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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
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: 0-51077
Abington Community Bancorp, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania 02-0724068
- ---------------------------------------------- --------------------------------
(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
180 Old York Road
Jenkintown, Pennsylvania 19046
- ---------------------------------------------- --------------------------------
(Address of Principal Executive Offices) (Zip Code)
(215) 886-8280
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
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 of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES __X__ No _____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES _____ No __X__
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: As of May 13, 2005,
15,870,000 shares of the Registrant's common stock were issued and outstanding.
ABINGTON COMMUNITY BANCORP, INC.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------------------------------------------------
PAGE
PART I - FINANANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
Unaudited Consolidated Statements of Financial Condition as of March 31, 2005
and December 31, 2004 1
Unaudited Consolidated Statements of Income for the Three Months Ended
March 31, 2005 and 2004 2
Unaudited Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Income for the Three Months Ended March 31, 2005 3
Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31,
2005 and 2004 4
Notes to Unaudited Consolidated Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 27
ITEM 4. CONTROLS AND PROCEDURES 31
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 31
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
ITEM 3. Defaults upon Senior Securities 31
ITEM 4. Submission of Matters to a Vote of Security Holders 31
ITEM 5. Other Information 32
ITEM 6. Exhibits 32
SIGNATURES 33
CERTIFICATIONS 34
ABINGTON COMMUNITY BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ---------------------------------------------------------------------------------------------------------------------------------
March 31, 2005 December 31, 2004
-------------------------------------------------------
ASSETS
Cash and due from banks $ 16,962,483 $ 24,867,784
Interest-bearing bank balances 13,135,718 8,428,048
-------------------------- --------------------------
Total cash and cash equivalents 30,098,201 33,295,832
Investment securities held to maturity (estimated fair
value--2005, $10,182,007; 2004, $10,336,485) 10,219,050 10,219,764
Investment securities available for sale (amortized cost--
2005, $80,869,352; 2004, $77,348,884) 78,792,326 76,163,951
Mortgage-backed securities held to maturity (estimated fair
value--2005, $82,653,560; 2004, $81,322,041) 83,929,985 81,703,737
Mortgage-backed securities available for sale (amortized cost--
2005, $93,841,656; 2004, $83,300,963) 92,405,793 83,027,943
Loans receivable, net of allowance for loan loss
(2005, $1,397,411; 2004, $1,412,697) 415,342,202 412,655,664
Accrued interest receivable 3,006,552 2,710,162
Federal Home Loan Bank stock--at cost 10,090,300 10,450,100
Cash surrender value - bank owned life insurance 15,002,465 -
Property and equipment, net 5,457,986 5,533,085
Deferred tax asset 2,088,388 1,313,068
Prepaid expenses and other assets 1,696,877 905,074
-------------------------- --------------------------
TOTAL ASSETS $ 748,130,125 $ 717,978,380
========================== ==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing $ 38,735,552 $ 37,596,228
Interest-bearing 383,252,143 367,693,829
-------------------------- --------------------------
Total deposits 421,987,695 405,290,057
Advances from Federal Home Loan Bank 180,367,480 170,666,374
Other borrowed money 18,763,558 12,865,521
Accrued interest payable 1,759,249 910,040
Advances from borrowers for taxes and insurance 2,260,644 2,047,151
Accounts payable and accrued expenses 3,925,405 3,144,536
-------------------------- --------------------------
Total liabilities 629,064,031 594,923,679
-------------------------- --------------------------
COMMITMENTS AND CONTINGENCIES
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 2005 and 2004 158,700 158,700
Additional paid-in capital 69,096,866 69,096,936
Unallocated common stock held by:
Employee Stock Ownership Plan (ESOP) (6,089,299) (2,046,137)
Deferred compensation plans trust (1,074,200) (1,074,200)
Retained earnings 59,292,535 57,881,651
Accumulated other comprehensive loss (2,318,508) (962,249)
-------------------------- --------------------------
Total stockholders' equity 119,066,094 123,054,701
-------------------------- --------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 748,130,125 $ 717,978,380
========================== ==========================
See notes to unaudited consolidated financial statements.
1
ABINGTON COMMUNITY BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
- -----------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
---------------------------------------
2005 2004
---------------------------------------
AS RESTATED
(SEE NOTE 8)
INTEREST INCOME:
Interest on loans $ 6,278,624 $ 5,444,626
Interest and dividends on investment and
mortgage-backed securities:
Taxable 2,516,589 1,876,702
Tax-exempt 111,345 1,755
------------------- -----------------
Total interest income 8,906,558 7,323,083
INTEREST EXPENSE:
Interest on deposits 1,969,324 1,524,017
Interest on Federal Home Loan Bank advances 1,904,501 1,829,276
Interest on other borrowed money 77,995 10,736
------------------- -----------------
Total interest expense 3,951,820 3,364,029
------------------- -----------------
NET INTEREST INCOME 4,954,738 3,959,054
PROVISION FOR LOAN LOSSES - 45,000
------------------- -----------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,954,738 3,914,054
------------------- -----------------
NON-INTEREST INCOME
Service charges 436,035 433,791
Rental income 15,451 13,195
Gain (loss) on derivative instruments, net 14,175 (278,342)
Other income 113,828 103,309
------------------- -----------------
Total non-interest income 579,489 271,953
------------------- -----------------
NON-INTEREST EXPENSES
Salaries and employee benefits 1,800,435 1,620,339
Net occupancy 405,745 293,750
Depreciation 123,269 127,791
Data processing 348,702 300,189
ATM expense 85,837 28,229
Deposit insurance premium 29,096 28,128
Advertising and promotions 92,084 71,697
Other 600,175 480,249
------------------- -----------------
Total non-interest expenses 3,485,343 2,950,372
------------------- -----------------
INCOME BEFORE INCOME TAXES 2,048,884 1,235,635
------------------- -----------------
PROVISION FOR INCOME TAXES 638,000 409,675
------------------- -----------------
NET INCOME $ 1,410,884 $ 825,960
=================== =================
BASIC EARNINGS PER COMMON SHARE $ 0.09 n/a
DILUTED EARNINGS PER COMMON SHARE $ 0.09 n/a
AVERAGE COMMON SHARES OUTSTANDING 15,504,360 n/a
See notes to unaudited consolidated financial statements.
