ITEM 1. BUSINESS
General
Abington Bancorp, Inc. (the “Company”) is a Pennsylvania corporation which was recently organized to be the stock holding company for Abington Savings Bank in connection with our second-step conversion and reorganization completed on June 27, 2007, discussed further below. Abington Savings Bank is a Pennsylvania-chartered, FDIC-insured savings bank, which conducts business under the name “Abington Bank” (the “Bank” or “Abington Bank”). As a result of the Bank’s election pursuant to Section 10(l) of the Home Owners’ Loan Act, the Company is a savings and loan holding company regulated by the Office of Thrift Supervision (the “OTS”). 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 subsidiary, ASB Investment Co. As of December 31, 2007, the Company, on a consolidated basis, had total assets of $1.1 billion, total deposits of $609.6 million, and total stockholders’ equity of $249.9 million.
Abington Community Bancorp, Inc., a Pennsylvania corporation, was the former mid-tier holding company for the Bank. Abington Community Bancorp was organized in conjunction with the Bank’s reorganization from the mutual savings bank form to the mutual holding company structure in December 2004. Abington Mutual Holding Company, a Pennsylvania corporation, was the mutual holding company parent of Abington Community Bancorp, Inc. and originally owned 55% of Abington Community Bancorp’s outstanding stock. As a result of treasury stock purchases, this stake increased to approximately 57% of Abington Community Bancorp’s outstanding stock at the time of the Bank’s second-step conversion in June 2007.
On June 27, 2007, a second-step conversion was completed after which Abington Mutual Holding Company and Abington Community Bancorp, Inc. ceased to exist and Abington Bancorp, Inc. was organized as the new stock-form holding company for the Bank and as successor to Abington Community Bancorp. A total of 13,965,600 new shares of common stock. of the Company (“Common Stock”) were sold at $10 per share in the subscription, community and syndicated community offerings through which the Company received proceeds of approximately $134.7 million, net of offering costs of approximately $5.0 million. As part of the conversion, outstanding public shares of Abington Community Bancorp, Inc. (other than the shares owned by Abington Mutual Holding Company) were exchanged for 1.6 shares of Company Common Stock. The exchange resulted in an additional 10,494,640 outstanding shares of Common Stock of the Company for a total of 24,460,240 outstanding shares of Common Stock as of the closing of the second-step conversion. Treasury stock held by Abington Community Bancorp as of the June 27, 2007 closing date was cancelled. For further information on the Company’s second-step conversion, see Note 19 in the Notes to the Consolidated Financial Statements in Item 8 herein.
Abington Bank is a community-oriented savings bank, which was originally organized in 1867 and is headquartered in Jenkintown, Pennsylvania, approximately eight miles north of center city Philadelphia. Our banking office network currently consists of our headquarters and main office, eleven other full-service branch offices and six limited service branch offices. In addition, we maintain a loan processing office in Jenkintown, Pennsylvania. Thirteen of our banking offices are located in Montgomery County, Pennsylvania, four are in neighboring Bucks County, Pennsylvania and one is in Delaware County, Pennsylvania. The Bank plans to add an additional branch office in the first half of 2008 in Montgomery County. Our limited service offices have limited hours of operation and/or are limited to serving customers who live or work in the community in which the limited service office is located. Four of our limited service offices are located in retirement or age restricted communities. We maintain ATMs at all of our banking offices and we also have two off-site ATMs, located at a local grocery store and a local college. We also provide on-line banking and telephone banking services.
We are primarily engaged in attracting deposits from the general public and using those funds to invest in loans and securities. Our principal sources of funds are deposits, repayments of loans and mortgage-backed securities, maturities of investments and interest-bearing deposits, funds provided from operations and funds borrowed from outside sources such as the Federal Home Loan Bank (“FHLB”) of Pittsburgh. These funds are primarily used for the origination of various loan types including single-family residential mortgage loans, construction loans, non-residential or commercial real estate mortgage loans, home equity loans, commercial business loans and consumer loans. We are an active originator of residential home mortgage loans and home construction loans in our market area. In addition to offering loans and deposits, we also offer securities and annuities to our customers through an affiliation with a third-party broker-dealer.
The Company’s website address is www.abingtonbank.com. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other documents filed by the Company with the Securities and Exchange Commission (“SEC”) are available free of charge on the Company’s website under the Investor Relations menu. Such documents are available on the Company’s website as soon as reasonably practicable after they have been filed electronically with the SEC.
Forward Looking Statements
This document contains forward-looking statements, which can be identified by reference to a future period or periods or by the use of words such as “would be,” “will,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and similar expressions or the negative thereof. These forward-looking statements include:
`·
statements of goals, intentions and expectations;
·
statements regarding prospects and business strategy;
·
statements regarding asset quality and market risk; and
·
estimates of future costs, benefits and results.
These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the factors discussed under the heading “Risk Factors” in Item 1A
ITEM 1A. RISK FACTORS
Market Rates of Interest May Hurt Profitability
In recent years, market rates of interest had risen from historically low levels. Many institutions, including Abington Bank, had experienced a narrowing or “compression” of their net interest spread, which is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. Abington Bank’s net interest spread was 1.94% for the year ended December 31, 2007 compared to 2.13% and 2.27% for the years ended December 31, 2006 and 2005, respectively. Although rates began to fall in September 2007, and our net interest spread has improved since that point, future rate increases are possible. In a period of rising interest rates, the interest income earned on our assets may not increase as rapidly as the interest expense paid on our liabilities. In addition, increases in market rates of interest could adversely affect our net portfolio value. In the event of an immediate and sustained 200 basis point increase in interest rates, Abington Bank’s net portfolio value, which is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts, would decrease by $25.1 million or 13.21%. Under the same circumstances, our net interest income would be expected to decrease by $1.6 million or 5.24%.
Competition for Core Deposits Is Increasing
Partially as a result of rising interest rates in recent years, deposit customers have transferred significant amounts of their deposits from low-cost “core deposits” such as checking and savings accounts to certificates of deposit, also known as time deposits. For the year ended December 31, 2007 core deposits comprised 32.0% of our average total deposits compared to 33.7% and 47.9% for the years ended December 31, 2006 and 2005, respectively. At December 31, 2007, $414.6 million, or 68.0% of our total deposits were certificates of deposit, and of that amount $246.5 million or 59.5% of our total certificates of deposit, were “jumbo” certificates of $100,000 or more. Our balances of certificates of deposit has increased as a result of, among other factors, the increased rates available on those products relative to other deposit products or other investments in the prevailing interest rate environment. Although interest rates are currently falling, as competition for core deposits continues to increase, it is possible that the percentage of our total deposits that are core deposits will continue to shrink. If more of our customers invest in time deposits, or if core deposits are lost to competition, the average rate Abington Bank pays on its deposits will be relatively higher. This will have the effect of narrowing our net interest spread and net interest margin relative to the levels at which they might have been had a higher percentage of our deposits been in core deposits. This could aversely affect our profitability. The average rate we paid on our interest-bearing deposits was 3.81% for the year ended December 31, 2007 compared to 3.39% and 2.38% for the years ended December 31, 2006 and 2005, respectively.
Our Portfolio of Loans With a Higher Risk of Loss Is Increasing
In recent years, we have increased our originations of construction loans and commercial real estate and multi-family residential real estate loans. These loans have a higher risk of default and loss than single-family residential mortgage loans. The aggregate of construction loans and commercial real estate and multi-family residential loans has increased from $130.9 million or 32.7 % of our total loan portfolio at December 31, 2003 to $245.8 million or 33.2% of the total loan portfolio at December 31, 2007. Construction loans and commercial real estate and multi-family residential real estate loans all generally have a higher risk of loss than single-family residential mortgage loans because repayment of the loans often depends on the successful operation of a business or the underlying property. At December 31, 2007 and 2006, the Company had $1.4 million and $2.3 million, respectively, of commercial real estate and multi-family residential loans and construction loans that were considered non-performing. These loans were deemed to be impaired and placed on non-accrual status. The impaired loans at December 31, 2007 were comprised of one construction and four commercial real estate loans to one borrower. The impaired loans at December 31, 2006 were comprised of two construction and three commercial real estate loans to the same borrower.
Our Results of Operations are Significantly Dependent on Economic Conditions and Related Uncertainties
Banking is affected, directly and indirectly, by domestic and international economic and political conditions and by governmental monetary and fiscal policies. Conditions such as inflation, recession, unemployment, volatile interest rates, real estate values, government monetary policy, international conflicts, the actions of terrorists and other factors beyond our control may adversely affect our results of operations. Changes in interest rates, in particular, could adversely affect our net interest income and have a number of other adverse effects on our operations, as discussed the first risk factor above. Adverse economic conditions also could result in an increase in loan delinquencies, foreclosures and nonperforming assets and a decrease in the value of the property or other collateral which secures our loans, all of which could adversely affect our results of operations. We are particularly sensitive to changes in economic conditions and related uncertainties in the Delaware Valley because we derive substantially all of our loans, deposits and other business from the greater Philadelphia region in eastern Pennsylvania and contiguous counties in New Jersey and Delaware. Accordingly, we remain subject to the risks associated with prolonged declines in national or local economies.
Our Allowance for Losses on Loans May Not Be Adequate to Cover Probable Losses
We have established an allowance for loan losses based upon various assumptions and judgments about the collectibility of our loan portfolio which we believe is adequate to offset probable losses on our existing loans. Since we must use assumptions regarding individual loans and the economy, our current allowance for loan losses may not be sufficient to cover actual loan losses, and increases in the allowance may become necessary in the future. There can be no assurance that any future declines in real estate market conditions, general economic conditions or changes in regulatory policies will not require us to increase our allowance for loan losses, which would adversely affect our results of operations. We may also need to significantly increase our provision for loan losses, particularly if one or more of our larger loans or credit relationships becomes delinquent. In addition, federal regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize loan charge-offs. Our allowance for loan losses amounted to 116.8% of non-performing loans at December 31, 2007.
Our Loans are Concentrated to Borrowers In Our Market Area
At December 31, 2007, the preponderance of our total loans were to individuals and/or secured by properties located in our market area of the Delaware Valley region. We have relatively few loans outside of our market. As a result, we have a greater risk of loan defaults and losses in the event of an economic downturn in our market area as adverse economic changes may have a negative effect on the ability of our borrowers to make timely repayment of their loans. Additionally, a decline in local property values could adversely affect the value of property used as collateral. If we are required to liquidate a significant amount of collateral during a period of reduced real estate values to satisfy the debt, our earnings and capital could be adversely affected.
The Building of Market Share Through our Branching Strategy Could Cause our Expenses to Increase Faster than Revenues
We intend to continue to build market share through our branching strategy. We opened four new branches in 2007 and have plans to open additional branches within the next 24 months. There are costs involved in opening branches and new branches generally require a period of time to generate sufficient revenues to offset their costs, especially in areas in which we do not have an established presence. Accordingly, any new branch may negatively impact our earnings for some period of time until the branch reaches certain economies of scale. Our expenses could be further increased if we encounter delays in the opening of any of our new branches. Finally, we have no assurance our new branches will be successful even after they have been established.
We are Dependent Upon the Services of Our Management Team
Our future success and profitability depend upon the management and banking abilities of our senior executives. We believe that our future results will also depend in part upon our attracting and retaining highly skilled and qualified management. We are especially dependent on a limited number of key management personnel. The loss of our chief executive officer or other senior executive officers could have a material adverse impact on our operations because other officers may not have the experience and expertise to readily replace these individuals. Competition for such personnel is intense, and we cannot assure you that we will be successful in attracting or retaining such personnel. Changes in key personnel and their responsibilities may be disruptive to our business and could have a material adverse effect on our business, financial condition and results of operations.
We are Subject to Extensive Regulation Which Could Adversely Affect Our Business and Operations
We are subject to extensive federal and state governmental supervision and regulation, which are intended primarily for the protection of depositors. In addition, we are subject to changes in federal and state laws, as well as changes in regulations, governmental policies and accounting principles. The effects of any such potential changes cannot be predicted but could adversely affect our business and operations in the future.
Strong Competition Within our Market Area May Limit our Growth and Profitability
Competition in the banking and financial services industry is intense. In our market area, we compete with numerous commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operatin locally and elsewhere.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
ITEM 2. PROPERTIES
We currently conduct business from our main office, eleven additional full-service banking offices and six limited service offices. We also maintain a loan processing office. The following table sets forth the net book value of the land, building and leasehold improvements and certain other information with respect to our offices at December 31, 2007.
__________________
(1)
In February 2008, the Bank exercised its renewal option and extended this lease term through May 31, 2013.
(2)
In March 2008, the Bank signed a lease extension through August 15, 2013.
(3)
Opened in January 2007
(4)
Opened in April 2007
(5)
Opened in November 2007
(6)
In February 2008, the Bank exercised its renewal option and extended this lease term through May 21, 2009.
(7)
In March 2008, the Bank exercised its renewal option and extended this lease term through July 31, 2011.
(8)
In March 2008, the Bank signed a lease extension through October 31, 2013.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 2007, we were not, and we presently are not, involved in any legal proceedings of a material nature. From time to time, we are a party to legal proceedings incidental to our business to enforce our security interest in collateral pledged to secure loans made by Abington Bank.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(a)
Abington Bancorp, Inc. common stock trades on the Nasdaq Global Market under the trading symbol “ABBC.” At the close of business on December 31, 2007, there were 2,420 shareholders of record.
The following table sets forth the high and low sales prices of the Company’s common stock as reported by the Nasdaq Global Market during the periods presented. Prices for prior periods have been adjusted by the 1.6 exchange ratio as a result of the second-step conversion and reorganization of the Company, which occurred on June 27, 2007.
The following table summarizes the cash dividends per share of common stock paid by the Company during the periods indicated. Dividends per share for prior periods have been adjusted to reflect the impact of the second-step conversion and reorganization of the Company, which occurred on June 27, 2007.
The Company did not sell any of its equity securities during 2007 that were not registered under the Securities Act of 1933.
For information regarding the Company’s equity compensation plans see Item 12.
(b)
Not applicable.
(c)
Purchases of Equity Securities
The Company’s repurchases of its common stock made during the quarter are set forth in the following table.
