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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(Mark One)
|X| Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended DECEMBER 31, 2004.
OR
|_| Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______ to _______.
COMMISSION FILE NUMBER 000-51077
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ABINGTON COMMUNITY BANCORP, INC.
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(Exact Name of Registrant as specified in its charter)
PENNSYLVANIA 02-0724068
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
180 OLD YORK ROAD, JENKINTOWN, PENNSYLVANIA 19046
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 215-886-8280
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Securities registered pursuant to Section 12 (b) of the Exchange Act: None
Securities registered pursuant to Section 12 (g) of the Exchange Act:
Common Stock, $0.01 Par Value
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(Title of Class)
-----------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate 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 registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The registrant had no shares of common equity outstanding on the last
business day of the registrant's most recently completed second fiscal quarter.
The registrant completed its initial public offering on December 16, 2004.
The number of shares of the Issuer's common stock, par value $0.01 per
share, outstanding as of March 28, 2005 was 15,870,000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain documents incorporated by reference are listed in the Exhibit
Index
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ABINGTON COMMUNITY BANCORP, INC.
TABLE OF CONTENTS
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Page
PART I
ITEM 1. Business 1
ITEM 2. Properties 31
ITEM 3. Legal Proceedings 32
ITEM 4. Submission of Matters to a Vote of Security Holders 32
PART II
ITEM 5. Market for Registrant's Common Stock, Related Stockholder
Matters and Issuer Purchases of Equity Securities 32
ITEM 6. Selected Financial Data 34
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 36
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 50
ITEM 8. Financial Statements and Supplementary Data 54
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 83
ITEM 9A. Controls and Procedures 84
ITEM 9B. Other Information 84
PART III
ITEM 10. Directors and Executive Officers of the Registrant 84
ITEM 11. Executive Compensation 87
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 89
ITEM 13. Certain Relationships and Related Transactions 91
ITEM 14. Principal Accountant Fees and Services 91
PART IV
ITEM 15. Exhibits, Financial Statement Schedules 92
SIGNATURES 94
PART I
ITEM 1. BUSINESS
GENERAL
Abington Community Bancorp, Inc. (the "Company") is a Pennsylvania corporation
which was organized to be a mid-tier holding company for Abington Savings Bank.
Abington Savings Bank is a Pennsylvania-chartered, FDIC-insured savings bank
which conducts business under the name "Abington Bank" (the "Bank" or "Abington
Bank"). The Bank is a wholly owned subsidiary of the Company. The Company's
results of operations are primarily dependent on the results of the Bank and the
Bank's wholly owned subsidiaries, ASB Investment Co., Keswick Services II and
its wholly owned subsidiaries, and Abington Corp. As of December 31, 2004, the
Company, on a consolidated basis, had total assets of approximately $718.0
million, total deposits of approximately $405.3 million, and total stockholders'
equity of approximately $123.1 million.
The Company was formed when the Bank reorganized from a mutual savings bank to a
mutual holding company structure in December 2004. Abington Mutual Holding
Company, a Pennsylvania corporation, is the mutual holding company parent of the
Company. Abington Mutual Holding Company owns 55% of the Company's outstanding
common stock and must continue to own at least a majority of the outstanding
voting stock of the Company.
Abington Bank is a community-oriented savings bank, which was originally
organized in 1867 and is headquartered in Jenkintown, Pennsylvania,
approximately eight miles north of center city Philadelphia. Our banking office
network currently consists of our headquarters and main office, seven other
full-service branch offices and four limited service branch offices. In
addition, we maintain a loan processing office in Jenkintown, Pennsylvania. Ten
of our banking offices are located in Montgomery County, Pennsylvania and two
are in neighboring Bucks County, Pennsylvania. Moreover, the Bank is currently
in various stages of plans to add three additional branch offices - one in
Montgomery County and two in Bucks County. The Bucks County branch offices are
expected to open in 2005 with the Montgomery County branch office following by
mid-2006. Our limited service offices have limited hours of operation and/or are
limited to serving customers who live or work in the community in which the
limited service office is located. Three of our limited service offices are
located in retirement or age restricted communities. We maintain ATMs at all of
our banking offices and we also have two off-site ATMs, located at a local
grocery store and a local college. We also provide on-line banking and telephone
banking services.
We are primarily engaged in attracting deposits from the general public and
using those funds to invest in loans and securities. Our principal sources of
funds are deposits, repayments of loans and mortgage-backed securities,
maturities of investments and interest-bearing deposits, funds provided from
operations and funds borrowed from outside sources such as the Federal Home Loan
Bank of Pittsburgh. These funds are primarily used for the origination of
various loan types including single-family residential mortgage loans,
construction loans, non-residential or commercial real estate mortgage loans,
home equity loans, commercial business loans and consumer loans. We are an
active originator of residential home mortgage loans and home construction loans
in our market area. In addition to offering loans and deposits, we also offer
securities and annuities to our customers through an affiliation with a
third-party broker-dealer.
1
The Company's website address is WWW.ABINGTONBANK.COM. The Company's annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and other documents filed by the Company with the Securities and Exchange
Commission ("SEC") are available free of charge on the Company's website under
the Investor Relations menu. Such documents are available on the Company's
website as soon as reasonably practicable after they have been filed
electronically with the SEC.
FORWARD LOOKING STATEMENTS
This document contains forward-looking statements, which can be identified by
the use of words such as "estimate," "project," "believe," "intend,"
"anticipate," "plan," "seek," "expect" and similar expressions. These
forward-looking statements include:
o statements of goals, intentions and expectations;
o statements regarding prospects and business strategy;
o statements regarding asset quality and market risk; and
o estimates of future costs, benefits and results.
These forward-looking statements are subject to significant risks, assumptions
and uncertainties, including, among other things, the following: (1) general
economic conditions, (2) competitive pressure among financial services
companies, (3) changes in interest rates, (4) deposit flows, (5) loan demand,
(6) changes in legislation or regulation, (7) changes in accounting principles,
policies and guidelines, (8) litigation liabilities, including costs, expenses,
settlements and judgments and (9) other economic, competitive, governmental,
regulatory and technological factors affecting Abington Bank's operations,
pricing, products and services.
Because of these and other uncertainties, our actual future results may be
materially different from the results indicated by these forward-looking
statements. We have no obligation to update or revise any forward-looking
statements to reflect any changed assumptions, any unanticipated events or any
changes in the future.
MARKET AREA AND COMPETITION
Our market area is located in Montgomery County and Bucks County, Pennsylvania,
which are suburbs of Philadelphia. In addition, particularly with respect to
commercial and construction lending, we also make loans in Philadelphia, Chester
and Delaware Counties, Pennsylvania and contiguous counties in New Jersey and
Delaware. This area is referred to as the Delaware Valley region.
We face significant competition in originating loans and attracting deposits.
This competition stems primarily from commercial banks, other savings banks and
savings associations and mortgage-banking companies. Within our market area,
more than 50 other banks, savings institutions and credit unions are operating.
Many of the financial service providers operating in our market area are
significantly larger and have greater financial resources than us. We face
additional competition for deposits from short-term money market funds and other
corporate and
2
government securities funds, mutual funds and from other non-depository
financial institutions such as brokerage firms and insurance companies.
LENDING ACTIVITIES
GENERAL. At December 31, 2004, our net loan portfolio totaled $412.7 million or
57.5% of total assets. Historically, our principal lending activity has been the
origination of loans collateralized by one- to four-family, also known as
"single-family," residential real estate loans located in our market area. In
addition, while we have been making construction loans to homebuilders and
others for more than 30 years, we have increased our construction lending
activities in recent years. We also have increased our emphasis on originating
commercial real estate and multi-family (over four units) residential mortgage
loans. We also originate home equity lines of credit, commercial business loans
and consumer loans.
The types of loans that we may originate are subject to federal and state law
and regulations. Interest rates charged by us on loans are affected principally
by the demand for such loans and the supply of money available for lending
purposes and the rates offered by our competitors. These factors are, in turn,
affected by general and economic conditions, the monetary policy of the federal
government, including the Federal Reserve Board, legislative tax policies and
governmental budgetary matters.
3
LOAN PORTFOLIO COMPOSITION. The following table shows the composition of our
loan portfolio by type of loan at the dates indicated.
December 31,
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2004 2003 2002
---------------------- ---------------------- ----------------------
Amount % Amount % Amount %
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Real estate loans:
One- to four-family residential $243,705 54.69% $223,963 55.95% $247,159 61.70%
Commercial real estate and
multi-family residential 74,642 16.75 64,029 16.00 61,247 15.29
Construction 83,253 18.68 66,875 16.71 50,401 12.58
Home equity lines of credit 32,049 7.19 31,185 7.79 25,571 6.38
---------- ---------- ---------- ---------- ---------- ----------
Total real estate loans 433,649 97.31 386,052 96.45 384,378 95.95
---------- ---------- ---------- ---------- ---------- ----------
Commercial business loans 8,540 1.92 10,403 2.60 11,353 2.83
Consumer non-real estate loans 3,433 0.77 3,792 0.95 4,877 1.22
---------- ---------- ---------- ---------- ---------- ----------
Total non-real estate loans 11,973 2.69 14,195 3.55 16,230 4.05
---------- ---------- ---------- ---------- ---------- ----------
Total loans 445,622 100.00% 400,247 100.00% 400,608 100.00%
========== ========== ========== ========== ========== ==========
Less:
Undisbursed portion of
construction loans in process 30,131 32,699 25,880
Deferred loan fees 1,423 1,472 1,891
Allowance for loan losses 1,413 1,456 1,813
---------- ---------- ----------
Net loans $412,655 $364,620 $371,024
========== ========== ==========
December 31,
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2001 2000
---------------------- ----------------------
Amount % Amount %
---------- ---------- ---------- ----------
(Dollars in Thousands)
Real estate loans:
One- to four-family residential $267,044 74.41% $250,252 76.49%
Commercial real estate and
multi-family residential 46,998 13.10 33,874 10.35
Construction 14,715 4.10 17,588 5.38
Home equity lines of credit 19,021 5.30 16,101 4.92
---------- ---------- ---------- ----------
Total real estate loans 347,778 96.91 317,815 97.14
---------- ---------- ---------- ----------
Commercial business loans 8,092 2.25 6,588 2.01
Consumer non-real estate loans 3,013 0.84 2,773 0.85
---------- ---------- ---------- ----------
Total non-real estate loans 11,105 3.09 9,361 2.86
---------- ---------- ---------- ----------
Total loans 358,883 100.00% 327,176 100.00%
========== ========== ========== ==========
Less:
Undisbursed portion of
construction loans in process 6,510 9,985
Deferred loan fees 1,871 1,805
Allowance for loan losses 1,590 1,344
---------- ----------
Net loans $348,912 $314,042
========== ==========
4
CONTRACTUAL TERMS TO FINAL MATURITIES. The following table shows the scheduled
contractual maturities of our loans as of December 31, 2004, before giving
effect to net items. Demand loans, loans having no stated schedule of repayments
and no stated maturity, and overdrafts are reported as due in one year or less.
The amounts shown below do not take into account loan prepayments.
Commercial
Real Estate
One- to and Commercial Home Equity
Four-Family Multi-Family Business Lines of
Residential Residential Construction Loans Credit Consumer Total
------------- ------------- ------------ ----------- ------------- ---------- -----------
(In Thousands)
Amounts due after December 31, 2004 in:
One year or less $ 127 $16,115 $42,010 $7,128 $31,929 $ 207 $ 97,516
After one year through two years 658 4,033 33,646 185 120 603 39,245
After two years through three years 3,104 2,540 7,597 472 -- 1,005 14,718
After three years through five years 10,650 5,181 -- 580 -- 1,029 17,440
After five years through ten years 24,883 4,329 -- -- -- 589 29,801
After ten years through fifteen years 72,963 9,261 -- 175 -- -- 82,399
After fifteen years 131,320 33,183 -- -- -- -- 164,503
-------- ------- ------- ------ ------- ------ --------
Total $243,705 $74,642 $83,253 $8,540 $32,049 $3,433 $445,622
======== ======= ======= ====== ======= ====== ========
The following table shows the amount of our loans at December 31, 2004, which
are due after December 31, 2005, and indicates whether they have fixed-rates of
interest or rates which are floating or adjustable.
Floating or Total at
Fixed-Rate Adjustable-Rate December 31, 2004
-------------- ----------------- -----------------
(In Thousands)
One- to four-family residential $206,442 $37,136 $243,578
Commercial real estate and
multi-family residential 35,136 23,391 58,527
Construction 336 40,907 41,243
Commercial business 110 1,302 1,412
Home equity lines of credit -- 120 120
Consumer non-real estate 2,248 978 3,226
-------- -------- --------
Total $244,272 $103,834 $348,106
======== ======== ========
LOAN ORIGINATIONS. Our lending activities are subject to underwriting standards
and loan origination procedures established by our board of directors and
management. Loan originations are obtained through a variety of sources,
primarily existing customers as well as new customers obtained from referrals
and local advertising and promotional efforts. In addition, our commercial and
construction loan officers actively solicit new loans throughout our market
area. Single-family residential mortgage loan applications and consumer loan
applications are taken at any of Abington Bank's banking offices. Applications
for other loans typically are taken personally by our commercial or construction
lending officers, although they may be received by a branch office initially and
then referred to a construction or commercial lender. All loan applications are
processed and underwritten centrally at our loan processing office and main
office in Jenkintown, Pennsylvania.
Our single-family residential mortgage loans are written on standardized
documents used by the Federal Home Loan Mortgage Corporation ("FHLMC" or
"Freddie Mac") and Federal National Mortgage Association ("FNMA" or "Fannie
Mae"). We also utilize automated loan processing and underwriting software
systems developed by Freddie Mac for our new single-family residential mortgage
loans. Property valuations of loans secured by real estate are undertaken by our
in-house appraiser or by an independent third-party appraiser approved by our
board of directors.
5
Specified loan officers of Abington Bank have limited authority to approve
automobile loans and other consumer loans up to $15,000. Home equity loans and
lines of credit may be approved jointly by two authorized Vice Presidents. Our
loan policy generally requires that all other loans up to $1.0 million must be
approved by either the Consumer Loan Committee (which is comprised of the Bank's
President, Senior Vice President - Lending and five other officers) or
Commercial Loan Committee (comprised of the Bank's President, Senior Vice
President - Lending and five other officers). All of such loans are reported to
our board of directors on a monthly basis. Loans exceeding $1.0 million must be
approved by the full board of directors.
In addition to originating loans, we occasionally purchase participation
interests in larger balance loans, typically commercial real estate and
multi-family residential mortgage loans and construction loans, from other
financial institutions in our market area. Such participations are reviewed for
compliance with our underwriting criteria before they are purchased. Generally,
we have purchased such loans without any recourse to the seller. However, we
actively monitor the performance of such loans through the receipt of regular
reports from the lead lender regarding the loan's performance, physically
inspecting the loan security property on a periodic basis, discussing the loan
with the lead lender on a regular basis and receiving copies of updated
financial statements from the borrower.
During the years ended December 31, 2003 and 2002, we sold $2.6 million and $7.3
million, respectively, of newly originated single-family residential mortgage
loans with servicing retained. Such loans were sold in order to recognize
certain embedded gains. There were no sales during 2004, and we have
discontinued such loans sales, but, depending on market conditions, may again
consider such sales in the future. In addition, we have sold participation
interests in loans originated by us to other institutions. When we have sold
participation interests or whole loans, it generally has been done on the basis
of very limited recourse. As of December 31, 2004, our total exposure to
recourse arrangements with respect to our sales of whole loans and participation
interests in loans was $185,000. We generally have sold participation interests
in loans only when a loan would exceed our loans-to-one borrower limits. Our
loans-to-one borrower limit, with certain exceptions, generally is 15% of our
unimpaired capital and surplus or $12.9 million at December 31, 2004.
6
The following table shows our total loans originated, purchased, sold and repaid
during the periods indicated.
Year Ended December 31,
------------------------------------
2004 2003 2002
---------- ---------- ----------
(In Thousands)
Loan originations:
One- to four-family residential $ 64,593 $ 92,143 $ 58,771
Commercial real estate and
multi-family residential 23,996 14,301 17,437
Construction 51,159 47,737 49,623
Home equity lines of credit 13,196 14,843 11,189
Commercial business 11,607 5,700 5,782
Consumer non-real estate 1,389 1,081 4,212
---------- ---------- ----------
Total loan originations 165,940 175,805 146,954
---------- ---------- ----------
Loans purchased:
Whole loans -- -- --
Participation interests 15,300 4,940 17,540
---------- ---------- ----------
Total loans purchased 15,300 4,940 17,540
---------- ---------- ----------
Loans sold:
Whole loans -- (2,280) (7,332)
Participation interests -- (5,361) --
---------- ---------- ----------
Total loans sold -- (7,641) (7,332)
---------- ---------- ----------
Loan principal repayments (135,866) (181,746) (134,618)
---------- ---------- ----------
Total loans sold and principal
repayments (135,866) (189,387) (141,950)
Increase or (decrease) due to other
items, net (1) 2,661 2,238 (432)
---------- ---------- ----------
Net increase (decrease) in loan
portfolio $ 48,035 $ (6,404) $ 22,112
========== ========== ==========
- ---------------------------
(1) Other items consist of loans in process, deferred fees and the allowance
for loan losses.
ONE-TO FOUR-FAMILY RESIDENTIAL MORTGAGE LENDING. One of our primary lending
activities continues to be the origination of loans secured by first mortgages
on one- to four-family residences in our market area. At December 31, 2004,
$243.7 million of our total loan portfolio consisted of single-family
residential mortgage loans. Due primarily to increased mortgage loan prepayments
due to refinance activity as a result of the low interest rate environment, as
well as our increased emphasis on commercial real estate, construction and
commercial business loans, the percentage of single-family residential mortgage
loans in our portfolio has decreased from 76.5% at December 31, 2000 to 54.7% at
December 31, 2004.
Our single-family residential mortgage loans generally are underwritten on terms
and documentation conforming with guidelines issued by Freddie Mac and Fannie
Mae. We utilize proprietary software developed by Freddie Mac in processing and
underwriting our single-family residential mortgage loans. Applications for
one-to four-family residential mortgage loans are accepted at any of our banking
offices and are then referred to the Residential Lending Department at our main
office and our Loan Processing Center in order to process the loan, which
consists primarily of obtaining all documents required by Freddie Mac and Fannie
Mae underwriting standards, and complete the underwriting, which includes making
a determination whether the loan meets our underwriting standards such that the
bank can extend a loan commitment to the customer. We generally have retained
for our portfolio a substantial portion of the single-family residential
mortgage loans that we originate. We service all loans that we have originated
through our in-house loan servicing department. We currently originate
fixed-rate, fully amortizing mortgage loans with maturities of 15, 20 or 30
years. We also have offered adjustable rate mortgage ("ARM") loans, however, due
to local market conditions, we had not offered single-family ARM loans for more
than 10 years through the end of 2004. At December 31, 2004, only $177,000, or
0.1%, of our one- to four-family residential loan portfolio consisted of ARM
loans. Based on a review of current market conditions, the Bank once again began
offering ARM loans in 2005.
7
We underwrite one- to four-family residential mortgage loans with loan-to-value
ratios of up to 95%, provided that the borrower obtains private mortgage
insurance on loans that exceed 80% of the appraised value or sales price,
whichever is less, of the secured property. We also require that title
insurance, hazard insurance and, if appropriate, flood insurance be maintained
on all properties securing real estate loans. Our in-house appraiser or another
licensed appraiser appraises all properties securing one- to four-family first
mortgage loans. Our mortgage loans generally include due-on-sale clauses which
provide us with the contractual right to deem the loan immediately due and
payable in the event the borrower transfers ownership of the property.
Due-on-sale clauses are an important means of adjusting the yields of fixed-rate
mortgage loans in our portfolio, and we generally exercise our rights under
these clauses.
Our single-family residential mortgage loans also include home equity loans,
which amounted to $19.7 million at December 31, 2004. We offer fixed-rate home
equity loans in amounts up to $200,000. Our home equity loans are fully
amortizing and have terms to maturity of up to 15 years. While home equity loans
also are secured by the borrower's residence, we generally obtain a second
mortgage position on these loans. Our lending policy provides that our home
equity loans have loan-to-value ratios, when combined with any first mortgage,
of 90% or less, although the preponderance of our home equity loans have
combined loan-to-value ratios of 80% or less. Our single-family residential
mortgage loans also include some loans to local businessmen for a commercial
purpose, but which are secured by liens on the borrower's residence.
COMMERCIAL REAL ESTATE AND MULTI-FAMILY RESIDENTIAL REAL ESTATE LOANS. At
December 31, 2004, our commercial real estate and multi-family residential loans
amounted to $74.6 million or 16.8% of our total loan portfolio. Our commercial
real estate and multi-family residential loans have increased, both in terms of
the aggregate amount outstanding and as a percentage of the loan portfolio,
since December 31, 2000.
Our commercial real estate and residential multi-family real estate loan
portfolio consists primarily of loans secured by office buildings, retail and
industrial use buildings, strip shopping centers, residential properties with
five or more units and other properties used for commercial and multi-family
purposes located in our market area. Our commercial and multi-family real estate
loans tend to be originated in an amount less than $3.0 million but will
occasionally exceed that amount. We currently employ four commercial lenders who
actively solicit commercial real estate and multi-family residential mortgage
loans in our market area.
Although terms for commercial real estate and multi-family loans vary, our
underwriting standards generally allow for terms up to 30 years with monthly
amortization over the life of the loan and loan-to-value ratios of not more than
80%. Interest rates are either fixed or adjustable, based upon designated market
indices such as the 5-year Treasury CMT plus a margin, and fees of up to 2.0%
are charged to the borrower at the origination of the loan. Generally, we obtain
personal guarantees of the principals as additional collateral for commercial
real estate and multi-family real estate loans.
Commercial real estate and multi-family real estate lending involves different
risks than single-family residential lending. These risks include larger loans
to individual borrowers and loan payments that are dependent upon the successful
operation of the project or the borrower's business. These risks can be affected
by supply and demand conditions in the project's market area of rental housing
units, office and retail space, warehouses, and other commercial space. We
attempt to minimize these risks by limiting loans to proven businesses, only
considering properties with existing operating performance which can be
analyzed, using conservative debt coverage ratios in our underwriting, and
periodically monitoring the operation of the business or project and the
physical condition of the property. At December 31, 2004, 2003 and 2002, none of
our commercial real estate and multi-family residential mortgage loans were
8
either delinquent for more than 30 days or considered non-performing. We
charged-off $99,000, $671,000 and $298,000 in commercial real estate and
multi-family residential real estate loans in the years ended December 31, 2004,
2003 and 2002, respectively, which constitute the only charge-offs of such loans
over the past five years.
Various aspects of a commercial and multi-family loan transactions are evaluated
in an effort to mitigate the additional risk in these types of loans. In our
underwriting procedures, consideration is given to the stability of the
property's cash flow history, future operating projections, current and
projected occupancy levels, location and physical condition. Generally, we
impose a debt service ratio (the ratio of net cash flows from operations before
the payment of debt service to debt service) of not less than 110% in the case
of multi-family residential real estate loans and 120% in the case of commercial
real estate loans. We also evaluate the credit and financial condition of the
borrower, and if applicable, the guarantor. Appraisal reports prepared by
independent appraisers or, in some cases, Abington Bank's staff appraiser are
obtained on each loan to substantiate the property's market value, and are
reviewed by us prior to the closing of the loan.
CONSTRUCTION LENDING. As part of our efforts to transition from a traditional
thrift to a community bank, we have been an active originator of construction
loans since the mid 1990s. We increased our construction loan efforts in 2002
when we hired a second construction loan officer. We targeted construction loans
as a growth area for the Bank because they have shorter terms to maturity and
they generally have floating or adjustable interest rates. We have focused our
construction lending on making loans to homebuilders in the Delaware Valley area
to acquire, develop and build single-family residences. Our construction loans
include, to a lesser extent, loans for the construction of commercial and
industrial use properties such as office buildings, retail shops and warehouses.
At December 31, 2004, our construction loans amounted to $83.3 million, or 18.7%
of our total loan portfolio. This amount includes $30.1 million of undisbursed
loans in process. Our construction loan portfolio has grown appreciably over the
past 4 years. At December 31, 2000, our construction loans amounted to $17.6
million, or 5.4% of our total loan portfolio.
A substantial amount of our construction loans are construction and development
loans to contractors and builders primarily to finance the construction of
single-family homes and subdivisions. Loans to finance the construction of
single-family homes and subdivisions are generally offered to experienced
builders in the Delaware Valley with whom we have an established relationship.
Residential construction and development loans are typically offered with terms
of up to 36 months. One or two six-month extensions may be provided for at our
option. The maximum loan-to-value limit applicable to these loans is 80% of the
appraised post construction value. We often establish interest reserves and
obtain personal and/or corporate guarantees as additional security on our
construction loans. Construction loan proceeds are disbursed periodically in
increments as construction progresses and as inspection by our approved
appraisers or loan inspectors warrants. Our construction loans are negotiated on
an individual basis but typically have floating rates of interest based upon THE
WALL STREET JOURNAL prime rate or, in some cases, LIBOR. Additional fees may be
charged as funds are disbursed. In addition to interest payments during the term
of the construction loan, we typically require that payments to principal be
made as units are completed and released. Generally such principal payments must
be equal to 110% of the amount attributable to acquisition and development of
the lot plus 100% of the amount attributable to construction of the individual
home. We permit a pre-determined number of model homes to be constructed on an
unsold or "speculative" basis. All other units must be pre-sold before we will
disburse funds for construction. Our construction loans also include loans to
acquire and hold unimproved land, loans to acquire land and develop the basic
infrastructure, such as roads and sewers, and construction loans for commercial
uses. The majority of our construction loans are secured by properties located
in Bucks and Montgomery Counties, Pennsylvania. However, we also make
construction loans in Philadelphia, Chester and Delaware Counties, Pennsylvania
as well as the New Jersey suburbs of Philadelphia.
9
Construction financing is generally considered to involve a higher degree of
credit risk than long-term financing on improved, owner-occupied real estate.
Risk of loss on a construction loan depends largely upon the accuracy of the
initial estimate of the property's value at completion of construction compared
to the estimated costs, including interest, of construction and other
assumptions. Additionally, if the estimate of value proves to be inaccurate, we
may be confronted with a project, when completed, having a value less than the
loan amount. We have attempted to minimize these risks by generally
concentrating on residential construction loans in our market area to
contractors with whom we have established relationships. At December 31, 2004,
2003 and 2002, we had no construction loans that were considered non-performing,
however, in January 2005 a construction loan for $2.9 million was placed on
non-accrual status due to delinquency. This one construction loan was 60 days
delinquent at December 31, 2004 and was our only delinquent construction loan at
such date. We had no construction loans more than 30 days delinquent at December
31, 2003 or 2002. We have not charged-off any construction loans in more than
five years.
HOME EQUITY LINES. At December 31, 2004, our home equity lines of credit
amounted to $32.0 million or 7.2% of our net loan portfolio. The unused portion
of home equity lines was $20.3 million at such date. We offer home equity lines
in amounts up to $200,000 on a revolving line of credit basis with interest tied
to the prime rate. Generally, we have a second mortgage on the borrower's
residence as collateral on its home equity lines. Generally, our home equity
lines have loan-to-value ratios (combined with any loan secured by a first
mortgage) of 80% or less. Our customers may apply for home equity lines as well
as home equity loans at any banking office or on-line through our website.
COMMERCIAL BUSINESS LOANS. Our commercial business loans amounted to $8.5
million or 1.9% of the total loan portfolio at December 31, 2004. The unused
portion of our commercial lines of credit at December 31, 2004, was $38.2
million.
Our commercial business loans typically are to small to mid-sized businesses in
our market area and may be for working capital, inventory financing or accounts
receivable financing. Small business loans may have adjustable or fixed rates of
interest and generally have terms of three years or less but may go up to 10
years. Our commercial business loans generally are secured by equipment,
machinery or other corporate assets. In addition, we generally obtain personal
guarantees from the principals of the borrower with respect to all commercial
business loans.
Our four commercial lenders actively solicit commercial business loans in our
market area. Given the on-going consolidation of financial institutions, we are
seeking to increase our commercial business loan portfolio. In particular, we
are targeting loans of $250,000 to $500,000 that generally are considered too
small by the regional and super-regional banks operating in our market.
Commercial business loans generally are deemed to involve a greater degree of
risk than single-family residential mortgage loans.
CONSUMER LENDING ACTIVITIES. In our efforts to provide a full range of financial
services to our customers, we offer various types of consumer loans such as
loans secured by deposit accounts, automobile loans and unsecured personal
loans. These loans are originated primarily through existing and walk-in
customers and direct advertising. At December 31, 2004, $3.4 million, or 0.8% of
the total loan portfolio consisted of these types of loans.
Consumer loans generally have higher interest rates and shorter terms than
residential loans, however, they have additional credit risk due to the type of
collateral securing the loan or in some cases the absence of collateral. In the
years ended December 31, 2004, 2003 and 2002 we charged-off $32,000, $89,000 and
$0 of consumer loans, respectively.
10
LOAN APPROVAL PROCEDURES AND AUTHORITY. Our Board of Directors establishes the
bank's lending policies and procedures. Our Lending Policy Manual is reviewed on
at least an annual basis by our management team in order to propose
modifications as a result of market conditions, regulatory changes and other
factors. All modifications must be approved by our Board of Directors.
Various officers or combinations of officers of Abington Bank have the authority
within specifically identified limits to approve new loans. The largest
individual lending authority is $1.0 million. Amounts in excess of the
individual lending limits must be approved by the Commercial Lending Committee
or the Consumer Lending Committee. Loans in excess of $1.0 million must be
approved by the Board of Directors of Abington Bank.
ASSET QUALITY
GENERAL. One of our key objectives has been, and continues to be, maintaining a
high level of asset quality. In addition to maintaining credit standards for new
originations which we believe are sound, we are proactive in our loan
monitoring, collection and workout processes in dealing with delinquent or
problem loans. In addition, in recent years, we have retained independent, third
parties to undertake reviews of the credit quality of our loan portfolio.
When a borrower fails to make a scheduled payment, we attempt to cure the
deficiency by making personal contact with the borrower. Initial contacts are
generally made 15 days after the date the payment is due. In most cases,
deficiencies are promptly resolved. If the delinquency continues, late charges
are assessed and additional efforts are made to collect the deficiency. All
loans delinquent 60 days or more are reported to the Board of Directors of
Abington Bank.