2
ABINGTON COMMUNITY BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON
STOCK
ACQUIRED ACCUMULATED
ADDITIONAL BY OTHER TOTAL COMPRE-
COMMON PAID-IN BENEFIT RETAINED COMPREHENSIVE STOCKHOLDERS' HENSIVE
STOCK CAPITAL PLANS EARNINGS LOSS EQUITY INCOME
BALANCE--JANUARY 1, 2005 $ 158,700 $69,096,936 $(3,120,337) $57,881,651 $ (962,249) $ 123,054,701
Comprehensive income:
Net income - - - 1,410,884 - 1,410,884 $ 1,410,884
Net realized holding
loss on available
for sale securities
arising during the
period, net of tax
benefit of $698,677 - - - - (1,356,259) (1,356,259) (1,356,259)
-----------
Comprehensive income $ 54,625
===========
ESOP shares committed
to be released - (70) 126,385 - 126,315
Common stock acquired
by ESOP - - (4,169,547) - - (4,169,547)
--------- ----------- ------------ ----------- ------------ -------------
BALANCE--MARCH 31, 2005 $ 158,700 $69,096,866 $(7,163,499) $59,292,535 $ (2,318,508) $ 119,066,094
========= =========== ============ =========== ============ =============
See notes to unaudited consolidated financial statements.
3
ABINGTON COMMUNITY BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------
Three Months Ended March 31,
--------------------------------
2005 2004
--------------------------------
As Restated
(see note 8)
OPERATING ACTIVITIES:
Net income $ 1,410,884 $ 825,960
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses - 45,000
Depreciation 123,269 127,791
ESOP expense 126,315 -
Unrealized (gain) loss on derivative instruments (68,000) 106,750
Deferred income tax benefit (76,643) (48,741)
Amortization of:
Deferred loan fees (291,085) (291,800)
Premiums and discounts, net 69,303 65,292
Income from bank owned life insurance (2,465) -
Changes in assets and liabilities which (used)
provided cash:
Accrued interest receivable (296,390) 74,779
Prepaid expenses and other assets (791,803) (11,206)
Accrued interest payable 849,209 525,680
Accounts payable and accrued expenses 848,869 597,466
------------- -------------
Net cash provided by operating activities 1,901,463 2,016,971
------------- -------------
INVESTING ACTIVITIES:
Principal collected on loans 48,824,880 33,117,822
Disbursements for loans (51,220,333) (32,014,168)
Purchases of:
Mortgage-backed securities held to maturity (7,597,217) (10,956,924)
Mortgage-backed securities available for sale (15,585,382) (2,009,346)
Investments available for sale (4,020,282) (12,029,989)
Federal Home Loan Bank stock (695,900) (563,000)
Property and equipment (48,170) (38,715)
Bank owned life insurance (15,000,000) -
Proceeds from:
Maturities of mortgage-backed securities available
for sale 1,211,522 90,440
Maturities of investments available for sale 500,000 26,500,000
Principal repayments of mortgage-backed securities
held to maturity 5,317,221 1,315,631
Principal repayments of mortgage-backed securities
available for sale 3,818,140 4,363,164
Redemption of Federal Home Loan Bank stock 1,055,700 813,400
------------- -------------
Net cash (used in) provided by investing
activities (33,439,821) 8,588,315
------------- -------------
FINANCING ACTIVITIES:
Net (decrease) increase in demand deposits and
savings accounts (4,046,100) 6,385,518
Net increase in certificate accounts 20,743,738 3,514,180
Net increase in other borrowed money 5,898,037 5,683,043
Advances from Federal Home Loan Bank 73,995,000 179,500,000
Repayments of advances from Federal Home Loan Bank (64,293,894) (191,636,900)
Net increase in advances from borrowers
for taxes and insurance 213,493 609,563
Acquisition of stock for ESOP (4,169,547) -
------------- -------------
Net cash provided by financing activities 28,340,727 4,055,404
============= =============
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (3,197,631) 14,660,690
CASH AND CASH EQUIVALENTS--Beginning of period 33,295,832 19,695,625
============= =============
CASH AND CASH EQUIVALENTS--End of period $ 30,098,201 $ 34,356,315
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest on deposits and other borrowings $ 3,102,611 $ 2,838,349
============= =============
Income taxes $ 750,000 $ -
============= =============
See notes to unaudited consolidated financial statements.
4
ABINGTON COMMUNITY BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. FINANCIAL STATEMENT PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION-- 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. The consolidated financial statements presented for
periods prior to December 2004 include the accounts of the Bank 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.
The accompanying unaudited consolidated financial statements were
prepared in accordance with the instructions to Form 10-Q, and
therefore, do not include all the information or footnotes necessary for
a complete presentation of financial position, results of operations,
changes in equity and comprehensive income and cash flows in conformity
with accounting principles generally accepted in the United States of
America. However, all normal recurring adjustments that, in the opinion
of management, are necessary for a fair presentation of the consolidated
financial statements have been included. These financial statements
should be read in conjunction with the audited consolidated financial
statements of the Company and the accompanying notes thereto included in
the Company's Annual Report on Form 10-K for the period ended December
31, 2004. The results for the three months ended March 31, 2005 are not
necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 2005, or any other period.