(1)
Shares were acquired as part of the Company’s 2005 recognition and retention plan. In conjunction with the plan, participants may elect to have a portion of their awarded shares withheld upon vesting solely to pay for any related tax liabilities on these awards.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial and other data of Abington Bancorp, Inc. set forth below does not purport to be complete and should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including the Consolidated Financial Statements and related Notes, appearing elsewhere herein.
__________________
(1)
Earnings per share and cash dividends per share for the prior periods have been adjusted to reflect the impact of the second-step conversion and reorganization of the Company, which occurred on June 27, 2007.
(2)
Earnings per share for the 2004 period is presented on a pro forma basis under the assumption that the 13,965,600 shares (as adjusted as a result of the second-step conversion and reorganization of the Company which occurred on June 27, 2007) issued to Abington Mutual Holding Company in the December 16, 2004 initial public offering were outstanding for the entire year. The 11,426,400 public shares (as adjusted) sold in the initial public offering are considered to be outstanding beginning on December 16, 2004.
(3)
With the exception of end of period ratios, all ratios are based on average monthly balances during the indicated periods.
(4)
Average interest rate spread represents the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities, and net interest margin represents net interest income as a percentage of average interest-earning assets.
(5)
The efficiency ratio represents the ratio of non-interest expense divided by the sum of net interest income and non-interest income.
(6)
Asset quality ratios are end of period ratios, except for net charge-offs to average loans receivable.
(7)
Non-performing assets consist of non-performing loans and real estate owned. Non-performing loans consist of all accruing loans 90 days or more past due and all non-accruing loans. It is our policy, with certain limited exceptions, to cease accruing interest on single-family residential mortgage loans 120 days or more past due and all other loans 90 days or more past due. Real estate owned consists of real estate acquired through foreclosure and real estate acquired by acceptance of a deed-in-lieu of foreclosure.
(8)
Capital ratios are end of period ratios and are calculated for Abington Bank per regulatory requirements.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview-The Company is a Pennsylvania corporation which was recently organized to be the stock holding company for Abington Savings Bank in connection with our second-step conversion and reorganization which was completed on June 27, 2007. 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, 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, professional services 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 FDIC and the Pennsylvania Department of Banking. The Bank’s executive offices and loan processing office are in Jenkintown, Pennsylvania, with eleven other branches and six limited service facilities located in nearby Montgomery, Bucks and Delaware County neighborhoods. The Bank is principally engaged in the business of accepting customer deposits and investing these funds in loans, primarily residential mortgages.
We had net income of $7.1 million for the year ended December 31, 2007, representing an increase of $264,000 or 3.9% over net income of $6.8 million for the year ended December 31, 2006. Diluted earnings per share increased to $0.30 for 2007 from $0.28 for 2006. Earnings per share for periods prior to the second quarter of 2007 have been adjusted to reflect the impact of the second-step conversion and reorganization of the Company, which occurred on June 27, 2007. Our net interest income improved by $3.2 million or 14.2% to $25.7 million for 2007 from $22.6 million for 2006. The improvement was primarily a result of an increase in the average balances of our loan portfolio and our other interest-earning assets. This increase was partially offset by an increase in the average balance of, and average rate paid on, deposits. Our net interest margin improved to 2.73% for 2007 from 2.68% for 2006. Our non-interest income improved $301,000 or 10.5% to $3.2 million for 2007 from $2.9 million for 2006. Our non-interest expense also increased, growing $2.9 million or 18.7% to $18.7 million for 2006 from $15.7 million for 2006. Our total assets increased $154.5 million, or 16.7%, to $1.1 billion at December 31, 2007 compared to $925.2 million at December 31, 2006. The increase in total assets was due primarily to $134.7 million in net proceeds received from the Company’s second-step conversion and stock offering completed on June 27, 2007.
Critical Accounting Policies, Judgments and Estimates-In reviewing and understanding financial information for Abington 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 2 of the notes to our consolidated financial statements. The accounting and financial reporting policies of Abington Bancorp, Inc. conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The preparation of the Company’s consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Management evaluates these estimates and assumptions on an ongoing basis including those related to the allowance for loan losses, other-than-temporary impairment of securities, 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 basis 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 increased by charges to income through the provision for loan losses and decreased by charge-offs (net of recoveries). The allowance is maintained at a level that management considers adequate to provide for losses based upon evaluation of the known and inherent risks in the loan portfolio. Management’s periodic evaluation of the adequacy of the allowance is based on the Company’s past loan loss experience, the volume and composition of lending conducted by the Company, adverse situations that may affect a borrower’s ability to repay, the estimated value of any underlying collateral, current economic conditions and other factors affecting the known and inherent losses in the portfolio. This evaluation is inherently subjective as it requires material estimates including, among others, the amount and timing of expected future cash flows on impacted loans, exposure at default, value of collateral, and estimated losses on our commercial and residential loan portfolios. All of these estimates may be susceptible to significant change.
The allowance consists of specific allowances for impaired loans, a general allowance on all classified loans which are not impaired and a general allowance on the remainder of the portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.
We establish an allowance on certain impaired loans for the amount by which the discounted cash flows, observable market price or fair value of collateral, if the loan is collateral dependent, is lower than the carrying value of the loan. 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.
We establish a general valuation allowance on classified loans which are not impaired. We segregate these loans by category and assign allowance percentages to each category based on inherent losses associated with each type of lending and consideration that these loans, in the aggregate, represent an above-average credit risk and that more of these loans will prove to be uncollectible compared to loans in the general portfolio. The categories used by the Company include “doubtful,” “substandard” and “special mention.” Classification of a loan within such categories is based on identified weaknesses that increase the credit risk of loss on the loan.
We establish a general allowance on non-classified loans to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem loans. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on our historical loss experience, delinquency trends, and management’s evaluation of the collectibility of the loan portfolio.
The allowance is adjusted for significant factors that, in management’s judgment, affect the collectibility of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary lending areas, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, loss experience in particular segments of the portfolio, duration of the current business cycle, and bank regulatory examination results. The applied loss factors are reevaluated each reporting period to ensure their relevance in the current economic environment.
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 losses 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 or 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.
Other-Than-Temporary Impairment of Securities-Securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline and the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for an anticipated recovery in the fair value. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.
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 and our forecast of future taxable income. In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.
Recent Accounting Pronouncements-In September 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) in Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 applies to life insurance arrangements that provide an employee with a specified benefit that is not limited to the employee’s active service period, including certain bank-owned life insurance (“BOLI”) policies. EITF 06-4 requires an employer to recognize a liability and related compensation costs for future benefits that extend to postretirement periods. EITF 06-4 is effective for fiscal years beginning after December 15, 2007, with earlier application permitted. During 2007, the Company amended its BOLI policies to increase the benefit paid to employees during their period of employment, but to discontinue any postretirement benefits. As a result of this amendment to our BOLI policies, the adoption of this consensus is not expected to have any effect on our consolidated financial position or results of operations.
In September 2006, the FASB ratified the consensus reached by the EITF in Issue 06-5, Accounting for Purchases of Life Insurance - Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance. Technical Bulletin No. 85-4 states that an entity should report as an asset in the statement of financial position the amount that could be realized under the insurance contract. EITF 06-5 clarifies certain factors that should be considered in the determination of the amount that could be realized. EITF 06-5 is effective for fiscal years beginning after December 15, 2006, with earlier application permitted under certain circumstances. The Company adopted this consensus as of January 1, 2007. The adoption did not have a material effect on the Company’s financial position or results of operations.
In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. FASB Statement No. 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. In February 2008, the FASB issued FASB Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157, that permits a one-year deferral in applying the measurement provisions of Statement No. 157 to non-financial assets and non-financial liabilities (non-financial items) that are not recognized or disclosed at fair value in an entity’s financial statements on a recurring basis (at least annually). Therefore, if the change in fair value of a non-financial item is not required to be recognized or disclosed in the financial statements on an annual basis or more frequently, the effective date of application of Statement 157 to that item is deferred until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The Company is continuing to evaluate the impact of this statement, but does not expect that the guidance will have any effect on our consolidated financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No.157. We elected not to early adopt the provisions of this statement. We adopted this statement as of January 1, 2008, however, we have not elected to measure any assets or liabilities at fair value under the provisions of this statement. The adoption of this statement did not have any effect on the Company’s financial position or results of operations.
In March 2007, the FASB ratified EITF Issue No. 06-10 Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements. EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. The Company adopted this consensus as of January 1, 2007. The adoption did not have a material effect on the Company’s financial position or results of operations.
In June 2007, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. EITF 06-11 states that an entity should recognize a realized tax benefit associated with dividends on nonvested equity shares, nonvested equity share units and outstanding equity share options charged to retained earnings as an increase in additional paid in capital. The amount recognized in additional paid in capital should be included in the pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards. EITF 06-11 should be applied prospectively to income tax benefits of dividends on equity-classified share-based payment awards that are declared in fiscal years beginning after December 15, 2007. The Company is currently evaluating the impact of EITF 06-11, but does not expect that the guidance will have a material effect on our consolidated financial position or results of operations.
In November 2007, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin (“SAB”) No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings. SAB No. 109 expresses the views of the staff regarding written loan commitments that are accounted for at fair value through earnings under generally accepted accounting principles. To make the staff's views consistent with current authoritative accounting guidance, SAB 109 revises and rescinds portions of SAB No. 105, Application of Accounting Principles to Loan Commitments. Specifically, SAB 109 revises the SEC staff's views on incorporating expected net future cash flows related to loan servicing activities in the fair value measurement of a written loan commitment. SAB 109 retains the staff's views on incorporating expected net future cash flows related to internally-developed intangible assets in the fair value measurement of a written loan commitment. The staff expects registrants to apply the views in Question 1 of SAB 109 on a prospective basis to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The Company adopted this statement as of January 1, 2008. The adoption did not have a material effect on the Company’s financial position or results of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations. This statement establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. The Company is continuing to evaluate the impact of this statement, but does not expect that the guidance will have a material effect on our consolidated financial position or results of operations.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51. This statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. The Company is continuing to evaluate the impact of this statement, but does not expect that the guidance will have a material effect on our consolidated financial position or results of operations.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2007 AND DECEMBER 31, 2006
Our total assets increased $154.5 million, or 16.7%, to $1.1 billion at December 31, 2007 compared to $925.2 million at December 31, 2006. The increase in total assets was due primarily to $134.7 million in net proceeds received from the Company’s second-step conversion and stock offering completed on June 27, 2007. Our cash and cash equivalents increased $23.5 million to $68.1 million at December 31, 2007 from $44.6 million at December 31, 2006, primarily due to an increase in our interest-bearing deposits in other banks. Additionally, our total investment and mortgage-backed securities increased by an aggregate of $31.1 million as purchases of $99.7 million and unrealized gains on available for sale securities of $3.5 million exceeded the aggregate amount of calls, maturities and repayments of $71.9 million during 2007. Our net loans receivable increased $77.0 million or 12.7% during 2007. The largest loan growth occurred in one- to four-family residential loans, which increased $48.4 million or 12.9%, construction loans, which increased $33.7 million or 25.0%, and commercial business loans, which increased $18.0 million or 157.3%. Consumer non-real estate loans also increased $3.5 million or 79.9%. These increases were partially offset by a $15.3 million decrease in multi-family residential and commercial real estate loans and an $862,000 decrease in home equity lines of credit. Also contributing to the overall increase in assets during 2007 was the purchase of $20.0 million of additional BOLI during the third quarter, which increased our total BOLI to $37.3 million at December 31, 2007.
Our total deposits increased $22.6 million or 3.9% to $609.6 million at December 31, 2007 compared to $587.0 million at December 31, 2006. The increase was due primarily to growth in certificate accounts of $25.7 million. Increases in savings and money market accounts of $2.0 million and interest-bearing checking accounts of $3.1 million during 2007 were offset by a decrease of $8.2 million in non-interest-bearing checking accounts. Advances from the Federal Home Loan Bank decreased $6.7 million or 3.4% to $189.6 million at December 31, 2007 from $196.3 million at December 31, 2006.
Our stockholders’ equity increased $135.8 million to $249.9 million at December 31, 2007 compared to $114.1 million at December 31, 2006. The increase was due primarily to the $134.7 million in net proceeds received from the Company’s second-step conversion and stock offering, which occurred in June 2007. The Company sold approximately 14.0 million shares of Common Stock in its subscription, community and syndicated community offerings and issued approximately 10.5 million additional shares of Common Stock in exchange for the previously outstanding shares of Abington Community Bancorp, Inc., the Bank’s former “mid-tier” holding company. The conversion and reorganization included the cancellation of the approximately 582,000 shares of treasury stock of Abington Community Bancorp with a cost basis of $8.3 million. A portion of the offering proceeds were used to make a loan to our ESOP, which purchased approximately 1.0 million additional shares of the Company’s Common Stock for an aggregate of $10.4 million. Our retained earnings increased $3.1 million during 2007 as our net income of $7.1 million was partially offset by a reduction of $4.0 million resulting from the payment of our quarterly dividends. Our accumulated other comprehensive loss improved by $2.4 million due primarily to unrealized gains on available for sale securities.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funds are from deposits, amortization of loans, loan prepayments and pay-offs, cash flows from mortgage-backed securities and other investments, and other funds provided from operations. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing investment securities are relatively predictable sources of funds, deposit flows and loan prepayments can be greatly influenced by general interest rates, economic conditions and competition. We also maintain excess funds in short-term, interest-bearing assets that provide additional liquidity. At December 31, 2007, our cash and cash equivalents amounted to $68.1 million. In addition, at that date we had $15.5 million in investment securities scheduled to mature within the next 12 months. Our available for sale investment and mortgage-backed securities amounted to an aggregate of $192.9 million at December 31, 2007.
We use our liquidity to fund existing and future loan commitments, to fund maturing certificates of deposit and demand deposit withdrawals, to invest in other interest-earning assets, and to meet operating expenses. At December 31, 2007, we had certificates of deposit maturing within the next 12 months of $331.5 million. Based upon historical experience, we anticipate that a significant portion of the maturing certificates of deposit will be redeposited with us.
