, management's ongoing review of
individual loans, trends in levels of watched or criticized assets, an
evaluation of results of examinations by regulatory authorities and analyses of
historical trends in charge-offs and delinquencies. Loans are charged-off to the
allowance for loan losses when, in the opinion of management, such loans are
deemed to be uncollectible. The allowance is an estimate, and ultimate losses
may vary from current estimates. As adjustments become necessary, they are
reported in earnings during the periods in which they become known.
The allowance for possible loan losses as of December 31, 1998 is based on
management's estimate of the amount required to absorb losses in the loan
portfolio based on known current circumstances and real estate market
conditions. Additionally, management assesses the risk of increased, inherent
but unidentified losses which may exist through evaluation of watched asset
report trends and migration analysis, the results of which are reflected in
current reserves. However, some degree of uncertainty exists as to future trends
in the local economy and real estate market which, if there is significant
deterioration, could result in the Company experiencing increases in
non-performing loans, additional provisions for loan losses and increased lost
interest income on non-accrual loans.
Funds for lending are partially derived from selling participating and whole
interests in mortgage loans. Loans designated as held for sale are accounted for
at the lower of their aggregate cost or market value. Gains or losses on sales
of loans are recognized at the time of the sale and are adjusted when the
average interest rate on the loans sold, after normal servicing fees, differs
from the agreed yield to the buyer.
MORTGAGE SERVICING RIGHTS
On January 1, 1996, the Company adopted SFAS No. 122, "Accounting for Mortgage
Servicing Rights." This statement, which was superseded in June 1996 upon the
issuance of SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities," requires the recognition of a
separate asset for the rights to service mortgage loans for others regardless of
how those servicing rights were created. SFAS No. 125 impacts the Company to the
extent fixed rate loan originations having terms in excess of 15 years are sold
in the secondary mortgage market with servicing of the related loan retained by
the Company. In such cases, the Company is required to allocate a portion of the
cost of the loan to the mortgage servicing rights based on the relative fair
values of such servicing rights and the loan. The value of such servicing rights
is to be periodically assessed for impairment based on the fair value of those
rights. During 1996, the Company capitalized approximately $103,000 of mortgage
servicing rights which resulted in a corresponding increase in gains on sales of
mortgages. No mortgage servicing rights were capitalized in 1997 nor 1998 as
substantially all loan sales on the secondary market were made on a servicing
released basis. All previously capitalized mortgage servicing rights were
written-off in 1997 as the result of higher than anticipated prepayment
experience on the related loan portfolios.
OTHER REAL ESTATE OWNED
Real estate acquired by foreclosure and acquired by deed in lieu of foreclosure
are classified as other real estate owned and initially recorded at the lower of
cost or fair value less estimated selling costs. In the event subsequent
declines in value are identified, other real estate owned is adjusted to fair
market value through a charge to non-interest income.
The fair value for these assets is based on periodic analysis of the real estate
by management. Factors considered include, but are not limited to, general
economic and market conditions, geographic location, the composition of the real
estate holdings and property conditions.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF
The management of the Company reviews long-lived assets and certain identifiable
intangibles to be held and used for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If impairment is deemed to exist, long-lived assets and certain
identifiable intangibles are reported at the lower of the carrying amount or
fair value 39 less cost to sell.
BANKING PREMISES AND EQUIPMENT
Land is carried at cost. Buildings, leasehold improvements and equipment are
carried at cost less accumulated depreciation computed on the straight-line
method over the estimated useful lives of the assets, or the terms of the
leases, if shorter. The cost of maintenance and repairs are expensed as
incurred; major expenditures for betterments are capitalized and depreciated.
INVESTMENT IN REAL ESTATE LIMITED PARTNERSHIP
The Company has investments in a real estate limited partnership which is
accounted for on the cost recovery method and have been substantially
written-off as of December 31, 1998. The carrying value of this investment and
related deferred tax assets is periodically evaluated by management as to its
expected future recoverability and write-downs are recorded once an impairment
in value is identified and quantified.
INTANGIBLE ASSETS
Core deposit intangibles are being amortized on a straight-line basis over their
estimated lives of 7 to 10 years. Goodwill is being amortized on a straight-line
basis over 10 to 15 years. The carrying value of these assets is periodically
evaluated by management as to their expected future recoverability. To date no
write-downs have been recognized.
INCOME TAXES
Tax assets and liabilities are reflected at currently enacted income tax rates.
As changes in tax laws and rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
EARNINGS PER SHARE
In 1997, the Company adopted the provisions of SFAS No. 128, "Earnings Per
Share." The only reconciling difference between the Company's computation of
basic and diluted earnings per share is the diluitive effect of stock options
issued and unexercised (see Note 16 for stock options). Additionally, on October
30, 1997, the Board of Directors of Abington Bancorp, Inc. approved a split of
its common stock on a 2-for-1 basis in the form of a stock dividend payable on
December 12, 1997, to share-holders of record as of November 14, 1997. All share
and per share data presented in these consolidated financial statements has been
retroactively restated for this event.
COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for the 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; unrealized gains and losses on debt and equity securities in
the case of the Company. This
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
statement requires that an enterprise (a) classify items of other comprehensive
income by their nature in a financial statement 13. Stockholders' Equity
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.
STOCK BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25), and related interpretations in accounting
for its stock-based compensation plans (Note 16). Accordingly, no accounting
recognition is given to options granted at fair market value until they are
exercised. Upon exercise, net proceeds, including tax benefits realized, if any,
are credited to equity.
Effective in 1995, the Company adopted the disclosure option of SFAS No. 123,
"Accounting for Stock Based Compensation." SFAS No. 123 defines a fair value
based method of accounting for an employee stock option or similar equity
instrument and encourages all entities to adopt that method of accounting for
their employee stock compensation plans. This statement requires that entities
which do not choose to account for stock-based compensation as prescribed by
this statement shall continue to account for these plans under APB 25 and
disclose the pro forma effects on earnings and earnings per 14. Employee Benefit
Plan share as if SFAS No. 123 had been adopted.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board (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.
2. GUARANTEED PREFERRED BENEFICIAL INTEREST IN THE COMPANY'S JUNIOR SUBORDINATED
DEBENTURES (TRUST PREFERRED SECURITIES)
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 5 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 8.25% trust preferred securities pay quarterly distributions which
commenced 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 anticipated
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 as minority interest 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.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory requirements
administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory -
and possibly additional discretionary - actions by regulators that, if
undertaken, could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and Bank must meet specific capital
guidelines that involve quantitative measures of the Company's and the Bank's
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company's and the Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk-weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes as of December 31,
1998, that the Company and the Bank met all capital adequacy requirements to
which they are subject.
As of December 31, 1998, the most recent notification from the FDIC categorized
the Bank as well-capitalized under the regulatory framework for prompt
corrective action. There are no conditions or events since that notification
that management believes have changed the institution's category. To be
considered well-capitalized under the regulatory framework for prompt corrective
action, the Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based, and
total risk-based capital ratios as set forth in the table below.