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
5
results could differ from those estimates. The Company's most
significant estimates are the allowance for loan losses and deferred
income taxes.
ACCOUNTING FOR 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 previously entered into interest rate cap and swap
agreements in order 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,
gain (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 Financial Accounting Standards Board ("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.
At March 31, 2005, the Company is party to two swap agreements with
terms expiring in June 2005, and December 2005, respectively. Under the
June 2005 agreement, the Company either receives or pays, on a quarterly
basis, the amount by which the ten-year Constant Maturity Treasury
("CMT") exceeds or falls below 5.57% on the notional amount of $15
million. This agreement effectively changed a portion of the Company's
fixed rate mortgage portfolio to a variable rate of interest. Under the
December 2005, agreement, the Company 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 a portion of the Company's variable rate money
market accounts to a fixed rate of interest.
The fair value of the swap agreements was a negative $17,000 and a
negative $85,000 at March 31, 2005, and December 31, 2004, respectively.
During the three months ended March 31, 2005 and 2004, the Company paid
to the contra parties $53,825 and $171,592, respectively, under the
agreements. In addition, the unrealized gain (loss) on derivatives
recognized in gain (loss) on derivative instruments, net in the
Company's unaudited consolidated statements of income was $68,000 and
$(106,750) for the three months ended March 31, 2005 and 2004,
respectively.
BANK OWNED LIFE INSURANCE ("BOLI")-- In March 2005, the Company
purchased $15 million in Bank Owned Life Insurance as a mechanism for
funding various employee benefit costs. The Company is the beneficiary
of this policy that insures the lives of certain officers of its
subsidiaries. The Company has recognized the cash surrender value under
the insurance policy as an asset in the consolidated statements of
financial condition. Changes in the cash surrender value are recorded in
other non-interest income in the consolidated statements of income.
6
RECENT ACCOUNTING PRONOUNCEMENTS-- 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
January 1, 2006. 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-month periods ended March 31, 2005 and 2004.
2. EARNINGS PER SHARE
Basic earnings per common share is computed based on the weighted
average number of shares outstanding. Diluted earnings per share is
computed based on the weighted average number of shares outstanding and
common share equivalents ("CSEs") that would arise from the exercise of
dilutive securities. During the three months ended March 31, 2005, the
Company did not issue and does not have outstanding any CSEs.
THREE MONTHS ENDED MARCH 31, 2005
------------------------------------
BASIC DILUTED
----------- -------------
Net income $ 1,410,884 $ 1,410,884
Weighted average shares outstanding 15,504,360 15,504,360
Effect of unvested common stock awards - -
----------- -------------
Adjusted weighted average shares used in
earnings per share computation 15,504,360 15,504,360
----------- -------------
Earnings per share $ 0.09 $ 0.09
=========== =============
No common shares of the Company were outstanding during the three months
ended March 31, 2004.
7
3. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities are
summarized as follows:
HELD TO MATURITY
March 31, 2005
----------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
Debt securities:
Municipal bonds $ 10,219,050 $ 10,784 $ (47,827) $ 10,182,007
------------ --------- ----------- ------------
Total debt securities $ 10,219,050 $ 10,784 $ (47,827) $ 10,182,007
============ ========= =========== ============
AVAILABLE FOR SALE
March 31, 2005
----------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
Debt securities:
Agency bonds $ 74,989,955 $ 18,760 $(1,986,500) $ 73,022,215
Corporate bonds and
commercial paper 999,819 6,189 (793) 1,005,215
Municipal bonds 180,000 2,446 - 182,446
Certificates of deposit 1,282,000 - - 1,282,000
------------ --------- ----------- ------------
Total debt securities 77,451,774 27,395 (1,987,293) 75,491,876
------------ --------- ----------- ------------
Equity securities:
Common stock 2,510 535 (2,500) 545
Mutual funds 3,415,068 - (115,163) 3,299,905
------------ --------- ----------- ------------
Total equity securities 3,417,578 535 (117,663) 3,300,450
------------ --------- ----------- ------------
Total $ 80,869,352 $ 27,930 $(2,104,956) $ 78,792,326
============ ========= =========== ============
8
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
============ ========= =========== ============
9
The table below sets forth investment securities which have an
unrealized loss position as of March 31, 2005:
LESS THAN 12 MONTHS MORE THAN 12 MONTHS
------------------------------------------ -----------------------------------------
GROSS ESTIMATED GROSS ESTIMATED
UNREALIZED FAIR UNREALIZED FAIR
LOSSES VALUE LOSSES VALUE
Securities held to maturity:
Municipal bonds $ (47,827) $ 6,453,823
----------- -----------
Total securities held to maturity (47,827) 6,453,823
----------- -----------
Securities available for sale:
Government agency securities $ (390,635) $25,109,365 $(1,595,865) $45,894,090
Other securities (793) 498,415 (117,663) 3,299,905
----------- ----------- ----------- -----------
Total securities available for sale (391,428) 25,607,780 (1,713,528) 49,193,995
----------- ----------- ----------- -----------
Total $ (439,255) $32,061,603 $(1,713,528) $49,193,995
=========== =========== =========== ===========
The table below sets forth investment securities which have an
unrealized loss position 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
=========== =========== =========== ===========
At March 31, 2005, securities in a gross unrealized loss position for
twelve months or longer consist of 24 securities having an aggregate
depreciation of 3.4% from the Company's amortized cost basis. Securities
in a gross unrealized loss position for less than twelve months at March
31, 2005, consist of 29 securities having an aggregate depreciation of
1.4% 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 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
10
does not intend to sell the securities at a loss. Thus, the unrealized
losses are not considered 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
actual outcomes differ from conclusions reached by management in
determining whether an other-than-temporary impairment exists.
