Abington Community Bancorp, Inc.
GENERAL  Abington Community Bancorp, Inc. (the "Company") is a Pennsylvania corporation which was organized to be a mid-tier holding company for Abington Savings Bank. Abington Savings Bank is a Pennsylvania-chartered, FDIC-insured savings bank which conducts business under the name "Abington Bank" (the "Bank" or "Abington Bank"). The Bank is a wholly owned subsidiary of the Company. The Company's results of operations are primarily dependent on the results of the Bank and the Bank's wholly owned subsidiaries, ASB Investment Co., Keswick Services II and its wholly owned subsidiaries, and Abington Corp. As of December 31, 2005, the Company, on a consolidated basis, had total assets of $844.1 million, total deposits of $501.2 million, and total stockholders' equity of $117.2 million.  The Company was formed when the Bank reorganized from a mutual savings bank to a mutual holding company structure in December 2004. Abington Mutual Holding Company, a Pennsylvania corporation, is the mutual holding company parent of the Company. Abington Mutual Holding Company owns 55% of the Company's outstanding common stock and must continue to own at least a majority of the outstanding voting stock of the Company.  Abington Bank is a community-oriented savings bank, which was originally organized in 1867 and is headquartered in Jenkintown, Pennsylvania, approximately eight miles north of center city Philadelphia. Our banking office network currently consists of our headquarters and main office, seven other full-service branch offices and four limited service branch offices. In addition, we maintain a loan processing office in Jenkintown, Pennsylvania. Ten of our banking offices are located in Montgomery County, Pennsylvania and two are in neighboring Bucks County, Pennsylvania. Moreover, the Bank plans to open three additional branch offices in 2006 - one in Montgomery County and two in Bucks County. One of the Bucks County branch offices is expected to open in the second quarter of 2006 with the other new Bucks County branch office and the Montgomery County branch office following in the second half of 2006. Our limited service offices have limited hours of operation and/or are limited to serving customers who live or work in the community in which the limited service office is located. Three of our limited service offices are located in retirement or age restricted communities. We maintain ATMs at all of our banking offices and we also have two off-site ATMs, located at a local grocery store and a local college. We also provide on-line banking and telephone banking services.  We are primarily engaged in attracting deposits from the general public and using those funds to invest in loans and securities. Our principal sources of funds are deposits, repayments of loans and mortgage-backed securities, maturities of investments and interest-bearing deposits, funds provided from operations and funds borrowed from outside sources such as the Federal Home Loan Bank of Pittsburgh. These funds are primarily used for the origination of various loan types including single-family residential mortgage loans, construction loans, non-residential or commercial real estate mortgage loans, home equity loans, commercial business loans and consumer loans. We are an active originator of residential home mortgage loans and home construction loans in our market area. In addition to offering loans and deposits, we also offer securities and annuities to our customers through an affiliation with a third-party broker-dealer.    The Company's website address is WWW.ABINGTONBANK.COM. The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other documents filed by the Company with the Securities and Exchange Commission ("SEC") are available free of charge on the Company's website under the Investor Relations menu. Such documents are available on the Company's website as soon as reasonably practicable after they have been filed electronically with the SEC.  FORWARD LOOKING STATEMENTS  This document contains forward-looking statements, which can be identified by reference to a future period or periods or by the use of words such as "would be," "will," "estimate," "project," "believe," "intend," "anticipate," "plan," "seek," "expect" and similar expressions or the negative thereof. These forward-looking statements include:          o       statements of goals, intentions and expectations;          o       statements regarding prospects and business strategy;          o       statements regarding asset quality and market risk; and          o       estimates of future costs, benefits and results.  These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following: (1) general economic conditions, (2) competitive pressure among financial services companies, (3) changes in interest rates, (4) deposit flows, (5) loan demand, (6) changes in legislation or regulation, (7) changes in accounting principles, policies and guidelines, (8) litigation liabilities, including costs, expenses, settlements and judgments and (9) other economic, competitive, governmental, regulatory and technological factors affecting the Company's operations, pricing, products and services.  Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. We have no obligation to update or revise any forward-looking statements to reflect any changed assumptions, any unanticipated events or any changes in the future.  MARKET AREA AND COMPETITION  Our market area is located in Montgomery County and Bucks County, Pennsylvania, which are suburbs of Philadelphia. In addition, particularly with respect to commercial and construction lending, we also make loans in Philadelphia, Chester and Delaware Counties, Pennsylvania and contiguous counties in New Jersey and Delaware. This area is referred to as the Delaware Valley region.  We face significant competition in originating loans and attracting deposits. This competition stems primarily from commercial banks, other savings banks and savings associations and mortgage-banking companies. Within our market area, more than 50 other banks, savings institutions and credit unions are operating. Many of the financial service providers operating in our market area are significantly larger and have greater financial resources than us. We face additional competition for deposits from short-term money market funds and other corporate and government securities funds, mutual funds and from other non-depository financial institutions such as brokerage firms and insurance companies.                                         