ITEM 1. BUSINESS
GENERAL
Abington Community Bancorp, Inc. (the "Company") is a Pennsylvania corporation which was organized to be a mid-tier holding company for Abington Savings Bank. Abington Savings Bank is a Pennsylvania-chartered, FDIC-insured savings bank which conducts business under the name "Abington Bank" (the "Bank" or "Abington Bank"). The Bank is a wholly owned subsidiary of the Company. The Company's results of operations are primarily dependent on the results of the Bank and the Bank's wholly owned subsidiaries, ASB Investment Co., Keswick Services II and its wholly owned subsidiaries, and Abington Corp. As of December 31, 2005, the Company, on a consolidated basis, had total assets of $844.1 million, total deposits of $501.2 million, and total stockholders' equity of $117.2 million.
The Company was formed when the Bank reorganized from a mutual savings bank to a mutual holding company structure in December 2004. Abington Mutual Holding Company, a Pennsylvania corporation, is the mutual holding company parent of the Company. Abington Mutual Holding Company owns 55% of the Company's outstanding common stock and must continue to own at least a majority of the outstanding voting stock of the Company.
Abington Bank is a community-oriented savings bank, which was originally organized in 1867 and is headquartered in Jenkintown, Pennsylvania, approximately eight miles north of center city Philadelphia. Our banking office network currently consists of our headquarters and main office, seven other full-service branch offices and four limited service branch offices. In addition, we maintain a loan processing office in Jenkintown, Pennsylvania. Ten of our banking offices are located in Montgomery County, Pennsylvania and two are in neighboring Bucks County, Pennsylvania. Moreover, the Bank plans to open three additional branch offices in 2006 - one in Montgomery County and two in Bucks County. One of the Bucks County branch offices is expected to open in the second quarter of 2006 with the other new Bucks County branch office and the Montgomery County branch office following in the second half of 2006. Our limited service offices have limited hours of operation and/or are limited to serving customers who live or work in the community in which the limited service office is located. Three of our limited service offices are located in retirement or age restricted communities. We maintain ATMs at all of our banking offices and we also have two off-site ATMs, located at a local grocery store and a local college. We also provide on-line banking and telephone banking services.
We are primarily engaged in attracting deposits from the general public and using those funds to invest in loans and securities. Our principal sources of funds are deposits, repayments of loans and mortgage-backed securities, maturities of investments and interest-bearing deposits, funds provided from operations and funds borrowed from outside sources such as the Federal Home Loan Bank of Pittsburgh. These funds are primarily used for the origination of various loan types including single-family residential mortgage loans, construction loans, non-residential or commercial real estate mortgage loans, home equity loans, commercial business loans and consumer loans. We are an active originator of residential home mortgage loans and home construction loans in our market area. In addition to offering loans and deposits, we also offer securities and annuities to our customers through an affiliation with a third-party broker-dealer.
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:
o statements of goals, intentions and expectations;
o statements regarding prospects and business strategy;
o statements regarding asset quality and market risk; and
o estimates of future costs, benefits and results.
These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following: (1) general economic conditions, (2) competitive pressure among financial services companies, (3) changes in interest rates, (4) deposit flows, (5) loan demand, (6) changes in legislation or regulation, (7) changes in accounting principles, policies and guidelines, (8) litigation liabilities, including costs, expenses, settlements and judgments and (9) other economic, competitive, governmental, regulatory and technological factors affecting the Company's operations, pricing, products and services.
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. We have no obligation to update or revise any forward-looking statements to reflect any changed assumptions, any unanticipated events or any changes in the future.
MARKET AREA AND COMPETITION
Our market area is located in Montgomery County and Bucks County, Pennsylvania, which are suburbs of Philadelphia. In addition, particularly with respect to commercial and construction lending, we also make loans in Philadelphia, Chester and Delaware Counties, Pennsylvania and contiguous counties in New Jersey and Delaware. This area is referred to as the Delaware Valley region.
We face significant competition in originating loans and attracting deposits. This competition stems primarily from commercial banks, other savings banks and savings associations and mortgage-banking companies. Within our market area, more than 50 other banks, savings institutions and credit unions are operating. Many of the financial service providers operating in our market area are significantly larger and have greater financial resources than us. We face additional competition for deposits from short-term money market funds and other corporate and government securities funds, mutual funds and from other non-depository financial institutions such as brokerage firms and insurance companies.
LENDING ACTIVITIES
GENERAL. At December 31, 2005, our net loan portfolio totaled $529.5 million or 62.7% of total assets. Historically, our principal lending activity has been the origination of loans collateralized by one- to four-family, also known as "single-family," residential real estate loans located in our market area. In addition, while we have been making construction loans to homebuilders and others for more than 30 years, we have increased our construction lending activities in recent years. We also have increased our emphasis on originating commercial real estate and multi-family (over four units) residential mortgage loans. We also originate home equity lines of credit, commercial business loans and consumer loans.
The types of loans that we may originate are subject to federal and state law and regulations. Interest rates charged by us on loans are affected principally by the demand for such loans and the supply of money available for lending purposes and the rates offered by our competitors. These factors are, in turn, affected by general and economic conditions, the monetary policy of the federal government, including the Federal Reserve Board, legislative tax policies and governmental budgetary matters.
LOAN PORTFOLIO COMPOSITION. The following table shows the composition of our loan portfolio by type of loan at the dates indicated.
CONTRACTUAL TERMS TO FINAL MATURITIES. The following table shows the scheduled contractual maturities of our loans as of December 31, 2005, before giving effect to net items. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. The amounts shown below do not take into account loan prepayments.
The following table shows the amount of our loans at December 31, 2005, which are due after December 31, 2006, and indicates whether they have fixed-rates of interest or rates which are floating or adjustable.
LOAN ORIGINATIONS. Our lending activities are subject to underwriting standards and loan origination procedures established by our board of directors and management. Loan originations are obtained through a variety of sources, primarily existing customers as well as new customers obtained from referrals and local advertising and promotional efforts. In addition, our commercial and construction loan officers actively solicit new loans throughout our market area. Single-family residential mortgage loan applications and consumer loan applications are taken at any of Abington Bank's banking offices. Beginning in November 2005, we also began taking single-family residential mortgage loan applications and consumer loan applications on-line. Applications for other loans typically are taken personally by our commercial or construction lending officers, although they may be received by a branch office initially and then referred to a construction or commercial lender. All loan applications are processed and underwritten centrally at our loan processing office and main office in Jenkintown, Pennsylvania.
Our single-family residential mortgage loans are written on standardized documents used by the Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac") and Federal National Mortgage Association ("FNMA" or "Fannie Mae"). We also utilize automated loan processing and underwriting software systems developed by Freddie Mac for our new single-family residential mortgage loans. Property valuations of loans secured by real estate are undertaken by our in-house appraiser or by an independent third-party appraiser approved by our board of directors.
Specified loan officers of Abington Bank have limited authority to approve automobile loans and other consumer loans up to $15,000. Home equity loans and lines of credit may be approved jointly by two authorized Vice Presidents. Our loan policy generally requires that all other loans up to $1.0 million must be approved by either the Consumer Loan Committee (which is comprised of the Bank's President, Senior Vice President - Lending and five other officers) or Commercial Loan Committee (comprised of the Bank's President, Senior Vice President - Lending and five other officers). All of such loans are reported to our board of directors on a monthly basis. Loans exceeding $1.0 million must be approved by the full board of directors.
In addition to originating loans, we occasionally purchase participation interests in larger balance loans, typically commercial real estate and multi-family residential mortgage loans and construction loans, from other financial institutions in our market area. Such participations are reviewed for compliance with our underwriting criteria before they are purchased. Generally, we have purchased such loans without any recourse to the seller. However, we actively monitor the performance of such loans through the receipt of regular reports from the lead lender regarding the loan's performance, physically inspecting the loan security property on a periodic basis, discussing the loan with the lead lender on a regular basis and receiving copies of updated financial statements from the borrower.
During the year ended December 31, 2003 we sold $2.6 million of newly originated single-family residential mortgage loans with servicing retained. There were no sales during 2005 or 2004, and we have discontinued such loans sales, but, depending on market conditions, may again consider such sales in the future. In addition, we have sold participation interests in loans originated by us to other institutions. When we have sold participation interests or whole loans, it generally has been done on the basis of very limited recourse. As of December 31, 2005, our total exposure to recourse arrangements with respect to our sales of whole loans and participation interests in loans was $185,000. We generally have sold participation interests in loans only when a loan would exceed our loans-to-one borrower limits. The Bank's loans-to-one borrower limit, with certain exceptions, generally is 15% of our unimpaired capital and surplus, or $12.7 million at December 31, 2005.
The following table shows our total loans originated, purchased, sold and repaid during the periods indicated.
- -------------------- (1) Other items consist of loans in process, deferred fees and the allowance for loan losses.
ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE LENDING. One of our primary lending activities continues to be the origination of loans secured by first mortgages on one- to four-family residences in our market area. At December 31, 2005, $323.7 million of our total loan portfolio consisted of single-family residential mortgage loans. Due primarily to increased mortgage loan prepayments due to refinance activity as a result of the low interest rate environment, as well as our increased emphasis on commercial real estate, construction and commercial business loans, the percentage of single-family residential mortgage loans in our portfolio has decreased from 74.4% at December 31, 2001 to 54.9% at December 31, 2005.
Our single-family residential mortgage loans generally are underwritten on terms and documentation conforming with guidelines issued by Freddie Mac and Fannie Mae. We utilize proprietary software developed by Freddie Mac in processing and underwriting our single-family residential mortgage loans. Applications for one- to four-family residential mortgage loans are accepted at any of our banking offices and are then referred to the Residential Lending Department at our main office and our Loan Processing Center in order to process the loan, which consists primarily of obtaining all documents required by Freddie Mac and Fannie Mae underwriting standards, and complete the underwriting, which includes making a determination whether the loan meets our underwriting standards such that the bank can extend a loan commitment to the customer. We generally have retained for our portfolio a substantial portion of the single-family residential mortgage loans that we originate. We service all loans that we have originated through our in-house loan servicing department. We currently originate fixed-rate, fully amortizing mortgage loans with maturities of 15, 20 or 30 years. We also currently offer adjustable rate mortgage ("ARM") loans. Due to local market conditions, we had not offered single-family ARM loans for more than 10 years through the end of 2004. However, we again began offering ARM loans in 2005. At December 31, 2005, only $2.5 million, or 0.8%, of our one- to four-family residential loan portfolio consisted of ARM loans.
We underwrite one- to four-family residential mortgage loans with loan-to-value ratios of up to 95%, provided that the borrower obtains private mortgage insurance on loans that exceed 80% of the appraised value or sales price, whichever is less, of the secured property. We also require that title insurance, hazard insurance and, if appropriate, flood insurance be maintained on all properties securing real estate loans. Our in-house appraiser or another licensed appraiser appraises all properties securing one- to four-family first mortgage loans. Our mortgage loans generally include due-on-sale clauses which provide us with the contractual right to deem the loan immediately due and payable in the event the borrower transfers ownership of the property. Due-on-sale clauses are an important means of adjusting the yields of fixed-rate mortgage loans in our portfolio, and we generally exercise our rights under these clauses.
Our single-family residential mortgage loans also include home equity loans, which amounted to $27.6 million at December 31, 2005. We offer fixed-rate home equity loans in amounts up to $200,000. Our home equity loans are fully amortizing and have terms to maturity of up to 15 years. While home equity loans also are secured by the borrower's residence, we generally obtain a second mortgage position on these loans. Our lending policy provides that our home equity loans have loan-to-value ratios, when combined with any first mortgage, of 90% or less, although the preponderance of our home equity loans have combined loan-to-value ratios of 80% or less. Our single-family residential mortgage loans also include some loans to local businessmen for a commercial purpose, but which are secured by liens on the borrower's residence.
COMMERCIAL REAL ESTATE AND MULTI-FAMILY RESIDENTIAL REAL ESTATE LOANS. At December 31, 2005, our commercial real estate and multi-family residential loans amounted to $76.6 million or 13.0% of our total loan portfolio. In recent years, we have increased our portfolio of commercial real estate and multi-family residential loans.
Our commercial real estate and residential multi-family real estate loan portfolio consists primarily of loans secured by office buildings, retail and industrial use buildings, strip shopping centers, residential properties with five or more units and other properties used for commercial and multi-family purposes located in our market area. Our commercial and multi-family real estate loans tend to be originated in an amount less than $3.0 million but will occasionally exceed that amount. We currently employ five commercial lenders who actively solicit commercial real estate and multi-family residential mortgage loans in our market area.
Although terms for commercial real estate and multi-family loans vary, our underwriting standards generally allow for terms up to 30 years with monthly amortization over the life of the loan and loan-to-value ratios of not more than 80%. Interest rates are either fixed or adjustable, based upon designated market indices such as the 5-year Treasury CMT plus a margin, and fees of up to 2.0% are charged to the borrower at the origination of the loan. Generally, we obtain personal guarantees of the principals as additional collateral for commercial real estate and multi-family real estate loans.
Commercial real estate and multi-family real estate lending involves different risks than single-family residential lending. These risks include larger loans to individual borrowers and loan payments that are dependent upon the successful operation of the project or the borrower's business. These risks can be affected by supply and demand conditions in the project's market area of rental housing units, office and retail space, warehouses, and other commercial space. We attempt to minimize these risks by limiting loans to proven businesses, only considering properties with existing operating performance which can be analyzed, using conservative debt coverage ratios in our underwriting, and periodically monitoring the operation of the business or project and the physical condition of the property. At December 31, 2005, 2004 and 2003, none of our commercial real estate and multi-family residential mortgage loans were either delinquent for more than 30 days or considered non-performing. No commercial real estate and
multi-family residential real estate loans were charged-off in 2005. We charged-off $99,000 and $671,000 in commercial real estate and multi-family residential real estate loans in the years ended December 31, 2004 and 2003, respectively.
Various aspects of a commercial and multi-family loan transactions are evaluated in an effort to mitigate the additional risk in these types of loans. In our underwriting procedures, consideration is given to the stability of the property's cash flow history, future operating projections, current and projected occupancy levels, location and physical condition. Generally, we impose a debt service ratio (the ratio of net cash flows from operations before the payment of debt service to debt service) of not less than 110% in the case of multi-family residential real estate loans and 120% in the case of commercial real estate loans. We also evaluate the credit and financial condition of the borrower, and if applicable, the guarantor. Appraisal reports prepared by independent appraisers or, in some cases, Abington Bank's staff appraiser are obtained on each loan to substantiate the property's market value, and are reviewed by us prior to the closing of the loan.
CONSTRUCTION LENDING. As part of our efforts to transition from a traditional thrift to a community bank, we have been an active originator of construction loans since the mid 1990s. We increased our construction loan efforts in 2002 when we hired a second construction loan officer. We targeted construction loans as a growth area for the Bank because they have shorter terms to maturity and they generally have floating or adjustable interest rates. We have focused our construction lending on making loans to homebuilders in the Delaware Valley area to acquire, develop and build single-family residences. Our construction loans include, to a lesser extent, loans for the construction of commercial and industrial use properties such as office buildings, retail shops and warehouses. At December 31, 2005, our construction loans amounted to $132.8 million, or 22.5% of our total loan portfolio. This amount includes $57.7 million of undisbursed loans in process. Our construction loan portfolio has grown appreciably over the past four years. At December 31, 2001, our construction loans amounted to $14.7 million, or 4.1% of our total loan portfolio.
A substantial amount of our construction loans are construction and development loans to contractors and builders primarily to finance the construction of single-family homes and subdivisions. Loans to finance the construction of single-family homes and subdivisions are generally offered to experienced builders in the Delaware Valley with whom we have an established relationship. Residential construction and development loans are typically offered with terms of up to 36 months. One or two six-month extensions may be provided for at our option. The maximum loan-to-value limit applicable to these loans is 80% of the appraised post construction value. We often establish interest reserves and obtain personal and/or corporate guarantees as additional security on our construction loans. Construction loan proceeds are disbursed periodically in increments as construction progresses and as inspection by our approved appraisers or loan inspectors warrants. Our construction loans are negotiated on an individual basis but typically have floating rates of interest based upon THE WALL STREET JOURNAL prime rate or, in some cases, LIBOR. Additional fees may be charged as funds are disbursed. In addition to interest payments during the term of the construction loan, we typically require that payments to principal be made as units are completed and released. Generally such principal payments must be equal to 110% of the amount attributable to acquisition and development of the lot plus 100% of the amount attributable to construction of the individual home. We permit a pre-determined number of model homes to be constructed on an unsold or "speculative" basis. All other units must be pre-sold before we will disburse funds for construction. Our construction loans also include loans to acquire and hold unimproved land, loans to acquire land and develop the basic infrastructure, such as roads and sewers, and construction loans for commercial uses. The majority of our construction loans are secured by properties located in Bucks and Montgomery Counties, Pennsylvania. However, we also make construction loans in Philadelphia, Chester and Delaware Counties, Pennsylvania as well as the New Jersey suburbs of Philadelphia.
Construction financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property's value at completion of construction compared to the estimated costs, including interest, of construction and other assumptions. Additionally, if the estimate of value proves to be inaccurate, we may be confronted with a project, when completed, having a value less than the loan amount. We have attempted to minimize these risks by generally concentrating on residential construction loans in our market area to contractors with whom we have established relationships. At December 31, 2004 and 2003 we had no construction loans that were considered non-performing. At December 31, 2005, we had one construction loan with a carrying value of $2.9 million that was considered non-performing. This one construction loan, which was placed on non-accrual status in November 2005, was 60 days delinquent at December 31, 2005 and was our only delinquent construction loan at such date. This same loan was also 60 days delinquent at December 31, 2004. An allowance was reserved on this loan at December 31, 2005 that management considers adequate to provide for the estimated uncertainty in collection of the outstanding balance. During the first quarter of 2006, we agreed to allow the sale of a portion of the underlying collateral of the loan, with the proceeds paid to the Bank. Approximately $1.7 million in net proceeds was received, reducing the outstanding balance of the loan to $1.2 million. Based on the specific circumstances of this loan, including the estimated value of the remaining collateral, we do not expect to incur any significant loss on this loan. We had no construction loans more than 30 days delinquent at December 31, 2003. We have not charged-off any construction loans in more than five years.