4. MORTGAGE-BACKED SECURITIES
The amortized cost and estimated fair value of mortgage-backed
securities are summarized as follows:
HELD TO MATURITY
MARCH 31, 2005
----------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
FNMA pass-through
certificates $ 32,353,297 $ - $ (757,146) $ 31,596,151
FHLMC pass-through
certificates 22,912,145 - (544,526) 22,367,619
Real estate mortgage
investment conduits 28,664,543 131,162 (105,915) 28,689,790
------------ --------- ----------- ------------
Total $ 83,929,985 $ 131,162 $(1,407,587) $ 82,653,560
============ ========= =========== ============
AVAILABLE FOR SALE
MARCH 31, 2005
----------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
GNMA pass-through
certificates $ 801,992 $ 31,572 $ - $ 833,564
FNMA pass-through
certificates 12,808,967 167,490 (90,292) 12,886,165
FHLMC pass-through
certificates 72,610,386 189,653 (1,584,650) 71,215,389
Real estate mortgage
investment conduits 7,620,311 5,631 (155,267) 7,470,675
------------ --------- ----------- ------------
Total $ 93,841,656 $ 394,346 $(1,830,209) $ 92,405,793
============ ========= =========== ============
11
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
============ ========= =========== ============
12
The table below sets forth mortgage-backed securities which have an
unrealized loss position as of March 31, 2005:
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 $ (435,009) $45,125,759 $ (972,578) $23,014,292
----------- ----------- ----------- -----------
Total securities held to maturity (435,009) 45,125,759 (972,578) 23,014,292
----------- ----------- ----------- -----------
Securities available for sale:
Mortgage-backed securities and
collateralized mortgage obligations $ (589,895) $35,948,215 $(1,240,314) $32,767,106
----------- ----------- ----------- -----------
Total securities available for sale (589,895) 35,948,215 (1,240,314) 32,767,106
----------- ----------- ----------- -----------
Total $(1,024,904) $81,073,974 $(2,212,892) $55,781,398
=========== =========== =========== ===========
The table below sets forth mortgage-backed securities which have an
unrealized loss position 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
=========== =========== =========== ===========
13
At March 31, 2005, securities in a gross unrealized loss position for
twelve months or longer consist of 21 securities having an aggregate
depreciation of 3.8% from the Company's amortized cost basis. Securities
in a gross unrealized loss position for less than twelve months at March
31, 2005, consist of 22 securities having an aggregate depreciation of
1.2% 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 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 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 considered 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 actual outcomes differ from
conclusions reached by management in determining whether an
other-than-temporary impairment exists.
5. ALLOWANCE FOR LOAN LOSSES
Following is a summary of changes in the allowance for loan losses:
THREE MONTHS ENDED YEAR ENDED
------------------------ ------------------------------
MARCH 31, 2005 DECEMBER 31, 2004
-------------------- --------------------------
Balance--beginning of year $ 1,412,697 $ 1,455,889
Provision for loan losses - 45,000
Charge-offs (20,694) (146,736)
Recoveries 5,408 58,544
-------------------- --------------------------
Charge-offs/recoveries--net (15,286) (88,192)
-------------------- --------------------------
Balance--end of period $ 1,397,411 $ 1,412,697
==================== ==========================
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 March 31, 2005 and December 31, 2004, the
Company had no loans that were determined to be impaired.
Commercial business 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
14
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 when they become 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. At March 31, 2005 and December 31, 2004, we had no
nonaccrual loans. Non-performing loans, which consist of non-accruing
loans plus accruing loans 90 days or more past due, at March 31, 2005
and December 31, 2004, amounted to approximately $281,000, and $227,000,
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. For the three months ended March 31, 2005 and 2004, no cash basis
interest income was recognized. Interest income foregone on nonaccrual
loans was zero and $7,000 for the three-month periods ended March 31,
2005, and 2004, respectively.
6. DEFERRED INCOME TAXES
Items that gave rise to significant portions of the deferred tax
accounts are as follows:
MARCH 31, 2005 DECEMBER 31, 2004
--------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 475,120 $ 480,317
Deferred compensation 879,959 839,320
Unrealized loss on securities available-for-sale
and cap and swap contracts 1,200,163 524,604
Other 25,544 -
-------------- --------------
Total deferred tax assets 2,580,786 1,844,241
-------------- --------------
Deferred tax liabilities:
Property and equipment (209,566) (201,066)
Deferred loan fees (258,917) (259,767)
Other (23,915) (70,340)
-------------- --------------
Total deferred tax liabilities (492,398) (531,173)
-------------- --------------
Net deferred tax asset $ 2,088,388 $ 1,313,068
============== ==============
15
7. PENSION AND PROFIT SHARING PLANS
The Company maintains a nonqualified, unfunded, defined benefit pension
plan for the Board of Directors and certain officers. The components of
the Company's net periodic cost for the plan is as follows:
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------
2005 2004
-------------------- ---------------------
Components of net periodic benefit cost:
Service cost $ 24,655 $ 23,775
Interest cost 28,998 27,962
Expected return on assets - -
Amortization of prior service cost 30,347 29,263
-------------------- ---------------------
Net periodic pension cost $ 84,000 $ 81,000
==================== =====================
Weighted average assumptions:
Discount rate 6.50% 6.50%
Rate of return on assets n/a n/a
Rate of increase in future board fees/salary levels 4.00% 4.00%
In 2004, the Company established an employee stock ownership plan
("ESOP") for substantially all of its full-time employees. Shares of the
Company's common stock purchased by the ESOP are held in a suspense
account until released for allocation to participants. 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 Company recognizes compensation
expense equal to the current market price of the shares released. As of
March 31, 2005, 468,300 shares of the Company's common stock had been
purchased for approximately $6.2 million by the ESOP towards its
anticipated total of 571,320 shares for the ESOP. Of these shares,
315,800 were purchased in the quarter ended March 31, 2005 for
approximately $4.2 million. In April and May 2005, the ESOP purchased
the remaining 103,020 shares for an additional $1.2 million. The average
purchase price of the 468,300 shares held at March 31, 2005 and the
571,320 shares held after all purchases were made were $13.27 and $12.90
per share, respectively. The fair value of the 468,300 shares held by
the ESOP at March 31, 2005 was approximately $6.0 million. During the
quarter ended March 31, 2005, approximately 9,500 shares were committed
to be released to participants resulting in recognition of approximately
$126,000 in compensation expense.
