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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(Mark One)
|X| Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended DECEMBER 31, 2004.
OR
|_| Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______ to _______.
COMMISSION FILE NUMBER 000-51077
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ABINGTON COMMUNITY BANCORP, INC.
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(Exact Name of Registrant as specified in its charter)
PENNSYLVANIA 02-0724068
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
180 OLD YORK ROAD, JENKINTOWN, PENNSYLVANIA 19046
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 215-886-8280
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Securities registered pursuant to Section 12 (b) of the Exchange Act: None
Securities registered pursuant to Section 12 (g) of the Exchange Act:
Common Stock, $0.01 Par Value
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(Title of Class)
-----------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The registrant had no shares of common equity outstanding on the last
business day of the registrant's most recently completed second fiscal quarter.
The registrant completed its initial public offering on December 16, 2004.
The number of shares of the Issuer's common stock, par value $0.01 per
share, outstanding as of March 28, 2005 was 15,870,000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain documents incorporated by reference are listed in the Exhibit
Index
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ABINGTON COMMUNITY BANCORP, INC.
TABLE OF CONTENTS
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Page
PART I
ITEM 1. Business 1
ITEM 2. Properties 31
ITEM 3. Legal Proceedings 32
ITEM 4. Submission of Matters to a Vote of Security Holders 32
PART II
ITEM 5. Market for Registrant's Common Stock, Related Stockholder
Matters and Issuer Purchases of Equity Securities 32
ITEM 6. Selected Financial Data 34
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 36
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 50
ITEM 8. Financial Statements and Supplementary Data 54
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 83
ITEM 9A. Controls and Procedures 84
ITEM 9B. Other Information 84
PART III
ITEM 10. Directors and Executive Officers of the Registrant 84
ITEM 11. Executive Compensation 87
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 89
ITEM 13. Certain Relationships and Related Transactions 91
ITEM 14. Principal Accountant Fees and Services 91
PART IV
ITEM 15. Exhibits, Financial Statement Schedules 92
SIGNATURES 94
PART I
ITEM 1. BUSINESS
GENERAL
Abington Community Bancorp, Inc. (the "Company") is a Pennsylvania corporation
which was organized to be a mid-tier holding company for Abington Savings Bank.
Abington Savings Bank is a Pennsylvania-chartered, FDIC-insured savings bank
which conducts business under the name "Abington Bank" (the "Bank" or "Abington
Bank"). The Bank is a wholly owned subsidiary of the Company. The Company's
results of operations are primarily dependent on the results of the Bank and the
Bank's wholly owned subsidiaries, ASB Investment Co., Keswick Services II and
its wholly owned subsidiaries, and Abington Corp. As of December 31, 2004, the
Company, on a consolidated basis, had total assets of approximately $718.0
million, total deposits of approximately $405.3 million, and total stockholders'
equity of approximately $123.1 million.
The Company was formed when the Bank reorganized from a mutual savings bank to a
mutual holding company structure in December 2004. Abington Mutual Holding
Company, a Pennsylvania corporation, is the mutual holding company parent of the
Company. Abington Mutual Holding Company owns 55% of the Company's outstanding
common stock and must continue to own at least a majority of the outstanding
voting stock of the Company.
Abington Bank is a community-oriented savings bank, which was originally
organized in 1867 and is headquartered in Jenkintown, Pennsylvania,
approximately eight miles north of center city Philadelphia. Our banking office
network currently consists of our headquarters and main office, seven other
full-service branch offices and four limited service branch offices. In
addition, we maintain a loan processing office in Jenkintown, Pennsylvania. Ten
of our banking offices are located in Montgomery County, Pennsylvania and two
are in neighboring Bucks County, Pennsylvania. Moreover, the Bank is currently
in various stages of plans to add three additional branch offices - one in
Montgomery County and two in Bucks County. The Bucks County branch offices are
expected to open in 2005 with the Montgomery County branch office following by
mid-2006. Our limited service offices have limited hours of operation and/or are
limited to serving customers who live or work in the community in which the
limited service office is located. Three of our limited service offices are
located in retirement or age restricted communities. We maintain ATMs at all of
our banking offices and we also have two off-site ATMs, located at a local
grocery store and a local college. We also provide on-line banking and telephone
banking services.
We are primarily engaged in attracting deposits from the general public and
using those funds to invest in loans and securities. Our principal sources of
funds are deposits, repayments of loans and mortgage-backed securities,
maturities of investments and interest-bearing deposits, funds provided from
operations and funds borrowed from outside sources such as the Federal Home Loan
Bank of Pittsburgh. These funds are primarily used for the origination of
various loan types including single-family residential mortgage loans,
construction loans, non-residential or commercial real estate mortgage loans,
home equity loans, commercial business loans and consumer loans. We are an
active originator of residential home mortgage loans and home construction loans
in our market area. In addition to offering loans and deposits, we also offer
securities and annuities to our customers through an affiliation with a
third-party broker-dealer.
1
The Company's website address is WWW.ABINGTONBANK.COM. The Company's annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and other documents filed by the Company with the Securities and Exchange
Commission ("SEC") are available free of charge on the Company's website under
the Investor Relations menu. Such documents are available on the Company's
website as soon as reasonably practicable after they have been filed
electronically with the SEC.
FORWARD LOOKING STATEMENTS
This document contains forward-looking statements, which can be identified by
the use of words such as "estimate," "project," "believe," "intend,"
"anticipate," "plan," "seek," "expect" and similar expressions. These
forward-looking statements include:
o statements of goals, intentions and expectations;
o statements regarding prospects and business strategy;
o statements regarding asset quality and market risk; and
o estimates of future costs, benefits and results.
These forward-looking statements are subject to significant risks, assumptions
and uncertainties, including, among other things, the following: (1) general
economic conditions, (2) competitive pressure among financial services
companies, (3) changes in interest rates, (4) deposit flows, (5) loan demand,
(6) changes in legislation or regulation, (7) changes in accounting principles,
policies and guidelines, (8) litigation liabilities, including costs, expenses,
settlements and judgments and (9) other economic, competitive, governmental,
regulatory and technological factors affecting Abington Bank's operations,
pricing, products and services.
Because of these and other uncertainties, our actual future results may be
materially different from the results indicated by these forward-looking
statements. We have no obligation to update or revise any forward-looking
statements to reflect any changed assumptions, any unanticipated events or any
changes in the future.
MARKET AREA AND COMPETITION
Our market area is located in Montgomery County and Bucks County, Pennsylvania,
which are suburbs of Philadelphia. In addition, particularly with respect to
commercial and construction lending, we also make loans in Philadelphia, Chester
and Delaware Counties, Pennsylvania and contiguous counties in New Jersey and
Delaware. This area is referred to as the Delaware Valley region.
We face significant competition in originating loans and attracting deposits.
This competition stems primarily from commercial banks, other savings banks and
savings associations and mortgage-banking companies. Within our market area,
more than 50 other banks, savings institutions and credit unions are operating.
Many of the financial service providers operating in our market area are
significantly larger and have greater financial resources than us. We face
additional competition for deposits from short-term money market funds and other
corporate and
2
government securities funds, mutual funds and from other non-depository
financial institutions such as brokerage firms and insurance companies.
LENDING ACTIVITIES
GENERAL. At December 31, 2004, our net loan portfolio totaled $412.7 million or
57.5% of total assets. Historically, our principal lending activity has been the
origination of loans collateralized by one- to four-family, also known as
"single-family," residential real estate loans located in our market area. In
addition, while we have been making construction loans to homebuilders and
others for more than 30 years, we have increased our construction lending
activities in recent years. We also have increased our emphasis on originating
commercial real estate and multi-family (over four units) residential mortgage
loans. We also originate home equity lines of credit, commercial business loans
and consumer loans.
The types of loans that we may originate are subject to federal and state law
and regulations. Interest rates charged by us on loans are affected principally
by the demand for such loans and the supply of money available for lending
purposes and the rates offered by our competitors. These factors are, in turn,
affected by general and economic conditions, the monetary policy of the federal
government, including the Federal Reserve Board, legislative tax policies and
governmental budgetary matters.
3
LOAN PORTFOLIO COMPOSITION. The following table shows the composition of our
loan portfolio by type of loan at the dates indicated.
December 31,
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2004 2003 2002
---------------------- ---------------------- ----------------------
Amount % Amount % Amount %
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Real estate loans:
One- to four-family residential $243,705 54.69% $223,963 55.95% $247,159 61.70%
Commercial real estate and
multi-family residential 74,642 16.75 64,029 16.00 61,247 15.29
Construction 83,253 18.68 66,875 16.71 50,401 12.58
Home equity lines of credit 32,049 7.19 31,185 7.79 25,571 6.38
---------- ---------- ---------- ---------- ---------- ----------
Total real estate loans 433,649 97.31 386,052 96.45 384,378 95.95
---------- ---------- ---------- ---------- ---------- ----------
Commercial business loans 8,540 1.92 10,403 2.60 11,353 2.83
Consumer non-real estate loans 3,433 0.77 3,792 0.95 4,877 1.22
---------- ---------- ---------- ---------- ---------- ----------
Total non-real estate loans 11,973 2.69 14,195 3.55 16,230 4.05
---------- ---------- ---------- ---------- ---------- ----------
Total loans 445,622 100.00% 400,247 100.00% 400,608 100.00%
========== ========== ========== ========== ========== ==========
Less:
Undisbursed portion of
construction loans in process 30,131 32,699 25,880
Deferred loan fees 1,423 1,472 1,891
Allowance for loan losses 1,413 1,456 1,813
---------- ---------- ----------
Net loans $412,655 $364,620 $371,024
========== ========== ==========
December 31,
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2001 2000
---------------------- ----------------------
Amount % Amount %
---------- ---------- ---------- ----------
(Dollars in Thousands)
Real estate loans:
One- to four-family residential $267,044 74.41% $250,252 76.49%
Commercial real estate and
multi-family residential 46,998 13.10 33,874 10.35
Construction 14,715 4.10 17,588 5.38
Home equity lines of credit 19,021 5.30 16,101 4.92
---------- ---------- ---------- ----------
Total real estate loans 347,778 96.91 317,815 97.14
---------- ---------- ---------- ----------
Commercial business loans 8,092 2.25 6,588 2.01
Consumer non-real estate loans 3,013 0.84 2,773 0.85
---------- ---------- ---------- ----------
Total non-real estate loans 11,105 3.09 9,361 2.86
---------- ---------- ---------- ----------
Total loans 358,883 100.00% 327,176 100.00%
========== ========== ========== ==========
Less:
Undisbursed portion of
construction loans in process 6,510 9,985
Deferred loan fees 1,871 1,805
Allowance for loan losses 1,590 1,344
---------- ----------
Net loans $348,912 $314,042
========== ==========
4
CONTRACTUAL TERMS TO FINAL MATURITIES. The following table shows the scheduled
contractual maturities of our loans as of December 31, 2004, before giving
effect to net items. Demand loans, loans having no stated schedule of repayments
and no stated maturity, and overdrafts are reported as due in one year or less.