On loans where the collection of principal or interest payments is doubtful, the
accrual of interest income ceases ("non-accrual" loans). On single-family
residential mortgage loans 120 days or more past due and all other loans 90 days
or more past due, as to principal and interest payments, our policy, with
certain limited exceptions, is to discontinue accruing additional interest and
reverse any interest currently accrued. On occasion, this action may be taken
earlier if the financial condition of the borrower raises significant concern
with regard to his/her ability to service the debt in accordance with the terms
of the loan agreement. Interest income is not accrued on these loans until the
borrower's financial condition and payment record demonstrate an ability to
service the debt.
Real estate which is acquired as a result of foreclosure is classified as real
estate owned until sold. Real estate owned is recorded at the lower of cost or
fair value less estimated selling costs. Costs associated with acquiring and
improving a foreclosed property are usually capitalized to the extent that the
carrying value does not exceed fair value less estimated selling costs. Holding
costs are charged to expense. Gains and losses on the sale of real estate owned
are charged to operations, as incurred.
We account for our impaired loans under generally accepted accounting
principles. An impaired loan generally is one for which it is probable, based on
current information, that the lender will not collect all the amounts due under
the contractual terms of the loan. Large groups of smaller balance, homogeneous
loans are collectively evaluated for impairment. Loans collectively evaluated
for impairment include smaller balance commercial real estate loans, residential
real estate loans and consumer loans. These loans are evaluated as a group
because they have similar characteristics and performance experience. Larger
commercial real estate, construction and commercial business loans are
individually evaluated for impairment. As of December 31, 2004 and 2003, we had
$0 and $99,000, respectively, of loans deemed to be impaired. We charged-off
$671,000 of impaired loans in 2003 (all of which were to the same borrower) and
the remaining $99,000 was charged-off in the second quarter of 2004.
11
Federal regulations and our policies require that we utilize an internal asset
classification system as a means of reporting problem and potential problem
assets. We have incorporated an internal asset classification system, consistent
with Federal banking regulations, as a part of our credit monitoring system. We
currently classify problem and potential problem assets as "substandard,"
"doubtful" or "loss" assets. An asset is considered "substandard" if it is
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the insured institution will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
"doubtful" have all of the weaknesses inherent in those classified "substandard"
with the added characteristic that the weaknesses present make "collection or
liquidation in full," on the basis of currently existing facts, conditions, and
values, "highly questionable and improbable." Assets classified as "loss" are
those considered "uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss reserve is not warranted.
Assets which do not currently expose the insured institution to sufficient risk
to warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "special mention."
When an insured institution classifies one or more assets, or portions thereof,
as "substandard" or "doubtful," it is required that a general valuation
allowance for loan losses be established for loan losses in an amount deemed
prudent by management. General valuation allowances represent loss allowances
which have been established to recognize the inherent losses associated with
lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
one or more assets, or portions thereof, as "loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount.
A savings institution's determination as to the classification of its assets and
the amount of its valuation allowances is subject to review by Federal and state
bank regulators which can order the establishment of additional general or
specific loss allowances. The Federal banking agencies, have adopted an
interagency policy statement on the allowance for loan and lease losses. The
policy statement provides guidance for financial institutions on both the
responsibilities of management for the assessment and establishment of
allowances and guidance for banking agency examiners to use in determining the
adequacy of general valuation guidelines. Generally, the policy statement
recommends that institutions have effective systems and controls to identify,
monitor and address asset quality problems; that management analyze all
significant factors that affect the collectibility of the portfolio in a
reasonable manner; and that management establish acceptable allowance evaluation
processes that meet the objectives set forth in the policy statement. In July
2001, the SEC issued Staff Accounting Bulletin ("SAB") No. 102, "Selected Loan
Loss Allowance Methodology and Documentation Issues." The guidance contained in
the SAB focuses on the documentation the SEC staff normally expects registrants
to prepare and maintain in support of the allowance for loan and lease losses.
Concurrent with the SEC's issuance of SAB No. 102, the federal banking agencies,
represented by the Federal Financial Institutions Examination Council ("FFIEC"),
issued an interagency policy statement entitled "Allowance for Loan and Lease
Losses Methodologies and Documentation for Banks and Savings Institutions"
(Policy Statement). The SAB and Policy Statement were the result of an agreement
between the SEC and the federal banking agencies in March 1999 to provide
guidance on allowance for loan and lease losses methodologies and supporting
documentation. Our allowance for loan losses includes a portion which is
allocated by type of loan, based primarily upon our periodic reviews of the risk
elements within the various categories of loans, as well as an unallocated
portion. The unallocated portion of the allowance is established upon
consideration of various qualitative and quantitative factors with respect to
the overall loan portfolio. Our management believes that, based on information
currently available, its allowance for loan losses is maintained at a level
which covers all known and inherent losses that are both probable and reasonably
estimable at each reporting date. However, actual losses are dependent upon
future events and, as such, further additions to the level of allowances for
loan losses may become necessary.
12
DELINQUENT LOANS. The following table shows the delinquencies in our loan
portfolio as of the dates indicated.
December 31, 2004 December 31, 2003
-------------------------------------------- --------------------------------------------
30-89 90 or More Days 30-89 90 or More Days
Days Overdue Overdue Days Overdue Overdue
--------------------- --------------------- --------------------- ---------------------
Number Principal Number Principal Number Principal Number Principal
of Loans Balance of Loans Balance of Loans Balance of Loans Balance
---------- --------- ---------- --------- ---------- --------- ---------- ---------
(Dollars in Thousands)
One- to four-family
residential 6 $460 3 $227 19 $1,055 3 $321
Commercial real estate
and multi-family
residential -- -- -- -- -- -- -- --
Construction 1 2,900 -- -- -- -- -- --
Commercial business -- -- -- -- -- -- -- --
Home equity lines of
credit 2 314 -- -- 4 219 3 109
Consumer non- real estate -- -- -- -- 7 14 2 32
---------- --------- ---------- --------- ---------- --------- ---------- ---------
Total delinquent loans 9 $3,674 3 $227 30 $1,288 8 $462
========== ========= ========== ========= ========== ========= ========== =========
Delinquent loans to
total net loans 0.89% 0.06% 0.35% 0.13%
========= ========= ========= =========
Delinquent loans to
total loans 0.82% 0.05% 0.32% 0.12%
========= ========= ========= =========
December 31, 2002
--------------------------------------------
30-89 90 or More Days
Days Overdue Overdue
--------------------- ---------------------
Number Principal Number Principal
of Loans Balance of Loans Balance
---------- --------- ---------- ---------
(Dollars in Thousands)
One- to four-family
residential 35 $1,467 15 $ 424
Commercial real estate
and multi-family
residential -- -- 1 671
Construction -- -- -- --
Commercial business -- -- -- --
Home equity lines of
credit -- -- 1 99
Consumer non- real estate 11 321 10 56
---------- --------- ---------- ---------
Total delinquent loans 46 $1,788 26 $1,250
========== ========= ========== =========
Delinquent loans to
total net loans 0.48% 0.34%
========= =========
Delinquent loans to
total loans 0.45% 0.31%
========= =========
13
NON-PERFORMING LOANS AND REAL ESTATE OWNED. The following table sets forth
information regarding our non-performing loans and real estate owned. Our
general policy is to cease accruing interest on single-family residential
mortgages which are 120 days or more past due and all other loans which are 90
days or more past due and to charge-off all accrued interest.
For the years ended December 31, 2004, 2003 and 2002, the amount of additional
interest income that would have been recognized on non-accrual loans if such
loans had continued to perform in accordance with their contractual terms was
$5,000, $16,000 and $45,000, respectively.
The following table shows the amounts of our non-performing assets (defined as
non-accruing loans, accruing loans 90 days or more past due and real estate
owned) at the dates indicated. We did not have troubled debt restructurings at
any of the dates indicated.
December 31,
-----------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ -------------
(Dollars in Thousands)
Non-accruing loans:
One- to four-family residential $ -- $ 99 $ -- $ 82 $131
Commercial real estate and
multi-family residential -- -- 671 969 --
Construction -- -- -- -- --
Commercial business -- -- -- -- --
Home equity lines of credit -- -- 99 99 --
Consumer non-real estate -- 16 -- -- --
------------ ------------ ------------ ------------ -------------
Total non-accruing loans -- 115 770 1,150 131
------------ ------------ ------------ ------------ -------------
Accruing loans 90 days or more past due:
One- to four-family residential 227 222 424 233 637
Multi-family residential and
commercial real estate -- -- -- -- --
Construction -- -- -- -- --
Commercial business -- -- -- -- --
Home equity lines of credit -- 109 -- 24 --
Consumer non-real estate -- 16 56 19 --
------------ ------------ ------------ ------------ -------------
Total accruing loans 90 days or
more past due 227 347 480 276 637
------------ ------------ ------------ ------------ -------------
Total non-performing
loans(1) 227 462 1,250 1,426 768
------------ ------------ ------------ ------------ -------------
Real estate owned, net -- -- -- -- --
Total non-performing assets $227 $462 $1,250 $1,426 $768
============ ============ ============ ============ ============
Total non-performing loans as a
percentage of loans 0.06% 0.13% 0.34% 0.41% 0.24%
============ ============ ============ ============ ============
Total non-performing loans as a
percentage of total assets 0.03% 0.08% 0.23% 0.30% 0.18%
============ ============ ============ ============ ============
Total non-performing assets as a
percentage of total assets 0.03% 0.08% 0.23% 0.30% 0.18%
============ ============ ============ ============ ============
- ------------------
(1) Non-performing loans consist of non-accruing loans plus accruing loans
90 days or more past due.
Property acquired by Abington Bank through foreclosure is initially recorded at
the lower of cost, which is the lesser of the carrying value of the loan or fair
value at the date of acquisition, or the fair value of the related assets at the
date of foreclosure, less estimated costs to sell. Thereafter, if there is a
further deterioration in value, we charge earnings for the diminution in value.
Our policy is to obtain an appraisal on all real estate subject to foreclosure
proceedings prior to the time of foreclosure and to require appraisals on a
periodic basis on foreclosed properties and conduct inspections on foreclosed
properties.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established through
a provision for loan losses. We maintain the allowance at a level believed to
cover all known and inherent losses in the portfolio that are both probable and
reasonable to estimate at each reporting date. Management reviews the allowance
for loan losses on no less than a quarterly basis in order to identify those
inherent losses and to assess the overall collection probability for the loan
portfolio. Our evaluation process includes,
14
among other things, an analysis of delinquency trends, non-performing loan
trends, the level of charge-offs and recoveries, prior loss experience, total
loans outstanding, the volume of loan originations, the type, size and
geographic concentration of our loans, the value of collateral securing the
loan, the borrower's ability to repay and repayment performance, the number of
loans requiring heightened management oversight, local economic conditions and
industry experience. In addition, in establishing the allowance for loan losses,
we have implemented a nine point internal rating system for all loans originated
by the Commercial Lending Department. At the time of origination, each loan,
other than single-family residential mortgage loans, home equity lines and
consumer loans, is assigned a rating based on the assumed risk elements of the
loan. Such risk ratings are periodically reviewed by management and revised as
deemed appropriate. The establishment of the allowance for loan losses is
significantly affected by management judgment and uncertainties and there is a
likelihood that different amounts would be reported under different conditions
or assumptions. Various regulatory agencies, as an integral part of their
examination process, periodically review our allowance for loan losses. Such
agencies may require it to make additional provisions for estimated loan losses
based upon judgments different from those of management. As of December 31,
2004, our allowance for loan losses was 0.34% of total loans receivable.
During the year ended December 31, 2004, we charged-off $99,000 of one- to
four-family residential mortgage loans. Such loans were all to one borrower and
previously had been deemed impaired. During the year ended December 31, 2003, we
charged-off $671,000 of commercial real estate and multi-family residential
mortgage loans to this borrower. As of December 31, 2004, all loans to this
borrower had been charged-off. See "Asset Quality-General." In the five-year
period ended December 31, 2004, our loan charge-offs have been relatively
minimal and three borrowers and their affiliates were responsible for 91.3% of
such charge-offs.
We will continue to monitor and modify our allowances for loan losses as
conditions dictate. No assurances can be given that our level of allowance for
loan losses will cover all of the inherent losses on our loans or that future
adjustments to the allowance for loan losses will not be necessary if economic
and other conditions differ substantially from the economic and other conditions
used by management to determine the current level of the allowance for loan
losses.
The following table shows changes in our allowance for loan losses
during the periods presented.
At or For the Year Ended December 31,
----------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Total loans outstanding at end of period $445,622 $400,247 $401,453 $358,883 $327,176
Average loans outstanding 384,990 361,548 366,246 341,112 295,404
Allowance for loan losses, beginning of
period 1,456 1,813 1,590 1,344 1,346
Provision for loan losses 45 375 500 628 --
---------- ---------- ---------- ---------- ----------
Charge-offs:
One- to four-family residential 16 -- -- -- --
Commercial real estate and
multi-family residential -- 671 298 -- --
Construction -- -- -- -- --
Commercial business -- -- -- 413 --
Home equity lines of credit 99 -- -- -- --
Consumer non-real estate 32 89 -- 2 2
---------- ---------- ---------- ---------- ----------
Total charge-offs 147 760 298 415 2
---------- ---------- ---------- ---------- ----------
Recoveries on loans previously charged off 59 28 21 33 --
---------- ---------- ---------- ---------- ----------
Allowance for loan losses, end of period $ 1,413 $ 1,456 $ 1,813 $ 1,590 $ 1,344
========== ========== ========== ========== ==========
Allowance for loan losses as a percent
of non-performing loans 622.47% 315.15% 145.04% 111.50% 175.00%
========== ========== ========== ========== ==========
Ratio of net charge-offs during the
period to average loans outstanding
during the period 0.02% 0.21% 0.08% 0.12% 0.00%
========== ========== ========== ========== ==========
15
The following table shows how our allowance for loan losses is allocated by type
of loan at each of the dates indicated.
December 31,
----------------------------------------------------------------------
2004 2003 2002
---------------------- ---------------------- ----------------------
Loan Loan Loan
Category Category Category
Amount as a % Amount as a % Amount as a %
of of Total of of Total of of Total
Allowance Loans Allowance Loans Allowance Loans
----------- --------- ----------- --------- ----------- ---------
(Dollars in Thousands)
One- to four-family residential $ 657 54.69% $ 625 55.95% $ 694 61.70%
Commercial real estate and
multi-family residential 458 16.75 224 16.00 636 15.29
Construction 106 18.68 68 16.71 49 12.58
Home equity lines of credit 70 7.19 51 7.79 55 6.38
Commercial business 85 1.92 104 2.60 114 2.83
Consumer non-real estate 34 0.77 38 0.95 49 1.22
Unallocated 3 -- 346 -- 216 --
----------- --------- ----------- --------- ----------- ---------
Total $1,413 100.00% $1,456 100.00% $1,813 100.00%
=========== ========= =========== ========= =========== =========
December 31,
----------------------------------------------
2001 2000
---------------------- ----------------------
Loan Loan
Category Category
Amount as a % Amount as a %
of of Total of of Total
Allowance Loans Allowance Loans
----------- --------- ----------- ---------
(Dollars in Thousands)
One- to four-family residential $ 856 74.41% $ 889 76.49%
Commercial real estate and
multi-family residential 505 13.10 93 10.35
Construction 16 4.10 19 5.38
Home equity lines of credit 52 5.30 35 4.92
Commercial business 81 2.25 66 2.01
Consumer non-real estate 30 0.84 28 0.85
Unallocated 50 -- 214 --
----------- --------- ----------- ---------
Total $1,590 100.00% $1,344 100.00%
=========== ========= =========== =========
The allowance consists of specific, general and unallocated components. The
specific component relates to loans that are classified as either doubtful,
substandard or special mention. The general component covers non-classified
loans and is based on historical loss experience adjusted for qualitative
factors. An unallocated component is maintained to cover uncertainties that
could affect management's estimate of probable losses. The unallocated component
of the allowance reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating specific and general losses
in the portfolio.
16
INVESTMENT ACTIVITIES
GENERAL. We invest in securities pursuant to our Investment Policy, which has
been approved by our board of directors. The Investment Policy designates our
President and three Senior Vice Presidents as the Investment Committee. The
Investment Committee is authorized by the board to make the bank's investments
consistent with the Investment Policy. The board of directors of Abington Bank
reviews all investment activity on a monthly basis.
Our investment policy is designed primarily to manage the interest rate
sensitivity of our assets and liabilities, to generate a favorable return
without incurring undue interest rate and credit risk, to complement our lending
activities and to provide and maintain liquidity. We also use a leveraged
investment strategy for the purpose of enhancing returns. Pursuant to this
strategy, we have utilized borrowings from the Federal Home Loan Bank of
Pittsburgh ("FHLB") to purchase additional investment securities. We attempt to
match the advances with the securities purchased in order to obtain a favorable
difference, or "spread," between the interest paid on the advance against the
yield received on the security purchased.
At December 31, 2004, our investment and mortgage-backed securities amounted to
$251.1 million in the aggregate or 35.0% of total assets at such date. The
largest component of our securities portfolio in recent periods has been
mortgage-backed securities, which amounted to $164.7 million or 65.6% of the
securities portfolio at December 31, 2004. In addition, we invest in U.S.
government and agency obligations, municipal securities, corporate debt
obligations and other securities. The majority of our agency debt securities
have call provisions which provide the agency with the ability to call the
securities at specified dates.
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, our securities
are classified as available for sale, held to maturity, or trading, at the time
of acquisition. Securities classified as held to maturity must be purchased with
the intent and ability to hold that security until its final maturity and can be
sold prior to maturity only under rare circumstances. Held to maturity
securities are accounted for based upon the amortized cost of the security.
Available for sale securities can be sold at any time based upon needs or market
conditions. Available for sale securities are accounted for at fair value, with
unrealized gains and losses on these securities, net of income tax provisions,
reflected in retained earnings as accumulated other comprehensive income. At
December 31, 2004, we had $159.2 million of securities classified as available
for sale, $91.9 million of securities classified as held to maturity and no
securities classified as trading account.
We do not purchase mortgage-backed derivative instruments that would be
characterized "high-risk" under Federal banking regulations at the time of
purchase, nor do we purchase corporate obligations which are not rated
investment grade or better.
Our mortgage-backed securities consist primarily of mortgage pass-through
certificates issued by the Government National Mortgage Association ("GNMA" or
"Ginnie Mae"), Fannie Mae or Freddie Mac. Our mortgage-backed securities also
include collateralized mortgage obligations ("CMOs") issued by such agencies. At
December 31, 2004, $33.8 million of our mortgage-backed securities were CMOs. At
December 31, 2004, all of our mortgage-backed securities were issued by the
GNMA, FNMA or FHLMC and we had no mortgage-backed securities issued by private
issuers.
Investments in mortgage-backed securities involve a risk that actual prepayments
will be greater than estimated prepayments over the life of the security, which
may require adjustments to the amortization of any premium or accretion of any
discount relating to such instruments thereby changing the net yield on
17
such securities. There is also reinvestment risk associated with the cash flows
from such securities or in the event such securities are redeemed by the issuer.
In addition, the market value of such securities may be adversely affected by
changes in interest rates.
Ginnie Mae is a government agency within the Department of Housing and Urban
Development which was created to help finance government-assisted housing
programs. Ginnie Mae securities are backed by loans insured by the Federal
Housing Administration or guaranteed by the Veterans Administration. The timely
payment of principal and interest on Ginnie Mae securities is guaranteed by
Ginnie Mae and backed by the full faith and credit of the U.S. Government.
Freddie Mac is a private corporation chartered by the U.S. Government. Freddie
Mac issues participation certificates backed principally by conventional
mortgage loans. Freddie Mac guarantees the timely payment of interest and the
ultimate return of principal on participation certificates. Fannie Mae is a
private corporation chartered by the U.S. Congress with a mandate to establish a
secondary market for mortgage loans. Fannie Mae guarantees the timely payment of
principal and interest on Fannie Mae securities. Freddie Mac and Fannie Mae
securities are not backed by the full faith and credit of the U.S. Government,
but because Freddie Mac and Fannie Mae are U.S. Government-sponsored
enterprises, these securities are considered to be among the highest quality
investments with minimal credit risks.
Collateralized mortgage obligations are typically issued by a special-purpose
entity, in our case, of government agencies, which may be organized in a variety
of legal forms, such as a trust, a corporation, or a partnership. Substantially
all of the collateralized mortgage obligations held in our portfolio consist of
senior sequential tranches. By purchasing senior sequential tranches, management
attempts to ensure the cash flow associated with such an investment.
The following table sets forth certain information relating to our investment
and mortgage-backed securities portfolios and our investment in FHLB stock at
the dates indicated.
December 31,
-------------------------------------------------------------------
2004 2003 2002
--------------------- --------------------- ---------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- --------- --------- --------- --------- ---------
(Dollars in Thousands)
Mortgage-backed securities $165,005 $164,350 $120,917 $121,104 $49,904 $51,438
U.S. government and agency
obligations 71,489 70,393 72,988 72,429 35,197 35,721
Corporate securities 1,000 1,012 1,501 1,538 2,399 2,411
Municipal obligations 10,400 10,520 180 189 180 191
Investment certificates of deposit 1,282 1,282 1,579 1,579 1,777 1,777
Mutual funds 3,395 3,292 3,330 3,250 3,270 3,218
FHLB stock 10,450 10,450 10,039 10,039 7,033 7,033
Other 3 1 3 1 3 1
--------- --------- --------- --------- --------- ---------
Total investment and
mortgage-backed securities $263,024 $261,300 $210,537 $210,129 $99,763 $101,790
========= ========= ========= ========= ========= =========
18
The following table sets forth the amount of investment securities which mature
during each of the periods indicated and the weighted average yields for each
range of maturities at December 31, 2004. No tax-exempt yields have been
adjusted to a tax-equivalent basis.
Amounts at December 31, 2004 Which Mature In
----------------------------------------------------------------------------------------------
Over One
Weighted Year Weighted Over Five Weighted Over Weighted
One Year Average Through Average Through Average Ten Average
or Less Yield Five Years Yield Ten Years Yield Years Yield
--------- --------- ------------ --------- --------- --------- --------- ---------
(Dollars in Thousands)
Bonds and other debt securities:
U.S. government and agency
obligations $ 500 7.13% $ 58,000 2.79% $10,990 3.91% $ 2,000 6.50%
Corporate securities -- -- 1,000 5.19 -- -- -- --
Municipal obligations -- -- 180 3.90 -- -- 10,220 4.31
Mortgage-backed securities -- -- 27,175 3.64 21,047 3.84 116,781 4.63
Investment certificates of
deposit 783 3.40 500 3.94 -- -- -- --
--------- ------------ --------- ---------
Total $ 1,283 4.85% $ 86,855 3.09% $32,037 3.86% $129,001 4.63%
========= ============ ========= =========
SOURCES OF FUNDS
GENERAL. Deposits, loan repayments and prepayments, proceeds from sales of
loans, cash flows generated from operations and Federal Home Loan Bank advances
are the primary sources of our funds for use in lending, investing and for other
general purposes.
DEPOSITS. We offer a variety of deposit accounts with a range of interest rates
and terms. Our deposits consist of checking, both interest-bearing and
non-interest-bearing, money market, savings and certificate of deposit accounts.
At December 31, 2004, 54.9% of the funds deposited with Abington Bank were in
core deposits, which are deposits other than certificates of deposit.
The flow of deposits is influenced significantly by general economic conditions,
changes in money market rates, prevailing interest rates and competition. Our
deposits are obtained predominantly from the areas where its branch offices are
located. We have historically relied primarily on customer service and
long-standing relationships with customers to attract and retain these deposits;
however, market interest rates and rates offered by competing financial
institutions significantly affect our ability to attract and retain deposits.
Abington Bank uses traditional means of advertising its deposit products,
including broadcast and print media and generally does not solicit deposits from
outside its market area. In recent years, we have emphasized the origination of
core deposits. This strategy has resulted in a significant increase in core
deposits, particularly checking accounts, as well as increased fee income and
new customer relationships.
We do not actively solicit certificate accounts in excess of $100,000, known as
"jumbo CDs," or use brokers to obtain deposits. Our jumbo CDs amounted to $64.9
million and $58.1 million, respectively, at December 31, 2004 and 2003, of which
$25.0 million and $29.3 million, respectively, were scheduled to mature in 12
months. At December 31, 2004, the weighted average remaining maturity of our
certificate of deposit accounts was 23.0 months.
19
The following table shows the distribution of, and certain other information
relating to, our deposits by type of deposit, as of the dates indicated.
December 31,
-------------------------------------------------------------------------
2004 2003 2002
----------------------- ----------------------- -----------------------
Amount % Amount % Amount %
---------- ------------ ---------- ------------ ---------- ------------
(Dollars in Thousands)
Certificate accounts:
1.00% - 1.99% $32,923 8.12% $52,112 14.37% $10,528 3.06%
2.00% - 2.99% 38,636 9.53 29,555 8.15 58,405 16.96
3.00% - 3.99% 60,106 14.83 28,871 7.96 36,478 10.59
4.00% - 4.99% 19,691 4.86 16,005 8.16 17,179 10.05
5.00% - 5.99% 29,078 7.18 34,289 9.45 39,180 11.38
6.00% - 6.99% 2,337 0.58 5,681 1.57 11,393 3.31
7.00% or more -- -- -- -- 305 0.09
---------- ------------ ---------- ------------ ---------- ------------
Total certificate accounts 182,771 45.10 166,513 45.91 173,468 50.38
---------- ------------ ---------- ------------ ---------- ------------
Transaction accounts:
Savings and money market 125,204 30.89 107,565 29.66 95,341 27.69
Checking:
Interest bearing 59,719 14.73 50,733 13.99 45,562 13.23
Non-interest bearing 37,596 9.28 37,855 10.44 29,965 8.70
---------- ------------ ---------- ------------ ---------- ------------
Total transaction accounts 222,519 54.90 196,153 54.09 170,868 49.62
---------- ------------ ---------- ------------ ---------- ------------
Total deposits $405,290 100.00% $362,666 100.00% $344,336 100.00%
========== ============ ========== ============ ========== ============
The following table shows the average balance of each type of deposit and the
average rate paid on each type of deposit for the periods indicated.
Year Ended December 31,
--------------------------------------------------------------------------------------------------
2004 2003 2002
-------------------------------- -------------------------------- --------------------------------
Average Interest Average Average Interest Average Average Interest Average
Balance Expense Rate Paid Balance Expense Rate Paid Balance Expense Rate Paid
--------- --------- ----------- --------- --------- ----------- --------- --------- -----------
(Dollars in Thousands)
Savings and money market $120,748 $ 1,065 0.88% $107,291 $ 1,068 1.00% $ 89,659 $ 1,524 1.70%
Checking 52,804 44 0.08 46,433 51 0.11 42,632 58 0.14
Certificates of deposit 175,492 5,452 3.11 169,058 5,703 3.37 164,089 6,631 4.04
--------- --------- --------- --------- --------- ---------
Total interest-bearing
deposits 349,044 6,561 1.88 322,782 6,822 2.11 296,380 8,213 2.77
========= ========= =========== ========= ========= =========== ========= ========= ===========
Total deposits $394,905 $ 6,561 1.66% $359,230 $ 6,822 1.90% $325,315 $ 8,213 2.52%
========= ========= =========== ========= ========= =========== ========= ========= ===========
The following table shows our savings flows during the periods indicated.
Year Ended December 31,
----------------------------------
2004 2003 2002
---------- ---------- ----------
(In Thousands)
Total deposits $3,387,865 $3,016,200 $2,482,245
Total withdrawals 3,351,887 3,004,934 2,455,580
Interest credited $ 6,646 $ 7,064 8,612
---------- ---------- ----------
Total increase in deposits 42,624 18,330 $ 35,277
========== ========== ==========
20
The following table presents, by various interest rate categories and
maturities, the amount of our certificates of deposit at December 31, 2004.
Balance at December 31, 2004
Maturing in the 12 Months Ending December 31,
-------------------------------------------------------------
Certificates of Deposit 2005 2006 2007 Thereafter Total
- -------------------------- -------- -------- -------- ---------- ---------
(In Thousands)
Less than 2.00% $32,852 $ 70 $ -- $ -- $32,922
2.00% - 2.99% 24,659 11,480 887 1,610 38,636
3.00% - 3.99% 14,929 29,686 8,396 7,096 60,107
4.00% - 4.99% 398 2,158 4,582 12,554 19,692
5.00% - 5.99% 677 3,559 23,619 1,223 29,078
6.00% or more 961 437 479 459 2,336
-------- -------- -------- ---------- ---------
Total certificate accounts $74,476 $47,390 $37,963 $22,942 $182,771
======== ======== ======== ========== =========
The following table shows the maturities of our certificates of deposit of
$100,000 or more at December 31, 2004, by time remaining to maturity.
At December 31, 2004
- -----------------------------------------------------------------------------
Weighted
Quarter Ending: Amount Average Rate
- ------------------------------------------ ------------ ----------------
(Dollars in Thousands)
March 31, 2005 $ 5,621 1.70%
June 30, 2005 2,710 2.08
September 30, 2005 13,232 3.50
December 31, 2005 3,420 2.55
After December 31, 2005 39,941 4.41
------------
Total certificates of deposit with
balances of $100,000 or more $64,924 3.79%
============ ================
BORROWINGS. We utilize advances from the Federal Home Loan Bank of Pittsburgh as
an alternative to retail deposits to fund our operations as part of our
operating strategy. These FHLB advances are collateralized primarily by certain
of our mortgage loans and mortgage-backed securities and secondarily by our
investment in capital stock of the Federal Home Loan Bank of Pittsburgh. FHLB
advances are made pursuant to several different credit programs, each of which
has its own interest rate and range of maturities. The maximum amount that the
Federal Home Loan Bank of Pittsburgh will advance to member institutions,
including Abington Bank, fluctuates from time to time in accordance with the
policies of the Federal Home Loan Bank. At December 31, 2004, we had $170.7
million in outstanding FHLB advances and $246.3 million of additional FHLB
advances available. At such date all of our FHLB advances had maturities of more
than one year and fixed rates of interest. Approximately $92.2 million of our
FHLB advances at December 31, 2004 were part of our matched funding program
whereby we use such advances to purchase securities. Our current policy permits
us to utilize up to $100.0 million of advances to match-fund securities. It is
likely that we will increase such limit to permit moderately increased
utilization of FHLB advances.
21
In addition to FHLB advances, our borrowings include securities sold under
agreements to repurchase (repurchase agreements). Repurchase agreements are
contracts for the sale of securities owned or borrowed by Abington Bank, with an
agreement to repurchase those securities at an agreed upon price and date. We
use repurchase agreements as an investment vehicle for our commercial sweep
checking product. We enter into securities repurchase agreements with our
commercial checking account customers under a sweep account arrangement. Account
balances are swept on a daily basis into mortgage-backed securities purchases
from us, which we agree to repurchase as the checking account is drawn upon by
the customer. At December 31, 2004, our securities repurchase agreements
amounted to $12.9 million and all of such borrowings were short-term, having
maturities of one year or less. The average balance of our securities sold under
repurchase agreements for the year ended December 31, 2004 was $17.7 million.
