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| ABBC > SEC Filings for ABBC > Form 10-Q on 8-Aug-2008 | All Recent SEC Filings |
8-Aug-2008
Quarterly Report
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: statements of goals, intentions and expectations, statements regarding prospects and business strategy, statements regarding asset quality and market risk, and estimates of future costs, benefits and results.
These forward-looking statements are subject to significant risks, assumptions
and uncertainties, including, among other things, the 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) costs related to the expansion of our branch
network, (9) changes in the amount or character of our non-performing assets,
and (10) other economic, competitive, governmental, regulatory and technological
factors affecting our operations, pricing, products and services.
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. We have no obligation to update or revise any forward-looking statements to reflect any changed assumptions, any unanticipated events or any changes in the future.
Overview-The Company was formed by the Bank in connection with the Bank's second-step conversion and reorganization, completed on June 27, 2007. Previously, Abington Community Bancorp was the mid-tier holding company for the Bank, and Abington Mutual Holding Company owned approximately 57% of Abington Community Bancorp's outstanding stock. Upon completion of the second-step reorganization, Abington Community Bancorp, Inc. and Abington Mutual Holding Company ceased to exist and the Company became the holding company for the Bank. The Bank is now a wholly owned subsidiary of the Company.
The Company's results of operations are primarily dependent on the results of the Bank. The Bank's results of operations depend to a large extent on net interest income, which is the difference between the income earned on its loan and investment portfolios and the cost of funds, which is the interest paid on deposits and borrowings. Results of operations are also affected by our provisions for loan losses, service charges and other non-interest income and non-interest expense. Non-interest expense principally consists of salaries and employee benefits, office occupancy and equipment expense, professional services expense, data processing expense, advertising and promotions and other expense. Our results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially impact our financial condition and results of operations. The Bank is subject to regulation by the Federal Deposit Insurance Corporation ("FDIC") and the Pennsylvania Department of Banking. The Bank's executive offices and loan processing office are in Jenkintown, Pennsylvania, with eleven other full service branches and six limited service facilities located in Montgomery, Bucks and Delaware Counties, Pennsylvania. The Bank is principally engaged in the business of accepting customer deposits and investing these funds in loans, primarily residential mortgages.
We earned net income of $1.7 million for the quarter ended June 30, 2008, representing an increase of $338,000 or 24.0% over the comparable 2007 period. Basic and diluted earnings per share each increased to $0.08 for the quarter compared to $0.06 for each for the second quarter of 2007. Additionally, we earned net income of $3.7 million for the six months ended June 30, 2008, representing an increase of $794,000 or 27.6% over the comparable 2007 period. Basic and diluted earnings per share each increased to $0.16 for the first six months of 2008 compared to $0.12 for each for the first six months of 2007.
The increase reported in net income for the three-month and six-month periods was primarily driven by an increase in our net interest income. The increase in net interest income was partially offset by an impairment charge of approximately $331,000 taken at June 30, 2008 on our investment in a mortgage-backed securities based mutual fund and increases in our provisions for loan losses to $677,000 and $726,000, respectively, for the three and six months ended June 30, 2008
Net interest income was $7.5 million and $14.4 million for the three months and six months ended June 30, 2008, respectively, representing increases of 28.1% and 26.7%, respectively, over the comparable 2007 periods. The increases in our net interest income arose as increases in our interest income were augmented by decreases in our interest expense. Our average interest rate spread and net interest margin for the second quarter of 2008 increased to 2.22% and 2.92%, respectively, from 1.85% and 2.55%, respectively, for the second quarter of 2007. Our average interest rate spread and net interest margin for first six months of 2008 increased to 2.06% and 2.82%, respectively, from 1.87% and 2.52%, respectively, for the first six months of 2007.