8. RESTATMENT OF FINANCIAL STATEMENT - CORRECTION OF AN ERROR
Subsequent to the issuance of 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 during the 2004 period 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. The restatement
is described in further detail in the Company's prospectus included in
its amended registration statement on Form S-1 filed on October 19,
2004.
16
The following is a summary of the effects of the restatement on the
consolidated income statement for the three-month period ended March 31,
2004:
THREE MONTHS ENDED
----------------------------
MARCH 31, 2004
----------------------------
AS ORIGINALLY
REPORTED AS RESTATED
INTEREST INCOME:
Interest on loans $ 5,326,876 $ 5,444,626
INTEREST EXPENSE:
Interest on Federal Home Loan Bank advances 1,883,118 1,829,276
NET INTEREST
INCOME 3,787,462 3,959,054
Loss on derivative instruments, net (278,342)
INCOME BEFORE INCOME TAXES 1,342,425 1,235,635
PROVISIONS FOR INCOME TAXES 445,970 409,675
NET INCOME 896,455 825,960
ITEM 2. - 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, gains or 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
17
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 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
18
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 in 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.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2005 AND DECEMBER 31, 2004
The Company's total assets increased $30.2 million, or 4.2%, to $748.1 million
at March 31, 2005 compared to $718.0 million at December 31, 2004. During the
first quarter of 2005, the Company purchased $15.0 million of bank owned life
insurance ("BOLI"), which is reflected in the Company's balance sheet at its
cash surrender value. The BOLI is intended to fund various benefit programs of
the Company. Our mortgage-backed securities, both held-to-maturity and
available-for-sale, increased by an aggregate of $11.6 million or 7.0% to an
aggregate of $176.3 million at March 31, 2005 compared to an aggregate of $164.7
million at December 31, 2004. During the first quarter of 2005, purchases of
$23.2 million in the aggregate were partially offset by $10.3 million in
repayments and maturities of our held-to-maturity and available-for-sale
mortgage-backed securities. Our net loans receivable remained relatively
consistent, increasing by $2.7 million or 0.7% to $415.3 million at March 31,
2005 compared to $412.7 million at December 31, 2004.
The $16.7 million or 4.1% increase in deposits from December 31, 2004 to March
31, 2005 resulted mainly from a $20.7 million increase in certificate of deposit
accounts. The increase in certificates of deposits was also accompanied by a
$4.4 million increase in savings and money market accounts which were partially
offset by an $8.4 million decrease in checking accounts. Our advances from the
Federal Home Loan Bank ("FHLB") increased $9.7 million or 5.7% during the first
quarter of 2005 to $180.4 million at March 31, 2005 compared to $170.7 million
at December 31, 2004. We utilize advances from the FHLB as an alternative to
retail deposits to fund operations and additional asset growth. The $5.9 million
increase in other borrowed money to $18.8 million at March 31, 2005 compared to
$12.9 million at December 31, 2004 reflects an increase in the amount of
securities repurchase agreements entered into with certain commercial checking
account customers.
Our stockholders' equity decreased $4.0 million to $119.1 million at March 31,
2005 compared to $123.1 million at December 31, 2004. The decrease was primarily
due to the purchase of 318,500 shares of the Company's common stock for an
aggregate of $4.2 million by the Company's Employee Stock Ownership Plan
("ESOP"), partially offset by a commitment to release approximately 9,500
unallocated ESOP shares with an aggregate cost of approximately $126,000.
Additionally, accumulated other comprehensive loss increased $1.4 million during
the first quarter of 2005, based on changes in the fair value of our
available-for-sale investment portfolio. These decreases to stockholders' equity
were partially offset by a $1.4 million increase in retained earnings resulting
from first quarter net income.
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 March 31, 2005,
our cash and cash equivalents amounted to $30.1 million. In addition, at such
date we had $3.2 million in
19
investment securities scheduled to mature within the next 12 months. Our
available for sale investment and mortgage-backed securities amounted to an
aggregate of $171.2 million at March 31, 2005.
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 March 31,
2005, we had certificates of deposit maturing within the next 12 months
amounting to $92.5 million. Based upon historical experience, we anticipate that
a significant portion of the maturing certificates of deposit will be
redeposited with us. For the three months ended March 31, 2005, and the year
ended December 31, 2004, the average balance of our outstanding FHLB advances
was $174.0 million and $169.7 million, respectively. At March 31, 2005, we had
$180.4 million in outstanding FHLB advances and we had $266.1 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 an alternative 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.
Our stockholders' equity amounted to $119.1 million at March 31, 2005, inclusive
of $69.3 million in net proceeds from the Company's initial public offering on
December 16, 2004. The capital raised in the offering has provided us with
additional flexibility to grow and diversify. Proceeds have been conservatively
invested in instruments that yield a market rate until we can deploy them into
loans. As part of our long-term strategic plan to leverage our capital through
retail deposit and loan growth, we anticipate opening a new branch in
Warrington, Bucks County, Pennsylvania in the second half of 2005. Planning is
also under way for two additional branches, which are projected to open within
the next twelve months. Additionally, a portion of the net proceeds from the
offering has been used to buy shares of the Company's common stock for our ESOP.