The amounts shown below do not take into account loan prepayments.
Commercial
Real Estate
One- to and Commercial Home Equity
Four-Family Multi-Family Business Lines of
Residential Residential Construction Loans Credit Consumer Total
------------- ------------- ------------ ----------- ------------- ---------- -----------
(In Thousands)
Amounts due after December 31, 2004 in:
One year or less $ 127 $16,115 $42,010 $7,128 $31,929 $ 207 $ 97,516
After one year through two years 658 4,033 33,646 185 120 603 39,245
After two years through three years 3,104 2,540 7,597 472 -- 1,005 14,718
After three years through five years 10,650 5,181 -- 580 -- 1,029 17,440
After five years through ten years 24,883 4,329 -- -- -- 589 29,801
After ten years through fifteen years 72,963 9,261 -- 175 -- -- 82,399
After fifteen years 131,320 33,183 -- -- -- -- 164,503
-------- ------- ------- ------ ------- ------ --------
Total $243,705 $74,642 $83,253 $8,540 $32,049 $3,433 $445,622
======== ======= ======= ====== ======= ====== ========
The following table shows the amount of our loans at December 31, 2004, which
are due after December 31, 2005, and indicates whether they have fixed-rates of
interest or rates which are floating or adjustable.
Floating or Total at
Fixed-Rate Adjustable-Rate December 31, 2004
-------------- ----------------- -----------------
(In Thousands)
One- to four-family residential $206,442 $37,136 $243,578
Commercial real estate and
multi-family residential 35,136 23,391 58,527
Construction 336 40,907 41,243
Commercial business 110 1,302 1,412
Home equity lines of credit -- 120 120
Consumer non-real estate 2,248 978 3,226
-------- -------- --------
Total $244,272 $103,834 $348,106
======== ======== ========
LOAN ORIGINATIONS. Our lending activities are subject to underwriting standards
and loan origination procedures established by our board of directors and
management. Loan originations are obtained through a variety of sources,
primarily existing customers as well as new customers obtained from referrals
and local advertising and promotional efforts. In addition, our commercial and
construction loan officers actively solicit new loans throughout our market
area. Single-family residential mortgage loan applications and consumer loan
applications are taken at any of Abington Bank's banking offices. Applications
for other loans typically are taken personally by our commercial or construction
lending officers, although they may be received by a branch office initially and
then referred to a construction or commercial lender. All loan applications are
processed and underwritten centrally at our loan processing office and main
office in Jenkintown, Pennsylvania.
Our single-family residential mortgage loans are written on standardized
documents used by the Federal Home Loan Mortgage Corporation ("FHLMC" or
"Freddie Mac") and Federal National Mortgage Association ("FNMA" or "Fannie
Mae"). We also utilize automated loan processing and underwriting software
systems developed by Freddie Mac for our new single-family residential mortgage
loans. Property valuations of loans secured by real estate are undertaken by our
in-house appraiser or by an independent third-party appraiser approved by our
board of directors.
5
Specified loan officers of Abington Bank have limited authority to approve
automobile loans and other consumer loans up to $15,000. Home equity loans and
lines of credit may be approved jointly by two authorized Vice Presidents. Our
loan policy generally requires that all other loans up to $1.0 million must be
approved by either the Consumer Loan Committee (which is comprised of the Bank's
President, Senior Vice President - Lending and five other officers) or
Commercial Loan Committee (comprised of the Bank's President, Senior Vice
President - Lending and five other officers). All of such loans are reported to
our board of directors on a monthly basis. Loans exceeding $1.0 million must be
approved by the full board of directors.
In addition to originating loans, we occasionally purchase participation
interests in larger balance loans, typically commercial real estate and
multi-family residential mortgage loans and construction loans, from other
financial institutions in our market area. Such participations are reviewed for
compliance with our underwriting criteria before they are purchased. Generally,
we have purchased such loans without any recourse to the seller. However, we
actively monitor the performance of such loans through the receipt of regular
reports from the lead lender regarding the loan's performance, physically
inspecting the loan security property on a periodic basis, discussing the loan
with the lead lender on a regular basis and receiving copies of updated
financial statements from the borrower.
During the years ended December 31, 2003 and 2002, we sold $2.6 million and $7.3
million, respectively, of newly originated single-family residential mortgage
loans with servicing retained. Such loans were sold in order to recognize
certain embedded gains. There were no sales during 2004, and we have
discontinued such loans sales, but, depending on market conditions, may again
consider such sales in the future. In addition, we have sold participation
interests in loans originated by us to other institutions. When we have sold
participation interests or whole loans, it generally has been done on the basis
of very limited recourse. As of December 31, 2004, our total exposure to
recourse arrangements with respect to our sales of whole loans and participation
interests in loans was $185,000. We generally have sold participation interests
in loans only when a loan would exceed our loans-to-one borrower limits. Our
loans-to-one borrower limit, with certain exceptions, generally is 15% of our
unimpaired capital and surplus or $12.9 million at December 31, 2004.
6
The following table shows our total loans originated, purchased, sold and repaid
during the periods indicated.
Year Ended December 31,
------------------------------------
2004 2003 2002
---------- ---------- ----------
(In Thousands)
Loan originations:
One- to four-family residential $ 64,593 $ 92,143 $ 58,771
Commercial real estate and
multi-family residential 23,996 14,301 17,437
Construction 51,159 47,737 49,623
Home equity lines of credit 13,196 14,843 11,189
Commercial business 11,607 5,700 5,782
Consumer non-real estate 1,389 1,081 4,212
---------- ---------- ----------
Total loan originations 165,940 175,805 146,954
---------- ---------- ----------
Loans purchased:
Whole loans -- -- --
Participation interests 15,300 4,940 17,540
---------- ---------- ----------
Total loans purchased 15,300 4,940 17,540
---------- ---------- ----------
Loans sold:
Whole loans -- (2,280) (7,332)
Participation interests -- (5,361) --
---------- ---------- ----------
Total loans sold -- (7,641) (7,332)
---------- ---------- ----------
Loan principal repayments (135,866) (181,746) (134,618)
---------- ---------- ----------
Total loans sold and principal
repayments (135,866) (189,387) (141,950)
Increase or (decrease) due to other
items, net (1) 2,661 2,238 (432)
---------- ---------- ----------
Net increase (decrease) in loan
portfolio $ 48,035 $ (6,404) $ 22,112
========== ========== ==========
- ---------------------------
(1) Other items consist of loans in process, deferred fees and the allowance
for loan losses.
ONE-TO FOUR-FAMILY RESIDENTIAL MORTGAGE LENDING. One of our primary lending
activities continues to be the origination of loans secured by first mortgages
on one- to four-family residences in our market area. At December 31, 2004,
$243.7 million of our total loan portfolio consisted of single-family
residential mortgage loans. Due primarily to increased mortgage loan prepayments
due to refinance activity as a result of the low interest rate environment, as
well as our increased emphasis on commercial real estate, construction and
commercial business loans, the percentage of single-family residential mortgage
loans in our portfolio has decreased from 76.5% at December 31, 2000 to 54.7% at
December 31, 2004.
Our single-family residential mortgage loans generally are underwritten on terms
and documentation conforming with guidelines issued by Freddie Mac and Fannie
Mae. We utilize proprietary software developed by Freddie Mac in processing and
underwriting our single-family residential mortgage loans. Applications for
one-to four-family residential mortgage loans are accepted at any of our banking
offices and are then referred to the Residential Lending Department at our main
office and our Loan Processing Center in order to process the loan, which
consists primarily of obtaining all documents required by Freddie Mac and Fannie
Mae underwriting standards, and complete the underwriting, which includes making
a determination whether the loan meets our underwriting standards such that the
bank can extend a loan commitment to the customer. We generally have retained
for our portfolio a substantial portion of the single-family residential
mortgage loans that we originate. We service all loans that we have originated
through our in-house loan servicing department. We currently originate
fixed-rate, fully amortizing mortgage loans with maturities of 15, 20 or 30
years. We also have offered adjustable rate mortgage ("ARM") loans, however, due
to local market conditions, we had not offered single-family ARM loans for more
than 10 years through the end of 2004. At December 31, 2004, only $177,000, or
0.1%, of our one- to four-family residential loan portfolio consisted of ARM
loans. Based on a review of current market conditions, the Bank once again began
offering ARM loans in 2005.