Critical Accounting Policies, Judgments and Estimates-In reviewing and understanding financial information for Abington Bancorp, Inc., you are encouraged to read and understand the significant accounting policies used in preparing our consolidated financial statements. These policies are described in Note 1 of the notes to our unaudited consolidated financial statements. The accounting and financial reporting policies of Abington Bancorp, Inc. conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The preparation of the Company's consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Management evaluates these estimates and assumptions on an ongoing basis including those related to the allowance for loan losses and deferred income taxes. Management bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances. These form the bases for making judgments on the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Allowance for Loan Losses-The allowance for loan losses is increased by charges to income through the provision for loan losses and decreased by charge-offs (net of recoveries). The allowance is maintained at a level that management considers adequate to provide for losses based upon evaluation of the known and inherent risks in the loan portfolio. Management's periodic evaluation of the adequacy of the allowance is based on the Company's past loan loss experience, the volume and composition of lending conducted by the Company, adverse situations that may affect a borrower's ability to repay, the estimated value of any underlying collateral, current economic conditions and other factors affecting the known and inherent risk in the portfolio. This evaluation is inherently subjective as it requires material estimates including, among others, the amount and timing of expected future cash flows on impacted loans, exposure at default, value of collateral, and estimated losses on our commercial and residential loan portfolios. All of these estimates may be susceptible to significant change.
The allowance consists of specific allowances for impaired loans, a general allowance on all classified loans which are not impaired and a general allowance on the remainder of the portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.
We establish an allowance on certain impaired loans for the amount by which the discounted cash flows, observable market price or fair value of collateral, if the loan is collateral dependent, is lower than the carrying value of the loan. A loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. An insignificant delay or insignificant shortfall in amount of payments does not necessarily result in the loan being identified as impaired.
We establish a general valuation allowance on classified loans which are not impaired. We segregate these loans by category and assign allowance percentages to each category based on inherent losses associated with each type of lending and consideration that these loans, in the aggregate, represent an above-average credit risk and that more of these loans will prove to be uncollectible compared to loans in the general portfolio. The categories used by the Company include "Doubtful," "Substandard" and "Special Mention." Classification of a loan within such categories is based on identified weaknesses that increase the credit risk of the loan.
We establish a general allowance on non-classified loans to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem loans. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on our historical loss experience, delinquency trends, and management's evaluation of the collectibility of the loan portfolio.
The allowance is adjusted for significant factors that, in management's judgment, affect the collectibility of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary lending areas, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, loss experience in particular segments of the portfolio, duration of the current business cycle, and bank regulatory examination results. The applied loss factors are reevaluated each reporting period to ensure their relevance in the current economic environment.
While management uses the best information available to make loan loss allowance valuations, adjustments to the allowance may be necessary based on changes in economic and other conditions, changes in the composition of the loan portfolio or changes in accounting guidance. In times of economic slowdown, either regional or national, the risk inherent in the loan portfolio could increase resulting in the need for additional provisions to the allowance for loan losses in future periods. An increase could also be necessitated by an increase in the size of the loan portfolio or in any of its components even though the credit quality of the overall portfolio may be improving. Historically, our estimates of the allowance for loan losses have approximated actual losses incurred. In addition, the Pennsylvania Department of Banking and the FDIC, as an integral part of their examination processes, periodically review our allowance for loan losses. The Pennsylvania Department of Banking or the FDIC may require the recognition of adjustment to the allowance for loan losses based on their judgment of information available to them at the time of their examinations. To the extent that actual outcomes differ from management's estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods.
Fair Value Measurements-We use fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Investment and mortgage-backed securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans, real estate owned and certain other assets. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual assets.
Under SFAS No. 157, Fair Value Measurements, we group our assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:
· Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.
· Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
· Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company's own estimates of assumptions that market participants would use in pricing the asset.
Under SFAS No. 157, we base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy in SFAS No. 157. Fair value measurements for most of our assets are obtained from independent pricing services that we have engaged for this purpose. When available, we, or our independent pricing service, use quoted market prices to measure fair value. If market prices are not available, fair value measurement is based upon models that incorporate available trade, bid and other market information. Substantially all of our financial instruments use either of the foregoing methodologies to determine fair value adjustments recorded to our financial statements. In certain cases, however, when market observable inputs for model-based valuation techniques may not be readily available, we are required to make judgments about assumptions market participants would use in estimating the fair value of financial instruments.