2   LENDING ACTIVITIES  GENERAL. At December 31, 2005, our net loan portfolio totaled $529.5 million or 62.7% of total assets. Historically, our principal lending activity has been the origination of loans collateralized by one- to four-family, also known as "single-family," residential real estate loans located in our market area. In addition, while we have been making construction loans to homebuilders and others for more than 30 years, we have increased our construction lending activities in recent years. We also have increased our emphasis on originating commercial real estate and multi-family (over four units) residential mortgage loans. We also originate home equity lines of credit, commercial business loans and consumer loans.  The types of loans that we may originate are subject to federal and state law and regulations. Interest rates charged by us on loans are affected principally by the demand for such loans and the supply of money available for lending purposes and the rates offered by our competitors. These factors are, in turn, affected by general and economic conditions, the monetary policy of the federal government, including the Federal Reserve Board, legislative tax policies and governmental budgetary matters.                                              3   LOAN PORTFOLIO COMPOSITION. The following table shows the composition of our loan portfolio by type of loan at the dates indicated.                                                                     December 31,                                    ------------------------------------------------------------------------                                             2005                     2004                     2003                                    ----------------------   ----------------------   ----------------------                                      Amount        %          Amount        %          Amount        %                                    ----------  ----------   ----------  ----------   ----------  ----------                                                             (Dollars in Thousands)        Real estate loans:   One- to four-family residential    $323,710      54.88%     $243,705      54.69%     $223,963      55.95%   Commercial real estate and     multi-family residential           76,647      12.99        74,642      16.75        64,029      16.00   Construction                        132,789      22.51        83,253      18.68        66,875      16.71   Home equity lines of credit          41,063       6.96        32,049       7.19        31,185       7.79                                    ----------  ----------   ----------  ----------   ----------  ----------       Total real estate loans         574,209      97.34       433,649      97.31       386,052      96.45                                    ----------  ----------   ----------  ----------   ----------  ---------- Commercial business loans              10,975       1.86         8,540       1.92        10,403       2.60 Consumer non-real estate loans          4,712       0.80         3,433       0.77         3,792       0.95                                    ----------  ----------   ----------  ----------   ----------  ----------       Total non-real estate loans      15,687       2.69        11,973       2.69        14,195       3.55                                    ----------  ----------   ----------  ----------   ----------  ----------       Total loans                     589,896     100.00%      445,622     100.00%      400,247     100.00%                                    ==========  ==========   ==========  ==========   ==========  ========== Less:   Undisbursed portion of     construction loans in process      57,690                   30,131                   32,699   Deferred loan fees                    1,264                    1,423                    1,472   Allowance for loan losses             1,455                    1,413                    1,456                                    ----------               ----------               ----------       Net loans                      $529,487                 $412,655                 $364,620                                    ==========               ==========               ==========  (Continued)                                                      December 31,                                    -----------------------------------------------                                             2002                     2001                                    ----------------------   ----------------------                                      Amount        %          Amount        %                                    ----------  ----------   ----------  ----------                                                 (Dollars in Thousands) Real estate loans:   One- to four-family residential    $247,159      61.70%     $267,044      74.41%   Commercial real estate and     multi-family residential           61,247      15.29        46,998      13.10   Construction                         50,401      12.58        14,715       4.10   Home equity lines of credit          25,571       6.38        19,021       5.30                                    ----------  ----------   ----------  ----------       Total real estate loans         384,378      95.95       347,778      96.91                                    ----------  ----------   ----------  ---------- Commercial business loans              11,353       2.83         8,092       2.25 Consumer non-real estate loans          4,877       1.22         3,013       0.84                                    ----------  ----------   ----------  ----------       Total non-real estate loans      16,230       4.05        11,105       3.09                                    ----------  ----------   ----------  ----------       Total loans                     400,608     100.00%      358,883     100.00%  Less:   Undisbursed portion of     construction loans in process      25,880                    6,510   Deferred loan fees                    1,891                    1,871   Allowance for loan losses             1,813                    1,590                                    ----------               ----------       Net loans                      $371,024                 $348,912                                    ==========               ==========                                           4   CONTRACTUAL TERMS TO FINAL MATURITIES. The following table shows the scheduled contractual maturities of our loans as of December 31, 2005, before giving effect to net items. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. The amounts shown below do not take into account loan prepayments.                                                       Commercial                                                   Real Estate                                       One- to         and                    Home Equity    Commercial                                     Four-Family   Multi-Family                 Lines of      Business                                     Residential    Residential Construction     Credit         Loans        Consumer       Total                                    ------------- ------------- ------------- ------------- ------------- ------------- -------------                                                                         (In Thousands)         Amounts due after December 31,   2005 in:   One year or less                     $ 3,535      $ 21,686     $ 47,872       $ 40,641     $  7,564       $   336      $121,634   After one year through two years      11,713         1,414       71,750            422          511           466        86,276   After two years through three     years                                3,153            67        8,800             --          512           518        13,050   After three years through five     years                                8,952         1,103        4,035             --        1,805         3,117        19,012   After five years through ten     years                               25,692         3,071          332             --          411           205        29,711   After ten years through fifteen     years                               96,699        10,707           --             --          172            70       107,648   After fifteen years                  173,966        38,599           --             --           --            --       212,565                                       --------      --------     --------       --------     --------      --------      --------     Total                             $323,710      $ 76,647     $132,789       $ 41,063     $ 10,975      $  4,712      $589,896                                       ========      ========     ========       ========     ========      ========      ========   The following table shows the amount of our loans at December 31, 2005, which are due after December 31, 2006, and indicates whether they have fixed-rates of interest or rates which are floating or adjustable.                                                               Floating or        Total at                                           Fixed-Rate     Adjustable-Rate  December 31, 2005                                       ----------------- ----------------- -----------------                                                           (In Thousands)     One- to four-family residential            $247,837          $ 72,338          $320,175 Commercial real estate and   multi-family residential                   36,975            17,986            54,961 Construction                                     --            84,917            84,917 Home equity lines of credit                   2,418               993             3,411 Commercial business loans                        --               422               422 Consumer non-real estate                      3,609               767             4,376                                            --------          --------          --------   Total                                    $290,839          $177,423          $468,262                                            ========          ========          ========   LOAN ORIGINATIONS. Our lending activities are subject to underwriting standards and loan origination procedures established by our board of directors and management. Loan originations are obtained through a variety of sources, primarily existing customers as well as new customers obtained from referrals and local advertising and promotional efforts. In addition, our commercial and construction loan officers actively solicit new loans throughout our market area. Single-family residential mortgage loan applications and consumer loan applications are taken at any of Abington Bank's banking offices. Beginning in November 2005, we also began taking single-family residential mortgage loan applications and consumer loan applications on-line. Applications for other loans typically are taken personally by our commercial or construction lending officers, although they may be received by a branch office initially and then referred to a construction or commercial lender. All loan applications are processed and underwritten centrally at our loan processing office and main office in Jenkintown, Pennsylvania.  Our single-family residential mortgage loans are written on standardized documents used by the Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac") and Federal National Mortgage Association ("FNMA" or "Fannie Mae"). We also utilize automated loan processing and underwriting software systems developed by Freddie Mac for our new single-family residential mortgage loans. Property valuations of loans secured by real estate are undertaken by our in-house appraiser or by an independent third-party appraiser approved by our board of directors.                                         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 year ended December 31, 2003 we sold $2.6 million of newly originated single-family residential mortgage loans with servicing retained. There were no sales during 2005 or 2004, and we have discontinued such loans sales, but, depending on market conditions, may again consider such sales in the future. In addition, we have sold participation interests in loans originated by us to other institutions. When we have sold participation interests or whole loans, it generally has been done on the basis of very limited recourse. As of December 31, 2005, our total exposure to recourse arrangements with respect to our sales of whole loans and participation interests in loans was $185,000. We generally have sold participation interests in loans only when a loan would exceed our loans-to-one borrower limits. The Bank's loans-to-one borrower limit, with certain exceptions, generally is 15% of our unimpaired capital and surplus, or $12.7 million at December 31, 2005.                                          