HOME EQUITY LINES. At December 31, 2005, the outstanding balance of our home equity lines of credit amounted to $41.1 million or 7.0% of our net loan portfolio. The unused portion of home equity lines was $22.3 million at such date. We offer home equity lines in amounts up to $200,000 on a revolving line of credit basis with interest tied to the prime rate. Generally, we have a second mortgage on the borrower's residence as collateral on its home equity lines. Generally, our home equity lines have loan-to-value ratios (combined with any loan secured by a first mortgage) of 80% or less. Our customers may apply for home equity lines as well as home equity loans at any banking office or on-line through our website.
COMMERCIAL BUSINESS LOANS. Our commercial business loans amounted to $11.0 million or 1.9% of the total loan portfolio at December 31, 2005. The unused portion of our commercial lines of credit at December 31, 2005, was $41.7 million.
Our commercial business loans typically are to small to mid-sized businesses in our market area and may be for working capital, inventory financing or accounts receivable financing. Small business loans may have adjustable or fixed rates of interest and generally have terms of three years or less but may go up to 10 years. Our commercial business loans generally are secured by equipment, machinery or other corporate assets. In addition, we generally obtain personal guarantees from the principals of the borrower with respect to all commercial business loans.
Our five commercial lenders actively solicit commercial business loans in our market area. Given the on-going consolidation of financial institutions, we are seeking to increase our commercial business loan portfolio. In particular, we are targeting loans of $250,000 to $500,000 that generally are considered too small by the regional and super-regional banks operating in our market. Commercial business loans generally are deemed to involve a greater degree of risk than single-family residential mortgage loans.
CONSUMER LENDING ACTIVITIES. In our efforts to provide a full range of financial services to our customers, we offer various types of consumer loans such as loans secured by deposit accounts, automobile loans and unsecured personal loans. These loans are originated primarily through existing and walk-in customers and direct advertising. At December 31, 2005, $4.7 million, or 0.8% of the total loan portfolio consisted of these types of loans.
Consumer loans generally have higher interest rates and shorter terms than residential loans, however, they have additional credit risk due to the type of collateral securing the loan or in some cases the absence of collateral. In the years ended December 31, 2005, 2004 and 2003 we charged-off $70,000, $32,000 and $89,000 of consumer loans, respectively. The 2005 charge-offs include $60,000 of charge-offs of overdrawn deposit balances, which are classified as loans for reporting purposes.
LOAN APPROVAL PROCEDURES AND AUTHORITY. Our Board of Directors establishes the bank's lending policies and procedures. Our Lending Policy Manual is reviewed on at least an annual basis by our management team in order to propose modifications as a result of market conditions, regulatory changes and other factors. All modifications must be approved by our Board of Directors.
Various officers or combinations of officers of Abington Bank have the authority within specifically identified limits to approve new loans. The largest individual lending authority is $1.0 million. Amounts in excess of the individual lending limits must be approved by the Commercial Lending Committee or the Consumer Lending Committee. Loans in excess of $1.0 million must be approved by the Board of Directors of Abington Bank.
ASSET QUALITY
GENERAL. One of our key objectives has been, and continues to be, maintaining a high level of asset quality. In addition to maintaining credit standards for new originations which we believe are sound, we are proactive in our loan monitoring, collection and workout processes in dealing with delinquent or problem loans. In addition, in recent years, we have retained independent, third parties to undertake reviews of the credit quality of our loan portfolio.
When a borrower fails to make a scheduled payment, we attempt to cure the deficiency by making personal contact with the borrower. Initial contacts are generally made 15 days after the date the payment is due. In most cases, deficiencies are promptly resolved. If the delinquency continues, late charges are assessed and additional efforts are made to collect the deficiency. All loans delinquent 60 days or more are reported to the Board of Directors of Abington Bank.
On loans where the collection of principal or interest payments is doubtful, the accrual of interest income ceases ("non-accrual" loans). On single-family residential mortgage loans 120 days or more past due and all other loans 90 days or more past due, as to principal and interest payments, our policy, with certain limited exceptions, is to discontinue accruing additional interest and reverse any interest currently accrued. On occasion, this action may be taken earlier if the financial condition of the borrower raises significant concern with regard to his/her ability to service the debt in accordance with the terms of the loan agreement. Interest income is not accrued on these loans until the borrower's financial condition and payment record demonstrate an ability to service the debt.
Real estate which is acquired as a result of foreclosure is classified as real estate owned until sold. Real estate owned is recorded at the lower of cost or fair value less estimated selling costs. Costs associated with acquiring and improving a foreclosed property are usually capitalized to the extent that the carrying value does not exceed fair value less estimated selling costs. Holding costs are charged to expense. Gains and losses on the sale of real estate owned are charged to operations, as incurred.
We account for our impaired loans under generally accepted accounting principles. An impaired loan generally is one for which it is probable, based on current information, that the lender will not collect all the amounts due under the contractual terms of the loan. Large groups of smaller balance, homogeneous loans are collectively evaluated for impairment. Loans collectively evaluated for impairment include
smaller balance commercial real estate loans, residential real estate loans and consumer loans. These loans are evaluated as a group because they have similar characteristics and performance experience. Larger commercial real estate, construction and commercial business loans are individually evaluated for impairment. At December 31, 2005, the Company had $2.9 million of loans that were determined to be impaired compared to no impaired loans at December 31, 2004. The impaired loan at December 31, 2005 was to one borrower, and a reserve on this loan is included in the Company's allowance for loan losses at December 31, 2005.
Federal regulations and our policies require that we utilize an internal asset classification system as a means of reporting problem and potential problem assets. We have incorporated an internal asset classification system, consistent with Federal banking regulations, as a part of our credit monitoring system. We currently classify problem and potential problem assets as "special mention," "substandard," "doubtful" or "loss" assets. An asset is considered "special mention" if it does not yet warrant adverse classification such as "substandard" or "doubtful," but nonetheless possesses credit deficiencies or potential weaknesses deserving management's close attention. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard" with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated "special mention."
When an insured institution classifies one or more assets, or portions thereof, as "special mention," "substandard" or "doubtful," it is required that a general valuation allowance for loan losses be established for loan losses in an amount deemed prudent by management. General valuation allowances represent loss allowances which have been established to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies one or more assets, or portions thereof, as "loss," it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount.
A savings institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by Federal and state bank regulators which can order the establishment of additional general or specific loss allowances. The Federal banking agencies, have adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management analyze all significant factors that affect the collectibility of the portfolio in a reasonable manner; and that management establish acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. In July 2001, the SEC issued Staff Accounting Bulletin ("SAB") No. 102, "Selected Loan Loss Allowance Methodology and Documentation Issues." The guidance contained in the SAB focuses on the documentation the SEC staff normally expects registrants to prepare and maintain in support of the allowance for loan and lease losses. Concurrent with the SEC's issuance of SAB No. 102, the federal banking agencies, represented by the Federal Financial Institutions Examination Council ("FFIEC"), issued an interagency policy statement entitled "Allowance for Loan
and Lease Losses Methodologies and Documentation for Banks and Savings Institutions" (Policy Statement). The SAB and Policy Statement were the result of an agreement between the SEC and the federal banking agencies in March 1999 to provide guidance on allowance for loan and lease losses methodologies and supporting documentation. Our allowance for loan losses includes a portion which is allocated to non-classified loans by type of loan, based primarily upon our periodic reviews of the risk elements within the various categories of loans. Our management believes that, based on information currently available, its allowance for loan losses is maintained at a level which covers all known and inherent losses that are both probable and reasonably estimable at each reporting date. However, actual losses are dependent upon future events and, as such, further additions to the level of allowances for loan losses may become necessary.
DELINQUENT LOANS. The following table shows the delinquencies in our loan portfolio as of the dates indicated.
NON-PERFORMING LOANS AND REAL ESTATE OWNED. The following table sets forth information regarding our non-performing loans and real estate owned. Our general policy is to cease accruing interest on single-family residential mortgages which are 120 days or more past due and all other loans which are 90 days or more past due and to charge-off all accrued interest. We may also cease accruing or charge-off interest at an earlier date if collection is considered doubtful.
For the years ended December 31, 2005, 2004 and 2003, the amount of additional interest income that would have been recognized on non-accrual loans if such loans had continued to perform in accordance with their contractual terms was $20,000, $5,000 and $16,000, respectively.
The following table shows the amounts of our non-performing assets (defined as non-accruing loans, accruing loans 90 days or more past due and real estate owned) at the dates indicated. We did not have troubled debt restructurings at any of the dates indicated.
- ------------------ (1) Non-performing loans consist of non-accruing loans plus accruing loans 90 days or more past due.
Property acquired by Abington Bank through foreclosure is initially recorded at the lower of cost, which is the lesser of the carrying value of the loan or fair value at the date of acquisition, or the fair value of the related assets at the date of foreclosure, less estimated costs to sell. Thereafter, if there is a further deterioration in value, we charge earnings for the diminution in value. Our policy is to obtain an appraisal on all real estate subject to foreclosure proceedings prior to the time of foreclosure and to require appraisals on a periodic basis on foreclosed properties and conduct inspections on foreclosed properties.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established through a provision for loan losses. We maintain the allowance at a level believed to cover all known and inherent losses in the portfolio that are both probable and reasonable to estimate at each reporting date. Management reviews the allowance for loan losses on no less than a quarterly basis in order to identify those inherent losses
and to assess the overall collection probability for the loan portfolio. Our evaluation process includes, among other things, an analysis of delinquency trends, non-performing loan trends, the level of charge-offs and recoveries, prior loss experience, total loans outstanding, the volume of loan originations, the type, size and geographic concentration of our loans, the value of collateral securing the loan, the borrower's ability to repay and repayment performance, the number of loans requiring heightened management oversight, local economic conditions and industry experience. In addition, in establishing the allowance for loan losses, we have implemented a nine point internal rating system for all loans originated by the Commercial Lending Department. At the time of origination, each loan, other than single-family residential mortgage loans, home equity lines and consumer loans, is assigned a rating based on the assumed risk elements of the loan. Such risk ratings are periodically reviewed by management and revised as deemed appropriate. The establishment of the allowance for loan losses is significantly affected by management judgment and uncertainties and there is a likelihood that different amounts would be reported under different conditions or assumptions. Various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require it to make additional provisions for estimated loan losses based upon judgments different from those of management. As of December 31, 2005, our allowance for loan losses was 0.27% of total loans receivable.
In the five-year period ended December 31, 2005, our loan charge-offs have been relatively minimal and three borrowers and their affiliates were responsible for 87.6% of such charge-offs. During the year ended December 31, 2004, we charged-off $99,000 of one- to four-family residential mortgage loans. Such loans were all to one borrower and previously had been deemed impaired. During the year ended December 31, 2003, we charged-off $671,000 of commercial real estate and multi-family residential mortgage loans to this borrower. As of December 31, 2004, all loans to this borrower had been charged-off.
We will continue to monitor and modify our allowances for loan losses as conditions dictate. No assurances can be given that our level of allowance for loan losses will cover all of the inherent losses on our loans or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions used by management to determine the current level of the allowance for loan losses.
The following table shows changes in our allowance for loan losses during the periods presented.
The following table shows how our allowance for loan losses is allocated by type of loan at each of the dates indicated.
The allowance consists of specific and general components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.
INVESTMENT ACTIVITIES
GENERAL. We invest in securities pursuant to our Investment Policy, which has been approved by our board of directors. The Investment Policy designates our President and three Senior Vice Presidents as the Investment Committee. The Investment Committee is authorized by the board to make the bank's investments consistent with the Investment Policy. The board of directors of Abington Bank reviews all investment activity on a monthly basis.
Our investment policy is designed primarily to manage the interest rate sensitivity of our assets and liabilities, to generate a favorable return without incurring undue interest rate and credit risk, to complement our lending activities and to provide and maintain liquidity. We also use a leveraged investment strategy for the purpose of enhancing returns. Pursuant to this strategy, we have utilized borrowings from the Federal Home Loan Bank of Pittsburgh ("FHLB") to purchase additional investment securities. We attempt to match the advances with the securities purchased in order to obtain a favorable difference, or "spread," between the interest paid on the advance against the yield received on the security purchased.
At December 31, 2005, our investment and mortgage-backed securities amounted to $246.6 million in the aggregate or 29.2% of total assets at such date. The largest component of our securities portfolio in recent periods has been mortgage-backed securities, which amounted to $147.4 million or 59.8% of the securities portfolio at December 31, 2005. In addition, we invest in U.S. government and agency obligations, municipal securities, corporate debt obligations and other securities. The majority of our agency debt securities have call provisions which provide the agency with the ability to call the securities at specified dates.
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, our securities are classified as available for sale, held to maturity, or trading, at the time of acquisition. Securities classified as held to maturity must be purchased with the intent and ability to hold that security until its final maturity and can be sold prior to maturity only under rare circumstances. Held to maturity securities are accounted for based upon the amortized cost of the security. Available for sale securities can be sold at any time based upon needs or market conditions. Available for sale securities are accounted for at fair value, with unrealized gains and losses on these securities, net of income tax provisions, reflected in retained earnings as accumulated other comprehensive income. At December 31, 2005, we had $158.8 million of securities classified as available for sale, $87.8 million of securities classified as held to maturity and no securities classified as trading account.
We do not purchase mortgage-backed derivative instruments that would be characterized "high-risk" under Federal banking regulations at the time of purchase, nor do we purchase corporate obligations which are not rated investment grade or better.
Our mortgage-backed securities consist primarily of mortgage pass-through certificates issued by the Government National Mortgage Association ("GNMA" or "Ginnie Mae"), Fannie Mae or Freddie Mac. Our mortgage-backed securities also include collateralized mortgage obligations ("CMOs") issued by such agencies and certain AAA rated private issuers. At December 31, 2005, $24.7 million of our mortgage-backed securities were CMOs. At December 31, 2005, $128.6 million or 87.3% of our mortgage-backed securities were issued by the GNMA, FNMA or FHLMC. The remaining $18.8 million of our mortgage-backed securities were issued by certain AAA rated private issuers.
Investments in mortgage-backed securities involve a risk that actual prepayments will be greater than estimated prepayments over the life of the security, which may require adjustments to the amortization of
any premium or accretion of any discount relating to such instruments thereby changing the net yield on such securities. There is also reinvestment risk associated with the cash flows from such securities or in the event such securities are redeemed by the issuer. In addition, the market value of such securities may be adversely affected by changes in interest rates.
Ginnie Mae is a government agency within the Department of Housing and Urban Development which was created to help finance government-assisted housing programs. Ginnie Mae securities are backed by loans insured by the Federal Housing Administration or guaranteed by the Veterans Administration. The timely payment of principal and interest on Ginnie Mae securities is guaranteed by Ginnie Mae and backed by the full faith and credit of the U.S. Government. Freddie Mac is a private corporation chartered by the U.S. Government. Freddie Mac issues participation certificates backed principally by conventional mortgage loans. Freddie Mac guarantees the timely payment of interest and the ultimate return of principal on participation certificates. Fannie Mae is a private corporation chartered by the U.S. Congress with a mandate to establish a secondary market for mortgage loans. Fannie Mae guarantees the timely payment of principal and interest on Fannie Mae securities. Freddie Mac and Fannie Mae securities are not backed by the full faith and credit of the U.S. Government, but because Freddie Mac and Fannie Mae are U.S. Government-sponsored enterprises, these securities are considered to be among the highest quality investments with minimal credit risks.
Collateralized mortgage obligations are typically issued by a special-purpose entity, in our case, of government agencies, which may be organized in a variety of legal forms, such as a trust, a corporation, or a partnership. Substantially all of the collateralized mortgage obligations held in our portfolio consist of senior sequential tranches. By purchasing senior sequential tranches, management attempts to ensure the cash flow associated with such an investment.
The following table sets forth certain information relating to our investment and mortgage-backed securities portfolios and our investment in FHLB stock at the dates indicated.
The following table sets forth the amount of investment securities which mature during each of the periods indicated and the weighted average yields for each range of maturities at December 31, 2005. No tax-exempt yields have been adjusted to a tax-equivalent basis.
SOURCES OF FUNDS
GENERAL. Deposits, loan repayments and prepayments, proceeds from sales of loans, cash flows generated from operations and Federal Home Loan Bank advances are the primary sources of our funds for use in lending, investing and for other general purposes.
DEPOSITS. We offer a variety of deposit accounts with a range of interest rates and terms. Our deposits consist of checking, both interest-bearing and non-interest-bearing, money market, savings and certificate of deposit accounts. At December 31, 2005, 42.9% of the funds deposited with Abington Bank were in core deposits, which are deposits other than certificates of deposit.
The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition. Our deposits are obtained predominantly from the areas where our branch offices are located. We have historically relied primarily on customer service and long-standing relationships with customers to attract and retain these deposits; however, market interest rates and rates offered by competing financial institutions significantly affect our ability to attract and retain deposits. Abington Bank uses traditional means of advertising its deposit products, including broadcast and print media and generally does not solicit deposits from outside its market area.
We do not actively solicit certificate accounts in excess of $100,000, known as "jumbo CDs," or use brokers to obtain deposits. Our jumbo CDs amounted to $140.4 million and $64.9 million, respectively, at December 31, 2005 and 2004, of which $76.0 million and $25.0 million, respectively, were scheduled to mature in 12 months. At December 31, 2005, the weighted average remaining maturity of our certificate of deposit accounts was 17.0 months.
The following table shows the distribution of, and certain other information relating to, our deposits by type of deposit, as of the dates indicated.
The following table shows the average balance of each type of deposit and the average rate paid on each type of deposit for the periods indicated.
The following table shows our savings flows during the periods indicated.