The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments that trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value. When observable market prices and parameters are not fully available, management judgment is necessary to estimate fair value. In addition, changes in the market conditions may reduce the availability of quoted prices or observable data. When market data is not available, we use valuation techniques requiring more management judgment to estimate the appropriate fair value measurement. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, that could significantly affect the results of current or future valuations. At June 30, 2008, we did not have any assets that were measured at fair value on a recurring basis that use Level 3 measurements.
Other-Than-Temporary Impairment of Securities-Securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline and the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for an anticipated recovery in the fair value. The term "other-than-temporary" is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.
Income Taxes-Management makes estimates and judgments to calculate some of our tax liabilities and determine the recoverability of some of our deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenues and expenses. Management also estimates a reserve for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. These estimates and judgments are inherently subjective. Historically, our estimates and judgments to calculate our deferred tax accounts have not required significant revision from management's initial estimates.
In evaluating our ability to recover deferred tax assets, management considers all available positive and negative evidence, including our past operating results and our forecast of future taxable income. In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2008 AND DECEMBER 31, 2007
The Company's total assets increased $27.7 million, or 2.6%, to $1.11 billion at June 30, 2008 compared to $1.08 billion at December 31, 2007. Our total cash and cash equivalents decreased $14.1 million or 20.7% during the first half of 2008 as we redeployed certain of our interest-bearing deposits in other banks to purchase additional securities. Our mortgage-backed securities increased $46.4 million as purchases of $69.6 million outpaced repayments, maturities and sales aggregating $23.6 million. Our investment securities decreased $19.1 million in the aggregate due primarily to $40.4 million in calls, maturities and sales of agency bonds partially offset by $11.0 million in purchases of additional agency bonds and $11.1 million of municipal bonds. Net loans receivable increased $12.2 million or 1.8% during the first half of 2008. The largest loan growth occurred in one- to four-family residential loans, which increased $19.7 million, and construction loans, which increased $27.9 million. These increases were partially offset by decreases in all other categories of loans. Real estate owned ("REO") increased $1.3 million or 85.4% to $2.9 million at June 30, 2008 compared to $1.6 million at December 31, 2007. The majority of this increase occurred during the first quarter of 2008, when, as previously disclosed, we foreclosed on the collateral properties underlying three commercial real estate loans to one borrower with an aggregate balance of $977,000. The remainder of the increase in real estate owned was due to improvements made to existing REO properties. In July 2008, we entered into an agreement of sale with respect to the REO properties acquired in the first quarter. The closing of this sale is expected to occur before the end of the year and will result in a nominal gain on sale.
Our total deposits increased $31.6 million or 5.2% to $641.2 million at June 30, 2008 compared to $609.6 million at December 31, 2007. The increase during the first half of 2008 was due to growth in core deposits. During this period, our savings and money market accounts grew $23.6 million, or 24.7%, and our checking accounts grew $12.3 million, or 12.3%, resulting in an increase to core deposits of $35.8 million, or 18.4%. Our certificate accounts decreased $4.2 million or 1.0%. Advances from the Federal Home Loan Bank decreased $7.8 million to $181.8 million at June 30, 2008. Our other borrowed money, which is comprised of securities repurchase agreements entered into with certain commercial checking account customers, increased $3.7 million during the first half of 2008 to $21.1 million at June 30, 2008.