6   The following table shows our total loans originated, purchased, sold and repaid during the periods indicated.                                                        Year Ended December 31,                                            ------------------------------------------                                                2005            2004         2003                                            -------------  ------------- -------------                                                         (In Thousands)           Loan originations:         One- to four-family residential      $ 100,321      $  64,593     $  92,143         Commercial real estate and            multi-family residential             30,734         23,996        14,301         Construction                            94,857         51,159        47,737         Home equity lines of credit             12,836         13,196        14,843         Commercial business                     14,729         11,607         5,700         Consumer non-real estate                   561          1,389         1,081                                              ---------      ---------     ---------       Total loan originations                  254,038        165,940       175,805                                              ---------      ---------     ---------       Loans purchased:         Whole loans                             11,508             --            --         Participation interests                 18,100         15,300         4,940                                              ---------      ---------     ---------            Total loans purchased                29,608         15,300         4,940                                              ---------      ---------     ---------       Loans sold:         Whole loans                                 --             --       (2,280)         Participation interests                (8,281)             --       (5,361)                                              ---------      ---------     ---------            Total loans sold                    (8,281)             --       (7,641)                                              ---------      ---------     ---------          Loan principal repayments           (131,091)      (135,866)     (181,746)                                              ---------      ---------     ---------       Total loans sold and principal         repayments                           (139,372)      (135,866)     (189,387)       Increase or (decrease) due to other         items, net (1)                        (27,442)          2,661         2,238                                              ---------      ---------     ---------       Net increase (decrease) in loan         portfolio                            $ 116,832      $  48,035     $ (6,404)                                              =========      =========     =========  - -------------------- (1)     Other items consist of loans in process, deferred fees and the allowance         for loan losses.  ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE LENDING. One of our primary lending activities continues to be the origination of loans secured by first mortgages on one- to four-family residences in our market area. At December 31, 2005, $323.7 million of our total loan portfolio consisted of single-family residential mortgage loans. Due primarily to increased mortgage loan prepayments due to refinance activity as a result of the low interest rate environment, as well as our increased emphasis on commercial real estate, construction and commercial business loans, the percentage of single-family residential mortgage loans in our portfolio has decreased from 74.4% at December 31, 2001 to 54.9% at December 31, 2005.  Our single-family residential mortgage loans generally are underwritten on terms and documentation conforming with guidelines issued by Freddie Mac and Fannie Mae. We utilize proprietary software developed by Freddie Mac in processing and underwriting our single-family residential mortgage loans. Applications for one- to four-family residential mortgage loans are accepted at any of our banking offices and are then referred to the Residential Lending Department at our main office and our Loan Processing Center in order to process the loan, which consists primarily of obtaining all documents required by Freddie Mac and Fannie Mae underwriting standards, and complete the underwriting, which includes making a determination whether the loan meets our underwriting standards such that the bank can extend a loan commitment to the customer. We generally have retained for our portfolio a substantial portion of the single-family residential mortgage loans that we originate. We service all loans that we have originated through our in-house loan servicing department. We currently originate fixed-rate, fully amortizing mortgage loans with maturities of 15, 20 or 30 years. We also currently offer adjustable rate mortgage ("ARM") loans. Due to local market conditions, we had not offered single-family ARM loans for more than 10 years through the end of 2004. However, we again began offering ARM loans in 2005. At December 31, 2005, only $2.5 million, or 0.8%, of our one- to four-family residential loan portfolio consisted of ARM loans.                                         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 $27.6 million at December 31, 2005. We offer fixed-rate home equity loans in amounts up to $200,000. Our home equity loans are fully amortizing and have terms to maturity of up to 15 years. While home equity loans also are secured by the borrower's residence, we generally obtain a second mortgage position on these loans. Our lending policy provides that our home equity loans have loan-to-value ratios, when combined with any first mortgage, of 90% or less, although the preponderance of our home equity loans have combined loan-to-value ratios of 80% or less. Our single-family residential mortgage loans also include some loans to local businessmen for a commercial purpose, but which are secured by liens on the borrower's residence.  