<TABLE>
<CAPTION>
TO BE WELL-
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
As of December 31, 1998:
Company
Total Capital (to risk-weighted assets) $44,399 13.86% $25,633 8.00% N/A N/A
Tier 1 capital (to risk-weighted assets) $40,004 12.49% $12,817 4.00% N/A N/A
Tier 1 capital (to average assets) $40,004 7.27% $22,024 4.00% N/A N/A
Bank
Total Capital (to risk-weighted assets) $36,792 11.56% $25,460 8.00% $31,825 10.00%
Tier 1 capital (to risk-weighted assets) $33,715 10.59% $12,730 4.00% $19,095 6.00%
Tier 1 capital (to average assets) $33,715 5.95% $22,668 4.00% $28,335 5.00%
As of December 31, 1997:
Company
Total Capital (to risk-weighted assets) $34,254 13.02% $21,053 8.00% N/A N/A
Tier 1 capital (to risk-weighted assets) $31,974 12.15% $10,526 4.00% N/A N/A
Tier 1 capital (to average assets) $31,974 6.01% $21,279 4.00% N/A N/A
Bank
Total Capital (to risk-weighted assets) $32,982 12.54% $21,047 8.00% $26,309 10.00%
Tier 1 capital (to risk-weighted assets) $30,702 11.67% $10,524 4.00% $15,785 6.00%
Tier 1 capital (to average assets) $30,702 5.72% $21,279 4.00% $26,845 5.00%
</TABLE>
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. SECURITIES
The amortized cost and fair value of securities classified as held for
investment at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
Mortgage-backed securities:
Federal Home Loan
Mortgage Corporation $16,502 $ 62 $ 197 $16,367
Federal National
Mortgage Association 28,624 358 212 28,770
Government National
Mortgage Association 1,434 4 -- 1,438
Other 17,461 147 54 17,554
------- ------- ------- -------
Total mortgage-backed securities $64,021 $ 571 $ 463 $64,129
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
The amortized cost and fair value of securities classified as available for sale
at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
AT DECEMBER 31, 1998 1997
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. Government obligations $ 652 $ 23 $ -- $ 675 $ 683 $ -- $ -- $ 683
Federal agency obligations 25,842 204 92 25,954 30,112 143 48 30,207
Other bonds and obligations 20,799 303 881 20,221 3,095 28 3 3,120
-------- -------- -------- -------- -------- -------- -------- --------
Total investment securities 47,293 530 973 46,850 33,890 171 51 34,010
-------- -------- -------- -------- -------- -------- -------- --------
Marketable equity securities 4,339 727 270 4,796 4,137 996 106 5,027
Mortgage-backed securities:
Federal Home Loan
Mortgage Corporation 14,540 125 36 14,629 12,906 186 30 13,062
Federal National
Mortgage Association 45,527 818 22 46,323 29,660 586 71 30,175
Government National
Mortgage Association 22,943 172 81 23,034 9,476 -- 44 9,432
Other 45,096 890 272 45,714 9,235 90 -- 9,325
-------- -------- -------- -------- -------- -------- -------- --------
Total mortgage-backed
securities 128,106 2,005 411 129,700 61,277 862 145 61,994
-------- -------- -------- -------- -------- -------- -------- --------
$179,738 $ 3,262 $ 1,654 $181,346 $ 99,304 $ 2,029 $ 302 $101,031
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
The fair value and amortized cost of investments and mortgage-backed securities,
respectively, at December 31, 1998 by contractual maturity follows. Expected
maturities or cash flows from securities will differ from contractual maturities
because the issuer may have the right to call or repay obligations with or
without call or prepayment penalties. Projected payments and prepayments for
mortgage-backed securities have not been considered for purposes of this
presentation.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INVESTMENT SECURITIES AMORTIZED COST % TO TOTAL FAIR VALUE
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Within 1 year $ -- $ --
Over 1 year to 5 years 4,726 10.0 4,803
Over 5 years to 10 years 21,842 46.2 21,929
Over 10 years 20,725 43.8 20,118
------- ----- -------
$47,293 100.0% $46,850
------- ----- -------
------- ----- -------
</TABLE>
<TABLE>
<CAPTION>
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
(DOLLARS IN THOUSANDS)
AMORTIZED FAIR
COST VALUE
<S> <C> <C>
Within 1 year $ -- $ --
Over 1 year to 5 years 5,968 5,998
Over 5 years to 10 years 5,157 5,295
Over 10 years 116,981 118,407
-------- --------
$128,106 $129,700
-------- --------
-------- --------
</TABLE>
Gross gains on sales of marketable equity securities were $1,591,000, $687,000
and $407,000 for 1998, 1997 and 1996, respectively. There were losses of
$118,000 on sales of equity securities in 1998. There were no losses on sales
of equity securities in 1997 or 1996.
Gross gains on sales of investment securities were $12,000, $0 and $30,000 for
1998, 1997 and 1996, respectively. Gross losses on sales of investment
securities were $0, $54,000 and $54,000 for 1998, 1997 and 1996, respectively.
Proceeds from sales of mortgage-backed investments classified as available for
sale during 1998, 1997 and 1996 were $58,011,000, $26,402,000 and $17,082,000,
respectively. Gross gains of $324,000, $142,000 and $130,000 in 1998, 1997 and
1996, respectively, were realized on those sales. Gross losses of $78,000,
$235,000 and $18,000 were realized in 1998, 1997 and 1996, respectively.
A U.S. agency obligation security with a carrying value of $1,098,000 was
pledged to collateralize treasury, tax and loan obligations.
All agency and mortgage-backed securities also serve as collateral for FHLB
borrowings as part of a blanket collateral agreement as further described in
Note 9.
5. INTEREST RATE SWAP AGREEMENT
To help manage interest rate sensitivity on the Company's adjustable rate
mortgage loan portfolio, the Company entered into an interest rate swap
agreement in July 1994 for a period of 36 months with an international
investment banking firm. Under this agreement, the Company received a fixed rate
of interest of 5.35% on the notional amount and paid interest based on the 6
month floating LIBOR rate on the notional amount which reset semi-annually
(February and August). The notional amount of this swap was initially
$15,000,000. This amount amortized at a rate consistent with the amortization
and prepayment of a reference pool of residential mortgages as specified in the
agreement. In addition to the fixed rate of interest, the Company also received
$300,000 in cash upon execution of this agreement. This amount was accreted to
income over the life of the agreement at a rate consistent with the
aforementioned reference pool of mortgages. The resulting yield received by the
Company, including the impact of the accretion, was approximately 6.25% in 1997.
This agreement expired on August 15, 1997.
Net interest income (expense) associated with this swap was recognized based on
the accrual method. The net interest income recognized by the Bank during 1997
and 1996 as a result of this agreement was $34,000 and $77,000, respectively.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LOANS AND OTHER REAL ESTATE OWNED
A summary of the loan portfolio follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Mortgage loans:
Residential $ 270,887 $ 249,165
Second mortgages and home equity 20,339 20,392
Construction 7,109 7,681
Commercial 50,493 39,341
--------- ---------
348,828 316,579
Less: Due to borrowers on incomplete loans (2,557) (2,166)
Net deferred loan fees (626) (813)
--------- ---------
Total mortgage loans 345,645 313,600
Commercial loans:
Unsecured lines of credit 211 245
Secured and unsecured 9,262 7,399
--------- ---------
9,473 7,644
Net deferred loan fees (127) (124)
--------- ---------
Total commercial loans 9,346 7,520
Other loans:
Indirect automobile 158 1,263
Personal 1,393 1,562
Education 62 423
Passbook and other secured 6,951 8,323
Home improvement 257 381
--------- ---------
Total other loans 8,821 11,952
--------- ---------
Total loans 363,812 333,072
Less allowance for possible loan losses (3,077) (2,280)
--------- ---------
Loans and loans held for sale, net $ 360,735 $ 330,792
--------- ---------
--------- ---------
</TABLE>
Included in residential real estate mortgages at December 31, 1998 and 1997,
respectively, are approximately $3,901,000 and $1,332,000 of loans held for
sale. At December 31, 1998 and 1997, the estimated market values of loans held
for sale was in excess of their carrying value. The Company was servicing
mortgage loans sold under non-recourse agreements amounting to approximately
$153,145,000 and $208,073,000 at December 31, 1998 and 1997, respectively.