In addition to cash flow from loans and securities as well as from sales of available for sale securities, we have significant borrowing capacity available to fund liquidity needs. We have increased our utilization of borrowings in recent years as a cost efficient addition to deposits as a source of funds. Our borrowings consist primarily of advances from the Federal Home Loan Bank of Pittsburgh, of which we are a member. Under terms of the collateral agreement with the Federal Home Loan Bank, we pledge substantially all of our residential mortgage loans and mortgage-backed securities as well as all of our stock in the Federal Home Loan Bank as collateral for such advances. For years ended December 31, 2007 and 2006, the average balance of our outstanding Federal Home Loan Bank (“FHLB”) advances was $183.4 million and $201.8 million, respectively. At December 31, 2007, we had $189.6 million in outstanding FHLB advances and we had $443.0 million in additional FHLB advances available to us.
Our stockholders’ equity increased $135.8 million to $249.9 million at December 31, 2007 compared to $114.1 million at December 31, 2006. The increase was due primarily to the $134.7 million in net proceeds received from our second-step conversion and stock offering. Half of these net proceeds, approximately $67.3 million, were invested in Abington Bank. These proceeds have been initially invested in short-term, liquid investments to earn a market rate of return. The net proceeds received by the Bank have further strengthened its capital position, which already exceeded all regulatory requirements (see table below). Our long-term plan continues to be to leverage our capital through retail deposit and loan growth. Specifically, we plan to use the net proceeds received by the Bank to fund new loans, to invest in mortgage-backed securities, to finance the expansion of our business activities, including developing new branch locations and for general corporate purposes. Towards this goal, we opened four new branches in 2007, and we have further plans to open an additional branch in Hatboro, Pennsylvania in the first half of 2008. Although these branches will require a period of time to generate sufficient revenues to offset their costs, our ongoing branch expansion is a key component of our long-term business strategy. A portion of the net proceeds from the offering retained by the Company have been used to make a loan to our ESOP to fund the purchase of 1,042,771 shares of the Company’s Common Stock at an aggregate cost of $10.4 million. The remaining net proceeds held by the Company have been deposited in the Bank. In the long term, these proceeds may be used to invest in securities, to pay dividends to shareholders, to repurchase shares of the Company’s common stock, subject to regulatory restrictions, and to finance the possible acquisition of financial institutions or branch offices or other businesses that are related to banking. Although we currently have no plans, understandings or agreements with respect to any specific acquisitions, we are constantly considering potential opportunities to increase long-term shareholder value.
The following table summarizes regulatory capital ratios for the Company and the Bank as of the dates indicated and compares them to current regulatory requirements. As a savings and loan holding company, the Company is not subject to any regulatory capital requirements.
DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument includes futures, forwards, interest rate swaps, option contracts, and other financial instruments with similar characteristics. On occasion during the three years ended December 31, 2007, 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 used interest rate swap agreements to hedge interest rate risk resulting from our portfolio of interest-earning loans and interest-bearing deposit liabilities. We do not hold any derivative financial instruments for trading purposes.
At December 31, 2007 and 2006, the Company was not party to any cap or swap agreements. The Company was previously party to two swap agreements with terms expiring in June 2005 and December 2005, respectively.
The swaps we held in 2005 did not qualify as hedges under SFAS No. 133. As such, the fair value of the interest rate swaps were reflected as a liability in the consolidated statements of financial condition when in existence with the offset recorded in loss on derivative instruments, net in the consolidated statements of income. Amounts paid or received under the cap or swap agreement were recognized in gain (loss) on derivative instruments, net in the Company’s consolidated statements of income during the period in which they accrued. During the year ended December 31, 2005, the Company received $13,000 from the contra parties under the agreements. In addition, the unrealized gain on derivatives recognized in gain (loss) on derivative instruments, net in the Company’s consolidated statement of income was $85,000 for the year ended December 31, 2005. No interest was received from or paid to the contra party during, and no unrealized gains or losses were recognized for, the years ended December 31, 2007 and 2006.
SHARE-BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R (revised 2004), Share-Based Payment, which revises SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board (“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 the 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 were adopted by the Company as of July 1, 2005.
At December 31, 2007, the Company has two stock-based compensation plans, the 2005 Recognition and Retention Plan and the 2005 Stock Option Plan. Share awards were first issued under these plans in July 2005. In January 2008, shareholders of the Company approved the 2007 Recognition and Retention Plan and the 2007 Stock Option Plan.
The estimated fair value of options granted during 2007, 2006 and 2005, was $2.80, $2.69 and $1.80 per share, respectively. The fair value was estimated on the date of grant in accordance with SFAS No. 123R using the Black-Scholes Single Option Pricing Model with the following weighted average assumptions used. The fair value has been adjusted for the exchange ratio as a result of our second-step conversion:
The dividend yield was calculated based on the dividend amount and stock price existing at the grant date taking into consideration expected increases in the dividend and stock price over the lives of the options. The actual dividend yield may differ from this assumption. The risk-free interest rate used was based on the rates of treasury securities with maturities equal to the expected lives of the options.
As these were the first option awards provided to employees and directors of the Company, management made certain assumptions regarding the exercise behavior of recipients without the use of any prior exercise behavior as a basis. Assumptions of exercise behavior were made on an individual basis for directors and executive officers and general assumptions were made for the remainder of employees. In making these assumptions, management considered the age and financial status of recipients in addition to other qualitative factors.
For our initial stock option awards granted in July and December 2005, it was determined that the historical volatility of our stock price would not provide a reliable basis for determining the expected future volatility of our stock price, due to the relatively short period of time that the Company’s Common Stock had been outstanding to the public. Accordingly, management determined that the volatility used in the option pricing model at that time should be based on the volatilities of comparable companies. Management engaged a third party to assist in performing the task of selecting comparable companies and determining the volatility of their stock. The volatility used by the Company was based on the average historical volatilities of these comparable companies. For our stock options awarded in November 2006 and August 2007, a more extensive stock price history was available. Consequently, for these awards it was determined that the historical volatility would be the most reliable estimate of future stock volatility.
During the years ended December 31, 2007, 2006 and 2005, approximately $405,000, $370,000 and $181,000, respectively, was recognized in compensation expense for the 2005 Option Plan. During the years ended December 31, 2007, 2006 and 2005, a tax benefit of approximately $37,000, $36,000 and $18,000, respectively, was recognized from the plan. At December 31, 2007, approximately $1.2 million in additional compensation expense for awarded options remained unrecognized. The weighted average period over which this expense is scheduled to be recognized is approximately 2.8 years.
For a further discussion of these plans, see Note 14 in the Notes to the Consolidated Financial Statements in Item 8 herein.
COMMITMENTS AND OFF-BALANCE SHEET ARRANGEMENTS
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and the unused portions of lines of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. Commitments to extend credit and lines of credit are not recorded as an asset or liability by us until the instrument is exercised. At December 31, 2007 and 2006, 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 loan agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the customer. The amount and type of collateral required varies, but may include accounts receivable, inventory, equipment, real estate and income-producing commercial properties. At December 31, 2007 and 2006, 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 $126.0 million and $118.1 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 financings 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 December 31, 2007 and December 31, 2006, the Bank had letters of credit outstanding of approximately $17.2 million and $16.3 million, respectively, of which $15.8 million and $14.8 million, respectively, were standby letters of credit. The uncollateralized portion of the letters of credit extended by the Bank was approximately $97,000 at both December 31, 2007 and 2006, all of which was for standby letters of credit in both years. The current amount of the liability for guarantees under letters of credit is not material as of December 31, 2007 and 2006.
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 Bank’s contingent liabilities are exposures to limited recourse arrangements with respect to the Bank’s sales of whole loans and participation interests. At December 31, 2007, such 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 tables summarize our outstanding commitments to originate loans and to advance additional amounts pursuant to outstanding letters of credit, lines of credit and under our construction loans at December 31, 2007.
The following tables summarize our contractual cash obligations at December 31, 2007.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
General. We had net income of $7.1 million for the year ended December 31, 2007, representing an increase of $264,000 or 3.9% over net income of $6.8 million for the year ended December 31, 2006. Diluted earnings per share increased to $0.30 for 2007 from $0.28 for 2006. Earnings per share for 2006 have been adjusted to reflect the impact of the second-step conversion and reorganization of the Company, which occurred on June 27, 2007. Our net interest income improved by $3.2 million or 14.2% to $25.7 million for 2007 from $22.6 million for 2006. The improvement was primarily a result of an increase in the average balances of our loan portfolio and our other interest-earning assets. This increase was partially offset by an increase in the average balance of, and average rate paid on, deposits. Our average interest rate spread for 2007 decreased to 1.94% from 2.13% for 2006, however, our average interest rate spread improved during the second half of 2007. Furthermore, our net interest margin improved to 2.73% for 2007 from 2.68% for 2006. Our non-interest income improved $301,000 or 10.5% to $3.2 million for 2007 from $2.9 million for 2006. Our non-interest expense also increased, growing $2.9 million or 18.7% to $18.7 million for 2006 from $15.7 million for 2006.
Interest Income. Interest income was $56.8 million for the year ended December 31, 2007, an increase of $7.0 million or 14.0% from $49.8 million of interest income for the year ended December 31, 2006. The increase in interest income in 2007 was primarily a result of the growth in the average balance of our interest-earning assets. The average balance of our interest-earning assets increased $103.4 million or 12.3% to $944.0 million for 2007 compared to $840.5 million for 2006. The most significant impact was due to increases in the average balances of loans receivable and other interest-earning assets. The average balance of our loan portfolio increased $75.6 million or 13.2% to $646.5 million for the year ended December 31, 2007 from $570.9 million for the year ended December 31, 2006. The average balance of our other interest-earning assets increased $35.3 million or 136.9% to $61.1 million for the year ended December 31, 2007 from $25.8 million for the year ended December 31, 2006, primarily as a result of an increase in our interest-bearing deposits in other banks. Additionally, the average balance of our investment securities increased $5.0 million or 5.0% for 2007 compared to 2006 and the average balance of our mortgage-backed securities decreased $12.5 million or 8.7% over the same period. The average yield on our total interest-earning assets increased nine basis points to 6.02% for 2007 compared to 5.93% for 2006.
Interest Expense. Interest expense increased $3.8 million or 13.9% to $31.1 million for the year ended December 31, 2007 compared to $27.3 million for the year ended December 31, 2006. The increase in interest expense for 2007 was primarily the result of an increase in interest expense on deposits, partially offset by a decrease in interest expense on advances from the FHLB. Interest expense on deposits increased $4.5 million or 26.9% to $21.3 million for the year ended December 31, 2007 from $16.8 million for the year ended December 31, 2006. During the year ended December 31, 2007 compared to the year ended December 31, 2006, our average deposit balance grew by $63.5 million or 12.8% primarily due to growth in higher-rate certificates of deposit. The average balance of our certificates of deposits increased $65.6 million or 19.3% to $405.3 million for 2007 from $339.7 million for 2006. The growth in certificates of deposits was a result of higher market rates of interest on certificates of deposit relative to other deposit products and other investments in the current interest rate environment. The average rate we paid on our certificates of deposits increased 33 basis points to 4.93% for 2007 from 4.60% for 2006, and the average rate we paid on our total deposits increased 42 basis points to 3.81% for 2007 from 3.39% for 2006. During the year ended December 31, 2007 compared to the year ended December 31, 2006, our interest expense on advances from the FHLB decreased $752,000 or 7.8%, primarily due to an $18.4 million decrease in the average balance of those borrowings.
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 earned from average interest-earning assets and the resulting average yields, as well as the interest expense incurred on average interest-bearing liabilities and the resulting average rates, and the average interest rate spread and 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.
___________________________
(1)
Investment securities for the 2007 period include 71 tax-exempt municipal bonds with an aggregate average balance of $21.4 million and an average yield of 4.2%. Investment securities for the 2006 period include 47 tax-exempt municipal bonds with an aggregate average balance of $20.4 million and an average yield of 4.2%. The tax-exempt income from such securities has not been calculated on a tax equivalent basis.
(2)
Includes non-accrual loans during the respective periods. Calculated net of deferred fees and discounts, loans in process and allowance for loan losses. The impact of loan fee income has an immaterial effect on this analysis.
(3)
Equals net interest income divided by average interest-earning assets.
Rate/Volume Analysis. The following table shows the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities affected our interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate, which is the change in rate multiplied by prior year volume, and (2) changes in volume, which is the change in volume multiplied by prior year rate. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.
_______________
(1)
Investment securities for the 2007 period include 71 tax-exempt municipal bonds with an aggregate average balance of $21.4 million and an average yield of 4.2%. Investment securities for the 2006 period include 47 tax-exempt municipal bonds with an aggregate average balance of $20.4 million and an average yield of 4.2%. The tax-exempt income from such securities has not been calculated on a tax equivalent basis.
Provision for Loan Losses. We made a $457,000 provision for loan losses for the year ended December 31, 2007 compared to a provision of $186,000 for the year ended December 31, 2006. The provision for loan losses is charged to expense as necessary to bring our allowance for loan losses to a sufficient level to cover known and inherent losses in the loan portfolio. Our loan portfolio at December 31, 2007 included an aggregate of $1.6 million of non-performing loans, compared to $2.6 million of non-performing loans at December 31, 2006. During 2007, we charged-off approximately $197,000 through the allowance for loan losses in conjunction with foreclosures on the underlying collateral properties for one construction loan and two commercial real estate loans with an aggregate balance of $1.8 million. We also charged-off an aggregate of $79,000 in consumer loans in the year ended December 31, 2007. Total loan charge-offs were $276,000 in 2007 compared to $56,000 in 2006. At December 31, 2007, non-performing loans amounted to 0.23% of loans receivable and our allowance for loan losses amounted to 116.8% of non-performing loans. At December 31, 2006, non-performing loans of approximately $2.3 million amounted to 0.42% of loans receivable and our allowance for loan losses amounted to 62.7% of non-performing loans.