COMMERCIAL REAL ESTATE AND MULTI-FAMILY RESIDENTIAL REAL ESTATE LOANS. At December 31, 2005, our commercial real estate and multi-family residential loans amounted to $76.6 million or 13.0% of our total loan portfolio. In recent years, we have increased our portfolio of commercial real estate and multi-family residential loans.  Our commercial real estate and residential multi-family real estate loan portfolio consists primarily of loans secured by office buildings, retail and industrial use buildings, strip shopping centers, residential properties with five or more units and other properties used for commercial and multi-family purposes located in our market area. Our commercial and multi-family real estate loans tend to be originated in an amount less than $3.0 million but will occasionally exceed that amount. We currently employ five commercial lenders who actively solicit commercial real estate and multi-family residential mortgage loans in our market area.  Although terms for commercial real estate and multi-family loans vary, our underwriting standards generally allow for terms up to 30 years with monthly amortization over the life of the loan and loan-to-value ratios of not more than 80%. Interest rates are either fixed or adjustable, based upon designated market indices such as the 5-year Treasury CMT plus a margin, and fees of up to 2.0% are charged to the borrower at the origination of the loan. Generally, we obtain personal guarantees of the principals as additional collateral for commercial real estate and multi-family real estate loans.  Commercial real estate and multi-family real estate lending involves different risks than single-family residential lending. These risks include larger loans to individual borrowers and loan payments that are dependent upon the successful operation of the project or the borrower's business. These risks can be affected by supply and demand conditions in the project's market area of rental housing units, office and retail space, warehouses, and other commercial space. We attempt to minimize these risks by limiting loans to proven businesses, only considering properties with existing operating performance which can be analyzed, using conservative debt coverage ratios in our underwriting, and periodically monitoring the operation of the business or project and the physical condition of the property. At December 31, 2005, 2004 and 2003, none of our commercial real estate and multi-family residential mortgage loans were either delinquent for more than 30 days or considered non-performing. No commercial real estate and                                         8   multi-family residential real estate loans were charged-off in 2005. We charged-off $99,000 and $671,000 in commercial real estate and multi-family residential real estate loans in the years ended December 31, 2004 and 2003, respectively.  Various aspects of a commercial and multi-family loan transactions are evaluated in an effort to mitigate the additional risk in these types of loans. In our underwriting procedures, consideration is given to the stability of the property's cash flow history, future operating projections, current and projected occupancy levels, location and physical condition. Generally, we impose a debt service ratio (the ratio of net cash flows from operations before the payment of debt service to debt service) of not less than 110% in the case of multi-family residential real estate loans and 120% in the case of commercial real estate loans. We also evaluate the credit and financial condition of the borrower, and if applicable, the guarantor. Appraisal reports prepared by independent appraisers or, in some cases, Abington Bank's staff appraiser are obtained on each loan to substantiate the property's market value, and are reviewed by us prior to the closing of the loan.  CONSTRUCTION LENDING. As part of our efforts to transition from a traditional thrift to a community bank, we have been an active originator of construction loans since the mid 1990s. We increased our construction loan efforts in 2002 when we hired a second construction loan officer. We targeted construction loans as a growth area for the Bank because they have shorter terms to maturity and they generally have floating or adjustable interest rates. We have focused our construction lending on making loans to homebuilders in the Delaware Valley area to acquire, develop and build single-family residences. Our construction loans include, to a lesser extent, loans for the construction of commercial and industrial use properties such as office buildings, retail shops and warehouses. At December 31, 2005, our construction loans amounted to $132.8 million, or 22.5% of our total loan portfolio. This amount includes $57.7 million of undisbursed loans in process. Our construction loan portfolio has grown appreciably over the past four years. At December 31, 2001, our construction loans amounted to $14.7 million, or 4.1% of our total loan portfolio.  A substantial amount of our construction loans are construction and development loans to contractors and builders primarily to finance the construction of single-family homes and subdivisions. Loans to finance the construction of single-family homes and subdivisions are generally offered to experienced builders in the Delaware Valley with whom we have an established relationship. Residential construction and development loans are typically offered with terms of up to 36 months. One or two six-month extensions may be provided for at our option. The maximum loan-to-value limit applicable to these loans is 80% of the appraised post construction value. We often establish interest reserves and obtain personal and/or corporate guarantees as additional security on our construction loans. Construction loan proceeds are disbursed periodically in increments as construction progresses and as inspection by our approved appraisers or loan inspectors warrants. Our construction loans are negotiated on an individual basis but typically have floating rates of interest based upon THE WALL STREET JOURNAL prime rate or, in some cases, LIBOR. Additional