In the ordinary course of business, the Company has granted loans to certain of
its officers and directors and their affiliates. All transactions are on
substantially the same terms as those prevailing at the same time for
individuals not affiliated with the Bank and do not involve more than the normal
risk of collectibility. The total amount of such loans which exceeded $60,000 in
aggregate amount to any related party amounted to $1,216,000 at December 31,
1998, and $1,714,000 at December 31, 1997. During the year ended December 31,
1998, total principal additions were $213,000 and total principal reductions
were $711,000.
The following analysis summarizes the Company's non-performing assets at
December 31, 1998 and 1997.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Impaired loans or loans accounted for on a non-accrual basis $681 $622
Accruing loans past due 90 days or more as to principal or interest 50 91
---- ----
Total non-performing loans 731 713
Other real estate owned, net -- 265
---- ----
Total non-performing assets $731 $978
---- ----
---- ----
</TABLE>
Impaired loans totaling $77,000 and $293,000 at December 31, 1998 and 1997,
respectively, required an allocation of $20,000 and $45,000, respectively, of
the allowance for possible loan losses. The remaining impaired loans did not
require any allocation of the reserve for possible loan losses. The average
balance of impaired loans was approximately $622,000 and $966,000in 1998 and
1997, respectively. The total amount of interest income recognized on impaired
loans during 1998 and 1997 was approximately $55,000 and $50,000, respectively,
which approximated the amount of cash received for interest during those
periods. The Company has no commitments to lend additional funds to borrowers
whose loans have been deemed to be impaired. An analysis of the allowance for
possible loan losses follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at beginning of year $ 2,280 $ 1,811
Provision 760 630
Recoveries 261 205
------- -------
3,301 2,646
Loans charged-off (224) (366)
------- -------
Balance at end of year $ 3,077 $ 2,280
------- -------
------- -------
</TABLE>
7. BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation of banking premises and
equipment and their estimated useful lives is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997 ESTIMATED USEFUL LIVES
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Banking premises:
Land $ 1,971 $ 671
Buildings and improvements 5,345 5,000 10-25 years
Leasehold improvements 883 637 10-15 years
Equipment 9,597 8,219 3-10 years
------- -------
17,796 14,527
Less accumulated depreciation (9,468) (8,233)
------- -------
$ 8,328 $ 6,294
------- -------
------- -------
</TABLE>
Depreciation expense for the years ended December 31, 1998, 1997 and 1996
amounted to $1,235,000, $1,243,000 and $1,154,000, respectively.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. DEPOSITS
A summary of deposit balances, by type, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-interest NOW $ 43,874 $ 33,925
NOW 50,569 41,278
Other savings 90,823 81,923
Money market deposits 14,995 15,477
---------- ----------
Total non-certificate accounts 200,261 172,603
Term certificate accounts 131,305 125,661
Certificates of deposit greater than $100 32,387 26,670
---------- ----------
Total certificate accounts 163,692 152,331
---------- ----------
Total deposits $363,953 $324,934
---------- ----------
---------- ----------
</TABLE>
A summary of certificate accounts by maturity is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
(DOLLARS IN THOUSANDS)
WEIGHTED WEIGHTED
AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
------ ------------ ------ ------------
<S> <C> <C> <C> <C>
Within 1 year $119,064 5.24% $102,681 5.53%
Over 1 year to 3 years 38,886 5.82 43,846 6.26
Over 3 years to 5 years 5,742 5.25 5,804 5.67
-------- --------
$163,692 5.38% $152,331 5.74%
-------- --------
-------- --------
</TABLE>
9. SHORT-TERM BORROWINGS
Short-term borrowings consist primarily of Federal Home Loan Bank advances with
original maturities of 1 year or less. All borrowings from the Federal Home
Loan Bank of Boston are secured under a blanket lien by certain qualified
collateral defined principally as 85% to 90% of the carrying value of U.S.
Government and agency obligations, including mortgage-backed securities, and 75%
of the carrying value of residential mortgage loans. Information relating to
activity and rates paid under these borrowing agreements is presented below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Maximum amount of borrowings outstanding during the year $83,778 $94,506 $78,300
Average month-end borrowings outstanding during the year $42,039 $45,833 $66,790
Average interest rate during the year 5.42% 5.58% 5.59%
Unused line of credit at Federal Home Loan Bank of Boston $ 9,733 $ 4,780 $ 8,767
Amount outstanding at end of year $66,628 $55,910 $63,171
Weighted average interest rate at end of year 5.09% 5.68% 5.68%
</TABLE>
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. LONG-TERM DEBT
A summary of long-term debt, consisting of FHLB advances with an
original maturity of greater than 1 year is as follows:
<TABLE>
<CAPTION>
MATURITY DATE INTEREST RATE DECEMBER 31, 1998 DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
February 4, 1998 5.30% $ - $ 4,500
July 20, 1998 5.78 - 5,000
September 30, 1998 6.22 - 5,000
November 9, 1998 5.80 - 15,000
November 13, 1998 5.90 - 5,000
May 4, 1999* 5.05 5,000 5,000
May 13, 1999 6.38 4,000 4,000
September 16, 1999 6.66 5,000 5,000
October 20, 1999 6.06 5,000 5,000
November 1, 1999 6.23 5,000 5,000
February 24, 2000** 5.79 16,000 16,000
March 6, 2000 6.51 4,000 4,000
March 20, 2000 6.61 5,000 5,000
April 11, 2000 6.82 4,000 4,000
September 14, 2000 5.15 5,000 -
October 20, 2000 6.21 5,000 5,000
March 6, 2001 6.66 4,000 4,000
March 19, 2001 6.77 5,000 5,000
April 11, 2001 6.98 4,000 4,000
May 14, 2001 6.74 4,000 4,000
January 8, 2008*** 4.99 15,000 -
September 2, 2008**** 4.99 5,000 -
December 9, 2017 5.66 500 500
July 27, 2017+ 4.99 10,000 -
-------- -----------
$110,500 $110,000
-------- -----------
-------- -----------
</TABLE>
* LIBOR Roating advance with a monthly reset
** Variable rate advance with quarterly resets, with prepayment
option at reset dates without penalty
*** Option advance; callable quarterly at FHLB option commencing
January 8, 1999
**** Option advance; callable quarterly at FHLB option commencing
September 1, 1999
+ Option advance; callable quarterly at FHLB option commencing
July 28, 1999
11. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current: Federal $2,325 $2,509 $1,704
State 109 336 304
------ ------ ------
2,434 2,845 2,008
Deferred: Federal (49) (121) 110
State (17) (45) 21
------ ------ ------
(66) (166) 131
------ ------ ------
Total $2,368 $2,679 $2,139
------ ------ ------
------ ------ ------
</TABLE>
The reason for the differences between the effective tax rates and the statutory
tax rates are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
State taxes, net of federal benefit .9 2.7 3.8
Effect of amortization of non-deductible goodwill .6 .6 .7
Other, net (.4) .7 (.8)
------ ------ ------
35.1% 38.0% 37.7%
------ ------ ------
------ ------ ------
</TABLE>
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of net deferred taxes as recorded as of December 31, 1998 and
1997 are as follows (assets/(liabilities)):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Loan loss reserves $1,179 $ 827
Loan fee income - 40
Dividends on deposits not yet deducted
for tax purposes 34 74
Pension expense 159 94
Equity in partnership losses (1,474) (1,391)
Core deposit intangible (168) (312)
Other, net (40) 76
--------- ---------
(310) (492)
Deferred tax liabilities applicable to unrealized
losses on securities (658) (597)
--------- ---------
Net deferred tax liabilities included
in other liabilities
$(968) $(1,089)
--------- ---------
--------- ---------
</TABLE>
In August of 1996, Congress passed the Small Business Job Protection Act of
1996. Included in this bill was the repeal of IRC Section 593, which allowed
thrift institutions special provisions in calculating bad debt deductions for
income tax purposes. Thrift institutions now will be viewed as commercial banks
for income tax purposes. The repeal is effective for tax years beginning after
December 31, 1995.