Year Ended December 31, ---------------------------------------- 2005 2004 2003 ------------ ------------ ------------ (In Thousands)
Total deposits $3,536,390 $3,387,865 $3,016,200 Total withdrawals 3,449,453 3,351,887 3,004,934
Interest credited 8,956 6,646 7,064 ---------- ---------- ----------
Total increase in deposits $ 95,893 $ 42,624 $ 18,330 ========== ========== ==========
The following table presents, by various interest rate categories and maturities, the amount of our certificates of deposit at December 31, 2005.
The following table shows the maturities of our certificates of deposit of $100,000 or more at December 31, 2005, by time remaining to maturity.
BORROWINGS. We utilize advances from the Federal Home Loan Bank of Pittsburgh as an alternative to retail deposits to fund our operations as part of our operating strategy. These FHLB advances are collateralized primarily by certain of our mortgage loans and mortgage-backed securities and secondarily by our investment in capital stock of the Federal Home Loan Bank of Pittsburgh. FHLB advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the Federal Home Loan Bank of Pittsburgh will advance to member institutions, including Abington Bank, fluctuates from time to time in accordance with the policies of the Federal Home Loan Bank. At December 31, 2005, we had $201.5 million in outstanding FHLB advances and $314.5 million of additional FHLB advances available. Approximately $88.0 million of our FHLB advances at December 31, 2005 were part of our matched funding program whereby we use such advances to purchase securities. Our current policy permits us to utilize up to $100.0 million of advances to match-fund securities. Given the proper interest rate environment, it is likely that we would increase this limit to permit additional FHLB advances for such match-funding purposes.
In addition to FHLB advances, our borrowings include securities sold under agreements to repurchase (repurchase agreements). Repurchase agreements are contracts for the sale of securities owned or
borrowed by Abington Bank, with an agreement to repurchase those securities at an agreed upon price and date. We use repurchase agreements as an investment vehicle for our commercial sweep checking product. We enter into securities repurchase agreements with our commercial checking account customers under a sweep account arrangement. Account balances are swept on a daily basis into mortgage-backed securities purchases from us, which we agree to repurchase as the checking account is drawn upon by the customer. At December 31, 2005, our securities repurchase agreements amounted to $16.1 million and all of such borrowings were short-term, having maturities of one year or less. The average balance of our securities sold under repurchase agreements for the year ended December 31, 2005 was $20.2 million.
The following table shows certain information regarding our borrowings at or for the dates indicated:
At December 31, 2005, $27.7 million of our borrowings were short-term (maturities of one year or less). Such short-term borrowings had a weighted average interest rate of 3.82% at December 31, 2005.
EMPLOYEES
At December 31, 2005, we had 108 full-time employees, and 26 part-time employees. None of such employees are represented by a collective bargaining group, and we believe that our relationship with our employees is excellent.
SUPERVISION AND REGULATION
GENERAL
Abington Bank, as a Pennsylvania-chartered savings bank with deposits insured by the Savings Association Insurance Fund administered by the Federal Deposit Insurance Corporation, is subject to extensive regulation and examination by the Pennsylvania Department of Banking and by the Federal Deposit Insurance Corporation. The federal and state laws and regulations applicable to banks regulate, among other things, the scope of their business, their investments, the reserves required to be kept against deposits, the timing of the availability of deposited funds and the nature and amount of and collateral for certain loans. This regulatory structure also gives the federal and state banking agencies extensive discretion in connection with their supervisory and enforcement activities and examination policies,
including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. The laws and regulations governing Abington Bank generally have been promulgated to protect depositors and not for the purpose of protecting shareholders.
Federal law provides the federal banking regulators, including the Federal Deposit Insurance Corporation and the Federal Reserve Board, with substantial enforcement powers. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders, and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities. Any change in such regulation, whether by the Pennsylvania Department of Banking, the Federal Deposit Insurance Corporation, the Federal Reserve Board or the United States Congress, could have a material impact on us and our operations.
Abington Community Bancorp and Abington Mutual Holding Company are registered as bank holding companies under the Bank Holding Company Act and Abington Community Bancorp and Abington Mutual Holding Company are subject to regulation and supervision by the Federal Reserve Board and by the Pennsylvania Department of Banking. Abington Community Bancorp and Abington Mutual Holding Company are also required to file annually a report of its operations with, and are subject to examination by, the Federal Reserve Board and the Pennsylvania Department of Banking. This regulation and oversight is generally intended to ensure that Abington Community Bancorp and Abington Mutual Holding Company limit their activities to those allowed by law and that they operate in a safe and sound manner without endangering the financial health of Abington Bank.
REGULATION OF ABINGTON COMMUNITY BANCORP AND ABINGTON MUTUAL HOLDING COMPANY
BANK HOLDING COMPANY ACT ACTIVITIES AND OTHER LIMITATIONS. Under the Bank Holding Company Act, Abington Community Bancorp and Abington Mutual Holding Company must obtain the prior approval of the Federal Reserve Board before they may acquire control of another bank or bank holding company, merge or consolidate with another bank holding company, acquire all or substantially all of the assets of another bank or bank holding company, or acquire direct or indirect ownership or control of any voting shares of any bank or bank holding company if, after such acquisition, Abington Community Bancorp and Abington Mutual Holding Company would directly or indirectly own or control more than 5% of such shares.
Federal statutes impose restrictions on the ability of a bank holding company and its nonbank subsidiaries to obtain extensions of credit from its subsidiary bank, on the subsidiary bank's investments in the stock or securities of the holding company, and on the subsidiary bank's taking of the holding company's stock or securities as collateral for loans to any borrower. A bank holding company and its subsidiaries are also prevented from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property, or furnishing of services by the subsidiary bank.
A bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the policy of the Federal Reserve Board that a bank holding company should stand ready to use available resources to provide adequate capital to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board regulations, or both.
NON-BANKING ACTIVITIES. The business activities of Abington Community Bancorp and Abington Mutual Holding Company, as bank holding companies, are restricted by the Bank Holding Company Act. Under the Bank Holding Company Act and the Federal Reserve Board's bank holding company regulations, bank holding companies may only engage in, or acquire or control voting securities or assets of a company engaged in:
o banking or managing or controlling banks and other subsidiaries authorized under the Bank Holding Company Act; and
o any Bank Holding Company Act activity the Federal Reserve Board has determined to be so closely related that it is incidental to banking or managing or controlling banks.
The Federal Reserve Board has by regulation determined that certain activities are closely related to banking including operating a mortgage company, finance company, credit card company, factoring company, trust company or savings association; performing certain data processing operations; providing limited securities brokerage services; acting as an investment or financial advisor; acting as an insurance agent for certain types of credit-related insurance; leasing personal property on a full-payout, non-operating basis; providing tax planning and preparation services; operating a collection agency; and providing certain courier services. However, as discussed below, certain other activities are permissible for a bank holding company that becomes a financial holding company.
FINANCIAL MODERNIZATION. The Gramm-Leach-Bliley Act permits greater affiliation among banks, securities firms, insurance companies, and other companies under a new type of financial services company known as a "financial holding company." A financial holding company essentially is a bank holding company with significantly expanded powers. Financial holding companies are authorized by statute to engage in a number of financial activities previously impermissible for bank holding companies, including securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; and merchant banking activities. The Gramm-Leach-Bliley Act also permits the Federal Reserve Board and the Treasury Department to authorize additional activities for financial holding companies if they are "financial in nature" or "incidental" to financial activities. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized, well managed, and has at least a "satisfactory" Community Reinvestment Act rating. A financial holding company must provide notice to the Federal Reserve Board within 30 days after commencing activities previously determined by statute or by the Federal Reserve Board and Department of the Treasury to be permissible. Abington Community Bancorp and Abington Mutual Holding Company have not submitted notices to the Federal Reserve Board of their intent to be deemed financial holding companies. However, they are not precluded from submitting a notice in the future should they wish to engage in activities only permitted to financial holding companies.
REGULATORY CAPITAL REQUIREMENTS. The Federal Reserve Board has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the Bank Holding Company Act. The Federal Reserve Board's capital adequacy guidelines for Abington Community Bancorp, on a consolidated basis, are similar to those imposed on Abington Bank by the Federal Deposit Insurance Corporation. See "-Regulation of Abington Bank - Regulatory Capital Requirements." At December 31, 2005, Abington Community Bancorp met all applicable regulatory capital requirements.
RESTRICTIONS ON DIVIDENDS. Abington Community Bancorp's ability to declare and pay dividends may depend in part on dividends received from Abington Bank. The Pennsylvania Banking Code regulates the distribution of dividends by savings banks and states, in part, that dividends may be declared and paid out
of accumulated net earnings, provided that the bank continues to meet its surplus requirements. In addition, dividends may not be declared or paid if Abington Bank is in default in payment of any assessment due the Federal Deposit Insurance Corporation.
A Federal Reserve Board policy statement on the payment of cash dividends states that a bank holding company should pay cash dividends only to the extent that the holding company's net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company's capital needs, asset quality and overall financial condition. The Federal Reserve Board also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the federal prompt corrective action regulations, the Federal Reserve Board may prohibit a bank holding company from paying any dividends if the holding company's bank subsidiary is classified as "undercapitalized." See "-Regulation of Abington Bank - Prompt Corrective Action," below.
SARBANES-OXLEY ACT OF 2002. On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002 implementing legislative reforms intended to address corporate and accounting fraud. In addition to the establishment of a new accounting oversight board which is empowered to enforce auditing, quality control and independence standards, the Sarbanes-Oxley Act restricts provision of both auditing and consulting services by accounting firms. To ensure auditor independence, any non-audit services being provided to an audit client require pre-approval by the company's audit committee members. In addition, the audit partners must be rotated. The Sarbanes-Oxley Act requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willfully violate this certification requirement. In addition, under the Sarbanes-Oxley Act, attorneys are required to report evidence of a material violation of the securities laws or a breach of fiduciary duty by a company to its chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to the audit committee or other similar committee of the board of directors or the board itself.
Longer prison terms were legislated for corporate executives who violate federal securities laws, the period during which certain types of suits can be brought against a company or its officers has been extended, and bonuses issued to top executives prior to restatement of a company's financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirement plan "blackout" periods, and loans to company executives are restricted. In addition, a provision directs that civil penalties levied by the SEC as a result of any judicial or administrative action under the Sarbanes-Oxley Act be deposited to a fund for the benefit of harmed investors. The Federal Accounts for Investor Restitution (FAIR) provision also requires the SEC to develop methods of improving collection rates. The legislation accelerates the time frame for disclosures by public companies for any material changes in their financial condition or operations and certain other events. Directors and executive officers must also provide information for most changes in ownership in a company's securities within two business days of the change.
The Sarbanes-Oxley Act also increases the oversight of, and codifies certain requirements relating to audit committees of public companies and how they interact with the company's "registered public accounting firm" (RPAF). Audit Committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the issuer. In addition, companies must disclose whether at least one member of the committee is a "financial expert," as such term is defined by the SEC, and if not, why not. Under the Sarbanes-Oxley Act, a RPAF is prohibited from performing statutorily mandated audit services for a company if such company's chief executive officer, chief financial officer, comptroller, chief accounting officer or any person serving in equivalent positions has been employed by such firm and participated in the audit of such company during the one-year period preceding the audit initiation date. The Sarbanes-Oxley Act also prohibits any officer or director of a
company or any other person acting under their direction from taking any action to fraudulently influence, coerce, manipulate or mislead any independent public or certified accountant engaged in the audit of the company's financial statements for the purpose of rendering the financial statement's materially misleading. The Sarbanes-Oxley Act also will require inclusion of an internal control report and assessment by management in the annual report to shareholders (which, in the Company's case, is expected to be required for its fiscal year ending December 31, 2006). The Sarbanes-Oxley Act requires the RPAF that issues the audit report to attest to and report on management's assessment of the company's internal controls. In addition, the Sarbanes-Oxley Act requires that each financial report required to be prepared in accordance with, or reconciled to, generally accepted accounting principles and filed with the SEC reflect all material correcting adjustments that are identified by a RPAF in accordance with generally accepted accounting principles and the rules and regulations of the SEC.
RESTRICTIONS APPLICABLE TO MUTUAL HOLDING COMPANIES. Under authority of Section 115.1 of the Pennsylvania Banking Code of 1965, as amended ("Banking Code"), and a policy statement issued by the Pennsylvania Department of Banking, the Department is authorized to approve the reorganization of a state chartered savings bank to a mutual holding company, provided the savings bank has a CAMEL composite rating of one or two under the Uniform Financial Institutions Rating System. While regulations governing the formation of Pennsylvania-chartered mutual holding companies have not been adopted, the policy statement and form of application issued by the Department provide the means by which such applications will be processed and approved.
Pursuant to Pennsylvania law, a mutual holding company may engage only in the following activities:
o Investing in the stock of one or more financial institution subsidiaries.
o Acquiring one or more additional financial institution subsidiaries into a subsidiary of the holding company.
o Merging with or acquiring another holding company, one of whose subsidiaries is a financial institution subsidiary.
o Investing in a corporation the capital stock of which is available for purchase by a savings bank under federal law or under the Pennsylvania Banking Code.
o Engaging in such activities as are permitted, by statute or regulation, to a holding company of a federally chartered insured mutual institution under federal law.
o Engaging in such other activities as may be permitted by the Pennsylvania Department of Banking.
If a mutual holding company acquires or merges with another holding company, the holding company acquired or the holding company resulting from such merger or acquisition may only invest in assets and engage in activities listed above, and has a period of two years to cease any non-conforming activities and divest of any non-conforming investments.
The mutual holding company will be subject to such regulations as the Pennsylvania Department of Banking may prescribe. No mutual holding company regulations have been issued to date by the Department.
REGULATION OF ABINGTON BANK
PENNSYLVANIA SAVINGS BANK LAW. The Pennsylvania Banking Code contains detailed provisions governing the organization, location of offices, rights and responsibilities of directors, officers, and employees, as well as corporate powers, savings and investment operations and other aspects of Abington Bank and its affairs. The code delegates extensive rule-making power and administrative discretion to the Pennsylvania Department of Banking so that the supervision and regulation of state-chartered savings banks may be flexible and readily responsive to changes in economic conditions and in savings and lending practices.
The Pennsylvania Banking Code also provides that state-chartered savings banks may engage in any activity permissible for a federal savings association, subject to regulation by the Pennsylvania Department of Banking. The Federal Deposit Insurance Act, however, prohibits Abington Bank from making new investments, loans, or becoming involved in activities as principal and equity investments which are not permitted for national banks unless:
o the Federal Deposit Insurance Corporation determines the activity or investment does not pose a significant risk of loss to the Savings Association Insurance Fund; and
o Abington Bank meets all applicable capital requirements.
Accordingly, the additional operating authority provided to Abington Bank by the Pennsylvania Banking Code is significantly restricted by the Federal Deposit Insurance Act.
INSURANCE OF ACCOUNTS. The deposits of Abington Bank are insured to the maximum extent permitted by the Savings Association Insurance Fund, which is administered by the Federal Deposit Insurance Corporation, and are backed by the full faith and credit of the U.S. Government. As insurer, the Federal Deposit Insurance Corporation is authorized to conduct examinations of, and to require reporting by, insured institutions. It also may prohibit any insured institution from engaging in any activity the Federal Deposit Insurance Corporation determines by regulation or order to pose a serious threat to the Federal Deposit Insurance Corporation. The Federal Deposit Insurance Corporation also has the authority to initiate enforcement actions against savings institutions.
Under current Federal Deposit Insurance Corporation regulations, Savings Association Insurance Fund- insured institutions are assigned to one of three capital groups which are based solely on the level of an institution's capital. Assessment rates are then tied to the level of an institution's supervisory concern based on risk classifications derived from the capital groups. Rates during the last six months of 2005 ranged from zero for well capitalized, healthy institutions, such as Abington Bank, to 27 basis points for undercapitalized institutions with substantial supervisory concerns.
In addition, all institutions with deposits insured by the Federal Deposit Insurance Corporation are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, a mixed-ownership government corporation established to recapitalize the predecessor to the Savings Association Insurance Fund. These assessments will continue until the Financing Corporation bonds mature in 2019.
The Federal Deposit Insurance Corporation may terminate the deposit insurance of any insured depository institution, including Abington Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the Federal Deposit Insurance Corporation. It also may suspend deposit insurance temporarily during the
hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the Federal Deposit Insurance Corporation. Management is aware of no existing circumstances which would result in termination of Abington Bank's deposit insurance.
DEPOSIT INSURANCE REFORM. On February 8, 2006, President Bush signed into law legislation that merges the Bank Insurance Fund ("BIF") and the SAIF, eliminates any disparities in bank and thrift risk-based premium assessments, reduces the administrative burden of maintaining and operating two separate funds and establishes certain new insurance coverage limits and a mechanism for possible periodic increases. The legislation also gives the FDIC greater discretion to identify the relative risks all institutions present to the deposit insurance fund and set risk-based premiums.
Major provisions in the legislation include: maintaining basic deposit and municipal account insurance coverage at $100,000 but providing for a new basic insurance coverage for retirement accounts of $250,000. Insurance coverage for basic deposit and retirement accounts could be increased for inflation every five years in $10,000 increments beginning in 2011; providing the FDIC with the ability to set the designated reserve ratio within a range of between 1.15 percent and 1.50 percent, rather than maintaining 1.25 percent at all times regardless of prevailing economic conditions; providing a one-time assessment credit of $4.7 billion to banks and savings associations in existence on December 31, 1996. The institutions qualifying for the credit may use it to offset future premiums with certain limitations; requiring the payment of dividends of 100% of the amount that the insurance fund exceeds 1.5% of the estimated insured deposits and the payment of 50% of the amount that the insurance fund exceeds 1.35% of the estimated insured deposits. (when the reserve is greater than 1.35% but no more than 1.5%); the merger of the SAIF and BIF must occur no later than July 1, 2006. Other provisions will become effective within 90 days of the publication date of the final FDIC regulations implementing the legislation.
