ITEM 1B.
UNRESOLVED STAFF COMMENTS
Not applicable.
We currently conduct business from our main office, twelve additional full-service banking offices and seven limited service offices. We also maintain a loan processing office. The following table sets forth the net book value of the land, building and leasehold improvements and certain other information with respect to our offices at December 31, 2010.
As of December 31, 2010, 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. However, in connection with the Merger, the Company has received three letters from three separate alleged shareholders demanding that the Board remedy alleged breaches of fiduciary duties in connection with the merger (the “Demand Letters”). The Demand Letters assert that the Company’s directors breached their fiduciary duties by causing the Company to enter into the Merger Agreement. Among other things, the Demand Letters allege that the Merger is unfair to the Company’s shareholders. The Demand Letters request that the Company’s board take action to, among other things, ensure that the consideration paid to the Company’s shareholders is fair and to recover alleged damages on behalf of the Company. The Company’s board of directors intends to respond to the Demand Letters.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The following table sets forth the high and low sales prices of the Company’s common stock as reported by the Nasdaq Global Market during the periods presented.
The following table summarizes the cash dividends per share of common stock paid by the Company during the periods indicated.
The following graph demonstrates comparison of the cumulative total returns for the common stock of Abington Bancorp, the NASDAQ Composite Index and the SNL Securities Thrift Index for the periods indicated. The graph includes adjustments to reflect the reorganization we completed on June 27, 2007 and assumes that an investor originally purchased shares of our predecessor mid-tier company on December 31, 2005 and exchanged his or her shares in June 2007 pursuant to the exchange ratio for our second step conversion. The graph below represents $100 invested in our common stock at its closing price on December 31, 2005. The cumulative total returns include the payment of dividends by Abington Bancorp.
For information regarding the Company’s equity compensation plans see Item 12.
(b)
Not applicable.
(c)
Purchases of Equity Securities
The Company’s repurchases of its common stock made during the quarter are set forth in the following table.
The selected consolidated financial and other data of Abington Bancorp, Inc. set forth below does not purport to be complete and should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including the Consolidated Financial Statements and related Notes, appearing elsewhere herein.
(1)
Earnings per share and cash dividends per share for the prior periods have been adjusted to reflect the impact of the second-step conversion and reorganization of the Company, which occurred on June 27, 2007.
(2)
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, with certain limited exceptions, to cease accruing interest on single-family residential mortgage loans 120 days or more past due and all other loans 90 days or more past due. Real estate owned consists of real estate acquired through foreclosure and real estate acquired by acceptance of a deed-in-lieu of foreclosure.
(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 is a Pennsylvania corporation which was organized to be the stock holding company for Abington Savings Bank in connection with our second-step conversion and reorganization which was completed on June 27, 2007. On January 26, 2011, the Company announced the signing of a definitive Agreement and Plan of Merger with Susquehanna under which Susquehanna will acquire all outstanding shares of common stock of the Company in a stock-for-stock transaction. For further information on the Company’s proposed merger with Susquehanna, see Note 18 in the Notes to the Consolidated Financial Statements included in Item 8 herein The Company’s results of operations are primarily dependent on the results of the Bank, which is a wholly owned subsidiary of the Company. The Bank’s results of operations depend to a large extent on net interest income, which is the difference between the income earned on its loan and investment portfolios and the cost of funds, which is the interest paid on deposits and borrowings. Results of operations are also affected by our provisions for loan losses, service charges and other non-interest income and non-interest expense. Non-interest expense principally consists of salaries and employee benefits expense, office occupancy and equipment expense, professional services expense, data processing expense, deposit insurance premium expense, advertising and promotions expense, director compensation expense, and other expenses. Our results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially impact our financial condition and results of operations. The Bank is subject to regulation by the FDIC and the Pennsylvania Department of Banking. The Bank’s executive offices and loan processing office are in Jenkintown, Pennsylvania, with twelve other branches and seven limited service facilities located in nearby Montgomery, Bucks and Delaware County neighborhoods. The Bank is principally engaged in the business of accepting customer deposits and investing these funds in loans.
We reported net income of $7.7 million for the year ended December 31, 2010, compared to a net loss of $7.2 million for the year ended December 31, 2009. Basic and diluted earnings per share were $0.41 and $0.39, respectively, for 2010 compared to basic and diluted loss per share of $0.36 for 2009. Our net interest income was $33.3 million for the year ended December 31, 2010, representing an increase of $2.5 million or 8.1% over 2009. The increase in our net interest income for 2010 compared to 2009 occurred as lower interest expense more than offset a reduction in interest income. Our average interest rate spread and net interest margin increased to 2.72% and 2.95%, respectively, for 2010 from 2.43% and 2.81%, respectively, for 2009. We recorded a provision for loan losses of $977,000 for the year ended December 31, 2010 compared to a provision of $18.7 million for the year ended December 31, 2009, due primarily to the resolution of certain non-performing loans. Our total non-interest income increased to $2.6 million for the year 2010 from a loss of $1.5 million for 2009. The increase was due primarily to a $4.5 million improvement in our net loss on REO year-over-year. Our total non-interest expenses for the year 2010 amounted to $24.7 million, representing an increase of $1.7 million or 7.2% from 2009. Our total assets increased $9.0 million, or 0.7%, to $1.25 billion at December 31, 2010 compared to $1.24 billion at December 31, 2009. Our deposits increased $49.9 million or 5.9% to $900.1 million at December 31, 2010 compared to $850.2 million at December 31, 2009, due primarily to growth in our core deposits. Our total stockholders’ equity decreased to $211.9 million at December 31, 2010 from $214.2 million at December 31, 2009. The decrease was due primarily to our purchases of treasury stock and the payment of our quarterly dividends, partially offset by our net income for the period.
Critical Accounting Policies, Judgments and Estimates-In reviewing and understanding financial information for Abington Bancorp, Inc., you are encouraged to read and understand the significant accounting policies used in preparing our consolidated financial statements. These policies are described in Note 2 in the Notes to the Consolidated Financial Statements included in Item 8 herein. The accounting and financial reporting policies of Abington Bancorp, Inc. conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and to general practices within the banking industry. The Financial Accounting Standards Board (the “FASB”) established the Accounting Standards Codification (the “Codification” or the “ASC”) as the authoritative source for U.S. GAAP. The preparation of the Company’s consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Management evaluates these estimates and assumptions on an ongoing basis including those related to the allowance for loan losses, other-than-temporary impairment of securities, and deferred income taxes. Management bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances. These form the basis for making judgments on the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Allowance for Loan Losses-The allowance for loan losses is increased by charges to income through the provision for loan losses and decreased by charge-offs (net of recoveries). The allowance is maintained at a level that management considers adequate to provide for losses based upon evaluation of the known and inherent risks in the loan portfolio. Management’s periodic evaluation of the adequacy of the allowance is based on the Company’s past loan loss experience, the volume and composition of lending conducted by the Company, adverse situations that may affect a borrower’s ability to repay, the estimated value of any underlying collateral, current economic conditions and other factors affecting the known and inherent losses in the portfolio. This evaluation is inherently subjective as it requires material estimates including, among others, the amount and timing of expected future cash flows on impacted loans, exposure at default, value of collateral, and estimated losses on our loan portfolio. All of these estimates may be susceptible to significant change.
The allowance consists of specifically identified amounts for impaired loans, a general allowance, or in some cases a specific 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.
A loan is classified as a troubled debt restructuring (“TDR”) if the Company, for economic or legal reasons related to a debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. Concessions granted under a TDR typically involve a temporary or permanent reduction in payments or interest rate or an extension of a loan’s stated maturity date at less than a current market rate of interest. Loans classified as TDRs are designated as impaired.
We establish an allowance on impaired loans for the amount by which the present value of expected future cash flows discounted at the loan’s effective interest rate, observable market price or fair value of collateral, if the loan is collateral dependent, is lower than the carrying value of the loan. Impairment losses are included in the provision for loan losses. 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. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. 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 generally considered to be insignificant, although management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for all construction loans and most commercial real estate loans, including all such loans that are classified or criticized. Large groups of smaller balance, homogeneous loans are collectively evaluated for impairment, except for those loans restructured under a troubled debt restructuring and certain classified or criticized loans. Loans collectively evaluated for impairment include smaller balance commercial real estate loans, residential real estate loans and consumer loans. The determination of fair value for the collateral underlying a loan is more fully described in Note 16 in the Notes to the Consolidated Financial Statements included in Item 8 herein.
We typically establish a general valuation allowance on classified and criticized loans which are not impaired. In establishing the general valuation allowance, we segregate these loans by category. The categories used by the Company include “doubtful,” “substandard” and “special mention.” For commercial and construction loans, the determination of the category for each loan is based on periodic reviews of each loan by our lending officers as well as an independent, third-party consultant. The reviews include a consideration of such factors as recent payment history, current financial data and cash flow projections, collateral evaluations, and current economic and business conditions. Categories for mortgage and consumer loans are determined through a similar review. Placement of a loan within a category is based on identified weaknesses that increase the credit risk of loss on the loan. Each category carries a general rate for the allowance percentage to be assigned to the loans within that category. The general allowance percentage is determined based on inherent losses associated with each type of lending as determined through consideration of our loss history with each type of loan, trends in credit quality and collateral values, and an evaluation of current economic and business conditions. Although the placement of a loan within a given category assists us in our analysis of the risk of loss, the actual allowance percentage assigned to each loan within a category is adjusted for the specific circumstances of each loan, including an evaluation of the appraised value of the specific collateral for the loan, and will often differ from the general rate for the category. These classified and criticized loans, in the aggregate, represent an above-average credit risk and it is expected that more of these loans will prove to be uncollectible compared to loans in the general portfolio.
We establish a general allowance on non-classified and non-criticized loans to recognize the inherent losses associated with lending activities, but which, unlike amounts which have been specifically identified with respect to particular classified and criticized loans, is not established on an individual loan-by-loan basis. This general valuation allowance is determined by segregating the loans by portfolio segments and assigning allowance percentages to each segment. An evaluation of each segment is made to determine the need to further segregate the loans by a more focused class of financing receivable. For our residential mortgage and consumer loan portfolios, we identified similar characteristics throughout the portfolio including credit scores, loan-to-value ratios and collateral. These portfolios generally have high credit scores and strong loan-to-value ratios (typically below 80% at origination), and have not been significantly impacted by recent housing price depreciation. For our commercial real estate loan portfolio, although the loans are less uniform than with our residential mortgage and consumer loan portfolios, a review of our loss history does not suggest significant benefits from further segregation of the segment. With our construction loan portfolio, however, a further analysis is made in which we segregate the loans by class based on the purpose of the loan and the collateral properties securing the loan. Various risk factors are then considered for each class of loan, including the impact of general economic and business conditions, collateral value trends, credit quality trends and historical loss experience. Based on a consideration of our loss history in recent periods in comparison to the aging of our loan portfolio, we evaluated our loss experience using a time period of three years. In choosing this time period, our goal was to select a period that was sufficiently short so as to capture the recent economic environment, but long enough to fairly reflect the age of our loans at the time when losses began to occur. We believe that a three-year period appropriately reflects the life cycle of a loan that is indicative of the risk of loss.
The allowance is adjusted for significant other factors that, in management’s judgment, affect the collectibility of the portfolio as of the evaluation date. These significant factors, many of which have been previously discussed, 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. Although we review key ratios, such as the allowance for loan losses as a percentage of non-performing loans and total loans receivable, in order to help us understand the trends in our loan portfolio, we do not try to maintain any specific target range with respect to such ratios.
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, as has occurred in recent periods, 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. 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.
Fair Value Measurements-We use fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Investment and mortgage-backed securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans, real estate owned and certain other assets. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual assets.
In accordance with Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), we group our assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:
•
Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.
•
Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
•
Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset.
In accordance with ASC 820, we base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy in ASC 820. Fair value measurements for most of our assets are obtained from independent pricing services that we have engaged for this purpose. When available, we, or our independent pricing service, use quoted market prices to measure fair value. If market prices are not available, fair value measurement is based upon models that incorporate available trade, bid and other market information. Substantially all of our financial instruments use either of the foregoing methodologies to determine fair value adjustments recorded to our financial statements. In certain cases, however, when market observable inputs for model-based valuation techniques may not be readily available, we are required to make judgments about assumptions market participants would use in estimating the fair value of financial instruments.
The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments that trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value. When observable market prices and parameters are not fully available, management judgment is necessary to estimate fair value. In addition, changes in the market conditions may reduce the availability of quoted prices or observable data. When market data is not available, we use valuation techniques requiring more management judgment to estimate the appropriate fair value measurement. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, that could significantly affect the results of current or future valuations. At December 31, 2010 and 2009, while we did not have any assets that were measured at fair value on a recurring basis using Level 3 measurements, we did have assets that were measured at fair value on a nonrecurring basis using Level 3 measurements. See Note 16 in the Notes to the Consolidated Financial Statements included in Item 8 herein for a further description of our fair value measurements.
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 whether or not management intends to sell or expects that it is more likely than not that it will be required to sell the security prior to an anticipated recovery of 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 for a debt security is determined to be other-than-temporary, the other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income, except for equity securities, where the full amount of the other-than-temporary impairment is recognized in earnings.
Income Taxes-Management makes estimates and judgments to calculate some of our tax liabilities and determine the recoverability of some of our deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenues and expenses. Management also estimates a reserve for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. These estimates and judgments are inherently subjective. Historically, our estimates and judgments to calculate our deferred tax accounts have not required significant revision from management’s initial estimates.
In evaluating our ability to recover deferred tax assets, management considers all available positive and negative evidence, including our past operating results and our forecast of future taxable income. In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.
Recent Accounting Pronouncements-In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06, Improving Disclosures about Fair Value Measurements, which updates ASC 820, Fair Value Measurements and Disclosures. The updated guidance added new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarified existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The amended guidance in ASU 2010-06 was effective for the first interim or annual reporting period beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchase, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010. The Company adopted the amended guidance, except for the requirement effective for fiscal years beginning after December 15, 2010, on January 1, 2010. The Company adopted the additional requirement on January 1, 2011. The adoptions did not have any impact on our financial position or results of operations.
In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which updated ASC 310, Receivables. The updated guidance requires more robust and disaggregated disclosures about the credit quality of an entity’s financing receivables and its allowance for credit losses, including a rollforward schedule of the allowance for credit losses for the period on a portfolio segment basis, as well as additional information about the aging and credit quality of receivables by class of financing receivables as of the end of the period. The new and amended disclosures that relate to information as of the end of a reporting period were effective for the Company as of December 31, 2010, except for disclosures relating to Troubled Debt Restructurings (“TDRs”) as discussed further below. The disclosures that include information for activity that occurs during a reporting period will be effective for the first interim reporting period beginning after December 31, 2010. The Company adopted the required disclosures as of December 31, 2010. The adoptions did not have any impact on our financial position or results of operations. The Company is continuing to evaluate the guidance relating to disclosures that include information for activity that occurs during a reporting period. While the guidance will impact the presentation of certain disclosures within our financial statements, we do not expect that this guidance will have any impact on our financial position or results of operations.
In January of 2011, the FASB issued ASU 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. This update temporarily delays the effective date of additional disclosures relating to TDRs required by ASU 2010-20. The delay is intended to allow the FASB time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about TDRs for public entities and the guidance for determining what constitutes a TDR will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. The Company is continuing to evaluate this guidance.