The following table shows certain information regarding our borrowings at or for
the dates indicated:
At or For the Year
Ended December 31,
------------------------------------
2004 2003 2002
-------- -------- --------
(Dollars in Thousands)
FHLB advances:
Average balance outstanding $169,699 $148,090 $116,689
Maximum amount outstanding at any
month-end during the period 185,588 173,732 123,581
Balance outstanding at end of
period 170,666 173,732 122,761
Average interest rate during the
period 4.357% 4.673% 5.142%
Weighted average interest rate at
end of period 4.422% 4.180% 5.049%
Other borrowed money:
Average balance outstanding $17,703 $15,241 $10,304
Maximum amount outstanding at any
month-end during the period 27,686 21,722 14,273
Balance outstanding at end of
period 12,866 8,681 11,937
Average interest rate during the
period 0.817% 0.612% 1.048%
Weighted average interest rate at
end of period 1.785% 0.516% 0.716%
At December 31, 2004, $23.1 million of our borrowings were short-term
(maturities of one year or less). Such short-term borrowings had a weighted
average interest rate of 3.62% at December 31, 2004.
EMPLOYEES
At December 31, 2004, we had 98 full-time employees, and 19 part-time employees.
None of such employees are represented by a collective bargaining group, and we
believe that our relationship with our employees is excellent.
SUPERVISION AND REGULATION
GENERAL
Abington Bank as a Pennsylvania-chartered savings bank with deposits insured by
the Savings Association Insurance Fund administered by the Federal Deposit
Insurance Corporation, is subject to extensive regulation and examination by the
Pennsylvania Department of Banking and by the Federal Deposit Insurance
Corporation. The federal and state laws and regulations applicable to banks
regulate, among other things, the scope of their business, their investments,
the reserves required to be kept against deposits, the timing of the
availability of deposited funds and the nature and amount of and collateral for
certain loans. This regulatory structure also gives the federal and state
banking agencies extensive
22
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. The laws and regulations governing Abington Bank generally have been
promulgated to protect depositors and not for the purpose of protecting
shareholders.
Federal law provides the federal banking regulators, including the Federal
Deposit Insurance Corporation and the Federal Reserve Board, with substantial
enforcement powers. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders, and to initiate injunctive actions against banking organizations and
institution-affiliated parties, as defined. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with
regulatory authorities. Any change in such regulation, whether by the
Pennsylvania Department of Banking, the Federal Deposit Insurance Corporation,
the Federal Reserve Board or the United States Congress, could have a material
impact on us and our operations.
Abington Community Bancorp and Abington Mutual Holding Company are registered as
bank holding companies under the Bank Holding Company Act and Abington Community
Bancorp and Abington Mutual Holding Company are subject to regulation and
supervision by the Federal Reserve Board and by the Pennsylvania Department of
Banking. Abington Community Bancorp and Abington Mutual Holding Company are also
be required to file annually a report of its operations with, and are subject to
examination by, the Federal Reserve Board and the Pennsylvania Department of
Banking. This regulation and oversight is generally intended to ensure that
Abington Community Bancorp and Abington Mutual Holding Company limit their
activities to those allowed by law and that they operate in a safe and sound
manner without endangering the financial health of Abington Bank.
REGULATION OF ABINGTON COMMUNITY BANCORP AND ABINGTON MUTUAL HOLDING COMPANY
BANK HOLDING COMPANY ACT ACTIVITIES AND OTHER LIMITATIONS. Under the Bank
Holding Company Act, Abington Community Bancorp and Abington Mutual Holding
Company must obtain the prior approval of the Federal Reserve Board before they
may acquire control of another bank or bank holding company, merge or
consolidate with another bank holding company, acquire all or substantially all
of the assets of another bank or bank holding company, or acquire direct or
indirect ownership or control of any voting shares of any bank or bank holding
company if, after such acquisition, Abington Community Bancorp and Abington
Mutual Holding Company would directly or indirectly own or control more than 5%
of such shares.
Federal statutes impose restrictions on the ability of a bank holding company
and its nonbank subsidiaries to obtain extensions of credit from its subsidiary
bank, on the subsidiary bank's investments in the stock or securities of the
holding company, and on the subsidiary bank's taking of the holding company's
stock or securities as collateral for loans to any borrower. A bank holding
company and its subsidiaries are also prevented from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property, or furnishing of services by the subsidiary bank.
A bank holding company is required to serve as a source of financial and
managerial strength to its subsidiary banks and may not conduct its operations
in an unsafe or unsound manner. In addition, it is the policy of the Federal
Reserve Board that a bank holding company should stand ready to use available
resources to provide adequate capital to its subsidiary banks during periods of
financial stress or adversity and should maintain the financial flexibility and
capital-raising capacity to obtain additional resources for assisting its
subsidiary banks. A bank holding company's failure to meet its obligations to
serve as a
23
source of strength to its subsidiary banks will generally be considered by the
Federal Reserve Board to be an unsafe and unsound banking practice or a
violation of the Federal Reserve Board regulations, or both.
Non-Banking Activities. The business activities of Abington Community Bancorp
and Abington Mutual Holding Company, as bank holding companies, will be
restricted by the Bank Holding Company Act. Under the Bank Holding Company Act
and the Federal Reserve Board's bank holding company regulations, bank holding
companies may only engage in, or acquire or control voting securities or assets
of a company engaged in:
o banking or managing or controlling banks and other subsidiaries
authorized under the Bank Holding Company Act; and
o any Bank Holding Company Act activity the Federal Reserve Board
has determined to be so closely related that it is incidental to
banking or managing or controlling banks.
The Federal Reserve Board has by regulation determined that certain activities
are closely related to banking including operating a mortgage company, finance
company, credit card company, factoring company, trust company or savings
association; performing certain data processing operations; providing limited
securities brokerage services; acting as an investment or financial advisor;
acting as an insurance agent for certain types of credit-related insurance;
leasing personal property on a full-payout, non-operating basis; providing tax
planning and preparation services; operating a collection agency; and providing
certain courier services. However, as discussed below, certain other activities
are permissible for a bank holding company that becomes a financial holding
company.
FINANCIAL MODERNIZATION. The Gramm-Leach-Bliley Act permits greater affiliation
among banks, securities firms, insurance companies, and other companies under a
new type of financial services company known as a "financial holding company." A
financial holding company essentially is a bank holding company with
significantly expanded powers. Financial holding companies are authorized by
statute to engage in a number of financial activities previously impermissible
for bank holding companies, including securities underwriting, dealing and
market making; sponsoring mutual funds and investment companies; insurance
underwriting and agency; and merchant banking activities. The Gramm-Leach-Bliley
Act also permits the Federal Reserve Board and the Treasury Department to
authorize additional activities for financial holding companies if they are
"financial in nature" or "incidental" to financial activities. A bank holding
company may become a financial holding company if each of its subsidiary banks
is well capitalized, well managed, and has at least a "satisfactory" Community
Reinvestment Act rating. A financial holding company must provide notice to the
Federal Reserve Board within 30 days after commencing activities previously
determined by statute or by the Federal Reserve Board and Department of the
Treasury to be permissible. Abington Community Bancorp and Abington Mutual
Holding Company have not submitted notices to the Federal Reserve Board of their
intent to be deemed financial holding companies. However, they are not precluded
from submitting a notice in the future should they wish to engage in activities
only permitted to financial holding companies.
REGULATORY CAPITAL REQUIREMENTS. The Federal Reserve Board has adopted capital
adequacy guidelines pursuant to which it assesses the adequacy of capital in
examining and supervising a bank holding company and in analyzing applications
to it under the Bank Holding Company Act. The Federal Reserve Board's capital
adequacy guidelines for Abington Community Bancorp, on a consolidated basis, are
similar to those imposed on Abington Bank by the Federal Deposit Insurance
Corporation. See "-Regulation of Abington Bank - Regulatory Capital
Requirements." At December 31, 2004, Abington Community Bancorp met all
applicable regulatory capital requirements.
24
RESTRICTIONS ON DIVIDENDS. Abington Community Bancorp's ability to declare and
pay dividends may depend in part on dividends received from Abington Bank. The
Pennsylvania Banking Code regulates the distribution of dividends by savings
banks and states, in part, that dividends may be declared and paid out of
accumulated net earnings, provided that the bank continues to meet its surplus
requirements. In addition, dividends may not be declared or paid if Abington
Bank is in default in payment of any assessment due the Federal Deposit
Insurance Corporation.
A Federal Reserve Board policy statement on the payment of cash dividends states
that a bank holding company should pay cash dividends only to the extent that
the holding company's net income for the past year is sufficient to cover both
the cash dividends and a rate of earnings retention that is consistent with the
holding company's capital needs, asset quality and overall financial condition.
The Federal Reserve Board also indicated that it would be inappropriate for a
company experiencing serious financial problems to borrow funds to pay
dividends. Furthermore, under the federal prompt corrective action regulations,
the Federal Reserve Board may prohibit a bank holding company from paying any
dividends if the holding company's bank subsidiary is classified as
"undercapitalized." See "-Regulation of Abington Bank - Prompt Corrective
Action," below.
SARBANES-OXLEY ACT OF 2002. On July 30, 2002, the President signed into law the
Sarbanes-Oxley Act of 2002 implementing legislative reforms intended to address
corporate and accounting fraud. In addition to the establishment of a new
accounting oversight board which is empowered to enforce auditing, quality
control and independence standards, the Sarbanes-Oxley Act restricts provision
of both auditing and consulting services by accounting firms. To ensure auditor
independence, any non-audit services being provided to an audit client require
pre-approval by the company's audit committee members. In addition, the audit
partners must be rotated. The Sarbanes-Oxley Act requires chief executive
officers and chief financial officers, or their equivalent, to certify to the
accuracy of periodic reports filed with the SEC, subject to civil and criminal
penalties if they knowingly or willfully violate this certification requirement.
In addition, under the Sarbanes-Oxley Act, attorneys are required to report
evidence of a material violation of the securities laws or a breach of fiduciary
duty by a company to its chief executive officer or its chief legal officer,
and, if such officer does not appropriately respond, to report such evidence to
the audit committee or other similar committee of the board of directors or the
board itself.
Longer prison terms were legislated for corporate executives who violate federal
securities laws, the period during which certain types of suits can be brought
against a company or its officers has been extended, and bonuses issued to top
executives prior to restatement of a company's financial statements are now
subject to disgorgement if such restatement was due to corporate misconduct.
Executives are also prohibited from insider trading during retirement plan
"blackout" periods, and loans to company executives are restricted. In addition,
a provision directs that civil penalties levied by the SEC as a result of any
judicial or administrative action under the Sarbanes-Oxley Act be deposited to a
fund for the benefit of harmed investors. The Federal Accounts for Investor
Restitution (FAIR) provision also requires the SEC to develop methods of
improving collection rates. The legislation accelerates the time frame for
disclosures by public companies for any material changes in their financial
condition or operations and certain other events. Directors and executive
officers must also provide information for most changes in ownership in a
company's securities within two business days of the change.
The Sarbanes-Oxley Act also increases the oversight of, and codifies certain
requirements relating to audit committees of public companies and how they
interact with the company's "registered public accounting firm" (RPAF). Audit
Committee members must be independent and are barred from accepting consulting,
advisory or other compensatory fees from the issuer. In addition, companies must
disclose whether at least one member of the committee is a "financial expert,"
as such term is defined by the SEC, and if not, why not. Under the
Sarbanes-Oxley Act, a RPAF is prohibited from performing statutorily mandated
audit services for a company if such company's chief executive officer, chief
25
financial officer, comptroller, chief accounting officer or any person serving
in equivalent positions has been employed by such firm and participated in the
audit of such company during the one-year period preceding the audit initiation
date. The Sarbanes-Oxley Act also prohibits any officer or director of a company
or any other person acting under their direction from taking any action to
fraudulently influence, coerce, manipulate or mislead any independent public or
certified accountant engaged in the audit of the company's financial statements
for the purpose of rendering the financial statement's materially misleading.
The Sarbanes-Oxley Act also will require inclusion of an internal control report
and assessment by management in the annual report to shareholders (which, in the
Company's case, is expected to be required for its fiscal year ending December
31, 2005). The Sarbanes-Oxley Act requires the RPAF that issues the audit report
to attest to and report on management's assessment of the company's internal
controls. In addition, the Sarbanes-Oxley Act requires that each financial
report required to be prepared in accordance with, or reconciled to, generally
accepted accounting principles and filed with the SEC reflect all material
correcting adjustments that are identified by a RPAF in accordance with
generally accepted accounting principles and the rules and regulations of the
SEC.
RESTRICTIONS APPLICABLE TO MUTUAL HOLDING COMPANIES. Under authority of Section
115.1 of the Pennsylvania Banking Code of 1965, as amended ("Banking Code"), and
a policy statement issued by the Pennsylvania Department of Banking, the
Department is authorized to approve the reorganization of a state chartered
savings bank to a mutual holding company, provided the savings bank has a CAMEL
composite rating of one or two under the Uniform Financial Institutions Rating
System. While regulations governing the formation of Pennsylvania-chartered
mutual holding companies have not been adopted, the policy statement and form of
application issued by the Department provide the means by which such
applications will be processed and approved.
Pursuant to Pennsylvania law, a mutual holding company may engage only in the
following activities:
o Investing in the stock of one or more financial institution
subsidiaries.
o Acquiring one or more additional financial institution
subsidiaries into a subsidiary of the holding company.
o Merging with or acquiring another holding company, one of whose
subsidiaries is a financial institution subsidiary.
o Investing in a corporation the capital stock of which is
available for purchase by a savings bank under federal law or
under the Pennsylvania Banking Code.
o Engaging in such activities as are permitted, by statute or
regulation, to a holding company of a federally chartered
insured mutual institution under federal law.
o Engaging in such other activities as may be permitted by the
Pennsylvania Department of Banking.
If a mutual holding company acquires or merges with another holding company, the
holding company acquired or the holding company resulting from such merger or
acquisition may only invest in assets and engage in activities listed above, and
has a period of two years to cease any non-conforming activities and divest of
any non-conforming investments.
26
The mutual holding company will be subject to such regulations as the
Pennsylvania Department of Banking may prescribe. No mutual holding company
regulations have been issued to date by the Department.
REGULATION OF ABINGTON BANK
PENNSYLVANIA SAVINGS BANK LAW. The Pennsylvania Banking Code contains detailed
provisions governing the organization, location of offices, rights and
responsibilities of directors, officers, and employees, as well as corporate
powers, savings and investment operations and other aspects of Abington Bank and
its affairs. The code delegates extensive rule-making power and administrative
discretion to the Pennsylvania Department of Banking so that the supervision and
regulation of state-chartered savings banks may be flexible and readily
responsive to changes in economic conditions and in savings and lending
practices.
The Pennsylvania Banking Code also provides that state-chartered savings banks
may engage in any activity permissible for a federal savings association,
subject to regulation by the Pennsylvania Department of Banking. The Federal
Deposit Insurance Act, however, will prohibit Abington Bank from making new
investments, loans, or becoming involved in activities as principal and equity
investments which are not permitted for national banks unless:
o the Federal Deposit Insurance Corporation determines the
activity or investment does not pose a significant risk of loss
to the Savings Association Insurance Fund; and
o Abington Bank meets all applicable capital requirements.
Accordingly, the additional operating authority provided to Abington Bank by the
Pennsylvania Banking Code is significantly restricted by the Federal Deposit
Insurance Act.
INSURANCE OF ACCOUNTS. The deposits of Abington Bank are insured to the maximum
extent permitted by the Savings Association Insurance Fund, which is
administered by the Federal Deposit Insurance Corporation, and are backed by the
full faith and credit of the U.S. Government. As insurer, the Federal Deposit
Insurance Corporation is authorized to conduct examinations of, and to require
reporting by, insured institutions. It also may prohibit any insured institution
from engaging in any activity the Federal Deposit Insurance Corporation
determines by regulation or order to pose a serious threat to the Federal
Deposit Insurance Corporation. The Federal Deposit Insurance Corporation also
has the authority to initiate enforcement actions against savings institutions.
Under current Federal Deposit Insurance Corporation regulations, Savings
Association Insurance Fund- insured institutions are assigned to one of three
capital groups which are based solely on the level of an institution's capital -
"well capitalized," "adequately capitalized" and "undercapitalized" - which are
defined in the same manner as the regulations establishing the prompt corrective
action system discussed below. These three groups are then divided into three
subgroups which reflect varying levels of supervisory concern, from those which
are considered to be healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with rates during the last six months of 2004 ranging from zero
for well capitalized, healthy institutions, such as Abington Bank, to 27 basis
points for undercapitalized institutions with substantial supervisory concerns.
In addition, all institutions with deposits insured by the Federal Deposit
Insurance Corporation are required to pay assessments to fund interest payments
on bonds issued by the Financing Corporation, a mixed-ownership government
corporation established to recapitalize the predecessor to the Savings
27
Association Insurance Fund. These assessments will continue until the Financing
Corporation bonds mature in 2019.
The Federal Deposit Insurance Corporation may terminate the deposit insurance of
any insured depository institution, including Abington Bank, if it determines
after a hearing that the institution has engaged or is engaging in unsafe or
unsound practices, is in an unsafe or unsound condition to continue operations,
or has violated any applicable law, regulation, order or any condition imposed
by an agreement with the Federal Deposit Insurance Corporation. It also may
suspend deposit insurance temporarily during the hearing process for the
permanent termination of insurance, if the institution has no tangible capital.
If insurance of accounts is terminated, the accounts at the institution at the
time of the termination, less subsequent withdrawals, shall continue to be
insured for a period of six months to two years, as determined by the Federal
Deposit Insurance Corporation. Management is aware of no existing circumstances
which would result in termination of Abington Bank's deposit insurance.
REGULATORY CAPITAL REQUIREMENTS. The Federal Deposit Insurance Corporation has
promulgated capital adequacy requirements for state-chartered banks that, like
Abington Bank, are not members of the Federal Reserve Board System. The capital
regulations establish a minimum 3% Tier 1 leverage capital requirement for the
most highly rated state-chartered, non-member banks, with an additional cushion
of at least 100 to 200 basis points for all other state-chartered, non-member
banks, which effectively increases the minimum Tier 1 leverage ratio for such
other banks to 4% to 5% or more. Under the Federal Deposit Insurance
Corporation's regulations, the highest-rated banks are those that the Federal
Deposit Insurance Corporation determines are not anticipating or experiencing
significant growth and have well diversified risk, including no undue interest
rate risk exposure, excellent asset quality, high liquidity, good earnings and,
in general, which are considered a strong banking organization, rated composite
1 under the Uniform Financial Institutions Rating System. Tier 1, or leverage
capital, is defined as the sum of common shareholders' equity, including
retained earnings, noncumulative perpetual preferred stock and related surplus,
and minority interests in consolidated subsidiaries, minus all intangible assets
other than certain purchased mortgage servicing rights and purchased credit card
relationships.
The Federal Deposit Insurance Corporation's regulations also require that
state-chartered, non-member banks meet a risk-based capital standard. The
risk-based capital standard requires the maintenance of total capital, defined
as Tier 1 capital and supplementary (Tier 2) capital, to risk weighted assets of
8%. In determining the amount of risk-weighted assets, all assets, plus certain
off balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based
on the risks the Federal Deposit Insurance Corporation believes are inherent in
the type of asset or item. The components of Tier 1 capital for the risk-based
standards are the same as those for the leverage capital requirement. The
components of supplementary (Tier 2) capital include cumulative perpetual
preferred stock, mandatory subordinated debt, perpetual subordinated debt,
intermediate-term preferred stock, up to 45% of unrealized gains on equity
securities and a portion of a bank's allowance for loan losses. Allowance for
loan losses includable in supplementary capital is limited to a maximum of 1.25%
of risk-weighted assets. Overall, the amount of supplementary capital that may
be included in total capital is limited to 100% of Tier 1 capital.
A bank that has less than the minimum leverage capital requirement is subject to
various capital plan and activities restriction requirements. The Federal
Deposit Insurance Corporation's regulations also provide that any insured
depository institution with a ratio of Tier 1 capital to total assets that is
less than 2.0% is deemed to be operating in an unsafe or unsound condition
pursuant to Section 8(a) of the Federal Deposit Insurance Act and could be
subject to potential termination of deposit insurance.
Abington Bank is also subject to minimum capital requirements imposed by the
Pennsylvania Department of Banking on Pennsylvania chartered depository
institutions. Under the Pennsylvania Department of Banking's capital
regulations, a Pennsylvania bank or savings association must maintain a minimum
28
leverage ratio of Tier 1 capital, as defined under the Federal Deposit Insurance
Corporation's capital regulations, to total assets of 4%. In addition, the
Pennsylvania Department of Banking has the supervisory discretion to require a
higher leverage ratio for any institution or association based on inadequate or
substandard performance in any of a number of areas. The Pennsylvania Department
of Banking incorporates the same Federal Deposit Insurance Corporation
risk-based capital requirements in its regulations. As of December 31, 2004,
Abington Bank was in compliance with all applicable regulatory capital
requirements and was deemed to be a "well-capitalized" institution.
AFFILIATE TRANSACTION RESTRICTIONS. Federal laws strictly limit the ability of
banks to engage in transactions with their affiliates, including their bank
holding companies. Such transactions between a subsidiary bank and its parent
company or the nonbank subsidiaries of the bank holding company are limited to
10% of a bank subsidiary's capital and surplus and, with respect to such parent
company and all such nonbank subsidiaries, to an aggregate of 20% of the bank
subsidiary's capital and surplus. Further, loans and extensions of credit
generally are required to be secured by eligible collateral in specified
amounts. Federal law also requires that all transactions between a bank and its
affiliates be on terms as favorable to the bank as transactions with
non-affiliates.
FEDERAL HOME LOAN BANK SYSTEM. Abington Bank is a member of the Federal Home
Loan Bank of Pittsburgh, which is one of 12 regional Federal Home Loan Banks.
Each Federal Home Loan Bank serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from funds deposited by
member institutions and proceeds from the sale of consolidated obligations of
the Federal Home Loan Bank System. It makes loans to members (i.e., advances) in
accordance with policies and procedures established by the board of directors of
the Federal Home Loan Bank.
As a member, Abington Bank is required to purchase and maintain stock in the
Federal Home Loan Bank of Pittsburgh in an amount equal to the greater of 1% of
its aggregate unpaid residential mortgage loans, home purchase contracts or
similar obligations at the beginning of each year or 5% of its outstanding
advances from the Federal Home Loan Bank. At December 31, 2004, Abington Bank
was in compliance with this requirement.
FEDERAL RESERVE BOARD SYSTEM. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts, which are primarily checking and NOW
accounts, and non-personal time deposits. The balances maintained to meet the
reserve requirements imposed by the Federal Reserve Board may be used to satisfy
the liquidity requirements that are imposed by the Pennsylvania Department of
Banking. At December 31, 2004, Abington Bank was in compliance with these
reserve requirements.
TAXATION
FEDERAL TAXATION
GENERAL. Abington Community Bancorp, Abington Mutual Holding Company and
Abington Bank are subject to federal income taxation in the same general manner
as other corporations with some exceptions listed below. The following
discussion of federal, state and local income taxation is only intended to
summarize certain pertinent income tax matters and is not a comprehensive
description of the applicable tax rules. Abington Bank's federal and state
income tax returns for taxable years through December 31, 1999 have been closed
for purposes of examination by the Internal Revenue Service or the Pennsylvania
Department of Revenue.
29
Abington Community Bancorp files a consolidated federal income tax return with
Abington Bank. Accordingly, it is anticipated that any cash distributions made
by Abington Community Bancorp to its shareholders would be treated as cash
dividends and not as a non-taxable return of capital to shareholders for federal
and state tax purposes.
METHOD OF ACCOUNTING. For federal income tax purposes, Abington Bank reports
income and expenses on the accrual method of accounting and files its federal
income tax return on a calendar year basis.
BAD DEBT RESERVES. The Small Business Job Protection Act of 1996 eliminated the
use of the reserve method of accounting for bad debt reserves by savings
associations, effective for taxable years beginning after 1995. Prior to that
time, Abington Bank was permitted to establish a reserve for bad debts and to
make additions to the reserve. These additions could, within specified formula
limits, be deducted in arriving at taxable income. As a result of the Small
Business Job Protection Act of 1996, savings associations must use the specific
charge-off method in computing their bad debt deduction beginning with their
1996 federal tax return. In addition, federal legislation required the recapture
over a six year period of the excess of tax bad debt reserves at December 31,
1995 over those established as of December 31, 1987.
TAXABLE DISTRIBUTIONS AND RECAPTURE. Prior to the Small Business Job Protection
Act of 1996, bad debt reserves created prior to January 1, 1988 were subject to
recapture into taxable income if Abington Bank failed to meet certain thrift
asset and definitional tests. New federal legislation eliminated these savings
association related recapture rules. However, under current law, pre-1988
reserves remain subject to recapture should Abington Bank make certain
non-dividend distributions or cease to maintain a bank charter.
At December 31, 2004, Abington Bank's total federal pre-1988 reserve was
approximately $3.2 million. The reserve reflects the cumulative effects of
federal tax deductions by Abington Bank for which no federal income tax
provisions have been made.
ALTERNATIVE MINIMUM TAX. The Internal Revenue Code imposes an alternative
minimum tax at a rate of 20% on a base of regular taxable income plus certain
tax preferences. The alternative minimum tax is payable to the extent such
alternative minimum tax income is in excess of the regular income tax. Net
operating losses, of which Abington Bank has none, can offset no more than 90%
of alternative minimum taxable income. Certain payments of alternative minimum
tax may be used as credits against regular tax liabilities in future years.
Abington Bank has not been subject to the alternative minimum tax or any such
amounts available as credits for carryover.
CORPORATE DIVIDENDS-RECEIVED DEDUCTION. Abington Community Bancorp may exclude
from its income 100% of dividends received from Abington Bank as a member of the
same affiliated group of corporations. The corporate dividends received
deduction is 80% in the case of dividends received from corporations which a
corporate recipient owns less than 80%, but at least 20% of the distribution
corporation. Corporations which own less than 20% of the stock of a corporation
distributing a dividend may deduct only 70% of dividends received.
STATE AND LOCAL TAXATION
PENNSYLVANIA TAXATION. Abington Community Bancorp is subject to the Pennsylvania
Corporate Net Income Tax, Capital Stock and Franchise Tax. The Corporation Net
Income Tax rate for 2004 is 9.99% and is imposed on unconsolidated taxable
income for federal purposes with certain adjustments. In general, the Capital
Stock and Franchise Tax is a property tax imposed on a corporation's capital
stock
30
value at a statutorily defined rate, such value being determined in accordance
with a fixed formula based upon average net income and net worth.
Abington Bank is subject to tax under the Pennsylvania Mutual Thrift
Institutions Tax Act, as amended to include thrift institutions having capital
stock. Pursuant to the Mutual Thrift Institutions Tax, the tax rate is 11.5%.
The Mutual Thrift Institutions Tax exempts Abington Bank from other taxes
imposed by the Commonwealth of Pennsylvania for state income tax purposes and
from all local taxation imposed by political subdivisions, except taxes on real
estate and real estate transfers. The Mutual Thrift Institutions Tax is a tax
upon net earnings, determined in accordance with generally accepted accounting
principles with certain adjustments. The Mutual Thrift Institutions Tax, in
computing income according to generally accepted accounting principles, allows
for the deduction of interest earned on state and federal obligations, while
disallowing a percentage of a thrift's interest expense deduction in the
proportion of interest income on those securities to the overall interest income
of Abington Bank. Net operating losses, if any, thereafter can be carried
forward three years for Mutual Thrift Institutions Tax purposes.
ITEM 2. PROPERTIES
We currently conduct business from our main office, seven full-service banking
offices and four limited service offices. The following table sets forth the net
book value of the land, building and leasehold improvements and certain other
information with respect to our offices at December 31, 2004.
Date of Lease Net Book Value Amount of
Description/Address Leased/Owned Expiration of Property Deposits
- ---------------------------------------------- ---------------- --------------- --------------- ----------
(In Thousands)
Main Office Owned N/A $1,347 $95,131
180 Old York Road
Jenkintown, PA 19046
Loan Processing Office Owned N/A 942 n/a
179 Washington Lane
Jenkintown, PA 19046
Glenside Branch Bldg. Owned 12/31/19 473 77,933
273 Keswick Avenue Ground Lease
Glenside, PA 19038
Abington Branch Leased 1/31/19 180 55,959
990 Old York Road
Abington, PA 19001
Willow Grove Branch Owned N/A 1,120 65,525
275 Moreland Road
Willow Grove, PA 19090
Horsham Branch Leased 5/31/08 245 22,663
Rt 611 & County Line Road
Horsham, PA 19044
Huntingdon Valley Branch Leased 12/31/14 140 19,108
667 Welsh Road
Huntingdon Valley, PA 19006
31
Fort Washington Branch Leased 8/15/08 162 21,138
101 Fort Washington Avenue
Fort Washington, PA 19034
Montgomeryville Branch Leased 3/31/06 32 19,629
521 Stump Road
North Wales, PA 19454
Rydal Park Limited Service Office Leased 5/21/08 -- 7,110
1515 The Fairway
Rydal, PA 19046
Centennial Station Limited Service Office Leased 7/31/05 6 2,474
12106-B Centennial Station
Warminster, PA 18974
Regency Towers Limited Service Office Leased 11/14/05 44 3,663
1003 Easton Road
Willow Grove, PA 19090
Ann's Choice Limited Service Office Leased 7/31/08 3 14,957
10000 Ann's Choice Way
Warminster, PA 18974
ITEM 3. LEGAL PROCEEDINGS
We are not presently involved in any legal proceedings of a material nature.
From time to time, we are a party to legal proceedings incidental to our
business to enforce our security interest in collateral pledged to secure loans
made by Abington Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NOT APPLICABLE.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
(a) Abington Community Bancorp, Inc. common stock trades on the Nasdaq
National Market under the trading symbol "ABBC." At the close of
business on December 31, 2004, there were 2,260 shareholders of record.
The declaration and payment of dividends is at the sole discretion of
the Board of Directors, and their timing and amount will depend upon the
Board of Directors' consideration of the earnings, financial condition,
and capital needs of the Company and the Bank and certain other factors
including restriction arising from Federal banking laws and regulations.
As of December 31, 2004, no dividends had been paid or declared on
Company common stock. Company common shares were first sold in Abington
Community Bancorp's initial public offering as a part of Abington Bank's
mutual holding company reorganization on December 16, 2004 at the
offering price of $10.00 per share. The Company's common stock began
trading on Nasdaq on December 17, 2004.