REGULATORY CAPITAL REQUIREMENTS. The Federal Deposit Insurance Corporation has promulgated capital adequacy requirements for state-chartered banks that, like Abington Bank, are not members of the Federal Reserve Board System. The capital regulations establish a minimum 3% Tier 1 leverage capital requirement for the most highly rated state-chartered, non-member banks, with an additional cushion of at least 100 to 200 basis points for all other state-chartered, non-member banks, which effectively increases the minimum Tier 1 leverage ratio for such other banks to 4% to 5% or more. Under the Federal Deposit Insurance Corporation's regulations, the highest-rated banks are those that the Federal Deposit Insurance Corporation determines are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in general, which are considered a strong banking organization, rated composite 1 under the Uniform Financial Institutions Rating System. Tier 1, or leverage capital, is defined as the sum of common shareholders' equity, including retained earnings, noncumulative perpetual preferred stock and related surplus, and minority interests in consolidated subsidiaries, minus all intangible assets other than certain purchased mortgage servicing rights and purchased credit card relationships.
The Federal Deposit Insurance Corporation's regulations also require that state-chartered, non-member banks meet a risk-based capital standard. The risk-based capital standard requires the maintenance of total capital, defined as Tier 1 capital and supplementary (Tier 2) capital, to risk weighted assets of 8%. In determining the amount of risk-weighted assets, all assets, plus certain off balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the Federal Deposit Insurance Corporation believes are inherent in the type of asset or item. The components of Tier 1 capital for the risk-based standards are the same as those for the leverage capital requirement. The components of supplementary (Tier 2) capital include cumulative perpetual preferred stock, mandatory subordinated debt, perpetual
subordinated debt, intermediate-term preferred stock, up to 45% of unrealized gains on equity securities and a portion of a bank's allowance for loan losses. Allowance for loan losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital that may be included in total capital is limited to 100% of Tier 1 capital.
A bank that has less than the minimum leverage capital requirement is subject to various capital plan and activities restriction requirements. The Federal Deposit Insurance Corporation's regulations also provide that any insured depository institution with a ratio of Tier 1 capital to total assets that is less than 2.0% is deemed to be operating in an unsafe or unsound condition pursuant to Section 8(a) of the Federal Deposit Insurance Act and could be subject to potential termination of deposit insurance.
Abington Bank is also subject to minimum capital requirements imposed by the Pennsylvania Department of Banking on Pennsylvania chartered depository institutions. Under the Pennsylvania Department of Banking's capital regulations, a Pennsylvania bank or savings association must maintain a minimum leverage ratio of Tier 1 capital, as defined under the Federal Deposit Insurance Corporation's capital regulations, to total assets of 4%. In addition, the Pennsylvania Department of Banking has the supervisory discretion to require a higher leverage ratio for any institution or association based on inadequate or substandard performance in any of a number of areas. The Pennsylvania Department of Banking incorporates the same Federal Deposit Insurance Corporation risk-based capital requirements in its regulations. As of December 31, 2005, Abington Bank was in compliance with all applicable regulatory capital requirements and was deemed to be a "well-capitalized" institution.
AFFILIATE TRANSACTION RESTRICTIONS. Federal laws strictly limit the ability of banks to engage in transactions with their affiliates, including their bank holding companies. Such transactions between a subsidiary bank and its parent company or the nonbank subsidiaries of the bank holding company are limited to 10% of a bank subsidiary's capital and surplus and, with respect to such parent company and all such nonbank subsidiaries, to an aggregate of 20% of the bank subsidiary's capital and surplus. Further, loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts. Federal law also requires that all transactions between a bank and its affiliates be on terms as favorable to the bank as transactions with non-affiliates.
FEDERAL HOME LOAN BANK SYSTEM. Abington Bank is a member of the Federal Home Loan Bank of Pittsburgh, which is one of 12 regional Federal Home Loan Banks. Each Federal Home Loan Bank serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the Federal Home Loan Bank System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the Federal Home Loan Bank.
As a member, Abington Bank is required to purchase and maintain stock in the Federal Home Loan Bank of Pittsburgh in an amount equal to the greater of 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 5% of its outstanding advances from the Federal Home Loan Bank. At December 31, 2005, Abington Bank was in compliance with this requirement.
FEDERAL RESERVE BOARD SYSTEM. The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts, which are primarily checking and NOW accounts, and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy the liquidity requirements that are imposed by the Pennsylvania Department of Banking. At December 31, 2005, Abington Bank was in compliance with these reserve requirements.
TAXATION
FEDERAL TAXATION
GENERAL. Abington Community Bancorp, Abington Mutual Holding Company and Abington Bank are subject to federal income taxation in the same general manner as other corporations with some exceptions listed below. The following discussion of federal, state and local income taxation is only intended to summarize certain pertinent income tax matters and is not a comprehensive description of the applicable tax rules.
METHOD OF ACCOUNTING. For federal income tax purposes, Abington Bank reports income and expenses on the accrual method of accounting and files its federal income tax return on a calendar year basis.
BAD DEBT RESERVES. The Small Business Job Protection Act of 1996 eliminated the use of the reserve method of accounting for bad debt reserves by savings associations, effective for taxable years beginning after 1995. Prior to that time, Abington Bank was permitted to establish a reserve for bad debts and to make additions to the reserve. These additions could, within specified formula limits, be deducted in arriving at taxable income. As a result of the Small Business Job Protection Act of 1996, savings associations must use the specific charge-off method in computing their bad debt deduction beginning with their 1996 federal tax return. In addition, federal legislation required the recapture over a six year period of the excess of tax bad debt reserves at December 31, 1995 over those established as of December 31, 1987.
TAXABLE DISTRIBUTIONS AND RECAPTURE. Prior to the Small Business Job Protection Act of 1996, bad debt reserves created prior to January 1, 1988 were subject to recapture into taxable income if Abington Bank failed to meet certain thrift asset and definitional tests. New federal legislation eliminated these savings association related recapture rules. However, under current law, pre-1988 reserves remain subject to recapture should Abington Bank make certain non-dividend distributions or cease to maintain a bank charter.
At December 31, 2005, Abington Bank's total federal pre-1988 reserve was approximately $3.2 million. The reserve reflects the cumulative effects of federal tax deductions by Abington Bank for which no federal income tax provisions have been made.
ALTERNATIVE MINIMUM TAX. The Internal Revenue Code imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences. The alternative minimum tax is payable to the extent such alternative minimum tax income is in excess of the regular income tax. Net operating losses, of which Abington Bank has none, can offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. Abington Bank has not been subject to the alternative minimum tax or any such amounts available as credits for carryover.
CORPORATE DIVIDENDS-RECEIVED DEDUCTION. Abington Community Bancorp may exclude from its income 100% of dividends received from Abington Bank as a member of the same affiliated group of corporations. The corporate dividends received deduction is 80% in the case of dividends received from corporations which a corporate recipient owns less than 80%, but at least 20% of the distribution corporation. Corporations which own less than 20% of the stock of a corporation distributing a dividend may deduct only 70% of dividends received.
STATE AND LOCAL TAXATION
PENNSYLVANIA TAXATION. Abington Community Bancorp is subject to the Pennsylvania Corporate Net Income Tax, Capital Stock and Franchise Tax. The Corporation Net Income Tax rate for 2005 is 9.99% and is imposed on unconsolidated taxable income for federal purposes with certain adjustments. In general, the Capital Stock and Franchise Tax is a property tax imposed on a corporation's capital stock value at a statutorily defined rate, such value being determined in accordance with a fixed formula based upon average net income and net worth.
Abington Bank is subject to tax under the Pennsylvania Mutual Thrift Institutions Tax Act, as amended to include thrift institutions having capital stock. Pursuant to the Mutual Thrift Institutions Tax, the tax rate is 11.5%. The Mutual Thrift Institutions Tax exempts Abington Bank from other taxes imposed by the Commonwealth of Pennsylvania for state income tax purposes and from all local taxation imposed by political subdivisions, except taxes on real estate and real estate transfers. The Mutual Thrift Institutions Tax is a tax upon net earnings, determined in accordance with generally accepted accounting principles with certain adjustments. The Mutual Thrift Institutions Tax, in computing income according to generally accepted accounting principles, allows for the deduction of interest earned on state and federal obligations, while disallowing a percentage of a thrift's interest expense deduction in the proportion of interest income on those securities to the overall interest income of Abington Bank. Net operating losses, if any, thereafter can be carried forward three years for Mutual Thrift Institutions Tax purposes.
ITEM 1A.
ITEM 1A. RISK FACTORS
MARKET RATES OF INTEREST HAVE HURT PROFITABILITY
Market rates of interest are beginning to rise from historically low levels. Many institutions, including Abington Bank, have 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 2.27% for the year ended December 31, 2005 compared to 2.30% and 2.50% for the years ended December 31, 2004 and 2003, respectively. Abington Bank's net interest margin, which is net interest income as a percentage of average interest-earning assets, was 2.78% for the year ended December 31, 2005 compared to 2.67% and 2.88% for the years ended December 31, 2004 and 2003, respectively. In addition, a sudden increase 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 $8.2 million or 6.90%. Under the same circumstances, our net interest income would be expected to decrease by $336,000 or 1.43%.
COMPETITION FOR LOW-COST CORE DEPOSITS IS INCREASING
As a result of rising interest rates in recent periods, deposit customers have transferred significant amounts of their deposits from low-cost "core deposits" such as checking and savings accounts to certificates of deposits, also known as time deposits. For the year ended December 31, 2005 core deposits comprised 42.9% of our average total deposits compared to 49.7% and 47.6% for the years ended December 31, 2004 and 2003, respectively. This has been a result of the increased rates now available on those products relative to other deposit products. As more customers invest in time deposits and as competition for low-cost core deposits increases, the average rate Abington Bank pays on its deposits will likely increase. This will have the effect of narrowing our net interest spread and net interest margin. The
average rate we paid on our interest-bearing deposits was 2.38% for the year ended December 31, 2005 compared to 1.88% and 2.11% for the years ended December 31, 2004 and 2003, respectively.
OUR LOANS ARE CONCENTRATED TO BORROWERS IN OUR MARKET AREA
At December 31, 2005, the preponderance of our total loans were to individuals and/or secured by properties located in our market area of Montgomery and Bucks Counties in Pennsylvania. We have relatively few loans outside of our market. As a result, we may have a greater risk of loan defaults and losses in the event of an economic downturn in our market area such as a decline in local property values.
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 $61.7 million or 17.2 % of our total loan portfolio at December 31, 2001 to $209.4 million or 35.5% of the total loan portfolio at December 31, 2005. At the same time, the percentage of the loan portfolio comprised of single-family residential mortgage loans has decreased. Our single-family residential mortgage loans amounted to $267.0 million or 74.4% of our total loan portfolio at December 31, 2001 compared to $323.7 million or 54.9% at December 31, 2005. 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. As of December 31, 2005, our non-performing loans increased to $2.9 million compared to $227,000 at December 31, 2004. This increase was due to one construction loan which has not performed in accordance with its terms.
ABINGTON MUTUAL HOLDING COMPANY OWNS A MAJORITY OF OUR OUTSTANDING COMMON STOCK AND CAN CONTROL THE RESULT OF MOST MATTERS PUT TO A VOTE OF SHAREHOLDERS
Abington Mutual Holding Company owns 55% of our outstanding shares of common stock, and, through its board of directors, is able to exercise voting control over most matters put to a vote of our shareholders. The same directors and officers who manage Abington Community Bancorp and Abington Bank also manage Abington Mutual Holding Company. No assurances can be given that Abington Mutual Holding Company will not take action which the minority shareholders believe to be contrary to their interests. For example, Abington Mutual Holding Company could approve the implementation of stock benefit plans, prevent a sale or merger transaction or defeat a candidate for our board of directors or other proposals put forth by the minority shareholders. Moreover, Abington Mutual Holding Company's ownership of more than a majority of the outstanding shares of our common stock is likely to perpetuate existing management and directors.
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 which we believe is adequate to offset probable losses on our existing loans. 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. Our allowance for loan losses amounted to 50.3% of non-performing loans at December 31, 2005.
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.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
ITEM 2. PROPERTIES
We currently conduct business from our main office, seven full-service banking offices and four limited service offices. The following table sets forth the net book value of the land, building and leasehold improvements and certain other information with respect to our offices at December 31, 2005.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 2005, 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 Community Bancorp, Inc. common stock trades on the Nasdaq National Market under the trading symbol "ABBC." At the close of business on December 31, 2005, there were 1,600 shareholders of record.
Company common shares were first sold in Abington Community Bancorp's initial public offering as a part of Abington Bank's mutual holding company reorganization on December 16, 2004 at the offering price of $10.00 per share. The Company's common stock began trading on Nasdaq on December 17, 2004.
The following table sets forth the high and low closing stock prices of the Company's common stock as reported by the Nasdaq stock market during the periods presented.
YEAR ENDED DECEMBER 31, ------------------------------------------- 2005 2004 --------------------- ---------------------
High Low High Low
First Quarter $ 13.75 $ 12.79 n/a n/a Second Quarter $ 13.15 $ 10.30 n/a n/a Third Quarter $ 13.09 $ 11.65 n/a n/a Fourth Quarter $ 13.65 $ 11.90 $ 13.70 $ 13.01
The following table summarizes the cash dividends per share of common stock paid by the Company during the periods indicated.
YEAR ENDED DECEMBER 31, --------------------------- 2005 2004 ------------- -------------
First Quarter n/a n/a Second Quarter $ 0.05 n/a Third Quarter $ 0.05 n/a Fourth Quarter $ 0.05 n/a
The Company did not sell any of its equity securities during 2005 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 did not make any repurchases of its common stock during the fourth quarter of 2005.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial and other data of Abington Community Bancorp, Inc. set forth below does not purport to be complete and should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including the Consolidated Financial Statements and related Notes, appearing elsewhere herein.
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(1) Due to the timing of the Bank's reorganization into the mutual holding company form and the completion of the Company's initial public offering on December 16, 2004, earnings per share for the period from December 16, 2004 to December 31, 2004 is not considered meaningful and is not shown.
(2) With the exception of end of period ratios, all ratios are based on average monthly balances during the indicated periods.
(3) Average interest rate spread represents the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities, and net interest margin represents net interest income as a percentage of average interest-earning assets.
(4) The efficiency ratio represents the ratio of non-interest expense divided by the sum of net interest income and non-interest income.
(5) Asset quality ratios are end of period ratios, except for net charge-offs to average loans receivable.
(6) Non-performing assets consist of non-performing loans and real estate owned. Non-performing loans consist of all accruing loans 90 days or more past due and all non-accruing loans. It is our policy to cease accruing interest on all loans 90 days or more past due. Real estate owned consists of real estate acquired through foreclosure and real estate acquired by acceptance of a deed-in-lieu of foreclosure.
(7) Capital ratios are end of period ratios and are calculated for Abington Bank per regulatory requirements.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW--The Company was formed by the Bank in connection with the Bank's reorganization into the mutual holding company form and commenced operations in December 2004. The Company's results of operations are primarily dependent on the results of the Bank, which is a wholly owned subsidiary of the Company. The Bank's results of operations depend to a large extent on net interest income, which is the difference between the income earned on its loan and investment portfolios and the cost of funds, which is the interest paid on deposits and borrowings. Results of operations are also affected by our provisions for loan losses, losses on derivative instruments, service charges and other non-interest income and non-interest expense. Non-interest expense principally consists of salaries and employee benefits, office occupancy and equipment expense, data processing expense, advertising and promotions and other expense. Our results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially impact our financial condition and results of operations. The Bank is subject to regulation by the Federal Deposit Insurance Corporation ("FDIC") and the Pennsylvania Department of Banking. The Bank's executive offices and loan processing office are in Jenkintown, Pennsylvania, with seven other branches and four limited service facilities located in nearby Montgomery County neighborhoods. The Bank is principally engaged in the business of accepting customer deposits and investing these funds in loans, primarily residential mortgages.
We had net income of $6.3 million for the year ended December 31, 2005, our first full year as a public company, representing an increase of $1.7 million or 38.4% over net income of $4.6 million for the year ended December 31, 2004. Earnings per share was $0.41 for the year ended December 31, 2005. Our net interest income improved by $4.4 million or 26.3% to $21.0 million for 2005 from $16.6 million for 2004. The improvement was primarily a result of an increase in the average balances of our interest earning assets, most notably loans, combined with increases in the average yields on those assets. These increases were partially offset by increases in the average balances of our interest bearing liabilities and the rates paid on those liabilities. The Company's total assets increased $126.1 million or 17.6% to $844.1 million at December 31, 2005 compared to $718.0 million at December 31, 2004. The primary reason for the increase in total assets in 2005 was a $116.8 million or 28.3% increase in net loans receivable to $529.5 million. Our total deposits increased $95.9 million or 23.7% to $501.2 million at December 31, 2005 from $405.3 million at December 31, 2004, primarily as a result of a $103.4 million increase in certificate accounts. The shift towards higher-rate certificates of deposits was a result of the increased rates available on those products relative to other deposit products in the current interest rate environment. The Company continues to remain focused on maintaining and growing its base of core deposits over the long term. The upcoming opening of three new branches is expected to contribute towards this goal.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES--In reviewing and understanding financial information for Abington Community Bancorp, Inc., you are encouraged to read and understand the significant accounting policies used in preparing our consolidated financial statements. These policies are described in Note 1 of the notes to our consolidated financial statements included in Item 8 of this Form 10-K. The accounting and financial reporting policies of Abington Community Bancorp, Inc. conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The preparation of the Company's consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Management evaluates these estimates and assumptions on an ongoing basis including those related to the allowance for loan losses and deferred income taxes. Management bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances. These form the bases for making judgments on the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
ALLOWANCE FOR LOAN LOSSES--The allowance for loan losses is 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. 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 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 loss have approximated actual losses incurred. In addition, the Pennsylvania Department of Banking and the FDIC, as an integral part of their examination processes, periodically review our allowance for loan losses. The Pennsylvania Department of Banking 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.
INCOME TAXES--Management makes estimates and judgments to calculate some of our tax liabilities and determine the recoverability of some of our deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenues and expenses. Management also estimates a reserve for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. These estimates and judgments are inherently subjective. Historically, our estimates and judgments to calculate our deferred tax accounts have not required significant revision from management's initial estimates.