7
We underwrite one- to four-family residential mortgage loans with loan-to-value
ratios of up to 95%, provided that the borrower obtains private mortgage
insurance on loans that exceed 80% of the appraised value or sales price,
whichever is less, of the secured property. We also require that title
insurance, hazard insurance and, if appropriate, flood insurance be maintained
on all properties securing real estate loans. Our in-house appraiser or another
licensed appraiser appraises all properties securing one- to four-family first
mortgage loans. Our mortgage loans generally include due-on-sale clauses which
provide us with the contractual right to deem the loan immediately due and
payable in the event the borrower transfers ownership of the property.
Due-on-sale clauses are an important means of adjusting the yields of fixed-rate
mortgage loans in our portfolio, and we generally exercise our rights under
these clauses.
Our single-family residential mortgage loans also include home equity loans,
which amounted to $19.7 million at December 31, 2004. We offer fixed-rate home
equity loans in amounts up to $200,000. Our home equity loans are fully
amortizing and have terms to maturity of up to 15 years. While home equity loans
also are secured by the borrower's residence, we generally obtain a second
mortgage position on these loans. Our lending policy provides that our home
equity loans have loan-to-value ratios, when combined with any first mortgage,
of 90% or less, although the preponderance of our home equity loans have
combined loan-to-value ratios of 80% or less. Our single-family residential
mortgage loans also include some loans to local businessmen for a commercial
purpose, but which are secured by liens on the borrower's residence.
COMMERCIAL REAL ESTATE AND MULTI-FAMILY RESIDENTIAL REAL ESTATE LOANS. At
December 31, 2004, our commercial real estate and multi-family residential loans
amounted to $74.6 million or 16.8% of our total loan portfolio. Our commercial
real estate and multi-family residential loans have increased, both in terms of
the aggregate amount outstanding and as a percentage of the loan portfolio,
since December 31, 2000.
Our commercial real estate and residential multi-family real estate loan
portfolio consists primarily of loans secured by office buildings, retail and
industrial use buildings, strip shopping centers, residential properties with
five or more units and other properties used for commercial and multi-family
purposes located in our market area. Our commercial and multi-family real estate
loans tend to be originated in an amount less than $3.0 million but will
occasionally exceed that amount. We currently employ four commercial lenders who
actively solicit commercial real estate and multi-family residential mortgage
loans in our market area.
Although terms for commercial real estate and multi-family loans vary, our
underwriting standards generally allow for terms up to 30 years with monthly
amortization over the life of the loan and loan-to-value ratios of not more than
80%. Interest rates are either fixed or adjustable, based upon designated market
indices such as the 5-year Treasury CMT plus a margin, and fees of up to 2.0%
are charged to the borrower at the origination of the loan. Generally, we obtain
personal guarantees of the principals as additional collateral for commercial
real estate and multi-family real estate loans.
Commercial real estate and multi-family real estate lending involves different
risks than single-family residential lending. These risks include larger loans
to individual borrowers and loan payments that are dependent upon the successful
operation of the project or the borrower's business. These risks can be affected
by supply and demand conditions in the project's market area of rental housing
units, office and retail space, warehouses, and other commercial space. We
attempt to minimize these risks by limiting loans to proven businesses, only
considering properties with existing operating performance which can be
analyzed, using conservative debt coverage ratios in our underwriting, and
periodically monitoring the operation of the business or project and the
physical condition of the property. At December 31, 2004, 2003 and 2002, none of
our commercial real estate and multi-family residential mortgage loans were
8
either delinquent for more than 30 days or considered non-performing. We
charged-off $99,000, $671,000 and $298,000 in commercial real estate and
multi-family residential real estate loans in the years ended December 31, 2004,
2003 and 2002, respectively, which constitute the only charge-offs of such loans
over the past five years.
Various aspects of a commercial and multi-family loan transactions are evaluated
in an effort to mitigate the additional risk in these types of loans. In our
underwriting procedures, consideration is given to the stability of the
property's cash flow history, future operating projections, current and
projected occupancy levels, location and physical condition. Generally, we
impose a debt service ratio (the ratio of net cash flows from operations before
the payment of debt service to debt service) of not less than 110% in the case
of multi-family residential real estate loans and 120% in the case of commercial
real estate loans. We also evaluate the credit and financial condition of the
borrower, and if applicable, the guarantor. Appraisal reports prepared by
independent appraisers or, in some cases, Abington Bank's staff appraiser are
obtained on each loan to substantiate the property's market value, and are
reviewed by us prior to the closing of the loan.
CONSTRUCTION LENDING. As part of our efforts to transition from a traditional
thrift to a community bank, we have been an active originator of construction
loans since the mid 1990s. We increased our construction loan efforts in 2002
when we hired a second construction loan officer. We targeted construction loans
as a growth area for the Bank because they have shorter terms to maturity and
they generally have floating or adjustable interest rates. We have focused our
construction lending on making loans to homebuilders in the Delaware Valley area
to acquire, develop and build single-family residences. Our construction loans
include, to a lesser extent, loans for the construction of commercial and
industrial use properties such as office buildings, retail shops and warehouses.
At December 31, 2004, our construction loans amounted to $83.3 million, or 18.7%
of our total loan portfolio. This amount includes $30.1 million of undisbursed
loans in process. Our construction loan portfolio has grown appreciably over the
past 4 years. At December 31, 2000, our construction loans amounted to $17.6
million, or 5.4% of our total loan portfolio.
A substantial amount of our construction loans are construction and development
loans to contractors and builders primarily to finance the construction of
single-family homes and subdivisions. Loans to finance the construction of
single-family homes and subdivisions are generally offered to experienced
builders in the Delaware Valley with whom we have an established relationship.
Residential construction and development loans are typically offered with terms
of up to 36 months. One or two six-month extensions may be provided for at our
option. The maximum loan-to-value limit applicable to these loans is 80% of the
appraised post construction value. We often establish interest reserves and
obtain personal and/or corporate guarantees as additional security on our
construction loans. Construction loan proceeds are disbursed periodically in
increments as construction progresses and as inspection by our approved
appraisers or loan inspectors warrants. Our construction loans are negotiated on
an individual basis but typically have floating rates of interest based upon THE
WALL STREET JOURNAL prime rate or, in some cases, LIBOR. Additional fees may be
charged as funds are disbursed. In addition to interest payments during the term
of the construction loan, we typically require that payments to principal be
made as units are completed and released. Generally such principal payments must
be equal to 110% of the amount attributable to acquisition and development of
the lot plus 100% of the amount attributable to construction of the individual
home. We permit a pre-determined number of model homes to be constructed on an
unsold or "speculative" basis. All other units must be pre-sold before we will
disburse funds for construction. Our construction loans also include loans to
acquire and hold unimproved land, loans to acquire land and develop the basic
infrastructure, such as roads and sewers, and construction loans for commercial
uses. The majority of our construction loans are secured by properties located
in Bucks and Montgomery Counties, Pennsylvania. However, we also make
construction loans in Philadelphia, Chester and Delaware Counties, Pennsylvania
as well as the New Jersey suburbs of Philadelphia.
9
Construction financing is generally considered to involve a higher degree of
credit risk than long-term financing on improved, owner-occupied real estate.
Risk of loss on a construction loan depends largely upon the accuracy of the
initial estimate of the property's value at completion of construction compared
to the estimated costs, including interest, of construction and other
assumptions. Additionally, if the estimate of value proves to be inaccurate, we
may be confronted with a project, when completed, having a value less than the
loan amount. We have attempted to minimize these risks by generally
concentrating on residential construction loans in our market area to
contractors with whom we have established relationships. At December 31, 2004,
2003 and 2002, we had no construction loans that were considered non-performing,
however, in January 2005 a construction loan for $2.9 million was placed on
non-accrual status due to delinquency. This one construction loan was 60 days
delinquent at December 31, 2004 and was our only delinquent construction loan at
such date. We had no construction loans more than 30 days delinquent at December
31, 2003 or 2002. We have not charged-off any construction loans in more than
five years.
HOME EQUITY LINES. At December 31, 2004, our home equity lines of credit
amounted to $32.0 million or 7.2% of our net loan portfolio. The unused portion
of home equity lines was $20.3 million at such date. We offer home equity lines
in amounts up to $200,000 on a revolving line of credit basis with interest tied
to the prime rate. Generally, we have a second mortgage on the borrower's
residence as collateral on its home equity lines. Generally, our home equity
lines have loan-to-value ratios (combined with any loan secured by a first
mortgage) of 80% or less. Our customers may apply for home equity lines as well
as home equity loans at any banking office or on-line through our website.
COMMERCIAL BUSINESS LOANS. Our commercial business loans amounted to $8.5
million or 1.9% of the total loan portfolio at December 31, 2004. The unused
portion of our commercial lines of credit at December 31, 2004, was $38.2
million.
Our commercial business loans typically are to small to mid-sized businesses in
our market area and may be for working capital, inventory financing or accounts
receivable financing. Small business loans may have adjustable or fixed rates of
interest and generally have terms of three years or less but may go up to 10
years. Our commercial business loans generally are secured by equipment,
machinery or other corporate assets. In addition, we generally obtain personal
guarantees from the principals of the borrower with respect to all commercial
business loans.
Our four commercial lenders actively solicit commercial business loans in our
market area. Given the on-going consolidation of financial institutions, we are
seeking to increase our commercial business loan portfolio. In particular, we
are targeting loans of $250,000 to $500,000 that generally are considered too
small by the regional and super-regional banks operating in our market.
Commercial business loans generally are deemed to involve a greater degree of
risk than single-family residential mortgage loans.
CONSUMER LENDING ACTIVITIES. In our efforts to provide a full range of financial
services to our customers, we offer various types of consumer loans such as
loans secured by deposit accounts, automobile loans and unsecured personal
loans. These loans are originated primarily through existing and walk-in
customers and direct advertising. At December 31, 2004, $3.4 million, or 0.8% of
the total loan portfolio consisted of these types of loans.