fees may be charged as funds are disbursed. In addition to interest payments during the term of the construction loan, we typically require that payments to principal be made as units are completed and released. Generally such principal payments must be equal to 110% of the amount attributable to acquisition and development of the lot plus 100% of the amount attributable to construction of the individual home. We permit a pre-determined number of model homes to be constructed on an unsold or "speculative" basis. All other units must be pre-sold before we will disburse funds for construction. Our construction loans also include loans to acquire and hold unimproved land, loans to acquire land and develop the basic infrastructure, such as roads and sewers, and construction loans for commercial uses. The majority of our construction loans are secured by properties located in Bucks and Montgomery Counties, Pennsylvania. However, we also make construction loans in Philadelphia, Chester and Delaware Counties, Pennsylvania as well as the New Jersey suburbs of Philadelphia.                                         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 and 2003 we had no construction loans that were considered non-performing. At December 31, 2005, we had one construction loan with a carrying value of $2.9 million that was considered non-performing. This one construction loan, which was placed on non-accrual status in November 2005, was 60 days delinquent at December 31, 2005 and was our only delinquent construction loan at such date. This same loan was also 60 days delinquent at December 31, 2004. An allowance was reserved on this loan at December 31, 2005 that management considers adequate to provide for the estimated uncertainty in collection of the outstanding balance. During the first quarter of 2006, we agreed to allow the sale of a portion of the underlying collateral of the loan, with the proceeds paid to the Bank. Approximately $1.7 million in net proceeds was received, reducing the outstanding balance of the loan to $1.2 million. Based on the specific circumstances of this loan, including the estimated value of the remaining collateral, we do not expect to incur any significant loss on this loan. We had no construction loans more than 30 days delinquent at December 31, 2003. We have not charged-off any construction loans in more than five years.  HOME EQUITY LINES. At December 31, 2005, the outstanding balance of our home equity lines of credit amounted to $41.1 million or 7.0% of our net loan portfolio. The unused portion of home equity lines was $22.3 million at such date. We offer home equity lines in amounts up to $200,000 on a revolving line of credit basis with interest tied to the prime rate. Generally, we have a second mortgage on the borrower's residence as collateral on its home equity lines. Generally, our home equity lines have loan-to-value ratios (combined with any loan secured by a first mortgage) of 80% or less. Our customers may apply for home equity lines as well as home equity loans at any banking office or on-line through our website.  COMMERCIAL BUSINESS LOANS. Our commercial business loans amounted to $11.0 million or 1.9% of the total loan portfolio at December 31, 2005. The unused portion of our commercial lines of credit at December 31, 2005, was $41.7 million.  Our commercial business loans typically are to small to mid-sized businesses in our market area and may be for working capital, inventory financing or accounts receivable financing. Small business loans may have adjustable or fixed rates of interest and generally have terms of three years or less but may go up to 10 years. Our commercial business loans generally are secured by equipment, machinery or other corporate assets. In addition, we generally obtain personal guarantees from the principals of the borrower with respect to all commercial business loans.  Our five commercial lenders actively solicit commercial business loans in our market area. Given the on-going consolidation of financial institutions, we are seeking to increase our commercial business loan portfolio. In particular, we are targeting loans of $250,000 to $500,000 that generally are considered too small by the regional and super-regional banks operating in our market. Commercial business loans generally are deemed to involve a greater degree of risk than single-family residential mortgage loans.  CONSUMER LENDING ACTIVITIES. In our efforts to provide a full range of financial services to our customers, we offer various types of consumer loans such as loans secured by deposit accounts, automobile loans and unsecured personal loans. These loans are originated primarily through existing and walk-in customers and direct advertising. At December 31, 2005, $4.7 million, or 0.8% of the total loan portfolio consisted of these types of loans.                                         10   Consumer loans generally have higher interest rates and shorter terms than residential loans, however, they have additional credit risk due to the type of collateral securing the loan or in some cases the absence of collateral. In the years ended December 31, 2005, 2004 and 2003 we charged-off $70,000, $32,000 and $89,000 of consumer loans, respectively. The 2005 charge-offs include $60,000 of charge-offs of overdrawn deposit balances, which are classified as loans for reporting purposes.  LOAN APPROVAL PROCEDURES AND AUTHORITY. Our Board of Directors establishes the bank's lending policies and procedures. Our Lending Policy Manual is reviewed on at least an annual basis by our management team in order to propose modifications as a result of market conditions, regulatory changes and other factors. All modifications must be approved by our Board of Directors.  Various officers or combinations of officers of Abington Bank have the authority within specifically identified limits to approve new loans. The largest individual lending authority is $1.0 million. Amounts in excess of the individual lending limits must be approved by the Commercial Lending Committee or the Consumer Lending Committee. Loans in excess of $1.0 million must be approved by the Board of Directors of Abington Bank.  