In evaluating our ability to recover deferred tax assets, management considers all available positive and negative evidence, including our past operating results, recent cumulative losses and our forecast of future taxable income. In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction is estimated future taxable income may require us to record an additional valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.
RECENT ACCOUNTING PRONOUNCEMENTS--In May 2005, the FASB issued SFAS No. 154, ACCOUNTING CHANGES AND ERROR CORRECTIONS- A REPLACEMENT OF APB OPINION NO. 20 AND FASB STATEMENT NO. 3. SFAS No. 154 replaces APB Opinion No. 20, ACCOUNTING CHANGES, and FASB Statement No. 3, REPORTING ACCOUNTING CHANGES IN INTERIM FINANCIAL STATEMENTS, and changes the accounting and reporting requirements for a change in accounting principle. SFAS No. 154 applies to all voluntary changes in an accounting principle, as well as to changes required by a new accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS No. 154 is
effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005 and requires retrospective application to prior periods' financial statements for most voluntary changes in an accounting principle, unless it is impracticable to do so. The Company adopted this guidance on January 1, 2006. The adoption did not have a material effect on the Company's financial position or results of operations.
On November 3, 2005, the FASB issued FASB Staff Position ("FSP'") Nos. FAS 115-1 and FAS 124-1, THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS. This FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. This FSP nullifies certain requirements of EITF Issue 03-1, THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS, and supersedes EITF Topic No. D-44, RECOGNITION OF OTHER-THAN-TEMPORARY IMPAIRMENT UPON THE PLANNED SALE OF A SECURITY WHOSE COST EXCEEDS FAIR VALUE. The guidance in this FSP amends FASB Statement No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. The FSP is effective for reporting periods beginning after December 15, 2005. The Company adopted this guidance on January 1, 2006. The adoption did not have a material effect on the Company's financial position or results of operations.
On December 19, 2005, the FASB issued FSP 94-6-1, TERMS OF LOAN PRODUCTS THAT MAY GIVE RISE TO A CONCENTRATION OF CREDIT RISK. FSP 94-6-1 addresses whether, under existing guidance, nontraditional loan products represent a concentration of credit risk and what disclosures are required for entities that originate, hold, guarantee, service, or invest in loan products whose terms may give rise to a concentration of credit risk. Nontraditional loan products expose the originator, holder, investor, guarantor, or servicer to higher credit risk than traditional loan products. Typical features of nontraditional loan products may include high loan-to-value ratios and interest or principal repayments that are less than the repayments for fully amortizing loans of an equivalent term. FSP 94-6-1 was effective upon its issuance and it did not have a material impact on the Company's financial position or disclosures.
In February 2006, the FASB issued SFAS No. 155, ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS. This statement amends FASB Statements No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, and No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES. This statement resolves issues addressed in Statement 133 Implementation Issue No. D1, APPLICATION OF STATEMENT 133 TO BENEFICIAL INTEREST IN SECURITIZED FINANCIAL ASSETS. This Statement is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. The Company is continuing to evaluate the impact of this pronouncement and does not expect that the guidance will have a material effect on the Company's financial position or results of operations.
In March 2006, the FASB issued SFAS No. 156, ACCOUNTING FOR SERVICING OF FINANCIAL ASSET- AN AMENDMENT OF FASB STATEMENT NO. 140. This statement amends SFAS No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This statement requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. It also permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. This Company plans to adopt this statement effective January 1, 2007. The Company is continuing to evaluate the impact of this pronouncement and does not expect that the guidance will have a material effect on the Company's financial position or results of operations.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2005 AND DECEMBER 31, 2004
The Company's total assets increased $126.1 million or 17.6% to $844.1 million at December 31, 2005 compared to $718.0 million at December 31, 2004. The primary reason for the increase in total assets in 2005 was a $116.8 million or 28.3% increase in net loans receivable to $529.5 million. All categories of loans increased, with the largest growth occurring in one- to four-family residential loans and construction loans. Growing the Company's loan portfolio through new loan originations, loan purchases and loan participations has been a key element of the Company's long-term plan to leverage its capital. Our investment securities, both held-to-maturity and available-for-sale, increased by an aggregate of $12.8 million or 14.9% to an aggregate of $99.2 million at December 31, 2005 compared to an aggregate of $86.4 million at December 31, 2004. This increase was primarily the result of the purchase of approximately $10.2 million of municipal bonds. The tax-exempt income generated by these bonds has contributed to the reduction of the Company's effective tax rate. Our mortgage-backed securities, both held-to-maturity and available-for-sale, decreased by an aggregate of $17.4 million or 10.5% to an aggregate of $147.4 million at December 31, 2005 compared to an aggregate of $164.7 million at December 31, 2004. During 2005, purchases of approximately $29.3 million of both available-for-sale and held-to-maturity mortgage-backed securities were offset by approximately $44.5 million in repayments of such securities. The excess repayments were primarily invested in new loan originations. Our cash and cash equivalents decreased $5.6 million or 16.8% to $27.7 million at December 31, 2005 compared to $33.3 million at December 31, 2004. This decrease was also due primarily to investments in new loan originations. Additionally, the Company purchased $15.0 million of bank owned life insurance ("BOLI") during the first quarter of 2005, which is reflected in the Company's balance sheet at its cash surrender value. The BOLI is intended to fund various benefit programs of the Company.
Our total deposits increased $95.9 million or 23.7% to $501.2 million at December 31, 2005 from $405.3 million at December 31, 2004 as a result of a $103.4 million increase in certificate accounts and a $1.8 million increase in checking accounts that were partially offset by a decrease in savings and money market accounts. The shift towards higher-rate certificates of deposits was a result of the increased rates available on those products relative to other deposit products in the current interest rate environment. The Company continues to remain focused on maintaining and growing its base of core deposits over the long term. The upcoming opening of three new branches is expected to contribute towards this goal. Our advances from the Federal Home Loan Bank ("FHLB") increased $30.8 million or 18.0% during 2005 to $201.4 million at December 31, 2005 compared to $170.7 million at December 31, 2004. We utilize advances from the FHLB as an alternative to retail deposits in order to fund operations and additional asset growth. The $3.2 million increase in other borrowed money to $16.1 million at December 31, 2005 compared to $12.9 million at December 31, 2004 reflects an increase in the amount of securities repurchase agreements entered into with certain commercial checking account customers.
Our stockholders' equity decreased $5.8 million to $117.2 million at December 31, 2005 compared to $123.1 million at December 31, 2004. The decrease was primarily due to the purchase of approximately 419,000 shares of the Company's common stock for an aggregate of $5.3 million by the Company's employee stock ownership plan ("ESOP") and the purchase of approximately 286,000 shares of the Company's common stock for an aggregate of $3.7 million by the Company's 2005 Recognition and Retention Plan ("RRP"). The payment of the Company's quarterly cash dividends of $0.05 per share in June, September and December reduced retained earnings by an aggregate of $2.3 million. Additionally, our accumulated other comprehensive loss increased $1.8 million. These decreases to stockholders' equity were partially offset by our net income for 2005, resulting in a net increase in retained earnings of $4.0 million.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funds are from deposits, amortization of loans, loan prepayments and pay-offs, mortgage-backed securities and other investments, and other funds provided from operations. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing investment securities are relatively predictable sources of funds, deposit flows and loan prepayments can be greatly influenced by general interest rates, economic conditions and competition. We also maintain excess funds in short-term, interest-bearing assets that provide additional liquidity. At December 31, 2005, our cash and cash equivalents amounted to $27.7 million. In addition, at such date we had $24.1 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 $158.8 million at December 31, 2005.
We use our liquidity to fund existing and future loan commitments, to fund maturing certificates of deposit and demand deposit withdrawals, to invest in other interest-earning assets, and to meet operating expenses. At December 31, 2005, we had certificates of deposit maturing within the next 12 months amounting to $161.2 million. Based upon historical experience, we anticipate that a significant portion of the maturing certificates of deposit will be redeposited with us. For years ended December 31, 2005 and 2004, the average balance of our outstanding FHLB advances was $192.2 million and $169.7 million, respectively. At December 31, 2005, we had $201.4 million in outstanding FHLB advances and we had $314.5 million in additional FHLB advances available to us.
In addition to cash flow from loan and securities payments and prepayments as well as from sales of available for sale securities, we have significant borrowing capacity available to fund liquidity needs. We have increased our utilization of borrowings in recent years as a cost efficient addition to deposits as a source of funds. Our borrowings consist primarily of advances from the Federal Home Loan Bank of Pittsburgh, of which we are a member. Under terms of the collateral agreement with the Federal Home Loan Bank, we pledge substantially all of our residential mortgage loans and mortgage-backed securities as well as all of our stock in the Federal Home Loan Bank as collateral for such advances.
Our stockholders' equity amounted to $117.2 million at December 31, 2005, a decrease of $5.8 million from stockholders' equity of $123.1 million at December 31, 2004. Our stockholders' equity includes $69.3 million in net proceeds from the Company's initial public offering completed on December 16, 2004. A substantial amount of the net proceeds that had been initially invested conservatively in instruments that yield a market rate have been redeployed into loans. As part of our long-term strategic plan to leverage our capital through retail deposit and loan growth, we anticipate opening three additional branches within the next twelve months. Stockholders' equity was impacted during 2005 by the purchase of shares of our common stock by our ESOP and RRP. As noted above, our ESOP purchased approximately 419,000 shares of the Company's common stock in the open market for an aggregate of $5.3 million and our RRP purchased approximately 286,000 shares of the Company's common stock for an aggregate of $3.7 million during 2005. Additionally, during 2005 the Company began its policy of paying quarterly cash dividends. We paid quarterly cash dividends of $0.05 per share in June, September and December 2005 and such dividend payments in 2005 amounted to approximately $2.3 million in the aggregate. We recently commenced our first stock repurchase program. Through this program, which was announced on January 31, 2006, the Company will repurchase up to 10% of its outstanding shares held by persons other than Abington Mutual Holding Company, or 714,150 shares. The shares may be purchased in the open market or in privately negotiated transactions from time to time depending upon market conditions and other factors over a one-year period. We believe that the stock repurchase program will benefit our shareholders by improving the Company's return on equity and earnings per share and, at the same time, aid us in managing our strong capital position. The stock repurchase program reflects our
commitment to manage our capital in a manner which should enhance shareholder value while permitting us to prudently grow and diversify our business.
The following table summarizes the Company's and the Bank's capital ratios as of the dates indicated and compares them to current regulatory 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, 2005, 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, 2005, the Company was not party to any cap or swap agreements as our final swap agreements expired in December 2005. At December 31, 2004 the Company was party to two swap agreements with terms expiring in June 2005, and December 2005. Under the June 2005 agreement, the Company either received or paid, on a quarterly basis, the amount by which the ten-year Constant Maturity Treasury ("CMT") exceeded or fell below 5.57% on the notional amount of $15 million. This agreement effectively changed a portion of the Company's fixed rate mortgage portfolio to a variable rate of interest. Under the December 2005, agreement, the Company either received or paid on a quarterly basis, the amount by which the three month LIBOR exceeded or fell below 2.59% on the notional amount of $15 million. This agreement effectively changed the Company's variable rate money market accounts to a fixed rate of interest.
The swaps 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 accompanying consolidated statements of financial condition with the offset recorded in loss on derivative instruments, net in the consolidated statements of income. The fair value of the swap agreements was negative $85,000 at December 31, 2004.
Amounts paid or received under the cap or swap agreement are recognized in gain (loss) on derivative instruments, net in the Company's consolidated statements of income during the period in which they accrue. During the year ended December 31, 2005, the Company received $13,000 from the contra parties under the agreements. During the years ended December 31, 2004, and 2003, the Company paid $641,000 and $770,000, respectively, to the contra parties under the agreements. In addition, the unrealized gains
on derivatives recognized in gain (loss) on derivative instruments, net in the Company's consolidated statements of income were $85,000, $501,000 and $363,000 for the years ended December 31, 2005, 2004, and 2003, respectively.
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.
In March 2005, the Securities and Exchange Commission (the "SEC") issued Staff Accounting Bulletin ("SAB") No. 107 which expressed the views of the SEC regarding the interaction between SFAS No. 123R and certain SEC rules and regulations. SAB No. 107 provides guidance related to the valuation of share-based payment arrangements for public companies, including assumptions such as expected volatility and expected term.
At December 31, 2005, 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. See Note 14 in the Notes to the Consolidated Financial Statements in Item 8 herein for a further description of these plans.
During the year ended December 31, 2005, we recognized $333,000 in compensation expense related to the amortization of RRP shares, compared to no such expense in 2004. As of December 31, 2005, approximately $3.1 million in additional compensation expense will be recognized over the remaining lives of the RRP awards. At December 31, 2005, the weighted average remaining lives of the RRP awards is approximately 4.5 years.
During the year ended December 31, 2005, approximately $181,000 was recognized in compensation expense for the Option Plan. At December 31, 2005, approximately $1.7 million in additional compensation expense for awarded options remained unrecognized. The weighted average period over which this expense will be recognized is approximately 4.5 years.
The Company also has an employee stock ownership plan ("ESOP"). See Note 14 in the Notes to the Consolidated Financial Statements in Item 8 herein for a further description of this plan. 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. We recognized $475,000 in compensation expense due to the ESOP in the year ended December 31, 2005 compared to no ESOP expense in 2004.
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, 2005 and 2004, we had no commitments to originate loans for sale.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the customer. The amount and type of collateral required varies, but may include accounts receivable, inventory, equipment, real estate and income-producing commercial properties. At December 31, 2005 and 2004, commitments to originate loans and commitments under unused lines of credit, including undisbursed portions of construction loans in process, for which the Bank is obligated amounted to approximately $125.2 million and $92.4 million, respectively.
Letters of credit are conditional commitments issued by the Bank guaranteeing payments of drafts in accordance with the terms of the letter of credit agreements. Commercial letters of credit are used primarily to facilitate trade or commerce and are also issued to support public and private borrowing arrangements, bond 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, 2005 and December 31, 2004, the Bank had letters of credit outstanding of approximately $14.1 million and $11.3 million, respectively, of which $12.5 million and $10.5 million, respectively, were standby letters of credit. At December 31, 2005 and 2004, the uncollateralized portion of the letters of credit extended by the Bank was approximately $169,000 and $215,000, respectively, of which $97,000 and $99,000, respectively, was for standby letters of credit.
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, 2005, the exposure, which represent a portion of credit risk associated with the sold interests, amounted to $185,000. The exposure is for the life of the related loans and payable, on our proportional share, as losses are incurred.
We anticipate that we will continue to have sufficient funds and alternative funding sources to meet our current commitments.
The following tables summarize our outstanding commitments to originate loans and to advance additional amounts pursuant to outstanding letters of credit, lines of credit and under our construction loans at December 31, 2005.
The following tables summarize our contractual cash obligations at December 31, 2005.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
GENERAL. We had net income of $6.3 million for the year ended December 31, 2005, representing an increase of $1.7 million or 38.4% over net income of $4.6 million for the year ended December 31, 2004. Earnings per share was $0.41 for the year ended December 31, 2005. Our net interest income improved by $4.4 million or 26.3% to $21.0 million for 2005 from $16.6 million for 2004. The improvement was primarily a result of an increase in the average balances of our interest earning assets, most notably loans, combined with increases in the average yields on those assets. These increases were partially offset by increases in the average balances of our interest bearing liabilities and the rates paid on those liabilities. Overall, our net interest margin improved 11 basis points to 2.78% for 2005 from 2.67% for 2004, although our average interest rate spread decreased slightly to 2.27% for 2005 from 2.30% for 2004. Our non-interest income improved $555,000 or 24.7% to $2.8 million for 2005 from $2.2 million for 2004. The increase was due primarily to an improvement in our gain (loss) on derivative instruments, net and income on bank owned life insurance, which was purchased in 2005. Our non-interest expense also
increased, growing $3.0 million or 24.6% to $15.0 million for 2005 from $12.0 million for 2004. The increase was due primarily to increases salaries and employee benefits expense, occupancy expense, professional services expense and advertising and promotions expense.
INTEREST INCOME. Interest income was $40.0 million for the year ended December 31, 2005, an increase of $9.2 or 29.7% from $30.8 million of interest income for the year ended December 31, 2004. This increase in interest income was primarily a result of growth in the average balance of interest-earning assets, as well as increases in the average yields on those assets. The average balance of our interest-earning assets improved $99.0 million or 15.1% to $754.7 million for 2005 compared to $622.7 million for 2004. The average yield on our interest-earnings assets improved 35 basis points to 5.30% for 2005 compared to 4.95% for 2004. The most substantial growth was seen in our loan portfolio. The average balance of our loan portfolio increased $84.1 million or 21.8% to $469.1 million for 2005 from $385.0 million for 2004. Additionally, the average yield on our loan portfolio improved 31 basis points to 6.24% for 2005 compared to 5.93% for 2004. The average balance of our mortgage-backed securities in 2005 increased by $29.4 million over the 2004 average and the average balance of our investment securities increased by $12.5 million over the same periods. The average yields on such securities improved 17 and 49 basis points, respectively, from the prior year to 4.13% and 3.36%, respectively, for 2005. The asset growth has been a result of the Company's strategic plan to leverage the capital raised in its initial public offering, in part, through loan growth. A substantial amount of the net proceeds that had been initially invested conservatively in instruments that yielded a market rate have been redeployed into loans.