Our total stockholders' equity decreased to $247.6 million at June 30, 2008 from $249.9 million at December 31, 2007. The decrease was due primarily to the purchase of approximately 521,000 shares of the Company's common stock by the 2007 RRP trust for approximately $5.4 million in the aggregate, as part of the Company's previously announced plans to fund the 2007 Recognition and Retention Plan (the "2007 RRP"). Partially offsetting this decrease was a $1.4 million increase in retained earnings during the first half of 2008 as our net income of $3.7 million was partially offset by a reduction of $2.3 million resulting from the payment of our first and second quarter dividends.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funds are from deposits, amortization of loans, loan prepayments and pay-offs, mortgage-backed securities and other investments, and other funds provided from operations. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing investment securities are relatively predictable sources of funds, deposit flows and loan prepayments can be greatly influenced by general interest rates, economic conditions and competition. We also maintain excess funds in short-term, interest-bearing assets that provide additional liquidity. At June 30, 2008, our cash and cash equivalents amounted to $54.0 million. In addition, at such date we had $1.8 million in investment securities scheduled to mature within the next 12 months. Our available for sale investment and mortgage-backed securities amounted to an aggregate of $199.6 million at June 30, 2008.
We use our liquidity to fund existing and future loan commitments, to fund maturing certificates of deposit and demand deposit withdrawals, to invest in other interest-earning assets, and to meet operating expenses. At June 30, 2008, we had certificates of deposit maturing within the next 12 months amounting to $322.9 million. Based upon historical experience, we anticipate that a significant portion of the maturing certificates of deposit will be redeposited with us. For the six months ended June 30, 2008, and the year ended December 31, 2007, the average balance of our outstanding FHLB advances was $187.3 million and $183.4 million, respectively. At June 30, 2008, we had $181.8 million in outstanding FHLB advances and we had $417.0 million in additional FHLB advances available to us.
In addition to cash flow from loan and securities payments and prepayments as well as from sales of available for sale securities, we have significant borrowing capacity available to fund liquidity needs. We have increased our utilization of borrowings in recent years as an alternative to deposits as a source of funds. Our borrowings consist primarily of advances from the Federal Home Loan Bank of Pittsburgh, of which we are a member. Under terms of the collateral agreement with the Federal Home Loan Bank, we pledge substantially all of our residential mortgage loans and mortgage-backed securities as well as all of our stock in the Federal Home Loan Bank as collateral for such advances.
Our stockholders' equity amounted to $247.6 million at June 30, 2008, compared to stockholders' equity of $249.9 million at December 31, 2007. During 2007, we raised $134.7 million in net proceeds received from our second-step conversion and stock offering. Half of these net proceeds, approximately $67.3 million, were invested in Abington Bank.
The net proceeds received by the Bank have further strengthened its capital position, which already exceeded all regulatory requirements (see table below). While these proceeds were initially invested in short-term, liquid investments to earn a market rate of return, our long-term plan continues to be to leverage our capital through retail deposit and loan growth. Specifically, we plan to use the net proceeds received by the Bank to fund new loans, to invest in mortgage-backed securities, to finance the expansion of our business activities, including developing new branch locations and for general corporate purposes. Towards this goal, we have plans to open a new branch in Hatboro, Pennsylvania in the third quarter of 2008 after opening four new branches in 2007. Although these branches will require a period of time to generate sufficient revenues to offset their costs, our ongoing branch expansion is a key component of our long-term business strategy.
The net proceeds held by the Company are on deposit with the Bank. These proceeds have been used, in part, to pay quarterly dividends to our shareholders. The Company's quarterly dividend was increased to $0.045 per share in September 2007 and then to $0.05 per share in March 2008. In July 2008, we announced plans to utilize a portion of our capital to repurchase up to 5% of the outstanding shares of the Company, or 1,221,772 shares. The repurchase plan will benefit our shareholders by improving the Company's return on equity and earnings per share as well as aid us in managing our strong capital position. In the long term, these proceeds may also be used to invest in securities and to finance the possible acquisition of financial institutions or branch offices or other businesses that are related to banking. Although we currently have no plans, understandings or agreements with respect to any specific acquisitions, we are constantly considering potential opportunities to increase long-term shareholder value.
The following table summarizes regulatory capital ratios for the Bank as of the dates indicated and compares them to current regulatory requirements. As a . . .
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