32
During the period of December 17, 2004 through December 31, 2004, bid
prices reported for the Company's common stock were a high of $13.70 and
a low of $13.01. The last sale price on December 31, 2004 was $13.37.
The Company did not sell any of its equity securities during 2004 that
were not registered under the Securities Act of 1933.
For information regarding the Company's equity compensation plans see
Item 12.
(b) The Company's Form S-1 (File No. 333-116370) was declared effective by
the SEC on October 21, 2004. A total of 7,141,500 shares of common stock
were sold at $10.00 per share in the subscription offering, which was
consummated on December 16, 2004, and 8,728,500 shares were issued to
the Abington Mutual Holding Company, on that date. The gross offering
proceeds were $71,415,000 and net proceeds are $69,256,000.
(c) PURCHASES OF EQUITY SECURITIES
The Company did not make any purchases of its common stock during the
fourth quarter of 2004, however, the Company's employee stock ownership
plan made certain purchases pursuant to a publicly-announced plan as set
forth in the table below.
TOTAL NUMBER OF MAXIMUM NUMBER OF
SHARES PURCHASED AS SHARES THAT MAY YET
TOTAL NUMBER PART OF PUBLICLY BE PURCHASED UNDER
OF SHARES AVERAGE PRICE ANNOUNCED PLANS OR THE PLAN OR
PERIOD PURCHASED PAID PER SHARE PROGRAMS PROGRAMS(1)
- --------------------------------- ------------- ------------------ -------------------- ---------------------
Beginning Date: December 1
Ending Date: December 31 153,000 $13.42 153,000 418,320
------- ------ ------- -------
Total 153,000 $13.42 153,000 418,320
======= ====== ======= =======
- ---------------------------
(1) On December 15, 2004, the Board of Directors authorized the Company's
employee stock ownership plan to purchase up to 571,320 shares of the
Company's common stock. Purchases will be made from, time to time, as,
in the opinion of management, market conditions warrant. Purchases to
fund the employee stock ownership plan are expected to continue until
the plan is fully funded.
33
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial and other data of Abington Community
Bancorp, Inc. set forth below does not purport to be complete and should be read
in conjunction with, and is qualified in its entirety by, the more detailed
information, including the Consolidated Financial Statements and related Notes,
appearing elsewhere herein.
At December 31,
--------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
SELECTED FINANCIAL AND OTHER DATA:
Total assets $717,978 $604,439 $535,797 $476,646 $432,513
Cash and cash equivalents 33,296 19,696 51,702 36,689 14,621
Investment securities and FHLB stock:
Held-to-maturity 10,220 -- -- -- --
Available-for-sale 86,614 89,023 50,351 35,237 57,662
Mortgage-backed securities:
Held-to-maturity 81,704 43,009 10,060 -- --
Available-for-sale 83,028 78,213 41,251 45,663 36,945
Loans receivable, net 412,656 364,620 371,024 348,912 314,042
Deposits 405,290 362,666 344,336 309,059 275,603
FHLB advances 170,666 173,732 122,761 107,251 107,396
Other borrowings 12,866 8,681 11,937 9,749 4,058
Stockholders' equity 123,055 53,234 50,591 45,388 40,259
Banking offices 12 12 9 9 8
Year Ended December 31,
--------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
SELECTED OPERATING DATA:
Total interest income $30,849 $29,997 $31,797 $32,345 $30,917
Total interest expense 14,209 13,898 14,583 16,792 16,815
------------ ------------ ------------ ------------ ------------
Net interest income 16,640 16,099 17,214 15,553 14,102
Provision for loan losses 45 375 500 628 --
------------ ------------ ------------ ------------ ------------
Net interest income after provision for
loan losses 16,595 15,724 16,714 14,925 14,102
Total non-interest income 2,243 1,859 741 1,072 1,443
Total non-interest expense 12,015 11,472 10,611 9,470 8,842
------------ ------------ ------------ ------------ ------------
Income before income taxes 6,823 6,111 6,844 6,527 6,703
Income taxes 2,268 2,021 2,467 2,328 2,353
------------ ------------ ------------ ------------ ------------
Net income $ 4,555 $ 4,090 $ 4,377 $ 4,199 $ 4,350
============ ============ ============ ============ ============
Basic earnings per share (1) n/a n/a n/a n/a
Diluted earnings per share (1) n/a n/a n/a n/a
34
At or For the
Year Ended December 31,
--------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
SELECTED OPERATING RATIOS(2):
Average yield on interest-earning assets 4.95% 5.36% 6.47% 7.25% 7.59%
Average rate on interest-bearing
liabilities 2.65 2.86 3.44 4.37 4.46
Average interest rate spread(3) 2.30 2.50 3.03 2.88 3.13
Net interest margin(3) 2.67 2.88 3.50 3.49 3.36
Average interest-earning assets to average
interest-bearing liabilities 116.08 115.11 116.12 116.07 107.35
Net interest income after provision
for loan losses to non-interest expense 138.12 137.06 157.52 157.60 159.49
Total non-interest expense to average
assets 1.85 1.97 2.09 2.06 2.10
Efficiency ratio(4) 63.63 63.88 59.10 56.96 56.88
Return on average assets 0.70 0.70 0.86 0.91 1.04
Return on average equity 7.52 7.85 9.11 9.71 11.68
Average equity to average assets 9.30 8.94 9.46 9.42 8.86
At or For the
Year Ended December 31,
--------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
ASSET QUALITY RATIOS(5):
Non-performing loans as a percent of
total loans receivable(6) 0.05% 0.12% 0.31% 0.40% 0.23%
Non-performing assets as a percent of
total assets(6) 0.03 0.08 0.23 0.30 0.18
Allowance for loan losses as a percent of
non-performing loans 622.03 315.15 145.04 111.50 175.00
Net charge-offs to average loans receivable 0.02 0.21 0.08 0.12 --
CAPITAL RATIOS(7):
Tier 1 leverage ratio 12.73% 8.81% 9.33% 9.50% 9.41%
Tier 1 risk-based capital ratio 21.24 15.12 14.64 15.33 16.44
Total risk-based capital ratio 21.57 15.53 15.18 15.88 16.98
- ------------------
(1) Due to the timing of the Bank's reorganization into the mutual holding
company form and the completion of the Company's initial public offering
on December 16, 2004, earnings per share for the period from December
16, 2004 to December 31, 2004 is not considered meaningful and is not
shown.
(2) With the exception of end of period ratios, all ratios are based on
average monthly balances during the indicated periods.
(3) Average interest rate spread represents the difference between the
average yield on interest-earning assets and the average rate paid on
interest-bearing liabilities, and net interest margin represents net
interest income as a percentage of average interest-earning assets.
(4) The efficiency ratio represents the ratio of non-interest expense
divided by the sum of net interest income and non-interest income.
(5) Asset quality ratios are end of period ratios, except for net
charge-offs to average loans receivable.
(6) Non-performing assets consist of non-performing loans and real estate
owned. Non-performing loans consist of all accruing loans 90 days or
more past due and all non-accruing loans. It is our policy to cease
accruing interest on all loans 90 days or more past due. Real estate
owned consists of real estate acquired through foreclosure and real
estate acquired by acceptance of a deed-in-lieu of foreclosure.
(7) Capital ratios are end of period ratios and are calculated for Abington
Bank per regulatory requirements.
35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW--The Company was formed by the Bank in connection with the Bank's
reorganization into the mutual holding company form and commenced operations in
December 2004. The Company's results of operations are primarily dependent on
the results of the Bank, which is a wholly owned subsidiary of the Company. The
Bank's results of operations depend to a large extent on net interest income,
which is the difference between the income earned on its loan and investment
portfolios and the cost of funds, which is the interest paid on deposits and
borrowings. Results of operations are also affected by our provisions for loan
losses, losses on derivative instruments, service charges and other non-interest
income and non-interest expense. Non-interest expense principally consists of
salaries and employee benefits, office occupancy and equipment expense, data
processing expense, advertising and promotions and other expense. Our results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in interest rates, government policies and
actions of regulatory authorities. Future changes in applicable laws,
regulations or government policies may materially impact our financial condition
and results of operations. The Bank is subject to regulation by the Federal
Deposit Insurance Corporation ("FDIC") and the Pennsylvania Department of
Banking. The Bank's executive offices and loan processing office are in
Jenkintown, Pennsylvania, with seven other branches and four limited service
facilities located in nearby Montgomery County neighborhoods. The Bank is
principally engaged in the business of accepting customer deposits and investing
these funds in loans, primarily residential mortgages.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES--In reviewing and
understanding financial information for Abington Community Bancorp, Inc., you
are encouraged to read and understand the significant accounting policies used
in preparing our consolidated financial statements. These policies are described
in Note 1 of the notes to our consolidated financial statements. The accounting
and financial reporting policies of Abington Community Bancorp, Inc. conform to
accounting principles generally accepted in the United States of America and to
general practices within the banking industry. The preparation of the Company's
consolidated financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Management evaluates these estimates and assumptions on an ongoing basis
including those related to the allowance for loan losses and deferred income
taxes. Management bases its estimates on historical experience and various other
factors and assumptions that are believed to be reasonable under the
circumstances. These form the bases for making judgments on the carrying value
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
ALLOWANCE FOR LOAN LOSSES--The allowance for loan losses is established through
a provision for loan losses charged to expense. Loans are charged against the
allowance for loan losses when management believes that the collectibility of
the principal is unlikely. Subsequent recoveries are added to the allowance. The
allowance is an amount that management believes will cover known and inherent
losses in the loan portfolio, based on regular evaluations of the collectibility
of loans. The evaluations take into consideration such factors as changes in the
types and amount of loans in the loan portfolio, delinquency and nonperforming
loan data, historical loss experience, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral,
estimated losses relating to specifically identified loans, and current economic
conditions. This evaluation is inherently subjective as it requires material
estimates including, among others, exposure at default, the amount and timing of
expected future cash flows on impacted loans, value of collateral, estimated
losses on our commercial and residential loan
36
portfolios and general amounts for historical loss experience. All of these
estimates may be susceptible to significant change.
While management uses the best information available to make loan loss allowance
valuations, adjustments to the allowance may be necessary based on changes in
economic and other conditions, changes in the composition of the loan portfolio
or changes in accounting guidance. In times of economic slowdown, either
regional or national, the risk inherent in the loan portfolio could increase
resulting in the need for additional provisions to the allowance for loan losses
in future periods. An increase could also be necessitated by an increase in the
size of the loan portfolio or in any of its components even though the credit
quality of the overall portfolio may be improving. Historically, our estimates
of the allowance for loan loss have approximated actual losses incurred. In
addition, the Pennsylvania Department of Banking and the FDIC, as an integral
part of their examination processes, periodically review our allowance for loan
losses. The Pennsylvania Department of Banking and the FDIC may require the
recognition of adjustment to the allowance for loan losses based on their
judgment of information available to them at the time of their examinations. To
the extent that actual outcomes differ from management's estimates, additional
provisions to the allowance for loan losses may be required that would adversely
impact earnings in future periods.
INCOME TAXES--Management makes estimates and judgments to calculate some of our
tax liabilities and determine the recoverability of some of our deferred tax
assets, which arise from temporary differences between the tax and financial
statement recognition of revenues and expenses. Management also estimates a
reserve for deferred tax assets if, based on the available evidence, it is more
likely than not that some portion or all of the recorded deferred tax assets
will not be realized in future periods. These estimates and judgments are
inherently subjective. Historically, our estimates and judgments to calculate
our deferred tax accounts have not required significant revision from
management's initial estimates.
In evaluating our ability to recover deferred tax assets, management considers
all available positive and negative evidence, including our past operating
results, recent cumulative losses and our forecast of future taxable income. In
determining future taxable income, management makes assumptions for the amount
of taxable income, the reversal of temporary differences and the implementation
of feasible and prudent tax planning strategies. These assumptions require us to
make judgments about our future taxable income and are consistent with the plans
and estimates we use to manage our business. Any reduction is estimated future
taxable income may require us to record an additional valuation allowance
against our deferred tax assets. An increase in the valuation allowance would
result in additional income tax expense in the period and could have a
significant impact on our future earnings.
RECENT ACCOUNTING PRONOUNCEMENTS--In March 2004, the Securities and Exchange
Commission ("SEC") issued Staff Accounting Bulletin (SAB) No. 105, APPLICATION
OF ACCOUNTING PRINCIPLES TO LOAN COMMITMENTS, which provides guidance regarding
loan commitments that are accounted for as derivative instruments. In this SAB,
the SEC determined that an interest rate lock commitment should generally be
valued at zero at inception. The rate locks will continue to be adjusted for
changes in value resulting from changes in market interest rates. The adoption
of this standard did not have a material effect on the Company's financial
position or results of operations.
In March 2004, the Financial Accounting Standards Board Emerging Issues Task
Force ("EITF") reached a consensus on EITF No. 03-1, THE MEANING OF
OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS. EITF
03-1 provides guidance for determining when an investment is considered
impaired, whether impairment is other-than-temporary, and measurement of an
impairment loss. In September 2004, the FASB issued FSP 03-1-1, which delayed
the effective date for the measurement and recognition guidance contained in
paragraphs 10-20 of Issue 03-1 due to additional proposed guidance. Management
is continuing to monitor the developments surrounding EITF 03-1. The amount of
other-than-temporary impairment to be recognized depends on market conditions,
management's intent and ability to hold investments until a forecasted recovery.
Management is following current guidance, which has not had a material impact on
the Company.
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123R (revised 2004), SHARE-BASED Payment, which revises SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, and supersedes APB Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. This Statement requires an entity to
recognize the cost of employee services received in share-based payment
transactions and measure the cost on a grant-date fair value of the award. That
cost will be recognized over the period during which an employee is required to
provide service in exchange for the award. The provisions of SFAS No. 123R will
be effective for the Company's consolidated financial statements issued for
periods beginning after June 15, 2005. Management is currently evaluating the
effects of the adoption of this Statement on its financial statements. The
Company did not issue and does not have outstanding any stock-based compensation
during the three year period ending December 31, 2004.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2004 AND DECEMBER 31, 2003
The Company's total assets increased $113.5 million, or 18.8%, to $718.0 million
at December 31, 2004 compared to $604.4 million at December 31, 2003. During
2004, the largest increases in our assets were in the categories of net loans
receivable, mortgage-backed securities and cash and cash equivalents. Our net
loans receivable increased by $48.0 million, or 13.2%, to $412.7 million at
December 31, 2004 compared to $364.6 million at December 31, 2003. Our growth in
loans resulted from $181.2 million of diversified loan originations (including
participations purchased) consisting of 37% construction loans, 35% one- to
four-family residential loans, 20% commercial loans (including commercial real
estate and mutli-family residential loans and commercial business loans) and 8%
consumer loans (including home equity lines of credit and consumer non-real
estate loans). Our mortgage-backed securities, both held-to-maturity and
available-for-sale, increased by an aggregate of $43.5 million, or 35.9% to an
aggregate of $164.7 million at December 31, 2004 compared to an aggregate of
$121.2 million at December 31, 2003.
37
During 2004, purchases of $83.1 million in the aggregate more than offset $38.7
million in payments and repayments of our held-to-maturity and
available-for-sale mortgage-backed securities. Given the relative efficiencies
provided by mortgage-backed securities coupled with what we believe is good
credit risk, we have continued to invest in mortgage-backed securities as part
of our growth efforts. Our cash and cash equivalents increased by $13.6 million
to $33.3 million at December 31, 2004 compared to $19.7 million at December 31,
2003. This was due primarily to $69.3 million in net proceeds from our stock
issuance in December 2004 as well as a $42.6 million increase in our deposit
base during 2004. These increases were partially offset by the previously
described new loan originations (net of repayments) and purchases of
mortgage-backed securities (net of payments and repayments), as well as
approximately $8.0 million in aggregate purchases of both held-to-maturity and
available-for-sale investment securities net of maturities.
The $42.6 million or 11.8% increase in deposits at December 31, 2004 compared to
December 31, 2003 resulted from an increase in all categories of deposits.
During 2004, demand deposits increased $13.2 million, savings accounts increased
$13.1 million and certificates of deposit increased $16.3 million. The $4.2
million increase in other borrowed money to $12.9 million at December 31, 2004
compared to $8.7 million at December 31, 2003 reflects an increase in the amount
of securities repurchase agreements entered into with certain commercial
checking account customers.
Our stockholders' equity increased $69.8 million to $123.1 million at December
31, 2004 compared to $53.2 million at December 31, 2003. The primary reason for
the increase was $69.3 million in net proceeds from the Company's initial public
offering on December 16, 2004. The Company sold 7,141,500 shares of stock to
eligible depositors for $10 per share representing 45% of the total outstanding
shares of the Company. The remaining 55% or 8,728,500 outstanding shares are
owned by the Company's parent mutual holding company, Abington Mutual Holding
Company. As of December 31, 2004, approximately 153,000 shares of the Company's
common stock had been purchased for $2.0 million by the Bank's Employee Stock
Ownership Plan ("ESOP"). Subsequent to December 31, 2004, the ESOP has purchased
an additional 316,000 shares of the Company's common stock towards its
anticipated total purchases of approximately 571,000 shares. Retained earnings
increased $4.5 million during 2004 primarily as a result of $4.6 million in net
income, which was partially offset by a $770,000 increase in accumulated other
comprehensive losses and the $100,000 capitalization of Abington Mutual Holding
Company.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funds are from deposits, amortization of loans, loan
prepayments and pay-offs, mortgage-backed securities and other investments, and
other funds provided from operations. While scheduled payments from the
amortization of loans and mortgage-backed securities and maturing investment
securities are relatively predictable sources of funds, deposit flows and loan
prepayments can be greatly influenced by general interest rates, economic
conditions and competition. We also maintain excess funds in short-term,
interest-bearing assets that provide additional liquidity. At December 31, 2004,
our cash and cash equivalents amounted to $33.3 million. In addition, at such
date we had $1.3 million in investment securities scheduled to mature within the
next 12 months. Our available for sale investment and mortgage-backed securities
amounted to an aggregate of $159.2 million at December 31, 2004.
We use our liquidity to fund existing and future loan commitments, to fund
maturing certificates of deposit and demand deposit withdrawals, to invest in
other interest-earning assets, and to meet operating expenses. At December 31,
2004, we had certificates of deposit maturing within the next 12 months
amounting to $74.5 million. Based upon historical experience, we anticipate that
a significant portion of
38
the maturing certificates of deposit will be redeposited with us. For years
ended December 31, 2004 and 2003, the average balance of our outstanding FHLB
advances was $169.7 million and $148.1 million, respectively. At December 31,
2004, we had $170.7 million in outstanding FHLB advances and we had $246.3
million in additional FHLB advances available to us.
In addition to cash flow from loan and securities payments and prepayments as
well as from sales of available for sale securities, we have significant
borrowing capacity available to fund liquidity needs. We have increased our
utilization of borrowings in recent years as a cost efficient addition to
deposits as a source of funds. Our borrowings consist primarily of advances from
the Federal Home Loan Bank of Pittsburgh, of which we are a member. Under terms
of the collateral agreement with the Federal Home Loan Bank, we pledge
substantially all of our residential mortgage loans and mortgage-backed
securities as well as all of our stock in the Federal Home Loan Bank as
collateral for such advances.
As noted above, our stockholders' equity increased $69.8 million to $123.1
million at December 31, 2004 compared to $53.2 million at December 31, 2003. The
primary reason for the increase was $69.3 million in net proceeds from the
Company's initial public offering on December 16, 2004. The Company sold
7,141,500 shares of stock to eligible depositors for $10 per share, and an
additional 8,728,500 shares were issued to Abington Mutual Holding Company. Half
of the net proceeds from the offering, approximately $34.6 million, were used by
the Company to buy the common stock of the Bank. While we have not identified
specific, long-term uses for this portion of the net proceeds, the Bank is using
the proceeds it received for general corporate purposes. On a short-term basis,
the Bank has purchased investment and mortgage-backed securities. The net
proceeds received by the Bank have further strengthened its capital position,
which already exceeded all regulatory requirements (see table below). As a
result, the Bank continues to be a well-capitalized institution and has
additional flexibility to grow and diversify. The proceeds invested in the Bank
may also be used to fund new loans and to finance the further expansion of our
banking operations in the long-term. As stated in the discussion of our general
business in Item I of Part I of this filing, the Bank is currently in various
stages of plans to add three additional branch offices by mid-2006. A portion of
the net proceeds from the offering retained by the Company have been used to
make a loan to our ESOP to permit it to buy shares of the Company's common stock
in the market. This loan will be repaid principally from the Bank's
contributions to the ESOP. The remaining net proceeds held by the Company have
been deposited in the Bank.
The following table summarizes the Bank's capital ratios as of the dates
indicated and compares them to current regulatory requirements.
Actual Ratios At December 31,
---------------------------------- Regulatory To Be Well
2004 2003 2002 Minimum Capitalized
---------- ---------- ---------- -------------- ------------
CAPITAL RATIOS:
Tier 1 leverage ratio 12.73% 8.81% 9.33% 4.00% 5.00%
Tier 1 risk-based capital ratio 21.24 15.12 14.64 4.00 6.00
Total risk-based capital ratio 21.57 15.53 15.18 8.00 10.00
39
DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument includes futures, forwards, interest rate
swaps, option contracts, and other financial instruments with similar
characteristics. On occasion, we have used interest rate caps and swap
agreements to manage our exposure to fluctuations in interest rates on a portion
of our fixed-rate loans and variable rate deposits. We have used interest rate
swap agreements to hedge interest rate risk resulting from our portfolio of
interest-earning loans and interest-bearing deposit liabilities. We do not hold
any derivative financial instruments for trading purposes.
At December 31, 2004, we are a party to two interest rate swap agreements, which
we entered into in June 2002 and December 2002, respectively, with notional
amounts of $15.0 million each, and with terms expiring in June 2005 and December
2005, respectively. Previously, we also were a party to one swap agreement, with
a notional amount of $15.0 million, which we entered into in December 2001 and
which expired in December 2004, and one interest rate cap agreement, with a
notional amount of $15.0 million, which we entered into in June 2001 and which
expired in June 2004. The contra party on each of our cap and swap agreements is
the FHLB of Pittsburgh. We entered into these cap and swap agreements as a part
of our strategy to manage our interest rate risk and we intended them to serve
as a direct hedge against a specified portion of our loans or deposits. Under
the cap agreement, which was intended to hedge a portion of our fixed-rate
single-family residential mortgage loan portfolio, we were entitled to receive
the amount, if any, by which the ten-year Constant Maturity Treasury ("CMT")
exceeded 7.53% on the notional amount. Given the low interest rates in recent
periods, we did not receive any payments from the cap agreement. However, had we
experienced a rising interest rate environment, the cap agreement would have
provided additional income that would have ameliorated the adverse impact of our
fixed-rate, long-term mortgage loans. The premium cost of the cap was $99,000,
which was amortized over its three-year term. Our swap agreement that expired in
December 2004 and one of our interest rate swap agreements at December 31, 2004,
also were designed to serve as a hedge against our fixed-rate, single-family
mortgage loan portfolio. Under the agreements which expired in December 2004 we
either paid or received the amount by which the ten-year CMT fell below or
exceeded 5.92%. Under the agreement with a term expiring in June 2005, we either
pay or receive the amount by which the ten-year CMT falls below or exceeds
5.57%. Again, given the low interest rate environment in recent periods, these
swap agreements have resulted in us making payments to the contra party. The
intent of these two agreements was to effectively convert a portion of our
fixed-rate loan portfolio to assets with a variable interest rate. Our other
interest rate swap agreement was designed to hedge a portion of our variable
rate money market deposit accounts against rising interest rates. Under this
swap agreement, we either pay or receive the amount by which the three-month
LIBOR falls below or exceeds 2.59%. Again, as a result of market rates in recent
periods, we have made payments on this swap agreement to the contra-party. Our
intent with this agreement was to effectively convert a portion of our deposits
from a variable rate liability to a fixed-rate liability.
The swaps do not qualify as hedges under SFAS No. 133. As such, the fair value
of the interest rate swaps are reflected as a liability in the accompanying
consolidated statements of financial condition with the offset recorded in loss
on derivative instruments, net in the consolidated statements of income. The
fair value of the swap agreements was a negative $85,000 and a negative $569,000
at December 31, 2004, and December 31, 2003, respectively. During the years
ended December 31, 2004, 2003, and 2002, the Bank paid $641,000, $770,000, and
$170,000, respectively, under the agreements. In addition, the unrealized gains
(losses) on derivatives recognized in loss on derivative instruments, net in the
Bank's consolidated statements of income were $501,000, $363,000, and $(795,000)
for the years ended December 31, 2004, 2003, and 2002, respectively.
40
The following tables summarize our derivative financial instruments at December
31, 2004.
Amount of Commitment Expiration - Per Period
----------------------------------------------------------
Total Amount To 1-3 4-5 After 5
Committed 1 Year Years Years Years
------------------ ------------- ------------- ------------ --------------
(In Thousands)
Interest rate cap agreement
(notional amount) $ -- $ -- $ -- $ -- $ --
Interest rate swap agreements
(notional amount) 30,000 30,000 -- -- --
Interest-rate loan lock
commitments -- -- -- -- --
COMMITMENTS AND OFF-BALANCE SHEET ARRANGEMENTS
We are a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of our customers. These
financial instruments include commitments to extend credit and the unused
portions of lines of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated statements of financial condition. Commitments to extend credit
and lines of credit are not recorded as an asset or liability by us until the
instrument is exercised. At December 31, 2004 and 2003 we had no commitments to
originate loans for sale.
Commitments to extend credit 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. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the customer. The amount and type of collateral required
varies, but may include accounts receivable, inventory, equipment, real estate
and income-producing commercial properties. At December 31, 2004 and 2003,
commitments to originate loans and commitments under unused lines of credit,
including undisbursed portions of construction loans in process, for which the
Bank is obligated amounted to approximately $92.4 million and $87.6 million,
respectively.
Letters of credit are conditional commitments issued by the Bank guaranteeing
payments of drafts in accordance with the terms of the letter of credit
agreements. Commercial letters of credit are used primarily to facilitate trade
or commerce and are also issued to support public and private borrowing
arrangements, bond financing and similar transactions. Collateral may be
required to support letters of credit based upon management's evaluation of the
creditworthiness of each customer. The credit risk involved in issuing letters
of credit is substantially the same as that involved in extending loan
facilities to customers. Most letters of credit expire within one year. At
December 31, 2004 and 2003, the Bank had letters of credit outstanding of
approximately $11.3 million and $7.7 million, respectively. At December 31,
2004, the uncollateralized portion of the letters of credit extended by the Bank
was approximately $215,000.
The Bank is also subject to various pending claims and contingent liabilities
arising in the normal course of business, which are not reflected in the
unaudited consolidated financial statements. Management considers that the
aggregate liability, if any, resulting from such matters will not be material.
41
Among the Bank's contingent liabilities are exposures to limited recourse
arrangements with respect to the Bank's sales of whole loans and participation
interests. At December 31, 2004, the exposure, which represent a portion of
credit risk associated with the sold interests, amounted to $185,000. The
exposure is for the life of the related loans and payable, on our proportional
share, as losses are incurred.
We anticipate that we will continue to have sufficient funds and alternative
funding sources to meet our current commitments.
The following tables summarize our outstanding commitments to originate loans
and to advance additional amounts pursuant to outstanding letters of credit,
lines of credit and under our construction loans at December 31, 2004.
Amount of Commitment Expiration - Per Period
-------------------------------------------------
Total Amounts To 1-3 4-5 After 5
Committed 1 Year Years Years Years
----------------- ---------- ---------- ---------- ----------
(In Thousands)
Letters of credit $ 11,314 $10,108 $ 1,206 $ -- $ --
Recourse obligations on loans sold 185 -- -- -- 185
Commitments to originate loans 3,708 3,708 -- -- --
Unused portion of home equity
lines of credit 20,346 -- -- -- 20,346
Unused portion of commercial
lines of credit 38,239 38,239 -- -- --
Undisbursed portion of
construction loans in process 30,131 9,671 20,460 -- --
----------------- ---------- ---------- ---------- ----------
Total commitments $103,923 $61,726 $21,666 $ -- $20,531
================= ========== ========== ========== ==========
The following tables summarize our contractual cash obligations at December 31,
2004.
Payments Due By Period
-------------------------------------------------
To 1-3 4-5 After 5
Total 1 Year Years Years Years
----------------- ---------- ---------- ---------- ----------
(In Thousands)
Certificates of deposit $182,771 $74,476 $85,353 $10,567 $12,375
----------------- ---------- ---------- ---------- ----------
FHLB advances 170,666 10,200 13,917 70,150 76,399
Repurchase agreements 12,866 12,866 -- -- --
----------------- ---------- ---------- ---------- ----------
Total debt 183,532 23,066 13,917 70,150 76,399
----------------- ---------- ---------- ---------- ----------
Operating lease obligations 3,764 426 773 587 1,978
----------------- ---------- ---------- ---------- ----------
Total contractual obligations $370,067 $97,968 $100,043 $81,304 $90,752
================= ========== ========== ========== ==========
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
GENERAL. We had net income of $4.6 million for the year ended December 31, 2004,
representing an increase of $465,000 or 11.4% over net income of $4.1 million
for the year ended December 31, 2003.
42
Our net interest income improved by $541,000 or 3.4% to $16.6 million for the
year ended December 31, 2004 from $16.1 million for the year ended December 31,
2003. Our results in the 2004 period reflect, in part, increases in the amount
of interest-earning assets, which have offset, in whole or in part, the
narrowing or compression of our net interest margins. Our net interest margin
decreased by 21 basis points to 2.67% for the year ended December 31, 2004
compared to 2.88% for the year ended December 31, 2003 while our net interest
spread decreased to 2.30% for the year ended December 31, 2004 compared to 2.50%
for the year ended December 31, 2003. In addition, non-interest income improved
$383,000 or 20.6% to $2.2 million for the year ended December 31, 2004 compared
to $1.9 million for the year ended December 31, 2003. This improvement was due
to an increase in service charge income and a decrease in the net loss on
derivative instruments. Partially offsetting these increases in income was a
$543,000 or 4.7% increase in non-interest expense to $12.0 million for the year
ended December 31, 2004 compared to $11.5 million for the year ended December
31, 2003, primarily due to increases in salaries and employee benefits expense,
the largest component of non-interest expense, and data processing expense
INTEREST INCOME. Interest income was $30.8 million for the year ended December
31, 2004, an increase of $852,000 or 2.8% from $30.0 million of interest income
for the year ended December 31, 2003. The increase in interest income was
primarily due to increases in interest income on investments and mortgage-backed
securities. Both the average yield and average balance of investment securities
increased. The average yield of investment securities increased to 2.87% for
2004 from 2.67% for 2003 while the average balance of investment securities
increased to $84.3 million in 2004 from $78.4 million in 2003. A slight decrease
in the average yield of mortgage-backed securities to 3.96% in 2004 from 4.09%
in 2003 was more than offset by a $44.8 million or 48.6% increase in the average
balance. A decrease in the average yield on loans receivable to 5.93% in 2004
compared to 6.59% in 2003 offset a $23.4 million increase in the average balance
of such assets.