INTEREST EXPENSE. Interest expense increased $4.8 million or 33.7% to $19.0 million for the year ended December 31, 2005 compared to $14.2 million for the year ended December 31, 2004. The increase in interest expense for 2005 was the result of increases in the average balances of, and average rates paid on, all categories of interest-bearing liabilities. The average balance of our interest-bearing liabilities increased $91.0 million or 17.0% to $627.5 million for 2005 compared to $536.4 million for 2004. The average rate on our interest-bearing liabilities increased 38 basis points to 3.03% for 2005 compared to 2.65% for 2004. For 2005 compared to 2004, our average deposit balance grew by $66.0 million or 18.9%, due primarily to growth in higher-rate certificates of deposit. The average balance of our certificates of deposit increased $61.5 million or 35.0% to $237.0 million for 2005 compared to $175.5 million for 2004. The growth in certificates of deposit was a result of higher market rates of interest on certificates of deposit relative to other deposit products in the current interest rate environment. Over the long term, the Company continues to remain focused on maintaining and growing its base of core deposits. There is, however, significant competition for core deposits, and no assurance can be given that we will succeed in increasing the proportion of core deposits that we hold. The average balance of FHLB advances also increased for 2005 when compared to 2004. The average balance of our FHLB advances increased $22.5 million or 13.3% to $192.2 million for 2005 compared to $170.0 million for 2004. The average rate on our FHLB advances was relatively consistent, increasing only 7 basis points to 4.51% for 2005 compared to 4.44% for 2004.
AVERAGE BALANCES, NET INTEREST INCOME, AND YIELDS EARNED AND RATES PAID. The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. Tax-exempt income and yields have not been adjusted to a tax-equivalent basis. All average balances are based on monthly balances. Management does not believe that the monthly averages differ significantly from what the daily averages would be.
- ------------------------ (1) Investment securities for the 2005 period include 47 non-taxable municipal bonds with an aggregate average balance of $16.3 million and an average yield of 4.2%. Investment securities for the 2004 period include 26 non-taxable municipal bonds with an aggregate average balance of $3.4 million and an average yield of 4.3%. The tax-exempt income from such securities has not been calculated on a tax equivalent basis. (2) Includes nonaccrual loans during the respective periods. Calculated net of deferred fees and discounts, loans in process and allowance for loan losses. The impact of loan fee income is 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.
2005 vs. 2004 ---------------------------------------- Increase (Decrease) Due to ------------------------------ Total Rate/ Increase Rate Volume Volume (Decrease) --------- --------- --------- --------- (Dollars in Thousands) Interest income: Investment securities(1) $ 409 $ 358 $ 60 $ 827 Mortgage-backed securities 232 1,166 50 1,148 Loans receivable, net 1,213 4,984 265 6,462 Other interest- earning assets 263 67 95 425 ------- ------- ------- ------- Total interest- earning assets 2,117 6,575 470 9,162 ------- ------- ------- ------- Interest expense: Savings accounts 290 45 12 347 Checking accounts 22 -- -- 22
Certificate accounts 762 1,910 267 2,939 ------- ------- ------- ------- Total deposits 1,074 1,955 279 3,308 FHLB advances 122 998 16 1,136
Other borrowings 289 16 41 346 ------- ------- ------- ------- Total interest- bearing liabilities 1,485 2,969 336 4,790 ------- ------- ------- ------- Increase in net interest income $ 632 $ 3,606 $ 134 $ 4,372 ======= ======= ======= =======
- --------------- (1) Investment securities for the 2005 period include 47 non-taxable municipal bonds with an aggregate average balance of $16.3 million and an average yield of 4.2%. Investment securities for the 2004 period include 26 non-taxable municipal bonds with an aggregate average balance of $3.4 million and an average yield of 4.3%. The tax-exempt income from such securities has not been calculated on a tax equivalent basis.
PROVISION FOR LOAN LOSSES. We made a $25,000 provision to the allowance for loan losses for the year ended December 31, 2005 compared to a provision of $45,000 for the year ended December 31, 2004. The provision for loan losses is charged to expense as necessary to bring our allowance for loan losses to a sufficient level to cover known and inherent losses in the loan portfolio. The provision taken during 2005 was primarily the result of growth in the loan portfolio while the overall credit quality of the loan portfolio remained strong. At December 31, 2005, non-performing loans amounted to 0.54% of loans receivable and our allowance for loan losses amounted to 50.3% of non-performing loans. The balance of non-performing loans at December 31, 2005 consisted primarily of one loan, with a carrying value of $2.9 million, placed on non-accrual status in the fourth quarter. An allowance was reserved on this loan at December 31, 2005. During the first quarter of 2006, we agreed to allow the sale of a portion of the underlying collateral of the loan, with the proceeds paid to the Bank. Approximately $1.7 million in net proceeds was received, reducing the outstanding balance of the loan to $1.2 million. Based on the specific circumstances of this loan, including the estimated value of the remaining collateral, we do not expect to incur any significant loss.
NON-INTEREST INCOME. Our total non-interest income amounted to $2.8 million for the year ended December 31, 2005 compared to $2.2 million for year ended December 31, 2004. The increase was due primarily to $499,000 of income from BOLI purchased in March 2005 and a $98,000 gain on derivative instruments in 2005 compared to a loss of $141,000 in 2004. Our BOLI is expected to continue to generate positive income going forward and is intended to fund various benefit programs of the Company. The Company does not expect to generate any income from derivatives in 2006, as the Company is no longer party to any derivative agreements. Income from BOLI and the gain on derivative instruments in the year ended December 31, 2005, was partially offset by a $73,000 impairment charge on investment securities recognized in 2005 with no comparable charge in 2004, a $67,000 decrease in service charges and a $31,000 decrease in other non-interest income. 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. Although market values of the Company's investments fluctuate as market conditions change, management believes that the overall credit quality of its investment portfolio is strong. The decrease in service charges in 2005 when compared to 2004 was due primarily to a $61,000 decrease in fees generated by our overdraft protection program due to a decrease in the volume of customer overdrafts. The decrease in other non-interest income is due to decreases in various categories of income.
NON-INTEREST EXPENSE. Our total non-interest expense for the year ended December 31, 2005 amounted to $15.0 million, representing an increase of $3.0 million or 24.6% from the year ended December 31, 2004. The overall increase was due to increases in all categories of non-interest expense other than data processing expense, which decreased slightly. Salaries and employee benefits expense increased $1.6 million or 24.7% for 2005 compared to 2004. This increase was primarily due to additional expenses of $838,000 in the aggregate relating to the Company's ESOP, SOP and RRP, all of which began in 2005. The aggregate expense for these plans is expected to increase in 2006 to approximately $1.3 million in the aggregate. The remainder of the increase in salaries and employee benefits expense was due to growth in the total number of employees, normal merit increases in salaries, and higher benefit costs. We anticipate additional increases in salaries and employee benefits in 2006 due to additional staffing needs, further merit increases in salary, and continued rising benefit costs. Our occupancy expense increased approximately $480,000 or 41.2% in 2005 compared to 2004, due in part to the leases entered into for three new branches. We do not expect to experience a significant increase in occupancy expense in 2006. Professional services expense increased approximately $382,000 or 75.1% due primarily to increased audit and professional fees as the result of becoming a public reporting entity. Such professional fees are expected to continue to be a significant expense in 2006. Other non-interest expense increased approximately $374,000 or 25.8% due primarily to additional expense of $151,000 for SOP and RRP awards to directors combined with smaller increases in various other categories of other non-interest expense. The aggregate expense for these plans for directors is expected to increase in 2006 to approximately $300,000.
INCOME TAX EXPENSE. Income tax expense for the year ended December 31, 2005 amounted to $2.5 million compared to $2.3 million for the year ended December 31, 2004. The fluctuations in income tax expense from year to year is the result of an increase in our pre-tax income partially offset by an improvement in our effective tax rate. Our effective tax rate decreased to 28.5% for 2005 from 33.2% for 2004. The improved tax rate was primarily a result of increased investment in tax-exempt municipal securities and BOLI income, which is also tax exempt.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
GENERAL. We had net income of $4.6 million for the year ended December 31, 2004, representing an increase of $465,000 or 11.4% over net income of $4.1 million for the year ended December 31, 2003. Our net interest income improved by $541,000 or 3.4% to $16.6 million for the year ended December 31, 2004 from $16.1 million for the year ended December 31, 2003. Our results in the 2004 period reflect, in part, increases in the amount of interest-earning assets, which have offset, in whole or in part, the narrowing or compression of our net interest margins in 2004 compared to 2003. Our net interest margin decreased by 21 basis points to 2.67% for the year ended December 31, 2004 compared to 2.88% for the year ended December 31, 2003 while our net interest spread decreased to 2.30% for the year ended December 31, 2004 compared to 2.50% for the year ended December 31, 2003. In addition, non-interest income improved $383,000 or 20.6% to $2.2 million for the year ended December 31, 2004 compared to $1.9 million for the year ended December 31, 2003. This improvement was due to an increase in service charge income and a decrease in the net loss on derivative instruments. Partially offsetting these increases in income was a $543,000 or 4.7% increase in non-interest expense to $12.0 million for the year ended December 31, 2004 compared to $11.5 million for the year ended December 31, 2003, primarily due to increases in salaries and employee benefits expense, the largest component of non-interest expense, professional services expense and data processing expense
INTEREST INCOME. Interest income was $30.8 million for the year ended December 31, 2004, an increase of $852,000 or 2.8% from $30.0 million of interest income for the year ended December 31, 2003. The increase in interest income was primarily due to increases in interest income on investments and mortgage-backed securities. Both the average yield and average balance of investment securities increased in 2004 compared to 2003. The average yield of investment securities increased to 2.87% for 2004 from 2.67% for 2003 while the average balance of investment securities increased to $84.3 million in 2004 from $78.4 million in 2003. A slight decrease in the average yield of mortgage-backed securities to 3.96% in 2004 from 4.09% in 2003 was more than offset by a $44.8 million or 48.6% increase in the average balance. A decrease in the average yield on loans receivable to 5.93% in 2004 compared to 6.59% in 2003 offset a $23.4 million increase in the average balance of such assets.
INTEREST EXPENSE. Interest expense increased $310,000 or 2.2% to $14.2 million for the year ended December 31, 2004 compared to $13.9 million for the prior year. The increase was due primarily to increases in the average balances of FHLB advances and other borrowings. The average balance of FHLB advances increased $21.6 million or 14.6% to $169.7 million in 2004 from $148.1 million in 2003. The increase in the average balance more than offset a decrease in the average cost to 4.44% in 2004 from 4.73% in 2003. The average balance of other borrowings increased $2.5 million or 16.2% to $17.7 million in 2004 from $15.2 million in 2003. The increase in the average balance of other borrowings was accompanied by an increase in the average cost of other borrowings to 0.66% in 2004 from 0.45% in 2003. Interest expense on deposits decreased $261,000 or 3.8% to $6.6 million in 2004 from $6.8 million in 2003 due to a decrease in the average cost to 1.88% in 2004 from 2.11% in 2003. The decrease in cost was partially offset by an increase in the average balance of deposits to $349.0 million for 2004 compared to $322.8 million for 2003.
AVERAGE BALANCES, NET INTEREST INCOME, AND YIELDS EARNED AND RATES PAID. The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. Tax-exempt income and yields have not been adjusted to a tax-equivalent basis. All average balances are based on monthly balances. Management does not believe that the monthly averages differ significantly from what the daily averages would be.
- -------------------- (4) Investment securities for the 2004 period include 26 non-taxable municipal bonds with an aggregate average balance of $3.4 million and an average yield of 4.3%. Investment securities for the 2003 period include one non-taxable municipal bond in the amount of $180,000 and a yield of 3.9%. The tax-exempt income from such securities has not been calculated on a tax equivalent basis. (5) Includes nonaccrual 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 is immaterial effect on this analysis. (6) 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.
2004 vs. 2003 ---------------------------------------- Increase (Decrease) Due to ------------------------------ Total Rate/ Increase Rate Volume Volume (Decrease) --------- --------- --------- --------- (Dollars in Thousands) Interest income: Investment securities(1) $ 161 $ 159 $ 13 $ 333 Mortgage-backed securities (122) 1,832 (59) 1,651 Loans receivable, net (2,397) 1,545 (155) (1,007) Other interest- earning assets (3) (123) 1 (125) ------- ------- ------- ------- Total interest- earning assets (2,361) 3,413 (200) 852 ------- ------- ------- ------- Interest expense: Savings accounts (122) 134 (15) (3) Checking accounts (12) 7 (2) (7) Certificate accounts (451) 217 (17) (251) ------- ------- ------- ------- Total deposits (585) 358 (34) (261) FHLB advances (435) 1,023 (64) 524 Other borrowings 32 11 5 48 ------- ------- ------- ------- Total interest- bearing liabilities (988) 1,392 (93) 311 ------- ------- ------- ------- Increase (decrease) in net interest income $(1,373) $ 2,021 $ (107) $ 541 ======= ======= ======= =======
- --------------- (1) Investment securities for the 2004 period include 26 non-taxable municipal bonds with an aggregate average balance of $3.4 million and an average yield of 4.3%. Investment securities for the 2003 period include one non-taxable municipal bond in the amount of $180,000 and a yield of 3.9%. The tax-exempt income from such securities has not been calculated on a tax equivalent basis.
PROVISION FOR LOAN LOSSES. For the year ended December 31, 2004 our provision for loan losses was $45,000 compared to $375,000 for the year ended December 31, 2003. The provision for loan losses is charged to expense as necessary to bring our allowance for loan losses to a sufficient level to cover known and inherent losses in the loan portfolio. At December 31, 2004 we had $227,000 of non-performing assets and our allowance for loan losses amounted to $1.4 million. Our non-performing loans as a percentage of total loans receivable was 0.06% at December 31, 2004 and 0.13% at December 31, 2003. For the year ended December 31, 2004 our net loan charge-offs amounted to $88,000. Net loan charge-offs amounted to $733,000 for the year ended December 31, 2003 of which $671,000 related to one borrower.
NON-INTEREST INCOME. Total non-interest income increased $383,000 or 20.6% to $2.2 million for the year ended December 31, 2004 compared to $1.9 million for the year ended December 31, 2003. Contributing to the increase was a $318,000 or 20.8% increase in service charge income, particularly fees earned on our overdraft protection program which we began offering in May 2003. Our loss on derivative instruments improved to $141,000 for the year ended December 31, 2004 compared to $407,000 for the
year ended December 31, 2003. These changes were somewhat offset as $190,000 of combined gains on sales of loans and property that were recognized in 2003 did not recur in 2004.
NON-INTEREST EXPENSE. Our total non-interest expense for the year ended December 31, 2004 amounted to $12.0 million representing an increase of $543,000 from the year ended December 31, 2003. The increase for the year ended December 31, 2004 when compared to the prior year was due primarily to increases in salaries and employee benefits expense, the largest component of non-interest expense, and data processing expense. The $453,000 or 7.6% increase in salaries and employee benefits expense to $6.4 million in 2004 from $6.0 million in 2003 was due primarily to normal merit increases in salaries and an increase in staffing levels. Our professional services expense increased $186,000 or 57.5% due primarily to increased audit and professional fees as the result of becoming a public reporting entity. Our data processing expense increased $116,000 or 10.0% to $1.3 million in 2004 from $1.2 million in 2003 as a result of increased deposits and deposit activity. The increase in deposit activity result in an increase in our data processing expense as data processing expense is dependent in part on the number of deposit transactions that are processed. These increases were partially offset by decreases of $131,000 and $64,000 in ATM expense and advertising and promotions expense, respectively. The decrease in ATM expense was due to certain savings negotiated during a contract renewal in 2004. The decrease in advertising and promotions was due to higher expenditures in 2003 to promote the opening of new branches in that year.
INCOME TAX EXPENSE. Income tax expense for the year ended December 31, 2004 amounted to $2.3 million, compared to $2.0 million for the year ended December 31, 2003. The increase in income tax expense was due primarily to the increase in our pre-tax income. Our effective income tax rate remained relatively consistent at 33.2% and 33.1% for the years ended December 31, 2004 and 2003, respectively.
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:
o we have increased our originations of shorter term loans and/or loans with adjustable rates of interest, particularly construction loans, commercial real estate and multi-family residential mortgage loans and home equity lines of credit;
o we have attempted to match fund a portion of our securities portfolio with borrowings having similar expected lives;
o we have attempted, where possible, to extend the maturities of our deposits and borrowings; and
o 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 4.09% at December 31, 2005, compared to a positive 0.57% at December 31, 2004. We have become more liability sensitive in 2005 mainly as a result of increases in our short-term repricing 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, 2005, which we expect, based upon certain assumptions, to reprice or mature in each of the future time periods shown (the "GAP Table"). Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities at December 31, 2005, on the basis of contractual maturities, anticipated prepayments, and scheduled rate adjustments within a three-month period and subsequent selected time intervals. The loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and anticipated prepayments of adjustable-rate loans and fixed-rate loans, and as a result of contractual rate adjustments on adjustable-rate loans. Annual prepayment rates for adjustable-rate and fixed-rate single-family and multi-family mortgage loans are assumed to range from 10% to 26%. The annual prepayment rate for mortgage-backed securities is assumed to range from 9% to 63%. Money market deposit accounts, savings accounts and interest-bearing checking accounts are assumed to have annual rates of withdrawal, or "decay rates," of 16%, 12.5% and 0%, respectively.
- --------------------- (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, 2005 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, 2005.
Change in Interest Rates In Basis Points (Rate Shock) Net Interest Income $ Change % Change - -------------------- ----------------------- --------------- --------------- (Dollars in Thousands) 200bp $23,225 $ (336) (1.43)% 100 23,692 131 0.56 Static 23,561 -- -- (100) 22,792 (769) (3.26) (200) 21,388 (2,173) (9.22)
The above table indicates that as of December 31, 2005, 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, 2006 would be expected to decrease by $336,000 or 1.43% to $23.2 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 Community Bancorp, Inc. and subsidiaries: Jenkintown, Pennsylvania
We have audited the accompanying consolidated statements of financial condition of Abington Community Bancorp, Inc. and subsidiaries (the "Company") as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders' equity and comprehensive income and cash flows for each of the three years in the period ended December 31, 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 audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits 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 audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Abington Community Bancorp, Inc. and subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period 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, 2006
See notes to consolidated financial statements.