One effect of this legislative change is to suspend the Bank's bad debt reserve
for income tax purposes as of its base year (October 31, 1988). Any bad debt
reserve in excess of the base year amount is subject to recapture over a 6 year
time period. The suspended (i.e., base year) amount is subject to recapture upon
the occurrence of certain events, such as complete or partial redemption of the
Bank's stock or if the Bank ceases to qualify as a bank for income tax purposes.
At December 31, 1998, the Bank's surplus includes approximately $1,960,000 of
bad debt deductions for which income taxes have not been provided. As the Bank
does not intend to use the reserve for purposes other than to absorb loan
losses, deferred taxes of approximately $820,000 have not been provided on this
amount.
12. COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding commitments and
contingencies which are not reflected in the consolidated financial statements.
LITIGATION
The Company is a defendant in various legal claims incident to its business,
none of which is believed by management, based on the advice of legal counsel,
to be material to the consolidated financial statements.
SPECIAL TERMINATION AGREEMENTS
The Company has entered into Special Termination Agreements with five officers
which provide for a lump-sum severance payment within a 3 year period following
a "change in control," as defined in the agreements.
LOAN AND GENERAL COMMITMENTS
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments principally include commitments to extend credit and
advance funds on outstanding lines of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheet. The contract amounts or unpaid principal
balance of those instruments reflect the extent of involvement the Company has
in these particular classes of financial instruments.
The Company's exposure to credit loss is represented by the contractual amount
or unpaid principal balance of those instruments. The Company uses the same
credit policies in making commitments and conditional obligations as it does for
financial instruments reflected on the balance sheet. Financial instruments
which represent credit risk at December 31, 1998 and 1997 are as follows:
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998 1997
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Contract amount of:
Commitments to grant loans $11,071 $ 8,359
Commitments to sell loans 3,428 1,415
Unadvanced funds on home equity lines of credit 11,085 11,230
Unadvanced funds on other lines of credit 499 2,242
Commitments to advance funds under
construction loan agreements 2,557 2,166
Commitments to purchase loans 26,580
</TABLE>
Commitments to grant loans are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The commitments for lines of credit may expire
without being drawn upon. Therefore, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's credit worthiness on a case-by-case basis.
LEASE COMMITMENTS
Pursuant to the terms of non-cancelable lease agreements in effect, future
minimum rent commitments for the next 5 years and thereafter are as follows at
December 31, 1998:
<TABLE>
<CAPTION>
YEAR AMOUNT
(DOLLARS IN THOUSANDS)
<S> <C>
1999 $ 360
2000 316
2001 262
2002 274
2003 290
2004 and thereafter 2,029
-------
$3,531
-------
-------
</TABLE>
Certain leases also contain renewal options (up to 10 years) and real estate tax
escalation clauses. Rent expense for the years ended December 31, 1998, 1997 and
1996 amounted to approximately $338,000, $238,000 and $235,000, respectively.
13. STOCKHOLDERS' EQUITY
At the time of the conversion from mutual to stock form in 1986, the Bank
established a liquidation account in the amount of $7,478,000. In accordance
with Massachusetts statutes, the liquidation account will be maintained for the
benefit of eligible account holders who continue to maintain their accounts in
the Bank after the conversion. The liquidation account will be reduced annually
to the extent that eligible account holders have reduced their qualifying
deposit. Subsequent increases will not restore an eligible account holder's
interest in the liquidation account. In the event of a complete liquidation of
the Bank, each eligible account holder will be entitled to receive a
distribution in an amount equal to their current adjusted liquidation account
balances to the extent that funds are available.
Federal and state banking regulations place certain restrictions on dividends
paid and loans or advances made by the Company. The total amount of dividends
which may be paid at any date is generally limited to the undivided profits of
the Company. Undivided profits at the Company totaled $23,182,000 at
December 31, 1998. Additionally, future dividends, if any, will depend on the
earnings of the Company and its subsidiary, its need for funds, its financial
condition, and other factors, including applicable government regulations.
(See Note 3.)
14. EMPLOYEE BENEFIT PLAN
The Company provides basic pension benefits for eligible employees through the
Savings Bank's Employees Retirement Associations ("SBERA") Pension Plan. Each
employee reaching the age of 21 and having completed at least 1,000 hours of
service in a consecutive 12 month period beginning with such employee's date of
employment automatically becomes a participant in the pension plan. All
participants are fully vested after being credited with 3 years of service or at
age 62, if earlier. Employees are also able to participate in a contributory
plan administered by SBERA based on the same eligibility requirements. The
Company has no obligation to contribute to this plan. Net periodic pension
expense for the plan years ended October 31, 1998, 1997 and 1996, consisted of
the following:
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Benefit obligation at beginning of year $3,172 $2,527
Service cost 350 247
Interest cost 215 190
Actuarial loss (gain) (87) 409
Benefits paid (149) (201)
------- --------
Benefit obligation at end of year $3,501 $3,172
------- --------
------- --------
Value of vested benefits $2,168 $1,896
Accumulated benefit obligation $2,212 $1,965
Change in plan assets:
Fair value of plan assets at beginning of year $3,214 $2,709
Actuarial return on plan assets 264 484
Contributions 323 222
Benefits paid (149) (201)
------- -------
Fair value of plan assets at end of year $3,652 $3,214
------- -------
------- -------
Funding status:
Transition liability/(asset) $ (80) $ (86)
Deferred loss/(gain) (449) (396)
Accrued/(prepaid) expense 378 440
------- -------
Net amount recognized $ (151) $ (42)
------- --------
------- --------
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $350 $247 $247
Interest cost 215 190 180
Expected return on plan assets (278) (217) (347)
Amortization of prior service cost (6) (7) (7)
Recognized net actuarial gain/loss (23) (23) 158
-------- ------- -------
Net periodic benefit cost $258 $190 $231
-------- ------- -------
-------- ------- -------
Weighted average assumptions:
Discount rate 7.00% 7.25% 7.50%
Expected return on plan assets 8.50% 8.00% 8.00%
Rate of compensation increase 5.50% 6.00% 6.00%
</TABLE>
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bank has adopted a management incentive plan (the "Plan") whereby all
officers and supervisors are eligible to receive a bonus, proportionate to their
respective salary, if the Bank meets or exceeds certain base standards of
profitability and net worth levels for its fiscal year. The structure of the
Plan is reviewed on an annual basis by the Board of Directors. The incentive
bonus expense in 1998, 1997 and 1996 was approximately $204,000, $310,000 and
$175,000, respectively.