INTEREST EXPENSE. Interest expense increased $310,000 or 2.2% to $14.2 million
for the year ended December 31, 2004 compared to $13.9 million for the prior
year. The increase was due primarily to increases in the average balances of
FHLB advances and other borrowings. The average balance of FHLB advances
increased $21.6 million or 14.6% to $169.7 million in 2004 from $148.1 million
in 2003. The increase in the average balance more than offset a decrease in the
average cost to 4.44% in 2004 from 4.73% in 2003. The average balance of other
borrowings increased $2.5 million or 16.2% to $17.7 million in 2004 from $15.2
million in 2003. The increase in the average balance of other borrowings was
accompanied by an increase in the average cost of other borrowings to 0.66% in
2004 from 0.45% in 2003. Interest expense on deposits decreased $261,000 or 3.8%
to $6.6 million in 2004 from $6.8 million in 2003 due to a decrease in the
average cost to 1.88% in 2004 from 2.11% in 2003. The decrease in cost was
partially offset by an increase in the average balance of deposits to $349.0
million for 2004 compared to $322.8 million for 2003.
43
AVERAGE BALANCES, NET INTEREST INCOME, AND YIELDS EARNED AND RATES PAID. The
following table shows for the periods indicated the total dollar amount of
interest from average interest-earning assets and the resulting yields, as well
as the interest expense on average interest-bearing liabilities, expressed both
in dollars and rates, and the net interest margin. Tax-exempt income and yields
have not been adjusted to a tax-equivalent basis. All average balances are based
on monthly balances. Management does not believe that the monthly averages
differ significantly from what the daily averages would be.
Years Ended December 31,
----------------------------------------------------------------------------------
2004 2003
---------------------------------------- ----------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------------- ------------ ------------ ------------- ------------ ------------
(Dollars in Thousands)
Interest-earning assets:
Investment securities(1) $ 84,320 $2,423 2.87% $ 78,351 $ 2,090 2.67%
Mortgage-backed securities 136,864 5,421 3.96 92,108 3,770 4.09
Loans receivable(2) 384,990 22,821 5.93 361,548 23,828 6.59
Other interest-earning assets 16,554 184 1.11 27,566 309 1.12
------------- ------------ ------------- ------------
Total interest-earning assets 622,728 30,849 4.95% 559,573 29,997 5.36%
------------ ------------ ------------ ------------
Cash and non-interest bearing
balances 17,241 12,069
Other non-interest-earning assets 11,157 11,338
------------- -------------
Total assets $651,126 $582,980
============= =============
Interest-bearing liabilities:
Deposits:
Savings and money market accounts $120,748 1,065 0.88% $107,291 1,068 1.00%
Checking accounts 52,804 44 0.08 46,433 51 0.11
Certificate accounts 175,492 5,452 3.11 169,058 5,703 3.37
------------- ------------ ------------- ------------
Total deposits 349,044 6,561 1.88 322,782 6,822 2.11
FHLB advances 169,699 7,532 4.44 148,090 7,008 4.73
Other borrowings 17,703 116 0.66 15,241 68 0.45
------------- ------------ ------------- ------------
Total interest-bearing liabilities 536,446 $14,209 2.65% 486,113 $13,898 2.86%
------------ ------------ ------------ ------------
Non-interest-bearing liabilities:
Non-interest-bearing demand
accounts 45,861 36,449
Real estate tax escrow accounts 2,204 2,093
Other liabilities 6,028 6,194
------------- -------------
Total liabilities 590,539 530,849
Retained earnings 60,587 52,131
------------- -------------
Total liabilities and retained
earnings $651,126 $582,980
============= =============
Net interest-earning assets $ 86,282 $ 73,460
============= =============
Net interest income; average
Interest rate spread $16,640 2.30% $16,099 2.50%
============ ============ ============ ============
Net interest margin(3) 2.67% 2.88%
============ ============
- ---------------------------
(1) Investment securities for the 2004 period include 26 non-taxable
municipal bonds with an aggregate average balance of $3.4 million and an
average yield of 4.3%. Investment securities for the 2003 period include
one non-taxable municipal bond in the amount of $180,000 and a yield of
3.9%. The tax-exempt income from such securities has not been calculated
on a tax equivalent basis.
(2) Includes nonaccrual loans during the respective periods. Calculated net
of deferred fees and discounts, loans in process and allowance for loan
losses.
(3) Equals net interest income divided by average interest-earning assets.
44
RATE/VOLUME ANALYSIS. The following table shows the extent to which changes in
interest rates and changes in volume of interest-earning assets and
interest-bearing liabilities affected our interest income and expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(1) changes in rate, which is the change in rate multiplied by prior year
volume, and (2) changes in volume, which is the change in volume multiplied by
prior year rate. The combined effect of changes in both rate and volume has been
allocated proportionately to the change due to rate and the change due to
volume.
2004 vs. 2003
----------------------------------------
Increase (Decrease) Due to
----------------------------
Total
Rate/ Increase
Rate Volume Volume (Decrease)
------ -------- -------- ----------
(Dollars in Thousands)
Interest income:
Investment securities(1) $161 $159 $13 $ 333
Mortgage-backed
securities (122) 1,832 (59) 1,651
Loans receivable, net (2,397) 1,545 (155) (1,007)
Other interest-
earning assets (3) (123) 1 (125)
------ -------- -------- ----------
Total interest-
earning assets (2,361) 3,413 (200) 852
------ -------- -------- ----------
Interest expense:
Savings accounts (122) 134 (15) (3)
Checking accounts (12) 7 (2) (7)
Certificate accounts (451) 217 (17) (251)
------ -------- -------- ----------
Total deposits (585) 358 (34) (261)
FHLB advances (435) 1,023 (64) 524
Other borrowings 32 11 5 48
------ -------- -------- ----------
Total interest-
bearing liabilities (988) 1,392 (93) 311
------ -------- -------- ----------
Increase (decrease) in
net interest income $(1,373) $2,021 $(107) $541
====== ======== ======== ==========
- ---------------
(1) Investment securities for the 2004 period include 26 non-taxable
municipal bonds with an aggregate average balance of $3.4 million and an
average yield of 4.3%. Investment securities for the 2003 period include
one non-taxable municipal bond in the amount of $180,000 and a yield of
3.9%. The tax-exempt income from such securities has not been calculated
on a tax equivalent basis.
PROVISION FOR LOAN LOSSES. For the year ended December 31, 2004 our provision
for loan losses was $45,000 compared to $375,000 for the year ended December 31,
2003. The provision for loan losses is charged to expense as necessary to bring
our allowance for loan losses to a sufficient level to cover known and inherent
losses in the loan portfolio. At December 31, 2004 we had $227,000 of
non-performing assets and our allowance for loan losses amounted to $1.4
million. Our non-performing loans as a percentage of total loans receivable was
0.06% at December 31, 2004 and 0.13% at December 31, 2003. For the year ended
December 31, 2004 our net loan charge-offs amounted to $88,000. Net loan
charge-offs amounted to $733,000 for the year ended December 31, 2003 of which
$671,000 related to one borrower.
NON-INTEREST INCOME. Total non-interest income increased $383,000 or 20.6% to
$2.2 million for the year ended December 31, 2004 compared to $1.9 million for
the year ended December 31, 2003. Contributing to the increase was a $318,000 or
20.8% increase in service charge income, particularly fees earned on our
overdraft protection program which we began offering in May 2003. Our loss on
derivative instruments improved to $141,000 for the year ended December 31, 2004
compared to $407,000 for the year ended December 31, 2003. These changes were
somewhat offset as $190,000 of combined gains on sales of loans and property
that were recognized in 2003 did not recur in 2004.
NON-INTEREST EXPENSE. Our total non-interest expense for the year ended December
31, 2004 amounted to $12.0 million representing an increase of $543,000 from the
year ended December 31, 2003. The
45
increase for the year ended December 31, 2004 when compared to the prior year
was due primarily to increases in salaries and employee benefits expense, the
largest component of non-interest expense, and data processing expense. The
$460,000 or 7.7% increase in salaries and employee benefits expense to $6.4
million in 2004 from $6.0 million in 2003 was due primarily to normal merit
increases in salaries and an increase in staffing levels. Our data processing
expense increased $101,000 or 8.7% to $1.3 million in 2004 from $1.2 million in
2003 as a result of increased deposits and deposit activity. The increase in
deposit activity result in an increase in our data processing expense as data
processing expense is dependent in part on the number of deposit transactions
that are processed. These increases were partially offset by decreases of
$131,000 and $64,000 in ATM expense and advertising and promotions expense,
respectively. The decrease in ATM expense was due to certain savings negotiated
during a contract renewal in 2004. The decrease in advertising and promotions
was due to higher expenditures in 2003 to promote the opening of new branches in
that year.
INCOME TAX EXPENSE. Income tax expense for the year ended December 31, 2004
amounted to $2.3 million, compared to $2.0 million for the year ended December
31, 2003. The increase in income tax expense was due primarily to the increase
in our pre-tax income. Our effective income tax rate remained relatively
consistent at 33.2% and 33.1% for the years ended December 31, 2004 and 2003,
respectively.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
General. We reported net income of $4.1 million for the year ended December 31,
2003 compared to $4.4 million for the year ended December 31, 2002. The primary
reason for the decrease was a $1.1 million decrease in net interest income in
2003 compared to 2002. The low interest rate environment which prevailed
throughout 2003 contributed to the trend of net interest spread and margin
compression that we have faced in recent periods. Our net interest margin
decreased by 62 basis points to 2.88% in 2003 compared to 3.50% in 2002. Our net
interest rate spread decreased by 53 basis points to 2.50% in 2003 compared to
3.03% in 2002. Again, the compression in our net interest margin and net
interest spread in 2003 compared to 2002 in large part reflects the low interest
rate environment that prevailed throughout 2003. The low interest rate
environment had the effect of reducing the average yields earned on our
interest-earning assets to a greater degree than it reduced the average rate
paid on our interest-bearing liabilities. In addition, our non-interest expense
increased in 2003 compared to 2002, due primarily to higher salary and benefit
costs. The effects of the reduction in net interest income and the increase in
non-interest expense were partially offset by a $1.1 million increase in
non-interest income due primarily to fees earned on our overdraft protection
program, which we began offering in May 2003, and an improvement in the amount
of loss on derivative instruments.
INTEREST INCOME. Our total interest income amounted to $30.0 million for the
year ended December 31, 2003 compared to $31.8 million for the year ended
December 31, 2002. The primary reason for the decrease in interest income in
2003 compared to 2002 was a decrease in the average yields earned on
interest-earning assets which was partially offset by an increase in the average
balance of investment and mortgage-backed securities. Interest income on net
loans receivable amounted to $23.8 million in 2003 compared to $26.7 million in
2002. The $2.8 million or 10.7% decrease was due to a 69 basis point decrease in
the average yield earned to 6.59% in 2003 compared to 7.28% in 2002. Interest
earned on investment and mortgage-backed securities increased by $1.0 million in
2003 compared to 2002 due to increases of $45.9 million and $31.7 million,
respectively, in the average balance of our mortgage-backed and investment
securities portfolios. The increases in average balances of our mortgage-backed
and investment securities more than offset declines of 184 basis points and 152
basis points, respectively, in the average yields earned. The declines in the
average yields earned on interest-earning assets in 2003 compared to 2002
primarily reflects the continuing low market rates of interest during the
period.
INTEREST EXPENSE. Our total interest expense amounted to $13.9 million for the
year ended December 31, 2003 compared to $14.6 million for the year ended
December 31, 2002, a decrease of $685,000 or 4.7%. The reason for the decrease
in interest expense in 2003 compared to 2002 was a decrease in the average rates
paid on all of our interest-bearing liabilities which more than offset the
effects of increases in the
46
average balances of our deposits, FHLB advances and other borrowings. Interest
paid on deposit accounts decreased by $1.4 million in 2003 compared to 2002. The
average rate paid on total deposits was 2.11% in 2003 compared to 2.77% in 2002.
The average balance of our total deposits increased by $26.4 million in 2003
compared to 2002. The average balance of our FHLB advances increased by $31.4
million in 2003 compared to 2002, while the average interest rate paid declined
to 4.73% in 2003 compared to 5.39% in 2002.
47
AVERAGE BALANCES, NET INTEREST INCOME, AND YIELDS EARNED AND RATES PAID. The
following table shows for the periods indicated the total dollar amount of
interest from average interest-earning assets and the resulting yields, as well
as the interest expense on average interest-bearing liabilities, expressed both
in dollars and rates, and the net interest margin. Tax-exempt income and yields
have not been adjusted to a tax-equivalent basis. All average balances are based
on monthly balances. Management does not believe that the monthly averages
differ significantly from what the daily averages would be.
Years Ended December 31,
----------------------------------------------------------------------------------
2004 2003
---------------------------------------- ----------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------------- ------------ ------------ ------------- ------------ ------------
(Dollars in Thousands)
Interest-earning assets:
Investment securities(1) $ 78,351 $ 2,090 2.67% $ 46,665 $ 1,955 4.19%
Mortgage-backed securities 92,108 3,770 4.09 46,249 2,744 5.93
Loans receivable(2) 361,548 23,828 6.59 366,246 26,674 7.28
Other interest-earning assets 27,566 309 1.12 32,460 424 1.31
------------- ------------ ------------- ------------
Total interest-earning assets 559,573 29,997 5.36% 491,620 31,797 6.47%
------------ ------------ ------------ ------------
Cash and non-interest bearing
balances 12,069 4,849
Other non-interest-earning assets 11,338 11,149
------------- -------------
Total assets $582,980 $507,618
============= =============
Interest-bearing liabilities:
Deposits:
Savings and money market accounts $107,291 1,068 1.00% $ 89,659 1,524 1.70%
Checking accounts 46,433 51 0.11 42,632 58 0.14
Certificate accounts 169,058 5,703 3.37 164,089 6,631 4.04
------------- ------------ ------------- ------------
Total deposits 322,782 6,822 2.11 296,380 8,213 2.77
FHLB advances 148,090 7,008 4.73 116,689 6,288 5.39
Other borrowings 15,241 68 0.45 10,304 82 0.80
------------- ------------ ------------- ------------
Total interest-bearing liabilities 486,113 $13,898 2.86% 423,373 $14,583 3.44%
------------ ------------ ------------ ------------
Non-interest-bearing liabilities:
Non-interest-bearing demand
accounts 36,449 28,935
Real estate tax escrow accounts 2,093 2,204
Other liabilities 6,194 5,073
------------- -------------
Total liabilities 530,849 459,585
Retained earnings 52,131 48,033
------------- -------------
Total liabilities and retained
earnings $582,980 $507,618
============= =============
Net interest-earning assets $ 73,460 $ 68,247
============= =============
Net interest income; average
Interest rate spread $16,099 2.50% $17,214 3.03%
============ ============ ============ ============
Net interest margin(3) 2.88% 3.50%
============ ============
- ---------------------------
(1) Investment securities include in all periods one non-taxable municipal
bond in the amount of $180,000 and a yield of 3.9%. The tax-exempt
income from such securities has not been calculated on a tax equivalent
basis.
(2) Includes nonaccrual loans during the respective periods. Calculated net
of deferred fees and discounts, loans in process and allowance for loan
losses.
(3) Equals net interest income divided by average interest-earning assets.
48
RATE/VOLUME ANALYSIS. The following table shows the extent to which changes in
interest rates and changes in volume of interest-earning assets and
interest-bearing liabilities affected our interest income and expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(1) changes in rate, which is the change in rate multiplied by prior year
volume, and (2) changes in volume, which is the change in volume multiplied by
prior year rate. The combined effect of changes in both rate and volume has been
allocated proportionately to the change due to rate and the change due to
volume.
2003 vs. 2002
----------------------------------------
Increase (Decrease) Due to
----------------------------
Total
Rate/ Increase
Rate Volume Volume (Decrease)
------ -------- -------- ----------
(Dollars in Thousands)
Interest income:
Investment securities(1) $(710) $1,327 $(482) $ 135
Mortgage-backed
securities (851) 2,722 (845) 1,026
Loans receivable, net (2,536) (343) 33 (2,846)
Other interest-
earning assets (60) (64) 9 (115)
------ -------- -------- ----------
Total interest-
earning assets (4,157) 3,642 (1,285) (1,800)
------ -------- -------- ----------
Interest expense:
Savings and money
market accounts (631) 299 (124) (456)
Checking accounts (11) 5 (1) (7)
Certificate accounts (1,096) 201 (33) (928)
------ -------- -------- ----------
Total deposits (1,738) 505 (158) (1,391)
FHLB advances (766) 1,692 (206) 720
Other borrowings (36) 38 (16) (14)
------ -------- -------- ----------
Total interest-
bearing liabilities (2,540) 2,235 (380) (685)
------ -------- -------- ----------
Increase (decrease) in
net interest income $(1,617) $1,407 $(905) $(1,115)
====== ======== ======== ==========
PROVISION FOR LOAN LOSSES. Our provision for loan losses amounted to $375,000 in
2003 compared to $500,000 in 2002. The provision for loan losses is charged to
expense as necessary to bring our allowance for loan losses to a sufficient
level to cover known and inherent losses in the loan portfolio.Our allowance for
loan losses was $1.5 million at December 31, 2003 compared to $1.8 million at
December 31, 2002. Total loan charge-offs were $760,000 in 2003 compared to
$298,000 in 2002. Of the $760,000 of loan charge-offs in 2003, $671,000 was
charged-off in the first quarter with respect to one letter of credit which was
placed on non-accrual status in 2002. The $298,000 in charge-offs in 2002 was
with respect to one commercial loan. This commercial loan was to an affiliate of
the borrower responsible for the previously discussed charge-off in the first
quarter of 2003. Both of these relationships were placed on non-accrual status
in 2002. In addition, the financial difficulties of the borrower and affiliated
entities which became known in 2002 and the non-performance of these related
loans was part of the reason for the higher level of our provision for loan
losses in 2002 compared to 2003.
NON-INTEREST INCOME. Our non-interest income increased by $1.1 million or 151.1%
to $1.9 million for the year ended December 31, 2003 compared to $741,000 for
the year ended December 31, 2002. A principal reason for the increase in
non-interest income in 2003 compared to 2002 was a $599,000, or 64.4%, increase
in service charges to $1.5 million in 2003 compared to $930,000 in 2002, which
was due primarily to fees generated by our overdraft protection program. Our
non-interest income also was affected by a $559,000 improvement in the amount of
loss on derivative instruments to a loss of $407,000 for 2003 compared to a
$966,000 loss for 2002. The loss on derivative instruments for the year ended
December 31, 2003 consisted of a realized amount of $770,000 of payments made by
us to the contra parties under our interest rate cap and swap agreements which
was partially offset by an unrealized gain of $363,000. For the year ended
December 31, 2002, the loss on derivative instruments consisted of $170,000 in
realized payments to the contra parties and an unrealized loss of $795,000 on
our interest rate
49
swap and cap agreements. In addition, the increase in non-interest income in
2003 compared to 2002 was due to a $146,000 gain on the sale of property in 2003
compared to no such gain in 2002. The gain recorded in 2003 reflects our sale of
an equity investment in a property held for development and our sale of one
property held as real estate owned.
NON-INTEREST EXPENSE. Our non-interest expense increased by $862,000 or 8.1% to
$11.5 million for the year ended December 31, 2003 compared to $10.6 million for
the year ended December 31, 2002. The primary reasons for the increase in
non-interest expense were increases in salary and employee benefits expense of
$421,000, increases in net occupancy expense of $144,000, increases in
advertising and promotions cost of $55,000, an increase in ATM expense of
$51,000 and increases in other non-interest expenses of $151,000. The increase
in salary and employee benefits expense in 2003 compared to 2002 was 7.6% and
was due primarily to normal merit increases and increases in full-time
personnel. The increase in occupancy costs was due to the expansion of our
branch network. The increase in ATM expense was due to an increase in the amount
of transactions, largely as a result of our increased deposit base. The increase
in other non-interest expenses was due primarily to increases in costs related
to our overdraft protection program of $76,000 and increased group insurance
costs of $84,000.
INCOME TAX EXPENSE. Our income tax expense decreased by $446,000 or 18.1% to
$2.0 million for the year ended December 31, 2003 compared to $2.5 million for
the year ended December 31, 2002. The decrease in income tax expense was due
primarily to the decrease in pre-tax income. Our effective Federal tax rate was
33.1% for the year ended December 31, 2003 compared to 36.1% for the year ended
December 31, 2002.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
ASSET/LIABILITY MANAGEMENT AND MARKET RISK. Market risk is the risk of loss from
adverse changes in market prices and rates. Our market risk arises primarily
from the interest rate risk which is inherent in our lending and deposit taking
activities. To that end, management actively monitors and manages interest rate
risk exposure. In addition to market risk, our primary risk is credit risk on
our loan portfolio. We attempt to manage credit risk through our loan
underwriting and oversight policies.
The principal objective of our interest rate risk management function is to
evaluate the interest rate risk embedded in certain balance sheet accounts,
determine the level of risk appropriate given our business strategy, operating
environment, capital and liquidity requirements and performance objectives, and
manage the risk consistent with approved guidelines. We seek to manage our
exposure to risks from changes in interest rates while at the same time trying
to improve our net interest spread. We monitor interest rate risk as such risk
relates to our operating strategies. We have established an Asset/Liability
Committee at Abington Bank, which is comprised of our President and Chief
Executive Officer, three Senior Vice Presidents and two Vice Presidents of
Lending, and which is responsible for reviewing our asset/liability policies and
interest rate risk position. The Asset/Liability Committee meets on a regular
basis. The extent of the movement of interest rates is an uncertainty that could
have a negative impact on future earnings.
In recent years, we primarily have utilized the following strategies in our
efforts to manage interest rate risk:
o we have increased our originations of shorter term loans and/or
loans with adjustable rates of interest, particularly
construction loans, commercial real estate and multi-family
residential mortgage loans and home equity lines of credit;
o we have attempted to match fund a portion of our securities
portfolio with borrowings having similar expected lives;
50
o we have reduced our reliance on certificates of deposit as a
funding source and increased the amount of our transaction
accounts;
o we have attempted, where possible, to extend the maturities of
our deposits and borrowings;
o we have invested in securities with relatively short anticipated
lives, generally three to five years, and increased our holding
of liquid assets; and
o on occasion, we have utilized certain off-balance sheet
derivative products, consisting of interest rate cap and swap
agreements, in our efforts to protect our net interest income
from sudden shifts.
GAP ANALYSIS. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a bank's interest rate sensitivity "gap." An asset
and liability is said to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
same time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to affect adversely
net interest income while a positive gap would tend to result in an increase in
net interest income. Conversely, during a period of falling interest rates, a
negative gap would tend to result in an increase in net interest income while a
positive gap would tend to affect adversely net interest income. Our current
asset/liability policy provides that our one-year interest rate gap as a
percentage of total assets should not exceed positive or negative 20%. This
policy was adopted by our management and Board based upon their judgment that it
established an appropriate benchmark for the level of interest-rate risk,
expressed in terms of the one-year gap, for the Bank. In the event our one-year
gap position were to approach or exceed the 20% policy limit, we would review
the composition of our assets and liabilities in order to determine what steps
might appropriately be taken, such as selling certain securities or loans or
repaying certain borrowings, in order to maintain our one-year gap in accordance
with the policy. Alternatively, depending on the then-current economic scenario,
we could determine to make an exception to our policy or we could determine to
revise our policy. In recent periods, our one-year gap position was well within
our policy. Our one-year cumulative gap was a positive 0.57% at December 31,
2004, compared to a negative 1.78% at December 31, 2003. Part of the reason that
we determined several years ago to increase our originations of commercial real
estate and multi-family residential real estate loans, construction loans, home
equity lines and commercial business loans, all of which generally have shorter
terms to maturity than single-family residential mortgage loans and are more
likely to have floating or adjustable rates of interest, was, in part, to
increase the amount of our interest rate sensitive assets in the one- to
three-year time horizon. By increasing the amount of our interest rate sensitive
assets in the one-to three-year time horizon, we felt that we better positioned
ourselves to benefit from a rising interest rate environment because the average
interest rates on our loans would increase as general market rates of interest
were increasing.
The following table sets forth the amounts of our interest-earning assets and
interest-bearing liabilities outstanding December 31, 2004, which we expect,
based upon certain assumptions, to reprice or mature in each of the future time
periods shown (the "GAP Table"). Except as stated below, the amount of assets
and liabilities shown which reprice or mature during a particular period were
determined in accordance with the earlier of term to repricing or the
contractual maturity of the asset or liability. The table sets forth an
approximation of the projected repricing of assets and liabilities at December
31, 2004, on the basis of contractual maturities, anticipated prepayments, and
scheduled rate adjustments within a three-month period and subsequent selected
time intervals. The loan amounts in the table reflect principal balances
expected to be redeployed and/or repriced as a result of contractual
amortization and anticipated prepayments of adjustable-rate loans and fixed-rate
loans, and as a result of contractual rate adjustments on adjustable-rate loans.
Annual prepayment rates for adjustable-rate and fixed-rate single-family and
multi-family mortgage loans are assumed to range from 10% to 26%. The annual
prepayment rate for mortgage-backed securities is assumed to range from 9% to
63%. Money market deposit accounts,
51
savings accounts and interest-bearing checking accounts are assumed to have
annual rates of withdrawal, or "decay rates," of 16%, 12.5% and 0%,
respectively.
More than More than More than
6 Months 6 Months 1 Year 3 Years More than
or Less to 1 Year to 3 Years to 5 Years 5 Years Total Amount
------------- ------------- ------------- ------------- ------------- ------------
(Dollars in Thousands)
Interest-earning assets(1):
Loans receivable(2) $150,455 $25,958 $ 86,553 $ 64,151 $85,539 $412,656
Mortgage-backed securities 25,260 20,576 53,897 34,710 30,289 164,732
Investment securities 14,729 297 37,482 21,500 22,826 96,834
Other interest-earning assets 7,452 -- -- -- -- 7,452
------------- ------------- ------------- ------------- ------------- ------------
Total interest-earning
assets 197,896 46,831 177,932 120,361 138,654 681,674
============= ============= ============= ============= ============= ============
Interest-bearing liabilities:
Savings and money market
accounts $18,727 $18,727 $ 47,048 $ 21,647 $19,055 $125,204
Checking accounts -- -- -- -- 59,719 59,719
Certificate accounts 38,855 35,623 85,352 10,567 12,374 182,771
FHLB advances 103,714 12,115 23,309 18,262 13,266 170,666
Other borrowed money 12,866 -- -- -- -- 12,866
------------- ------------- ------------- ------------- ------------- ------------
Total interest-bearing
liabilities 174,162 66,464 155,709 50,476 104,414 551,226
============= ============= ============= ============= ============= ============
Interest-earning assets less
interest-bearing liabilities $23,734 $(19,633) $ 22,223 $69,885 $34,240 $130,448
============= ============= ============= ============= ============= ============
Cumulative interest-rate
sensitivity gap(3) $23,734 $ 4,101 $ 26,324 $96,209 $130,449
============= ============= ============= ============= =============
Cumulative interest-rate
gap as a percentage of total
assets at December 31, 2004 3.31% 0.57% 3.67% 13.40% 18.17%
============= ============= ============= ============= =============
Cumulative interest-earning
assets as a percentage of
cumulative interest-bearing
liabilities at December 31,
2004 113.63% 101.70% 106.64% 121.53% 123.67%
============= ============= ============= ============= =============
- ---------------------
(1) Interest-earning assets are included in the period in which the balances
are expected to be redeployed and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments and contractual maturities.
(2) For purposes of the gap analysis, loans receivable includes
non-performing loans net of the allowance for loan losses, undisbursed
loan funds, unamortized discounts and deferred loan fees.
(3) Interest-rate sensitivity gap represents the difference between net
interest-earning assets and interest-bearing liabilities.
52
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate loans, have
features which restrict changes in interest rates both on a short-term basis and
over the life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their adjustable-rate loans may decrease in the event of an interest
rate increase.
NET PORTFOLIO VALUE AND NET INTEREST INCOME ANALYSIS. Our interest rate
sensitivity also is monitored by management through the use of models which
generate estimates of the change in its net portfolio value ("NPV") and net
interest income ("NII") over a range of interest rate scenarios. NPV is the
present value of expected cash flows from assets, liabilities, and off-balance
sheet contracts. The NPV ratio, under any interest rate scenario, is defined as
the NPV in that scenario divided by the market value of assets in the same
scenario. The following table sets forth our NPV as of December 31, 2004 and
reflects the changes to NPV as a result of immediate and sustained changes in
interest rates as indicated.
Change in NPV as % of Portfolio
Interest Rates Net Portfolio Value Value of Assets
In Basis Points ------------------------------------------------------- -------------------------------------
(Rate Shock) Amount $ Change % Change NPV Ratio Change
- -------------------- ----------------- ----------------- ----------------- ----------------- ------------------
(Dollars in Thousands)
300bp $ 80,800 $(25,745) (24.16)% 11.55% (280)bp
200 90,651 (15,894) (14.92) 12.69 (165)
100 101,622 (4,923) (4.62) 13.93 (41)
Static 106,545 -- -- 14.34 --
(100) 100,535 (6,010) (5.64) 13.48 (86)
(200) 89,594 (10,941) (10.88) 12.04 (230)
(300) 76,501 (13,093) (14.61) 10.33 (401)
In addition to modeling changes in NPV, we also analyze potential changes to NII
for a twelve-month period under rising and falling interest rate scenarios. The
following table shows our NII model as of December 31, 2004.
Change in Interest Rates in Basis
Points (Rate Shock) Net Interest Income $ Change % Change
- ------------------------------------- ------------------------------ ---------------------- -------------------
(Dollars in Thousands)
300bp $20,816 $1,478 7.64%
200 20,174 836 4.32
100 19,826 488 2.52
Static 19,338 -- --
(100) 18,688 (650) (3.36)
(200) 17,654 (1,684) (8.71)
(300) 16,561 (2,777) (14.36)
The above table indicates that as of December 31, 2004, in the event of an
immediate and sustained 300 basis point increase in interest rates, Abington
Bank's net interest income for the 12 months ending December 31, 2005 would be
expected to increase by $1.5 million or 7.64% to $20.8 million.