ASSET QUALITY  GENERAL. One of our key objectives has been, and continues to be, maintaining a high level of asset quality. In addition to maintaining credit standards for new originations which we believe are sound, we are proactive in our loan monitoring, collection and workout processes in dealing with delinquent or problem loans. In addition, in recent years, we have retained independent, third parties to undertake reviews of the credit quality of our loan portfolio.  When a borrower fails to make a scheduled payment, we attempt to cure the deficiency by making personal contact with the borrower. Initial contacts are generally made 15 days after the date the payment is due. In most cases, deficiencies are promptly resolved. If the delinquency continues, late charges are assessed and additional efforts are made to collect the deficiency. All loans delinquent 60 days or more are reported to the Board of Directors of Abington Bank.  On loans where the collection of principal or interest payments is doubtful, the accrual of interest income ceases ("non-accrual" loans). On single-family residential mortgage loans 120 days or more past due and all other loans 90 days or more past due, as to principal and interest payments, our policy, with certain limited exceptions, is to discontinue accruing additional interest and reverse any interest currently accrued. On occasion, this action may be taken earlier if the financial condition of the borrower raises significant concern with regard to his/her ability to service the debt in accordance with the terms of the loan agreement. Interest income is not accrued on these loans until the borrower's financial condition and payment record demonstrate an ability to service the debt.  Real estate which is acquired as a result of foreclosure is classified as real estate owned until sold. Real estate owned is recorded at the lower of cost or fair value less estimated selling costs. Costs associated with acquiring and improving a foreclosed property are usually capitalized to the extent that the carrying value does not exceed fair value less estimated selling costs. Holding costs are charged to expense. Gains and losses on the sale of real estate owned are charged to operations, as incurred.  We account for our impaired loans under generally accepted accounting principles. An impaired loan generally is one for which it is probable, based on current information, that the lender will not collect all the amounts due under the contractual terms of the loan. Large groups of smaller balance, homogeneous loans are collectively evaluated for impairment. Loans collectively evaluated for impairment include                                         11   smaller balance commercial real estate loans, residential real estate loans and consumer loans. These loans are evaluated as a group because they have similar characteristics and performance experience. Larger commercial real estate, construction and commercial business loans are individually evaluated for impairment. At December 31, 2005, the Company had $2.9 million of loans that were determined to be impaired compared to no impaired loans at December 31, 2004. The impaired loan at December 31, 2005 was to one borrower, and a reserve on this loan is included in the Company's allowance for loan losses at December 31, 2005.  Federal regulations and our policies require that we utilize an internal asset classification system as a means of reporting problem and potential problem assets. We have incorporated an internal asset classification system, consistent with Federal banking regulations, as a part of our credit monitoring system. We currently classify problem and potential problem assets as "special mention," "substandard," "doubtful" or "loss" assets. An asset is considered "special mention" if it does not yet warrant adverse classification such as "substandard" or "doubtful," but nonetheless possesses credit deficiencies or potential weaknesses deserving management's close attention. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard" with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated "special mention."  When an insured institution classifies one or more assets, or portions thereof, as "special mention," "substandard" or "doubtful," it is required that a general valuation allowance for loan losses be established for loan losses in an amount deemed prudent by management. General valuation allowances represent loss allowances which have been established to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies one or more assets, or portions thereof, as "loss," it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount.  A savings institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by Federal and state bank regulators which can order the establishment of additional general or specific loss allowances. The Federal banking agencies, have adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management analyze all significant factors that affect the collectibility of the portfolio in a reasonable manner; and that management establish acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. In July 2001, the SEC issued Staff Accounting Bulletin ("SAB") No. 102, "Selected Loan Loss Allowance Methodology and Documentation Issues." The guidance contained in the SAB focuses on the documentation the SEC staff normally expects registrants to prepare and maintain in support of the allowance for loan and lease losses. Concurrent with the SEC's issuance of SAB No. 102, the federal banking agencies, represented by the Federal Financial Institutions Examination Council ("FFIEC"), issued an interagency policy statement entitled "Allowance for Loan                                         12   and Lease Losses Methodologies and Documentation for Banks and Savings Institutions" (Policy Statement). The SAB and Policy Statement were the result of an agreement between the SEC and the federal banking agencies in March 1999 to provide guidance on allowance for loan and lease losses methodologies and supporting documentation. Our allowance for loan losses includes a portion which is allocated to non-classified loans by type of loan, based primarily upon our periodic reviews of the risk elements within the various categories of loans. Our management believes that, based on information currently available, its allowance for loan losses is maintained at a level which covers all known and inherent losses that are both probable and reasonably estimable at each reporting date. However, actual losses are dependent upon future events and, as such, further additions to the level of allowances for loan losses may become necessary.                                              