As noted above, our ESOP purchased approximately 318,500 shares of the Company's
common stock in the open market for an aggregate of $4.2 million in the quarter
ended March 31, 2005.
The following table summarizes the Bank's capital ratios as of the dates
indicated and compares them to current regulatory requirements.
Actual Ratios At
------------- ------------
March 31, December 31, Regulatory To Be Well
2005 2004 Minimum Capitalized
------------- ------------ ------------- ------------
CAPITAL RATIOS:
Tier 1 leverage ratio 11.75% 12.73% 4.00% 5.00%
Tier 1 risk-based capital ratio 19.83 21.24 4.00 6.00
Total risk-based capital ratio 20.15 21.57 8.00 10.00
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 economically hedge
20
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 March 31, 2005, 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 March 31, 2005,
also were designed to serve as a hedge against our fixed-rate, single-family
mortgage loan portfolio. Under the agreement 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 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 and the change in fair value is
recorded in gain (loss) on derivative instruments, net in the consolidated
statements of income. The fair value of the swap agreements was a negative
$17,000 and a negative $85,000 at March 31, 2005 and December 31, 2004,
respectively. During the three months ended March 31, 2005 and 2004, the Company
paid $53,825 and $171,592, respectively, under the agreements. In addition, the
unrealized gain (loss) on derivatives recognized in gain (loss) on derivative
instruments, net in the Company's unaudited consolidated statements of income
was $68,000 and $(106,750) for the three months ended March 31, 2005 and 2004,
respectively.
21
The following table summarizes our derivative financial instruments at March 31,
2005.
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 March 31, 2005 and December 31, 2004 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 March 31, 2005 and December 31,
2004, 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 $86.5 million and $92.4
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. Standby letters of credit
are conditional commitments issued by the Bank to guarantee the performance of a
customer to a third party. 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 March 31, 2005 and December 31,
2004, the Bank had letters of credit outstanding of approximately $10.9 million
and $11.3 million, respectively, of which $10.7 million and $10.5 million,
respectively, were standby letters of credit. At March 31, 2005, the
uncollateralized portion of the letters of credit extended by the Bank was
approximately $215,000 of which $99,000 was for standby letters of credit.
22
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.
Among the Company's contingent liabilities are exposures to limited recourse
arrangements with respect to the Bank's sales of whole loans and participation
interests. At March 31, 2005, the exposure, which represents 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 table summarizes 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 March 31, 2005.
Amount of Commitment Expiration - Per Period
---------------------------------------------------------
Total Amount To 1-3 4-5 After 5
Committed 1 Year Years Years Years
------------------ ------------- ------------- ------------ --------------
(In Thousands)
Letters of credit $10,865 $ 9,996 $ 869 $ -- $ --
Recourse obligations on loans sold 185 -- -- -- 185
Commitments to originate loans 10,196 10,196 -- -- --
Unused portion of home equity
lines of credit 21,927 -- -- -- 21,927
Unused portion of commercial
lines of credit 10,577 10,577 -- -- --
Undisbursed portion of
construction loans in process 43,788 9,670 34,118 -- --
------------------ ------------- ------------- ------------ --------------
Total commitments $97,538 $40,439 $34,987 $ -- $22,112
================== ============= ============= ============ ==============
The following table summarizes our contractual cash obligations at March 31,
2005.
Payments Due By Period
---------------------------------------------------------
Total Amount To 1-3 4-5 After 5
Committed 1 Year Years Years Years
------------------ ------------- ------------- ------------ --------------
(In Thousands)
Certificates of deposit $203,515 $ 92,519 $ 85,831 $12,220 $12,945
------------------ ------------- ------------- ------------ --------------
FHLB advances 180,367 24,310 19,014 60,876 76,167
Repurchase agreements 18,764 18,764 -- -- --
------------------ ------------- ------------- ------------ --------------
Total debt 199,131 43,074 19,014 60,876 76,167
------------------ ------------- ------------- ------------ --------------
Operating lease obligations 4,259 466 901 667 2,225
------------------ ------------- ------------- ------------ --------------
Total contractual obligations $406,905 $136,059 $105,746 $73,763 $91,337
================== ============= ============= ============ ==============
23
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND
2004
GENERAL. We had net income of $1.4 million for the quarter ended March 31, 2005,
representing an increase of 70.8% over the comparable 2004 period. Earnings per
share on the Company's 15,870,000 outstanding common shares (of which 7,141,500
shares were sold to the public in the Company's initial public offering in
December 2004) was $0.09 for the quarter ended March 31, 2005. Our results for
the first quarter of 2005 reflect, in part, increases in the average amount of
interest-earning assets combined with increases in the average yield on such
assets. The resulting increase in interest income was partially offset by an
increase in interest expense. Although our net interest spread decreased to
2.29% for the quarter ended March 31, 2005 from 2.40% for the quarter ended
March 31, 2004, our net interest margin increased to 2.80% from 2.73% for the
same periods, respectively. In addition, we reported a gain on derivative
instruments for the quarter ended March 31, 2005 compared to a loss for the
quarter ended March 31, 2004, which was primarily responsible for a 113.1%
increase in non-interest income. Our non-interest expense for the quarter ended
March 31, 2005 also increased as a result of increases in all categories of
non-interest expense with the exception of depreciation expense which decreased
slightly.