As is the case with the GAP Table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling changes
in NPV and NII require the making of certain
53
assumptions which may or may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. In this regard, the models
presented assume that the composition of our interest sensitive assets and
liabilities existing at the beginning of a period remains constant over the
period being measured and also assumes that a particular change in interest
rates is reflected uniformly across the yield curve regardless of the duration
to maturity or repricing of specific assets and liabilities. Accordingly,
although the NPV measurements and net interest income models provide an
indication of interest rate risk exposure at a particular point in time, such
measurements are not intended to and do not provide a precise forecast of the
effect of changes in market interest rates on net interest income and will
differ from actual results.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Abington Community Bancorp, Inc. and subsidiaries:
Jenkintown, Pennsylvania
We have audited the accompanying consolidated statements of financial condition
of Abington Community Bancorp, Inc. and subsidiaries (the "Company") as of
December 31, 2004 and 2003, and the related consolidated statements of income,
stockholders' equity and comprehensive income and cash flows for each of the
three years in the period ended December 31, 2004. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Abington Community Bancorp, Inc.
and subsidiaries at December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 23, 2005
54
ABINGTON COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ----------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2004 DECEMBER 31, 2003
-------------------------------------------
ASSETS
Cash and due from banks $ 24,867,784 $ 11,483,730
Interest-bearing bank balances 8,428,048 8,211,895
------------- -------------
Total cash and cash equivalents 33,295,832 19,695,625
Investment securities held to maturity (estimated fair
value--2004, $10,336,485) 10,219,764 --
Investment securities available for sale (amortized cost--
2004, $77,348,884; 2003, $79,579,757) 76,163,951 78,984,495
Mortgage-backed securities held to maturity (estimated fair
value--2004, $81,322,041; 2003, $42,891,508) 81,703,737 43,009,221
Mortgage-backed securities available for sale (amortized cost--
2004, $83,300,963; 2003, $77,908,514) 83,027,943 78,212,883
Loans receivable, net of allowance for loan loss
(2004, $1,412,697; 2003, $1,455,889) 412,655,664 364,619,621
Accrued interest receivable 2,710,162 2,386,841
Federal Home Loan Bank stock--at cost 10,450,100 10,039,300
Property and equipment, net 5,533,085 5,800,068
Deferred tax asset 1,313,068 1,062,471
Prepaid expenses and other assets 905,074 628,431
------------- -------------
TOTAL ASSETS $ 717,978,380 $ 604,438,956
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing $ 37,596,228 $ 37,855,415
Interest-bearing 367,693,829 324,810,757
------------- -------------
Total deposits 405,290,057 362,666,172
Advances from Federal Home Loan Bank 170,666,374 173,731,623
Other borrowed money 12,865,521 8,680,916
Accrued interest payable 910,040 943,949
Advances from borrowers for taxes and insurance 2,047,151 2,135,301
Accounts payable and accrued expenses 3,144,536 3,046,727
------------- -------------
Total liabilities 594,923,679 551,204,688
------------- -------------
COMMITMENTS AND CONTINGENCIES (see note 14)
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, 10,000,000 shares authorized,
none issued -- --
Common stock, $0.01 par value, 40,000,000 shares authorized,
issued and outstanding: 15,870,000 in 2004 158,700 --
Additional paid-in capital 69,096,936 --
Unallocated common stock held by:
Employee Stock Ownership Plan (ESOP) (2,046,137) --
Deferred compensation plans trust (1,074,200) --
Retained earnings 57,881,651 53,426,380
Accumulated other comprehensive loss (962,249) (192,112)
------------- -------------
Total stockholders' equity 123,054,701 53,234,268
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 717,978,380 $ 604,438,956
============= =============
See notes to consolidated financial statements.
55
ABINGTON COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
- -----------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2004 2003 2002
--------------------------------------------------------------
INTEREST INCOME:
Interest on loans $ 22,820,635 $ 23,827,902 $ 26,674,302
Interest and dividends on investment and
mortgage-backed securities 8,027,992 6,168,838 5,122,644
------------ ------------ ------------
Total interest income 30,848,627 29,996,740 31,796,946
INTEREST EXPENSE:
Interest on deposits 6,561,036 6,822,294 8,213,012
Interest on Federal Home Loan Bank advances 7,531,886 7,008,352 6,287,684
Interest on other borrowed money 115,618 67,494 81,944
------------ ------------ ------------
Total interest expense 14,208,540 13,898,140 14,582,640
------------ ------------ ------------
NET INTEREST INCOME 16,640,087 16,098,600 17,214,306
PROVISION FOR LOAN LOSSES 45,000 375,000 500,000
------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 16,595,087 15,723,600 16,714,306
------------ ------------ ------------
NON-INTEREST INCOME
Service charges 1,846,622 1,528,524 929,736
Rental income 52,327 55,667 49,710
Loss on derivative instruments, net (140,813) (406,710) (965,642)
Gain on sale of property -- 146,268 --
Gain on sale of investments -- -- 22,625
Gain on sale of loans -- 44,036 88,611
Other income 484,682 492,048 615,533
------------ ------------ ------------
Total non-interest income 2,242,818 1,859,833 740,573
------------ ------------ ------------
NON-INTEREST EXPENSES
Salaries and employee benefits 6,431,433 5,971,415 5,550,650
Net occupancy 1,163,667 1,157,090 1,012,982
Depreciation 496,477 539,454 504,514
Data processing 1,268,339 1,166,936 1,166,639
ATM expense 291,962 422,463 371,798
Deposit insurance premium 113,318 107,565 103,493
Advertising and promotions 285,532 349,448 294,028
Other 1,964,477 1,757,848 1,606,454
------------ ------------ ------------
Total non-interest expenses 12,015,205 11,472,219 10,610,558
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 6,822,700 6,111,214 6,844,321
------------ ------------ ------------
PROVISION FOR INCOME TAXES 2,267,429 2,021,192 2,467,238
------------ ------------ ------------
NET INCOME $ 4,555,271 $ 4,090,022 $ 4,377,083
============ ============ ============
BASIC EARNINGS PER SHARE (1) n/a n/a
DILUTED EARNINGS PER SHARE (1) n/a n/a
- --------------------------------------------------------------------------------
(1) Due to the timing of the Bank's reorganization into the mutual holding
company form and the completion of the Company's initial public offering on
December 16, 2004, earnings per share for the period from December 16, 2004 to
December 31, 2004 is not considered meaningful and is not shown.
See notes to consolidated financial statements.
56
ABINGTON COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON
STOCK
ACQUIRED ACCUMULATED
ADDITIONAL BY OTHER TOTAL
COMMON PAID-IN BENEFIT RETAINED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
STOCK CAPITAL PLANS EARNINGS INCOME (LOSS) EQUITY INCOME
BALANCE--JANUARY 1, 2002 $ -- $ -- $ -- $ 44,959,275 $ 429,181 $ 45,388,456
Comprehensive income:
Net income -- -- -- 4,377,083 -- 4,377,083 $ 4,377,083
Net realized holding
gain on available
for sale securities
arising during the
period, net of tax
expense of $425,434
(1) -- -- -- -- 825,842 825,842 825,842
-----------
Comprehensive income -- -- -- -- -- -- $ 5,202,925
--------- ----------- ------------ ------------ ----------- ------------- ===========
BALANCE--DECEMBER 31, 2002 -- -- -- 49,336,358 1,255,023 50,591,381
Comprehensive income:
Net income -- -- -- 4,090,022 -- 4,090,022 $ 4,090,022
Net realized holding
loss on available
for sale securities
arising during the
period, net of tax
benefit of $745,494
(1) -- -- -- -- (1,447,135) (1,447,135) (1,447,135)
-----------
Comprehensive income -- -- -- -- -- -- $ 2,642,887
--------- ----------- ------------ ------------ ----------- ------------- ===========
BALANCE--DECEMBER 31, 2003 -- -- -- 53,426,380 (192,112) 53,234,268
Comprehensive income:
Net income -- -- -- 4,555,271 -- 4,555,271 $ 4,555,271
Net realized holding
loss on available
for sale securities
arising during the
period, net of tax
benefit of $396,923
(1) -- -- -- -- (770,137) (770,137) (770,137)
-----------
Comprehensive income $ 3,785,134
===========
Capitalization of mutual
holding company -- -- -- (100,000) -- (100,000)
Issuance of common stock 158,700 69,096,936 69,255,636
Common stock acquired by
ESOP -- -- (2,046,137) -- -- (2,046,137)
Common stock acquired by
deferred compensation
plans trust -- -- (1,074,200) -- -- (1,074,200)
--------- ----------- ------------ ------------ ----------- -------------
BALANCE--DECEMBER 31, 2004 $ 158,700 $69,096,936 $ (3,120,337) $ 57,881,651 $ (962,249) $ 123,054,701
========= =========== ============ ============ =========== =============
(1) Disclosure of reclassication amount, net of tax, for: YEAR ENDED
DECEMBER 31,
--------------------------------------------
2004 2003 2002
Net unrealized (depreciation) appreciation arising
during the year $ (770,137) $ (1,447,135) $ 840,775
Less: reclassification adjustment for net gains included in
net income net of related taxes -- - 14,933
------------ ------------ ------------
Net unrealized (loss) gain on securities $ (770,137) $ (1,447,135) $ 825,842
============ ============ ============
See notes to consolidated financial statements.
57
ABINGTON COMMUNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2004 2003 2002
---------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 4,555,271 $ 4,090,022 $ 4,377,083
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 45,000 375,000 500,000
Depreciation 496,477 539,454 504,514
Unrealized (gain) loss on derivative instruments (500,500) (363,462) 795,263
Gain on sale of loans -- (44,036) (88,611)
Gain on sale of property -- (146,268) --
Gain on sale of investments -- -- (22,625)
Deferred income tax expense (benefit) 146,326 38,914 (752,102)
Deferred loan fees 1,670,599 1,811,274 883,287
(Accretion) Amortization of:
Deferred loan fees (1,719,730) (2,424,541) (863,237)
Premiums and discounts, net 342,307 171,940 (3,703)
Changes in assets and liabilities which (used) provided cash:
Accrued interest receivable (323,321) (279,209) 55,202
Prepaid expenses and other assets (276,643) (2,175) 432,488
Accrued interest payable (33,909) (194,411) (342,370)
Accounts payable and accrued expenses 598,309 659,629 626,937
------------- ------------- -------------
Net cash provided by operating activities 5,000,186 4,232,131 6,102,126
------------- ------------- -------------
INVESTING ACTIVITIES:
Principal collected on loans 135,777,456 184,360,172 141,961,250
Disbursements for loans (183,809,368) (175,718,229) (164,504,718)
Purchases of:
Mortgage-backed securities held to maturity (47,862,570) (37,289,373) (10,062,560)
Mortgage-backed securities available for sale (35,222,233) (61,942,717) (10,491,464)
Investments held to maturity (10,220,792) -- --
Investments available for sale (34,263,462) (109,356,340) (52,084,119)
Federal Home Loan Bank stock (2,911,021) (3,006,400) (1,219,300)
Real estate investment -- -- (523,631)
Property and equipment (229,494) (456,760) (1,404,717)
Proceeds from:
Maturities of mortgage-backed securities available for sale 221,147 5,406,638 --
Maturities of investments available for sale 36,495,000 72,574,172 38,329,477
Principal repayments of mortgage-backed securities held to maturity 8,989,832 4,268,486 --
Principal repayments of mortgage-backed securities available for sale 29,444,915 18,398,879 16,018,885
Sale of real estate investment -- 448,000 --
Sale of real estate owned -- 178,334 --
Sales of Federal Home Loan Bank stock 2,500,221 -- --
Sales/disposals of investments -- -- 22,625
------------- ------------- -------------
Net cash used in investing activities (101,090,369) (102,135,138) (43,958,272)
------------- ------------- -------------
FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts 26,366,205 25,284,368 7,351,320
Net increase (decrease) in certificate accounts 16,257,680 (6,954,670) 27,926,301
Net increase (decrease) in other borrowed money 4,184,605 (3,256,189) 2,188,354
Advances from Federal Home Loan Bank 352,275,000 61,024,379 55,865,191
Repayments of advances from Federal Home Loan Bank (355,340,249) (10,053,408) (40,355,244)
Net decrease in advances from borrowers for taxes and insurance (88,150) (147,554) (107,008)
Proceeds from stock issuance, net of conversion costs and -- --
acquisition of stock for deferred compensation plans trust 68,181,436 -- --
Acquisition of stock for ESOP (2,046,137) -- --
Capitalization of mutual holding company (100,000) -- --
------------- ------------- -------------
Net cash provided by financing activities 109,690,390 65,896,926 52,868,914
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 13,600,207 (32,006,081) 15,012,768
CASH AND CASH EQUIVALENTS--Beginning of year 19,695,625 51,701,706 36,688,938
------------- ------------- -------------
CASH AND CASH EQUIVALENTS--End of year $ 33,295,832 $ 19,695,625 $ 51,701,706
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Noncash transfer of real estate investment to loans receivable $ 1,955,322
=============
Cash paid during the year for:
Interest on deposits and other borrowings $ 14,242,449 $ 13,956,551 $ 14,844,010
============= ============= =============
Income taxes $ 2,350,000 $ 1,931,135 $ 2,051,465
============= ============= =============
See notes to consolidated financial statements.
58
ABINGTON COMMUNITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
Abington Community Bancorp, Inc. (the "Company") is a Pennsylvania
corporation, which was organized to be a mid-tier holding company for
Abington Savings Bank. Abington Savings Bank is a
Pennsylvania-chartered, FDIC-insured savings bank, which conducts
business under the name "Abington Bank" (the "Bank" or "Abington Bank").
The Company was organized in conjunction with the Bank's reorganization
from the mutual savings bank to the mutual holding company structure in
December 2004. Abington Mutual Holding Company, a Pennsylvania
corporation, is the mutual holding company parent of the Company.
Abington Mutual Holding Company owns 55% of the Company's outstanding
common stock and must continue to own at least a majority of the voting
stock of the Company. The Bank is a wholly owned subsidiary of the
Company. The Company's results of operations are primarily dependent on
the results of the Bank and the Bank's wholly owned subsidiaries, ASB
Investment Co., Keswick Services II and its wholly owned subsidiaries,
and Abington Corp. The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.
The Bank's executive offices are in Jenkintown, Pennsylvania, with seven
other branches and four limited service facilities located in nearby
Montgomery County and Bucks County neighborhoods. The Bank is
principally engaged in the business of accepting customer deposits and
investing these funds in loans that include residential mortgage,
commercial, consumer and construction loans. The principal business of
ASB Investment Co. is to hold certain investment securities for the
Bank. Keswick Services II and its subsidiaries manage the Bank's real
estate, including real estate rentals. Abington Corp. is a dormant
subsidiary.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--All significant intercompany transactions
and balances have been eliminated.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS--The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of income and expenses during the reporting period. Actual
results could differ from those estimates. The Company's most
significant estimates are the allowance for loan losses and deferred
income taxes.
CASH AND CASH EQUIVALENTS--For purposes of the consolidated statements
of cash flows, cash and cash equivalents include cash and
interest-bearing deposits with banks, commercial paper and liquid money
market funds with original maturities of three months or less.
INVESTMENT AND MORTGAGE-BACKED SECURITIES--Debt and equity securities
are classified and accounted for as follows:
HELD TO MATURITY--Debt securities that management has the positive
intent and ability to hold until maturity are classified as held to
maturity and are carried at their remaining unpaid principal balances,
net of unamortized premiums or unaccreted discounts. Premiums are
amortized and discounts are accreted using the interest method over the
estimated remaining term of the underlying security.
59
AVAILABLE FOR SALE--Debt and equity securities that will be held for
indefinite periods of time, including securities that may be sold in
response to changes in market interest or prepayment rates, needs for
liquidity, and changes in the availability of and in the yield of
alternative investments, are classified as available for sale. These
assets are carried at fair value. Fair value is determined using
published quotes as of the close of business. Unrealized gains and
losses are excluded from earnings and are reported net of tax as a
separate component of retained earnings until realized. Realized gains
and losses on the sale of investment and mortgage-backed securities are
reported in the consolidated statements of income and determined using
the adjusted cost of the specific security sold.
Management analyzes the securities portfolio on a quarterly basis to
determine whether any unrealized losses indicate an impairment, whether
such impairment is other-than-temporary, and what, if any, impairment
loss should be recognized.
DERIVATIVE FINANCIAL INSTRUMENTS--The Company recognizes all derivatives
as either assets or liabilities in the statements of financial condition
and measures those instruments at fair value. The accounting for changes
in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation.
The Company uses interest rate cap and swap agreements to manage its
exposure to fluctuations in interest rates on a portion of its fixed
rate loans and variable rate deposits. The agreements do not qualify for
hedge accounting under Statement of Financial Accounting Standards
("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES. Gains and losses in the fair value of the cap and swap
agreements, as well as amounts paid or received under the agreements,
are recognized in a separate line item, loss on derivative instruments,
net, included in non-interest income in the Company's consolidated
statements of income during the period in which they accrue. The Company
does not hold any derivative financial instruments for trading purposes.
In April 2003, the FASB issued SFAS No. 149, AMENDMENT OF STATEMENT 133
ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 149 amends
and clarifies accounting for derivative instruments and hedging
activities under Statement 133. In addition, this statement clarifies
under what circumstances a contract with an initial net investment meets
the characteristic of a derivative and when a derivative contains a
financing component that warrants special reporting in the statement of
cash flows. This statement is effective for contracts entered into or
modified after June 30, 2003. The adoption of SFAS No. 149 did not have
a significant effect on the Company's financial position or results of
operations.
ALLOWANCE FOR LOAN LOSSES--The allowance for loan losses is increased by
charges to income and decreased by charge-offs (net of recoveries).
Management's periodic evaluation of the adequacy of the allowance is
based on the Company's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect a borrower's
ability to repay, the estimated value of any underlying collateral and
current economic conditions.
The allowance consists of specific, general and unallocated components.
The specific component relates to loans that are classified as either
doubtful, substandard or special mention. The general component covers
non-classified loans and is based on historical loss experience adjusted
for qualitative factors. An unallocated component is maintained to cover
uncertainties that could affect management's estimate of probable
losses. The unallocated component of the allowance reflects the margin
of imprecision inherent in the underlying assumptions used in the
methodologies for estimating specific and general losses in the
portfolio.
The Company measures impaired loans based on the present value of
expected future cash flows discounted at the loan's effective interest
rate, the loan's observable market price, or the fair value of the
collateral if the loan is collateral dependent. Impairment losses are
included in the provision for loan losses.
LOANS HELD FOR SALE AND LOANS SOLD--The Company originates mortgage
loans held for investment and for sale. At origination, the mortgage
loan is identified as either held for sale or for investment.
60
Mortgage loans held for sale are carried at the lower of cost or forward
committed contracts (which approximates market), determined on a net
aggregate basis. The Company had no loans classified as held for sale at
December 31, 2004 and 2003.
The Company assesses the retained interest in the servicing asset or
liability associated with the sold loans based on the relative fair
values. The servicing asset or liability is amortized in proportion to
and over the period during which estimated net servicing income or net
servicing loss, as appropriate, will be received. Assessment of the fair
value of the retained interest is performed on a continual basis. At
December 31, 2004 and 2003, mortgage servicing rights of $72,000 and
$91,000, respectively, were included in other assets. No valuation
allowance is deemed necessary for any of the periods presented.
Amortization of the servicing asset totaled $19,000, $43,000 and $23,000
for the years ended December 31, 2004, 2003 and 2002, respectively.
REAL ESTATE OWNED--Real estate properties acquired through foreclosure
are initially recorded at fair value at the date of foreclosure,
establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at
the lower of cost or fair value less estimated costs to sell. Net
revenue and expenses from operations and additions to the valuation
allowance are included in gain or loss on foreclosed real estate.
REAL ESTATE INVESTMENT--Real estate investment is carried at lower of
cost, including cost of improvements, or fair value less cost to sell.
Costs relating to development and improvement of property are
capitalized, whereas costs relating to holding the property are
expensed.
PROPERTY AND EQUIPMENT--Property and equipment is recorded at cost.
Depreciation is computed using the straight-line method over the
expected useful lives of the related assets. The costs of maintenance
and repairs are expensed as they are incurred, and renewals and
betterments are capitalized.
OTHER BORROWED MONEY--The Company enters into overnight repurchase
agreements with commercial checking account customers. These agreements
are treated as financings, and the obligations to repurchase securities
sold are reflected as a liability in the consolidated statements of
financial condition. Securities pledged as collateral under agreements
to repurchase are reflected as assets in the consolidated statements of
financial condition.
LOAN ORIGINATION AND COMMITMENT FEES--The Company defers loan
origination and commitment fees, net of certain direct loan origination
costs. The balance is accreted into income as a yield adjustment over
the life of the loan using the level-yield method.
INTEREST ON LOANS--The Company recognizes interest on loans on the
accrual basis. Income recognition is generally discontinued when a loan
becomes 90 days or more delinquent. Any interest previously accrued is
deducted from interest income. Such interest ultimately collected is
credited to income when collection of principal and interest is no
longer in doubt.
INCOME TAXES--Deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory
tax rates applicable to future years to differences between the
financial statement carrying amounts and the tax bases of existing
assets and liabilities. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment
date.
COMPREHENSIVE INCOME--The Company presents as a component of
comprehensive income the amounts from transactions and other events
which currently are excluded from the consolidated statements of income
and are recorded directly to retained earnings. These amounts consist of
unrealized holding gains (losses) on available for sale securities.
61
UNALLOCATED COMMON STOCK--Stock held in treasury by the Company,
including unallocated stock held by certain benefit plans, is accounted
for using the cost method which treats stock held in treasury as a
reduction to total shareholders' equity.
EARNINGS PER SHARE--Earnings per share ("EPS") consists of two separate
components, basic EPS and diluted EPS. Basic EPS is computed by dividing
net income by the weighted average number of common shares outstanding
for each period presented. Diluted EPS is calculated by dividing net
income by the weighted average number of common shares outstanding plus
dilutive common stock equivalents ("CSEs"). CSEs consist of unvested
common stock awards. Common stock equivalents which are considered
antidilutive are not included for the purposes of this calculation. At
December 31, 2004 there were no antidilutive shares. Due to the timing
of the Bank's reorganization into the mutual holding company form and
the completion of the Company's initial public offering on December 16,
2004, earnings per share for the period from December 16, 2004 to
December 31, 2004 is not considered meaningful and is not shown.
ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES--In
July 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL
ACTIVITIES. The standard requires companies to recognize costs
associated with exit or disposal activities when they are incurred
rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination
costs and certain employee severance costs that are associated with a
restructuring, discontinued operation, plant closing, or other exit
disposal activity. SFAS No. 146 is to be applied prospectively to exit
or disposal activities initiated after December 31, 2002. The adoption
of SFAS No. 146 did not have a significant effect on the Company's
financial position or results of operations.
ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS--In October 2002, the
FASB issued SFAS No. 147, ACQUISITIONS OF CERTAIN FINANCIAL
INSTITUTIONS, which addresses the financial accounting and reporting for
the acquisition of all of a financial institution, except for a
transaction between two or more mutual companies. This statement also
provides guidance on the accounting for the impairment or disposal of
acquired long-term customer-relationship intangible assets (such as
depositor-and borrower-relationship intangible assets and credit
cardholder intangible assets), including those acquired in transactions
between two or more mutual enterprises. The effective date of this
statement is October 1, 2002. The adoption of SFAS No. 147 did not have
a significant effect on the Company's financial position or results of
operations.
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES,
INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS--In November
2002, the FASB issued FASB Interpretation ("FIN") No. 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS. This Interpretation
elaborates on the disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for
the fair value of the obligation undertaken in issuing the guarantee.
This Interpretation also incorporates, without change, the guidance in
FIN No. 34, DISCLOSURE OF INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS,
which is being superseded. The initial recognition and initial
measurement provisions of this Interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31,
2002, irrespective of the guarantor's fiscal year-end. The disclosure
requirements in this Interpretation are effective for financial
statements of interim or annual periods ending after December 15, 2002.
The adoption of this Interpretation did not have a significant effect on
the Company's financial position or results of operations. At December
31, 2004 and 2003, the Bank had letters of credit outstanding of
approximately $11.3 million and $7.7 million, respectively. At December
31, 2004, the uncollateralized portion of the letters of credit extended
by the Bank was approximately $215,000.
RECENT ACCOUNTING PRONOUNCEMENTS--In March 2004, the Securities and
Exchange Commission ("SEC") issued Staff Accounting Bulletin (SAB) No.
105, APPLICATION OF ACCOUNTING PRINCIPLES TO LOAN COMMITMENTS, which
provides guidance regarding loan commitments that are accounted for as
derivative instruments. In this SAB, the SEC determined that an interest
rate lock commitment should
62
generally be valued at zero at inception. The rate locks will continue
to be adjusted for changes in value resulting from changes in market
interest rates. The adoption of this standard did not have a material
effect on the Company's financial position or results of operations.
In March 2004, the FASB Emerging Issues Task Force ("EITF") reached a
consensus on EITF No. 03-1, THE MEANING OF OTHER-THAN-TEMPORARY
IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS. EITF 03-1
provides guidance for determining when an investment is considered
impaired, whether impairment is other-than-temporary, and measurement of
an impairment loss. In September 2004, the FASB issued FSP 03-1-1, which
delayed the effective date for the measurement and recognition guidance
contained in paragraphs 10-20 of Issue 03-1 due to additional proposed
guidance. Management is continuing to monitor the developments
surrounding EITF 03-1. The amount of other-than-temporary impairment to
be recognized depends on market conditions, management's intent and
ability to hold investments until a forecasted recovery. Management is
following current guidance, which has not had a material impact on the
Company.
In December 2004, the FASB issued SFAS No. 123R (revised 2004),
SHARE-BASED Payment, which revises SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, and supersedes APB Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES. This Statement requires an entity to
recognize the cost of employee services received in share-based payment
transactions and measure the cost on a grant-date fair value of the
award. That cost will be recognized over the period during which an
employee is required to provide service in exchange for the award. The
provisions of SFAS No. 123R will be effective for the Company's
consolidated financial statements issued for periods beginning after
June 15, 2005. Management is currently evaluating the effects of the
adoption of this Statement on its financial statements. The Company did
not issue and does not have outstanding any stock-based compensation
during the three year period ending December 31, 2004.
RECLASSIFICATIONS--Certain items in the 2003 and 2002 consolidated
financial statements have been reclassified to conform to the
presentation in the 2004 consolidated financial statements.
63
3. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities are
summarized as follows:
HELD TO MATURITY
DECEMBER 31, 2004
---------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
Debt securities:
Municipal bonds $ 10,219,764 $ 116,721 $ - $ 10,336,485
------------ ------------ ------------ ------------
Total debt securities $ 10,219,764 $ 116,721 $ - $ 10,336,485
============ ============ ============ ============
AVAILABLE FOR SALE
DECEMBER 31, 2004
---------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
Debt securities:
Agency bonds $ 71,489,648 $ 55,440 $ (1,152,448) $ 70,392,640
Corporate bonds and
commercial paper 999,940 14,306 (1,951) 1,012,295
Municipal bonds 180,000 3,960 - 183,960
Certificates of deposit 1,282,000 - - 1,282,000
------------ ------------ ------------ ------------
Total debt securities 73,951,588 73,706 (1,154,399) 72,870,895
------------ ------------ ------------ ------------
Equity securities:
Common stock 2,510 702 (2,500) 712
Mutual funds 3,394,786 - (102,442) 3,292,344
------------ ------------ ------------ ------------
Total equity securities 3,397,296 702 (104,942) 3,293,056
------------ ------------ ------------ ------------
Total $ 77,348,884 $ 74,408 $ (1,259,341) $ 76,163,951
============ ============ ============ ============
64
AVAILABLE FOR SALE
DECEMBER 31, 2003
---------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
Debt securities:
Agency bonds $ 72,988,418 $ 321,800 $ (881,048) $ 72,429,170
Corporate bonds and
commercial paper 1,500,506 36,284 - 1,536,790
Municipal bonds 180,000 9,340 - 189,340
Certificates of deposit 1,579,000 - - 1,579,000
------------ ------------ ------------ ------------
Total debt securities 76,247,924 367,424 (881,048) 75,734,300
------------ ------------ ------------ ------------
Equity securities:
Common stock 2,510 741 (2,500) 751
Mutual funds 3,329,323 - (79,879) 3,249,444
------------ ------------ ------------ ------------
Total equity securities 3,331,833 741 (82,379) 3,250,195
------------ ------------ ------------ ------------
Total $ 79,579,757 $ 368,165 $ (963,427) $ 78,984,495
============ ============ ============ ============
There were no sales of debt securities during the years ended December 31, 2004
and 2003. During the year ended December 31, 2002, a gross gain of $62,000 and a
gross loss of $39,375 was realized on the sale of available-for-sale debt
securities.
Included in debt securities are structured notes with federal agencies. These
structured notes consist of step-up bonds which provide the agency with the
right, but not the obligation, to call the bonds on the step-up date.
The amortized cost and estimated fair value of debt securities by contractual
maturity are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
DECEMBER 31, 2004
--------------------------------
ESTIMATED
AMORTIZED FAIR
COST VALUE
Due in one year or less $ 1,283,000 $ 1,285,655
Due after one year through five years 59,678,940 58,998,670
Due after five years through ten years 10,989,648 10,540,310
Due after ten years 12,219,764 12,382,745
------------ ------------
Total $ 84,171,352 $ 83,207,380
============ ============
65
The table below sets forth investment securities which have an unrealized loss
positions as of December 31, 2004:
LESS THAN 12 MONTHS MORE THAN 12 MONTHS
------------------------------ -----------------------------
GROSS ESTIMATED GROSS ESTIMATED
UNREALIZED FAIR UNREALIZED FAIR
LOSSES VALUE LOSSES VALUE
Securities available for sale:
Government agency securities $ (392,850) $ 30,607,150 $ (759,598) $ 30,230,050
Other securities (1,951) 497,195 (104,942) 3,292,344
------------ ------------ ------------ ------------
Total securities available for sale (394,801) 31,104,345 (864,540) 33,522,394
------------ ------------ ------------ ------------
Total $ (394,801) $ 31,104,345 $ (864,540) $ 33,522,394
============ ============ ============ ============
The table below sets forth investment securities which have an unrealized loss
positions as of December 31, 2003:
LESS THAN 12 MONTHS MORE THAN 12 MONTHS
------------------------------ -----------------------------
GROSS ESTIMATED GROSS ESTIMATED
UNREALIZED FAIR UNREALIZED FAIR
LOSSES VALUE LOSSES VALUE
Securities available for sale:
Government agency securities $ (881,048) $ 36,807,370
Other securities (6,369) 1,059,156 $ (76,010) $ 2,189,958
------------ ------------ ------------ ------------
Total securities available for sale (887,417) 37,866,526 (76,010) 2,189,958
------------ ------------ ------------ ------------
Total $ (887,417) $ 37,866,526 $ (76,010) $ 2,189,958
============ ============ ============ ============
At December 31, 2004, securities in a gross unrealized loss position for twelve
months or longer consist of 16 securities having an aggregate depreciation of
2.5% from the Company's amortized cost basis. Securities in a gross unrealized
loss position for less than twelve months consist of 16 securities having an
aggregate depreciation of 1.3% from the Company's amortized cost basis.