In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations, which updates ASC 805, Business Combinations. ASC 805 requires a public entity to disclose pro forma information for business combinations that occurred in the current reporting period. The updated guidance specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this ASU also expand the supplemental pro forma disclosures under ASC 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this ASU are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 31, 2010. The Company is continuing to evaluate this guidance.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2010 AND DECEMBER 31, 2009
Our total assets increased $9.0 million, or 0.7%, to $1.25 billion at December 31, 2010 compared to $1.24 billion at December 31, 2009. The most significant increases were in our cash and cash equivalents, which grew by $33.0 million, and our investment and mortgage-backed securities, which grew by $49.9 million during 2010. Our investment securities grew by $41.0 million during 2010, due primarily to purchases of agency bonds aggregating approximately $177.2 million, partially offset by the calls and maturities of agency bonds of $133.7 million in the aggregate. Our mortgage-backed securities grew by $9.3 million during 2010, due primarily to aggregate purchases of $91.5 million of CMOs, substantially offset by calls, maturities and repayments on mortgage-backed securities of $81.4 million in the aggregate. The increases in our cash and cash equivalents and our investment and mortgage-backed securities
were largely funded by our deposit growth and our loan repayments. Our net loans receivable decreased $68.1 million or 8.9% to $696.4 million at December 31, 2010 from $764.6 million at December 31, 2009. The largest decrease was in our construction loans. New originations of construction loans remained limited as a result of the current economic environment combined with management’s increased scrutiny of this portion of the loan portfolio. Our gross construction loans decreased $65.1 million during 2010, however, this was partially offset by a $24.1 million decrease in the balance of our loans-in-process. Our one- to four-family residential loans also decreased significantly during 2010 to $393.4 million at December 31, 2010 from $432.0 million at December 31, 2009. The decrease in this portion of the loan portfolio of 8.9% was due largely to a decreased demand for loans in the current market environment. Our multi-family residential and commercial real estate loans and our home equity lines of credit increased $5.6 million and $4.9 million, respectively, during 2010.
Our deposits increased $49.9 million or 5.9% to $900.1 million at December 31, 2010 compared to $850.2 million at December 31, 2009. The increase during 2010 was due primarily to growth in our core deposits. During 2010, our core deposits increased $74.6 million or 19.0% driven by an increase in our savings and money market accounts of $60.6 million, or 22.8%. A significant portion of the funds from our deposit growth were used to pay down our advances from the FHLB. Our advances from the FHLB decreased $36.9 million or 25.1% to $109.9 million at December 31, 2010 from $146.7 million at December 31, 2009. The repayment of a portion of our advances was based on a number of factors including an evaluation of our overall liquidity and leverage positions, as well as our collateral position with the FHLB.
Our total stockholders’ equity decreased to $211.9 million at December 31, 2010 from $214.2 million at December 31, 2009. The decrease was due primarily to our purchases of treasury stock and the payment of our quarterly dividends, partially offset by our net income for the period. During 2010 we repurchased approximately 860,000 shares of the Company’s common stock for an aggregate cost of approximately $7.4 million as part of our stock repurchase plans. We paid an aggregate of $4.0 million in cash dividends during 2010, which included an $0.01 increase in the per share dividend amount to $0.06 per share commencing with the fourth quarter of 2010. The Bank’s regulatory capital levels continue to far exceed requirements for well capitalized institutions.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funds are from deposits, amortization of loans, loan prepayments and pay-offs, cash flows from mortgage-backed securities and other investments, and other funds provided from operations. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing investment securities are relatively predictable sources of funds, deposit flows and loan prepayments can be greatly influenced by general interest rates, economic conditions and competition. We also maintain excess funds in short-term, interest-bearing assets that provide additional liquidity. At December 31, 2010, our cash and cash equivalents amounted to $77.7 million. In addition, at that date we had $3.4 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 $293.1 million at December 31, 2010.
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, 2010, we had certificates of deposit maturing within the next 12 months of $238.5 million. Based upon historical experience, we anticipate that a significant portion of the maturing certificates of deposit will be redeposited with us.
In addition to cash flow from loans and securities as well as from sales of available for sale securities, we have significant borrowing capacity available to fund liquidity needs. Our borrowings consist primarily of advances from the FHLB of Pittsburgh, of which we are a member. Under terms of the collateral agreement with the FHLB, we pledge substantially all of our residential mortgage loans and mortgage-backed securities as well as all of our stock in the FHLB as collateral for such advances. As of December 31, 2010, we had $109.9 million in outstanding FHLB advances, and we had $408.8 million in additional FHLB advances available to us. During 2010, as in 2009, we significantly reduced our outstanding balance of advances from the FHLB. We determined to continue to repay a portion of our FHLB advances due to a number of factors, including an evaluation of our overall liquidity and leverage positions, as well as our collateral position with the FHLB. Should we decide to utilize sources of funding other than advances from the FHLB, we believe that additional funding is readily available in the form of advances or repurchase agreements through various other sources.
Our total stockholders’ equity decreased to $211.9 million at December 31, 2010 from $214.2 million at December 31, 2009. The decrease was due primarily to our purchases of treasury stock and the payment of our quarterly dividends, partially offset by our net income for the period. We continue to maintain a strong capital base due largely to the $134.7 million in net proceeds received from our second-step conversion and stock offering completed in June 2007. Half of these net proceeds, approximately $67.3 million, were invested in Abington Bank. The net proceeds received by the Bank further strengthened its capital position, which already exceeded all regulatory requirements (see table below).
The following table summarizes regulatory capital ratios for the Bank as of the dates indicated and compares them to current regulatory requirements. As a savings and loan holding company, the Company is not subject to any regulatory capital requirements.
SHARE-BASED COMPENSATION
The Company accounts for its share-based compensation awards in accordance with the stock compensation topic of the ASC. Under ASC Topic 718, Compensation - Stock Compensation (“ASC 718”), the Company recognizes the cost of employee services received in share-based payment transactions and measures the cost based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award.
At December 31, 2010, the Company has four share-based compensation plans, the 2005 and the 2007 Recognition and Retention Plans (the “2005 RRP” and “2007 RRP”, respectively) and the 2005 and 2007 Stock Option Plans (the “2005 Option Plan” and “2007 Option Plan”, respectively). Share awards were first issued under the 2005 plans in July 2005. Share awards were issued under the 2007 plans in January 2008.
The Company also has an employee stock ownership plan (“ESOP”). Shares held under the ESOP are also accounted for under ASC 718. 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 a further discussion of these plans, see Note 13 in the Notes to the Consolidated Financial Statements included in Item 8 herein.
COMMITMENTS AND OFF-BALANCE SHEET ARRANGEMENTS
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and the unused portions of lines of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. Commitments to extend credit and lines of credit are not recorded as an asset or liability by us until the instrument is exercised. At December 31, 2010 and 2009, we had no commitments to originate loans for sale.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the customer. The amount and type of collateral required varies, but may include accounts receivable, inventory, equipment, real estate and income-producing commercial properties. At December 31, 2010 and 2009, commitments to originate loans and commitments under unused lines of credit, including undisbursed portions of construction loans in process, for which the Bank was obligated amounted to approximately $114.9 million and $125.9 million, respectively, in the aggregate.
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, 2010 and December 31, 2009, the Bank had letters of credit outstanding of approximately $48.3 million and $48.5 million, respectively, of which $47.5 million and $47.6 million, respectively, were standby letters of credit. At December 31, 2010 and 2009, the uncollateralized portion of the letters of credit extended by the Bank was approximately $7,000 and $219,000, respectively, all of which was for standby letters of credit in both years. The current amount of the liability for guarantees under letters of credit was not material as of December 31, 2010 and 2009.
The Company is also subject to various pending claims and contingent liabilities arising in the normal course of business, which are not reflected in the unaudited consolidated financial statements. Management considers that the aggregate liability, if any, resulting from such matters will not be material.
Among the Company’s contingent liabilities are exposures to limited recourse arrangements with respect to the Bank’s sales of whole loans and participation interests. At December 31, 2010, such exposure, which represents a portion of credit risk associated with the sold interests, amounted to $185,000. The exposure is for the life of the related loans and payable, on our proportional share, as losses are incurred.
We anticipate that we will continue to have sufficient funds and alternative funding sources to meet our current commitments.
The following table summarizes our outstanding commitments to originate loans and to advance additional amounts pursuant to outstanding letters of credit, lines of credit and under our construction loans at December 31, 2010.
The following table summarizes our contractual cash obligations at December 31, 2010. The balances included in the table do not reflect the interest due on these obligations.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
General. We reported net income of $7.7 million for the year ended December 31, 2010, compared to a net loss of $7.2 million for the year ended December 31, 2009. Basic and diluted earnings per share were $0.41 and $0.39, respectively, for 2010 compared to basic and diluted loss per share of $0.36 for 2009. Our net interest income was $33.3 million for the year ended December 31, 2010, representing an increase of $2.5 million or 8.1% over 2009. The increase in our net interest income for 2010 compared to 2009 occurred as lower interest expense more than offset a reduction in interest income. Our average interest rate spread and net interest margin increased to 2.72% and 2.95%, respectively, for 2010 from 2.43% and 2.81%, respectively, for 2009. Our total non-interest income increased to $2.6 million for the year 2010 from a loss of $1.5 million for 2009. Our total non-interest expenses for the year ended December 31, 2010 amounted to $24.7 million, representing an increase of $1.7 million or 7.2% from 2009.
Interest Income. Interest income for the year ended December 31, 2010 decreased $2.4 million or 4.5% over 2009 to $51.3 million. The decrease occurred as growth in the average balance of our total interest-earning assets was more than offset by a decrease in the average yield earned on those assets. The average balance of our total interest-earning assets increased $30.6 million or 2.8% to $1.13 billion for 2010 from $1.10 billion for 2009. The increase was driven by a $40.3 million, or 45.2%, increase in the average balance of our investment securities and a $27.5 million, or 72.3%, increase in the average balance of our other interest-earning assets that were partially offset by a decrease of $36.1 million, or 4.8%, in the average balance of our loans receivable. The average balance of our mortgage-backed securities also decreased slightly to $213.7 million for 2010 from $214.7 million for 2009. The average yield earned on our total interest-earning assets decreased 35 basis points to 4.55% for 2010 from 4.90% for 2009. Although the average yield earned on our loans receivable increased 11 basis points year-over-year, these assets decreased as a percentage of our total interest-earning assets. As a result, decreases in the average yields earned on our investment and mortgage-backed securities of 96 basis points and 71 basis points, respectively, drove our overall decline in yield. The average yield on our other interest-earning assets increased slightly year-over-year, but remained low at 12 basis points. Included in our other interest-earning assets is FHLB stock on which we are not currently earning a dividend. The decrease in the average yield earned on our interest-earning assets was primarily the result of the current interest rate environment.
Interest Expense. Interest expense for the year ended December 31, 2010 decreased $4.9 million or 21.5% from 2009 to $18.0 million. The decrease in our interest expense occurred as a reduction in the average rate paid on our total interest-bearing liabilities more than offset an increase in the average balance of those liabilities. The average rate we paid on our total interest-bearing liabilities decreased 64 basis points to 1.83% for 2010 from 2.47% for 2009. The average rate we paid on our total deposits decreased 62 basis points year-over-year, driven by a 64 basis point decrease in the average rate paid on our certificates of deposit and a 43 basis point decrease in the average rate paid on our savings and money market accounts. The average balance of our total deposits increased $113.4 million or 15.7% to $837.2 million for 2010 from $723.8 million for 2009 due primarily to growth in our core deposits. The average balance of our core deposits increased $105.5 million or 38.5% to $379.8 million for 2010 from $274.3 million for 2009. Although the average rate we paid on our advances from the FHLB increased six basis points for 2010 compared to 2009, this increase was more than offset by a decrease of $54.3 million or 30.0% in the average balance of those advances year-over-year. The average rate of our FHLB advances increased in 2010, as we relied less on overnight advances than we did during 2009. The average rate paid on overnight advances is substantially below the average rate paid on our other, longer-term advances from the FHLB. The average balance of, and the average rate paid on, our other borrowings remained relatively consistent year-over-year and did not significantly contribute to the change in interest expense.
Average Balances, Net Interest Income, and Yields Earned and Rates Paid. The following table shows for the periods indicated the total dollar amount of interest earned from average interest-earning assets and the resulting average yields, as well as the interest expense incurred on average interest-bearing liabilities and the resulting average rates, and the average interest rate spread and net interest margin. Tax-exempt income and yields have not been adjusted to a tax-equivalent basis. All average balances are based on monthly balances. Management does not believe that the monthly averages differ significantly from what the daily averages would be.
(1)
Investment securities for the 2010 period include 133 tax-exempt municipal bonds with an aggregate average balance of $40.1 million and an average yield of 4.0%. Investment securities for the 2009 period include 134 tax-exempt municipal bonds with an aggregate average balance of $41.8 million and an average yield of 3.9%. The tax-exempt income from such securities has not been calculated on a tax equivalent basis.
(2)
Includes non-accrual loans during the respective periods. Calculated net of deferred fees and discounts, loans in process and allowance for loan losses. The impact of loan fee income has an immaterial effect on this analysis.
(3)
Equals net interest income divided by average interest-earning assets.
Rate/Volume Analysis. The following table shows the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities affected our interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate, which is the change in rate multiplied by prior year volume, and (2) changes in volume, which is the change in volume multiplied by prior year rate. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.
Provision for Loan Losses. We recorded a provision for loan losses of $977,000 for the year ended December 31, 2010 compared to a provision of $18.7 million for the year ended December 31, 2009. 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 decrease in our provision for loan losses year-over-year was the result of the resolution of certain non-performing loans and the improvement in the overall credit quality of our remaining loan portfolio, as well as the recognition of a recovery to the allowance for loan losses during the year of $1.2 million in the aggregate.
Our non-accrual loans decreased $21.3 million or 75.3% during 2010 to $7.0 million at December 31, 2010 compared to $28.3 million at December 31, 2009. The decrease was attributable to the resolution of certain of our non-accrual loans, including the settlement of our participation interests in two shared national credit loans with an aggregate outstanding balance of $7.2 million at December 31, 2009. Additionally, three other loans that were classified as non-accrual at December 31, 2009, were transferred to real estate owned (“REO”) during 2010. The three loans included two construction loans, with an aggregate outstanding balance of $8.6 million at December 31, 2009 and one commercial real estate loan with an outstanding balance of $2.1 million at December 31, 2009. The remainder of the decrease was due primarily to the charge-off of certain loan balances during 2010. Our total non-performing loans, which consist of non-accruing loans plus accruing loans 90 days or more past due, decreased $25.6 million or 73.9% to $9.0 million at December 31, 2010 from $34.6 million at December 31, 2009. Despite the aforementioned transfers of property to REO, the balance of our REO increased $769,000 year-over-year as these transfers were substantially offset by the sale of six REO properties during the year, including the sale of a 40-unit high rise condominium project in Center City, Philadelphia, with a carrying value of $8.4 million at December 31, 2009. At December 31, 2010 and 2009, our non-performing loans amounted to 1.29% and 4.47%, respectively, of loans receivable, and our allowance for loan losses amounted to 47.27% and 26.28%, respectively, of non-performing loans. At December 31, 2010 and 2009, our non-performing assets amounted to 2.62% and 4.64% of total assets, respectively.
Non-interest Income. Our total non-interest income increased to $2.6 million for the year 2010 from a loss of $1.5 million for 2009. The increase was due primarily to a $4.5 million improvement in our net loss on REO year-over-year that was partially offset by a $386,000 decrease in our service charge income. The improvement in loss on REO was primarily due to a decrease to our expense to write-down REO properties to $351,000 in 2010 compared to an expense of $4.5 million in the aggregate to write-down the value of certain REO properties in 2009. The decrease in our service charge income was primarily due to a decrease in fees recognized for overdraft charges.
Non-interest Expenses. Our total non-interest expenses for the year 2010 amounted to $24.7 million, representing an increase of $1.7 million or 7.2% from 2009. Our largest increases were in our salaries and employee benefits, occupancy, and professional services expenses, which increased $628,000, $330,000 and $579,000, respectively. The increase in salaries and employee benefits expenses was due primarily to an increase in our employee profit sharing expense, which amounted to $672,000 for 2010. We had no expense for employee profit sharing during 2009 as a result of our net loss for the year. Also contributing to the year-over-year increase was a $151,000 or 20.2% increase in the expense for our ESOP and a $96,000 increase in our expense for salaries. Our ESOP expense is based on the average market value of our stock during the year and increased as a result of an increase in the average market value of our stock for 2010 compared to 2009. The increase in our salaries expense was the result of normal merit increases in salaries. Partially offsetting these increases was a decrease in our expense for our 2005 RRP and 2005 Option Plan, as the majority of shares awarded under these plans became fully vested in July 2010. The increase in occupancy expense was due largely to higher real estate taxes, as well as increases in certain expenses related to our computer network. The increase in professional services expenses was due primarily to legal fees incurred in relation to the resolution of certain non-performing loans and real estate owned. We expect our legal fees to remain elevated in 2011 as a result of the ongoing resolution of non-performing assets as well fees incurred in relation to our announced merger with Susquehanna.