ABINGTON COMMUNITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 - --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
Abington Community Bancorp, Inc. (the "Company") is a Pennsylvania corporation, which was organized to be a mid-tier holding company for Abington Savings Bank. Abington Savings Bank is a Pennsylvania-chartered, FDIC-insured savings bank, which conducts business under the name "Abington Bank" (the "Bank" or "Abington Bank"). The Company was organized in conjunction with the Bank's reorganization from the mutual savings bank to the mutual holding company structure in December 2004. Abington Mutual Holding Company, a Pennsylvania corporation, is the mutual holding company parent of the Company. Abington Mutual Holding Company owns 55% of the Company's outstanding common stock and must continue to own at least a majority of the voting stock of the Company. The Bank is a wholly owned subsidiary of the Company. The Company's results of operations are primarily dependent on the results of the Bank and the Bank's wholly owned subsidiaries, ASB Investment Co., Keswick Services II and its wholly owned subsidiaries, and Abington Corp. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
The Bank's executive offices are in Jenkintown, Pennsylvania, with seven other branches and four limited service facilities located in nearby Montgomery County and Bucks County neighborhoods. The Bank is principally engaged in the business of accepting customer deposits and investing these funds in loans that include residential mortgage, commercial, consumer and construction loans. The principal business of ASB Investment Co. is to hold certain investment securities for the Bank. Keswick Services II and its subsidiaries manage the Bank's real estate, including real estate rentals. Abington Corp. is a dormant subsidiary.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--All significant intercompany transactions and balances have been eliminated.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS--The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. The Company's most significant estimates are the allowance for loan losses and deferred income taxes.
CASH AND CASH EQUIVALENTS--For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and interest-bearing deposits with banks, commercial paper and liquid money market funds with original maturities of three months or less.
INVESTMENT AND MORTGAGE-BACKED SECURITIES--Debt and equity securities are classified and accounted for as follows:
HELD TO MATURITY--Debt securities that management has the positive intent and ability to hold until maturity are classified as held to maturity and are carried at their remaining unpaid principal balances, net of unamortized premiums or unaccreted discounts. Premiums are amortized and discounts are accreted using the interest method over the estimated remaining term of the underlying security.
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. 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. No impairment charge was recognized during the years ended December 31, 2004 and 2003.
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.
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, 2005 or 2004.
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, 2005 and 2004, mortgage servicing rights of $61,000 and $72,000, respectively, were included in other assets. No valuation allowance was deemed necessary for any of the periods presented.
Amortization of the servicing asset totaled $11,000, $19,000 and $43,000 for the years ended December 31, 2005, 2004 and 2003, respectively.
REAL ESTATE OWNED--Real estate properties acquired through foreclosure are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of cost or fair value less estimated costs to sell. Net revenue and expenses from operations and additions to the valuation allowance are included in gain or loss on foreclosed real estate.
REAL ESTATE INVESTMENT--Real estate investment is carried at lower of cost, including cost of improvements, or fair value less cost to sell. Costs relating to development and improvement of property are capitalized, whereas costs relating to holding the property are expensed.
PROPERTY AND EQUIPMENT--Property and equipment is recorded at cost. Depreciation is computed using the straight-line method over the expected useful lives of the related assets. The costs of maintenance and repairs are expensed as they are incurred, and renewals and betterments are capitalized.
BANK OWNED LIFE INSURANCE ("BOLI")-- In March 2005, the Company purchased $15 million in Bank Owned Life Insurance as a mechanism for funding various employee benefit costs. The Company is the beneficiary of this policy that insures the lives of certain officers of its subsidiaries. The Company has recognized the cash surrender value under the insurance policy as an asset in the consolidated statements of financial condition. Changes in the cash surrender value are recorded in other non-interest income in the consolidated statements of income.
OTHER BORROWED MONEY--The Company enters into overnight repurchase agreements with commercial checking account customers. These agreements are treated as financings, and the obligations to repurchase securities sold are reflected as a liability in the consolidated statements of financial condition. Securities pledged as collateral under agreements to repurchase are reflected as assets in the consolidated statements of financial condition.
LOAN ORIGINATION AND COMMITMENT FEES--The Company defers loan origination and commitment fees, net of certain direct loan origination costs. The balance is accreted into income as a yield adjustment over the life of the loan using the level-yield method.
INTEREST ON LOANS--The Company recognizes interest on loans on the accrual basis. Income recognition is generally discontinued when a loan becomes 90 days or more delinquent. Any interest previously accrued is deducted from interest income. Such interest ultimately collected is credited to income when collection of principal and interest is no longer in doubt.
INCOME TAXES--Deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
COMPREHENSIVE INCOME--The Company presents as a component of comprehensive income the amounts from transactions and other events which currently are excluded from the consolidated statements of income and are recorded directly to stockholders' equity. These amounts consist of unrealized holding gains (losses) on available for sale securities.
UNALLOCATED COMMON STOCK--Stock held in treasury by the Company, including unallocated stock held by certain benefit plans, is accounted for using the cost method which treats stock held in treasury as a reduction to total shareholders' equity.
SHARE-BASED COMPENSATION--In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123R (revised 2004), SHARE-BASED PAYMENT, which revises SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, and supersedes 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.
In March 2005, the Securities and Exchange Commission (the "SEC") issued Staff Accounting Bulletin ("SAB") No. 107 which expressed the views of the SEC regarding the interaction between SFAS No. 123R and certain SEC rules and regulations. SAB No. 107 provides guidance related to the valuation of share-based payment arrangements for public companies, including assumptions such as expected volatility and expected term.
At December 31, 2005, 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. 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. Common stock equivalents which are considered antidilutive are not included for the purposes of this calculation. At December 31, 2005, there were 643,250 antidilutive CSEs, representing 100% of the outstanding options. Earnings per share were calculated as follows:
Due to the timing of the Bank's reorganization into the mutual holding company form and the completion of the Company's initial public offering on December 16, 2004, earnings per share for the period from December 16, 2004 to December 31, 2004 is not considered meaningful and is not shown.
RECENT ACCOUNTING PRONOUNCEMENTS--In May 2005, the FASB issued SFAS No. 154, ACCOUNTING CHANGES AND ERROR CORRECTIONS- A REPLACEMENT OF APB OPINION NO. 20 AND FASB STATEMENT NO. 3. SFAS No. 154 replaces APB Opinion No. 20, ACCOUNTING CHANGES, and FASB Statement No. 3, REPORTING ACCOUNTING CHANGES IN INTERIM FINANCIAL STATEMENTS, and changes the accounting and reporting requirements for a change in accounting principle. SFAS No. 154 applies to all voluntary changes in an accounting principle, as well as to changes required by a new accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS No. 154 is effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005 and requires retrospective application to prior periods' financial statements for most voluntary changes in an accounting principle, unless it is impracticable to do so. The Company adopted this guidance on January 1, 2006. The adoption did not have a material effect on the Company's financial position or results of operations.
On November 3, 2005, the FASB issued FASB Staff Position ("FSP") Nos. FAS 115-1 and FAS 124-1, THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS. This FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. This FSP nullifies certain requirements of EITF Issue 03-1, THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN Investments, and supersedes EITF Topic No. D-44, RECOGNITION OF OTHER-THAN-TEMPORARY IMPAIRMENT UPON THE PLANNED SALE OF A SECURITY WHOSE COST EXCEEDS FAIR VALUE. The guidance in this FSP amends FASB Statement No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. The FSP is effective for reporting periods beginning after December 15, 2005. The Company adopted this guidance on January 1, 2006. The adoption did not have a material effect on the Company's financial position or results of operations.
On December 19, 2005, the FASB issued FSP 94-6-1, TERMS OF LOAN PRODUCTS THAT MAY GIVE RISE TO A CONCENTRATION OF CREDIT RISK. FSP 94-6-1 addresses whether, under existing guidance, nontraditional loan products represent a concentration of credit risk and what disclosures are required for entities that originate, hold, guarantee, service, or invest in loan products whose terms may give rise to a concentration of credit risk. Nontraditional loan products expose the originator, holder, investor, guarantor, or servicer to higher credit risk than traditional loan products. Typical features of nontraditional loan products may include high loan-to-value ratios and interest or principal repayments that are less than the repayments for fully amortizing loans of an equivalent term. FSP 94-6-1 was effective upon its issuance and it did not have a material impact on the Company's financial position or disclosures.
In February 2006, the FASB issued SFAS No. 155, ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS. This statement amends FASB Statements No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, and No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES. This statement resolves issues addressed in Statement 133 Implementation Issue No. D1, APPLICATION OF STATEMENT 133 TO BENEFICIAL INTEREST IN SECURITIZED FINANCIAL ASSETS. This Statement is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. The Company is continuing to evaluate the impact of this pronouncement and does not expect that the guidance will have a material effect on the Company's financial position or results of operations.
In March 2006, the FASB issued SFAS No. 156, ACCOUNTING FOR SERVICING OF FINANCIAL ASSET- AN AMENDMENT OF FASB STATEMENT NO. 140. This statement amends SFAS No. 140, ACCOUNTING FOR
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This statement requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. It also permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. This Company plans to adopt this statement effective January 1, 2007. The Company is continuing to evaluate the impact of this pronouncement and does not expect that the guidance will have a material effect on the Company's financial position or results of operations.
RECLASSIFICATIONS--Certain items in the 2004 and 2003 consolidated financial statements have been reclassified to conform to the presentation in the 2005 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, 2005 and 2004, these reserve balances amounted to $5.8 million and $13.3 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, 2005, 2004 and 2003.
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. No impairment charge was recognized during the years ended December 31, 2004 and 2003.
Included in debt securities are structured notes with federal agencies. These structured notes consist of step-up bonds which provide the agency with the right, but not the obligation, to call the bonds on the step-up date.
The amortized cost and estimated fair value of debt securities by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
The table below sets forth investment securities which have unrealized loss positions as of December 31, 2005:
The table below sets forth investment securities which have unrealized loss positions as of December 31, 2004:
On at least a quarterly basis, management of the Company formally reviews the securities in its investment portfolio to identify any securities that might have an other-than-temporary impairment. At December 31, 2005, investment securities in a gross unrealized loss position for twelve months or longer consist of 29 securities having an aggregate depreciation of 2.8% from the Company's amortized cost basis. Investment securities in a gross unrealized loss position for less than twelve months at December 31, 2005, consist of 33 securities having an aggregate depreciation of 1.3% 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 move. The Company has the intent and ability to hold these investments for the time necessary to recover its 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, 2005, 2004 and 2003.
No impairment charge was recognized on mortgage-backed securities during the years ended December 31, 2005, 2004 and 2003.
The table below sets forth mortgage-backed securities which have unrealized loss positions as of December 31, 2005:
The table below sets forth mortgage-backed securities which have unrealized loss positions as of December 31, 2004:
On at least a quarterly basis, management of the Company formally reviews the securities in its investment portfolio to identify any securities that might have an other-than-temporary impairment. At December 31, 2005, mortgage-backed securities in a gross unrealized loss position for twelve months or longer consist of 30 securities having an aggregate depreciation of 4.2% from the Company's amortized cost basis. Mortgage-backed securities in a gross unrealized loss position for less than twelve months at December 31, 2005, consist of 21 securities having an aggregate depreciation of 2.1% 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 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 move. 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, 2005, the Company is not party to any cap or swap agreements. At December 31, 2004, the Company was party to two swap agreements with terms expiring in June 2005, and December 2005. Under the June 2005 agreement, the Company either received or paid, on a quarterly basis, the amount by which the ten-year Constant Maturity Treasury ("CMT") exceeded or fell below 5.57% on the notional amount of $15 million. This agreement effectively changed a portion of the Company's fixed rate mortgage portfolio to a variable rate of interest. Under the December 2005, agreement, the Company either received or paid on a quarterly basis, the amount by which the three month LIBOR exceeded or fell below 2.59% on the notional amount of $15 million. This agreement effectively changed the Company's variable rate money market accounts to a fixed rate of interest.
The swaps 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 accompanying consolidated statements of financial condition with the offset recorded in loss on derivative instruments, net in the consolidated statements of income. The fair value of the swap agreements was negative $85,000 at December 31, 2004.
Amounts paid or received under the cap or swap agreement are recognized in gain (loss) on derivative instruments, net in the Company's consolidated statements of income during the period in which they accrue. During the year ended December 31, 2005, the Company received $13,000 from the contra parties under the agreements. During the years ended December 31, 2004, and 2003, the Company paid $641,000 and $770,000, respectively, to the contra parties under the agreements. In addition, the unrealized gains on derivatives recognized in gain (loss) on derivative instruments, net in the Company's consolidated statements of income were $85,000, $501,000 and $363,000 for the years ended December 31, 2005, 2004, and 2003, respectively.
The Company was exposed to credit losses in the event of nonperformance by the counterparties to its interest rate caps and swaps, but has no off-balance-sheet credit risk of accounting loss. The counterparties were able to fully satisfy their obligations under the contracts. The Company did not obtain collateral or other security to support financial instruments subject to credit risk but monitored the credit standing of counterparties.
7. LOANS RECEIVABLE--NET
Loans receivable consist of the following:
DECEMBER 31, ------------------------------ 2005 2004 -------------- --------------
One-to four-family residential $ 323,709,542 $ 243,705,065 Multi-family residential and commercial 76,646,911 74,642,109 Construction 132,789,343 83,253,027 Home equity lines of credit 41,063,321 32,048,508 Commercial business loans 10,974,955 8,539,781 Consumer non-real estate loans 4,711,519 3,433,536 -------------- --------------
Total loans 589,895,591 445,622,026
Less: Construction loans in process (57,690,327) (30,130,703) Deferred loan fees (1,263,545) (1,422,962) Allowance for loan loss (1,454,510) (1,412,697) -------------- --------------
Loans receivable--net $ 529,487,209 $ 412,655,664 ============== ==============
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 $13,591,000 and $15,268,000 at December 31, 2005 and 2004, respectively. These loan balances are excluded from the Company's consolidated financial statements. At December 31, 2005 and 2004, mortgage servicing rights of $61,000 and $72,000, 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:
YEAR ENDED DECEMBER 31, ------------------------------------------ 2005 2004 2003 ------------ ------------ ------------
Balance--beginning of year $ 927,514 $ 1,241,595 $ 861,985 Additions 89,566 229,878 667,943 Repayments (122,640) (543,959) (288,333) ------------ ------------ ------------
Balance--end of year $ 894,440 $ 927,514 $ 1,241,595 ============ ============ ============
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:
YEAR ENDED DECEMBER 31, ------------------------------------------ 2005 2004 2003 ------------ ------------ ------------
Balance--beginning of year $ 1,412,697 $ 1,455,889 $ 1,813,450 Provision for loan losses 25,000 45,000 375,000 Charge-offs (69,774) (146,736) (760,145) Recoveries 86,587 58,544 27,584 ------------ ------------ ------------ Charge-offs/recoveries- net 16,813 (88,192) (732,561) ------------ ------------ ------------
Balance--end of year $ 1,454,510 $ 1,412,697 $ 1,455,889 ============ ============ ============
The provision for loan losses charged to expense is based upon past loan and loss experience and an evaluation of losses in the current loan portfolio, including the evaluation of impaired loans. A loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. An insignificant delay or insignificant shortfall in amount of payments does not necessarily result in the loan being identified as impaired. For this purpose, delays less than 90 days are considered to be insignificant. During the periods presented, loan impairment was evaluated based on the fair value of the loans' collateral. Impairment losses are included in the provision for loan losses. Large groups of smaller balance, homogeneous loans are collectively evaluated for impairment, except for those loans restructured under a troubled debt restructuring. Loans collectively evaluated for impairment include smaller balance commercial real estate loans, residential real estate loans and consumer loans. As of December 31, 2005, 2004 and 2003, the recorded investment in loans that are considered to be impaired is as follows:
------------------------------------------ 2005 2004 2003 ------------ ------------ ------------
Impaired collateral- dependent loans $ 2,885,364 $ - $ 99,137
Average impaired loan balance $ 94,861 $ 41,828 $ 264,586
Interest income recognized on impaired loans $ - $ - $ -
As a result of the Company's measurement of impaired loans, an allowance for probable loan losses of approximately $116,000 was established for the $2.9 million of total impaired loans (which consisted of one construction loan) at December 31, 2005. During the first quarter of 2006, we agreed to allow the sale of a portion of the underlying collateral of the loan, with the proceeds paid to the Bank. Approximately $1.7 million in net proceeds was received, reducing the outstanding balance of the loan to $1.2 million. Based on the specific circumstances of this loan, including the estimated value of the remaining collateral, we do not expect to incur any significant loss on this loan.
Nonaccrual loans (which consist of smaller balance, homogeneous loans) at December 31, 2005, 2004 and 2003 amounted to approximately $2.9 million, $0, and $115,000, respectively. Commercial loans and commercial real estate loans are placed on nonaccrual at the time the loan is 90 days delinquent unless the credit is well secured and in the process of collection. Commercial loans are charged off when the loan is deemed uncollectible. Residential real estate loans are typically placed on nonaccrual only when the loan is 90 days delinquent and not well secured and in the process of
collection. Other consumer loans are typically charged off at 90 days delinquent. In all cases, loans must be placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. Non-performing loans, which consist of non-accruing loans plus accruing loans 90 days or more past due, at December 31, 2005, 2004 and 2003 amounted to approximately $2.9 million, $227,000 and $462,000, respectively.
Interest payments on impaired loans and nonaccrual loans are typically applied to principal unless the ability to collect the principal amount is fully assured, in which case interest is recognized on the cash basis. At December 31, 2005 and 2004, no cash basis interest income has been recognized. Interest income foregone on nonaccrual loans was $20,000, $5,000 and $16,000 for years ended December 31, 2005, 2004, and 2003, respectively.
8. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
DECEMBER 31, ------------------------------ 2005 2004 -------------- --------------
Investments and interest-bearing deposits $ 730,677 $ 603,207 Mortgage-backed securities 538,723 593,241 Loans receivable 2,205,950 1,513,714 -------------- --------------
Total $ 3,475,350 $ 2,710,162 ============== ==============
9. PROPERTY AND EQUIPMENT
Property and equipment is summarized by major classifications as follows:
DECEMBER 31, ------------------------------ 2005 2004 -------------- --------------
Properties and equipment: Land and buildings $ 4,220,125 $ 3,818,178 Leasehold improvements 3,102,688 2,640,527 Furniture and fixtures 4,883,498 4,251,201 -------------- --------------
Total 12,206,311 10,709,906 Accumulated depreciation (5,696,167) (5,176,821) -------------- --------------
Total property and equipment, net of accumulated depreciation $ 6,510,144 $ 5,533,085 ============== ==============
Certain office facilities and equipment are leased under various operating leases. The leases range in terms from 1 year to 14 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 $833,000, $427,000, and $405,000 for the years ended December 31, 2005, 2004, and 2003, respectively.
Future minimum annual rental payments required under noncancelable operating leases are as follows:
DECEMBER 31, ---------------
2006 $ 563,770 2007 580,903 2008 532,439 2009 424,706 2010 436,967 Thereafter 2,293,291 ---------------
$ 4,832,076 ===============
10. DEPOSITS
Deposits consist of the following major classifications:
DECEMBER 31, --------------------------------------------------- 2005 2004 ------------------------ ------------------------
Type of Account Amount Percent Amount Percent
Certificates $286,120,697 57.1 % $182,771,378 45.1 % NOW and MMDA 119,572,302 23.9 117,782,800 29.1 Passbook and club 95,490,025 19.0 104,735,879 25.8 ------------ ------ ------------ ------
Total $501,183,024 100.0 % $405,290,057 100.0 % ============ ====== ============ ======
The weighted average rate paid on deposits at December 31, 2005 and 2004, was 2.43% and 1.62%, respectively. Deposits in amounts greater than $100,000 were approximately $140,379,000 and $64,924,000 at December 31, 2005 and 2004, respectively, of which approximately $75,973,000 and $24,983,000 were due in one year or less at December 31, 2005 and 2004, respectively.
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:
DECEMBER 31, --------------------------------------------------- 2005 2004 ------------------------- -------------------------
WEIGHTED WEIGHTED INTEREST INTEREST Maturing Period Amount Rate Amount Rate
1 to 12 months $ 11,616,290 3.74 % $ 10,200,000 2.62 % 13 to 24 months 29,836,998 4.03 4,384,533 2.49 25 to 36 months 48,972,133 4.14 9,532,595 4.07 37 to 48 months 16,012,531 4.57 51,966,104 4.12 49 to 60 months 42,051,697 5.53 18,183,739 4.45 Over 60 months 52,955,303 4.45 76,399,403 5.01 ------------- ------ ------------- ------
Total $ 201,444,952 4.51 % $ 170,666,374 4.42 % ============= ====== ============= ======
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 4.51% and 4.42% at December 31, 2005 and 2004, respectively. The average balance outstanding was approximately $192.2 million and $169.7 million for the years ended December 31, 2005 and 2004 respectively. The maximum amount outstanding at any month-end was $212.6 million and $185.6 million for the years ended December 31, 2005 and 2004, respectively.
12. OTHER BORROWED MONEY
During the years ended December 31, 2005 and 2004, the Bank entered into overnight repurchase agreements with commercial checking account customers. At December 31, 2005 and 2004, the amounts outstanding were $16.1 million and $12.9 million, respectively. Interest expense on customer repurchase agreements was $462,000, $116,000, and $67,000 for the years ended December 31, 2005, 2004 and 2003, 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 3.88% and 1.79% at December 31, 2005 and 2004, respectively. The average balance outstanding was approximately $20.2 million and $17.7 million for the years ended December 31, 2005 and 2004 respectively. The maximum amount outstanding at any month-end was $25.0 million and $27.7 million for the years ended December 31, 2005 and 2004, 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:
DECEMBER 31, ------------------------------ 2005 2004 -------------- --------------
Deferred tax assets: Allowance for loan losses $ 494,533 $ 480,317 Deferred compensation 1,136,056 839,320 Unrealized loss on securities available-for-sale and cap and swap contracts 1,457,172 524,604 Other - - -------------- --------------
Total deferred tax assets 3,087,761 1,844,241 -------------- --------------
Deferred tax liabilities: Property (105,635) (201,066) Deferred loan fees (313,175) (259,767) Other (20,751) (70,340) -------------- --------------
Total deferred tax liabilities (439,561) (531,173) -------------- --------------
Net deferred tax asset $ 2,648,200 $ 1,313,068 ============== ==============
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, 2005 and 2004 include approximately $3,250,000 representing bad debt deductions for which no deferred income tax has been provided. This amount represents the Bank's bad debt reserve as of the base year and is not subject to recapture as long as the Bank continues to carry on the business of banking.
A thrift institution required to change its method of computing reserve for bad debts treats such change as a change in a method of accounting determined solely with respect to the "applicable excess reserves" of the institution. The amount of the applicable excess reserves is taken into account ratably over a six-taxable year period, beginning with the first taxable year beginning after December 31, 1995. The timing of this recapture may be delayed for a two-year period provided certain residential lending requirements are met. For financial reporting purposes, the Bank has not incurred any additional tax expense. At December 31, 2005, deferred taxes were provided on the difference between the book reserve at December 31, 2005 and the applicable excess reserve in the amount equal to the Bank's increase in the tax reserve from December 31, 1987 to December 31, 2005. Retained earnings at December 31, 2005 and 2004 includes approximately $3,250,000 of income for which no deferred income taxes will need to be provided.
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 employees, including the increased benefits available as a result of the mutual holding company reorganization completed in December 2004 and the adoption of equity compensation plans 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 $38,000, $159,000, and $169,000 for the years ended December 31, 2005, 2004, and 2003, respectively.
SUPPLEMENTAL RETIREMENT PLAN The Company maintains a nonqualified, unfunded, defined benefit pension plan for the Board of Directors and certain officers. The components of the Company's net periodic cost for the plan is as follows:
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. The Company will match an employee's contribution up to a maximum of 5% of the employee's annual gross compensation. For the years ended December 31, 2004 and 2003, the Company matched 200% of the employee's contribution. Beginning January 1, 2005, this match was reduced to 100% of the employee's contribution. The Board of Directors took this action upon its review of the total compensation programs available to the Company's employees, including the increased benefits available as a result of the mutual holding company reorganization completed in December 2004. The expense incurred for this plan was approximately $181,000, $330,000, and $308,000 for the years ended December 31, 2005, 2004, and 2003, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN In 2004, the Company 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 are expected to be released over a 15-year period. 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. As of December 31, 2005, 571,320 shares of the Company's common stock had been purchased for approximately $7.4 million by the ESOP. Of these shares, 418,820 shares were purchased in 2005 for approximately $5.3 million. As of December 31, 2004, 152,500 shares of the Company's common stock had been purchased for approximately $2.0 million by the ESOP. No additional purchases are expected to be made by the ESOP under this plan. The average purchase price of the 571,320 shares held at December 31, 2005 was $12.90 per share. The fair value of these shares December 31, 2005 was approximately $7.2 million. During the year ended December 31, 2005, approximately 38,000 shares were committed to be released to participants resulting in recognition of approximately $475,000 in compensation expense. These shares were subsequently released to participants' accounts in March 2006. During the year ended December 31, 2004, no shares were committed to be released and no expense was recognized.
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. Approximately 107,000 shares of the Company's common stock 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. During the year ended December 31, 2005, approximately 2,000 shares of the Company's common stock held by the trust were released to one eligible participant. As of December 31, 2005, the trust holds 105,000 shares of the Company's common stock as well as an additional $274,000 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 the Company approved the adoption of the 2005 Recognition and Retention Plan (the "RRP"). Certain senior officers of the Bank have been designated as Trustees of the RRP. The 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 RRP, the Recognition Plan Trust (the "Trust") purchased 285,660 shares of the Company's common stock in the open market for approximately $3.7 million, an average price of $12.95 per share. The Company made sufficient contributions to the Trust to fund these purchases. No additional purchases are expected to be made by the Trust under this plan. Pursuant to the terms of the plan, all 285,660 shares acquired by the Trust were granted to certain officers, employees and directors of the Company in July 2005. Approximately 3,000 forfeited shares were reallocated in December 2005. RRP shares will generally vest at the rate of 20% per year over five years.
A summary of the status of the shares under the RRP as of December 31, 2005 and changes during the year ended December 31, 2005 are presented below:
Compensation expense on 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 year ended December 31, 2005, approximately 28,000 shares were amortized to expense, based on the proportional vesting of the awarded shares. During year ended December 31, 2005, approximately $333,000 was recognized in compensation expense for the plan. No tax benefit was recognized from the plan during this period. As of December 31, 2005, approximately $3.1 million in additional compensation expense will be recognized over the remaining lives of the RRP awards. At December 31, 2005, the weighted average remaining lives of the RRP awards is approximately 4.5 years.
STOCK OPTIONS In June 2005, the shareholders of the Company also approved the adoption of the 2005 Stock Option Plan (the "Option Plan"). The 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. A total of 714,150 shares of common stock have been reserved for future issuance pursuant to the Option Plan of which 70,900 shares remain unawarded. Approximately 3,000 options forfeited during the year ended December 31, 2005 were granted to other employees.
A summary of the status of the Company's stock options under the Option Plan as of December 31, 2005 and changes during the year ended December 31, 2005 are presented below:
The following table summarizes all stock options outstanding under the Option Plan as of December 31, 2005:
The estimated fair value of options granted during 2005 was $2.88 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:
YEAR ENDED DECEMBER 31, 2005 ---------------------
Dividend yield 1.67% Expected volatility 23.62% Risk-free interest rate 3.74 - 4.34% Expected life of options 3 - 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 this was the first option award 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.
Given the relatively short time period for which the Company has had its common stock outstanding to the public, it was determined that the historical volatility of our stock price since our initial public offering in December 2004 would not provide a reliable basis for determining the expected volatility of our stock price over the expected lives of our option awards. Accordingly, management determined that the volatility used in the option pricing model 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.
During the year ended December 31, 2005, approximately $181,000 was recognized in compensation expense for the Option Plan. No tax benefit was recognized from the plan during this period. At December 31, 2005, approximately $1.7 million in additional compensation expense for awarded options remained unrecognized. The weighted average period over which this expense will be recognized is approximately 4.5 years.
15. COMMITMENTS AND CONTINGENCIES
The Bank had approximately $3,597,000 in outstanding mortgage loan commitments at December 31, 2005. The commitments are expected to be funded within 90 days with $3,597,000 in fixed rates ranging from 5.50% to 6.25%. These loans are not originated for resale. Also outstanding at December 31, 2005 were unused lines of credit totaling approximately $63,953,000.
The Bank had approximately $3,700,000 in outstanding mortgage loan commitments at December 31, 2004. The commitments are expected to be funded within 90 days with $3,700,000 in fixed rates ranging from 5.00% to 6.25%. These loans are not originated for resale. Also outstanding at December 31, 2004 were unused lines of credit totaling approximately $58,585,000.
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, 2005 and December 31, 2004, the Bank had letters of credit outstanding of approximately $14.1 million and $11.3 million, respectively, of which $12.5 million and $10.5 million, respectively, were standby letters of credit. At December 31, 2005 and 2004, the uncollateralized portion of the letters of credit extended by the Bank was approximately $169,000 and $215,000, respectively, of which $97,000 and $99,000, respectively, was for standby letters of credit.
The Company is subject to various pending claims and contingent liabilities arising in the normal course of business which are not reflected in the accompanying consolidated financial statements. Management considers that the aggregate liability, if any, resulting from such matters will not be material.
Among the Company's contingent liabilities, are exposures to limited recourse arrangements with respect to the sales of whole loans and participation interests. At December 31, 2005, the exposure, which represent a portion of credit risk associated with the sold interests, amounted to $185,000. The exposure is for the life of the related loans and payable, on our proportional share, as losses are incurred.
16. REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators, that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). As of December 31, 2005, the Company and the Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 2005 and 2004, 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:
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.
DEPOSITS--The fair value of NOW, money market deposits and passbook and club accounts is the amount reported in the consolidated financial statements. The fair value of time certificates is based on a present value estimate using rates currently offered for deposits of similar remaining maturity.
ADVANCES FROM FEDERAL HOME LOAN BANK--The fair value is the amount payable on demand at the reporting date.
OTHER BORROWED MONEY--The fair value is considered to be equal to the carrying amount due to the short-term nature of the instruments.
INTEREST RATE SWAPS AND CAPS--The fair value of the interest rate swaps and caps are based on prices obtained from an independent pricing service.
COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT--The majority of the Bank's commitments to extend credit and letters of credit carry current market interest rates if converted to loans. Because commitments to extend credit and letters of credit are generally unassignable by either the Bank or the borrower, they only have value to the Bank and the borrower. The estimated fair value approximates the recorded deferred fee amounts, which are not significant.
The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2005 and 2004. 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, 2005 and 2004 and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.
18. ABINGTON COMMUNITY BANCORP, INC. (PARENT COMPANY ONLY)
Certain condensed financial information follows:
STATEMENT OF INCOME ------------------------------------------------------------------------ Year Ended December 31, --------------- ---------------
INCOME: Interest on loans $ 346,045 --------------- Total income 346,045 --------------- EXPENSES: Professional services 200,000 Other 152,000 --------------- Total expenses 352,000 --------------- INCOME BEFORE INCOME TAXES (5,955) --------------- EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY 6,306,261 --------------- PROVISION FOR INCOME TAXES (2,025) --------------- NET INCOME $ 6,302,331 ===============
STATEMENT OF CASH FLOWS ------------------------------------------------------------------------
Year Ended December 31, --------------- ---------------
OPERATING ACTIVITIES: Net income $ 6,302,331 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed income of subsidiary (6,306,261) Changes in assets and liabilities which (used) provided cash: Other assets (2,025) Accounts payable and accrued expenses 320,000 --------------- Net cash provided by operating activities 314,045 --------------- INVESTING ACTIVITIES: Principal collected on loans 466,624 Disbursements for loans (7,474,375) --------------- Net cash used in investing activities (7,007,751) --------------- FINANCING ACTIVITIES: Repayments of liabilities (2,138,530) Payment of cash dividend (2,294,802) --------------- Net cash provided by financing activities (4,433,332) ---------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (11,127,038) CASH AND CASH EQUIVALENTS--Beginning of period 36,766,348 --------------- CASH AND CASH EQUIVALENTS--End of period $ 25,639,310 ===============
Since Abington Community Bancorp, Inc. was formed on December 16, 2004, no condensed statements of income or cash flows are presented for the period from December 16, 2004 to December 31, 2004 due to the insignificant nature of the balances.
19. CONVERSION AND REORGANIZATION TO MUTUAL HOLDING COMPANY
On April 21, 2004, the Board of Trustees approved a plan of reorganization by which Abington Bank reorganized from a mutual savings bank to a mutual holding company structure. Upon completion of the reorganization on December 16, 2004, Abington Bank became a wholly owned subsidiary of Abington Community Bancorp, Inc. Abington Mutual Holding Company, a Pennsylvania corporation, became the mutual holding company parent of Abington Community Bancorp, Inc. Abington Mutual Holding Company owns 55% of Abington Community Bancorp, Inc.'s outstanding common stock and must continue to own at least a majority of the voting stock of Abington Community Bancorp, Inc. In addition to the shares of Abington Community Bancorp, Inc. which it owns, Abington Mutual Holding Company was capitalized with $100,000 in cash.
As part of the reorganization, approximately 45% of the outstanding common stock was offered to the public. The purchase price was $10.00 per share. All investors (including trustees and officers of Abington Bank) paid the same price per share in the offering. The Company sold 7,141,500 shares of stock to eligible depositors, generating $71.4 million in gross proceeds, and an additional 8,728,500 shares were issued to Abington Mutual Holding Company. Net proceeds were approximately $69.3 million after $2.2 million in conversion costs were deducted. Half of the net proceeds from the offering, approximately $34.6 million, were used by the Company to buy the common stock of the Bank.
As part of the initial public offering, a rabbi trust, which was established by the Bank to fund certain benefit plans, purchased approximately 107,000 shares of the Company's common stock for $1.1 million for the benefit of certain officers and directors that acquired shares through our deferred compensation plans.
******
SUPPLEMENTARY DATA
SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents summarized quarterly data for each of the last two years.
- ------------------ (1) Due to the timing of the Bank's reorganization into the mutual holding company form and the completion of the Company's initial public offering on December 16, 2004, earnings per share for the period from December 16, 2004 to December 31, 2004 is not considered meaningful and is not shown.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's management evaluated, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and regulations and are operating in an effective manner. No change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934) occurred during the quarter ended December 31, 2005 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 AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 2006 (the "Proxy Statement"), which will be filed with the Securities and Exchange Commission on or before April 30, 2006.
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," "Report of the Compensation Committee" and "Performance Graph" 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, 2005 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 285,660 shares subject to restricted stock grants which were not vested as of December 31, 2005. The weighted-average exercise price excludes such restricted stock grants.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 Report of Independent Registered Public Accounting Firm thereon, as listed below, have been filed under "Item 8, Financial Statements and Supplementary Data".
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition for the Years Ended December 31, 2005 and 2004
Consolidated Statements of Income for the Years Ended December 31, 2005, 2004 and 2003
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income for the Years Ended December 31, 2005, 2004 and
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements
(B) LIST OF EXHIBITS
- ------------- * Denotes a management contract or compensatory plan or arrangement
(1) Incorporated by reference from Abington Community Bancorp's Registration Statement on Form S-1 filed on June 10, 2004, as amended and declared effective on October 21, 2004 (Registration No. 333-116370)
(2) Incorporated by reference from the registrant's Annual Report on Form 10-K for the year ended December 31, 2004 as filed with the SEC on March 31, 2005 (File No. 0-51077).
(3) Incorporated by reference from the registrant's Current Report on Form 8-K dated as of June 23, 2005 and filed with the SEC on June 27, 2005 (File No. 0-51077).
(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.
ABINGTON COMMUNITY BANCORP, INC.
By: /s/ Robert W. White ----------------------------------------- Robert W. White Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.