Non-interest Income. Our total non-interest income amounted to $3.2 million for the year ended December 31, 2007 compared to $2.9 million for the year ended December 31, 2006. The increase of $301,000 or 10.5% resulted from a $429,000 increase in income on bank owned life insurance (“BOLI”) that was partially offset by an $86,000 decrease in service charge income and a $39,000 decrease in other non-interest income. The increase in income on BOLI for 2007 when compared to 2006 resulted primarily from the purchase of $20.0 million of additional BOLI during the third quarter of 2007. Our BOLI is expected to continue to generate non-interest income going forward and is intended to fund various employee benefit programs of the Company. The decrease in service charge income in 2007 compared to 2006 resulted primarily from a $141,000 decrease in overdraft fees, partially offset by a $68,000 increase in debit card income. The decrease in other non-interest income for the year ended December 31, 2007 compared to the year ended December 31, 2006 resulted primarily from a $36,000 decrease in appraisal fee income.
Non-interest Expense. Our total non-interest expense for the year ended December 31, 2007 amounted to $18.7 million, representing an increase of $2.9 million or 18.7% from the year ended December 31, 2006. The largest increases in non-interest expense were in salaries and employee benefits, occupancy, professional services and other non-interest expense. Salaries and employee benefits expense increased $1.4 million or 15.9% for 2007 compared to 2006 due primarily to growth in the total number of employees, normal merit increases in salaries, and higher health and insurance benefit costs. We anticipate additional increases in salaries and employee benefits in 2008 due to additional staffing needs, further merit increases in salary, and continued rising benefit costs. Also contributing to the increase in salaries and employee benefits expense in 2007 compared to 2006 was a $406,000 or 72.1% increase in the expense for our ESOP. This increase was due primarily to the commitment to release a full year’s allocation of additional shares of Company Stock acquired by our ESOP in conjunction with the second-step conversion and reorganization completed in June 2007. The 2008 expense for our ESOP, which is based on the market price of our stock, fluctuates as the market price of our stock fluctuates, but should otherwise be consistent with the 2007 expense. An additional increase in salaries and employee benefits expense is expected in 2008 as a result of our 2007 Stock Option Plan and 2007 Recognition and Retention Plan that were approved by shareholders in January 2008. Occupancy expense increased by $453,000 or 29.5% for 2007 compared to 2006. The increase primarily was the result of our new branches in Lansdale, Chalfont, Whitemarsh and Springhouse, Pennsylvania, all of which opened during 2007. We do not expect to have a similar magnitude of increase in occupancy expense in 2008, although we do expect to open an additional branch in Hatboro, Pennsylvania in the first half of 2008. Our professional services expense increased $447,000 over the same period due primarily to increased legal and audit expenses. These expenses are not expected to increase significantly in 2008, but could rise in the event of unanticipated legal or accounting issues that result from our operations. Our other non-interest expenses increased by $254,000 or 13.0% year-over-year due largely to increases in expenses for office supplies, copying, and postage as a result of our new branch offices. These expenses are expected to increase again in 2008 as our new offices will be operating for the entire year.
Income Tax Expense. Income tax expense for the year ended December 31, 2007 amounted to $2.7 million compared to $2.7 million for the year ended December 31, 2006. Our effective tax rate improved to 27.8% for the year ended December 31, 2007 from 28.4% for the year ended December 31, 2006. The improvement resulted primarily from an increase in our tax-exempt income from municipal securities and BOLI as a percent of our total pretax income.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
General. We had net income of $6.8 million for the year ended December 31, 2006, representing an increase of $500,000 or 7.9% over net income of $6.3 million for the year ended December 31, 2005. Diluted earnings per share increased to $0.28 for 2006 from $0.26 for 2005. Earnings per share for both periods have been adjusted to reflect the impact of the second-step conversion and reorganization of the Company, which occurred on June 27, 2007. Our net interest income improved by $1.5 million or 7.3% to $22.6 million for 2006 from $21.0 million for 2005. The improvement was primarily a result of an increase in the average balance of our loan portfolio combined with an increase in the average yield on those assets. This increase was partially offset by an increase in the average balance of and average rate paid on deposits. Our average interest rate spread and net interest margin for 2006 decreased to 2.13% and 2.68%, respectively, from 2.27% and 2.78%, respectively, for 2005. Our non-interest income improved $78,000 or 2.8% to $2.9 million for 2006 from $2.8 million for 2005. Our non-interest expense also increased, growing $771,000 or 5.1% to $15.7 million for 2006 from $15.0 million for 2005.
Interest Income. Interest income was $49.8 million for the year ended December 31, 2006, an increase of $9.8 million or 24.5% from $40.0 million of interest income for the year ended December 31, 2005. The average balance of our interest-earning assets increased $85.8 million or 11.4% to $840.5 million for 2006 compared to $754.7 million for 2005. The average yield on our interest-earning assets increased 63 basis points to 5.93% for 2006 compared to 5.30% for 2005. The increase in interest income in 2006 was primarily a result of growth in the average balance of our loan portfolio. The average balance of our loan portfolio increased $101.8 million or 21.7% to $570.9 million for the year ended December 31, 2006 from $469.1 million for the year ended December 31, 2005. Additionally, the average yield on our loan portfolio increased 53 basis points to 6.77% for 2006 from 6.24% for 2005. The asset growth has been a result of the Company’s strategic plan to leverage our capital through loan growth. The growth of the loan portfolio was partially offset by a $22.6 million or 13.6% decrease in the average balance of our mortgage-backed securities to $143.7 million for 2006 from $166.3 million for 2005.
Interest Expense. Interest expense increased $8.3 million or 43.5% to $27.3 million for the year ended December 31, 2006 compared to $19.0 million for the year ended December 31, 2005. The increase in interest expense for 2006 was primarily the result of increases in the average balance of, and average rate paid on, deposits. During the year ended December 31, 2006 compared to the year ended December 31, 2005, our average deposit balance grew by $80.1 million or 19.3%, primarily due to growth in higher-rate certificates of deposit. The average balance of our certificates of deposit increased $102.8 million or 43.4% to $339.7 million for 2006 from $237.0 million for 2005. The growth in certificates of deposit was a result of higher market rates of interest on certificates of deposit relative to other deposit products and other investments in the current interest rate environment. The average rate we paid on our certificate of deposits increased 106 basis points to 4.60% for 2006 from 3.54% for 2005. As a result of the increase in our certificates of deposit as a proportion of our total deposits, as well as the rising interest rate environment, the average rate we paid on all of our deposits increased 101 basis points to 3.39% for 2006 from 2.38% for 2005. Also contributing to the increase in interest expense in 2006 compared to 2005 was a $9.6 million or 5.6% increase in the average balance of our FHLB advances to $201.8 million for 2006 compared to $192.2 million for 2005. The average rate on our FHLB advances increased 27 basis points to 4.78% for 2006 from 4.51% for 2005.
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 earned from average interest-earning assets and the resulting average yields, as well as the interest expense incurred on average interest-bearing liabilities and the resulting average rates and the average interest rate spread and 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.
___________________________
(1)
Investment securities for the 2006 period include 47 tax-exempt municipal bonds with an aggregate average balance of $20.4 million and an average yield of 4.2%. Investment securities for the 2005 period include 47 tax-exempt municipal bonds with an aggregate average balance of $16.3 million and an average yield of 4.2%. The tax-exempt income from such securities has not been calculated on a tax equivalent basis.
(2)
Includes non-accrual loans during the respective periods. Calculated net of deferred fees and discounts, loans in process and allowance for loan losses. The impact of loan fee income has an immaterial effect on this analysis.
(3)
Equals net interest income divided by average interest-earning assets.
Rate/Volume Analysis. The following table shows the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities affected our interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate, which is the change in rate multiplied by prior year volume, and (2) changes in volume, which is the change in volume multiplied by prior year rate. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.
_______________
(1)
Investment securities for the 2006 period include 47 tax-exempt municipal bonds with an aggregate average balance of $20.4 million and an average yield of 4.2%. Investment securities for the 2005 period include 47 tax-exempt municipal bonds with an aggregate average balance of $16.3 million and an average yield of 4.2%. The tax-exempt income from such securities has not been calculated on a tax equivalent basis.
Provision for Loan Losses. We made a $186,000 provision for loan losses for the year ended December 31, 2006 compared to a provision of $25,000 for the year ended December 31, 2005. During 2006, our analysis of our past loss experience combined with consideration of the inherent losses associated with certain types of lending identified the need to adjust the allowance percentages assigned to certain loan categories. The shifts in the allowance percentages were considered appropriate based upon a review of the collateral generally obtained for those types of loans, the then current real estate trends affecting such collateral and the impact of the then current economic environment on different borrowers’ financial performance and ability to repay. These factors, in addition to the overall growth in the loan portfolio, impacted our analysis of the adequacy of our allowance for loan losses and result in the provision taken during 2006. At December 31, 2006, we held an aggregate of $2.3 million of loans to one borrower, consisting of construction and commercial real estate loans that were placed on non-accrual status in the fourth quarter and were determined to be impaired. The loans were placed on non-accrual status as certain loans had become over 90 days delinquent. For one of these loans, settlement was made in October 2007, when we acquired the underlying collateral property through foreclosure, as previously discussed. At December 31, 2006, non-performing loans amounted to 0.42% of loans receivable and our allowance for loan losses amounted to 62.69% of non-performing loans.
Non-interest Income. Our total non-interest income amounted to $2.9 million for the year ended December 31, 2006 compared to $2.8 million for year ended December 31, 2005, an increase of $78,000 or 2.8%. This increase was due in part to a $186,000 increase in income on BOLI. Additionally, non-interest income improved due to the fact that no impairment charge was recorded on our investment securities in 2006 whereas a $73,000 impairment charge on investment securities was recorded in 2005. The impaired securities were sold for a loss in the first quarter of 2006. The impairment charge taken during 2005 was the result of management’s periodic evaluations of its investment portfolio and the determination that the fair value of certain securities would not recover to their cost. The increases in income in bank owned life insurance and impairment charge on investment securities were partially offset by a $98,000 decrease in the gain on derivative instruments, net, as our final swap agreement expired in December 2005, as well as a $60,000 decrease in service charge income.
Non-interest Expense. Our total non-interest expense for the year ended December 31, 2006 amounted to $15.7 million, representing an increase of $771,000 or 5.1% from the year ended December 31, 2005. Decreases in occupancy expense and professional services expense were offset by increases in other expense categories. The largest increases in expense for 2006 compared to 2005 were in salaries and employee benefits expense, depreciation expense, data processing expense and other non-interest expense. The decrease in professional services expense of $224,000 for 2006 compared to 2005 was primarily the result of decreased audit fees. No such decrease is expected for 2007. Salaries and employee benefits expense increased $662,000 or 8.3% for the year ended December 31, 2006 compared to the year ended December 31, 2005. This increase was primarily due to additional expenses of $379,000 in the aggregate relating to the Company’s 2005 Stock Option Plan (“SOP”) and 2005 Recognition and Retention Plan (“RRP”), both of which began in the third quarter of 2005. The remainder of the increase in salaries and employee benefits expense was primarily due to growth in the total number of employees from 134 total employees at December 31, 2005 to 148 total employees at December 31, 2006, primarily due to the opening of additional branch offices. In addition, salaries and employee benefits expense increased due to normal merit increases in salaries, higher health and insurance benefit costs, and an increase in the expense for our ESOP, partially offset by a decrease in the total year-end bonuses paid. Depreciation expense for 2006 compared to 2005 increased $152,000 or 29.3%. The increase for the full year was primarily due to our new branch office facilities. Data processing expense for 2006 compared to 2005 increased $79,000 or 6.5%, primarily due to the increase in our deposit and loan accounts and transactions and our additional branch offices. Additional expenses of approximately $158,000 were recognized in other non-interest expense for SOP and RRP awards to directors in 2006, but were somewhat offset by decreases in various other categories of other non-interest expense.
Income Tax Expense. Income tax expense for the year ended December 31, 2006 amounted to $2.7 million compared to $2.5 million for the year ended December 31, 2005. The fluctuation in income tax expense from year to year is primarily the result of an increase in our pre-tax income. Our effective tax rate improved slightly to 28.4% for the year ended December 31, 2006 from 28.5% for the year ended December 31, 2005.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Asset/Liability Management and Market Risk. Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from the interest rate risk which is inherent in our lending and deposit taking activities. To that end, management actively monitors and manages interest rate risk exposure. In addition to market risk, our primary risk is credit risk on our loan portfolio. We attempt to manage credit risk through our loan underwriting and oversight policies.
The principal objective of our interest rate risk management function is to evaluate the interest rate risk embedded in certain balance sheet accounts, determine the level of risk appropriate given our business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the risk consistent with approved guidelines. We seek to manage our exposure to risks from changes in interest rates while at the same time trying to improve our net interest spread. We monitor interest rate risk as such risk relates to our operating strategies. We have established an Asset/Liability Committee at Abington Bank, which is comprised of our President and Chief Executive Officer, three Senior Vice Presidents and two Vice Presidents of Lending, and which is responsible for reviewing our asset/liability policies and interest rate risk position. The Asset/Liability Committee meets on a regular basis. The extent of the movement of interest rates is an uncertainty that could have a negative impact on future earnings.
In recent years, we primarily have utilized the following strategies in our efforts to manage interest rate risk:
·
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;
·
we have attempted to match fund a portion of our securities portfolio with borrowings having similar expected lives;
·
we have attempted, where possible, to extend the maturities of our deposits and borrowings; and
·
we have invested in securities with relatively short anticipated lives, generally three to five years, and increased our holding of liquid assets.
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 9.04% at December 31, 2007, compared to a negative 14.70% at December 31, 2006. We have become more liability sensitive in 2006 mainly as a result of increases in our short-term deposits, primarily short-term certificates of deposit. Partially for this reason, we continue to remain focused on maintaining and growing our base of core deposits, which are less interest-rate sensitive. Part of the reason that we determined several years ago to increase our originations of commercial real estate and multi-family residential real estate loans, construction loans, home equity lines and commercial business loans, all of which generally have shorter terms to maturity than single-family residential mortgage loans and are more likely to have floating or adjustable rates of interest, was, in part, to increase the amount of our interest rate sensitive assets in the one- to three-year time horizon. By increasing the amount of our interest rate sensitive assets in the one-to three-year time horizon, we felt that we better positioned ourselves to benefit from a rising interest rate environment because the average interest rates on our loans would increase as general market rates of interest were increasing.
The following table sets forth the amounts of our interest-earning assets and interest-bearing liabilities outstanding December 31, 2007, which we expect, based upon certain assumptions, to reprice or mature in each of the future time periods shown (the “GAP Table”). Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities at December 31, 2007, 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.