Income Tax Expense. We recorded an income tax expense of approximately $2.5 million for the year 2010 compared to an income tax benefit of approximately $5.3 million for 2009. The fluctuation in our income tax expense was primarily a result of a shift to pre-tax income in 2010 from a pre-tax loss in 2009, and was significantly impacted by the deferred benefit of expenses incurred in prior periods to write-down certain REO properties, most notably our 40-unit high rise in Center City, Philadelphia. While the portion of our total income that is generated from tax-exempt municipal securities and BOLI contributed to our overall tax benefit in 2009, it was a more significant factor than in 2010, due to the proportion of this income to our overall pre-tax income in 2010 compared to the proportion of this income to our overall pre-tax loss in 2009.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
General. We reported a net loss of $7.2 million for the year ended December 31, 2009, compared to net income of $2.1 million for the year ended December 31, 2008. The Company’s basic and diluted loss per share were both $0.36 for 2009 compared to basic and diluted earnings per share of $0.10 and $0.09, respectively, for 2008. The net loss for 2009 was due primarily to our provision for loan losses, which amounted to $18.7 million for 2009, as well as a net loss on real estate owned of $5.5 million. Our net interest income was $30.8 million for the year ended December 31, 2009, representing an increase of $1.0 million or 3.5% over 2008. The increase in our net interest income for 2009 compared to 2008 occurred as a decrease in our interest expense year-over-year exceeded the decrease in our interest income. Our average interest rate spread increased to 2.43% for 2009 from 2.21% for 2008. Our net interest margin decreased year-over-year to 2.81% for 2009 from 2.87% for 2008 as a result of our deposit growth, which outpaced the growth in our interest-earning assets. Our total non-interest income decreased $4.5 million to a loss of $1.5 million for the year ended December 31, 2009 from income of $3.1 million for the year ended December 31, 2008, due primarily to a $5.4 million increase in net loss on real estate owned year-over-year. Our total non-interest expenses for the year ended December 31, 2009 amounted to $23.1 million compared to $21.2 million for 2008.
Interest Income. Interest income for the year ended December 31, 2009 decreased $2.5 million or 4.5% over the comparable 2008 period to $53.7 million. The decrease occurred as growth in the average balance of our total interest-earning assets was more than offset by a decrease in the average yield earned on those assets. The average balance of our total interest-earning assets increased $59.2 million or 5.7% to $1.10 billion for 2009 from $1.04 billion for 2008. The increase was driven by a $51.8 million increase in the average balance of our loans receivable and a $31.1 million increase in the average balance of our mortgage-backed securities that were partially offset by decreases in the average balances of our investment securities and other interest-earning assets. The average yield earned on our total interest-earning assets decreased 52 basis points to 4.90% for 2009 from 5.42% for 2008. Decreases in the average yields earned on our investment securities, loans receivable and other interest-earning assets of 87 basis points, 62 basis points and 225 basis points, respectively, more than offset an 8 basis point increase in the average yield earned on our mortgage-backed securities. The decreases in the average yields earned on our interest-earning assets were primarily the result of the then current interest rate environment, as reflected by the actions of the Federal Reserve Board’s Open Market Committee in significantly cutting the federal funds rate throughout 2008 and maintaining a rate of near zero throughout 2009. The decrease in the yield on our other interest-earning assets was also impacted by the decision of the FHLB to suspend the dividend on their stock during the fourth quarter of 2008. As of December 31, 2009 and 2008, we held approximately 146,000 shares of FHLB capital stock with a book value of $14.6 million. We earned no dividend income on our FHLB stock during 2009 compared to dividend income of $261,000 in 2008.
Interest Expense. Interest expense for the year ended December 31, 2009 decreased $3.6 million or 13.4% over 2008 to $22.9 million. The decrease in our interest expense occurred as a decrease in the average rate paid on our total interest-bearing liabilities offset an increase in the average balance of those liabilities. The average rate we paid on our total interest-bearing liabilities decreased 74 basis points to 2.47% for 2009 from 3.21% for 2008. The average rate we paid on our total deposits decreased 72 basis points year-over-year, driven by a 78 basis point decrease in the average rate paid on our certificates of deposit. The average balance of our total deposits increased $127.3 million or 21.3% to $723.8 million for 2009 from $596.5 million for 2008 due primarily to growth in our core deposits. The average balance of our core deposits increased $91.9 million or 50.4% to $274.3 million for 2009 from $182.4 million for 2008. The average balance of our advances from the FHLB decreased $28.6 million or 13.6% to $180.9 million for 2009 from $209.5 million for 2008 as we decreased our utilization of this source of funding during 2009. The average rate paid on our advances in 2009 decreased 25 basis points year-over-year. Although the average balance of our other borrowings increased $3.5 million or 17% in 2009 compared to 2008, the increase in the balance was more than offset by decrease in the average rate paid on our other borrowings of 149 basis points year-over-year.
Average Balances, Net Interest Income, and Yields Earned and Rates Paid. The following table shows for the periods indicated the total dollar amount of interest earned from average interest-earning assets and the resulting average yields, as well as the interest expense incurred on average interest-bearing liabilities and the resulting average rates, and the average interest rate spread and net interest margin. Tax-exempt income and yields have not been adjusted to a tax-equivalent basis. All average balances are based on monthly balances. Management does not believe that the monthly averages differ significantly from what the daily averages would be.
(1)
Investment securities for the 2009 period include 134 tax-exempt municipal bonds with an aggregate average balance of $41.8 million and an average yield of 3.9%. Investment securities for the 2008 period include 132 tax-exempt municipal bonds with an aggregate average balance of $35.8 million and an average yield of 3.9%. The tax-exempt income from such securities has not been calculated on a tax equivalent basis.
(2)
Includes non-accrual loans during the respective periods. Calculated net of deferred fees and discounts, loans in process and allowance for loan losses. The impact of loan fee income has an immaterial effect on this analysis.
(3)
Equals net interest income divided by average interest-earning assets.
Rate/Volume Analysis. The following table shows the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities affected our interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate, which is the change in rate multiplied by prior year volume, and (2) changes in volume, which is the change in volume multiplied by prior year rate. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.
Provision for Loan Losses. We recorded a provision for loan losses of $18.7 million for the year ended December 31, 2009, compared to a provision of $9.8 million for the year ended December 31, 2008. Our provision for loan losses during 2009 was due primarily to provisions with respect to our construction loan portfolio (which includes land acquisition and development loans). Our loan portfolio at December 31, 2009 included an aggregate of $34.6 million of non-performing loans, net of $9.6 million of charge-offs on those loans during 2009. At December 31, 2009, $29.3 million of our non-performing loans were construction loans, of which $26.0 million became non-performing during 2009. All of the $9.6 million in charge-offs on non-performing loans during 2009 were on construction loans. Among the additions to our balance of non-performing loans during 2009 were the Company’s participation interests in three shared national credit loans, with an aggregate outstanding balance of $9.0 million at December 31, 2009, net of
$7.6 million in charge-offs. Based on our analysis of the circumstances surrounding these loans, which were included in our construction loan portfolio, and having considered the $7.6 million that was already charged-off during 2009, no additional valuation allowance was considered necessary on these loans at December 31, 2009. Also among the additions to our non-performing loan balance during 2009 were four construction loans and two commercial real estate loans to three borrowers, with an aggregate outstanding balance of $15.3 million at December 31, 2009, net of $1.8 million in charge-offs. At December 31, 2009, $3.6 million of our allowance for loan losses was allocated to these loans. The balance of our non-performing loans at December 31, 2009 was lower than it would have otherwise been due to the aforementioned charge-offs of $9.6 million, as well as the transfer of certain loans to REO. During 2009, 13 loans, with an aggregate outstanding balance of $25.6 million, net of $7.9 million of charge-offs, were transferred to REO. Of these loans, seven loans with an aggregate outstanding balance of $24.7 million, net of $7.8 million of charge-offs, were construction loans (which include land acquisition and development loans). As of December 31, 2009, 19.6% of our $149.4 million of total outstanding construction loans were non-performing, and at such date, $6.7 million, or 73.3%, of our allowance for loan losses was allocated to construction loans. At December 31, 2009 and December 31, 2008, our non-performing loans amounted to 4.47% and 3.06%, respectively, of loans receivable, and our non-performing assets amounted to 4.64% and 2.12% of total assets, respectively. At December 31, 2009 and December 31, 2008, our allowance for loan losses amounted to 26.28% and 49.35%, respectively, of non-performing loans. Our allowance for loan losses decreased as a percentage of non-performing loans year-over-year, despite an increase in our non-performing loans over the same period, due primarily to our high level of net charge-offs in 2009.
Non-interest Income. Our total non-interest income decreased $4.5 million to a loss of $1.5 million for the year ended December 31, 2009 from income of $3.1 million for the year ended December 31, 2008. The decrease was due primarily to a $5.4 million increase in net loss on REO year-over-year. The $5.5 million net loss on REO recognized during 2009 was due primarily to an expense of $4.5 million in the aggregate to write-down the value of certain REO properties, as well as to additional expenses to maintain our REO properties throughout the year. Our net loss on REO was partially offset as no securities impairment charge was recognized during 2009 compared to an impairment charge on investment securities of $869,000 recognized during 2008. Decreases in our service charge income and income on bank owned life insurance (“BOLI”) of $58,000 and $88,000, respectively, as well as a $141,000 decrease in our gain on sale of securities were mostly offset by a $262,000 increase in our other non-interest income year-over-year. The most significant factor contributing to the increase in other non-interest income was a $112,000 increase in rental income as a result of rent received on certain REO properties.
Non-interest Expenses. Our total non-interest expenses for the year ended December 31, 2009 amounted to $23.1 million, representing an increase of $1.9 million or 8.7% from the year ended December 31, 2008. The most significant increase was in our deposit insurance premium expense, which increased $1.3 million or 260.1% to $1.8 million for 2009. The increase in the insurance premium was due to an increase in our regular quarterly premium as a result of a new fee structure implemented by the FDIC, as well as a special assessment by the FDIC on all insured institutions during the second quarter of 2009. Our occupancy, data processing and professional services expenses experienced the next largest increases year-over-year. Our occupancy expense increased $245,000 or 11.4% year-over-year, primarily as a result of higher real estate taxes on certain of our branches, as well as higher expenses related to maintenance of certain equipment, primarily certain computer equipment. Our data processing expense increased $111,000 or 7.4% year-over-year, due in part to a higher number of transactions as a result of our deposit growth. Our professional services expense increased $108,000 or 8.9% due primarily to additional legal expenses incurred in connection with the resolution of certain non-performing loans.
Income Tax Expense. We recorded an income tax benefit of approximately $5.3 million for the year 2009 compared to a benefit of approximately $278,000 for the year 2008. The benefit recognized in was a result of our overall net loss, and was significantly impacted by the immediate tax benefit of certain expense incurred during the year in relation to our loan charge-offs. While the portion of our total income that is generated from tax-exempt municipal securities and BOLI contributed to our overall tax benefit in 2009, it was a less significant factor than in 2008, due to the proportion of this income to our overall pre-tax loss in 2009 compared to the proportion of this income to our overall pre-tax income in 2008.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES 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, one Vice Presidents of Lending and our Controller, 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.
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 0.50% at December 31, 2010, compared to a negative 1.30% at December 31, 2009.
The following table sets forth the amounts of our interest-earning assets and interest-bearing liabilities outstanding at December 31, 2010, 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, 2010, 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 15% to 25%. The annual prepayment rate for mortgage-backed securities is assumed to range from 24% to 41%. Money market deposit accounts, savings accounts and interest-bearing checking accounts are assumed to have annual rates of withdrawal, or “decay rates,” ranging from 0% to 45%.
(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, 2010 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, 2010.
The above table indicates that as of December 31, 2010, 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, 2011 would be expected to increase by $373,000 or 1.05% to $36.0 million.
As is the case with the GAP Table, certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV and NII require the making of certain assumptions which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the models presented assume that the composition of our interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the NPV measurements and net interest income models provide an indication of interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on net interest income and will differ from actual results.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Abington Bancorp, Inc. and subsidiaries
Jenkintown, Pennsylvania
We have audited the accompanying consolidated statements of financial condition of Abington Bancorp, Inc. and its subsidiaries (the “Company”) as of December 31, 2010 and 2009 and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Abington Bancorp, Inc. and its subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Abington Bancorp, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 14, 2011 expressed an unqualified opinion.
/s/ ParenteBeard LLC
Malvern, Pennsylvania
March 14, 2011
ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
See notes to consolidated financial statements.
ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
See notes to consolidated financial statements.
ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
See notes to consolidated financial statements.
ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
See notes to consolidated financial statements.
ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
ABINGTON BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
See notes to consolidated financial statements.
ABINGTON BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
1.
NATURE OF OPERATIONS
Abington Bancorp, Inc. (the “Company”) is a Pennsylvania corporation which was organized to be the stock holding company for Abington Savings Bank in connection with our second-step conversion and reorganization completed on June 27, 2007, which is discussed further below. Abington Savings Bank is a Pennsylvania-chartered, FDIC-insured savings bank, which conducts business under the name “Abington Bank” (the “Bank” or “Abington Bank”). As a result of the Bank’s election pursuant to Section 10(l) of the Home Owners’ Loan Act, the Company is a savings and loan holding company regulated by the Office of Thrift Supervision (the “OTS”). The Bank is a wholly owned subsidiary of the Company. The Company’s results of operations are primarily dependent on the results of the Bank and the Bank’s wholly owned subsidiaries that include ASB Investment Co. and certain limited purpose LLCs. 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 twelve additional full service branch offices and seven limited service banking offices located in Montgomery, Bucks and Delaware Counties, Pennsylvania. The Bank is principally engaged in the business of accepting customer deposits and investing these funds in loans that include residential mortgage, commercial, consumer and construction loans. The principal business of ASB Investment Co. is to hold certain investment securities for the Bank. The principal business of the LLCs is to own and manage certain properties that were acquired as real estate owned. Keswick Services II, and its wholly owned subsidiaries, and Abington Corp. are currently inactive subsidiaries of the Bank.
On January 26, 2011, the Company and Susquehanna Bancshares, Inc., (“Susquehanna”) announced the signing of a definitive Agreement and Plan of Merger under which Susquehanna will acquire all outstanding shares of common stock of the Company in a stock-for-stock transaction. Under the terms of the agreement, shareholders of the Company will receive 1.32 shares of Susquehanna’s common stock for each share of common stock of the Company. The proposed transaction is expected to be completed during the third quarter of 2011. For further information on this transaction, see Note 18.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation-The Company follows accounting standards set by the Financial Accounting Standards Board (the “FASB”). The FASB sets generally accepted accounting principles (“GAAP”) that we follow to ensure we consistently report our financial condition, results of operations and cash flows. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification (the “Codification” or the “ASC”). The FASB established the Codification as the source of authoritative accounting principles effective for interim and annual periods ended on or after September 15, 2009. The Company adopted the Codification as of September 30, 2009. The adoption did not have an impact on our financial position or results of operations.
In accordance with the subsequent events topic of the ASC, the Company evaluates events and transactions that occur after the balance sheet date for potential recognition in the financial statements. The effect of all subsequent events that provide additional evidence of conditions that existed at the balance sheet date are recognized in the financial statements as of December 31, 2010.
Principles of Consolidation-The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated.
Use of Estimates in the Preparation of Financial Statements-The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. The Company’s most significant estimates are the allowance for loan losses, the assessment of other-than-temporary impairment of investment and mortgage-backed securities and deferred income taxes.
Cash and Cash Equivalents-For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and interest-bearing deposits with banks, commercial paper and liquid money market funds with original maturities of three months or less.
Investment and Mortgage-Backed Securities-Debt and equity securities are classified and accounted for as follows:
Held to Maturity-Debt securities that management has the positive intent and ability to hold until maturity are classified as held to maturity and are carried at their remaining unpaid principal balances, net of unamortized premiums or unaccreted discounts. Premiums are amortized and discounts are accreted using the interest method over the estimated remaining term of the underlying security.
Available for Sale-Debt and equity securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, needs for liquidity, and changes in the availability of and in the yield of alternative investments, are classified as available for sale. These assets are carried at fair value. Fair value is determined using published quotes as of the close of business. Unrealized gains and losses are excluded from earnings and are reported net of tax as a separate component of stockholders’ equity until realized. Realized gains and losses on the sale of investment and mortgage-backed securities are reported in the consolidated statements of income and determined using the adjusted cost of the specific security sold.