15. OTHER NON-INTEREST EXPENSE
Other non-interest expense consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Professional services $1,317 $1,144 $1,252
Item processing and statement rendering 395 368 371
Advertising 874 746 647
Deposit insurance 65 67 16
Real estate in foreclosure and other real estate owned 56 86 169
Amortization of intangible assets 495 387 423
Other 1,968 1,627 1,513
------- -------- --------
$5,170 $4,425 $4,391
------- -------- --------
------- -------- --------
</TABLE>
Professional services include amounts paid for legal services, audits and
regulatory examinations.
16. STOCK OPTION PLAN
The Bank adopted a stock option plan, the 1986 Incentive and Nonqualified Stock
Option Plan (the "1986 Stock Option Plan"), in connection with its conversion
from mutual to stock form in 1986. On the effective date of the Holding Company
Plan, the 1986 Stock Option Plan became the Stock Option Plan of the Company. By
its terms, the 1986 Stock Option Plan has expired, and new options may no longer
be granted. The Company has adopted the Abington Bancorp, Inc. 1997 Incentive
and Nonqualified Stock Option Plan ("the 1997 Stock Option Plan") to replace the
1986 Stock Option Plan.
The 1997 Stock Option Plan authorizes the grant of (i) options to purchase
common stock intended to qualify as incentive stock options ("Incentive
Options") as defined in Section 422 of the Code, and (ii) options that do not
so qualify ("Nonqualified Options"). Up to 300,000 shares of common stock
(subject to adjustment upon certain changes in the capitalization of the
Company) may be issued pursuant to awards granted under the 1997 Stock Option
Plan. The 1997 Stock Option Plan is administered by the Company's
Compensation Committee (the "Compensation Committee"). The Compensation
Committee recommends to the full Board of Directors the individuals to whom
awards are granted and determines the terms of each award, subject to the
provisions of the 1997 Stock Option Plan. Incentive Options may be granted
under the 1997 Stock Option Plan only to officers and other employees of the
Company or its subsidiary. Nonqualified Options may be granted under the 1997
Stock Option Plan to officers or other employees of the Company or its
subsidiaries, and to members of the Board of Directors and consultants or
other persons who render services to the Company.
Each option shall expire on the date specified in the option
agreement, which date shall not, in the case of an Incentive Option, extend for
more than 10 years from the date of grant (5 years in the case of an optionee
who owns stock possessing more than 10% of the total combined voting power of
all classes of stock of the Company or any subsidiary
("greater-than-ten-percent-stockholder")). The exercise price of each option
shall be determined by the Compensation Committee at the time the option is
granted, provided, however, that the option price of any Incentive Option
granted under the 1997 Stock Option Plan must be at least equal to the fair
market value of the common stock on the date of grant (110% of fair market value
in the case of a greater-than-ten-percent-stockholder). The aggregate fair
market value (determined at the time of grant) of shares issuable pursuant to
Incentive Options which first become exercisable by an employee or officer in
any calendar year may not exceed one hundred thousand dollars ($100,000).
Options are non-transferable except by will or by the laws of descent or
distribution and are exercisable, during the optionee's lifetime, only by the
optionee.
Options generally may not be exercised (i) after termination of the
optionee's employment with the Company or any of its subsidiaries, or
directorship with the Company, for cause or by reason of such optionee's
voluntary resignation, (ii) 30 days after termination of the optionee's
employment with the Company or its subsidiary, or directorship with the Company,
without cause or by reason of retirement in accordance with the Company's (or
the applicable subsidiary's) retirement policies, (iii) 90 days after
termination of the optionee's employment with the Company or its subsidiary, or
directorship with the Company, by reason of disability, and (iv) 180 days
after termination of the optionee's employment with the Company, its subsidiary,
or directorship with the Company, by reason of death. In all cases, however, the
Board has the discretion to extend the exercise date. Payment of the exercise
price of the shares subject to the option may be made (i) in cash in an amount,
or by check, bank draft or postal or express money order payable in an amount,
equal to the aggregate exercise price for such shares, (ii) with the consent of
the Compensation Committee, in the form of shares of common stock having a fair
market value equal to the exercise price of such shares, (iii) with the consent
of the Compensation Committee, by reducing the number of
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
option shares otherwise issuable to the optionee upon exercise of the option by
a number of shares having a fair market value equal to the aggregate exercise
price of such shares, (iv) with the consent of the Compensation Committee, by
delivering such other consideration that is acceptable to the Compensation
Committee and that has a fair market value, as determined by the Compensation
Committee, equal to the aggregate exercise price of such shares, including any
broker-directed cashless exercise/resale procedure adopted by the Compensation
Committee, or (v) with the consent of the Compensation Committee, any
combination of the foregoing.
At the discretion of the Company, options granted
under the 1997 Stock Option Plan may include a so-called "reload" feature
pursuant to which an optionee exercising an option by the delivery of a number
of shares of common stock would automatically be granted an additional option
(with an exercise price equal to the fair market value of the common stock on
the date the additional option is granted and with the same expiration date as
the original option being exercised, and with such other terms as the
Compensation Committee may provide) to purchase that number of shares of common
stock equal to the number delivered to exercise the original option.
In the event of a change of control, as defined in the 1997 Stock Option Plan,
(i) the time for exercise of all unexercised and unexpired awards will be
automatically accelerated, effective as of the effective time of the change of
control (or such earlier date as may be specified by the Board) and (ii) after
the effective time of the change of control, all unexercised awards will remain
outstanding and will be exercisable in full for shares of common stock or, if
applicable, for shares of such securities, cash or property as the holders of
shares of common stock received in connection with the change of control.
The per share exercise prices of the options granted by the 1986 and 1997 Option
Plan range from $1.50 to $20.75 and equaled the fair market value of the shares
on the date the options were granted. Stock Option activity for the years ended
December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
NUMBER OF WEIGHTED AVG. NUMBER OF WEIGHTED AVG. NUMBER OF WEIGHTED AVG.