Management believes that the estimated fair value of the securities disclosed
above is primarily dependent upon the movement in market interest rates.
Although the fair value will fluctuate as the market interest rates move, the
majority of the Company's investment portfolio consists of securities from
municipalities and government agencies considered to be low-risk. If held to
maturity, the contractual principal and interest payments of the securities are
expected to be received in full and the value of the securities is expected to
recover. As such, no loss in value is expected over the lives of the securities.
Although not all of the securities are classified as held to maturity, the
Company has the ability to hold these securities until they mature and the value
recovers, and the Company does not intend to sell the securities at a loss.
Thus, the unrealized losses are not other-than-temporary. The determination of
whether a decline in market value is other-than-temporary is necessarily a
matter of subjective judgment. The timing and amount of any realized losses
reported in the Company's financial statements could vary if conclusions other
than those made by management were to determine whether an other-than-temporary
impairment exists.
66
4. MORTGAGE-BACKED SECURITIES
The amortized cost and estimated fair value of mortgage-backed securities
are summarized as follows:
HELD TO MATURITY
DECEMBER 31, 2004
---------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
FNMA pass-through
certificates $ 33,609,534 $ 135,032 $ (409,512) $ 33,335,054
FHLMC pass-through
certificates 23,539,633 85,073 (216,836) 23,407,870
Real estate mortgage
investment conduits 24,554,570 28,116 (3,569) 24,579,117
------------ ------------ ------------ ------------
Total $ 81,703,737 $ 248,221 $ (629,917) $ 81,322,041
============ ============ ============ ============
AVAILABLE FOR SALE
DECEMBER 31, 2004
---------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
GNMA pass-through
certificates $ 887,920 $ 38,887 $ - $ 926,807
FNMA pass-through
certificates 13,314,817 289,367 (30,370) 13,573,814
FHLMC pass-through
certificates 59,823,297 420,808 (944,709) 59,299,396
Real estate mortgage
investment conduits 9,274,929 7,117 (54,120) 9,227,926
------------ ------------ ------------ ------------
Total $ 83,300,963 $ 756,179 $ (1,029,199) $ 83,027,943
============ ============ ============ ============
67
HELD TO MATURITY
DECEMBER 31, 2003
---------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
FNMA pass-through
certificates $ 40,275,940 $ 345,905 $ (449,890) $ 40,171,955
FHLMC pass-through
certificates 2,733,281 - (13,728) 2,719,553
------------ ------------ ------------ ------------
Total $ 43,009,221 $ 345,905 $ (463,618) $ 42,891,508
============ ============ ============ ============
AVAILABLE FOR SALE
DECEMBER 31, 2003
---------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
GNMA pass-through
certificates $ 1,575,087 $ 77,829 $ (8,613) $ 1,644,303
FNMA pass-through
certificates 11,790,003 236,737 (13,144) 12,013,596
FHLMC pass-through
certificates 58,687,031 442,747 (412,742) 58,717,036
Real estate mortgage
investment conduits 5,856,393 11,017 (29,462) 5,837,948
------------ ------------ ------------ ------------
Total $ 77,908,514 $ 768,330 $ (463,961) $ 78,212,883
============ ============ ============ ============
There were no sales of mortgage-backed securities during the years ended
December 31, 2004, 2003 and 2002.
68
The table below sets forth mortgage-backed securities which have an unrealized
loss positions as of December 31, 2004:
LESS THAN 12 MONTHS MORE THAN 12 MONTHS
------------------------------ -----------------------------
GROSS ESTIMATED GROSS ESTIMATED
UNREALIZED FAIR UNREALIZED FAIR
LOSSES VALUE LOSSES VALUE
Securities held to maturity:
Mortgage-backed securities $ (233,538) $ 22,273,458 $ (396,379) $ 17,169,143
------------ ------------ ------------ ------------
Total securities held to maturity (233,538) 22,273,458 (396,379) 17,169,143
------------ ------------ ------------ ------------
Securities available for sale:
Mortgage-backed securities and
collateralized mortgage obligations $ (199,104) $ 24,610,156 $ (830,095) $ 33,161,710
------------ ------------ ------------ ------------
Total securities available for sale (199,104) 24,610,156 (830,095) 33,161,710
------------ ------------ ------------ ------------
Total $ (432,642) $ 46,883,614 $ (1,226,474) $ 50,330,853
============ ============ ============ ============
The table below sets forth mortgage-backed securities which have an unrealized
loss positions as of December 31, 2003:
LESS THAN 12 MONTHS MORE THAN 12 MONTHS
------------------------------ -----------------------------
GROSS ESTIMATED GROSS ESTIMATED
UNREALIZED FAIR UNREALIZED FAIR
LOSSES VALUE LOSSES VALUE
Securities held to maturity:
Mortgage-backed securities $ (463,618) $ 21,520,348
------------ ------------
Total securities held to maturity (463,618) 21,520,348
------------ ------------
Securities available for sale:
Mortgage-backed securities and
collateralized mortgage obligations $ (462,619) $ 40,654,472 $ (1,342) $ 71,667
------------ ------------ ------------ ------------
Total securities available for sale (462,619) 40,654,472 (1,342) 71,667
------------ ------------ ------------ ------------
Total $ (926,237) $ 62,174,820 $ (1,342) $ 71,667
============ ============ ============ ============
At December 31, 2004, securities in a gross unrealized loss position for twelve
months or longer consist of 18 securities having an aggregate depreciation of
2.4% from the Company's amortized cost basis. Securities in a gross unrealized
loss position for less than twelve months consist of 16 securities having an
aggregate depreciation of 0.9% from the Company's amortized cost basis.
Management believes that the estimated fair value of the securities disclosed
above is primarily dependent upon the movement in market interest rates.
Although the fair value will fluctuate as the market interest rates move, all of
the Company's mortgage-backed securities portfolio consists of securities from
FNMA, FHLMC and GNMA considered to be low-risk. If held to maturity, the
contractual principal and interest payments of the securities are expected to be
received in full and the value of the securities is expected to recover. As
such, no loss in value is expected over the lives of the securities. Although
not all of the securities are classified as held to maturity, the Company has
the ability to hold these
69
securities until they mature and the value recovers, and the Company does not
intend to sell the securities at a loss. Thus, the unrealized losses are not
other-than-temporary. The determination of whether a decline in market value is
other-than-temporary is necessarily a matter of subjective judgment. The timing
and amount of any realized losses reported in the Company's financial statements
could vary if conclusions other than those made by management were to determine
whether an other-than-temporary impairment exists.
5. DERIVATIVE FINANCIAL INSTRUMENTS
The Company has derivative financial instruments which are used to manage
interest rate risks.
At December 31, 2004 and 2003, the Bank is party to two swap agreements with
terms expiring in June 2005, and December 2005. Under the June 2005 agreement,
the Bank either receives or pays, on a quarterly basis, the amount by which the
ten-year Constant Maturity Treasurty ("CMT") exceeds or falls below 5.57% on the
notional amount of $15 million. This agreement effectively changed a portion of
the Bank's fixed rate mortgage portfolio to a variable rate of interest. Under
the December 2005, agreement, the Bank either receives or pays on a quarterly
basis, the amount by which the three month LIBOR exceeds or falls below 2.59% on
the notional amount of $15 million. This agreement effectively changed the
Bank's variable rate money market accounts to a fixed rate of interest.
At December 31, 2003 the Bank was also party to an additional swap agreement
with a term that expired in December 2004. Under the December 2004 agreement,
the Bank either received or paid, on a quarterly basis, the amount by which the
ten-year CMT exceeded or fell below 5.92% on the notional amount of $15 million
per contract. This agreement effectively changed a portion of the Bank's fixed
rate mortgage portfolio to a variable rate of interest.
At December 31, 2003 the Bank was party to one interest rate cap agreement, with
a term that expired in June 2004. Under the June 2004 agreement, the Bank was
entitled to receive, on a quarterly basis, the amount, if any, by which the
ten-year CMT exceeded 7.535% on the notional amount of $15 million. At December
31, 2002, the Bank was party to two additional interest rate cap agreements that
expired in 2003. The Bank's interest rate cap agreements had a fair value of $0
and $4,000 at December 31, 2003 and 2002, respectively. The Bank is not party to
any interest rate cap agreements at December 31, 2004.
The swaps do not qualify as hedges under SFAS No. 133. As such, the fair value
of the interest rate swaps are reflected as a liability in the accompanying
consolidated statements of financial condition with the offset recorded in loss
on derivative instruments, net in the consolidated statements of income. The
fair value of the swap agreements was $(85,000), and $(569,000) at December 31,
2004 and 2003, respectively.
Amounts paid or received under the cap or swap agreement are recognized in loss
on derivative instruments, net in the Company's consolidated statements of
income during the period in which they accrue. During the years ended December
31, 2004, 2003, and 2002, the Bank paid $641,313, $770,172, and $170,379,
respectively, under the agreements. In addition, the unrealized gains (losses)
on derivatives recognized in loss on derivative instruments, net in the
Company's consolidated statements of income were $500,500, $363,462, and
$(795,263) for the years ended December 31, 2004, 2003, and 2002, respectively.
The Company is exposed to credit losses in the event of nonperformance by the
counterparties to its interest rate caps and swaps, but has no off-balance-sheet
credit risk of accounting loss. The Company anticipates, however, that
counterparties will be able to fully satisfy their obligations under the
contracts. The Company does not obtain collateral or other security to support
financial instruments subject to credit risk but monitors the credit standing of
counterparties.
70
6. LOANS RECEIVABLE--NET
Loans receivable consist of the following:
DECEMBER 31,
----------------------------------
2004 2003
----------------------------------
One-to four family residential $243,705,065 $223,963,193
Multi-family residential and commercial 74,642,109 64,028,754
Construction 83,253,027 66,875,399
Home equity lines of credit 32,048,508 31,185,276
Commercial business loans 8,539,781 10,402,664
Consumer non-real estate loans 3,433,536 3,791,527
------------ ------------
Total loans 445,622,026 400,246,813
Less:
Construction loans in process (30,130,703) (32,699,210)
Deferred loan fees (1,422,962) (1,472,093)
Allowance for loan loss (1,412,697) (1,455,889)
------------ ------------
Loans receivable--net $412,655,664 $364,619,621
============ ============
The Bank has sold and is servicing for others loans in the amounts of
approximately $15,268,000, $13,286,000, and $16,613,000 at December 31, 2004,
2003, and 2002, respectively. These loan balances are excluded from the
Company's consolidated financial statements.
Certain officers and directors have loans with the Bank. The aggregate dollar
amount of these loans outstanding to related parties along with an analysis of
the activity is summarized as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------
2004 2003 2002
--------------------------------------------
Balance--beginning of year $ 1,241,595 $ 861,985 $ 1,149,550
Additions 229,878 667,943 166,138
Repayments (543,959) (288,333) (453,703)
----------- ----------- -----------
Balance--end of year $ 927,514 $ 1,241,595 $ 861,985
=========== ========== ===========
The Bank grants loans primarily to customers in its local market area. The
ultimate repayment of these loans is dependent to a certain degree on the local
economy and real estate market.
71
Following is a summary of changes in the allowance for loan losses:
YEAR ENDED DECEMBER 31,
--------------------------------------------
2004 2003 2002
--------------------------------------------
Balance--beginning of year $ 1,455,889 $ 1,813,450 $ 1,590,196
Provision for loan losses 45,000 375,000 500,000
Charge-offs (146,736) (760,145) (297,926)
Recoveries 58,544 27,584 21,180
----------- ----------- -----------
Charge-offs/recoveries--net (88,192) (732,561) (276,746)
----------- ----------- -----------
Balance--end of year $ 1,412,697 $ 1,455,889 $ 1,813,450
=========== =========== ===========
The provision for loan losses charged to expense is based upon past loan and
loss experience and an evaluation of losses in the current loan portfolio,
including the evaluation of impaired loans. A loan is considered to be impaired
when, based upon current information and events, it is probable that the Company
will be unable to collect all amounts due according to the contractual terms of
the loan. An insignificant delay or insignificant shortfall in amount of
payments does not necessarily result in the loan being identified as impaired.
For this purpose, delays less than 90 days are considered to be insignificant.
During the periods presented, loan impairment was evaluated based on the fair
value of the loans' collateral. Impairment losses are included in the provision
for loan losses. Large groups of smaller balance, homogeneous loans are
collectively evaluated for impairment, except for those loans restructured under
a troubled debt restructuring. Loans collectively evaluated for impairment
include smaller balance commercial real estate loans, residential real estate
loans and consumer loans. At December 31, 2004 and 2003, the Company had $0 and
$99,000 of loans, respectively, that were determined to be impaired. The $99,000
of impaired loans were to one borrower, and a reserve on these loans is included
in the Company's allowance for loan losses at December 31, 2003.
Nonaccrual loans (which consist of smaller balance, homogeneous loans) at
December 31, 2004, 2003 and 2002 amounted to approximately $0, $115,000, and
$770,000, respectively. Commercial loans and commercial real estate loans are
placed on nonaccrual at the time the loan is 90 days delinquent unless the
credit is well secured and in the process of collection. Commercial loans are
charged off when the loan is deemed uncollectible. Residential real estate loans
are typically placed on nonaccrual only when the loan is 90 days delinquent and
not well secured and in the process of collection. Other consumer loans are
typically charged off at 90 days delinquent. In all cases, loans must be placed
on nonaccrual or charged off at an earlier date if collection of principal or
interest is considered doubtful. Non-performing loans, which consist of
non-accruing loans plus accruing loans 90 days or more past due, at December 31,
2004, 2003 and 2002 amounted to approximately $227,000, $462,000 and $1.3
million, respectively.
Interest payments on impaired loans and nonaccrual loans are typically applied
to principal unless the ability to collect the principal amount is fully
assured, in which case interest is recognized on the cash basis. At December 31,
2004 and 2003, no cash basis interest income has been recognized. Interest
income foregone on nonaccrual loans was $5,000, $16,000 and $45,000 for years
ended December 31, 2004, 2003, and 2002, respectively.
72
7. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
DECEMBER 31,
------------------------------
2004 2003
------------------------------
Investments and interest-bearing deposits $ 603,207 $ 552,957
Mortgage-backed securities 593,241 440,596
Loans receivable 1,513,714 1,393,288
----------- -----------
Total $ 2,710,162 $ 2,386,841
=========== ===========
8. PROPERTY AND EQUIPMENT
Property and equipment is summarized by major classifications as follows:
DECEMBER 31,
------------------------------
2004 2003
------------------------------
Properties and equipment:
Land and buildings $ 3,818,178 $ 3,712,060
Leasehold improvements 2,640,527 2,604,373
Furniture and fixtures 4,251,201 4,163,979
----------- -----------
Total 10,709,906 10,480,412
Accumulated depreciation (5,176,821) (4,680,344)
----------- -----------
Total property and equipment, net of
accumulated depreciation $ 5,533,085 $ 5,800,068
=========== ===========
Certain office facilities and equipment are leased under various operating
leases. The leases range in terms from 1 year to 15 years, some of which include
renewal options as well as specific provisions relating to rent increases. Rent
expense on those lease agreements that contain incremental increases in rent has
not been recognized on a straight-line basis. The difference in expense
recognized between straight-line expense and actual expense is immaterial to the
consolidated financial statements for the years ended December 31, 2004, 2003
and 2002. Rental expense under operating leases was approximately $427,000,
$405,000, and $373,000 for the years ended December 31, 2004, 2003, and 2002,
respectively.
73
Future minimum annual rental payments required under noncancelable operating
leases are as follows:
DECEMBER 31,
2004
--------------
2005 $ 426,046
2006 385,744
2007 387,196
2008 339,699
2009 247,855
Thereafter 1,977,826
--------------
$ 3,764,366
==============
9. DEPOSITS
Deposits consist of the following major classifications:
DECEMBER 31,
---------------------------------------------------
2004 2003
------------------------- -------------------------
TYPE OF ACCOUNT AMOUNT PERCENT AMOUNT PERCENT
Certificates $ 182,771,378 45.1 % $ 166,513,698 45.9 %
NOW and MMDA 117,782,800 29.1 104,544,500 28.8
Passbook and club 104,735,879 25.8 91,607,974 25.3
------------- ------ ------------- ------
Total $ 405,290,057 100.0 % $ 362,666,172 100.0 %
============= ====== ============= ======
The weighted average rate paid on deposits at December 31, 2004 and 2003, was
1.62% and 1.84%, respectively. Deposits in amounts greater than $100,000 were
approximately $64,924,000 and $58,055,000 at December 31, 2004 and 2003,
respectively, of which approximately $24,983,000 and $29,280,000 were due in one
year or less at December 31, 2004 and 2003, respectively.
A summary of certificates by maturities is as follows:
DECEMBER 31,
---------------------------------------------------
2004 2003
------------------------- -------------------------
TYPE OF ACCOUNT AMOUNT PERCENT AMOUNT PERCENT
One year or less $ 74,475,925 40.7 % $ 68,358,117 41.1 %
One through three years 85,353,319 46.7 43,290,187 25.9
Three through five years 10,567,336 5.8 42,219,115 25.4
Over five years 12,374,798 6.8 12,646,279 7.6
------------- ------ ------------- ------
Total $ 182,771,378 100.0 % $ 166,513,698 100.0 %
============= ====== ============= ======
74
10. ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from Federal Home Loan Bank consist of the following:
DECEMBER 31,
-----------------------------------------------------
2004 2003
-------------------------- --------------------------
WEIGHTED WEIGHTED
INTEREST INTEREST
MATURING PERIOD AMOUNT RATE AMOUNT RATE
1 to 12 months $ 10,200,000 2.62 % $ 20,000,000 1.00 %
13 to 24 months 4,384,533 2.49 2,000,000 4.63
25 to 36 months 9,532,595 4.07 4,001,982 3.11
37 to 48 months 51,966,104 4.12 9,482,888 4.50
49 to 60 months 18,183,739 4.45 54,847,435 4.11
Over 60 months 76,399,403 5.01 83,399,318 5.00
------------- ----- ------------- -----
Total $ 170,666,374 4.42 % $ 173,731,623 4.18 %
============= ===== ============= =====
The advances are collateralized by all of the Federal Home Loan Bank stock and
substantially all qualifying first mortgage loans and mortgage-backed
securities.
11. OTHER BORROWED MONEY
During the years ended December 31, 2004 and 2003, the Bank entered into
overnight repurchase agreements with commercial checking account customers. At
December 31, 2004 and 2003, the amounts outstanding were $12,865,521 and
$8,680,916, respectively. Interest expense on customer repurchase agreements was
$115,618, $67,494, and $81,944 for the years ended December 31, 2004, 2003 and
2002, respectively. Collateral for customer repurchase agreements was
mortgage-backed securities. The market value of the collateral was approximately
equal to the amounts outstanding. The weighted average interest rate on other
borrowed money was 1.79% and 0.52% at December 31, 2004 and 2003, respectively.
The average balance outstanding was approximately $17,703,251 and $15,241,380
for the years ended December 31, 2004 and 2003 respectively. The maximum amount
outstanding at any month-end was $27,685,730 and $21,721,843 for the years ended
December 31, 2004 and 2003, respectively.
12. INCOME TAXES
The income tax provision consists of the following:
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2004 2003 2002
-----------------------------------------------
Current:
Federal $ 2,127,036 $ 1,978,578 $ 3,001,340
State (5,933) 3,700 218,000
------------ ------------ ------------
Total current 2,121,103 1,982,278 3,219,340
Deferred--Federal 146,326 38,914 (752,102)
------------ ------------ ------------
Total income tax provision $ 2,267,429 $ 2,021,192 $ 2,467,238
============ ============ ============
75
The following table presents a reconciliation between the reported income tax
expense and the income tax expense which would be computed by applying the
normal federal income tax rate of 34% to income before income taxes:
YEAR ENDED DECEMBER 31,
------------------------------------------
2004 2003 2002
------------- ------------- --------------
AMOUNT AMOUNT AMOUNT
At statutory rate $ 2,319,718 $ 2,076,982 $ 2,278,150
Increase resulting from:
State tax--net of federal tax benefit (3,916) 2,442 143,880
Other (48,373) (58,232) 45,208
----------- ----------- -----------
Total $ 2,267,429 $ 2,021,192 $ 2,467,238
=========== =========== ===========
Effective income tax rate 33.2 % 33.1 % 36.1 %
----------- ----------- -----------
Items that gave rise to significant portions of the deferred tax accounts are as
follows:
DECEMBER 31,
----------------------------------
2004 2003
----------------------------------
Deferred tax assets:
Allowance for loan losses $ 480,317 $ 495,000
Deferred compensation 839,320 677,749
Unrealized loss on securities available-for-sale
and cap and swap contracts 524,604 297,974
Other - 74,891
------------- -------------
Total deferred tax assets 1,844,241 1,545,614
------------- -------------
Deferred tax liabilities:
Property (201,066) (221,392)
Deferred loan fees (259,767) (261,751)
Other (70,340) -
------------- -------------
Total deferred tax liabilities (531,173) (483,143)
------------- -------------
Net deferred tax asset $ 1,313,068 $ 1,062,471
============= =============
The Bank uses the specific charge-off method for computing reserves for bad
debts. The bad debt deduction allowable under this method is available to large
banks with assets greater than $500 million. Generally, this method allows the
Bank to deduct an annual addition to the reserve for bad debts equal to its net
charge-offs. Retained earnings at December 31, 2004 and 2003 include
approximately $3,250,000 representing bad debt deductions for which no deferred
income tax has been provided. This amount represents the Bank's bad debt reserve
as of the base year and is not subject to recapture as long as the Bank
continues to carry on the business of banking.
A thrift institution required to change its method of computing reserve for bad
debts treats such change as a change in a method of accounting determined solely
with respect to the "applicable excess reserves" of the institution. The amount
of the applicable excess reserves is taken into account ratably over a
six-taxable year period, beginning with the first taxable year beginning after
December 31, 1995. The timing of this recapture may be delayed for a two-year
period provided certain residential lending requirements are met. For financial
reporting purposes, the Bank has not incurred
76
any additional tax expense. At December 31, 2004, deferred taxes were provided
on the difference between the book reserve at December 31, 2003 and the
applicable excess reserve in the amount equal to the Bank's increase in the tax
reserve from December 31, 1987 to December 31, 2003. Retained earnings at
December 31, 2004 and 2003 includes approximately $3,250,000 of income for which
no deferred income taxes will need to be provided.
13. PENSION AND PROFIT SHARING PLANS
The Bank maintains an executive deferred compensation plan for selected
executive officers under which the Board of Directors may elect to contribute a
portion of the Bank's net profits. The Bank also maintains a board of directors
deferred compensation plan into which the Board of Directors may elect to
contribute a percentage of their board fees. The expense relating to these plans
was approximately $159,000, $169,000, and $188,000 for the years ended December
31, 2004, 2003, and 2002, respectively.
The Bank maintains a nonqualified pension plan for the Board of Directors and
certain officers. The expense relating to this plan was approximately $337,000,
$324,000, and $317,000 for the years ended December 31, 2004, 2003, and 2002,
respectively.
The Bank also maintains a 401(k) retirement plan for substantially all of its
employees. The Bank will match an employee's contribution at 200% up to a
maximum of 5% of the employee's annual gross compensation. The expense incurred
for this plan was approximately $330,000, $308,000, and $294,000 for the years
ended December 31, 2004, 2003, and 2002, respectively.
In 2004, the Bank established an employee stock ownership plan ("ESOP") for
substantially all of its full-time employees. The purchase of shares of the
Company's common stock by the ESOP is funded by a loan from the Company. The
loan will be repaid principally from the Bank's contributions to the ESOP.
Shares of the Company's common stock purchased by the ESOP are held in a
suspense account and released for allocation to participants on a pro rata basis
as debt service payments are made on the loan. Shares released are allocated to
each eligible participant based on the ratio of each such participant's base
compensation to the total base compensation of all eligible plan participants.
As the unearned shares are released and allocated among participants, the Bank
recognizes compensation expense equal to the current market price of the shares
released. From the period December 16, 2004 to December 31, 2004, 152,500 shares
of the Company's common stock had been purchased for approximately $2.0 million
by the ESOP towards its anticipated total of 571,320 shares for the ESOP. The
average purchase price was $13.42 per share. The fair value of the 152,500
shares held by the ESOP at December 31, 2004 was approximately $2.0 million. No
shares were released or committed to be released to participants and no
compensation expense was recognized for the year ended December 31, 2004.
During 2004, the Bank established a rabbi trust to fund certain benefit plans.
Approximately 107,000 shares of the Company's common stock was purchased for
$1.1 million by this trust for the benefit of certain officers and directors
that acquired shares through our deferred compensation plans.
14. COMMITMENTS AND CONTINGENCIES
The Bank had approximately $3,700,000 in outstanding mortgage loan commitments
at December 31, 2004. The commitments are expected to be funded within 90 days
with $3,700,000 in fixed rates ranging from 5.00% to 6.25%. These loans are not
originated for resale. Also outstanding at December 31, 2004 were unused lines
of credit totaling approximately $58,585,000.
The Bank had approximately $2,945,000 in outstanding mortgage loan commitments
at December 31, 2003. The commitments are expected to be funded within 90 days
with $1,715,000 in fixed rates ranging from 5.13% to 6.00%. These loans are not
originated for resale. Also outstanding at December 31, 2003 were unused lines
of credit totaling approximately $51,919,000.
77
At December 31, 2004 and 2003, the Bank had letters of credit outstanding of
approximately $11.3 million and $7.7 million, respectively. At December 31,
2004, the uncollateralized portion of the letters of credit extended by the Bank
was approximately $215,000.
The Company is subject to various pending claims and contingent liabilities
arising in the normal course of business which are not reflected in the
accompanying consolidated financial statements. Management considers that the
aggregate liability, if any, resulting from such matters will not be material.
Among the Company's contingent liabilities, are exposures to limited recourse
arrangements with respect to the sales of whole loans and participation
interests. At December 31, 2004, the exposure, which represent a portion of
credit risk associated with the sold interests, amounted to $185,000. The
exposure is for the life of the related loans and payable, on our proportional
share, as losses are incurred.
15. REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital requirements
administered by federal and state 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 consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of 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 Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). As of December 31, 2004, the Company and the Bank meet all
capital adequacy requirements to which they are subject.
As of December 31, 2004 and 2003, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum Tier I risk-based, total risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Bank's category.
78
The Company's and the Bank's actual capital amounts and ratios are presented in
the table below:
TO BE WELL CAPITALIZED
REQUIRED FOR UNDER PROMPT
CAPITAL ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
------------------------ ------------------------ -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
As of December 31, 2004:
Total Capital
(to Risk Weighted Assets)
The Company $ 125,318,000 29.81 % $ 33,631,000 8.00 % N/A N/A
The Bank 90,690,000 21.57 33,631,000 8.00 $ 42,039,000 10.00 %
Tier I Capital
(to Risk Weighted Assets)
The Company 123,905,000 29.47 16,816,000 4.00 N/A N/A
The Bank 89,277,000 21.24 16,816,000 4.00 25,223,000 6.00
Tier I Capital
(to Average Assets)
The Company 123,905,000 17.67 28,045,000 4.00 N/A N/A
The Bank 89,277,000 12.73 28,045,000 4.00 35,057,000 5.00
As of December 31, 2003:
Total Capital
(to Risk Weighted Assets)
The Company N/A N/A N/A N/A N/A N/A
The Bank $ 54,792,000 15.53 % $ 28,224,000 8.00 % $ 35,280,000 10.00 %
Tier I Capital
(to Risk Weighted Assets)
The Company N/A N/A N/A N/A N/A N/A
The Bank 53,336,000 15.12 14,112,000 4.00 21,168,000 6.00
Tier I Capital
(to Average Assets)
The Company N/A N/A N/A N/A N/A N/A
The Bank 53,336,000 8.81 24,212,000 4.00 30,265,000 5.00
79
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
DECEMBER 31,
--------------------------------------------------------
2004 2003
--------------------------- ---------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
(In Thousands) (In Thousands)
Assets:
Cash and cash equivalents $ 33,296 $ 33,296 $ 19,696 $ 19,696
Investment securities 86,384 86,500 78,984 78,984
Mortgage-backed securities 164,732 164,350 121,222 121,104
Loans receivable--net 412,656 410,388 364,620 368,674
Liabilities:
Deposits $ 405,290 $ 380,580 $ 362,666 $ 351,748
Advances from Federal
Home Loan Bank 170,666 174,735 173,732 180,370
Other borrowed money 12,866 12,866 8,681 8,681
Interest rate swaps and caps 85 85 569 569
CASH AND CASH EQUIVALENTS--For cash and cash equivalents, the carrying amount is
a reasonable estimate of fair value.
INVESTMENT AND MORTGAGE-BACKED SECURITIES--The fair value of investment
securities and mortgage-backed securities is based on quoted market prices,
dealer quotes and prices obtained from independent pricing services.
LOANS RECEIVABLE--The fair value of loans is estimated based on present value
using approximate current entry-value interest rates applicable to each category
of such financial instruments.
DEPOSITS--The fair value of NOW, money market deposits and passbook and club
accounts is the amount reported in the consolidated financial statements. The
fair value of time certificates is based on a present value estimate using rates
currently offered for deposits of similar remaining maturity.
ADVANCES FROM FEDERAL HOME LOAN BANK--The fair value is the amount payable on
demand at the reporting date.
OTHER BORROWED MONEY--The fair value is considered to be equal to the carrying
amount due to the short-term nature of the instruments.
INTEREST RATE SWAPS AND CAPS--The fair value of the interest rate swaps and caps
are based on prices obtained from an independent pricing service.
COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT--The majority of the Bank's
commitments to extend credit and letters of credit carry current market interest
rates if converted to loans. Because commitments to extend credit and letters of
credit are generally unassignable by either the Bank or the borrower, they only
have value to the Bank and the borrower. The estimated fair value approximates
the recorded deferred fee amounts, which are not significant.
80
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 2004 and 2003. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since December 31, 2004 and 2003 and, therefore,
current estimates of fair value may differ significantly from the amounts
presented herein.