Consumer loans generally have higher interest rates and shorter terms than
residential loans, however, they have additional credit risk due to the type of
collateral securing the loan or in some cases the absence of collateral. In the
years ended December 31, 2004, 2003 and 2002 we charged-off $32,000, $89,000 and
$0 of consumer loans, respectively.
10
LOAN APPROVAL PROCEDURES AND AUTHORITY. Our Board of Directors establishes the
bank's lending policies and procedures. Our Lending Policy Manual is reviewed on
at least an annual basis by our management team in order to propose
modifications as a result of market conditions, regulatory changes and other
factors. All modifications must be approved by our Board of Directors.
Various officers or combinations of officers of Abington Bank have the authority
within specifically identified limits to approve new loans. The largest
individual lending authority is $1.0 million. Amounts in excess of the
individual lending limits must be approved by the Commercial Lending Committee
or the Consumer Lending Committee. Loans in excess of $1.0 million must be
approved by the Board of Directors of Abington Bank.
ASSET QUALITY
GENERAL. One of our key objectives has been, and continues to be, maintaining a
high level of asset quality. In addition to maintaining credit standards for new
originations which we believe are sound, we are proactive in our loan
monitoring, collection and workout processes in dealing with delinquent or
problem loans. In addition, in recent years, we have retained independent, third
parties to undertake reviews of the credit quality of our loan portfolio.
When a borrower fails to make a scheduled payment, we attempt to cure the
deficiency by making personal contact with the borrower. Initial contacts are
generally made 15 days after the date the payment is due. In most cases,
deficiencies are promptly resolved. If the delinquency continues, late charges
are assessed and additional efforts are made to collect the deficiency. All
loans delinquent 60 days or more are reported to the Board of Directors of
Abington Bank.
On loans where the collection of principal or interest payments is doubtful, the
accrual of interest income ceases ("non-accrual" loans). On single-family
residential mortgage loans 120 days or more past due and all other loans 90 days
or more past due, as to principal and interest payments, our policy, with
certain limited exceptions, is to discontinue accruing additional interest and
reverse any interest currently accrued. On occasion, this action may be taken
earlier if the financial condition of the borrower raises significant concern
with regard to his/her ability to service the debt in accordance with the terms
of the loan agreement. Interest income is not accrued on these loans until the
borrower's financial condition and payment record demonstrate an ability to
service the debt.
Real estate which is acquired as a result of foreclosure is classified as real
estate owned until sold. Real estate owned is recorded at the lower of cost or
fair value less estimated selling costs. Costs associated with acquiring and
improving a foreclosed property are usually capitalized to the extent that the
carrying value does not exceed fair value less estimated selling costs. Holding
costs are charged to expense. Gains and losses on the sale of real estate owned
are charged to operations, as incurred.
We account for our impaired loans under generally accepted accounting
principles. An impaired loan generally is one for which it is probable, based on
current information, that the lender will not collect all the amounts due under
the contractual terms of the loan. Large groups of smaller balance, homogeneous
loans are collectively evaluated for impairment. Loans collectively evaluated
for impairment include smaller balance commercial real estate loans, residential
real estate loans and consumer loans. These loans are evaluated as a group
because they have similar characteristics and performance experience. Larger
commercial real estate, construction and commercial business loans are
individually evaluated for impairment. As of December 31, 2004 and 2003, we had
$0 and $99,000, respectively, of loans deemed to be impaired. We charged-off
$671,000 of impaired loans in 2003 (all of which were to the same borrower) and
the remaining $99,000 was charged-off in the second quarter of 2004.
11
Federal regulations and our policies require that we utilize an internal asset
classification system as a means of reporting problem and potential problem
assets. We have incorporated an internal asset classification system, consistent
with Federal banking regulations, as a part of our credit monitoring system. We
currently classify problem and potential problem assets as "substandard,"
"doubtful" or "loss" assets. An asset is considered "substandard" if it is
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the insured institution will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
"doubtful" have all of the weaknesses inherent in those classified "substandard"
with the added characteristic that the weaknesses present make "collection or
liquidation in full," on the basis of currently existing facts, conditions, and
values, "highly questionable and improbable." Assets classified as "loss" are
those considered "uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss reserve is not warranted.
Assets which do not currently expose the insured institution to sufficient risk
to warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "special mention."
When an insured institution classifies one or more assets, or portions thereof,
as "substandard" or "doubtful," it is required that a general valuation
allowance for loan losses be established for loan losses in an amount deemed
prudent by management. General valuation allowances represent loss allowances
which have been established to recognize the inherent losses associated with
lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
one or more assets, or portions thereof, as "loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount.
A savings institution's determination as to the classification of its assets and
the amount of its valuation allowances is subject to review by Federal and state
bank regulators which can order the establishment of additional general or
specific loss allowances. The Federal banking agencies, have adopted an
interagency policy statement on the allowance for loan and lease losses. The
policy statement provides guidance for financial institutions on both the
responsibilities of management for the assessment and establishment of
allowances and guidance for banking agency examiners to use in determining the
adequacy of general valuation guidelines. Generally, the policy statement
recommends that institutions have effective systems and controls to identify,
monitor and address asset quality problems; that management analyze all
significant factors that affect the collectibility of the portfolio in a
reasonable manner; and that management establish acceptable allowance evaluation
processes that meet the objectives set forth in the policy statement. In July
2001, the SEC issued Staff Accounting Bulletin ("SAB") No. 102, "Selected Loan
Loss Allowance Methodology and Documentation Issues." The guidance contained in
the SAB focuses on the documentation the SEC staff normally expects registrants
to prepare and maintain in support of the allowance for loan and lease losses.
Concurrent with the SEC's issuance of SAB No. 102, the federal banking agencies,
represented by the Federal Financial Institutions Examination Council ("FFIEC"),
issued an interagency policy statement entitled "Allowance for Loan and Lease
Losses Methodologies and Documentation for Banks and Savings Institutions"
(Policy Statement). The SAB and Policy Statement were the result of an agreement
between the SEC and the federal banking agencies in March 1999 to provide
guidance on allowance for loan and lease losses methodologies and supporting
documentation. Our allowance for loan losses includes a portion which is
allocated by type of loan, based primarily upon our periodic reviews of the risk
elements within the various categories of loans, as well as an unallocated
portion. The unallocated portion of the allowance is established upon
consideration of various qualitative and quantitative factors with respect to
the overall loan portfolio. Our management believes that, based on information
currently available, its allowance for loan losses is maintained at a level
which covers all known and inherent losses that are both probable and reasonably
estimable at each reporting date. However, actual losses are dependent upon
future events and, as such, further additions to the level of allowances for
loan losses may become necessary.
12
DELINQUENT LOANS. The following table shows the delinquencies in our loan
portfolio as of the dates indicated.
December 31, 2004 December 31, 2003
-------------------------------------------- --------------------------------------------
30-89 90 or More Days 30-89 90 or More Days
Days Overdue Overdue Days Overdue Overdue
--------------------- --------------------- --------------------- ---------------------
Number Principal Number Principal Number Principal Number Principal
of Loans Balance of Loans Balance of Loans Balance of Loans Balance
---------- --------- ---------- --------- ---------- --------- ---------- ---------
(Dollars in Thousands)
One- to four-family
residential 6 $460 3 $227 19 $1,055 3 $321
Commercial real estate
and multi-family
residential -- -- -- -- -- -- -- --
Construction 1 2,900 -- -- -- -- -- --
Commercial business -- -- -- -- -- -- -- --
Home equity lines of
credit 2 314 -- -- 4 219 3 109
Consumer non- real estate -- -- -- -- 7 14 2 32
---------- --------- ---------- --------- ---------- --------- ---------- ---------
Total delinquent loans 9 $3,674 3 $227 30 $1,288 8 $462
========== ========= ========== ========= ========== ========= ========== =========
Delinquent loans to
total net loans 0.89% 0.06% 0.35% 0.13%
========= ========= ========= =========
Delinquent loans to
total loans 0.82% 0.05% 0.32% 0.12%
========= ========= ========= =========
December 31, 2002
--------------------------------------------
30-89 90 or More Days
Days Overdue Overdue
--------------------- ---------------------
Number Principal Number Principal
of Loans Balance of Loans Balance
---------- --------- ---------- ---------
(Dollars in Thousands)
One- to four-family
residential 35 $1,467 15 $ 424
Commercial real estate
and multi-family
residential -- -- 1 671
Construction -- -- -- --
Commercial business -- -- -- --
Home equity lines of
credit -- -- 1 99
Consumer non- real estate 11 321 10 56
---------- --------- ---------- ---------
Total delinquent loans 46 $1,788 26 $1,250
========== ========= ========== =========
Delinquent loans to
total net loans 0.48% 0.34%
========= =========
Delinquent loans to
total loans 0.45% 0.31%
========= =========
13
NON-PERFORMING LOANS AND REAL ESTATE OWNED. The following table sets forth
information regarding our non-performing loans and real estate owned. Our
general policy is to cease accruing interest on single-family residential
mortgages which are 120 days or more past due and all other loans which are 90
days or more past due and to charge-off all accrued interest.
For the years ended December 31, 2004, 2003 and 2002, the amount of additional
interest income that would have been recognized on non-accrual loans if such
loans had continued to perform in accordance with their contractual terms was
$5,000, $16,000 and $45,000, respectively.
The following table shows the amounts of our non-performing assets (defined as
non-accruing loans, accruing loans 90 days or more past due and real estate
owned) at the dates indicated. We did not have troubled debt restructurings at
any of the dates indicated.