Other-Than-Temporary Impairment of Securities-Securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline and whether or not management intends to sell or expects that it is more likely than not that it will be required to sell the security prior to an anticipated recovery of 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 for a debt security is determined to be other-than-temporary, the other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income. For equity securities, the full amount of the other-than-temporary impairment is recognized in earnings. No impairment charges were recognized during the years ended December 31, 2010 or 2009. During the year ended December 31, 2008, the Company recognized impairment charges aggregating approximately $869,000 to write-down the book value of an investment in a mortgage-backed security based mutual fund to its fair value of $2.5 million at December 31, 2008.
Allowance for Loan Losses-The allowance for loan losses is increased by charges to income through the provision for loan losses and decreased by charge-offs (net of recoveries). The allowance is maintained at a level that management considers adequate to provide for losses based upon evaluation of the known and inherent risks in the loan portfolio. Management’s periodic evaluation of the adequacy of the allowance is based on the Company’s past loan loss experience, the volume and composition of lending conducted by the Company, adverse situations that may affect a borrower’s ability to repay, the estimated value of any underlying collateral, current economic conditions and other factors affecting the known and inherent losses in the portfolio. This evaluation is inherently subjective as it requires material estimates including, among others, the amount and timing of expected future cash flows on impacted loans, exposure at default, value of collateral, and estimated losses on our loan portfolio. All of these estimates may be susceptible to significant change.
The allowance consists of specifically identified amounts for impaired loans, a general allowance, or in some cases a specific 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.
A loan is classified as a troubled debt restructuring (“TDR”) if the Company, for economic or legal reasons related to a debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. Concessions granted under a TDR typically involve a temporary or permanent reduction in payments or interest rate or an extension of a loan’s stated maturity date at less than a current market rate of interest. Loans classified as TDRs are designated as impaired.
We establish an allowance on impaired loans for the amount by which the present value of expected future cash flows discounted at the loan’s effective interest rate, observable market price or fair value of collateral, if the loan is collateral dependent, is lower than the carrying value of the loan. Impairment losses are included in the provision for loan losses. 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. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. 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 generally considered to be insignificant, although management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for all construction loans and most commercial real estate loans, including all such loans that are classified or criticized. Large groups of smaller balance, homogeneous loans are collectively evaluated for impairment, except for those loans restructured under a troubled debt restructuring and certain classified or criticized loans. Loans collectively evaluated for impairment include smaller balance commercial real estate loans, residential real estate loans and consumer loans. Further detail of loans identified as impaired is included in Note 6. The determination of fair value for the collateral underlying a loan is more fully described in Note 16.
We typically establish a general valuation allowance on classified and criticized loans which are not impaired. In establishing the general valuation allowance, we segregate these loans by category. The categories used by the Company include “doubtful,” “substandard” and “special mention.” For commercial and construction loans, the determination of the category for each loan is based on periodic reviews of each loan by our lending officers as well as an independent, third-party consultant. The reviews include a consideration of such factors as recent payment history, current financial data and cash flow projections, collateral evaluations, and current economic and business conditions. Categories for mortgage and consumer loans are determined through a similar review. Placement of a loan within a category is based on identified weaknesses that increase the credit risk of loss on the loan. Each category carries a general rate for the allowance percentage to be assigned to the loans within that category. The general allowance percentage is determined based on inherent losses associated with each type of lending as determined through consideration of our loss history with each type of loan, trends in credit quality and collateral values, and an evaluation of current economic and business conditions. Although the placement of a loan within a given category assists us in our analysis of the risk of loss, the actual allowance percentage assigned to each loan within a category is adjusted for the specific circumstances of each loan, including an evaluation of the appraised value of the specific collateral for the loan, and will often differ from the general rate for the category. These classified and criticized loans, in the aggregate, represent an above-average credit risk and it is expected that more of these loans will prove to be uncollectible compared to loans in the general portfolio.
We establish a general allowance on non-classified and non-criticized loans to recognize the inherent losses associated with lending activities, but which, unlike amounts which have been specifically identified with respect to particular classified and criticized loans, is not established on an individual loan-by-loan basis. This general valuation allowance is determined by segregating the loans by portfolio segments and assigning allowance percentages to each segment. An evaluation of each segment is made to determine the need to further segregate the loans by a more focused class of financing receivable. For our residential mortgage and consumer loan portfolios, we identified similar characteristics throughout the portfolio including credit scores, loan-to-value ratios and collateral. These portfolios generally have high credit scores and strong loan-to-value ratios (typically below 80% at origination), and have not been significantly impacted by recent housing price depreciation. For our commercial real estate loan portfolio, although the loans are less uniform than with our residential mortgage and consumer loan portfolios, a review of our loss history does not suggest significant benefits from further segregation of the segment. With our construction loan portfolio, however, a further analysis is made in which we segregate the loans by class based on the purpose of the loan and the collateral properties securing the loan. Various risk factors are then considered for each class of loan, including the impact of general economic and business conditions, collateral value trends, credit quality trends and historical loss experience. Based on a consideration of our loss history in recent periods in comparison to the aging of our loan portfolio, we evaluated our loss experience using a time period of three years. In choosing this time period, our goal was to select a period that was sufficiently short so as to capture the recent economic environment, but long enough to fairly reflect the age of our loans at the time when losses began to occur. We believe that a three-year period appropriately reflects the life cycle of a loan that is indicative of the risk of loss.
The allowance is adjusted for significant other factors that, in management’s judgment, affect the collectibility of the portfolio as of the evaluation date. These significant factors, many of which have been previously discussed, 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. Although we review key ratios, such as the allowance for loan losses as a percentage of non-performing loans and total loans receivable, in order to help us understand the trends in our loan portfolio, we do not try to maintain any specific target range with respect to such ratios.
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, 2010 or 2009.
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, 2010 and 2009, mortgage servicing rights of $26,000 and $32,000, respectively, were included in other assets. No valuation allowance was deemed necessary for any of the periods presented.
Federal Home Loan Bank Stock-Federal Home Loan Bank (“FHLB”) stock is a restricted investment security that is generally viewed as a long-term investment. FHLB stock is carried at cost and evaluated for impairment. When evaluating FHLB stock for impairment, its value is determined based on the ultimate recoverability of the par value of the stock. We evaluate our holdings of FHLB stock for impairment each period. No impairment charges were recognized on FHLB stock during the years ended December 31, 2010, 2009 or 2008. Dividends received on FHLB stock are recognized as interest income, however, during the fourth quarter of 2008, the FHLB of Pittsburgh announced a decision to suspend the dividend on shares of its stock. As a result of the FHLB’s suspension of dividends, which is continuing, no interest income was recognized on our FHLB stock during 2010 or 2009.
Real Estate Owned-Real estate properties acquired through foreclosure are initially recorded at the fair value of the property at the date of foreclosure, establishing a new cost basis. Losses arising from foreclosure transactions are charged against the allowance for loan losses. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of cost or fair value less estimated costs to sell. Development costs associated with foreclosed property under construction are capitalized and considered in determining the fair value of the property. Net revenue and expenses from operations and changes to the valuation allowance are included in net gain or loss on real estate owned.
Property and Equipment-Property and equipment is recorded at cost. Depreciation is computed using the straight-line method over the expected useful lives of the related assets, which range from 5 years for software, computer equipment and automobiles to 45 years for buildings. The costs of maintenance and repairs are expensed as they are incurred, and renewals and betterments are capitalized.
Bank Owned Life Insurance (“BOLI”)-The Company purchases bank owned life insurance as a mechanism for funding various employee benefit costs. The Company is the beneficiary of these policies that insure the lives of certain officers of its subsidiaries. The Company has recognized the cash surrender value under the insurance policies as an asset in the consolidated statements of financial condition. Changes in the cash surrender value are recorded in non-interest income in the consolidated statements of income.
Other Borrowed Money-The Company enters into overnight repurchase agreements with commercial checking account customers. These agreements are treated as financings, and the obligations to repurchase securities sold are reflected as a liability in the consolidated statements of financial condition. Securities pledged as collateral under agreements to repurchase are reflected as assets in the consolidated statements of financial condition.
Loan Origination and Commitment Fees-The Company defers loan origination and commitment fees, net of certain direct loan origination costs. The balance is accreted into income as a yield adjustment over the life of the loan using the level-yield method.
Interest on Loans-The Company recognizes interest on loans on the accrual basis. Income recognition is generally discontinued on single-family residential mortgage loans when a loan becomes 120 days or more delinquent and not well secured and in the process of collection or on all other loans when a loan becomes 90 days or more delinquent and not well secured and in the process of collection. In all cases, loans must be placed on non-accrual or charged off at an earlier date if collection of principal or interest is considered doubtful. Any interest previously accrued is deducted from interest income. Such interest ultimately collected is credited to income when collection of principal and interest is no longer in doubt.
Income Taxes-Deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Interest and penalties incurred in relation to payment of income tax liabilities are recognized in the provision for income taxes in the income statement in the period in which they occur. No interest or penalties for income taxes were recognized during the years ended December 31, 2010, 2009 or 2008.
In accordance with the income taxes topic of the ASC, the Company analyzes each tax position taken in its tax returns and determines the likelihood that that position will be realized. Only tax positions that are “more-likely-than-not” to be realized are recognized in an entity’s financial statements. For tax positions that do not meet this recognition threshold, we will record an unrecognized tax benefit for the difference between the position taken on the tax return and the amount recognized in the financial statements. The Company did not have any unrecognized tax benefits at December 31, 2010 or 2009 or during the years then ended. No unrecognized tax benefits are expected to arise within the twelve months ending December 31, 2011.
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 operations and are recorded directly to stockholders’ equity. These amounts consist of unrealized holding gains on available for sale securities and unrecognized deferred costs of the Company’s defined benefit pension plan.
The components of other comprehensive (loss) income are as follows:
The components of accumulated other comprehensive income are as follows:
Treasury Stock and Unallocated Common Stock-Stock held in treasury by the Company, including unallocated stock held by certain benefit plans, is accounted for using the cost method which treats stock held in treasury as a reduction to total stockholders’ equity. The cost basis for subsequent sales of treasury shares is determined using a first-in first-out method.
Share-Based Compensation-The Company accounts for its share-based compensation awards in accordance with the stock compensation topic of the ASC. Under ASC Topic 718, Compensation - Stock Compensation (“ASC 718”), the Company recognizes the cost of employee services received in share-based payment transactions and measures the cost based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award.
The Company also has an employee stock ownership plan (“ESOP”). This plan is more fully described in Note 13. Shares held under the ESOP are also accounted for under ASC 718. As ESOP shares are committed to be released and allocated among participants, the Company recognizes compensation expense equal to the average market price of the shares over the period earned. For purposes of computing basic and diluted earnings per share, ESOP shares that have been committed to be released are considered outstanding. ESOP shares that have not been committed to be released are not considered outstanding. Dividends paid on unallocated shares are used to pay debt service.
Earnings per share-Earnings per share (“EPS”) consists of two separate components, basic EPS and diluted EPS. Basic EPS is computed based on the weighted average number of shares of common stock outstanding for each period presented. Diluted EPS is calculated based on the weighted average number of shares of common stock outstanding plus dilutive common stock equivalents (“CSEs”). CSEs consist of shares that are assumed to have been purchased with the proceeds from the exercise of stock options, as well as unvested common stock awards. CSEs which are considered antidilutive are not included for the purposes of this calculation. For the years ended December 31, 2010, 2009 and 2008, there were 1,248,480, 2,198,888 and 1,277,240 antidilutive CSEs, respectively. Due to the net loss recognized for the year ended December 31, 2009, the inclusion of any CSEs would decrease the amount of net loss per share for the year and be antidilutive. Consequently, basic and diluted weighted average shares outstanding are equal for the year ended December 31, 2009. Earnings (loss) per share were calculated as follows:
Recent Accounting Pronouncements-In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06, Improving Disclosures about Fair Value Measurements, which updates ASC 820, Fair Value Measurements and Disclosures. The updated guidance added new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarified existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The amended guidance in ASU 2010-06 was effective for the first interim or annual reporting period beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchase, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010. The Company adopted the amended guidance, except for the requirement effective for fiscal years beginning after December 15, 2010, on January 1, 2010. The Company adopted the additional requirement on January 1, 2011. The adoptions did not have any impact on our financial position or results of operations.
In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which updated ASC 310, Receivables. The updated guidance requires more robust and disaggregated disclosures about the credit quality of an entity’s financing receivables and its allowance for credit losses, including a rollforward schedule of the allowance for credit losses for the period on a portfolio segment basis, as well as additional information about the aging and credit quality of receivables by class of financing receivables as of the end of the period. The new and amended disclosures that relate to information as of the end of a reporting period were effective for the Company as of December 31, 2010, except for disclosures relating to TDRs as discussed further below. The disclosures that include information for activity that occurs during a reporting period will be effective for the first interim reporting period beginning after December 31, 2010. The Company adopted the required disclosures as of December 31, 2010. The adoptions did not have any impact on our financial position or results of operations. The Company is continuing to evaluate the guidance relating to disclosures that include information for activity that occurs during a reporting period. While the guidance will impact the presentation of certain disclosures within our financial statements, we do not expect that this guidance will have any impact on our financial position or results of operations.
In January of 2011, the FASB issued ASU 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. This update temporarily delays the effective date of additional disclosures relating to TDRs required by ASU 2010-20. The delay is intended to allow the FASB time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about TDRs for public entities and the guidance for determining what constitutes a TDR will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. The Company is continuing to evaluate this guidance.
In December 2010, the FASB issues ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations, which updates ASC 805, Business Combinations. ASC 805 requires a public entity to disclose pro forma information for business combinations that occurred in the current reporting period. The updated guidance specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this ASU also expand the supplemental pro forma disclosures under ASC 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this ASU are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 31, 2010. The Company is continuing to evaluate this guidance.
Reclassifications-Certain items in the 2009 and 2008 consolidated financial statements have been reclassified to conform to the presentation in the 2010 consolidated financial statements. Such reclassifications did not have any impact on our financial position or results of operations.
3.
RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANKS
4.
INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities are summarized as follows:
No impairment charges were recognized on investment securities during the years ended December 31, 2010 or 2009. Impairment charges aggregating approximately $869,000 were recognized during the year ended December 31, 2008. These impairment charges were taken to write-down the book value of our investment in a mortgage-backed security based mutual fund to its fair value of $2.5 million at December 31, 2008, based on our determination that the investment was other-than-temporarily impaired. This determination for the fund, the AMF Ultra Short Mortgage Fund, was made, in part, based on credit rating downgrades in certain of the private label mortgage-backed securities held by the fund, as well as an analysis of the overall status of the fund. We continue to hold this fund.
All municipal bonds included in debt securities are bank-qualified municipal bonds.
The amortized cost and estimated fair value of debt securities by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
On a quarterly basis, management of the Company reviews the securities in its investment portfolio to identify any securities that might have an other-than-temporary impairment. At December 31, 2010, no investment securities were in a gross unrealized loss position for 12 months or longer. Investment securities in a gross unrealized loss position for less than 12 months at December 31, 2010, consisted of 24 securities having an aggregate depreciation of 1.5% from the Company’s amortized cost basis. The securities included 17 agency bonds, four municipal bonds and one corporate bond. Management has concluded that, as of December 31, 2010, the unrealized losses above were temporary in nature. The unrealized losses on these securities are not related to the underlying credit quality of the issuers, and they are on securities that have a contractual maturity date. The principal and interest payments on these securities have been made as scheduled, and there is no evidence that the issuers will not continue to do so. In management’s opinion, the future principal payments will be sufficient to recover the current amortized cost of the securities. The unrealized losses above are primarily related to the current interest rate environment. The Company does not currently have plans to sell any these securities, nor does it anticipate that it will be required to sell any these securities prior to a recovery of their cost basis.
5.