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 430,024 $5.59 398,824 $4.40 367,824 $3.92
Granted 85,000 19.02 46,500 15.50 50,500 8.50
Exercised (119,624) 5.58 (15,300) 4.75 (19,000) 5.93
Canceled (24,000) 19.00 - - (500) 8.03
--------- ------- ---------- --------- -------- --------
Outstanding at end of year 371,400 $7.80 430,024 $5.59 398,824 $4.40
--------- ------- ---------- --------- -------- --------
--------- ------- ---------- --------- -------- --------
Exercisable at end of year 309,050 $5.53 430,024 $5.59 358,324 $4.12
--------- ------- ---------- --------- -------- --------
--------- ------- ---------- --------- -------- --------
Option price per share $1.50-$20.75 $1.50-$15.50 $1.50-$8.50
Weighted average fair value of
options granted during the year $6.39 $5.09 $3.35
</TABLE>
In conjunction with the Company's aforementioned Stock Option Plans, the Company
adopted a Long Term Performance Incentive Plan to encourage executive management
and members of the Board of Directors to build long-term shareholder value. The
plan was a 3 year program which provided a mechanism for granting options under
the Company's Stock Option Plan. Options to purchase approximately 40,500 to
46,500 shares of common stock for each of the 1995, 1996 and 1997 fiscal years
were granted to members of the Board of Directors and certain principal
officers. All options granted under this plan are included in the preceding
table. The options are granted based on achievement of strategic goals such as
acquisitions and asset purchases. The exercise price would be at least equaled
to the fair market value of the common stock on the date of grant. The options
become exercisable upon a change of control of the Company or after the average
market price of the common stock exceeds 120-140% of the exercise price for
periods of 5 to 180 days depending on the qualifications set for each issuance.
As of December 31, 1998, all but 44,000 of the previously issued options under
this plan were exercisable.
All options granted become fully vested no later than at the end of the ninth
year after issuance. The maximum amount of options which can become exercisable
in any 1 year is limited to $100,000 based on grant prices except in the event
of a change of control, in which case all options become exercisable.
As discussed in Note 1, the Bank applies APB 25 in accounting for its
stock-based compensation plans under which no compensation cost has been
recognized. Had compensation cost for awards in 1998, 1997 and 1996 under the
Bank's stock-based compensation plans been determined based on the fair value at
the grant dates consistent with the method set forth under SFAS No. 123, the
effect on the Bank's net income and earnings per share would have been as
follows:
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1998 1997 1996
(DOLLARS IN THOUSANDS, EXCEPT IN SHARE AMOUNTS)
<S> <C> <C> <C>
Net income:
As reported $4,371 $4,378 $3,533
Pro forma 4,213 4,236 3,428
Earnings per share:
As reported -
Basic 1.25 1.18 .94
Diluted 1.17 1.10 .89
Pro forma -
Basic 1.21 1.14 .91
Diluted 1.13 1.07 .86
</TABLE>
The initial impact of applying SFAS No. 123 on pro forma net income may not be
indicative of future amounts when the method prescribed by SFAS No. 123 will
apply to all outstanding awards because compensation expense for options granted
prior to January 1, 1995 is not reflected in the pro forma amounts above.
The fair value of each option grant is estimated on the grant date using the
Black-Scholes option-pricing model using the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Expected volatility 21.10% 21.10% 34.05%
Risk-free interest rate 5.75% 6.17% 5.71%
Term of options 7.0 yrs. 7.0 yrs. 9.2 yrs.
Expected dividend yield 1.20% 1.40% 2.35%
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
17. EMPLOYEE STOCK OWNERSHIP PLAN
The Company has established an Employee Stock Ownership Plan ("ESOP") which is
being funded by the Company's contributions made in cash (which generally will
be invested in common stock) or common stock. Benefits may be paid in shares of
common stock or in cash, subject to the employees' right to demand shares.
In November 1993, the Company loaned the ESOP $570,000 to acquire additional
shares for participants on the open market. The loan is to be repaid over 7
years with principal and interest (at a rate equal to 85% of the prevailing
prime rate) payable quarterly. The loan is secured by the unallocated shares
acquired by the ESOP.
The Company's ESOP expense for the years ended December 31, 1998, 1997 and 1996
amounted to $161,000, $181,000 and $81,000, respectively.
In the event that the stock price of the Company fluctuates materially at the
point that shares vest with participants from the cost of shares acquired by the
ESOP (at prices which range from $5.63 - $6.13 per share), the Company's
statement of operations could be adversely (if increasing stock price) or
favorably (decreasing stock price) affected. However, in all instances there
will be no negative impact on the Company's capital. During 1998 and 1997, the
impact of the stock price market value in excess of original cost increased the
Company's ESOP expense by $80,000 and $100,000, respectively, in addition to
normal amortization expense associated with the participants' earn out of the
shares allocated. There was no material impact related to changes in the market
price in 1996 and 1995.
18. RESTRICTION ON CASH AND DUE FROM BANKS
At December 31, 1998 and 1997, cash and due from banks included $5,486,000
and $3,618,000, respectively, to satisfy the reserve requirements of the
Federal Reserve Bank.
19. STOCK REPURCHASE PROGRAM
On March 27, 1997, the Company announced that its Board of Directors had
authorized the Company to repurchase up to 10% (375,000 shares) of its currently
outstanding common stock from time to time at prevailing market prices. 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. On March 25, 1999, the Board of Directors had authorized the Company
an additional 10% (320,000) of its outstanding common stock, as adjusted for
amounts remaining to be repurchased under the February 24, 1998 plan. As of
February 25, 1999, there were approximately 147,000 shares still authorized to
be repurchased under the prior 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.
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. SUPPLEMENTAL EXECUTIVE RETIREMENT PROGRAM
The Bank has a supplemental executive retirement plan with a single participant.
Under this arrangement, the individual is entitled to receive monthly benefits
for approximately 18 years in amounts specified in the contract. Benefits
commence upon retirement date which is deemed to be the age of sixty-five. If
death occurs during employment at the Bank, the individual designated as
beneficiary will receive a distribution equal to 3 times the annual salary of
the executive, as determined under the plan. The key employee vests in the
rights under the supplemental retirement plan ratably over a 5 year period,
which entitles this individual to the vested portion of the amount accrued by
the Bank under the plan. This right is only exercisable in the event the
executive terminates employment from the Bank prior to retirement age. In March
1998, the Bank also purchased a single life annuity insurance policy. The
contract was purchased at a cost of $2,863,184. The cash surrender value is
earning a rate of return, with a guaranteed minimum rate of 4%. In addition, the
Bank has entered into a split dollar agreement with the executive, which
requires that any death benefit be shared between the Bank and the designated
beneficiary, based on a predetermined schedule. The amounts due to the
beneficiary under the Plan are reduced to the extent death benefits under the
insurance contract are remitted to such beneficiary. The obligation under the
plan is being accrued over the expected employment period, through age 65. The
current year charge was $70,795, all of which was reflected as compensation
expense in 1998. As of March 1998, the insurance contract had earned interest
income totaling $101,250 resulting in a December 31, 1998 cash surrender value
of $2,964,434.