December 31,
-----------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ -------------
(Dollars in Thousands)
Non-accruing loans:
One- to four-family residential $ -- $ 99 $ -- $ 82 $131
Commercial real estate and
multi-family residential -- -- 671 969 --
Construction -- -- -- -- --
Commercial business -- -- -- -- --
Home equity lines of credit -- -- 99 99 --
Consumer non-real estate -- 16 -- -- --
------------ ------------ ------------ ------------ -------------
Total non-accruing loans -- 115 770 1,150 131
------------ ------------ ------------ ------------ -------------
Accruing loans 90 days or more past due:
One- to four-family residential 227 222 424 233 637
Multi-family residential and
commercial real estate -- -- -- -- --
Construction -- -- -- -- --
Commercial business -- -- -- -- --
Home equity lines of credit -- 109 -- 24 --
Consumer non-real estate -- 16 56 19 --
------------ ------------ ------------ ------------ -------------
Total accruing loans 90 days or
more past due 227 347 480 276 637
------------ ------------ ------------ ------------ -------------
Total non-performing
loans(1) 227 462 1,250 1,426 768
------------ ------------ ------------ ------------ -------------
Real estate owned, net -- -- -- -- --
Total non-performing assets $227 $462 $1,250 $1,426 $768
============ ============ ============ ============ ============
Total non-performing loans as a
percentage of loans 0.06% 0.13% 0.34% 0.41% 0.24%
============ ============ ============ ============ ============
Total non-performing loans as a
percentage of total assets 0.03% 0.08% 0.23% 0.30% 0.18%
============ ============ ============ ============ ============
Total non-performing assets as a
percentage of total assets 0.03% 0.08% 0.23% 0.30% 0.18%
============ ============ ============ ============ ============
- ------------------
(1) Non-performing loans consist of non-accruing loans plus accruing loans
90 days or more past due.
Property acquired by Abington Bank through foreclosure is initially recorded at
the lower of cost, which is the lesser of the carrying value of the loan or fair
value at the date of acquisition, or the fair value of the related assets at the
date of foreclosure, less estimated costs to sell. Thereafter, if there is a
further deterioration in value, we charge earnings for the diminution in value.
Our policy is to obtain an appraisal on all real estate subject to foreclosure
proceedings prior to the time of foreclosure and to require appraisals on a
periodic basis on foreclosed properties and conduct inspections on foreclosed
properties.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established through
a provision for loan losses. We maintain the allowance at a level believed to
cover all known and inherent losses in the portfolio that are both probable and
reasonable to estimate at each reporting date. Management reviews the allowance
for loan losses on no less than a quarterly basis in order to identify those
inherent losses and to assess the overall collection probability for the loan
portfolio. Our evaluation process includes,
14
among other things, an analysis of delinquency trends, non-performing loan
trends, the level of charge-offs and recoveries, prior loss experience, total
loans outstanding, the volume of loan originations, the type, size and
geographic concentration of our loans, the value of collateral securing the
loan, the borrower's ability to repay and repayment performance, the number of
loans requiring heightened management oversight, local economic conditions and
industry experience. In addition, in establishing the allowance for loan losses,
we have implemented a nine point internal rating system for all loans originated
by the Commercial Lending Department. At the time of origination, each loan,
other than single-family residential mortgage loans, home equity lines and
consumer loans, is assigned a rating based on the assumed risk elements of the
loan. Such risk ratings are periodically reviewed by management and revised as
deemed appropriate. The establishment of the allowance for loan losses is
significantly affected by management judgment and uncertainties and there is a
likelihood that different amounts would be reported under different conditions
or assumptions. Various regulatory agencies, as an integral part of their
examination process, periodically review our allowance for loan losses. Such
agencies may require it to make additional provisions for estimated loan losses
based upon judgments different from those of management. As of December 31,
2004, our allowance for loan losses was 0.34% of total loans receivable.
During the year ended December 31, 2004, we charged-off $99,000 of one- to
four-family residential mortgage loans. Such loans were all to one borrower and
previously had been deemed impaired. During the year ended December 31, 2003, we
charged-off $671,000 of commercial real estate and multi-family residential
mortgage loans to this borrower. As of December 31, 2004, all loans to this
borrower had been charged-off. See "Asset Quality-General." In the five-year
period ended December 31, 2004, our loan charge-offs have been relatively
minimal and three borrowers and their affiliates were responsible for 91.3% of
such charge-offs.
We will continue to monitor and modify our allowances for loan losses as
conditions dictate. No assurances can be given that our level of allowance for
loan losses will cover all of the inherent losses on our loans or that future
adjustments to the allowance for loan losses will not be necessary if economic
and other conditions differ substantially from the economic and other conditions
used by management to determine the current level of the allowance for loan
losses.
The following table shows changes in our allowance for loan losses
during the periods presented.
At or For the Year Ended December 31,
----------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Total loans outstanding at end of period $445,622 $400,247 $401,453 $358,883 $327,176
Average loans outstanding 384,990 361,548 366,246 341,112 295,404
Allowance for loan losses, beginning of
period 1,456 1,813 1,590 1,344 1,346
Provision for loan losses 45 375 500 628 --
---------- ---------- ---------- ---------- ----------
Charge-offs:
One- to four-family residential 16 -- -- -- --
Commercial real estate and
multi-family residential -- 671 298 -- --
Construction -- -- -- -- --
Commercial business -- -- -- 413 --
Home equity lines of credit 99 -- -- -- --
Consumer non-real estate 32 89 -- 2 2
---------- ---------- ---------- ---------- ----------
Total charge-offs 147 760 298 415 2
---------- ---------- ---------- ---------- ----------
Recoveries on loans previously charged off 59 28 21 33 --
---------- ---------- ---------- ---------- ----------
Allowance for loan losses, end of period $ 1,413 $ 1,456 $ 1,813 $ 1,590 $ 1,344
========== ========== ========== ========== ==========
Allowance for loan losses as a percent
of non-performing loans 622.47% 315.15% 145.04% 111.50% 175.00%
========== ========== ========== ========== ==========
Ratio of net charge-offs during the
period to average loans outstanding
during the period 0.02% 0.21% 0.08% 0.12% 0.00%
========== ========== ========== ========== ==========
15
The following table shows how our allowance for loan losses is allocated by type
of loan at each of the dates indicated.
December 31,
----------------------------------------------------------------------
2004 2003 2002
---------------------- ---------------------- ----------------------
Loan Loan Loan
Category Category Category
Amount as a % Amount as a % Amount as a %
of of Total of of Total of of Total
Allowance Loans Allowance Loans Allowance Loans
----------- --------- ----------- --------- ----------- ---------
(Dollars in Thousands)
One- to four-family residential $ 657 54.69% $ 625 55.95% $ 694 61.70%
Commercial real estate and
multi-family residential 458 16.75 224 16.00 636 15.29
Construction 106 18.68 68 16.71 49 12.58
Home equity lines of credit 70 7.19 51 7.79 55 6.38
Commercial business 85 1.92 104 2.60 114 2.83
Consumer non-real estate 34 0.77 38 0.95 49 1.22
Unallocated 3 -- 346 -- 216 --
----------- --------- ----------- --------- ----------- ---------
Total $1,413 100.00% $1,456 100.00% $1,813 100.00%
=========== ========= =========== ========= =========== =========
December 31,
----------------------------------------------
2001 2000
---------------------- ----------------------
Loan Loan
Category Category
Amount as a % Amount as a %
of of Total of of Total
Allowance Loans Allowance Loans
----------- --------- ----------- ---------
(Dollars in Thousands)
One- to four-family residential $ 856 74.41% $ 889 76.49%
Commercial real estate and
multi-family residential 505 13.10 93 10.35
Construction 16 4.10 19 5.38
Home equity lines of credit 52 5.30 35 4.92
Commercial business 81 2.25 66 2.01
Consumer non-real estate 30 0.84 28 0.85
Unallocated 50 -- 214 --
----------- --------- ----------- ---------
Total $1,590 100.00% $1,344 100.00%
=========== ========= =========== =========
The allowance consists of specific, general and unallocated components. The
specific component relates to loans that are classified as either doubtful,
substandard or special mention. The general component covers non-classified
loans and is based on historical loss experience adjusted for qualitative
factors. An unallocated component is maintained to cover uncertainties that
could affect management's estimate of probable losses. The unallocated component
of the allowance reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating specific and general losses
in the portfolio.
16
INVESTMENT ACTIVITIES
GENERAL. We invest in securities pursuant to our Investment Policy, which has
been approved by our board of directors. The Investment Policy designates our
President and three Senior Vice Presidents as the Investment Committee. The
Investment Committee is authorized by the board to make the bank's investments
consistent with the Investment Policy. The board of directors of Abington Bank
reviews all investment activity on a monthly basis.
Our investment policy is designed primarily to manage the interest rate
sensitivity of our assets and liabilities, to generate a favorable return
without incurring undue interest rate and credit risk, to complement our lending
activities and to provide and maintain liquidity. We also use a leveraged
investment strategy for the purpose of enhancing returns. Pursuant to this
strategy, we have utilized borrowings from the Federal Home Loan Bank of
Pittsburgh ("FHLB") to purchase additional investment securities. We attempt to
match the advances with the securities purchased in order to obtain a favorable
difference, or "spread," between the interest paid on the advance against the
yield received on the security purchased.
At December 31, 2004, our investment and mortgage-backed securities amounted to
$251.1 million in the aggregate or 35.0% of total assets at such date. The
largest component of our securities portfolio in recent periods has been
mortgage-backed securities, which amounted to $164.7 million or 65.6% of the
securities portfolio at December 31, 2004. In addition, we invest in U.S.
government and agency obligations, municipal securities, corporate debt
obligations and other securities. The majority of our agency debt securities
have call provisions which provide the agency with the ability to call the
securities at specified dates.