MORTGAGE-BACKED SECURITIES
The amortized cost and estimated fair value of mortgage-backed securities are summarized as follows:
On a quarterly basis, management of the Company reviews the securities in its investment portfolio to identify any securities that might have an other-than-temporary impairment. At December 31, 2010, mortgage-backed securities in a gross unrealized loss position for 12 months or longer consisted of three securities having an aggregate depreciation of 5.8% from the Company’s amortized cost basis. All three securities were CMOs, two of which were issued by private issuers. The two CMOs from private issuers, which had an aggregate principal balance of approximately $3.4 million at December 31, 2010, that had declines of approximately 8.8% and 19.5% from their amortized cost basis at such date. The third security, with a principal balance of approximately $6.7 million at December 31, 2010, had a decline of approximately 0.3% from its amortized cost basis at such date. Mortgage-backed securities in a gross unrealized loss position for less than 12 months at December 31, 2010, consisted of 24 securities having an aggregate depreciation of 1.4% from the Company’s amortized cost basis. All of these securities were CMOs issued by government agencies. Management has concluded that, as of December 31, 2010, the unrealized losses above were temporary in nature. There is no exposure to subprime loans with these CMOs. The losses are not related to the underlying credit quality of the issuers, all of whom remain AAA rated, including the private issuers, and they are on securities that have contractual maturity dates. The principal and interest payments on these CMOs have been made as scheduled, and there is no evidence that the issuers will not continue to do so. In management’s opinion, the future principal payments will be sufficient to recover the current amortized cost of the securities. The unrealized losses above are primarily related to the current market environment. The Company does not currently have plans to sell any these securities, nor does it anticipate that it will be required to sell any these securities prior to a recovery of their cost basis.
6.
LOANS RECEIVABLE AND REAL ESTATE OWNED
Loans receivable consist of the following:
Our one- to four-family residential loans also include some loans to local businessmen for a commercial purpose, but which are secured by liens on the borrower’s residence as well as fixed-rate consumer loans which are secured by liens on the borrower’s residence.
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.
Certain officers and directors and their affiliates 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:
Following is a summary of changes in the allowance for loan losses:
The provision for loan losses is charged to expense to maintain the allowance for loan losses at a level that management considers adequate to provide for losses based upon an evaluation of the loan portfolio. Factors considered in determining the appropriate level for the allowance for loan losses are discussed in detail in Note 2.
The following table presents the classes of the loan portfolio summarized by the aggregate pass rating, the criticized rating of special mention and the classified ratings of substandard and doubtful within the Company’s internal risk rating system as of December 31, 2010:
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 generally 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. Impairment is measured on a loan by loan basis for all construction loans and most commercial real estate loans, including all such loans that are classified or criticized. Large groups of smaller balance, homogeneous loans are collectively evaluated for impairment, except for those loans restructured under a troubled debt restructuring and certain classified or criticized loans. Loans collectively evaluated for impairment include smaller balance commercial real estate loans, residential real estate loans and consumer loans. The determination of fair value for the collateral underlying a loan is more fully described in Note 16.
The following table summarizes the distribution of our allowance for loan losses in relation to our recorded investment in financing receivables as of December 31, 2010:
Loans are charged off when the loan is deemed uncollectible. Loans that are not charged off are placed on non-accrual status when collection of principal or interest is considered doubtful. One- to four-family residential loans are typically placed on non-accrual at the time the loan is 120 days delinquent, and all other loans are typically placed on non-accrual at the time the loan is 90 days delinquent unless the credit is well secured and in the process of collection. In all cases, loans must be placed on non-accrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
A loan is classified as a TDR if the Company, for economic or legal reasons related to a debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. We had six loans classified as TDRs at December 31, 2010, with an aggregate outstanding balance of $10.3 million at such date. The $10.3 million of total TDRs consisted of four multi-family residential and commercial real estate loans with an aggregate outstanding balance of $9.8 million and two one- to four-family residential mortgage loans with an aggregate outstanding balance of $583,000 at December 31, 2010. Except for one one- to four-family residential mortgage loan that was 30 days past due, none of the TDRs were delinquent at December 31, 2010. Of the six TDRs, one commercial real estate loan with an outstanding balance of $1.3 million at December 31, 2010 was classified as non-accrual. No specific allowance was reserved on any of the TDRs at such date. The loans are deemed to be TDRs due to concessions made to borrowers considered to be experiencing financial difficulties and we have reduced either the monthly payments or interest rate from the original contractual terms. We have no commitments to lend additional funds to the borrowers under any of these loans. We had one TDR at December 31, 2009 with an outstanding balance of $2.5 million at such date. This loan is the commercial real estate loan with an outstanding balance of $1.3 million at December 31, 2010 that was classified as non-accrual at such date. This loan was also classified as non-accrual at December 31, 2009.
Following is a summary of changes in the balance of real estate owned:
7.
ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
8.
PROPERTY AND EQUIPMENT
Property and equipment is summarized by major classifications as follows:
Future minimum annual rental payments required under non-cancelable operating leases are as follows:
Deposits consist of the following major classifications:
Interest expense for each major classification of deposit account is as follows:
A summary of certificates by maturities is as follows:
Advances from Federal Home Loan Bank consist of the following:
The income tax provision (benefit) consists of the following:
The following table presents a reconciliation between the reported income tax expense and the income tax expense which would be computed by applying the normal federal income tax rate of 34% to income before income taxes:
Items that gave rise to significant portions of the deferred tax accounts are as follows:
The Bank uses the specific charge-off method for computing reserves for bad debts. The bad debt deduction allowable under this method is available to large banks with assets greater than $500 million. Generally, this method allows the Bank to deduct an annual addition to the reserve for bad debts equal to its net charge-offs. Retained earnings at December 31, 2010 and 2009 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.
Deferred Compensation Plans
The Company maintains an executive deferred compensation plan for selected executive officers under which the Board of Directors may elect to contribute a portion of the Company’s net profits. In December 2005, the Board of Directors elected to freeze this plan retroactive to January 1, 2005, such that no further contributions will be made on behalf of the executive officers under the plan. The Board of Directors took this action upon its review of the total compensation programs available to the Company’s executive officers, including the increased benefits available as a result of the equity compensation plans adopted by the Company’s shareholders in June 2005. The Company also maintains a board of directors deferred compensation plan into which the Board of Directors may elect to contribute a percentage of their board fees. The expense relating to these plans was approximately $0 for each of the years ended December 31, 2010, 2009, and 2008. The liability for these plans at December 31, 2010 and 2009 was approximately $1.1 million and $1.0 million, respectively.
Supplemental Retirement Plan
The Company maintains a nonqualified, unfunded, defined benefit, supplemental retirement plan (“SERP”) for the Board of Directors and certain officers. The funded status of the plan is as follows:
Amounts related to the plan have been recognized in the balance sheet in accumulated other comprehensive income, net of tax, as follows:
The components of net periodic pension cost and other changes in the amounts recognized in accumulated other comprehensive income (loss) are as follows:
The following weighted average assumptions were used in calculating the net periodic pension cost:
The estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic benefit cost in 2011 are as follows:
Employee Stock Ownership Plan
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. In addition to cash balances, the trust holds shares of Company common stock that were purchased for the benefit of certain officers and directors that acquired shares through our deferred compensation plans. Participants may acquire additional shares through the Company’s dividend reinvestment plan or through purchases with cash balances held by the trust. Distributions are made to participants as payments are required under certain benefit plans of the Company. Distributions are made in cash, to the extent cash is available, or in shares of Company stock when the trust does not hold a sufficient cash balance for the benefiting participant. Company stock is not sold by the trust to make cash distributions. Approximately 2,000 and 39,000 shares, respectively, were distributed by the trust in 2010 and 2009. As of December 31, 2010, the trust holds approximately 161,000 shares of the Company’s common stock as well as an additional $10,000 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 Plans
Any remaining unvested SOP awards will become fully vested in accordance with the provisions of the Plans upon a change in control, such as the proposed merger with Susquehanna, resulting in the full recognition of any unrecognized expense. See Note 18 for further details of the proposed merger with Susquehanna.
The dividend yield was calculated based on the dividend amount and stock price existing at the grant date taking into consideration expected increases in the dividend and stock price over the lives of the options. The actual dividend yield may differ from this assumption. The risk-free interest rate used was based on the rates of treasury securities with maturities equal to the expected lives of the options.
As the Company has a limited history of granting option awards, management made certain assumptions regarding the exercise behavior of recipients without the use of any reliable 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.
The expected volatility was based on and calculated from the historical volatility of our stock, as it was determined that this would be the most reliable estimate of future stock volatility. The actual future volatility may differ from our historical volatility.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the customer. The amount and type of collateral required varies, but may include accounts receivable, inventory, equipment, real estate and income-producing commercial properties. At December 31, 2010 and 2009, commitments to originate loans and commitments under unused lines of credit, including undisbursed portions of construction loans in process, for which the Bank was obligated amounted to approximately $114.9 million and $125.9 million, respectively, in the aggregate.
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, 2010 and December 31, 2009, the Bank had letters of credit outstanding of approximately $48.3 million and $48.5 million, respectively, of which $47.5 million and $47.6 million, respectively, were standby letters of credit. At December 31, 2010 and 2009, the uncollateralized portion of the letters of credit extended by the Bank was approximately $7,000 and $219,000, respectively, all of which was for standby letters of credit in both years. The current amount of the liability for guarantees under letters of credit was not material as of December 31, 2010 and 2009.
The Company is subject to various pending claims and contingent liabilities arising in the normal course of business which are not reflected in the accompanying consolidated financial statements. Management considers that the aggregate liability, if any, resulting from such matters will not be material to our financial position or results of operations.
Among the Company’s contingent liabilities, are exposures to limited recourse arrangements with respect to the sales of whole loans and participation interests. At December 31, 2010, the exposure, which represents a portion of credit risk associated with the sold interests, amounted to $185,000. The exposure is for the life of the related loans and payable, on our proportional share, as losses are incurred.
The Bank is subject to various regulatory capital requirements administered by federal and state banking agencies. As a savings and loan holding company, the Company is not subject to any regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory-and possibly additional discretionary-actions by regulators, that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). As of December 31, 2010 and 2009, the Bank met all capital adequacy requirements to which it was subject.
As of December 31, 2010, 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 Bank’s actual capital amounts and ratios are presented in the table below:
The following table reconciles the Bank’s GAAP capital to its regulatory capital as of the dates indicated:
The Company uses fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Investment and mortgage-backed securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans, real estate owned and certain other assets. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual assets.
In accordance with ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), the Company groups its assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:
•
Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.
•
Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
•
Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset.
In accordance with ASC 820, the Company bases its fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy in ASC 820.
Fair value measurements for assets where there exists limited or no observable market data and, therefore, are based primarily upon the Company’s or other third-party’s estimates, are often calculated based on the characteristics of the asset, the economic and competitive environment and other such factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, that could significantly affect the results of current or future valuations. At December 31, 2010 and December 31, 2009, the Company did not have any assets that were measured at fair value on a recurring basis that use Level 3 measurements.
Following is a description of valuation methodologies used in determining the fair value for our assets and liabilities.
Cash and Cash Equivalents-These assets are carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.
Investment and Mortgage-backed Securities Available for Sale-Investment and mortgage-backed securities available for sale are recorded at fair value on a recurring basis. Fair value measurements for these securities are typically obtained from independent pricing services that we have engaged for this purpose. When available, we, or our independent pricing service, use quoted market prices to measure fair value. If market prices are not available, fair value measurement is based upon models that incorporate available trade, bid and other market information and for structured securities, cash flow and, when available, loan performance data. Because many fixed income securities do not trade on a daily basis, our independent pricing service’s applications apply available information as applicable through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to prepare evaluations. For each asset class, pricing applications and models are based on information from market sources and integrate relevant credit information. All of our securities available for sale are valued using either of the foregoing methodologies to determine fair value adjustments recorded to our financial statements. Level 1 securities include equity securities such as common stock and mutual funds traded on active exchanges. Level 2 securities include corporate bonds, agency bonds, municipal bonds, certificates of deposit, mortgage-backed securities, and collateralized mortgage obligations. Investment and mortgage-backed securities held to maturity are carried at amortized cost.
Loans Receivable-We do not record loans at fair value on a recurring basis. As such, valuation techniques discussed herein for loans are primarily for estimating fair value for footnote disclosure purposes. However, from time to time, we record nonrecurring fair value adjustments to loans to reflect partial write-downs for impairment or the full charge-off of the loan carrying value. The valuation of impaired loans is discussed below. The fair value estimate for footnote disclosure purposes differentiates loans based on their financial characteristics, such as product classification, loan category, pricing features and remaining maturity. Prepayment and credit loss estimates are evaluated by loan type and rate. The fair value of one- to four-family residential mortgage loans is estimated by discounting contractual cash flows using discount rates based on current industry pricing, adjusted for prepayment and credit loss estimates. The fair value of loans is estimated by discounting contractual cash flows using discount rates based on our current pricing for loans with similar characteristics, adjusted for prepayment and credit loss estimates.
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 the amount of payments does not necessarily result in the loan being identified as impaired. 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. Fair value is generally based upon independent market prices or appraised value of the collateral less estimated cost to sell. During the periods presented, loan impairment was evaluated based on the fair value of the loans’ collateral. Our appraisals are typically performed by independent third party appraisers, and are obtained as soon as practicable once indicators of possible impairment are identified. We obtained current appraisals of the collateral underlying all of our impaired loans for the periods presented. For appraisals of commercial and construction properties, comparable properties within the area may not be available. In such circumstances, our appraisers will rely on certain judgments in determining how a specific property compares in value to other properties that are not identical in design or in geographic area. Our impaired loans at December 31, 2010 and 2009 that were recorded at fair value are secured by commercial and construction properties for which there are no comparable properties available and, accordingly, all of these impaired loans were classified as Level 3 assets at such dates.
Accrued Interest Receivable-This asset is carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.
FHLB Stock- Although Federal Home Loan Bank (“FHLB”) stock is an equity interest in the FHLB, it is carried at cost because it does not have a readily determinable fair value as its ownership is restricted and it lacks a market. The estimated fair value approximates the carrying amount. FHLB stock is evaluated for impairment based on the ultimate recoverability of the par value of the security. We have evaluated our FHLB stock for impairment, and we have determined that the stock was not impaired at December 31, 2010.
Real Estate Owned- Real estate owned includes foreclosed properties securing commercial and construction loans. Real estate properties acquired through foreclosure are initially recorded at the fair value of the property at the date of foreclosure. 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. As is the case for collateral of impaired loans, fair value is generally based upon independent market prices or appraised value of the collateral. Our appraisal process for real estate owned is identical to our appraisal process for the collateral of impaired loans. Our current portfolio of real estate owned is comprised of commercial and construction properties for which comparable properties within the area are not available. Our appraisers have relied on certain judgments in determining how our specific properties compare in value to other properties that are not identical in design or in geographic area and, accordingly, we classify real estate owned as a Level 3 asset.
Deposits-Deposit liabilities are carried at cost. As such, valuation techniques discussed herein for deposits are primarily for estimating fair value for footnote disclosure purposes. The fair value of deposits is discounted based on rates available for borrowings of similar maturities. A decay rate is estimated for non-time deposits. The discount rate for non-time deposits is adjusted for servicing costs based on industry estimates.
Advances from Federal Home Loan Bank-Advances from the FHLB are carried at amortized cost. However, we are required to estimate the fair value of this debt for footnote disclosure purposes. The fair value is based on the contractual cash flows, which are discounted using rates currently offered for new notes with similar remaining maturities.
Other Borrowed Money-These liabilities are carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.
Accrued Interest Payable-This liability is carried at historical cost. The carrying amount is a reasonable estimate of fair value because of the relatively short time between the origination of the instrument and its expected realization.
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 table below presents the balances of asset measured at fair value on a recurring basis:
For assets measured at fair value on a nonrecurring basis that were still held at the end of the period, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related individual assets or portfolios at December 31, 2010 and 2009:
The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies as described above. 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.
The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2010 and 2009. 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, 2010 and 2009 and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.
17.
ABINGTON BANCORP, INC. (PARENT COMPANY ONLY)
Certain condensed financial information follows:
STATEMENTS OF FINANCIAL CONDITION
STATEMENTS OF OPERATIONS
STATEMENTS OF CASH FLOWS
18.
MERGER AGREEMENT WITH SUSQUEHANNA BANCSHARES, INC.
On January 26, 2011, the Company and Susquehanna entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which the Company will merge with and into Susquehanna (the “Merger”). Promptly following consummation of the Merger, it is expected that the Bank will merge with and into Susquehanna Bank (the “Bank Merger”). The Merger is expected to be completed during the third quarter of 2011.