21. DEFERRED STOCK COMPENSATION PLAN
In 1998, the Company adopted a Deferred Stock Compensation Plan for directors
(the "Plan") which, for these directors who elected to participate, would, in
lieu of current cash payments, elect to defer their compensation for attendance
at various meetings of the Board of Directors to retirement or some future point
in time to be determined. Furthermore, the deferral is eligible to be paid only
in shares of the Company's common stock, the units earned of which are
predetermined based upon a fixed 3 year Board meeting fee schedule which was
established as of July 1, 1998, divided by the stock price of the Company's
common shares at the close of business on July 1, 1998. This price was $18.75
per share. The shares as earned are placed in a Rabbi Trust (the "Trust") which
is administered by an Independent Trustee. The voting for these shares is
controlled by the Independent Trustee although for accounting purposes the
shares are reflected as treasury shares until such time as the shares are
distributed. The expense associated with this plan is based upon the market
value of the shares of stock earned on the date of the respective meeting. There
are currently 7 directors who participate in the Directors Plan. The amount of
expense associated with this plan for 1998 was $36,000 which has been reflected
as salaries expense with the corresponding liability pertaining to stock earned
and not yet distributed is $36,000 which is reflected in stockholders' equity. A
total of 100,000 shares has been registered for the Directors Plan. There have
been approximately 2,400 shares earned and deferred as of December 31, 1998.
22. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate that
value. Fair value estimates which were derived from discounted cash flows or
broker quotes cannot be substantiated by comparison to independent markets and,
in many cases, could not be realized in immediate settlement of the instrument.
CASH, FEDERAL FUNDS SOLD AND SHORT-TERM INVESTMENTS
For these short-term instruments, the carrying amount is a reasonable estimate
of fair value.
INVESTMENT SECURITIES, ASSETS HELD FOR SALE AND MORTGAGE-BACKED
INVESTMENTS
For investment securities, assets held for sale (typically loans) and
mortgage-backed derivative investments, fair values are based on quoted market
prices or dealer quotes.
LOANS
For certain homogeneous categories of loans, such as residential mortgages, home
equity and indirect automobile loans, fair value is estimated using the quoted
market prices for securities backed by similar loans adjusted for differences in
loan characteristics or dealer quotes. The fair value of other types of loans
was estimated by discounting anticipated future cash flows using current rates
at which similar loans would be made to borrowers with similar credit ratings
and for the same remaining maturities.
DEPOSIT LIABILITIES
The fair value of non-certificate deposit accounts is the amount payable on
demand at the reporting date. The fair value of fixed maturity certificates of
deposit is estimated by discounting the anticipated future cash payments using
the rates currently offered for deposits of similar remaining maturities.
SHORT-TERM AND LONG-TERM BORROWINGS
The fair value of borrowings was determined by discounting the anticipated
future cash payments by using the rates currently available to the Company for
debt with similar terms and remaining maturities.
COMMITMENTS TO EXTEND CREDIT/SELL LOANS
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of customers. For fixed rate loan
commitments and obligations to deliver fixed rate loans, fair value also
considers the difference between committed rates and current levels of interest
rates.
VALUES NOT DETERMINED
SFAS No. 107 excludes certain financial instruments from its disclosure
requirements including, among others, real estate included in banking premises
and equipment, the intangible value of the Bank's portfolio of loans serviced
(both for itself and for others) and related servicing network and the
intangible value inherent in the Bank's deposit relationships (i.e., core
deposits). Accordingly, the aggregate fair value amounts presented are not
intended to represent the underlying value of the Bank.
The carrying amount and estimated fair values of the Bank's financial
instruments at December 31, 1998 and 1997 are represented as follows:
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998 1997
(DOLLARS IN THOUSANDS)
CARRYING CARRYING
OR NOTIONAL FAIR OR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Financial instrument assets:
Cash and cash equivalents $ 19,717 $ 19,717 $ 13,475 $ 13,475
Securities 181,346 181,346 165,052 165,160
Loans, including held for sale, net 360,735 383,736 330,792 343,984
Mortgage servicing rights - - 26 26
Financial instrument liabilities:
Deposits $363,953 $ 366,011 $ 324,934 $327,563
Short-term borrowings 66,628 66,920 55,910 55,934
Long-term debt 110,500 110,058 110,000 109,241
Off-balance sheet financial instruments:
Commitments to grant loans $ 11,071 $ 11,071 $ 8,359 $ 8,359
Commitments to sell loans 3,428 3,428 1,415 1,415
Unadvanced funds on home equity
lines of credit 11,085 11,085 11,230 11,230
Commitments to advance funds under
construction loan agreements 2,557 2,557 2,242 2,242
Unadvanced funds on other lines of
credit 499 499 2,166 2,166
Commitments to purchase loans 26,580 26,580 - -
</TABLE>
23. BUSINESS SEGMENTS
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which establishes standards for reporting operating segments of a
business enterprise. The new rules establish revised standards for public
companies relating to the reporting of financial and descriptive information
about their operating segments in financial statements. Operating segments are
components of an enterprise which are evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The Company's chief operating decision maker is the President and
Chief Executive Officer. The adoption of SFAS No. 131 did not have a material
effect on the Company's primary financial statements, but did result in the
disclosure of segment information contained herein. The Company has identified
its reportable operating business segment as Community Banking based on products
and services provided to the customer.
The Company's community banking business segments consist of commercial banking
and retail banking. The community banking business segments derive their
revenues from a wide range of banking services, including lending activities,
acceptance of demand, saving and time deposits, investment management, mortgage
lending and sales, as well as servicing income from investors.
Non-reportable operating segments of the Company's operations which do not have
similar characteristics to the community banking operations and do not meet the
quantitative thresholds requiring disclosure are included in the Other category
in the disclosure of business segments below. These non-reportable segments
include Parent Company financial information and the Trust (Note 24).
Consolidation adjustments are also included in the Other category.