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, our securities
are classified as available for sale, held to maturity, or trading, at the time
of acquisition. Securities classified as held to maturity must be purchased with
the intent and ability to hold that security until its final maturity and can be
sold prior to maturity only under rare circumstances. Held to maturity
securities are accounted for based upon the amortized cost of the security.
Available for sale securities can be sold at any time based upon needs or market
conditions. Available for sale securities are accounted for at fair value, with
unrealized gains and losses on these securities, net of income tax provisions,
reflected in retained earnings as accumulated other comprehensive income. At
December 31, 2004, we had $159.2 million of securities classified as available
for sale, $91.9 million of securities classified as held to maturity and no
securities classified as trading account.
We do not purchase mortgage-backed derivative instruments that would be
characterized "high-risk" under Federal banking regulations at the time of
purchase, nor do we purchase corporate obligations which are not rated
investment grade or better.
Our mortgage-backed securities consist primarily of mortgage pass-through
certificates issued by the Government National Mortgage Association ("GNMA" or
"Ginnie Mae"), Fannie Mae or Freddie Mac. Our mortgage-backed securities also
include collateralized mortgage obligations ("CMOs") issued by such agencies. At
December 31, 2004, $33.8 million of our mortgage-backed securities were CMOs. At
December 31, 2004, all of our mortgage-backed securities were issued by the
GNMA, FNMA or FHLMC and we had no mortgage-backed securities issued by private
issuers.
Investments in mortgage-backed securities involve a risk that actual prepayments
will be greater than estimated prepayments over the life of the security, which
may require adjustments to the amortization of any premium or accretion of any
discount relating to such instruments thereby changing the net yield on
17
such securities. There is also reinvestment risk associated with the cash flows
from such securities or in the event such securities are redeemed by the issuer.
In addition, the market value of such securities may be adversely affected by
changes in interest rates.
Ginnie Mae is a government agency within the Department of Housing and Urban
Development which was created to help finance government-assisted housing
programs. Ginnie Mae securities are backed by loans insured by the Federal
Housing Administration or guaranteed by the Veterans Administration. The timely
payment of principal and interest on Ginnie Mae securities is guaranteed by
Ginnie Mae and backed by the full faith and credit of the U.S. Government.
Freddie Mac is a private corporation chartered by the U.S. Government. Freddie
Mac issues participation certificates backed principally by conventional
mortgage loans. Freddie Mac guarantees the timely payment of interest and the
ultimate return of principal on participation certificates. Fannie Mae is a
private corporation chartered by the U.S. Congress with a mandate to establish a
secondary market for mortgage loans. Fannie Mae guarantees the timely payment of
principal and interest on Fannie Mae securities. Freddie Mac and Fannie Mae
securities are not backed by the full faith and credit of the U.S. Government,
but because Freddie Mac and Fannie Mae are U.S. Government-sponsored
enterprises, these securities are considered to be among the highest quality
investments with minimal credit risks.
Collateralized mortgage obligations are typically issued by a special-purpose
entity, in our case, of government agencies, which may be organized in a variety
of legal forms, such as a trust, a corporation, or a partnership. Substantially
all of the collateralized mortgage obligations held in our portfolio consist of
senior sequential tranches. By purchasing senior sequential tranches, management
attempts to ensure the cash flow associated with such an investment.
The following table sets forth certain information relating to our investment
and mortgage-backed securities portfolios and our investment in FHLB stock at
the dates indicated.
December 31,
-------------------------------------------------------------------
2004 2003 2002
--------------------- --------------------- ---------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- --------- --------- --------- --------- ---------
(Dollars in Thousands)
Mortgage-backed securities $165,005 $164,350 $120,917 $121,104 $49,904 $51,438
U.S. government and agency
obligations 71,489 70,393 72,988 72,429 35,197 35,721
Corporate securities 1,000 1,012 1,501 1,538 2,399 2,411
Municipal obligations 10,400 10,520 180 189 180 191
Investment certificates of deposit 1,282 1,282 1,579 1,579 1,777 1,777
Mutual funds 3,395 3,292 3,330 3,250 3,270 3,218
FHLB stock 10,450 10,450 10,039 10,039 7,033 7,033
Other 3 1 3 1 3 1
--------- --------- --------- --------- --------- ---------
Total investment and
mortgage-backed securities $263,024 $261,300 $210,537 $210,129 $99,763 $101,790
========= ========= ========= ========= ========= =========
18
The following table sets forth the amount of investment securities which mature
during each of the periods indicated and the weighted average yields for each
range of maturities at December 31, 2004. No tax-exempt yields have been
adjusted to a tax-equivalent basis.
Amounts at December 31, 2004 Which Mature In
----------------------------------------------------------------------------------------------
Over One
Weighted Year Weighted Over Five Weighted Over Weighted
One Year Average Through Average Through Average Ten Average
or Less Yield Five Years Yield Ten Years Yield Years Yield
--------- --------- ------------ --------- --------- --------- --------- ---------
(Dollars in Thousands)
Bonds and other debt securities:
U.S. government and agency
obligations $ 500 7.13% $ 58,000 2.79% $10,990 3.91% $ 2,000 6.50%
Corporate securities -- -- 1,000 5.19 -- -- -- --
Municipal obligations -- -- 180 3.90 -- -- 10,220 4.31
Mortgage-backed securities -- -- 27,175 3.64 21,047 3.84 116,781 4.63
Investment certificates of
deposit 783 3.40 500 3.94 -- -- -- --
--------- ------------ --------- ---------
Total $ 1,283 4.85% $ 86,855 3.09% $32,037 3.86% $129,001 4.63%
========= ============ ========= =========
SOURCES OF FUNDS
GENERAL. Deposits, loan repayments and prepayments, proceeds from sales of
loans, cash flows generated from operations and Federal Home Loan Bank advances
are the primary sources of our funds for use in lending, investing and for other
general purposes.
DEPOSITS. We offer a variety of deposit accounts with a range of interest rates
and terms. Our deposits consist of checking, both interest-bearing and
non-interest-bearing, money market, savings and certificate of deposit accounts.
At December 31, 2004, 54.9% of the funds deposited with Abington Bank were in
core deposits, which are deposits other than certificates of deposit.
The flow of deposits is influenced significantly by general economic conditions,
changes in money market rates, prevailing interest rates and competition. Our
deposits are obtained predominantly from the areas where its branch offices are
located. We have historically relied primarily on customer service and
long-standing relationships with customers to attract and retain these deposits;
however, market interest rates and rates offered by competing financial
institutions significantly affect our ability to attract and retain deposits.
Abington Bank uses traditional means of advertising its deposit products,
including broadcast and print media and generally does not solicit deposits from
outside its market area. In recent years, we have emphasized the origination of
core deposits. This strategy has resulted in a significant increase in core
deposits, particularly checking accounts, as well as increased fee income and
new customer relationships.
We do not actively solicit certificate accounts in excess of $100,000, known as
"jumbo CDs," or use brokers to obtain deposits. Our jumbo CDs amounted to $64.9
million and $58.1 million, respectively, at December 31, 2004 and 2003, of which
$25.0 million and $29.3 million, respectively, were scheduled to mature in 12
months. At December 31, 2004, the weighted average remaining maturity of our
certificate of deposit accounts was 23.0 months.
19
The following table shows the distribution of, and certain other information
relating to, our deposits by type of deposit, as of the dates indicated.
December 31,
-------------------------------------------------------------------------
2004 2003 2002
----------------------- ----------------------- -----------------------
Amount % Amount % Amount %
---------- ------------ ---------- ------------ ---------- ------------
(Dollars in Thousands)
Certificate accounts:
1.00% - 1.99% $32,923 8.12% $52,112 14.37% $10,528 3.06%
2.00% - 2.99% 38,636 9.53 29,555 8.15 58,405 16.96
3.00% - 3.99% 60,106 14.83 28,871 7.96 36,478 10.59
4.00% - 4.99% 19,691 4.86 16,005 8.16 17,179 10.05
5.00% - 5.99% 29,078 7.18 34,289 9.45 39,180 11.38
6.00% - 6.99% 2,337 0.58 5,681 1.57 11,393 3.31
7.00% or more -- -- -- -- 305 0.09
---------- ------------ ---------- ------------ ---------- ------------
Total certificate accounts 182,771 45.10 166,513 45.91 173,468 50.38
---------- ------------ ---------- ------------ ---------- ------------
Transaction accounts:
Savings and money market 125,204 30.89 107,565 29.66 95,341 27.69
Checking:
Interest bearing 59,719 14.73 50,733 13.99 45,562 13.23
Non-interest bearing 37,596 9.28 37,855 10.44 29,965 8.70
---------- ------------ ---------- ------------ ---------- ------------
Total transaction accounts 222,519 54.90 196,153 54.09 170,868 49.62
---------- ------------ ---------- ------------ ---------- ------------
Total deposits $405,290 100.00% $362,666 100.00% $344,336 100.00%
========== ============ ========== ============ ========== ============
The following table shows the average balance of each type of deposit and the
average rate paid on each type of deposit for the periods indicated.
Year Ended December 31,
--------------------------------------------------------------------------------------------------
2004 2003 2002
-------------------------------- -------------------------------- --------------------------------
Average Interest Average Average Interest Average Average Interest Average
Balance Expense Rate Paid Balance Expense Rate Paid Balance Expense Rate Paid
--------- --------- ----------- --------- --------- ----------- --------- --------- -----------
(Dollars in Thousands)
Savings and money market $120,748 $ 1,065 0.88% $107,291 $ 1,068 1.00% $ 89,659 $ 1,524 1.70%
Checking 52,804 44 0.08 46,433 51 0.11 42,632 58 0.14
Certificates of deposit 175,492 5,452 3.11 169,058 5,703 3.37 164,089 6,631 4.04
--------- --------- --------- --------- --------- ---------
Total interest-bearing
deposits 349,044 6,561 1.88 322,782 6,822 2.11 296,380 8,213 2.77
========= ========= =========== ========= ========= =========== ========= ========= ===========
Total deposits $394,905 $ 6,561 1.66% $359,230 $ 6,822 1.90% $325,315 $ 8,213 2.52%
========= ========= =========== ========= ========= =========== ========= ========= ===========
The following table shows our savings flows during the periods indicated.