_____________________
(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.
Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates both on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to service their adjustable-rate loans may decrease in the event of an interest rate increase.
Net Portfolio Value and Net Interest Income Analysis. Our interest rate sensitivity also is monitored by management through the use of models which generate estimates of the change in its net portfolio value (“NPV”) and net interest income (“NII”) over a range of interest rate scenarios. NPV is the present value of expected cash flows from assets, liabilities, and off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario. The following table sets forth our NPV as of December 31, 2007 and reflects the changes to NPV as a result of immediate and sustained changes in interest rates as indicated.
In addition to modeling changes in NPV, we also analyze potential changes to NII for a twelve-month period under rising and falling interest rate scenarios. The following table shows our NII model as of December 31, 2007.
The above table indicates that as of December 31, 2007, in the event of an immediate and sustained 200 basis point increase in interest rates, Abington Bank’s net interest income for the 12 months ending December 31, 2008 would be expected to decrease by $1.6 million or 5.24% to $28.1 million.
As is the case with the GAP Table, certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV and NII require the making of certain assumptions which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the models presented assume that the composition of our interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the NPV measurements and net interest income models provide an indication of interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on net interest income and will differ from actual results.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Abington Bancorp, Inc. and subsidiaries
Jenkintown, Pennsylvania
We have audited the accompanying consolidated statements of financial condition of Abington Bancorp, Inc. and subsidiaries (the “Company”) as of December 31, 2007 and 2006 and the related consolidated statements of income, stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The consolidated financial statements for the year ended December 31, 2005 were audited by other auditors whose report, dated March 22, 2006, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 2007 and 2006 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Abington Bancorp, Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
As discussed in Notes 2 and 14 to the consolidated financial statements, the Company changed its method of accounting for its defined benefit pension plan in 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Abington Bancorp, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 10, 2008 expressed an unqualified opinion.
/s/ BEARD MILLER COMPANY LLP
Beard Miller Company LLP
Harrisburg, Pennsylvania
March 10,
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Abington Bancorp, Inc. and subsidiaries
Jenkintown, Pennsylvania
We have audited the accompanying consolidated statements of income, stockholders’ equity and cash flows of Abington Bancorp, Inc. (the “Company”) for the year ended December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of Abington Bancorp, Inc. for the year ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 22,
(March 10, 2008 as to the last paragraph of Note 19)
ABINGTON BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
1.
NATURE OF OPERATIONS
Abington Bancorp, Inc. (the “Company”) is a Pennsylvania corporation which was organized to be the stock holding company for Abington Savings Bank in connection with our second-step conversion and reorganization completed on June 27, 2007, discussed further below. Abington Savings Bank is a Pennsylvania-chartered, FDIC-insured savings bank, which conducts business under the name “Abington Bank” (the “Bank” or “Abington Bank”). As a result of the Bank’s election pursuant to Section 10(l) of the Home Owners’ Loan Act, the Company is a savings and loan holding company regulated by the Office of Thrift Supervision (the “OTS”). 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 subsidiary, ASB Investment Co. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
The Bank’s executive offices are in Jenkintown, Pennsylvania, with eleven other branches and six limited service facilities located in Montgomery, Bucks and Delaware Counties, Pennsylvania. 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 wholly owned subsidiaries, and Abington Corp. are currently inactive subsidiaries.
Abington Community Bancorp, Inc., a Pennsylvania corporation, was the former mid-tier holding company for the Bank. Abington Community Bancorp 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, was the mutual holding company parent of Abington Community Bancorp, Inc. and originally owned 55% of Abington Community Bancorp’s outstanding stock. As a result of treasury stock purchases, this stake increased to approximately 57% of Abington Community Bancorp’s outstanding stock at the time of the Bank’s second-step conversion.
On June 27, 2007, a second-step conversion was completed after which Abington Mutual Holding Company and Abington Community Bancorp, Inc. ceased to exist and Abington Bancorp, Inc. was organized as the new stock-form holding company for the Bank and successor to Abington Community Bancorp. A total of 13,965,600 new shares of the Company were sold at $10 per share in the subscription, community and syndicated community offerings through which the Company received proceeds of approximately $134.7 million, net of offering costs of approximately $5.0 million. As part of the conversion, each outstanding public share of Abington Community Bancorp, Inc. (that is, shares owned by stockholders other than Abington Mutual Holding Company) was exchanged for 1.6 shares of Company Common Stock. The exchange resulted in an additional 10,494,640 outstanding shares of common stock of the Company for a total of 24,460,240 outstanding shares as of the closing of the second-step conversion. Treasury stock held was cancelled. For further information on the Company’s second-step conversion see Note 19 herein.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation-The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated.
Use of Estimates in the Preparation of Financial Statements-The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. The Company’s most significant estimates are the allowance for loan losses, the assessment of other-than-temporary impairment of investment and mortgage-backed securities and deferred income taxes.
Cash and Cash Equivalents-For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and interest-bearing deposits with banks, commercial paper and liquid money market funds with original maturities of three months or less.
Investment and Mortgage-Backed Securities-Debt and equity securities are classified and accounted for as follows:
Held to Maturity-Debt securities that management has the positive intent and ability to hold until maturity are classified as held to maturity and are carried at their remaining unpaid principal balances, net of unamortized premiums or unaccreted discounts. Premiums are amortized and discounts are accreted using the interest method over the estimated remaining term of the underlying security.
Available for Sale-Debt and equity securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, needs for liquidity, and changes in the availability of and in the yield of alternative investments, are classified as available for sale. These assets are carried at fair value. Fair value is determined using published quotes as of the close of business. Unrealized gains and losses are excluded from earnings and are reported net of tax as a separate component of stockholders’ equity until realized. Realized gains and losses on the sale of investment and mortgage-backed securities are reported in the consolidated statements of income and determined using the adjusted cost of the specific security sold.
Other-Than-Temporary Impairment of Securities-Securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline and the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for an anticipated recovery in the fair value. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized. No impairment charge was recognized during the years ended December 31, 2007 and 2006. During the year ended December 31, 2005, the Company recognized an impairment charge of approximately $73,000 to write-down the carrying values of two securities.
Allowance for Loan Losses-The allowance for loan losses is increased by charges to income through the provision for loan losses and decreased by charge-offs (net of recoveries). The allowance is maintained at a level that management considers adequate to provide for losses based upon evaluation of the known and inherent risks in the loan portfolio. Management’s periodic evaluation of the adequacy of the allowance is based on the Company’s past loan loss experience, the volume and composition of lending conducted by the Company, adverse situations that may affect a borrower’s ability to repay, the estimated value of any underlying collateral, current economic conditions and other factors affecting the known and inherent risk in the portfolio.
The allowance consists of specific allowances for impaired loans, a general allowance on all classified loans which are not impaired and a general allowance on the remainder of the portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio. The allowance on impaired loans is established for the amount by which the discounted cash flows, observable market price or fair value of collateral if the loan is collateral dependent is lower than the carrying value of the loan. The general valuation allowance on classified loans which are not impaired relates to loans that are classified as either doubtful, substandard or special mention. Such classifications are based on identified weaknesses that increase the credit risk of the loan. The general allowance on non-classified loans is established to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem loans. This allowance is based on historical loss experience adjusted for qualitative factors.
The Company measures impaired loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. Impairment losses are included in the provision for loan losses.
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 did 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. The Company did not hold any derivatives at December 31, 2007 or 2006.
Loans Held for Sale and Loans Sold-The Company originates mortgage loans held for investment and for sale. At origination, the mortgage loan is identified as either held for sale or for investment. Mortgage loans held for sale are carried at the lower of cost or forward committed contracts (which approximates market), determined on a net aggregate basis. The Company had no loans classified as held for sale at December 31, 2007 or 2006.
The Company assesses the retained interest in the servicing asset or liability associated with the sold loans based on the relative fair values. The servicing asset or liability is amortized in proportion to and over the period during which estimated net servicing income or net servicing loss, as appropriate, will be received. Assessment of the fair value of the retained interest is performed on a continual basis. At December 31, 2007 and 2006, mortgage servicing rights of $49,000 and $55,000, respectively, were included in other assets. No valuation allowance was deemed necessary for any of the periods presented.
Amortization of the servicing asset totaled $6,000, $6,000 and $11,000 for the years ended December 31, 2007, 2006 and 2005, respectively.
Real Estate Owned-Real estate properties acquired through foreclosure are initially recorded at the fair value of the property at the date of foreclosure, establishing a new cost basis. Losses arising from foreclosure transactions are charged against the allowance for loan losses. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of cost or fair value less estimated costs to sell. Net revenue and expenses from operations and additions to the valuation allowance are included in gain or loss on foreclosed real estate.
Property and Equipment-Property and equipment is recorded at cost. Depreciation is computed using the straight-line method over the expected useful lives of the related assets, which range from 5 years for software, computer equipment and automobiles to 45 years for buildings. The costs of maintenance and repairs are expensed as they are incurred, and renewals and betterments are capitalized.
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. In August 2007, the Company purchased an additional $20 million in bank owned life insurance. The Company is the beneficiary of these policies that insure the lives of certain officers of its subsidiaries. The Company has recognized the cash surrender value under the insurance policies as an asset in the consolidated statements of financial condition. Changes in the cash surrender value are recorded in non-interest income in the consolidated statements of income.
Other Borrowed Money-The Company enters into overnight repurchase agreements with commercial checking account customers. These agreements are treated as financings, and the obligations to repurchase securities sold are reflected as a liability in the consolidated statements of financial condition. Securities pledged as collateral under agreements to repurchase are reflected as assets in the consolidated statements of financial condition.
Loan Origination and Commitment Fees-The Company defers loan origination and commitment fees, net of certain direct loan origination costs. The balance is accreted into income as a yield adjustment over the life of the loan using the level-yield method.
Interest on Loans-The Company recognizes interest on loans on the accrual basis. Income recognition is generally discontinued on single-family residential mortgage loans when a loan becomes 120 days or more delinquent or on all other loans when a loan becomes 90 days or more delinquent. Any interest previously accrued is deducted from interest income. Such interest ultimately collected is credited to income when collection of principal and interest is no longer in doubt.
Income Taxes-Deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Interest and penalties incurred in relation to payment of income tax liabilities are recognized in the provision for income taxes in the income statement in the period in which they occur. No interest or penalties for income taxes were recognized during the years ended December 31, 2007, 2006 and 2005.
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes. This Interpretation requires an entity to analyze each tax position taken in its tax returns and determine the likelihood that that position will be realized. Only tax positions that are “more-likely-than-not” to be realized can be recognized in an entity’s financial statements. For tax positions that do not meet this recognition threshold, an entity will record an unrecognized tax benefit for the difference between the position taken on the tax return and the amount recognized in the financial statements. The Company adopted this Interpretation on January 1, 2007. The Company does not have any unrecognized tax benefits at December 31, 2007 or during the year ended December 31, 2007. No unrecognized tax benefits are expected to arise within the next twelve months.
Comprehensive Income-The Company presents as a component of comprehensive income the amounts from transactions and other events which currently are excluded from the consolidated statements of income and are recorded directly to stockholders’ equity. These amounts consist of unrealized holding gains (losses) on available for sale securities and unrecognized deferred costs of the Company’s defined benefit pension plan.
The components of other comprehensive income (loss) are as follows:
The components of accumulated other comprehensive loss are as follows:
Treasury Stock and Unallocated Common Stock-Stock held in treasury by the Company, including unallocated stock held by certain benefit plans, is accounted for using the cost method which treats stock held in treasury as a reduction to total stockholders’ equity.
Share-Based Compensation-The Company follows SFAS No. 123R (revised 2004) for share-based compensation. This Statement requires an entity to recognize the cost of employee services received in share-based payment transactions and measure the cost based on the 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 were adopted by the Company as of July 1, 2005.
At December 31, 2007, the Company has two stock-based compensation plans, the 2005 Recognition and Retention Plan and the 2005 Stock Option Plan. Share awards were first issued under these plans in July 2005. In January 2008, shareholders of the Company approved the 2007 Recognition and Retention Plan and the 2007 Stock Option Plan. These plans are more fully described in Note 14.
The Company also has an employee stock ownership plan (“ESOP”). This plan is more fully described in Note 14. Shares awarded under the ESOP are accounted for in accordance with AICPA Statement of Position (“SOP”) 93-6, Employers’ Accounting for Employee Stock Ownership Plans. As ESOP shares are committed to be released and allocated among participants, the Company recognizes compensation expense equal to the average market price of the shares over the period earned. For purposes of computing basic and diluted earnings per share, ESOP shares that have been committed to be released are considered outstanding. ESOP shares that have not been committed to be released are not considered outstanding. Dividends paid on unallocated shares are used to pay debt service.
Earnings per share-Earnings per share ("EPS") consists of two separate components, basic EPS and diluted EPS. Basic EPS is computed based on the weighted average number of shares of common stock outstanding for each period presented. Diluted EPS is calculated based on the weighted average number of shares of common stock outstanding plus dilutive common stock equivalents ("CSEs"). CSEs consist of shares that are assumed to have been purchased with the proceeds from the exercise of stock options, as well as unvested common stock awards. CSEs which are considered antidilutive are not included for the purposes of this calculation. For the years ended December 31, 2007 and 2006, there were no antidilutive CSEs. For the year ended December 31, 2005, there were 1,029,200 antidilutive CSEs, representing 100% of the outstanding options. Earnings per share and average common shares outstanding for the prior periods have been adjusted to reflect the impact of the second-step conversion and reorganization of the Company, which occurred on June 27, 2007. Earnings per share were calculated as follows:
Recent Accounting Pronouncements-In September 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) in Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 applies to life insurance arrangements that provide an employee with a specified benefit that is not limited to the employee’s active service period, including certain bank-owned life insurance (“BOLI”) policies. EITF 06-4 requires an employer to recognize a liability and related compensation costs for future benefits that extend to postretirement periods. EITF 06-4 is effective for fiscal years beginning after December 15, 2007, with earlier application permitted. During 2007, the Company amended its split dollar insurance agreements with employees to increase the benefits paid to those employees during their period of employment, but to discontinue any postretirement benefits. As a result of the amendments to those agreements, the adoption of this consensus is not expected to have any effect on our consolidated financial position or results of operations.