Under the terms of the Merger Agreement, upon consummation of the Merger, shareholders of the Company will receive 1.32 shares (the “Exchange Ratio”) of Susquehanna common stock for each share of common stock they own. The Merger Agreement also provides that all options to purchase Company stock which are outstanding and unexercised immediately prior to the closing (“Continuing Options”) under the Company’s Amended and Restated 2005 Stock Option Plan and its 2007 Stock Option Plan, shall become fully vested and exercisable and be converted into fully vested and exercisable options to purchase shares of Susquehanna stock.
At the closing of the Merger, Susquehanna and Susquehanna Bank will appoint Mr. Robert W. White, the Company’s Chairman, President and Chief Executive Officer, as a director of each of Susquehanna and Susquehanna Bank. In the event that Mr. White is unable or unwilling to serve as a director of Susquehanna and Susquehanna Bank pursuant to the terms of the Merger Agreement, another director of Abington, as mutually agreed upon by the Company and Susquehanna, shall be substituted for Mr. White, to serve as a member of the Susquehanna and Susquehanna Bank boards of directors. Mr. White also will become an Executive Vice President of Susquehanna Bank.
The Merger Agreement contains (a) customary representations and warranties of the Company and Susquehanna, including, among others, with respect to corporate organization, capitalization, corporate authority, third party and governmental consents and approvals, financial statements, and compliance with applicable laws, (b) covenants of the Company to conduct its business in the ordinary course until the Merger is completed; and (c) covenants of the Company and Susquehanna not to take certain actions. The Company has also agreed not to (i) solicit proposals relating to alternative business combination transactions or (ii) subject to certain exceptions, enter into discussions concerning, or provide confidential information in connection with, any alternative transactions.
Consummation of the Merger is subject to certain conditions, including, among others, approval of the Merger by shareholders of both the Company and Susquehanna, governmental filings and regulatory approvals and expiration of applicable waiting periods, accuracy of specified representations and warranties of the other party, effectiveness of the registration statement to be filed with the SEC to register shares of Susquehanna common stock to be offered to shareholders of the Company, absence of a material adverse effect, and receipt of tax opinions.
The Merger Agreement also contains certain termination rights for the Company and Susquehanna, as the case may be, applicable upon the occurrence or non-occurrence of certain events. If the Merger is not consummated under certain circumstances, the Company has agreed to pay Susquehanna a termination fee of $11.0 million.
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SUPPLEMENTARY DATA
SUMMARIZED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents summarized consolidated quarterly data for each of the last two years.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
Based on their evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), the Company’s principal executive officer and principal financial officer have concluded that as of the end of the period covered by this Annual Report on Form 10-K such disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to the Company’s management, including the principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.
(b) Internal Control over Financial Reporting
1.
Management’s Annual Report on Internal Control Over Financial Reporting
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act of 1934 Rules 13(a)-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Management, including the chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework, we concluded that the Company’s internal control over financial reporting was effective as of December 31, 2010.
The Company’s internal control over financial reporting as of December 31, 2010 has been audited by ParenteBeard LLC, an independent registered public accounting firm, as stated in their report which is included in the following pages.
2.
Attestation Report of Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Abington Bancorp, Inc. and subsidiaries
Jenkintown, Pennsylvania
We have audited Abington Bancorp, Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Abington Bancorp, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition and the related consolidated statements of operations, stockholders’ equity and cash flows of Abington Bancorp, Inc. and its subsidiaries, and our report dated March 14, 2011, expressed an unqualified opinion.
3.
Changes in Internal Control over Financial Reporting
During the last quarter of the year under report, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our Articles of Incorporation provide that the Board of Directors shall be divided into three classes as nearly equal in number as possible. The directors are elected by our shareholders for staggered terms and until their successors are elected and qualified. No director is related to any other director or executive officer by blood, marriage or adoption.
The following tables present information concerning our directors, all of whom also serve as directors of Abington Bank. Ages are reflected as of March 1, 2011. Where applicable, service as a director includes service as a director of Abington Bank.
Age and Principal Occupation During the Past Five Years/
Name
Public Directorships
Douglas S. Callantine
President of Grosvenor Investment Management US, Inc., a privately owned property group, since 2006, following Grosvenor’s acquisition of Legg Mason Real Estate Services, where he had been President since 1987. Age 59. Director since 2007.
Mr. Callantine brings a wealth of real estate management and investment expertise to the Board from his service with an international property development and investment group and his prior service as President of Legg Mason Real Estate Services for nearly 20 years.
Age and Principal Occupation During the Past Five Years/
Name
Public Directorships
Michael F. Czerwonka, III, CPA
Partner, Fitzpatrick & Czerwonka, Certified Public Accountants, Abington, Pennsylvania, since 1988 and Treasurer of Abington School District, Abington, Pennsylvania from July, 2004 to June, 2005. Mr. Czerwonka is a member of the American Institute of Certified Public Accountants and the Pennsylvania Institute of Certified Public Accountants. Age 57.
As a certified public accountant, Mr. Czerwonka brings a wealth of financial expertise and practical knowledge to the Board. Mr. Czerwonka owns and oversees a professional accounting firm and has extensive knowledge of Abington Bank through his tenure as a director since 1998.
Jane Margraff Kieser
Retired. Formerly, Senior Vice President, Operations and Human Resources, Abington Bank from 1980 to December 2001. Age 75. Director since 2002.
Ms. Kieser brings valuable banking and institutional knowledge to the Board having served as our Senior Vice President of Operation and Human Resources for more than 20 years.
Robert J. Pannepacker, Sr.
President, Penny’s Flowers, a florist in Glenside, Pennsylvania since 1966. Age 62.
Mr. Pannepacker brings significant business and management expertise to the Board as the President and owner of a family operated business serving the greater Philadelphia area. Mr. Pannepacker has extensive knowledge of Abington Bank through his tenure as a director since 1991.
Jack J. Sandoski, CPA
Director since 2010. Senior Vice President and Chief Financial Officer of Abington Bancorp since June 2004; Senior Vice President of Abington Bank since 1997 and Chief Financial Officer and Treasurer since 1988. Age 67.
As a certified public accountant, Mr. Sandoski brings a wealth of financial expertise to the Board. Mr. Sandoski has gained valuable banking and institutional knowledge from his years of service as our Chief Financial Officer.
Robert W. White
Chairman of the Board, President and Chief Executive Officer of Abington Bancorp since June 2004; Chairman of the Board and Chief Executive Officer of Abington Bank since 1994 and President since 1991. Age 66. Director since 1977.
Mr. White brings valuable insight and knowledge to the Board of Abington Bancorp due to his service as its President and Chief Executive Officer and as the longest serving member of the Board since 1977. Mr. White also has gained valuable banking and institutional knowledge from his years of service in the financial institutions industry and his long-standing ties to the local business and legal community in the greater Philadelphia area.
G. Price Wilson, Jr.
Partner, Quinn & Wilson, Inc., Realtors in Abington, Pennsylvania. Age 68. Director since 2006.
Mr. Wilson possesses a vast amount of knowledge regarding the real estate market through his more than 40 years of experience in the residential and commercial real estate market in the greater Philadelphia area.
Executive Officers Who Are Not Directors
Set forth below is information regarding individuals currently serving as executive officers of Abington Bancorp and Abington Bank who do not also serve as directors. Ages are as of March 1, 2011.
In accordance with Abington Bancorp’s Bylaws, our executive officers are elected annually and hold office until their respective successors have been elected and qualified or until death, resignation or removal by the Board of Directors.
Audit Committee. The Committee reviews with management and our independent registered public accounting firm Abington Bancorp’s systems of internal controls, reviews our annual financial statements, including the Form 10-K and monitors Abington Bancorp’s adherence to generally accepted accounting principles in our in accounting and financial reporting. The Audit Committee is currently comprised of three directors, all of whom are independent directors as defined in the Nasdaq’s listing standards. Mr. Czerwonka, a certified public accountant and partner in the accounting firm of Fitzpatrick & Czerwonka, has been designated as our Audit Committee Financial Expert by the Board of Directors.
Code of Conduct and Ethics
Abington Bancorp maintains a comprehensive Code of Conduct and Ethics which covers all directors, officers and employees of Abington Bancorp and its subsidiaries. The Code of Conduct and Ethics requires that our directors, officers and employees avoid conflicts of interest; maintain the confidentiality of information relating to Abington Bancorp and its customers; engage in transactions in the common stock only in compliance with applicable laws and regulations and the requirements set forth in the Code of Conduct and Ethics; and comply with other requirements which are intended to ensure that they conduct business in an honest and ethical manner and otherwise act with integrity and in the best interest of Abington Bancorp. Our Code of Conduct and Ethics specifically imposes standards of conduct on our chief executive officer, chief financial officer, principal accounting officer and other persons with financial reporting responsibilities who are identified in regulations issued by the SEC dealing with corporate codes of conduct.
Our directors, officers and employees are required to affirm in writing that they have reviewed and understand the Code of Conduct and Ethics. A copy of our Code of Conduct and Ethics is available on our website at www.abingtonbank.com under the Investor Relations heading. In accordance with the listing requirements of The Nasdaq Stock Market, we will disclose on the SEC’s Form 8-K, the nature of any amendments to this Code of Conduct and Ethics (other than technical, administrative, or other non-substantive amendments), our approval of any material departure from a provision of this Code of Conduct and Ethics, and our failure to take action within a reasonable period of time regarding any material departure from a provision of this Code of Conduct and Ethics that has been made known to any of our executive officers.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the officers and directors, and persons who own more than 10% of Abington Bancorp’s common stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than 10% shareholders are required by regulation to furnish us with copies of all Section 16(a) forms they file. We know of no person who owns 10% or more of Abington Bancorp’s common stock.
Based solely on our review of the copies of such forms furnished to us, or written representations from our officers and directors, we believe that during, and with respect to, the fiscal year ended December 31, 2010, our officers and directors complied in all respects with the reporting requirements promulgated under Section 16(a) of the Securities Exchange Act of 1934.
Director Nominations
There have been no material changes to the procedures by which our shareholders may recommend nominees to our Board of Directors.
COMPENSATION DISCUSSION AND ANALYSIS
Overview. Our executive compensation program is designed to provide incentives to our executive officers to effectively lead and manage our business to achieve our corporate goals. Because the compensation of our executive officers plays an integral role in the successful operation of Abington Bancorp, our compensation programs are designed to attract, retain, and motivate qualified, effective executives and professionals. Decisions regarding executive compensation are made by our Compensation Committee, which reviews a number of factors, including performance of the individual executive officers, the performance of Abington Bancorp as well as publicly available compensation surveys for comparable companies. As of December 31, 2010, the members of our Compensation Committee were Ms. Margraff Kieser and Messrs. Callantine and Pannepacker, who is Chairman. In this compensation discussion and analysis, our chief executive officer, our chief financial officer and three other executive officers during 2010 are referred to collectively as our “named executive officers.”
During the year ended December 31, 2010, we compensated our named executive officers with a combination of base salary, cash bonus, equity compensation and participation in benefit plans at levels that we believed were comparable to other financial institution peers of similar size within our region. In addition to salaries, the primary benefit plans made available to our named executive officers include our employee stock ownership plan, 2005 Stock Option Plan and 2005 Recognition and Retention Plan, 2007 Stock Option Plan, 2007 Recognition and Retention Plan, 401(k) Plan, our frozen deferred compensation plan, supplemental executive retirement plan and split-dollar life insurance. Our compensation plans have been developed by our Board of Directors and the Compensation Committee with the assistance of our management. Historically, the Compensation Committee has conducted an analysis of our compensation levels based on its review of various publicly available surveys or reports to assist in setting appropriate levels of compensation for our named executive officers.
In the future, we may determine to engage the service of a compensation consultant to review our policies and procedures with respect to executive compensation, or conduct annual benchmark reviews of our executive compensation. Executive compensation consultants were not used in 2010 and the Board of Directors or Compensation Committee have no specific plans to do so at this time.
We offer various fringe benefits to all of our employees, including our executive officers, on a non-discriminatory basis, including group policies for medical, dental, life, disability and accidental death insurance. Our President and Chief Executive Officer receives an automobile allowance and country club dues. The Compensation Committee believes that such additional benefits are appropriate and assist Mr. White in fulfilling his employment obligations as chief executive officer. No such perquisites are provided to the other executive officers of the company.
Objectives of Our Compensation Programs. The primary objectives of our executive compensation policies and programs are to attract, retain and motivate talented and qualified individuals to manage and lead our company, which we believe will promote our corporate growth strategy and enhance long-term shareholder value. We focus on determining appropriate compensation levels that will enable the organization to meet the following objectives:
•
To attract, retain and motivate an experienced, competent executive management team;
•
To reward the executive management team for the enhancement of shareholder value based on our annual earnings performance and the market price of our stock;
•
To ensure that compensation rewards are adequately balanced between short-term and long-term considerations so as not to expose the company to undue financial risk;
•
To encourage ownership of our common stock through grants of stock options and restricted stock awards to bank management; and
•
To maintain compensation levels that are competitive with other financial institutions particularly those of executive officers at peer institutions based on asset size and market area.
Elements of Executive Compensation
Base Salary. For 2010, the Compensation Committee determined the base salaries of Messrs. White, Sandoski, Kovalcheck, Wasekanes and Golden and submitted such determination to the full board of directors for review. Mr. White and Mr. Sandoski, the only named executive officers who are also members of the Board, did not participate in discussions regarding their own compensation. In setting base salary, the Compensation Committee conducted a review of external competitiveness based on publicly available salary surveys produced by American Bankers Association (ABA) and L. R. Webber. The ABA is a national bank trade organization and their survey lists various job titles by asset size of the bank and the geographic region in which the bank operates. The L. R. Webber survey is for Pennsylvania banks and also provides information based on the institution’s asset size and geographic region within the state. Generally, the peer groups consisted of financial institutions within an asset range of $1 billion to $2.9 billion in the mid-Atlantic region.
In determining base salary for 2010, the Compensation Committee considered the overall financial performance of Abington Bancorp, the individual’s contribution to the attainment of the company’s internal budget, growth in market share, leadership, complexity of position, expense containment, asset quality and Abington Bank’s ratings with our banking regulators, however, no particular weight is given to any single factor. The base salaries for Messrs White, Sandoski, Kovalcheck, Wasekanes and Golden were $313,000, $161,500, $141,000, $128,500 and $91,000, respectively, for 2010, increases of zero, 2.9%, 2.9%, 6.2% and 4.0% respectively, compared to 2009 salaries. As a group, the total increase in salaries was 2.4%. For Mr. Wasekanes, the 6.2% increase in base salary was reflective of his promotion and increased responsibilities in September, 2008. The Compensation Committee believes that the base salaries paid to each member of the senior management team is commensurate with their duties, performance and range for the industry compared with financial institutions of similar size within our region.
Incentive/Bonus Compensation. The Compensation Committee allocates annual bonuses paid to Messrs. White, Sandoski, Kovalcheck, Wasekanes and Golden from a bonus pool determined by the Board of Directors that is based on a percentage of net profit for the year. By utilizing a calculation of cash bonus as a percentage of net profit, the Compensation Committee believes this component of executive compensation properly focuses management on the attainment of the company’s short term performance. The Compensation Committee approved cash bonuses to the named executive officers in 2010 due to the record net profit of Abington Bancorp in 2010. The Committee recognized that the management team was able to achieve the record net profit one year after a large net loss, though 2010 bonuses were not influenced by the fact that no bonuses were paid in 2009. Bonuses for Messrs White, Sandoski, Kovalcheck, Wasekanes and Golden were $108,372, $55,917, $48,819, $75,000, and $10,920 respectively. The Compensation Committee did review the performance in 2010 of each named executive officer. Mr. Wasekanes’ bonus was larger than normal due to his highly effective management of delinquent loans, real estate owned and non-performing loans.