Year Ended December 31,
----------------------------------
2004 2003 2002
---------- ---------- ----------
(In Thousands)
Total deposits $3,387,865 $3,016,200 $2,482,245
Total withdrawals 3,351,887 3,004,934 2,455,580
Interest credited $ 6,646 $ 7,064 8,612
---------- ---------- ----------
Total increase in deposits 42,624 18,330 $ 35,277
========== ========== ==========
20
The following table presents, by various interest rate categories and
maturities, the amount of our certificates of deposit at December 31, 2004.
Balance at December 31, 2004
Maturing in the 12 Months Ending December 31,
-------------------------------------------------------------
Certificates of Deposit 2005 2006 2007 Thereafter Total
- -------------------------- -------- -------- -------- ---------- ---------
(In Thousands)
Less than 2.00% $32,852 $ 70 $ -- $ -- $32,922
2.00% - 2.99% 24,659 11,480 887 1,610 38,636
3.00% - 3.99% 14,929 29,686 8,396 7,096 60,107
4.00% - 4.99% 398 2,158 4,582 12,554 19,692
5.00% - 5.99% 677 3,559 23,619 1,223 29,078
6.00% or more 961 437 479 459 2,336
-------- -------- -------- ---------- ---------
Total certificate accounts $74,476 $47,390 $37,963 $22,942 $182,771
======== ======== ======== ========== =========
The following table shows the maturities of our certificates of deposit of
$100,000 or more at December 31, 2004, by time remaining to maturity.
At December 31, 2004
- -----------------------------------------------------------------------------
Weighted
Quarter Ending: Amount Average Rate
- ------------------------------------------ ------------ ----------------
(Dollars in Thousands)
March 31, 2005 $ 5,621 1.70%
June 30, 2005 2,710 2.08
September 30, 2005 13,232 3.50
December 31, 2005 3,420 2.55
After December 31, 2005 39,941 4.41
------------
Total certificates of deposit with
balances of $100,000 or more $64,924 3.79%
============ ================
BORROWINGS. We utilize advances from the Federal Home Loan Bank of Pittsburgh as
an alternative to retail deposits to fund our operations as part of our
operating strategy. These FHLB advances are collateralized primarily by certain
of our mortgage loans and mortgage-backed securities and secondarily by our
investment in capital stock of the Federal Home Loan Bank of Pittsburgh. FHLB
advances are made pursuant to several different credit programs, each of which
has its own interest rate and range of maturities. The maximum amount that the
Federal Home Loan Bank of Pittsburgh will advance to member institutions,
including Abington Bank, fluctuates from time to time in accordance with the
policies of the Federal Home Loan Bank. At December 31, 2004, we had $170.7
million in outstanding FHLB advances and $246.3 million of additional FHLB
advances available. At such date all of our FHLB advances had maturities of more
than one year and fixed rates of interest. Approximately $92.2 million of our
FHLB advances at December 31, 2004 were part of our matched funding program
whereby we use such advances to purchase securities. Our current policy permits
us to utilize up to $100.0 million of advances to match-fund securities. It is
likely that we will increase such limit to permit moderately increased
utilization of FHLB advances.
21
In addition to FHLB advances, our borrowings include securities sold under
agreements to repurchase (repurchase agreements). Repurchase agreements are
contracts for the sale of securities owned or borrowed by Abington Bank, with an
agreement to repurchase those securities at an agreed upon price and date. We
use repurchase agreements as an investment vehicle for our commercial sweep
checking product. We enter into securities repurchase agreements with our
commercial checking account customers under a sweep account arrangement. Account
balances are swept on a daily basis into mortgage-backed securities purchases
from us, which we agree to repurchase as the checking account is drawn upon by
the customer. At December 31, 2004, our securities repurchase agreements
amounted to $12.9 million and all of such borrowings were short-term, having
maturities of one year or less. The average balance of our securities sold under
repurchase agreements for the year ended December 31, 2004 was $17.7 million.
The following table shows certain information regarding our borrowings at or for
the dates indicated:
At or For the Year
Ended December 31,
------------------------------------
2004 2003 2002
-------- -------- --------
(Dollars in Thousands)
FHLB advances:
Average balance outstanding $169,699 $148,090 $116,689
Maximum amount outstanding at any
month-end during the period 185,588 173,732 123,581
Balance outstanding at end of
period 170,666 173,732 122,761
Average interest rate during the
period 4.357% 4.673% 5.142%
Weighted average interest rate at
end of period 4.422% 4.180% 5.049%
Other borrowed money:
Average balance outstanding $17,703 $15,241 $10,304
Maximum amount outstanding at any
month-end during the period 27,686 21,722 14,273
Balance outstanding at end of
period 12,866 8,681 11,937
Average interest rate during the
period 0.817% 0.612% 1.048%
Weighted average interest rate at
end of period 1.785% 0.516% 0.716%
At December 31, 2004, $23.1 million of our borrowings were short-term
(maturities of one year or less). Such short-term borrowings had a weighted
average interest rate of 3.62% at December 31, 2004.
EMPLOYEES
At December 31, 2004, we had 98 full-time employees, and 19 part-time employees.
None of such employees are represented by a collective bargaining group, and we
believe that our relationship with our employees is excellent.
SUPERVISION AND REGULATION
GENERAL
Abington Bank as a Pennsylvania-chartered savings bank with deposits insured by
the Savings Association Insurance Fund administered by the Federal Deposit
Insurance Corporation, is subject to extensive regulation and examination by the
Pennsylvania Department of Banking and by the Federal Deposit Insurance
Corporation. The federal and state laws and regulations applicable to banks
regulate, among other things, the scope of their business, their investments,
the reserves required to be kept against deposits, the timing of the
availability of deposited funds and the nature and amount of and collateral for
certain loans. This regulatory structure also gives the federal and state
banking agencies extensive
22
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. The laws and regulations governing Abington Bank generally have been
promulgated to protect depositors and not for the purpose of protecting
shareholders.
Federal law provides the federal banking regulators, including the Federal
Deposit Insurance Corporation and the Federal Reserve Board, with substantial
enforcement powers. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders, and to initiate injunctive actions against banking organizations and
institution-affiliated parties, as defined. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with
regulatory authorities. Any change in such regulation, whether by the
Pennsylvania Department of Banking, the Federal Deposit Insurance Corporation,
the Federal Reserve Board or the United States Congress, could have a material
impact on us and our operations.
Abington Community Bancorp and Abington Mutual Holding Company are registered as
bank holding companies under the Bank Holding Company Act and Abington Community
Bancorp and Abington Mutual Holding Company are subject to regulation and
supervision by the Federal Reserve Board and by the Pennsylvania Department of
Banking. Abington Community Bancorp and Abington Mutual Holding Company are also
be required to file annually a report of its operations with, and are subject to
examination by, the Federal Reserve Board and the Pennsylvania Department of
Banking. This regulation and oversight is generally intended to ensure that
Abington Community Bancorp and Abington Mutual Holding Company limit their
activities to those allowed by law and that they operate in a safe and sound
manner without endangering the financial health of Abington Bank.
REGULATION OF ABINGTON COMMUNITY BANCORP AND ABINGTON MUTUAL HOLDING COMPANY
BANK HOLDING COMPANY ACT ACTIVITIES AND OTHER LIMITATIONS. Under the Bank
Holding Company Act, Abington Community Bancorp and Abington Mutual Holding
Company must obtain the prior approval of the Federal Reserve Board before they
may acquire control of another bank or bank holding company, merge or
consolidate with another bank holding company, acquire all or substantially all
of the assets of another bank or bank holding company, or acquire direct or
indirect ownership or control of any voting shares of any bank or bank holding
company if, after such acquisition, Abington Community Bancorp and Abington
Mutual Holding Company would directly or indirectly own or control more than 5%
of such shares.
Federal statutes impose restrictions on the ability of a bank holding company
and its nonbank subsidiaries to obtain extensions of credit from its subsidiary
bank, on the subsidiary bank's investments in the stock or securities of the
holding company, and on the subsidiary bank's taking of the holding company's
stock or securities as collateral for loans to any borrower. A bank holding
company and its subsidiaries are also prevented from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property, or furnishing of services by the subsidiary bank.
A bank holding company is required to serve as a source of financial and
managerial strength to its subsidiary banks and may not conduct its operations
in an unsafe or unsound manner. In addition, it is the policy of the Federal
Reserve Board that a bank holding company should stand ready to use available
resources to provide adequate capital to its subsidiary banks during periods of
financial stress or adversity and should maintain the financial flexibility and
capital-raising capacity to obtain additional resources for assisting its
subsidiary banks. A bank holding company's failure to meet its obligations to
serve as a
23
source of strength to its subsidiary banks will generally be considered by the
Federal Reserve Board to be an unsafe and unsound banking practice or a
violation of the Federal Reserve Board regulations, or both.
Non-Banking Activities. The business activities of Abington Community Bancorp
and Abington Mutual Holding Company, as bank holding companies, will be
restricted by the Bank Holding Company Act. Under the Bank Holding Company Act
and the Federal Reserve Board's bank holding company regulations, bank holding
companies may only engage in, or acquire or control voting securities or assets
of a company engaged in:
o banking or managing or controlling banks and other subsidiaries
authorized under the Bank Holding Company Act; and
o any Bank Holding Company Act activity the Federal Reserve Board
has determined to be so closely related that it is incidental to
banking or managing or controlling banks.