In September 2006, the FASB ratified the consensus reached by the EITF in Issue 06-5, Accounting for Purchases of Life Insurance - Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance. Technical Bulletin No. 85-4 states that an entity should report as an asset in the statement of financial position the amount that could be realized under the insurance contract. EITF 06-5 clarifies certain factors that should be considered in the determination of the amount that could be realized. EITF 06-5 is effective for fiscal years beginning after December 15, 2006, with earlier application permitted under certain circumstances. The Company adopted this consensus as of January 1, 2007. The adoption did not have a material effect on the Company’s financial position or results of operations.
In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. FASB Statement No. 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. In February 2008, the FASB issued FASB Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157, that permits a one-year deferral in applying the measurement provisions of Statement No. 157 to non-financial assets and non-financial liabilities (non-financial items) that are not recognized or disclosed at fair value in an entity’s financial statements on a recurring basis (at least annually). Therefore, if the change in fair value of a non-financial item is not required to be recognized or disclosed in the financial statements on an annual basis or more frequently, the effective date of application of Statement 157 to that item is deferred until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The Company is continuing to evaluate the impact of this statement, but does not expect that the guidance will have any effect on our consolidated financial position or results of operations.
In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R). This statement which amends SFAS No. 87 and SFAS No. 106 to require recognition of the overfunded or underfunded status of pension and other postretirement benefit plans on the balance sheet. Under SFAS No. 158, gains and losses, prior service costs and credits, and any remaining transition amounts under SFAS No. 87 and SFAS No. 106 that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects, until they are amortized as a component of net periodic cost. The measurement date - the date at which the benefit obligation and plan assets are measured - is required to be the company’s fiscal year end. SFAS No. 158 is effective for publicly-held companies for fiscal years ending after December 15, 2006, except for the measurement date provisions, which are effective for fiscal years ending after December 15, 2008. The Company adopted SFAS No. 158 as of December 31, 2006.
The Company maintains a nonqualified, unfunded, defined benefit pension plan for the Board of Directors and certain officers that is more fully described in Note 14. The incremental effect of applying SFAS No. 158 to this plan on individual line items in the consolidated statement of financial condition as of December 31, 2006 was as follows:
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No.157. We elected not to early adopt the provisions of this statement. We adopted this statement as of January 1, 2008, however, we have not elected to measure any assets or liabilities at fair value under the provisions of this statement. The adoption of this statement did not have any effect on the Company’s financial position or results of operations.
In March 2007, the FASB ratified EITF Issue No. 06-10 Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements. EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. The Company adopted this consensus as of January 1, 2007. The adoption did not have a material effect on the Company’s financial position or results of operations.
In June 2007, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. EITF 06-11 states that an entity should recognize a realized tax benefit associated with dividends on nonvested equity shares, nonvested equity share units and outstanding equity share options charged to retained earnings as an increase in additional paid in capital. The amount recognized in additional paid in capital should be included in the pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards. EITF 06-11 should be applied prospectively to income tax benefits of dividends on equity-classified share-based payment awards that are declared in fiscal years beginning after December 15, 2007. The Company is currently evaluating the impact of EITF 06-11, but does not expect that the guidance will have a material effect on our consolidated financial position or results of operations.
In November 2007, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin (“SAB”) No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings. SAB No. 109 expresses the views of the staff regarding written loan commitments that are accounted for at fair value through earnings under generally accepted accounting principles. To make the staff's views consistent with current authoritative accounting guidance, SAB 109 revises and rescinds portions of SAB No. 105, Application of Accounting Principles to Loan Commitments. Specifically, SAB 109 revises the SEC staff's views on incorporating expected net future cash flows related to loan servicing activities in the fair value measurement of a written loan commitment. SAB 109 retains the staff's views on incorporating expected net future cash flows related to internally-developed intangible assets in the fair value measurement of a written loan commitment. The staff expects registrants to apply the views in Question 1 of SAB 109 on a prospective basis to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The Company adopted this statement as of January 1, 2008. The adoption did not have a material effect on the Company’s financial position or results of operations
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations. This statement establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. The Company is continuing to evaluate the impact of this statement, but does not expect that the guidance will have a material effect on our consolidated financial position or results of operations.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51. This statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. The Company is continuing to evaluate the impact of this statement, but does not expect that the guidance will have a material effect on our consolidated financial position or results of operations.
Reclassifications-Certain items in the 2006 and 2005 consolidated financial statements have been reclassified to conform to the presentation in the 2007 consolidated financial statements. Such reclassifications did not have a material impact on the presentation of the overall financial statements.
3.
RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANKS
The Bank is required to maintain average balances on hand or with the Federal Reserve Bank. At December 31, 2007 and 2006, these reserve balances amounted to $8.7 million and $4.3 million, respectively.
4.
INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities are summarized as follows:
There were no sales of debt or equity securities during the years ended December 31, 2007 and 2005. During the year ended December 31, 2006 a gross loss of approximately $600 was recognized on the sale of certain available for sale equity securities. Proceeds from this sale were approximately $500,000.
No impairment charge was recognized during the years ended December 31, 2007 and 2006. During the year ended December 31, 2005, the Company recognized an impairment charge of approximately $73,000 to write-down the carrying values of two equity securities. The determination of impairment was made based on an analysis of all the quantitative and qualitative characteristics of the securities taken as whole, including the magnitude and duration of the decline in value and the nature of the investments.
Included in debt securities are structured notes with federal agencies. These structured notes consist of step-up bonds which provide the agency with the right, but not the obligation, to call the bonds on the step-up date. All municipal bonds included in debt securities are insured, bank-qualified municipal bonds.
The amortized cost and estimated fair value of debt securities by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
The table below sets forth investment securities which had unrealized loss positions as of December 31, 2007:
The table below sets forth investment securities which had unrealized loss positions as of December 31, 2006:
On a quarterly basis, management of the Company reviews the securities in its investment portfolio to identify any securities that might have an other-than-temporary impairment. At December 31, 2007, investment securities in a gross unrealized loss position for twelve months or longer consisted of 10 securities having an aggregate depreciation of 0.9% from the Company’s amortized cost basis. Investment securities in a gross unrealized loss position for less than twelve months at December 31, 2007, consisted of one security having a depreciation of 0.7% from the Company’s amortized cost basis. Management has concluded that the unrealized losses above are temporary in nature. They are not related to the underlying credit quality of the issuers, and (with the exception of equity securities) they are on securities that have contractual maturity dates. The principal and interest payments on our debt securities have been made as scheduled, and there is no evidence that the issuer will not continue to do so. The future principal payments will be sufficient to recover the current amortized cost of the securities. The unrealized losses above are primarily related to market interest rates. The current declines in market value are not significant, and management of the Company believes that these values will recover as market interest rates decline. The Company has the intent and ability to hold these investments for the time necessary to recover their cost.
5.
MORTGAGE-BACKED SECURITIES
The amortized cost and estimated fair value of mortgage-backed securities are summarized as follows:
There were no sales of mortgage-backed securities during the years ended December 31, 2007, 2006 and 2005.
No impairment charge was recognized on mortgage-backed securities during the years ended December 31, 2007, 2006 and 2005.
Our collateralized mortgage obligations (“CMOs”) are issued by the FNMA and the FHLMC as well as certain AAA rated private issuers. At December 31, 2007 and 2006, $12.4 million and $14.7 million of our CMOs were issued by private issuers.
The table below sets forth mortgage-backed securities which had unrealized loss positions as of December 31, 2007:
The table below sets forth mortgage-backed securities which had unrealized loss positions as of December 31, 2006:
On a quarterly basis, management of the Company reviews the securities in its investment portfolio to identify any securities that might have an other-than-temporary impairment. At December 31, 2007, mortgage-backed securities in a gross unrealized loss position for twelve months or longer consisted of 43 securities having an aggregate depreciation of 2.1% from the Company’s amortized cost basis. Mortgage-backed securities in a gross unrealized loss position for less than twelve months at December 31, 2007, consisted of 9 securities having an aggregate depreciation of 0.6% from the Company’s amortized cost basis. Management has concluded that the unrealized losses above are temporary in nature. There is no exposure to subprime loans in our mortgage-backed securities portfolio. The losses are not related to the underlying credit quality of the issuers, and they are on securities that have contractual maturity dates. The principal and interest payments on our mortgage-backed securities have been made as scheduled, and there is no evidence that the issuer will not continue to do so. The future principal payments will be sufficient to recover the current amortized cost of the securities. The unrealized losses above are primarily related to market interest rates. The current declines in market value are not significant, and management of the Company believes that these values will recover as market interest rates decline. The Company has the intent and ability to hold these investments for the time necessary to recover its cost.
6.
DERIVATIVE FINANCIAL INSTRUMENTS
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.
At December 31, 2007 and 2006, the Company was not party to any cap or swap agreements. The Company was previously party to two swap agreements with terms expiring in June 2005 and December 2005, respectively.
The swaps we held in 2005 did not qualify as hedges under SFAS No. 133. As such, the fair value of the interest rate swaps were reflected as a liability in the consolidated statements of financial condition when in existence with the offset recorded in loss on derivative instruments, net in the consolidated statements of income. Amounts paid or received under the cap or swap agreement were recognized in gain (loss) on derivative instruments, net in the Company’s consolidated statements of income during the period in which they accrued. During the year ended December 31, 2005, the Company received $13,000 from the contra parties under the agreements. In addition, the unrealized gain on derivatives recognized in gain (loss) on derivative instruments, net in the Company’s consolidated statement of income was $85,000 for the year ended December 31, 2005. No interest was received from or paid to the contra party during, and no unrealized gains or losses were recognized for, the years ended December 31, 2007 and 2006.
7.
LOANS RECEIVABLE-NET
Loans receivable consist of the following:
Our one- to four-family residential loans also include some loans to local businessmen for a commercial purpose, but which are secured by liens on the borrower’s residence.
The Bank has sold and is servicing for others loans in the amounts of approximately $12.2 million and $14.8 million at December 31, 2007 and 2006, respectively. These loan balances are excluded from the Company’s consolidated financial statements. At December 31, 2007 and 2006, mortgage servicing rights of $49,000 and $55,000, respectively, were included in other assets. No valuation allowance was deemed necessary for any of the periods presented.
Certain officers and directors have loans with the Bank. The aggregate dollar amount of these loans outstanding to related parties along with an analysis of the activity is summarized as follows:
The Bank grants loans primarily to customers in its local market area. The ultimate repayment of these loans is dependent to a certain degree on the local economy and real estate market.
Following is a summary of changes in the allowance for loan losses:
The provision for loan losses charged to expense is based upon past loan 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. As of December 31, 2007, 2006 and 2005, the recorded investment in loans that are considered to be impaired was as follows:
As a result of the Company’s measurement of impaired loans, no allowance for loan losses was established for the $1.4 million of total impaired loans at December 31, 2007. These loans represent four commercial real estate loans and one construction loan made to this borrower. Based on the appraised values of the properties collateralizing these loans, as well as additional collateral available, no reserve was considered necessary and no allowance for loan losses was established for these loans as a result of our measurement of impaired loans at December 31, 2007. In October and December 2007, respectively, one construction loan and two commercial real estate loans with an aggregate balance of $1.8 million that had previously been recognized as impaired were settled when we acquired the underlying collateral properties through foreclosure. These properties are classified as Real Estate Owned (“REO”) and are recorded at their fair value of $1.6 million on the December 31, 2007 balance sheet. A loss of approximately $197,000 was recognized through the allowance for loan losses in conjunction with the acquisitions. In December 2007, we also reached an agreement for the sale of the underlying collateral properties on two additional commercial real estate loans with an aggregate value of approximately $1.8 million that had also been previously recognized as impaired. The loans were not considered to be impaired at December 31, 2007. The payment from this sale, which was received in January 2008, included the full amount of the loans, as well as all past due interest and fees.
Non-accrual loans at December 31, 2007, 2006 and 2005 amounted to approximately $1.4 million, $2.3 million and $2.9 million, respectively. Commercial loans and commercial real estate loans are placed on non-accrual at the time the loan is 90 days delinquent unless the credit is well secured and in the process of collection. Commercial loans are charged off when the loan is deemed uncollectible. Residential real estate loans are typically placed on non-accrual only when the loan is 120 days delinquent and not well secured and in the process of collection. Other consumer loans are typically charged off at 90 days delinquent. In all cases, loans must be placed on non-accrual or charged off at an earlier date if collection of principal or interest is considered doubtful. Non-performing loans, which consist of non-accruing loans plus accruing loans 90 days or more past due, at December 31, 2007, 2006 and 2005 amounted to approximately $1.6 million, $2.6 million, and $2.9 million, respectively.
Interest payments on impaired loans and non-accrual 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 years ended December 31, 2007 and 2006, approximately $176,000 and $66,000 in interest income was recognized on non-accrual loans. For the years ended December 31, 2005, no interest income was recognized on non-accrual loans. Interest income foregone on non-accrual loans was $256,000, $68,000 and $20,000 for years ended December 31, 2007, 2006, and 2005, respectively.
8.
ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
9.
PROPERTY AND EQUIPMENT
Property and equipment is summarized by major classifications as follows:
Certain office facilities and equipment are leased under various operating leases. The leases range in terms from 1 year to 20 years, some of which include renewal options as well as specific provisions relating to rent increases. Rent expense on those lease agreements that contain incremental increases in rent is recognized on a straight-line basis over the life of the lease. Rental expense under operating leases was approximately $903,000, $604,000, and $833,000 for the years ended December 31, 2007, 2006, and 2005, respectively.
Future minimum annual rental payments required under non-cancelable operating leases are as follows:
10.
DEPOSITS
Deposits consist of the following major classifications:
Interest expense for each major classification of deposit account is as follows:
The weighted average rate paid on deposits at December 31, 2007 and 2006, was 3.07% and 3.43%, respectively. Deposits in amounts greater than $100,000 were approximately $246.5 million and $227.3 million at December 31, 2007 and 2006, respectively, of which approximately $198.9 million and $150.7 million were due in one year or less at December 31, 2007 and 2006, respectively. Deposit amounts in excess of $100,000 are generally not federally insured.