17. ABINGTON COMMUNITY BANCORP, INC. (PARENT COMPANY ONLY)
Certain condensed financial information follows:
STATEMENT OF FINANCIAL CONDITION
- ----------------------------------------------------------------------------------------
DECEMBER 31, 2004
-------------------
ASSETS
Cash and cash equivalents $ 36,766,348
Equity investment in Abington Bank 88,426,883
-----------------
TOTAL ASSETS $ 125,193,231
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts Payable $ 2,138,530
-----------------
Total liabilities 2,138,530
-----------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, 10,000,000 shares authorized,
none issued
Common stock, $0.01 par value, 40,000,000 shares authorized,
issued and outstanding: 15,870,000 in 2004 158,700
Additional paid-in capital 69,096,936
Unallocated common stock held by:
Employee Stock Ownership Plan (ESOP) (2,046,137)
Deferred compensation plans trust (1,074,200)
Retained earnings 57,881,651
Accumulated other comprehensive loss (962,249)
-----------------
Total stockholders' equity 123,054,701
-----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 125,193,231
=================
Since Abington Community Bancorp, Inc. was formed on December 16, 2004, no
condensed statements of income, stockholders' equity and comprehensive income or
cash flows are presented due to the insignificant nature of the balances.
18. CONVERSION AND REORGANIZATION TO MUTUAL HOLDING COMPANY
On April 21, 2004, the Board of Trustees approved a plan of reorganization by
which Abington Bank reorganized from a mutual savings bank to a mutual holding
company structure. Upon completion of the reorganization on December 16, 2004,
Abington Bank became a wholly owned subsidiary of Abington Community Bancorp,
Inc. Abington Mutual Holding Company, a Pennsylvania corporation, became the
mutual holding company parent of Abington Community Bancorp, Inc. Abington
Mutual Holding Company owns 55% of Abington Community Bancorp, Inc.'s
outstanding common stock and must continue to own at least a majority of the
voting stock of Abington Community Bancorp, Inc. In addition to the shares of
Abington Community Bancorp, Inc. which it owns, Abington Mutual Holding Company
was capitalized with $100,000 in cash.
81
As part of the reorganization, approximately 45% of the outstanding common stock
was offered to the public. The purchase price was $10.00 per share. All
investors (including trustees and officers of Abington Bank) paid the same price
per share in the offering. The Company sold 7,141,500 shares of stock to
eligible depositors, generating $71.4 million in gross proceeds, and an
additional 8,728,500 shares were issued to Abington Mutual Holding Company. Net
proceeds were approximately $69.3 million after $2.2 million in conversion costs
were deducted. Half of the net proceeds from the offering, approximately $34.6
million, were used by the Company to buy the common stock of the Bank.
As part of the initial public offering, a rabbi trust, which was established by
the Bank to fund certain benefit plans, purchased approximately 107,000 shares
of the Company's common stock for $1.1 million for the benefit of certain
officers and directors that acquired shares through our deferred compensation
plans.
Subsequent to the initial public offering, shares of the Company's common stock
were purchased by the Bank's employee stock ownership plan ("ESOP"). From the
period December 16, 2004 to December 31, 2004, 152,500 shares of the Company's
common stock had been purchased for approximately $2.0 million by the ESOP
towards its anticipated total of 571,320 shares for the ESOP.
******
82
SUPPLEMENTARY DATA
SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents summarized quarterly data for each of the
last two years.
Three Months Ended: December 31, September 30, June 30, March 31, March 31,
------------ ------------- -------- --------- ---------
(Restated) (As Originally
(2) Reported)
2004
Total interest income $8,426 $7,761 $7,339 $7,323 $7,205
Total interest expense 3,803 3,601 3,441 3,364 3,408
------------ ------------- -------- --------- ---------
Net interest income 4,623 4,160 3,898 3,959 3,787
Provision for loan losses -- -- -- 45 45
------------ ------------- -------- --------- ---------
Net interest income after provision for
loan losses 4,623 4,160 3,898 3,914 3,742
Total non-interest income 639 509 824 271 550
Total non-interest expense 3,197 3,044 2,824 2,950 2,950
------------ ------------- -------- --------- ---------
Income before income taxes 2,065 1,625 1,898 1,235 1,342
Income taxes 656 571 631 410 446
------------ ------------- -------- --------- ---------
Net income $ 1,409 $ 1,054 $ 1,267 $ 825 $ 896
============ ============= ======== ========= =========
Basic earnings per share (1) n/a n/a n/a n/a
Diluted earnings per share (1) n/a n/a n/a n/a
2003
Total interest income $7,386 $7,322 $7,584 $7,705 $7,579
Total interest expense 3,414 3,483 3,493 3,508 3,553
------------ ------------- -------- --------- ---------
Net interest income 3,972 3,839 4,091 4,197 4,026
Provision for loan losses -- 125 125 125 125
------------ ------------- -------- --------- ---------
Net interest income after provision for
loan losses 3,972 3,714 3,966 4,072 3,901
Total non-interest income 700 874 21 265 441
Total non-interest expense 2,782 3,073 2,753 2,865 2,865
------------ ------------- -------- --------- ---------
Income before income taxes 1,890 1,515 1,234 1,472 1,477
Income taxes 595 498 421 507 509
------------ ------------- -------- --------- ---------
Net income $ 1,295 $ 1,017 $ 813 $ 965 $ 968
============ ============= ======== ========= =========
Basic earnings per share n/a n/a n/a n/a n/a
Diluted earnings per share n/a n/a n/a n/a n/a
- ------------------
(1) Due to the timing of the Bank's reorganization into the mutual holding
company form and the completion of the Company's initial public offering
on December 16, 2004, earnings per share for the period from December
16, 2004 to December 31, 2004 is not considered meaningful and is not
shown.
(2) Amounts have been restated for previously reported amounts to give
effect to the restatement disclosed in the Company's registration
statement on Form S-1 filed on October 19, 2004. Subsequent to the
issuance of the Bank's 2003 financial statements and the Company's Form
S-1 filed June 10, 2004, Company's management determined that certain
derivatives that had been accounted for as cash flow hedges under SFAS
No. 133 did not qualify for hedge accounting. The unrealized gains
(losses) on the derivatives, net of related taxes, were inappropriately
included in other comprehensive income. Accordingly, the Company
restated the consolidated financial statements to include unrealized
gains (losses) on derivatives in the income statement.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
83
ITEM 9A. CONTROLS AND PROCEDURES
The Company's management evaluated, with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or
15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period
covered by this report. Based on such evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that these disclosure
controls and procedures are designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and regulations and are operating in an effective manner. No change in the
Company's internal control over financial reporting (as defined in Rules
13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934) occurred
during the most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF DIRECTORS. The board of directors of Abington Community Bancorp is
divided into three classes, each of which contains one-third of the board. The
directors are elected by our shareholders for staggered three-year terms, or
until their successors are elected and qualified. No director is related to any
other director or executive officer by first cousin or closer.
The following table sets forth certain information regarding the persons who
serve as Abington Community Bancorp's directors, all of whom also serve as
directors of Abington Bank. In addition, two individuals, Messrs. Harold N.
Grier and Baron Rowland, hold the position of director emeritus of Abington
Community Bancorp. Ages are reflected as of March 15, 2005.
YEAR
PRINCIPAL OCCUPATION DURING TERM
NAME AGE THE PAST FIVE YEARS/PUBLIC DIRECTORSHIPS EXPIRES
- ---------------------------------- -------- --------------------------------------------------- ---------
Michael F. Czerwonka, III 51 Partner, Fitzpatrick & Czerwonka, an accounting 2006
firm, Abington, Pennsylvania, since 1988 and
Treasurer of Abington School District, Abington,
Pennsylvania from July 2004 to June 2005. Mr.
Czerwonka is a member of the American Institute
of Certified Public Accountants and the
Pennsylvania Institute of Certified Public
Acountants.
A. Stuard Graham, Jr. 73 President, Hardy Graham, Inc., a design 2007
engineering firm located in North Wales,
Pennsylvania since 1988.
Jane Margraff Kieser 69 Retired. Formerly, Senior Vice President, 2005
Operations and Human Resources, Abington Bank
from 1980 to December 2001.
84
YEAR
PRINCIPAL OCCUPATION DURING TERM
NAME AGE THE PAST FIVE YEARS/PUBLIC DIRECTORSHIPS EXPIRES
- ---------------------------------- -------- --------------------------------------------------- ---------
Joseph B. McHugh 70 Owner, Joseph B. McHugh, P.E., mechanical 2007
engineer consulting, Jenkintown, Pennsylvania,
since May 1999; prior thereto, Owner and Chief
Executive Officer McHugh Services Co. Inc.,
Oreland, Pennsylvania.
Robert J. Pannepacker, Sr. 56 President, Penny's Flowers, a florist in 2006
Glenside, Pennsylvania since 1966.
Robert W. White 60 Chairman of the Board, President and Chief 2005
Executive Officer of Abington
Community Bancorp since June 2004;
Chairman of the Board and Chief
Executive Officer of Abington Bank
since 1995 and President since
1991.
COMMITTEES OF THE BOARD OF DIRECTORS. Abington Community Bancorp has established
a nominating and corporate governance committee, a compensation committee and an
audit committee. The Board of Directors has determined that Messrs. Czerwonka,
Graham, McHugh and Pannepacker, who are members of the audit committee, the
nominating and corporate governance committee and the compensation committee are
independent directors. In addition, as of January 2005, Ms. Margraff Kieser was
determined also to be an independent director. Mr. Czerwonka, who is Chairman of
the Audit Committee and a certified public accountant and partner in the
accounting firm of Fitzpatrick & Czerwonka, has been designated the Audit
Committee Financial Expert.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS. The following individuals serve as
executive officers of Abington Community Bancorp. Ages are as of March 15, 2005.
NAME AGE PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS
- -------------------------------- ------- --------------------------------------------------------------
Edward W. Gormley 55 Senior Vice President and Corporate Secretary of Abington
Community Bancorp since June 2004; Senior Vice President
of Abington Bank since 1997 and Secretary of Abington
Bank since 1985.
Frank Kovalcheck 47 Senior Vice President of Abington Community Bancorp
since June 2004; Senior Vice President of Abington Bank
since June 2001; prior thereto, Senior Vice President and
Assistant Secretary, First Federal Savings and Loan
Association of Bucks County, Bristol, Pennsylvania from
June 1976 to June 2001.
Jack J. Sandoski 61 Senior Vice President and Chief Financial Officer of
Abington Community Bancorp since June 2004; Senior Vice
President of Abington Bank since 1997 and Chief Financial
Officer and Treasurer since 1988.
In accordance with Abington Community Bancorp's bylaws, our executive officers
are elected annually and hold office until their respective successors have been
elected and qualified or until death, resignation or removal by the board of
directors.
85
CODE OF CONDUCT AND ETHICS
Abington Community Bancorp maintains a comprehensive Code of Conduct and Ethics
which covers all directors, officers and employees of Abington Community Bancorp
and its subsidiaries. The Code of Conduct and Ethics requires that our
directors, officers and employees avoid conflicts of interest; maintain the
confidentiality of information relating to Abington Community Bancorp and its
customers; engage in transactions in the Common Stock only in compliance with
applicable laws and regulations and the requirements set forth in the Code of
Conduct and Ethics; and comply with other requirements which are intended to
ensure that they conduct business in an honest and ethical manner and otherwise
act with integrity and in the best interest of Abington Community Bancorp. Our
Code of Conduct specifically imposes standards of conduct on our chief executive
officer, chief financial officer, principal accounting officer and other persons
with financial reporting responsibilities which are identified in a regulation
issued by the SEC dealing with corporate codes of conduct.
All of our directors, officers and employees are required to affirm in writing
that they have reviewed and understand the Code of Conduct and Ethics. A copy of
our Code of Conduct and Ethics is attached hereto as Exhibit 14.0. We will
disclose on our Internet website at www.abingtonbank.com, to the extent and in
the manner permitted by Item 5.05 of Form 8-K, the nature of any amendment to
this Code of Ethics (other than technical, administrative, or other
non-substantive amendments), our approval of any material departure from a
provision of this Code of Ethics, and our failure to take action within a
reasonable period of time regarding any material departure from a provision of
this Code of Ethics that has been made known to any of our executive officers.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16(a) of the Securities Exchange Act of 1934, our directors and
executive officers and certain persons who own more than 10% of our Common Stock
are required:
o to file reports of their ownership of the Common Stock and any
changes in that ownership with the Securities and Exchange Commission
and the Nasdaq Stock Market, Inc. by specific dates, and
o to furnish us with copies of the reports.
Based on our records and other information, we believe that all of these filing
requirements were satisfied by our directors and executive officers in 2004.
86
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth a summary of certain
information concerning the compensation paid by Abington Bank, including amounts
deferred to future periods by the officers, for services rendered in all
capacities during the fiscal years ended December 31, 2004 and 2003, to the
President and Chief Executive Officer and the three executive officers of
Abington Bank whose salary plus bonus exceeded $100,000.
ANNUAL COMPENSATION(1)
FISCAL ------------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(2)
- ----------------------------------------------- ------------ ------------ ----------- ------------------
Robert W. White, Chairman of the 2004 $252,500 $66,715 $90,641(3)
Board, 2003 230,000 50,047 95,368(3)
President and Chief Executive Officer
Jack J. Sandoski, Senior Vice President, 2004 124,334 45,357 43,954(4)
Chief Financial Officer and Treasurer 2003 115,000 30,023 43,884(4)
Edward W. Gormley, Senior Vice 2004 124,334 33,357 43,509(4)
President 2003 115,000 30,023 43,884(4)
and Secretary
Frank Kovalcheck, Senior Vice 2004 103,344 27,519 30,597(4)
President 2003 94,000 24,906 30,865(4)
- ---------------------
(1) Abington Bank provides various miscellaneous benefits to the named
executive officers. The costs of providing such benefits to the named
executive officers did not exceed the lesser of $50,000 or 10% of the
total annual salary and bonus reported for each of such individuals.
(2) Amounts paid during 2004 include Abington Bank's contributions under our
401(k) Plan in the amounts of $24,000, $12,433, $11,988 and $10,304 to
the accounts of Messrs. White, Sandoski, Gormley and Kovalcheck,
respectively, imputed income resulting from premiums paid by Abington
Bank with respect to split dollar life insurance purchased for Messrs.
White, Sandoski and Gormley in the amounts of $16,000, $8,000 and
$8,000, respectively, and amounts contributed to the Executive Deferred
Compensation Plan accounts of Messrs. White, Sandoski, Gormley and
Kovalcheck in the amounts of $36,891, $18,446, $18,446 and $15,218,
respectively.
(3) Includes for Mr. White an aggregate of $13,750 and $24,400 paid in 2004
and 2003, respectively, as board retainer and board meeting fees.
Commencing July 1, 2004, Mr. White no longer received the board retainer
or board fees.
(4) Includes fees of $5,075 and $8,400 paid to each of Messrs. Gormley,
Sandoski and Kovalcheck for attendance at Abington Bank's board of
trustees meetings held in 2004 and 2003, respectively. Commencing July
1, 2004, such officers no longer received fees for attending board
meetings.
EMPLOYMENT AGREEMENTS. We entered into an employment agreement with Mr. White
effective January 24, 2002, which provides for a three-year term which is
extended on a daily basis, unless either Abington Bank or Mr. White gives
written notice of non-renewal. Mr. White's contract has been reviewed and
updated on an annual basis. Mr. White's base salary for 2004 was $240,000. In
addition to the base salary, Mr. White's employment agreement provides for,
among other things, discretionary bonuses, participation in retirement and
executive benefit plans, and other fringe benefits applicable to executive
personnel. Abington Bank's board of directors may terminate Mr. White's
employment agreement at any time, but any termination, other than termination
for "cause" (as defined in the agreement) will not prejudice Mr. White's right
to compensation or other benefits for the remainder of the term under his
agreement. In the event of termination for cause, Mr. White has no right to
receive compensation or other benefits, for any period after termination for
cause with the exception of vested benefits under Abington Bank's benefit plans
or policies and incentive plans for the benefit of the executive. In the event
Mr. White terminates his employment for "good reason" (as defined in the
agreement), Mr. White would be
87
entitled to receive (i) a cash amount equal to the remaining salary and other
compensation he would otherwise be entitled to receive under the agreement over
the next three years; (ii) on retirement, his full pension and retirement
benefits and (iii) for a four-year period following termination, participation
in all employee benefit plans and programs in which he was entitled to
participate provided his continued participation is permissible. In the event
Mr. White's employment is terminated upon a change-in-control (as defined in the
agreement) or within 12 months, he will be entitled to a payment equal to 2.99
times his "base amount," as defined in Section 280G of the Internal Revenue
Code. Mr. White's employment agreement also provides for certain salary
continuation benefits in the event of his death during the term as well as
certain benefits in the event of disability.
In January 2005, Abington Bank entered into employment agreements with Messrs.
Gormley, Sandoski and Kovalcheck. The employment agreements have a term of three
years, beginning on the date the reorganization was completed. The term will be
extended annually thereafter unless either we or the executive give notice at
least 30 days prior to the annual anniversary date that the agreement shall not
be extended. Under the terms of the employment agreements, the executives
receive an initial annual base salary which shall be reviewed from time to time
by the board of directors. The executives are entitled to participate in our
benefit plans and programs and receive reimbursement for reasonable business
expenses. Each of the employment agreements is terminable with or without cause
by Abington Bank. The executives have no right to compensation or other benefits
pursuant to the employment agreements for any period after voluntary termination
by the executive without good cause (as defined in the agreement) or termination
by Abington Bank for cause, disability, retirement or death. In the event that
(i) the executive terminates his employment because of failure to comply with
any material provision of the employment agreement by Abington Bank or (ii) the
employment agreement is terminated by Abington Bank other than for cause
disability, retirement or death, the executives will be entitled to the payment
of one times his base salary as cash severance and the maintenance for one year,
or until the executive's full time employment, of participation in all employee
benefit plans in which the executive was entitled to participate or similar
plans, programs or arrangements if his continued participation is not
permissible. In the event that the executive's employment is terminated in
connection with a change in control, as defined, for other than cause,
disability, retirement or death or the executive terminates his employment as a
result of certain adverse actions which are taken with respect to the
executive's employment following a change in control, as defined, the executives
will be entitled to a cash severance amount equal to three times their base
salary and the maintenance, as described above, of the employee benefit plans
for three years or until the executive's full-time employment with another
employer that provides similar benefits. Benefits under the employment
agreements will be reduced to the extent necessary to ensure that the executives
do not receive any "parachute payment" as such term is defined under Section
280G of the Internal Revenue Code.
Although the above-described existing and proposed employment agreements could
increase the cost of any acquisition of control of Abington Community Bancorp,
we do not believe that the terms thereof would have a significant anti-takeover
effect.
BENEFIT PLANS
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. Abington Bank maintains a Supplemental
Executive Retirement Plan for selected executive officers. Currently, Messrs.
White, Gormley, Kovalcheck and Sandoski participate in the Supplemental
Executive Retirement Plan. The Supplemental Retirement Plan provides the
participants with a ten-year benefit upon retirement at age 65 or older in an
amount equal to 50% of the executive's average base compensation, as defined,
for the highest three calendar years during the 10 years immediately preceding
retirement. For the year ended December 31, 2004, we recognized $255,000 in
expense for the Supplemental Executive Retirement Plan.
EXECUTIVE DEFERRED COMPENSATION PLAN. Abington Bank maintains an Executive
Deferred Compensation Plan for selected executive officers. Currently, Messrs.
White, Gormley, Kovalcheck and Sandoski participate in the Executive Deferred
Compensation Plan. In addition, director Jane Margraff-Kieser maintains an
account in the Executive Deferred Compensation Plan with respect to amounts
accumulated when she was an executive officer of Abington Bank. Under the terms
of the Executive
88
Deferred Compensation Plan, the Board of Directors may elect to contribute to
the plan such amounts from Abington Bank's profits as the Board may determine on
an annual basis. Contributions made by Abington Bank are allocated to a
participant's individual account in the proportion which the base salary of each
plan participant bears to the aggregate base salary of all plan participants.
The participant maintains an account in the Executive Deferred Compensation Plan
until the earlier of retirement, termination of employment or death. The
executive may elect, subject to the committee's discretion, to invest amounts
credited to his or her account in either a cash account or stock unit account.
If the executive opts for a cash account, such account shall be credited with
earnings at a rate (adjusted annually) equal to the average of the Bank's
average cost of funds and the average yield on the interest bearing assets for
such plan year. If the executive opts for a stock unit account, subsequent
fluctuations in the fair market value of the stock shall determine the value of
the amount credited on his or her behalf. Stock dividends, if any, will be
credited to the stock unit account. For the year ended December 31, 2004, we
recognized $127,000 in expense for the Executive Deferred Compensation Plan.
DIRECTOR COMPENSATION
Directors of Abington Community Bancorp are not compensated by Abington
Community Bancorp but also serve as directors of Abington Bank and are
compensated by Abington Bank for such service. Members of Abington Bank's board
of directors received $1,250 per meeting attended and a $10,000 annual retainer
for fiscal 2004. For fiscal 2005, such fees have increased to $1,300 per meeting
and a $10,400 retainer. The Secretary of the Audit Committee received an
additional $100 per quarter for preparation of the minutes. Board fees are
subject to periodic adjustment by the board of directors.
We maintain a Deferred Compensation Plan for our board of directors whereby
directors may elect to defer a portion of their board fees until the earlier of
retirement, termination of service or death. The director may elect, subject to
the committee's discretion, to invest amounts credited to his or her account in
either a cash account or stock unit account. If the director opts for a cash
account, such account shall be credited with earnings at a rate (adjusted
annually) equal to the average of the Bank's average cost of funds and the
average yield on the interest bearing assets for such plan year. If the director
opts for a stock unit account, subsequent fluctuations in the fair market value
of the stock shall determine the value of the amount credited on his or her
behalf. Stock dividends, if any, will be credited to the stock unit account. For
the year ended December 31, 2004, we recognized $32,000 in expense for the Board
of Directors Deferred Compensation Plan. We also maintain a board Retirement
Plan. Pursuant to the board's Retirement Plan, upon retirement at age 75,
directors will receive an annual benefit equal to 75% of the director fees paid
in the year of retirement for a period of 10 years. For the year ended December
31, 2004, we recognized $82,000 in expense for the board's Retirement Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information as to the Common Stock beneficially
owned as of March 15, 2005 by (i) each of our nominees for election as director
and each of our directors whose term will continue after the annual meeting,
(ii) each of our executive officers named in the Summary Compensation Table in
Item 11 of this From 10-K, (iii) all of our nominees for director, directors
whose terms will continue after the annual meeting and executive officers as a
group and each person or entity, including any "group" as that term is used in
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), who was known to us to be the beneficial owner of 5% or more of
the outstanding common stock.
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AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT (1)
- -------------------------------------- ------------------------ --------------
Abington Mutual Holding Company 8,728,500 55.0%
180 Old York Road,
Jenkintown, Pennsylvania 19046
Directors:
Michael F. Czerwonka, III 29,450(1) *
A. Stuard Graham, Jr. -- *
Jane Margraff Kieser 35,500(2) *
Joseph B. McHugh 52,133(3) *
Robert J. Pannepacker, Sr. 52,000(4) *
Robert W. White 62,100(5) *
Other Executive Officers:
Edward W. Gormley 56,000(6) *
Frank Kovalcheck 34,887(7) *
Jack J. Sandoski 50,000(8) *
All Directors and Executive Officers
as a Group (9 persons) 372,070 2.3%
- ------------------------
* Represents less than 1% of the outstanding shares of Common Stock.
(1) Includes 9,000 shares held jointly with Mr. Czerwonka's spouse, 4,450
shares held in Mr. Czerwonka's individual retirement account and 16,000
shares held by Fitzpatrick & Czerwonka, an accounting firm in which Mr.
Czerwonka is a partner.
(2) Includes 10,500 shares held in a Deferred Compensation Plan over which
Ms. Kieser disclaims ownership.
(3) The 52,133 shares are held jointly with Mr. McHugh's spouse.
(4) Includes 25,000 shares held by Mr. Pannepacker's spouse and 2,000 shares
held by Penny's Flowers, Inc., a corporation of which Mr. Pannepacker is
a 50% owner, and over which he disclaims beneficial ownership except
with respect to his pecuniary interest therein.
(5) Includes 14,600 shares held in the Abington Bank 401(k) Plan and 47,500
shares held in a Deferred Compensation Plan over which Mr. White
disclaims beneficial ownership.
(6) Includes 33,900 shares held in Abington Bank's 401(k) Plan and 22,100
shares held in a Deferred Compensation Plan over which Mr. Gormley
disclaims beneficial ownership.
(7) Includes 7,680 shares held jointly with Mr. Kovalcheck's spouse, 9,807
shares held by Mr. Kovalcheck's spouse, 6,000 shares held in the
Abington Bank 401(k) Plan and 4,900 shares held in a Deferred
Compensation Plan over which Mr. Kovalcheck disclaims beneficial
ownership.
(8) Includes 30,000 shares held in Abington Bank's 401(k) Plan and 20,000
shares held in a Deferred Compensation Plan over which Mr. Sandoski
disclaims beneficial ownership.
EQUITY COMPENSATION PLAN INFORMATION
As of December 31, 2004, Abington Community Bancorp did not have any equity
compensation plans.
90
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In accordance with applicable federal laws and regulations, Abington Bank offers
mortgage loans to its directors, officers and employees as well as members of
their immediate families for the financing of their primary residences and
certain other loans. These loans are made on substantially the same terms as
those prevailing at the time for comparable transactions with non-affiliated
persons. It is the belief of management that these loans neither involve more
than the normal risk of collectibility nor present other unfavorable features.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
The following table sets forth the aggregate fees paid by us to Deloitte &
Touche LLP for professional services rendered in connection with the audit of
Abington Community Bancorp's consolidated financial statements for 2004 and
2003, as well as the fees paid by us to Deloitte & Touche LLP for audit-related
and other services rendered by Deloitte & Touche LLP to us during 2004 and 2003.
YEAR ENDED DECEMBER 31,
-------------------------------
2004 2003
--------------- --------------
Audit fees (1)............................. $ 147,375 $ 80,850
Audit-related fees (2)..................... 326,905 --
Tax fees .................................. 24,000 20,000
All other fees............................. -- --
Total.................................. --------- ---------
$ 498,280 $ 100,850
========= =========
- --------------------
(1) Audit fees consist of fees incurred in connection with the audit of our
annual financial statements and the review of the interim financial
statements included in our quarterly reports filed with the Securities
and Exchange Commission, as well as work generally only the independent
auditor can reasonably be expected to provide, such as statutory audits,
consents and assistance with and review of documents filed with the
Securities and Exchange Commission.
(2) Audit-related fees primarily consist of fees incurred in connection with
review of registration statements in connection with the reorganization
of Abington Savings Bank during 2004.
The Audit Committee selects our independent registered public accounting firm
and pre-approves all audit services to be provided by it to Abington Community
Bancorp. The Audit Committee also reviews and pre-approves all audit-related and
non-audit related services rendered by our independent registered public
accounting firm in accordance with the Audit Committee's charter. In its review
of these services and related fees and terms, the Audit Committee considers,
among other things, the possible effect of the performance of such services on
the independence of our independent registered public accounting firm. The Audit
Committee pre-approves certain audit-related services and certain non-audit
related tax services which are specifically described by the Audit Committee on
an annual basis and separately approves other individual engagements as
necessary.
Each new engagement of Deloitte & Touche LLP was approved in advance by the
Audit Committee and none of those engagements made use of the de minimis
exception to pre-approval contained in the Securities and Exchange Commission's
rules.
91
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
Financial Statements: The Consolidated Financial Statements of
Abington Community Bancorp, Inc. and the Report of Independent
Registered Public Accounting Firm thereon, as listed below, have
been filed under "Item 8, Financial Statements and Supplementary
Data".
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition for the Years
Ended December 31, 2004 and 2003
Consolidated Statements of Operations for the Years Ended
December 31, 2004, 2003 and 2002
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income for the Years Ended December 31, 2004, 2003
and 2002
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
(B) LIST OF EXHIBITS
NO. DESCRIPTION LOCATION
- ---------- --------------------------------------------------------------------------- --------------
3.1 Articles of Incorporation of Abington Community Bancorp, Inc. (1)
3.2 Bylaws of Abington Community Bancorp, Inc. (1)
4.0 Form of Stock Certificate of Abington Community Bancorp, Inc. (1)
10.1 Employment Agreement between Abington Bank and Robert W. White (1)
10.2 Form of Draft Employment Agreement between Abington Bank and each of Edward (1)
W. Gormley, Frank Kovalcheck and Jack J. Sandoski
10.3 Amended and Restated Board of Directors Deferred Compensation Plan Filed Herewith
10.4 Amended and Restated Executive Deferred Compensation Plan Filed Herewith
10.5 Supplemental Executive Retirement Plan (1)
10.6 Board of Trustees Retirement Plan (1)
14.0 Code of Conduct and Ethics Filed Herewith
23.0 Consent of Deloitte & Touche LLP Filed Herewith
31.1 Rule 13(a)-14(a) Certification of the Chief Executive Officer Filed Herewith
31.2 Rule 13(a)-14(a) Certification of the Chief Financial Officer Filed Herewith
32.0 Section 1350 Certifications Filed Herewith
- --------------
92
(1) Incorporated by reference from Abington Community Bancorp's Registration
Statement on Form S-1 filed on June 10, 2004, as amended and declared
effective on October 21, 2004 (Registration No. 333-116370)
(C) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted as the required information is not
applicable or is presented in the consolidated financial statements or
related notes included in Item 8 hereof.
93
SIGNATURES
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 its
behalf by the undersigned, thereunto duly authorized.
ABINGTON COMMUNITY BANCORP, INC.
By: /s/ Robert W. White
-----------------------------------------------
Robert W. White
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
NAME TITLE DATE
- ------------------------------ -------------------------------- --------------
/s/ Robert W. White
- ------------------------------ Chairman of the Board, President March 28, 2005
Robert W. White and Chief Executive Officer
/s/ Jack J. Sandoski
- ------------------------------ Senior Vice President and Chief March 28, 2005
Jack J. Sandoski Financial Officer
/s/ Michael F. Czerwonka, III
- ------------------------------ Director March 28, 2005
Michael F. Czerwonka, III
- ------------------------------ Director March 28, 2005
A. Stuard Graham, Jr.
/s/ Jane Margraff Kieser
- ------------------------------ Director March 28, 2005
Jane Margraff Kieser
- ------------------------------ Director March 28, 2005
Joseph B. McHugh
/s/ Robert John Pannepacker, Sr.
- ------------------------------ Director March 28, 2005
Robert John Pannepacker, Sr.
94