Equity Compensation. The Compensation Committee uses the award of stock options and recognition and retention plan shares to align the interests of the named executive officers with those of Abington Bancorp’s shareholders. At the annual meeting of shareholders in 2005, shareholders approved our 2005 stock option plan and 2005 recognition and retention plan. Messrs. White, Sandoski, Kovalcheck, Wasekanes and Golden received awards from the Compensation Committee under those plans during 2005 which are vesting at a rate of 20% per year over five years. See “Outstanding Equity Awards at Fiscal Year End.” Additional stock option awards were granted to Messrs. Wasekanes and Golden under the 2005 stock option plan during 2006 and 2007. In 2008 Mr. Wasekanes was granted additional stock options and additional recognition and retention plan shares due to his promotion to Chief Lending Officer. At a special meeting of shareholders in January, 2008, shareholders approved the 2007 stock option plan and 2007 recognition and retention plan. In January 2008, the Compensation Committee subsequently granted additional stock option and restricted share awards to directors and the named executive officers under the 2007 Stock Option Plan and 2007 Recognition and Retention Plan which are vesting at a rate of 20% per year over five years. The following compensation tables only include awards through December 31, 2010. In December 2010, Mr. Wasekanes was granted an additional 5,000 recognition and retention plan shares and Mr. Golden was granted an additional 1,000 recognition and retention plan shares. The Compensation Committee believes that the five-year vesting of stock options and recognition and retention plan awards will focus senior management on long term performance and stock appreciation. Vesting at a rate over no less than five years was mandated under the federal banking regulations applicable as a result of our mutual holding company reorganization completed in 2005 and second step conversion completed in 2007 and facilitates our goal of retaining our experienced, effective management team.
Stock option awards have an exercise price equal to the fair market value of the company’s common stock on the date of the award. The Compensation Committee closely monitors the stock option awards to all employees and directors for their adherence to applicable accounting, tax and other regulatory requirements. No changes to the option awards or option exercise price have been made to any option granted under our stock option plan other than changes required due to the second step conversion completed in June, 2007. At such time, all outstanding shares of the former Abington Community Bancorp were exchanged for 1.6 shares of Abington Bancorp and all outstanding stock option awards were adjusted for the exchange ratio along with the exercise price. Restricted stock awards were also adjusted per the exchange ratio.
Information regarding the outstanding stock option grants and unvested recognition and retention plan awards is included in the section titled “Outstanding Equity Awards at Fiscal Year End.” For information regarding Abington Bancorp’s expense related to each stock option and recognition and retention plan award that vested during fiscal 2010, as calculated in accordance with Statement of Financial Accounting Standards No. 123(R), see “Summary Compensation Table.”
Employment Agreements. Abington Bank has entered into employment agreements with each of the named executive officers. The contracts are reviewed annually by the Compensation Committee and the full board of directors. In November, 2007, the boards of directors of Abington Bancorp and Abington Bank approved the amendment and restatement of Abington Bank’s employment agreements with each of the named executive officers. The employment agreements were amended and restated primarily in order to comply with new Section 409A of the Internal Revenue Code. Furthermore, various defined terms, including the definitions of change in control and disability, were revised to be consistent with Section 409A of the Internal Revenue Code. For additional information regarding the terms of the employment agreements, see “Employment Agreements.”
Benefit Plans. The Compensation Committee reviews annually the expense and appropriateness of all benefit plans for the named executive officers and all other employees. Our benefit plans include a supplemental executive retirement plan, 401(k) plan, deferred compensation plan, employee stock ownership plan, and other benefit plans such as medical, dental, life and disability insurance.
Abington Bank maintains a deferred compensation plan for Messrs White, Sandoski and Kovalcheck. As of January 1, 2005, Abington Bank no longer contributes to the deferred compensation plan. Plan balances remain on behalf of each of the participants for contributions prior to 2005, the majority of which are invested in Abington Bancorp common stock.
The Compensation Committee reviewed the existing supplemental executive retirement plan in 2010 for the benefit of the named executive officers and determined that no changes to the plan formula were necessary. The Compensation Committee believes that the supplemental executive retirement plan is a means to provide suitable, supplemental retirement benefits to senior management. The supplemental executive retirement plan provides the participants with a ten-year benefit upon retirement at age 65 or older in an amount equal to 50% of the executive’s average base compensation, as defined, for the highest three calendar years during the 10 years immediately preceding retirement. Mr. Golden does not participate in this plan.
Abington Bank has purchased bank-owned life insurance and entered into endorsement split dollar insurance agreements with each of the named executive officers in consideration for termination of the named executive officers’ participation in the group life insurance benefits provided to other employees of Abington Bank. Bank-owned life insurance and the related split dollar life insurance arrangements are commonly utilized by financial institutions to provide a benefit to their executive officers while generating additional income and funding various other employee benefit programs. A description of the endorsement split dollar agreements is set forth under “Benefit Plans - Endorsement Split Dollar Insurance Agreements.”
Compensation Committee Report
We have reviewed and discussed with management certain Compensation Discussion and Analysis provisions to be included in Abington Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2010, filed pursuant to Section 14(a) of the Securities Exchange Act of 1934. Based on the reviews and discussions referred to above, we recommended to the Board of Directors that the Compensation Discussion and Analysis be included in Abington Bancorp’s proxy statement.
Members of the Compensation Committee
Robert J. Pannepacker, Sr., Chairman
Douglas S. Callantine
Jane Margraff Kieser
Summary Compensation Table
The table below summarizes the total compensation paid or earned by each of the named executive officers for the years ended December 31, 2010, 2009, and 2008.
(1)
Amounts disclosed in this column include contributions by the named executive officer to the Abington Bank 401(k) plan.
(2)
Reflects the aggregate grant date fair value computed in accordance with FASB ASC Topic 718 with respect to restricted stock awards and grants of stock options during the fiscal year. The fair value was estimated on the date of grant using the Black-Scholes Single Option Pricing Model with the following weighted average assumptions used.
Grants of Plan-Based Awards
The following table provides information with respect to equity awards granted to Mr. Wasekanes and Mr. Golden during 2010 under our 2007 Recognition and Retention Plan. No other named executive officers received equity awards in 2010. Abington Bancorp and Abington Bank do not maintain a management incentive plan.
Outstanding Equity Awards at Fiscal Year-End
The table below sets forth outstanding equity awards at December 31, 2010 to our named executive officers.
(1)
Stock options are vesting at a rate of 20% per year commencing on the first anniversary of the date of grant.
Option Exercises and Stock Vested
The table below sets forth the number of shares acquired and their value on the date of vesting pursuant to our Recognition and Retention Plans for the year ended December 31, 2010. None of our named executive officers exercised stock options during the fiscal year.
Employment Agreements
Abington Bank and Abington Bancorp have entered into amended and restated employment agreements, dated as of November 28, 2007 with Robert W. White, Chairman of the Board, President and Chief Executive Officer, and Abington Bank has entered into employment agreements, dated as of November 28, 2007, with Frank Kovalcheck and Jack J. Sandoski, an employment agreement dated August 8, 2007, with Eric L. Golden, and an employment agreement dated August 25, 2009, with Thomas J. Wasekanes.
The amended and restated agreements between Abington Bank and Mr. White and Abington Bancorp and Mr. White are substantially similar, however, in order to comply with the policies of the Office of Thrift Supervision, certain payments otherwise payable under the amended and restated agreement with Abington Bank are reduced or “scaled back” if they would constitute a “parachute payment” pursuant to Section 280G of the Internal Revenue Code. In addition, the amended and restated agreements with Mr. White include the following provisions:
•
Salary and other compensation payable to Mr. White will be shared by Abington Bancorp and Abington Bank on a proportional basis.
•
In the event Mr. White’s employment is involuntarily terminated, other than for cause, disability, retirement or death, or by Mr. White for good reason, as defined, prior to a change in control, he will be entitled to a lump sum payment equal three times his current base salary plus highest bonus received in the prior three years, plus the continuation of certain employee benefits for a period up to the remaining term of the agreement.
•
In the event Mr. White’s employment is terminated concurrently with or within 12 months following a change in control, Mr. White will be entitled to a lump sum payment equal to 2.99 times his “base amount” as defined under Section 280G of the Internal Revenue Code, subject to reduction in the amended and restated agreement with Abington Bank, plus the continuation of certain employee benefits for up to three years. Under his agreement with Abington Bancorp, Abington Bancorp will reimburse Mr. White for any excise tax liability incurred pursuant to Sections 280G and 4999 of the Internal Revenue Code and for any additional taxes incurred as a result of such reimbursement.
•
In the event of Mr. White’s disability, he will be entitled to receive aggregate annual disability benefits at least equal to 60% of his then current salary through his 70th birthday.
•
A death benefit equal to three times Mr. White’s base salary.
•
The agreements contain non-competition and arbitration provisions substantially similar to those currently in place with Mr. White.
In addition, Abington Bank’s Amended and Restated Employment Agreements with Messrs. Sandoski, Kovalcheck, Wasekanes and Golden include the following provisions:
•
If the executive’s employment is terminated by Abington Bank, other than for cause, disability, retirement or death, or is terminated by the executive for good reason, as defined, prior to a change in control, the executive will be entitled to a lump sum payment equal to two times his current base salary (one times base salary in the case of Mr. Golden) and any bonus received in the prior year, plus continuation of certain employee benefits for up to two years.
•
If the executive’s employment is terminated concurrently with or within 12 months following a change in control, the executive will be entitled, with certain exceptions, to a lump sum payment equal to three times his current base salary (two times in the case of Mr. Golden) and bonus for the prior year plus continuation of certain employee benefits for up to three years, subject to reduction in the event such payments or benefits would constitute a “parachute payment” under Section 280G of the Internal Revenue Code.
Although the above-described employment agreements could increase the cost of any acquisition of control of Abington Bancorp, we do not believe that the terms thereof would have a significant anti-takeover effect.
Potential Payments Upon Termination of Employment or Change in Control
The tables below reflect the amount of compensation to each of the named executive officers of Abington Bancorp and Abington Bank in the event of termination of such executive’s employment. The amount of compensation payable to each named executive officer upon voluntary termination, early retirement, involuntary not-for-cause termination, termination following a change in control and in the event of disability or death of the executive is shown below. The amounts shown assume that such termination was effective as of December 31, 2010, and thus includes amounts earned through such time and are estimates of the amounts which would be paid out to the executives upon their termination. The actual amounts to be paid out can only be determined at the time of such executive’s separation from Abington Bancorp and Abington Bank.
The amounts shown in the Change in Control columns in the following tables do not reflect the amounts payable to the named executive officers in connection with the pending merger of Abington Bancorp with and into Susquehanna Bancshares, Inc. (“Susquehanna”). The amounts payable in connection with the merger are expected to be higher primarily for the following reasons: (1) the cash severance payable in the merger reflects the salary increases effective January 1, 2011 and the bonuses paid to the named executive officers in 2010, and (2) the value of the merger consideration based on current market prices of the Susquehanna common stock is higher than the $11.93 closing price per share of common stock of Abington Bancorp as of December 31, 2010, which results in higher values for the unvested stock options and unvested restricted stock awards held by the named executive officers. The estimated amounts payable in the merger are set forth in the Joint Proxy Statement/Prospectus contained in Susquehanna’s Form S-4, which is incorporated herein by reference.
Robert W. White. The following table shows the potential payments upon termination of employment or a change in control of Abington Bancorp or Abington Bank to Robert W. White, our President and Chief Executive Officer, assuming such events had occurred as of December 31, 2010.
Jack J. Sandoski. The following table shows the potential payments upon termination of employment or a change in control of Abington Bancorp or Abington Bank to Jack J. Sandoski, our Senior Vice President and Chief Financial Officer, assuming such events had occurred as of December 31, 2010.
Frank Kovalcheck. The following table shows the potential payments upon termination of employment or a change in control of Abington Bancorp or Abington Bank to Frank Kovalcheck, our Senior Vice President, assuming such events had occurred as of December 31, 2010.
Thomas J. Wasekanes. The following table shows the potential payments upon termination of employment or a change in control of Abington Bancorp or Abington Bank to Thomas J. Wasekanes, our Senior Vice President and Chief Lending Officer, assuming such events had occurred as of December 31, 2010.
Eric Golden. The following table shows the potential payments upon termination of employment or a change in control of Abington Bancorp or Abington Bank to Eric Golden, our Vice President and Controller, assuming such events had occurred as of December 31, 2010.
(a)
These severance payments and benefits are payable if the executive’s employment is terminated prior to a change in control either (i) by the Company or the Bank for any reason other than cause, disability, retirement or death or (ii) by the executive if the Company or the Bank takes certain adverse actions (a “good reason” termination). The severance payments and benefits are also payable if an executive’s employment is terminated during the term of the executive’s employment agreement following a change in control.
(b)
For Mr. White, the amount in the Involuntary Termination column represents a lump sum payment equal to three times the sum of his current base salary from the Company and the Bank and his highest bonus paid in the prior three calendar years, while the amount in the Change in Control column represents 2.99 times his average taxable income from the Company and the Bank for the five years preceding the year in which the date of termination occurs. For each other executive, the amount in the Involuntary Termination column represents two times (one time for Mr. Golden) the sum of the executive’s current base salary and bonus for the prior calendar year, while the amount in the Change in Control column represents a lump sum cash payment equal to three times (two times for Mr. Golden) the sum of the executive’s current base salary and bonus for the prior calendar year.
(c)
In the Involuntary Termination column, represents the estimated present value cost of providing continued medical and dental coverage to each of the executives for the remaining term of Mr. White’s employment agreement or for an additional 24 months (12 months for Mr. Golden) for each of the other executives. In the Change in Control column, represents the estimated present value cost of providing continued medical and dental coverage to each of the executives for an additional 36 months (24 months for Mr. Golden). In each case, the benefits will be discontinued if the executive obtains full-time employment with a subsequent employer which provides substantially similar benefits. The estimated costs assume the current insurance premiums or costs increase by 10% in each of 2012 and 2013.
(d)
In the Involuntary Termination column, represents the estimated present value cost of providing continued life, accidental death and long-term disability coverage to each of the executives for the remaining term of Mr. White’s employment agreement or for an additional 24 months (12 months for Mr. Golden) for each of the other executives. In the Change in Control column, represents the estimated present value cost of providing such benefits to each of the executives for an additional 36 months (24 months for Mr. Golden). In each case, the benefits will be discontinued if the executive obtains full-time employment with a subsequent employer which provides substantially similar benefits. The estimated costs assume the current insurance premiums or costs increase by 10% in each of 2012 and 2013.
(e)
Represents the estimated costs of paying club dues to Mr. White for an assumed additional 24 months in the Involuntary Termination column (36 months in the Change in Control column), based on the amounts paid in 2009. The amounts have not been discounted to present value.
(f)
Represents the estimated costs of paying automobile leases and related expenses to Mr. White for an assumed additional 24 months in the Involuntary Termination Column (36 months in the Change in Control column), based on the amounts paid in 2009. The amounts have not been discounted to present value.
(g)
Represents the incremental increase in the present value of the benefits payable under the Bank’s Supplemental Executive Retirement Plan (the “SERP”). If a participant in the SERP has a separation from service on or after his normal retirement date of age 65, he is entitled to receive supplemental retirement benefits for 10 years. The annual supplemental retirement benefit is equal to 50% of the participant’s average base compensation for the highest three years during the 10 years preceding his separation from service, with the annual benefit payable in quarterly installments. In the event of a change in control, a participant becomes 100% vested in all amounts then accrued for his benefit under the SERP, and the vested benefits are paid in a lump sum on the first day of the month following the lapse of six months after the participant’s separation from service. At December 31, 2010, Messrs. White and Sandoski had reached at least age 65 and were fully vested in their SERP benefits. The amounts shown in the tables for Messrs. Kovalcheck and Wasekanes represent their accrued SERP benefits, discounted to present value from the date of payment to December 31, 2010. Mr. Golden does not participate in the SERP.
(h)
The payments and benefits to Mr. White in the Change in Control column are subject to a 20% excise tax to the extent the parachute amounts associated therewith under Section 280G of the Code equal or exceed three times his average taxable income for the five years preceding the year in which the change in control occurs. His payments exceed this threshold. If a change in control was to occur, the Company believes that the Section 280G gross-up payments could be reduced or even eliminated if tax planning was done in connection with the change in control. However, if the excise tax cannot be avoided, then the Company has agreed in its employment agreement with Mr. White to pay the 20% excise tax and the additional federal, state and local income taxes and excise taxes on such reimbursement in order to place him in the same after-tax position he would have been in if the excise tax had not been imposed. If the parachute amounts associated with the payments and benefits to Messrs. Sandoski, Kovalcheck and Golden equal or exceed three times their average taxable income for the five years preceding the year in which the change in control occurs, such payments and benefits in the event of a change in control will be reduced by the minimum amount necessary so that they do not trigger the 20% excise tax. The applicable amount of the reductions for each of such officers is shown in the tables. If the timing of the change in control permitted tax planning to be done, the Company believes that the amount of the cut-backs could be reduced or even eliminated.