A summary of certificates by maturities is as follows:
11.
ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from Federal Home Loan Bank consist of the following:
The advances are collateralized by all of the Federal Home Loan Bank stock and substantially all qualifying first mortgage loans and mortgage-backed securities. The weighted average interest rate on FHLB advances was 4.82% and 4.65% at December 31, 2007 and 2006, respectively. The average balance outstanding was approximately $183.4 million and $201.8 million for the years ended December 31, 2007 and 2006 respectively. The maximum amount outstanding at any month-end was $198.7 million and $211.7 million for the years ended December 31, 2007 and 2006, respectively.
12.
OTHER BORROWED MONEY
During the years ended December 31, 2007 and 2006, the Bank entered into overnight repurchase agreements with commercial checking account customers. At December 31, 2007 and 2006, the amounts outstanding were $17.5 million and $17.8 million, respectively. Interest expense on customer repurchase agreements was $871,000, $838,000, and $462,000 for the years ended December 31, 2007, 2006 and 2005, respectively. Collateral for customer repurchase agreements was mortgage-backed securities. The market value of the collateral was approximately equal to the amounts outstanding. The weighted average interest rate on other borrowed money was 3.92% and 4.90% at December 31, 2007 and 2006, respectively. The average balance outstanding was approximately $20.2 million for the years ended December 31, 2007 and 2006, respectively. The maximum amount outstanding at any month-end was $25.9 million and $25.7 million for the years ended December 31, 2007 and 2006, respectively.
13.
INCOME TAXES
The income tax provision consists of the following:
The following table presents a reconciliation between the reported income tax expense and the income tax expense which would be computed by applying the normal federal income tax rate of 34% to income before income taxes:
Items that gave rise to significant portions of the deferred tax accounts are as follows:
The Bank uses the specific charge-off method for computing reserves for bad debts. The bad debt deduction allowable under this method is available to large banks with assets greater than $500 million. Generally, this method allows the Bank to deduct an annual addition to the reserve for bad debts equal to its net charge-offs. Retained earnings at December 31, 2007 and 2006 include approximately $3,250,000 representing bad debt deductions for which no deferred income tax has been provided. This amount represents the Bank’s bad debt reserve as of the base year and is not subject to recapture as long as the Bank continues to carry on the business of banking.
14.
PENSION AND PROFIT SHARING PLANS
Deferred Compensation Plans
The Company maintains an executive deferred compensation plan for selected executive officers under which the Board of Directors may elect to contribute a portion of the Company’s net profits. In December 2005, the Board of Directors elected to freeze this plan retroactive to January 1, 2005, such that no further contributions will be made on behalf of the executive officers under the plan. The Board of Directors took this action upon its review of the total compensation programs available to the Company’s executive officers, including the increased benefits available as a result of the equity compensation plans adopted by the Company’s shareholders in June 2005. The Company also maintains a board of directors deferred compensation plan into which the Board of Directors may elect to contribute a percentage of their board fees. The expense relating to these plans was approximately $1,000, $2,000, and $38,000 for the years ended December 31, 2007, 2006, and 2005, respectively. The liability for these plans at December 31, 2007 and 2006 was approximately $1.2 million and $1.2 million, respectively.
Supplemental Retirement Plan
The Company maintains a nonqualified, unfunded, defined benefit pension plan for the Board of Directors and certain officers. The funded status of the plan is as follows:
Amounts related to the plan have been recognized in the balance sheet in accumulated other comprehensive loss, net of tax, as follows:
The components of net periodic pension cost and other changes in the amounts recognized in accumulated other comprehensive loss are as follows:
The following weighted average assumptions were used in calculating the net periodic pension cost:
The estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic benefit cost in 2008 are as follows:
401(k) Plan
The Company also maintains a 401(k) retirement plan for substantially all of its employees. Certain senior officers of the Bank have been designated as Trustees of the 401(k) plan. For the years ended December 31, 2006 and 2005, the Company matched 100% of an employee’s contribution up to 5% of the employee’s annual gross compensation. Beginning January 1, 2007, this match was reduced to 50% of the employee’s contribution, but the limit was raised to 6% of the employee’s annual gross compensation. The Board of Directors took these actions upon its review of the total compensation programs available to the Company’s employees, including the increased benefits available as a result of the Company’s second-step conversion completed in June 2007. The expense incurred for this plan was approximately $112,000, $175,000, and $181,000 for the years ended December 31, 2007, 2006, and 2005, respectively.
Employee Stock Ownership Plan
In 2004, the Bank established an employee stock ownership plan (“ESOP”) for substantially all of its full-time employees. Certain senior officers of the Bank have been designated as Trustees of the ESOP. 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 committed to be released and allocated among participants, the Company recognizes compensation expense equal to the average market price of the shares. Under this plan, during 2004 and 2005 the ESOP acquired 914,112 shares (as adjusted for the exchange ratio as part of the June 2007 second-step conversion) of common stock for approximately $7.4 million, an average price of $8.06 per share (as adjusted). These shares are expected to be released over a 15-year period. In June 2007, the ESOP acquired an additional 1,042,771 shares of the Company’s common stock for approximately $10.4 million, an average price of $10.00 per share. These shares are expected to be released over a 30-year period. No additional purchases are expected to be made by the ESOP. At December 31, 2007, the ESOP held approximately 1.8 million unallocated shares of Company common stock with a fair value of $17.2 million of which approximately 96,000 shares were committed-to-be-released. At December 31, 2007, the ESOP also held approximately 122,000 allocated shares with a fair value of $1.1 million. During the year ended December 31, 2007, approximately 96,000 shares were committed-to-be-released to participants, resulting in recognition of approximately $969,000 in compensation expense. These shares were subsequently released to participants’ accounts in the first quarter of 2008. During the years ended December 31, 2006 and 2005, approximately 38,000 shares were committed-to-be-released to participants each year, resulting in recognition of approximately $563,000 and $475,000 in compensation expense, respectively. These shares were subsequently released to participants’ accounts in the first quarters of 2007 and 2006, respectively.
Rabbi Trust
During 2004, the Company established a rabbi trust to fund certain benefit plans. An officer of the Bank has been designated as Trustee of the trust. As a result of the second-step conversion, shares of Abington Community Bancorp held by the trust were converted to shares of Company common stock. Approximately 172,000 shares of the Company’s common stock (as adjusted) were purchased for $1.1 million by this trust in December 2004 for the benefit of certain officers and directors that acquired shares through our deferred compensation plans. Approximately 7,500 additional shares were purchased for $75,000 in June 2007. In addition to these purchases, approximately 4,000 shares (as adjusted) have been acquired by participants through the Company’s dividend reinvestment plan. Distributions are made to participants as payments are required under certain benefit plans of the Company. Distributions are made in cash, to the extent cash is available, or in shares of Company stock when the trust does not hold a sufficient cash balance for the benefiting participant. Company stock is not sold by the trust to make cash distributions. As of December 31, 2007, the trust holds approximately 177,000 shares of the Company’s common stock as well as an additional $22,000 in cash. The assets of the trust are sufficient to cover the liabilities of the Company’s executive deferred compensation plan and board of directors deferred compensation plan.
Recognition and Retention Plan
In June 2005, the shareholders of Abington Community Bancorp approved the adoption of the 2005 Recognition and Retention Plan (the “2005 RRP”). As a result of the second-step conversion, the 2005 RRP became a stock benefit plan of the Company and the shares of Abington Community Bancorp held by the 2005 RRP were converted to shares of Company common stock. Certain senior officers of the Bank have been designated as Trustees of the 2005 RRP. The 2005 RRP provides for the grant of shares of common stock of the Company to certain officers, employees and directors of the Company. In order to fund the 2005 RRP, the 2005 Recognition Plan Trust (the “2005 Trust”) acquired 457,056 shares (adjusted for the second-step conversion exchange ratio) of common stock in the open market for approximately $3.7 million, an average price of $8.09 per share (as adjusted). The Company made sufficient contributions to the 2005 Trust to fund the purchase of these shares. No additional purchases are expected to be made by the 2005 Trust under this plan. Pursuant to the terms of the plan, all 457,056 shares acquired by the 2005 Trust have been granted to certain officers, employees and directors of the Company. 2005 RRP shares generally vest at the rate of 20% per year over five years.
In January 2008, the shareholders of the Company approved the adoption of the 2007 Recognition and Retention Plan (the “2007 RRP”). In order to fund the 2007 RRP, the 2007 Recognition Plan Trust (the “2007 Trust”) will acquire 520,916 shares of the Company’s common stock in the open market. The Company will make sufficient contributions to the 2007 Trust to fund the purchase of these shares. Pursuant to the terms of the plan, 517,200 shares acquired by the 2007 Trust were granted to certain officers, employees and directors of the Company in January 2008, with 3,716 shares remaining available for future grant. 2007 RRP shares generally vest at the rate of 20% per year over five years.
A summary of the status of the shares under the 2005 RRP as of December 31, 2007, 2006 and 2005, and changes during the years ended December 31, 2007, 2006 and 2005 are presented below. The number of shares and weighted average grant date fair value for all periods have been adjusted for the exchange ratio as a result of our second-step conversion:
Compensation expense on 2005 RRP shares granted is recognized ratably over the five year vesting period in an amount which totals the market price of the Company’s stock at the date of grant. During the years ended December 31, 2007, 2006 and 2005, approximately 91,000, 91,000 and 45,000 shares, respectively, were amortized to expense, based on the proportional vesting of the awarded shares. During years ended December 31, 2007, 2006 and 2005, approximately $689,000, $680,000 and $333,000, respectively, was recognized in compensation expense for the plan. During the years ended December 31, 2007, 2006, and 2005, a tax benefit of approximately $305,000, $281,000 and $113,000, respectively, was recognized from the plan. As of December 31, 2007, approximately $1.7 million in additional compensation expense is scheduled to be recognized over the remaining lives of the 2005 RRP awards. At December 31, 2007, the weighted average remaining lives of the 2005 RRP awards is approximately 2.6 years. The compensation expense for the 2007 RRP awards, which is schedule to be recognized ratably over the five year vesting period beginning in January 2008, is approximately $4.7 million.
Stock Options
In June 2005, the shareholders of Abington Community Bancorp also approved the adoption of the 2005 Stock Option Plan (the “2005 Option Plan”). As a result of the second-step conversion, the 2005 Option Plan became a stock benefit plan of the Company. Unexercised options which were previously granted under the 2005 Option Plan were adjusted by the 1.6 exchange ratio as a result of the second-step conversion and have been converted into options to acquire Company common stock. The 2005 Option Plan authorizes the grant of stock options to officers, employees and directors of the Company to acquire shares of common stock with an exercise price equal to the fair market value of the common stock on the grant date. Options will generally become vested and exercisable at the rate of 20% per year over five years and are generally exercisable for a period of ten years after the grant date. As of December 31, 2007, a total of 1,142,640 shares of common stock have been reserved for future issuance pursuant to the 2005 Option Plan of which 7,460 shares remain available for grant.
In January 2008, the shareholders of the Company also approved the adoption of the 2007 Stock Option Plan (the “2007 Option Plan”). Options will generally become vested and exercisable at the rate of 20% per year over five years and are generally exercisable for a period of ten years after the grant date. Under the 2008 Option Plan, a total of 1,302,990 shares of common stock have been reserved for future issuance of which 1,247,500 shares were granted in January 2008 and of which 55,490 shares remain available for future grant.
A summary of the status of the Company’s stock options under the 2005 Option Plan as of December 31, 2007, 2006 and 2005, and changes during the years ended December 31, 2007, 2006 and 2005 are presented below. The number of options and weighted average exercise price for all periods have been adjusted for the exchange ratio as a result of our second-step conversion:
The following table summarizes all stock options outstanding under the 2005 Option Plan as of December 31, 2007:
The estimated fair value of options granted during 2007, 2006 and 2005, was $2.80, $2.69 and $1.80 per share, respectively. The fair value was estimated on the date of grant in accordance with SFAS No. 123R using the Black-Scholes Single Option Pricing Model with the following weighted average assumptions used. The fair value has been adjusted for the exchange ratio as a result of our second-step conversion:
The estimated fair value of options granted in January 2008 was $2.13 per share. The fair value was estimated on the date of grant in accordance with SFAS No. 123R using the Black-Scholes Single Option Pricing Model with the following weighted average assumptions used:
Dividend yield
1.88
%
Expected volatility
23.25
%
Risk-free interest rate
3.13 - 3.49
%
Expected life of options
4 - 7 years
The dividend yield was calculated based on the dividend amount and stock price existing at the grant date taking into consideration expected increases in the dividend and stock price over the lives of the options. The actual dividend yield may differ from this assumption. The risk-free interest rate used was based on the rates of treasury securities with maturities equal to the expected lives of the options.
As the Company has a limited history of granting option awards, management made certain assumptions regarding the exercise behavior of recipients without the use of any prior exercise behavior as a basis. Assumptions of exercise behavior were made on an individual basis for directors and executive officers and general assumptions were made for the remainder of employees. In making these assumptions, management considered the age and financial status of recipients in addition to other qualitative factors.
For our initial stock option awards granted in July and December 2005, it was determined that the historical volatility of our stock price would not provide a reliable basis for determining the expected future volatility of our stock price, due to the relatively short time period for which the Company had had its common stock outstanding to the public. Accordingly, management determined that the volatility used in the option pricing model at that time should be based on the volatilities of comparable companies. Management engaged a third party to assist in performing the task of selecting comparable companies and determining the volatility of their stock. The volatility used by the Company was based on the average historical volatilities of these comparable companies. For our stock options awarded in November 2006 and August 2007, a more extensive stock price history was available. Consequently, for these awards it was determined that the historical volatility would be the most reliable estimate of future stock volatility.
During the years ended December 31, 2007, 2006 and 2005, approximately $405,000, $370,000 and $181,000, respectively, was recognized in compensation expense for the 2005 Option Plan. During the years ended December 31, 2007, 2006 and 2005, a tax benefit of approximately $37,000, $36,000 and $18,000, respectively, was recognized from the plan. At December 31, 2007, approximately $1.2 million in additional compensation expense for awarded options remained unrecognized. The weighted average period over which this expense is scheduled to be recognized is approximately 2.8 years. The compensation expense for awards under the 2007 Option Plan, which is schedule to be recognized ratably over the five year vesting period beginning in January 2008, is approximately $2.7 million.