INTEREST INCOME. Our total interest income was $8.9 million for the quarter
ended March 31, 2005 compared to $7.3 million for the quarter ended March 31,
2004, a $1.6 million or 21.6% increase. This increase was due to increases in
the average balances of all categories of interest-earning assets, with the
largest increases occurring in the average balances of loans and mortgage-backed
securities, which grew by $53.1 million and $50.0 million, respectively. The
increases in the average balances of our interest-earning assets were
accompanied by increases in the average yields of all categories of
interest-earning assets. Despite these overall increases, our average yield on
total interest-earning assets decreased to 5.03% for the quarter ended March 31,
2005 from 5.05% for the quarter ended March 31, 2004. This occurred as loans
receivable, our highest yielding interest-earning asset, decreased as a
proportion of total interest-earning assets to 58.8% of our average
interest-earning assets for the quarter ended March 31, 2005, compared to 62.5%
of our interest-earning assets for the comparable quarter in the prior year.
This change in the mix of our interest-earning assets occurred as capital from
our initial public offering has been disbursed into other investments more
quickly than it has been disbursed into loans.
INTEREST EXPENSE. Our total interest expense was $4.0 million for the quarter
ended March 31, 2005 compared to $3.4 million for the quarter ended March 31,
2004, an increase of $588,000 or 17.5%. The increase in interest expense for the
first quarter of 2005 when compared to the same period in the prior year
resulted mainly from increases in the average balances of deposits and FHLB
advances as well as increases in the average rates paid on deposits and other
borrowings. Our average deposit balance increased $51.1 million or 15.5% to
$381.8 million for the quarter ended March 31, 2005 from $330.7 million for the
quarter ended March 31, 2004. This occurred due to increases in the average
balances of all categories of deposit accounts, led by a $34.3 million increase
in the average balance of certificates of deposit. Our average rate on deposits
increased to 2.06% for the quarter ended March 31, 2005 from 1.84% for the
quarter ended March 31, 2004, driven largely by the growth in our certificate of
deposit accounts, which generally pay a higher rate of interest than other
deposit products. The average rate on these accounts increased to 3.25% for the
quarter ended March 31, 2005 from 3.07% for the quarter ended March 31, 2004.
Our average rate on interest-bearing liabilities as a whole increased to 2.74%
for the quarter ended March 31, 2005 from 2.65% for the quarter ended March 31,
2004.
24
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.
Three Months
Ended March 31,
--------------------------------------------------------------------
2005 2004
---------------------------------- --------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------------ --------- ----------- --------- --------- ----------
(Dollars in Thousands)
Interest-earning assets:
Investment securities(1) $ 89,248 $ 740 3.32% $ 80,821 605 2.99%
Mortgage-backed securities 172,942 1,798 4.16 122,948 1,257 4.09
Loans receivable(2) 416,041 6,279 6.04 362,902 5,445 6.00
Other interest-earning assets 29,906 90 1.20 13,920 16 0.46
------------ --------- --------- ---------
Total interest-earning assets 708,137 8,907 5.03% 580,591 7,323 5.05%
--------- ----------- --------- ----------
Cash and non-interest earning
balances 20,381 13,292
Other non-interest-earning assets 16,323 9,485
------------ ---------
Total assets $ 744,841 $ 603,368
============ =========
Interest-bearing liabilities:
Deposits:
Savings and money market accounts $ 128,252 319 0.99% $ 112,336 223 0.79%
Checking accounts 51,881 10 0.08 50,985 15 0.12
Certificate accounts 201,690 1,640 3.25 167,401 1,286 3.07
------------ --------- --------- ---------
Total deposits 381,823 1,969 2.06 330,722 1,524 1.84
FHLB advances 173,977 1,905 4.38 164,809 1,829 4.44
Other borrowings 21,131 78 1.48 12,139 11 0.36
------------ --------- --------- ---------
Total interest-bearing liabilities 576,931 $ 3,952 2.74% 507,670 $ 3,364 2.65%
--------- ----------- --------- ----------
Non-interest-bearing liabilities:
Non-interest-bearing demand
accounts 36,527 34,144
Real estate tax escrow accounts 2,600 2,702
Other liabilities 6,572 4,849
------------ ---------
Total liabilities 622,630 549,365
Retained earnings 122,211 54,003
------------ ---------
Total liabilities and retained
earnings $ 744,841 $ 603,368
============ =========
Net interest-earning assets $ 131,206 $ 72,921
============ =========
Net interest income $ 4,955 $ 3,959
========= =========
Average interest rate spread 2.29% 2.40%
=========== ==========
Net interest margin(3) 2.80% 2.73%
=========== ==========
- ---------------------------
(1) Investment securities for the 2005 period include 26 non-taxable
municipal bonds with an aggregate average balance of $10.4 million and
an average yield of 4.3%. Investment securities for the 2004 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.
25
PROVISION FOR LOAN LOSSES. We made no provision for loan losses in the first
quarter of 2005 compared to a provision of $45,000 in the first quarter of 2004.
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 March 31, 2005, we had $281,000 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
0.07% at March 31, 2005, 0.05% at December 31, 2004 and 0.10% at March 31, 2004.
For the quarter ended March 31, 2005 our net loan charge-offs amounted to
$15,000. For the quarter ended March 31, 2004 we had net recoveries of $2,000.
NON-INTEREST INCOME. Our total non-interest income amounted to $579,000 for the
three-months ended March 31, 2005 compared to $272,000 for the three-months
ended March 31, 2004. The increase was due primarily to a $14,000 gain on
derivative instruments for the first quarter of 2005 compared to a loss of
$278,000 for the first quarter of 2004. Service charge income, rental income and
other non-interest income remained relatively consistent during the first
quarter of 2005 compared to the first quarter of 2004.
NON-INTEREST EXPENSES. Our total non-interest expense for the quarter ended
March 31, 2005 amounted to $3.5 million, representing an increase of $535,000 or
18.1% from the quarter ended March 31, 2004. The overall increase was due to
increases in all categories of non-interest expense with the exception of
depreciation expense which decreased slightly. Salaries and employee benefits
expense, the largest component of non-interest expense, increased $180,000 or
11.1% in the first quarter of 2005 when compared to the first quarter of 2004.