The Federal Reserve Board has by regulation determined that certain activities
are closely related to banking including operating a mortgage company, finance
company, credit card company, factoring company, trust company or savings
association; performing certain data processing operations; providing limited
securities brokerage services; acting as an investment or financial advisor;
acting as an insurance agent for certain types of credit-related insurance;
leasing personal property on a full-payout, non-operating basis; providing tax
planning and preparation services; operating a collection agency; and providing
certain courier services. However, as discussed below, certain other activities
are permissible for a bank holding company that becomes a financial holding
company.
FINANCIAL MODERNIZATION. The Gramm-Leach-Bliley Act permits greater affiliation
among banks, securities firms, insurance companies, and other companies under a
new type of financial services company known as a "financial holding company." A
financial holding company essentially is a bank holding company with
significantly expanded powers. Financial holding companies are authorized by
statute to engage in a number of financial activities previously impermissible
for bank holding companies, including securities underwriting, dealing and
market making; sponsoring mutual funds and investment companies; insurance
underwriting and agency; and merchant banking activities. The Gramm-Leach-Bliley
Act also permits the Federal Reserve Board and the Treasury Department to
authorize additional activities for financial holding companies if they are
"financial in nature" or "incidental" to financial activities. A bank holding
company may become a financial holding company if each of its subsidiary banks
is well capitalized, well managed, and has at least a "satisfactory" Community
Reinvestment Act rating. A financial holding company must provide notice to the
Federal Reserve Board within 30 days after commencing activities previously
determined by statute or by the Federal Reserve Board and Department of the
Treasury to be permissible. Abington Community Bancorp and Abington Mutual
Holding Company have not submitted notices to the Federal Reserve Board of their
intent to be deemed financial holding companies. However, they are not precluded
from submitting a notice in the future should they wish to engage in activities
only permitted to financial holding companies.
REGULATORY CAPITAL REQUIREMENTS. The Federal Reserve Board has adopted capital
adequacy guidelines pursuant to which it assesses the adequacy of capital in
examining and supervising a bank holding company and in analyzing applications
to it under the Bank Holding Company Act. The Federal Reserve Board's capital
adequacy guidelines for Abington Community Bancorp, on a consolidated basis, are
similar to those imposed on Abington Bank by the Federal Deposit Insurance
Corporation. See "-Regulation of Abington Bank - Regulatory Capital
Requirements." At December 31, 2004, Abington Community Bancorp met all
applicable regulatory capital requirements.
24
RESTRICTIONS ON DIVIDENDS. Abington Community Bancorp's ability to declare and
pay dividends may depend in part on dividends received from Abington Bank. The
Pennsylvania Banking Code regulates the distribution of dividends by savings
banks and states, in part, that dividends may be declared and paid out of
accumulated net earnings, provided that the bank continues to meet its surplus
requirements. In addition, dividends may not be declared or paid if Abington
Bank is in default in payment of any assessment due the Federal Deposit
Insurance Corporation.
A Federal Reserve Board policy statement on the payment of cash dividends states
that a bank holding company should pay cash dividends only to the extent that
the holding company's net income for the past year is sufficient to cover both
the cash dividends and a rate of earnings retention that is consistent with the
holding company's capital needs, asset quality and overall financial condition.
The Federal Reserve Board also indicated that it would be inappropriate for a
company experiencing serious financial problems to borrow funds to pay
dividends. Furthermore, under the federal prompt corrective action regulations,
the Federal Reserve Board may prohibit a bank holding company from paying any
dividends if the holding company's bank subsidiary is classified as
"undercapitalized." See "-Regulation of Abington Bank - Prompt Corrective
Action," below.
SARBANES-OXLEY ACT OF 2002. On July 30, 2002, the President signed into law the
Sarbanes-Oxley Act of 2002 implementing legislative reforms intended to address
corporate and accounting fraud. In addition to the establishment of a new
accounting oversight board which is empowered to enforce auditing, quality
control and independence standards, the Sarbanes-Oxley Act restricts provision
of both auditing and consulting services by accounting firms. To ensure auditor
independence, any non-audit services being provided to an audit client require
pre-approval by the company's audit committee members. In addition, the audit
partners must be rotated. The Sarbanes-Oxley Act requires chief executive
officers and chief financial officers, or their equivalent, to certify to the
accuracy of periodic reports filed with the SEC, subject to civil and criminal
penalties if they knowingly or willfully violate this certification requirement.
In addition, under the Sarbanes-Oxley Act, attorneys are required to report
evidence of a material violation of the securities laws or a breach of fiduciary
duty by a company to its chief executive officer or its chief legal officer,
and, if such officer does not appropriately respond, to report such evidence to
the audit committee or other similar committee of the board of directors or the
board itself.
Longer prison terms were legislated for corporate executives who violate federal
securities laws, the period during which certain types of suits can be brought
against a company or its officers has been extended, and bonuses issued to top
executives prior to restatement of a company's financial statements are now
subject to disgorgement if such restatement was due to corporate misconduct.
Executives are also prohibited from insider trading during retirement plan
"blackout" periods, and loans to company executives are restricted. In addition,
a provision directs that civil penalties levied by the SEC as a result of any
judicial or administrative action under the Sarbanes-Oxley Act be deposited to a
fund for the benefit of harmed investors. The Federal Accounts for Investor
Restitution (FAIR) provision also requires the SEC to develop methods of
improving collection rates. The legislation accelerates the time frame for
disclosures by public companies for any material changes in their financial
condition or operations and certain other events. Directors and executive
officers must also provide information for most changes in ownership in a
company's securities within two business days of the change.
The Sarbanes-Oxley Act also increases the oversight of, and codifies certain
requirements relating to audit committees of public companies and how they
interact with the company's "registered public accounting firm" (RPAF). Audit
Committee members must be independent and are barred from accepting consulting,
advisory or other compensatory fees from the issuer. In addition, companies must
disclose whether at least one member of the committee is a "financial expert,"
as such term is defined by the SEC, and if not, why not. Under the
Sarbanes-Oxley Act, a RPAF is prohibited from performing statutorily mandated
audit services for a company if such company's chief executive officer, chief
25
financial officer, comptroller, chief accounting officer or any person serving
in equivalent positions has been employed by such firm and participated in the
audit of such company during the one-year period preceding the audit initiation
date. The Sarbanes-Oxley Act also prohibits any officer or director of a company
or any other person acting under their direction from taking any action to
fraudulently influence, coerce, manipulate or mislead any independent public or
certified accountant engaged in the audit of the company's financial statements
for the purpose of rendering the financial statement's materially misleading.
The Sarbanes-Oxley Act also will require inclusion of an internal control report
and assessment by management in the annual report to shareholders (which, in the
Company's case, is expected to be required for its fiscal year ending December
31, 2005). The Sarbanes-Oxley Act requires the RPAF that issues the audit report
to attest to and report on management's assessment of the company's internal
controls. In addition, the Sarbanes-Oxley Act requires that each financial
report required to be prepared in accordance with, or reconciled to, generally
accepted accounting principles and filed with the SEC reflect all material
correcting adjustments that are identified by a RPAF in accordance with
generally accepted accounting principles and the rules and regulations of the
SEC.
RESTRICTIONS APPLICABLE TO MUTUAL HOLDING COMPANIES. Under authority of Section
115.1 of the Pennsylvania Banking Code of 1965, as amended ("Banking Code"), and
a policy statement issued by the Pennsylvania Department of Banking, the
Department is authorized to approve the reorganization of a state chartered
savings bank to a mutual holding company, provided the savings bank has a CAMEL
composite rating of one or two under the Uniform Financial Institutions Rating
System. While regulations governing the formation of Pennsylvania-chartered
mutual holding companies have not been adopted, the policy statement and form of
application issued by the Department provide the means by which such
applications will be processed and approved.
Pursuant to Pennsylvania law, a mutual holding company may engage only in the
following activities:
o Investing in the stock of one or more financial institution
subsidiaries.
o Acquiring one or more additional financial institution
subsidiaries into a subsidiary of the holding company.
o Merging with or acquiring another holding company, one of whose
subsidiaries is a financial institution subsidiary.
o Investing in a corporation the capital stock of which is
available for purchase by a savings bank under federal law or
under the Pennsylvania Banking Code.
o Engaging in such activities as are permitted, by statute or
regulation, to a holding company of a federally chartered
insured mutual institution under federal law.
o Engaging in such other activities as may be permitted by the
Pennsylvania Department of Banking.
If a mutual holding company acquires or merges with another holding company, the
holding company acquired or the holding company resulting from such merger or
acquisition may only invest in assets and engage in activities listed above, and
has a period of two years to cease any non-conforming activities and divest of
any non-conforming investments.
26
The mutual holding company will be subject to such regulations as the
Pennsylvania Department of Banking may prescribe. No mutual holding company
regulations have been issued to date by the Department.
REGULATION OF ABINGTON BANK
PENNSYLVANIA SAVINGS BANK LAW. The Pennsylvania Banking Code contains detailed
provisions governing the organization, location of offices, rights and
responsibilities of directors, officers, and employees, as well as corporate
powers, savings and investment operations and other aspects of Abington Bank and
its affairs. The code delegates extensive rule-making power and administrative
discretion to the Pennsylvania Department of Banking so that the supervision and
regulation of state-chartered savings banks may be flexible and readily
responsive to changes in economic conditions and in savings and lending
practices.
The Pennsylvania Banking Code also provides that state-chartered savings banks
may engage in any activity permissible for a federal savings association,
subject to regulation by the Pennsylvania Department of Banking. The Federal
Deposit Insurance Act, however, will prohibit Abington Bank from making new
investments, loans, or becoming involved in activities as principal and equit