15.
COMMITMENTS AND CONTINGENCIES
The Bank had approximately $5.0 million in outstanding mortgage loan commitments at December 31, 2007. The commitments are expected to be funded within 90 days with $4.3 million in fixed rates ranging from 5.75% to 6.75%. These loans are not originated for resale. Also outstanding at December 31, 2007 were unused lines of credit totaling approximately $65.2 million.
The Bank had approximately $3.6 million in outstanding mortgage loan commitments at December 31, 2006. The commitments are expected to be funded within 90 days with $3.4 million in fixed rates ranging from 5.75% to 6.25%. These loans are not originated for resale. Also outstanding at December 31, 2006 were unused lines of credit totaling approximately $69.1 million.
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 financings 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 December 31, 2007 and December 31, 2006, the Bank had letters of credit outstanding of approximately $17.2 million and $16.3 million, respectively, of which $15.8 million and $14.8 million, respectively, were standby letters of credit. At December 31, 2007 and 2006, the uncollateralized portion of the letters of credit extended by the Bank was approximately $97,000 in both year, all of which was for standby letters of credit in both years. The current amount of the liability for guarantees under letters of credit is not material as of December 31, 2007 and 2006.
The Company is subject to various pending claims and contingent liabilities arising in the normal course of business which are not reflected in the accompanying consolidated financial statements. Management considers that the aggregate liability, if any, resulting from such matters will not be material to our financial position or results of operations.
Among the Company’s contingent liabilities, are exposures to limited recourse arrangements with respect to the sales of whole loans and participation interests. At December 31, 2007, 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.
16.
REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by federal and state banking agencies. The Company had also been subject to such requirements prior to our second-step conversion in June 2007, in which we converted to a savings and loan holding company. As a savings and loan holding company, the Company is not subject to any regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory-and possibly additional discretionary-actions by regulators, that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). As of December 31, 2007, the Bank met all capital adequacy requirements to which it was subject.
As of December 31, 2007 the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum Tier I risk-based, total risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category.
The Company’s and the Bank’s actual capital amounts and ratios are presented in the table below:
The following table reconciles the Company’s and the Bank’s GAAP capital to their regulatory capital as of the dates indicated:
17.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Cash and Cash Equivalents-For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.
Investment and Mortgage-Backed Securities-The fair value of investment securities and mortgage-backed securities is based on quoted market prices, dealer quotes and prices obtained from independent pricing services.
Loans Receivable-The fair value of loans is estimated based on present value using approximate current entry-value interest rates applicable to each category of such financial instruments.
FHLB Stock-Although Federal Home Loan Bank (“FHLB”) Stock is an equity interest in FHLB, it is carried at cost because it does not have a readily determinable fair value as its ownership is restricted and it lacks a market. The estimated fair value approximates the carrying amount.
Accrued Interest Receivable-The fair value is considered to be equal to the carrying amount due to the short-term nature of the assets.
Deposits-The fair value of NOW, money market deposits and passbook and club accounts is the amount reported in the consolidated financial statements. The fair value of time certificates is based on a present value estimate using rates currently offered for deposits of similar remaining maturity.
Advances from Federal Home Loan Bank-The fair value is the amount payable on demand at the reporting date.
Other Borrowed Money-The fair value is considered to be equal to the carrying amount due to the short-term nature of the instruments.
Accrued Interest Payable-The fair value is considered to be equal to the carrying amount due to the short-term nature of the liabilities.
Commitments to Extend Credit and Letters of Credit-The majority of the Bank’s commitments to extend credit and letters of credit carry current market interest rates if converted to loans. Because commitments to extend credit and letters of credit are generally unassignable by either the Bank or the borrower, they only have value to the Bank and the borrower. The estimated fair value approximates the recorded deferred fee amounts, which are not significant.
The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2007 and 2006. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since December 31, 2007 and 2006 and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.
18.
ABINGTON BANCORP, INC. (PARENT COMPANY ONLY)
Certain condensed financial information follows:
19.
CONVERSION AND REORGANIZATION TO STOCK HOLDING COMPANY
On November 30, 2006, Abington Community Bancorp, Inc. announced that Abington Community Bancorp, the Bank and Abington Mutual Holding Company had adopted a Plan of Conversion and Reorganization (the “Plan of Conversion”), which would result in Abington Community Bancorp’s and the Bank’s reorganization from the two-tier mutual holding company structure to the stock holding company structure. Pursuant to the Plan of Conversion, (i) Abington Mutual Holding Company and Abington Community Bancorp would, pursuant to an election made by the Bank pursuant to Section 10(l) of the Home Owners’ Loan Act, become federally chartered savings and loan holding companies and immediately thereafter each would convert to a federal interim stock association and then merge with and into the Bank, with the Bank being the surviving entity, (ii) the Bank would merge with an interim subsidiary of a newly formed Pennsylvania corporation, Abington Bancorp, Inc. (the “Company”), (iii) the shares of common stock of Abington Community Bancorp held by persons other than Abington Mutual Holding Company (whose shares will be canceled) would be converted into shares of common stock of the New Holding Company pursuant to an exchange ratio designed to preserve the percentage ownership interests of such persons, (iv) the Bank would issue all of its capital stock to the New Holding Company, and (v) the Company would offer and sell shares of the common stock to depositors of the Bank and others in the manner and subject to the priorities set forth in the Plan of Conversion.
In connection with the conversion, shares of Abington Community Bancorp’s common stock owned by Abington Mutual Holding Company were canceled and new shares of common stock, representing the approximate 57% ownership interest of Abington Mutual Holding Company, were offered for sale by the Company. Concurrent with the completion of the offering, Abington Community Bancorp’s existing public stockholders received shares of the Company’s common stock for each share of Abington Community Bancorp’s common stock they owned at that date, based on an exchange ratio to ensure that they owned approximately the same percentage of the Company’s common stock as they owned of the Abington Community Bancorp’s common stock immediately prior to the conversion.
On June 27, 2007, this second-step conversion was completed after which Abington Mutual Holding Company and Abington Community Bancorp, Inc. ceased to exist and the Company was organized as the new stock-form holding company for the Bank and successor to Abington Community Bancorp. A total of 13,965,600 new shares of the Company were sold at $10 per share in the subscription, community and syndicated community offerings through which the Company received proceeds of approximately $134.7 million, net of offering costs of approximately $5.0 million. The Company contributed $67.3 million or approximately 50% of the net proceeds to the Bank in the form of a capital contribution. The Company loaned $10.4 million to the ESOP and the ESOP used those funds to acquire 1,042,771 shares of the Company’s common stock at $10 per share. As part of the conversion, each outstanding public share of common stock of Abington Community Bancorp, Inc. (that is, shares owned by stockholders other than Abington Mutual Holding Company) was exchanged for 1.6 shares of the Company. No fractional shares were issued. Instead, cash was paid to shareholders at $10 per share for any fractional shares that would otherwise be issued. The exchange resulted in an additional 10,494,640 outstanding shares of common stock of the Company for a total of 24,460,240 outstanding shares as of the closing of the second-step conversion on June 27, 2007. Treasury stock held was cancelled.
Earnings per share and all common share amounts for prior periods have been adjusted to reflect the impact of the second-step conversion and reorganization.
******
SUPPLEMENTARY DATA
SUMMARIZED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents summarized consolidated quarterly data for each of the last two years.
__________________
* Earnings per share for the prior periods have been adjusted to reflect the impact of the second-step conversion and reorganization of the Company, which occurred on June 27, 2007.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
Based on their evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), the Company’s principal executive officer and principal financial officer have concluded that as of the end of the period covered by this Annual Report on Form 10-K such disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to the Company’s management, including the principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.
(b) Internal Control over Financial Reporting
1. Management’s Annual Report on Internal Control Over Financial Reporting
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act of 1934 Rules 13(a)-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Management, including the chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework, we concluded that the Company’s internal control over financial reporting was effective as of December 31, 2007.
The Company’s internal control over financial reporting as of December 31, 2007 has been audited by Beard Miller Company LLP, an independent registered public accounting firm, as stated in their report which is included in the following pages.
2. Attestation Report of Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Abington Bancorp, Inc. and subsidiaries:
Jenkintown, Pennsylvania
We have audited Abington Bancorp, Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Abington Bancorp, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition and the related consolidated statements of income, stockholders’ equity and cash flows of Abington Bancorp, Inc. and subsidiaries, and our report dated March 10, 2008 expressed an unqualified opinion.
/s/ BEARD MILLER COMPANY LLP
Beard Miller Company LLP
Harrisburg, Pennsylvania
March 10,
3. Changes in Internal Control over Financial Reporting
During the last quarter of the year under report, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS , EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Incorporated by reference to “Information with Respect to Nominees for Director, Continuing Directors and Executive Officers” in our definitive proxy statement for the annual meeting of shareholders to be held in May 2008 (the “Proxy Statement”), which will be filed with the Securities and Exchange Commission on or before April 30, 2008.
Incorporated by reference to “Beneficial Ownership of Common Stock by Certain Beneficial Owners and Management - Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.
The Company has adopted a Code of Conduct and Ethics that applies to its principal executive officer and principal financial officer, as well as other officers and employees of the Company and the Bank. A copy of the Code of Conduct and Ethics may be found on the Company’s website at www.abingtonbank.com.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to “Management Compensation” and “Report of the Compensation Committee” in the Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners and Management. Information regarding security ownership of certain beneficial owners and management is incorporated by reference to “Beneficial Ownership of Common Stock by Certain Beneficial Owners and Management” in the Proxy Statement.
Equity Compensation Plan Information. The following table provides information as of December 31, 2007 with respect to shares of common stock that may be issued under our existing equity compensation plans, which consist of the 2005 Stock Option Plan and 2005 Recognition and Retention Plan, both of which were approved by our shareholders.
(1)
Includes 274,874 shares subject to restricted stock grants which were not vested as of December 31, 2007. The weighted-average exercise price excludes such restricted stock grants.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Incorporated by reference to “Management Compensation - Indebtedness of Management and Related Party Transactions” in the Proxy Statement.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Incorporated by reference to “Ratification of Appointment of Independent Registered Public Accounting Firm” in the Proxy Statement.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Documents Filed as Part of this Report:
Financial Statements: The Consolidated Financial Statements of Abington Community Bancorp, Inc. and the Reports of Independent Registered Public Accounting Firm thereon, as listed below, have been filed under "Item 8, Financial Statements and Supplementary Data".
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition As of December 31, 2007 and 2006
Consolidated Statements of Income for the Years Ended December 31, 2007, 2006 and
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2007, 2006 and 2005
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and
Notes to Consolidated Financial Statements
(b) List of Exhibits
No.
Description
Location
3.1
Articles of Incorporation of Abington Bancorp, Inc.
(1)
3.2
Bylaws of Abington Bancorp, Inc.
(1)
4.0
Form of Stock Certificate of Abington Bancorp, Inc.
(2)
10.1*
Amended and Restated Employment Agreement between Abington Bancorp, Inc. and Robert W. White
(3)
10.2*
Amended and Restated Employment Agreement between Abington Savings Bank and Robert W. White
(3)
10.3*
Amended and Restated Employment Agreement between Abington Savings Bank and Jack J. Sandoski
(3)
10.4*
Amended and Restated Employment Agreement between Abington Savings Bank and Edward W. Gormley
(3)
10.5*
Amended and Restated Employment Agreement between Abington Savings Bank and Frank Kovalcheck
(3)
10.6*
Amended and Restated Employment Agreement between Abington Savings Bank and Eric L. Golden
(3)
10.7*
Abington Savings Bank Amended and Restated Executive Deferred Compensation Plan
(3)
10.8*
Abington Savings Bank Amended and Restated Directors Deferred Compensation Plan
(3)
10.9*
Abington Savings Bank Amended and Restated Board of Directors Retirement Plan
(3)
No.
Description
Location
10.10*
Abington Savings Bank Amended and Restated Supplemental Executive Retirement Plan
(3)
10.11*
Abington Bancorp, Inc. Amended and Restated 2005 Stock Option Plan
(3)
10.12*
Abington Bancorp, Inc. Amended and Restated 2005 Stock Recognition and Retention Plan and Trust Agreement
(3)
10.13*
Form of Split Dollar Insurance Agreement between Abington Bank and each of Robert W. White, Edward W. Gormley, Frank Kovalcheck, Jack J. Sandoski and Eric L. Golden
(4)
10.14*
Abington Bancorp, Inc. 2007 Stock Option Plan
(5)
10.15*
Abington Bancorp, Inc. 2007 Recognition and Retention Plan and Trust Agreement
(5)
23.0
Consent of Beard Miller Company LLP
Filed Herewith
23.1
Consent of Deloitte & Touche LLP
Filed Herewith
31.1
Rule 13(a)-14(a) Certification of the Chief Executive Officer
Filed Herewith
31.2
Rule 13(a)-14(a) Certification of the Chief Financial Officer
Filed Herewith
32.0
Section 1350 Certifications
Filed Herewith
_____________
*
Denotes a management contract or compensatory plan or arrangement
(1)
Incorporated by reference from the registration statement on Form S-1 of Abington Bancorp, Inc., as amended (File No. 333-142543), as filed on May 2, 2007.
(2)
Incorporated by reference from the registration statement on Form S-1 of Abington Bancorp, Inc. (File No. 333-142543) as filed on May 2, 2007.
(3)
Incorporated by reference from Abington Bancorp’s Current Report on Form 8-K dated as of November 28, 2007 and filed with the SEC on December 3, 2007 (File No. 0-52705).
(4)
Incorporated by reference from the Quarterly Report on Form 10-Q for Abington Bancorp, Inc. for the quarter ended September 30, 2007 and filed with the SEC on November 14, 2007 (File No. 0-52705).
(5)
Incorporated by reference to the definitive proxy statement filed by Abington Bancorp, Inc. with the SEC on December 26, 2007 (File No. 0-52705).
(c) Financial Statement Schedules
All schedules have been omitted as the required information is not applicable or is presented in the consolidated financial statements or related notes included in Item 8 hereof.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.