This increase was due to approximately $137,000 in additional expenses relating
to new employee benefit plans that began in 2005, as well as to normal merit
increases in salaries. Our advertising and promotions expense increased
approximately $20,000 or 28.4% as a result of additional promotions related to
our reorganization to the mutual holding company form. Other non-interest
expense increased approximately $120,000 or 25.0% due in large part to increased
audit and professional fees as the result of becoming a public reporting entity.
INCOME TAX EXPENSE. Income tax expense for the quarter ended March 31, 2005
amounted to $638,000 compared to $410,000 for the quarter ended March 31, 2004.
The increase in income tax expense was due to the increase in our pre-tax
income, partially offset by a decrease in our effective tax rate. Our effective
tax rate decreased to 31.1% for the first quarter of 2005 from 33.2% for the
first quarter of 2004, primarily as a result of increased investment in
tax-exempt municipal securities as well as the purchase of bank owned life
insurance in March 2005.
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
26
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 our
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.
ITEM 3. - 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, 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;
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
27
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 negative 1.82% at March 31, 2005,
compared to a positive 0.57% at December 31, 2004. We have increased our
originations of commercial real estate and multi-family residential real estate
loans, construction loans, home equity lines and commercial business loans. This
was done, in part, because all of these loans generally have shorter terms to
maturity than single-family residential mortgage loans and are more likely to
have floating or adjustable rates of interest, thereby increasing 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 at March 31, 2005, 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 March 31,
2005, 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, 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.
28
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) $ 143,964 $ 27,801 $ 91,477 $ 70,263 $ 83,235 $ 416,740
Mortgage-backed securities 35,420 24,730 60,405 27,354 29,012 176,921
Investment securities 7,613 2,986 37,778 19,500 23,211 91,088
Other interest-earning assets 23,226 -- -- -- -- 23,226
------------- ------------- ------------- ------------ ------------- ------------
Total interest-earning
assets 210,223 55,517 189,660 117,117 135,458 707,975
============= ============= ============= ============ ============= ============
Interest-bearing liabilities:
Savings and money market
accounts $ 19,446 $ 19,446 $ 48,684 $ 22,398 $ 19,615 $ 129,589
Checking accounts -- -- -- -- 50,148 50,148
Certificate accounts 61,047 31,480 85,831 12,220 12,937 203,515
FHLB advances 117,442 11,726 20,155 17,862 13,182 180,367
Other borrowed money 18,764 -- -- -- -- 18,764
------------- ------------- ------------- ------------ ------------- ------------
Total interest-bearing
liabilities 216,699 62,652 154,670 52,480 95,882 582,383
============= ============= ============= ============ ============= ============
Interest-earning assets less
interest-bearing liabilities $ (6,476) $ (7,135) $ 34,990 $ 64,637 $ 39,756 $ 125,592
============= ============= ============= ============ ============= ============
Cumulative interest-rate
sensitivity gap(3) $ (6,476) $ (13,611) $ 21,379 $ 86,016 $ 125,592
============= ============= ============= ============ =============
Cumulative
interest-rate
gap as a percentage of total
assets at March 31, 2005 (0.87)% (1.82)% 2.86% 11.50% 16.79%
============= ============= ============= ============ =============
Cumulative interest-earning
assets as a percentage of
cumulative interest-bearing
liabilities at March 31, 2005 97.01% 95.13% 104.93% 117.68% 121.57%
============= ============= ============= ============ =============
- ---------------------
(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.
29
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.
ITEM 4. - CONTROLS AND PROCEDURES
Our management evaluated, with the participation of our Chief Executive
Officer and Chief Financial Officer, the effectiveness of our disclosure
controls and procedures (as defined in Rule 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, our Chief Executive Officer
and Chief Financial Officer have concluded that our disclosure controls
and procedures are designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and
regulations and are operating in an effective manner.
No change in our internal control over financial reporting (as defined
in Rule 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, our internal
control over financial reporting.
30
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
(a) Not applicable.
(b) Not applicable.
(c) PURCHASES OF EQUITY SECURITIES
The Company did not make any purchases of its common stock during the
quarter ended March 31, 2005, 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
TOTAL SHARES PURCHASED AS SHARES THAT MAY YET
NUMBER OF PART OF PUBLICLY BE PURCHASED UNDER
SHARES AVERAGE PRICE ANNOUNCED PLANS OR THE PLAN OR
PERIOD PURCHASED PAID PER SHARE PROGRAMS PROGRAMS(1)
----------------------------------- ------------ ----------------- -------------------- ---------------------
January 1 - January 31, 2005 213,500 13.10 366,000 205,320
February 1 - February 28, 2005 34,000 13.20 400,000 171,320
March 1 - March 31, 2005 68,300 13.52 468,300 103,020
Total 315,800 $ 13.20 468,300 103,020
======= ===============- ======= =======
(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. A total of 152,500 shares were purchased in December 2004. The
remaining 103,020 shares were purchased by the ESOP in April and May 2005. No
additional purchases will be made by the ESOP under this plan.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
31
Item 5. Other Information
Not applicable.
Item 6. Exhibits
No. Description
--- -----------
31.1 Certification pursuant to Rule 13a-14
and 15d-14 of the Securities Exchange
Act of 1934, as amended, as adopted
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification pursuant to Rule 13a-14
and 15d-14 of the Securities Exchange
Act of 1934, as amended, as adopted
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
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SIGNATURES
Pursuant to the requirements 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.
Date: May 16, 2005 By: /s/ Robert W. White
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Robert W. White
Chairman, President and
Chief Executive Officer
Date: May 16, 2005 By: /s/ Jack J. Sandoski
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Jack J. Sandoski
Senior Vice President and
Chief Financial Officer
33