The accounting policies used in the disclosure of business segments are the same
as those described in the summary of significant accounting policies. The
consolidation adjustments reflects certain eliminations of inter-segment
revenue, cash and Parent Company investments in subsidiaries.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
BUSINESS SEGMENTS
RECONCILIATION TO CONSOLIDATED FINANCIAL INFORMATION COMMUNITY BANKING OTHER CONSOLIDATED
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
December 31, 1998:
Securities, available for sale and held to maturity $181,346 $ - $181,346
Net loans 360,735 - 360,735
Net assets 591,011 140 591,151
Total deposits 363,953 - 363,953
Total borrowings 177,128 - 177,128
Total liabilities $545,382 $ 775 $546,157
Total interest income $ 38,442 $ - $ 38,442
Total interest expense 21,585 - 21,585
Net interest income 16,857 - 16,857
Provisions for possible loan losses 760 - 760
Total non-interest income 6,909 - 6,909
Total non-interest expense 15,328 939 16,267
Net income $ 5,032 $(661) $ 4,371
December 31, 1997:
Securities, available for sale and held to maturity $165,052 $ - $165,052
Net loans 330,792 - 330,792
Net assets 531,770 216 531,986
Total deposits 324,934 - 324,934
Total borrowings 165,910 - 165,910
Total liabilities $494,820 $ 845 $495,665
Total interest income $36,297 $ - $ 36,297
Total interest expense 20,091 - 20,091
Net interest income 16,206 - 16,206
Provisions for possible loan losses 630 - 630
Total non-interest income 4,986 - 4,986
Total non-interest expense 13,198 307 13,505
Net income $ 4,600 $(222) $ 4,378
December 31, 1996:
Securities, available for sale and held to maturity $155,231 $ - $155,231
Net loans 298,970 - 298,970
Net assets 486,958 - 486,958
Total deposits 300,445 - 300,445
Total borrowings 147,524 - 147,524
Total liabilities $453,412 $ - $453,412
Total interest income $34,332 $ - $ 34,332
Total interest expense 19,517 - 19,517
Net interest income 14,185 - 14,815
Provisions for possible loan losses 480 - 480
Total non-interest income 4,177 - 4,177
Total non-interest expense 12,840 - 12,840
Net income $ 3,533 $ - $ 3,533
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME TWELVE MONTHS DECEMBER 31, 1998 ELEVEN MONTHS DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Operating income:
Dividends from Bank $2,500 $4,000
Interest income 102 13
------ ------
Total operating income 2,602 4,013
Operating expenses 223 307
Interest expense 716 --
------ ------
Income before income taxes and equity in
undistributed earnings of subsidiaries 1,663 3,706
Income tax benefit (278) (85)
------ ------
Income before equity in undistributed earnings
of subsidiaries 1,941 3,791
Equity in undistributed earnings of Bank and Trust 2,430 233
------ ------
Net income $4,371 $4,024
------ ------
------ ------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS TWELVE MONTHS DECEMBER 31, 1998 ELEVEN MONTHS DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income $4,371 $4,024
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings of bank
subsidiaries (2,430) (233)
Other, net (477) 59
------ ------
Net cash provided by operating activities 1,464 3,850
Cash flows from financing activities:
Proceeds from issuance of treasury and common
stock 667 72
Proceeds from issuance of junior subordinated
deferrable interest debentures 12,650 --
Dividends on common stock (1,062) (559)
Repurchase of common stock (7,352) (2,228)
------ ------
Net cash provided by (used in) financing activities 4,903 (2,715)
Net increase in cash and cash equivalents 6,367 1,135
Cash and cash equivalents at beginning of year 1,186 51
------ ------
Cash and cash equivalents at end of year $7,553 $1,186
------ ------
------ ------
</TABLE>
<PAGE>
STOCKHOLDER INFORMATION
STOCK MARKET DATA
The common stock of the Company is currently listed on the NASDAQ National
Market System (NMS) under the symbol "ABBK.'' The table below sets forth the
range of high and low sales prices for the stock for the quarters indicated.
Market quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual
transactions.
Transactions through January 31, 1997 are for the common stock of the Bank.
Transactions on and after that date are for the common stock of the Company.
<TABLE>
<CAPTION>
PRICE HIGH PRICE LOW DIVIDENDS DECLARED
<S> <C> <C> <C>
1999
1st quarter (through March 5, 1999) 15 1/8 12 3/4 $.05
1998
4th quarter 17 12 $.05
3rd quarter 19 1/2 12 1/2 $.05
2nd quarter 22 3/4 17 1/2 $.05
1st quarter 22 1/2 18 3/4 $.15
1997
4th quarter 23 1/2 15 5/8 $.05
3rd quarter 17 12 3/4 $.05
2nd quarter 13 10 1/4 $.05
1st quarter 11 5/8 9 1/2 $.05
1996
4th quarter 10 7/8 9 7/16 $.05
3rd quarter 9 7 3/4 $.05
2nd quarter 8 1/8 7 1/4 $.05
1st quarter 8 7/8 7 23/32 $.05
</TABLE>
As of March 5, 1999, the Company had approximately 803 stockholders of record
who held 3,347,300 outstanding shares of the Company's common stock. The
number of stockholders indicated does not reflect the number of persons or
entities who hold their common stock in nominee or "street" name through
various brokerage firms. If all such persons are included, the Company
believes there are approximately 1,100 beneficial owners of common stock.
ANNUAL REPORT ON FORM 10-K
A copy of the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 as filed with the Securities Exchange Commission, is
available to stockholders without charge upon written request to:
Investor Relations
Abington Bancorp, Inc.
536 Washington Street
Abington, MA 02351
INQUIRIES
Robert M. Lallo
Senior Vice President,
Chief Financial Officer and Treasurer
Abington Bancorp, Inc.
<PAGE>
bank office locations
Abington
533 Washington Street
Abington, MA 02351
Cohasset
Shaw's Supermarket
Route 3A
Cohasset, MA 02025
Halifax
319 Monponsett Street
Halifax, MA 02338
Hanson
Shaw's Supermarket
Route 58/14
Hanson, MA 02341
Holbrook
778 South Franklin Street
Holbrook, MA 02343
Hull
523 Nantasket Avenue
Hull, MA 02045
Kingston
157 Summer Street
Kingston, MA 02364
Pembroke
175 Center Street
Pembroke, MA 02359
Randolph
Shaw's Supermarket
121 Memorial Parkway
Randolph, MA 02368
Whitman
584 Washington Street
Whitman, MA 02382
Administrative Office
538 Bedford Street
Abington, MA 02351
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF ABINGTON BANCORP, INC.
Abington Bancorp, Inc. has two subsidiaries. Abington Savings Bank (the
"Bank"), is a wholly owned subsidiary which is a Massachusetts-chartered savings
bank. Abington Bancorp Capital Trust is a Delaware business trust whose sole
purpose is to issue capital securities. The Bank has three wholly-owned
subsidiaries, Holt Park Place Development Corporation and Norroway Pond
Development Corporation which are both Massachusetts Corporations, and Abington
Securities Corporation, which is a Delaware Corporation. ABBK Corporation, which
was a wholly owned subsidiary of Abington Savings Bank incorporated in
Massachusetts, was dissolved in January of 1997.
36
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Abington Bancorp, Inc.:
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated January 13, 1999 included in this Form 10-K, into
Abington Bancorp, Inc.'s previously filed Registration Statement on Form S-3,
File No. 333-20915, Registration Statement on Form S-8, File No. 333-20961,
Registration Statement on Form S-8, File No. 333-34987 and Registration
Statement on Form S-8, File No. 333-66227. It should be noted that we have not
audited any financial statements of Abington Bancorp, Inc. subsequent to
December 31, 1998 or performed any audit procedures subsequent to the date of
our report.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 24,1999
39
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1,000
<CASH> 15,424
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4293
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 181,346
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 363,812
<ALLOWANCE> (3,077)
<TOTAL-ASSETS> 591,151
<DEPOSITS> 363,953
<SHORT-TERM> 66,628
<LIABILITIES-OTHER> 5,076
<LONG-TERM> 110,500
11,934
0
<COMMON> 480
<OTHER-SE> 32,580
<TOTAL-LIABILITIES-AND-EQUITY> 591,151
<INTEREST-LOAN> 26,281
<INTEREST-INVEST> 12,047
<INTEREST-OTHER> 114
<INTEREST-TOTAL> 38,442
<INTEREST-DEPOSIT> 11,751
<INTEREST-EXPENSE> 21,585
<INTEREST-INCOME-NET> 16,857
<LOAN-LOSSES> 760
<SECURITIES-GAINS> 1,731
<EXPENSE-OTHER> 16,267
<INCOME-PRETAX> 6,739
<INCOME-PRE-EXTRAORDINARY> 6,739
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,371
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.17
<YIELD-ACTUAL> 7.39
<LOANS-NON> 681
<LOANS-PAST> 50
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,280
<CHARGE-OFFS> 224
<RECOVERIES> 261
<ALLOWANCE-CLOSE> 3,077
<ALLOWANCE-DOMESTIC> 1,833
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,244
</TABLE>