(i)
The vested stock options held by Messrs. White, Sandoski, Kovalcheck, Wasekanes and Golden had a value of approximately $1.6 million, $532,000, $532,000, $72,000 and $33,000, respectively, based on the December 31, 2010 closing price of $11.93 per share. Such value can be obtained in the event of termination due to voluntary termination, death, disability, retirement or cause only if the executive actually exercises the vested options in the manner provided for by the relevant option plan and subsequently sells the shares received for $11.93 per share. In the event of a termination of employment, each executive (or his or her estate in the event of death) will have the right to exercise vested stock options for the period specified in his or her option grant agreement. If the termination of employment occurs following a change in control, each executive can exercise the vested stock options for the remainder of the original ten-year term of the option.
(j)
Represents the amount by which the December 31, 2010 closing price of $11.93 per share of our common stock exceeds the exercise price per share of the unvested stock options held by Messrs. White, Sandoski, Kovalcheck, Wasekanes and Golden. All unvested stock options will become fully vested upon an executive’s death, disability or retirement after age 65 or upon a change in control. None of the executives except Messrs. White and Sandoski had reached age 65 as of December 31, 2009.
(k)
If an executive’s employment is terminated as a result of death or disability, unvested restricted stock awards are deemed fully earned. In addition, in the event of a change in control of the Company or the Bank, the unvested restricted stock awards are deemed fully earned. Amounts include the value of cash dividends accrued on the unvested restricted stock awards.
(l)
Does not include the value of the vested benefits to be paid under our tax-qualified 401(k) plan and ESOP or under our SERP and our Executive Deferred Compensation Plan. See the Pension Benefits table and the Nonqualified Deferred Compensation table under “- Benefit Plans” below. Also does not include the value of vested stock options set forth in Note (i) above, earned but unpaid salary and bonus, accrued but unused vacation leave, reimbursable expenses and any additional amounts that would be allocated to ESOP participants in the event of a change in control.
(m)
If the employment of any of the executives had terminated on December 31, 2010 due to death, such executive’s beneficiaries or estate would have received life insurance proceeds of $400,000 ($650,000 if the death was due to an accident) under our bank owned life insurance policies. For Mr. White, this amount is in addition to the continuation of his base salary in the event of his death as described in Note (n) below. The life insurance coverage is based on three times base salary, subject to a cap of $250,000, plus an additional $150,000 for each executive for a total benefit of $400,000 ($650,000 if the death was due to an accident). If the employment of any of the executives had terminated on December 31, 2010 due to disability, they would each have received disability benefits equal to 65% of their base salary for up to the first six months, after a four-week waiting period. If the executive is still disabled after six months, he would then receive disability benefits equal to 60% of his base salary, subject to a benefit cap of $5,000 per month, until the executive reaches his normal retirement age of 65, minus Social Security disability benefits. Mr. White will also receive supplemental disability benefits as described in Note (n) below. In addition, each executive’s unvested stock options and unvested restricted stock awards will become fully vested upon death or disability. The SERP benefits discussed in Note (n) below will also become payable following death or disability.
(n)
The Company has a SERP covering each executive other than Mr. Golden. Under the SERP, the normal retirement benefits in the event of retirement, death or disability on or after age 65 is an annual benefit equal to 50% of the executive’s salary for the highest three of the last 10 years, with the annual benefit payable for 10 years in quarterly installments. If the executive dies before age 65, his beneficiary or estate will receive a lump sum payment equal to the present value of the aggregate retirement benefit accrued by us. If the executive becomes disabled before age 65, then his 40 quarterly installments will begin as of the first day of the first full quarter following his 65th birthday. See the Pension Benefits table under “- Benefit Plans” below.
(o)
Represents the estimated present value of the supplemental disability benefits that Mr. White would be entitled to receive under his employment agreement if he remained disabled until age 70. In the event of disability, he is entitled to receive supplemental disability benefits equal to the difference between 60% of his base salary and the disability benefits otherwise payable to him, as described in Note (m) above. If Mr. White had died as of December 31, 2010, his spouse or his estate would have received a lump sum cash payment of approximately $934,000, representing the present value of his base salary for 36 months.
Benefit Plans
Supplemental Executive Retirement Plan. Abington Bank maintains a Supplemental Executive Retirement Plan (“SERP”) for selected executive officers. Currently, Messrs. White, Sandoski, Kovalcheck and Wasekanes participate in the Supplemental Executive Retirement Plan. The SERP provides the participants with a ten-year benefit upon retirement at age 65 or older in an amount equal to 50% of the executive’s average base compensation, as defined, for the highest three calendar years during the 10 years immediately preceding retirement. The SERP was amended and restated in January 2011 to permit the Bank to terminate it within 30 days of a change-in-control as defined, so that all benefits under the plan can be paid in a lump sum, provided certain conditions are met.
Pension Benefits. The table below shows the present value of accumulated benefits payable to Messrs. White, Sandoski, Kovalcheck and Wasekanes, including the number of years of credited service, under the supplemental executive retirement plan determined using interest rate and mortality rate assumptions consistent with those used in our financial statements. Mr. Golden does not participate in the supplemental executive retirement plan.
Executive Deferred Compensation Plan. Abington Bank maintains an Executive Deferred Compensation Plan for selected executive officers. In December 2005, Abington’s Board of Directors froze the Amended and Restated Executive Deferred Compensation Plan retroactive to January 1, 2005, such that no further contributions will be made on behalf of the executive officers under the plan. Messrs. White, Sandoski and Kovalcheck currently participate in the executive deferred compensation plan. In addition, director Jane Margraff Kieser maintains an account in the Executive Deferred Compensation Plan with respect to amounts accumulated when she was an executive officer of Abington Bank. The participant maintains an account in the Executive Deferred Compensation Plan until the earlier of retirement, termination of employment or death.
Nonqualified Deferred Compensation. The table below sets forth the aggregate balance at December 31, 2010 and earnings on the executive deferred compensation plan accounts for the named executive officers.
(1)
The executive deferred compensation plan was frozen in 2005 and no contributions have been made since that date. We have established a rabbi trust to fund the executive deferred compensation plan and certain other benefit plans. The aggregate earnings amounts in 2010 in the table above reflect the increase in value of assets held in the rabbi trust, which include our common stock. Messrs. Golden and Wasekanes do not participate in the executive deferred compensation plan.
Endorsement Split-Dollar Insurance Agreements. Abington Bank has purchased insurance policies on the lives of the five executive officers named in the Summary Compensation Table, and has entered into split-dollar insurance agreements with each of those officers. The policies are owned by Abington Bank which pays each premium due on the policies. Under the agreements with the named executive officers, upon an officer’s death while he remains employed by Abington Bank the executive’s beneficiary shall receive proceeds in the amount of the executive’s salary at the time of death multiplied by three (up to a maximum of $250,000) plus an additional $150,000. The officer’s beneficiary will not receive any proceeds in the case of the officer’s death after termination of employment. Abington Bank is entitled to receive the amount of the death benefits less those paid to the officer’s beneficiary, which is expected to reimburse Abington Bank in full for its life insurance investment.
The split-dollar insurance agreements may be terminated at any time by Abington Bank or the officer, by written notice to the other. The split-dollar insurance agreements will also terminate upon cancellation of the insurance policy by Abington Bank, cessation of Abington Bank’s business or upon bankruptcy, receivership or dissolution or by Abington Bank upon the officer’s termination of service to Abington Bank. Upon termination, the officer forfeits any right in the death benefit and Abington Bank may retain or terminate the insurance policy in its sole discretion.
Director Compensation
Directors of Abington Bancorp are not compensated separately by Abington Bancorp. All of our directors also serve as directors of Abington Bank and our non-employee directors are compensated by Abington Bank for such service. Messrs. White and Sandoski do not receive compensation for service on the Board.
Members of Abington Bank’s Board of Directors received $1,200 per meeting attended and a $13,000 annual retainer for 2010. Members of the Audit Committee received $500 per meeting, with the Chair receiving $900 per meeting. The members of the Compensation and Nominating and Corporate Governance Committees received $400 per meeting, with the Chair receiving $500. Such fees were paid only if the meetings were attended. Board fees are subject to periodic adjustment by the Board of Directors.
We maintain a Deferred Compensation Plan for our Board of Directors whereby non-employee directors may elect to defer a portion of their board fees until the earlier of retirement, termination of service, death or disability, each as defined in the Deferred Compensation Plan. The participants’ accounts are invested in cash unless they elect to invest all or a portion of their accounts in stock units representing an equal number of shares of Abington Bancorp common stock. Payments upon retirement, termination of service or disability will be made, at the election of the participant, in a lump sum or monthly installments over a period not to exceed fifteen years. Upon death of a participant prior to termination of service, payments are made to his or her beneficiary in a lump sum. We also maintain a Board of Directors Retirement Plan. Pursuant to the Board’s Retirement Plan, upon retirement after reaching age 75, non-employee directors will receive an annual benefit equal to 75% of the director fees paid in the year of retirement for a period of 10 years. If a director dies while serving as a director and prior to reaching age 75, his or her beneficiary will receive the present value of the director’s accrued retirement benefit in a lump sum. In January 2011, the Directors’ Retirement Plan was amended and restated to, among other things, waive the age 75 requirement in the plan for directors who have a separation of service after a change-in-control, as defined, and permit the Bank to terminate the plan within 30 days of a change-in-control, as defined.
Director Compensation Table. The table below summarizes the total compensation paid to our non-employee directors for the year ended December 31, 2010.
(2)
Our non-employee directors participate in the board of directors deferred compensation plan and board retirement plan. In addition, Ms. Margraff Kieser maintains an account in the executive deferred compensation plan with respect to amounts deferred while she served as an executive officer. The amounts represent the changes in the actuarial present value of accumulated pension benefits under the retirement plan. The amount for Ms. Margraff Kieser is net of aggregate distributions paid to her during 2010 of $21,026. There are no above-market or preferential earnings paid on the accounts under the deferred compensation plan. Mr. Callantine deferred all of his board fees in 2010 to the deferred compensation plan.
(3)
Consists of dividends paid on shares awarded pursuant to our Recognition and Retention Plans that vested during 2010.
Compensation Committee Interlocks and Insider Participation
Ms. Margraff Kieser and Messrs. Callantine and Pannepacker, who is Chairman, serve as members of the Compensation Committee. None of the members of the Compensation Committee during 2010 was a current or former officer or employee of Abington Bancorp or Abington Bank other than Ms. Margraff Kieser, who served as our Senior Vice President, Operations and Human Resources from 1980 to 2001. Nor did any member engage in certain transactions with Abington Bancorp or Abington Bank required to be disclosed by regulations of the SEC. Additionally, there were no compensation committee “interlocks” during 2010, which generally means that no executive officer of Abington Bancorp served as a director or member of the compensation committee of another entity, one of whose executive officers served as a director or member of the Compensation Committee of Abington Bancorp.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information. The following table sets forth certain information for all equity compensation plans and individual compensation arrangements (whether with employees or non-employees, such as directors) in effect as of December 31, 2010.
Beneficial Ownership of Common Stock By Certain Beneficial Owners and Management. The following table sets forth as of March 1, 2011, certain information as to the common stock beneficially owned by (a) each person or entity, including any “group” as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, who or which was known to us to be the beneficial owner of more than 5% of the issued and outstanding common stock, (b) the directors of Abington Bancorp, (c) certain executive officers of Abington Bancorp named in the Summary Compensation Table; and (d) all directors and executive officers of Abington Bancorp as a group.
*
Represents less than 1% of our outstanding common stock.
(1)
Based upon filings made pursuant to the Securities Exchange Act of 1934 and information furnished by the respective individuals. Under regulations promulgated pursuant to the Securities Exchange Act of 1934, shares of common stock are deemed to be beneficially owned by a person if he or she directly or indirectly has or shares (i) voting power, which includes the power to vote or to direct the voting of the shares, or (ii) investment power, which includes the power to dispose or to direct the disposition of the shares. Unless otherwise indicated, the named beneficial owner has sole voting and dispositive power with respect to the shares.
Under applicable regulations, a person is deemed to have beneficial ownership of any shares of common stock which may be acquired within 60 days of the record date pursuant to the exercise of outstanding stock options. Shares of common stock which are subject to stock options are deemed to be outstanding for the purpose of computing the percentage of outstanding common stock owned by such person or group but not deemed outstanding for the purpose of computing the percentage of common stock owned by any other person or group.
(2)
Messrs. Robert W. White, Jack J. Sandoski and Frank Kovalcheck act as trustees of the Abington Bancorp, Inc. Employee Stock Ownership Plan Trust. As of February 22, 2011, 481,758 shares held in the plan trust were allocated to the accounts of participating employees and 1,452,201 shares were held, unallocated, for allocation in future years. In general, the allocated shares held in the plan trust, will be voted by the plan trustees in accordance with the instructions of the participants. Any unallocated shares are generally required to be voted by the plan trustees in the same manner that the majority of the shares which have been allocated to participants are directed to be voted, subject to each case to the fiduciary duties of the plan trustees and applicable law. The amount of our common stock beneficially owned by officers who serve as plan trustees and by all directors and executive officers as a group does not include the shares held by the plan trust other than shares specifically allocated to the individual officer’s account.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Related Party Transactions
Abington Bank has made loans in the ordinary course of business to its directors and officers, and other related parties. These loans were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for loans with persons not related to Abington Bank and did not involve more than the normal risk of collectibility or present other unfavorable features. None of these loans or other extensions of credit are disclosed as non-accrual, past due, restructured or potential problem loans.
Under Abington Bancorp’s Audit Committee Charter, the Audit Committee is required to review and approve all related party transactions, as described in Item 404 of Regulation S-K of the SEC’s rules. To the extent such transactions are ongoing business relationships with Abington Bancorp or Abington Bank, such transactions shall be reviewed annually and such relationships shall be on terms not materially less favorable than what would be usual and customary in similar transactions between unrelated persons dealing at arms’ length.
Director Independence. A majority of our directors are independent directors as defined in the Nasdaq listing standards. The Board of Directors has determined that Messrs. Callantine, Czerwonka, Pannepacker and Wilson and Ms. Margraff Kieser are independent directors.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
The Audit Committee selects our independent registered public accounting firm and pre-approves all audit services to be provided by it to Abington Bancorp. The Audit Committee also reviews and pre-approves all audit-related and non-audit related services rendered by our independent registered public accounting firm in accordance with the Audit Committee’s charter. In its review of these services and related fees and terms, the Audit Committee considers, among other things, the possible effect of the performance of such services on the independence of our independent registered public accounting firm. The Audit Committee pre-approves certain audit-related services and certain non-audit related tax services which are specifically described by the Audit Committee on an annual basis and separately approves other individual engagements as necessary.
The following table sets forth the aggregate fees paid by us to ParenteBeard LLC for professional services rendered in connection with the audit of Abington Bancorp’s consolidated financial statements for 2010 and 2009, respectively, as well as the fees paid by us to ParenteBeard LLC for audit-related and other services rendered to us during 2010 and 2009, respectively.
(1)
Includes professional services rendered for the audit of Abington Bancorp’s annual consolidated financial statements, effectiveness of internal control over financial reporting required by Section 404 of the Sarbanes-Oxley Act, and review of consolidated financial statements included in Forms 10-Q, including out-of-pocket expenses.
(2)
Includes audit-related services provided for the annual audit of our tax-qualified benefit plans.
(3)
Includes assistance with corporate tax matters and preparation of state and federal tax returns.
Each new engagement of ParenteBeard LLC was approved in advance by the Audit Committee and none of those engagements made use of the de minimis exception to pre-approval contained in the Securities and Exchange Commission’s rules.
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 Bancorp, Inc. and the Reports of Independent Registered Public Accounting Firm thereon, as listed below, have been filed under “Item 8, Financial Statements and Supplementary Data”.
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition As of December 31, 2010 and 2009
Consolidated Statements of Operations for the Years Ended December 31, 2010, 2009 and 2008
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2010, 2009 and 2008
Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009 and 2008
Notes to Consolidated Financial Statements
(b) List of Exhibits
(c) Financial Statement Schedules
All schedules have been omitted as the required information is not applicable or is presented in the consolidated financial statements or related notes included in Item 8 hereof.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.