13   DELINQUENT LOANS. The following table shows the delinquencies in our loan portfolio as of the dates indicated.                                             December 31, 2005                              December 31, 2004                            --------------------------------------------  --------------------------------------------                                     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                    15       $608           1       $  8           6     $  460           3       $227 Commercial real estate and  multi-family residential                       --         --          --         --          --         --          --         -- Construction                       1      2,885          --         --           1      2,900          --         -- Commercial business               --         --          --         --          --         --          --         -- Home equity lines of credit                             2         89          --         --           2        314          --         -- Consumer non- real estate          3          4          --         --          --         --          --         --                            ----------  ---------  ----------  ---------  ----------  ---------  ----------  --------- Total delinquent loans            21     $3,586           1       $  8           9     $3,674           3       $227                            ==========  =========  ==========  =========  ==========  =========  ==========  ========= Delinquent loans to    total net loans                         0.68%                  0.00%                  0.89%                  0.06%                                        =========              =========              =========              ========= Delinquent loans to    total loans                             0.61%                  0.00%                  0.82%                  0.05%                                        =========              =========              =========              =========  (Continued)                                            December 31, 2003                            --------------------------------------------                                    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                    19     $1,055           3     $  321 Commercial real estate and  multi-family residential                       --         --          --         -- Construction                      --         --          --         -- Commercial business               --         --          --         -- Home equity lines of credit                             4        219           3        109 Consumer non- real estate          7         14           2         32                            ----------  ---------  ----------  --------- Total delinquent loans            30     $1,288           8     $  462                            ==========  =========  ==========  ========= Delinquent loans to    total net loans                         0.35%                  0.13%                                        =========              ========= Delinquent loans to    total loans                             0.32%                  0.12%                                        =========              =========                                            14   NON-PERFORMING LOANS AND REAL ESTATE OWNED. The following table sets forth information regarding our non-performing loans and real estate owned. Our general policy is to cease accruing interest on single-family residential mortgages which are 120 days or more past due and all other loans which are 90 days or more past due and to charge-off all accrued interest. We may also cease accruing or charge-off interest at an earlier date if collection is considered doubtful.  For the years ended December 31, 2005, 2004 and 2003, the amount of additional interest income that would have been recognized on non-accrual loans if such loans had continued to perform in accordance with their contractual terms was $20,000, $5,000 and $16,000, respectively.  The following table shows the amounts of our non-performing assets (defined as non-accruing loans, accruing loans 90 days or more past due and real estate owned) at the dates indicated. We did not have troubled debt restructurings at any of the dates indicated.                                                                           December 31,                                              -----------------------------------------------------------------                                                  2005         2004         2003         2002         2001                                              ------------ ------------ ------------ ------------ -------------                                                                     (Dollars in Thousands)             Non-accruing loans:          One- to four-family residential        $     --     $     --     $     99     $     --     $      82          Commercial real estate and            multi-family residential                   --           --           --          671           969          Construction                              2,885           --           --           --            --          Commercial business                          --           --           --           --            --          Home equity lines of credit                  --           --           --           99            99          Consumer non-real estate                     --           --           16           --            --                                                 --------     --------     --------     --------     ---------             Total non-accruing loans               2,885           --          115          770         1,150                                                 --------     --------     --------     --------     ---------       Accruing loans 90 days or more past due:          One- to four-family residential               8          227          222          424           233          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                         8          227          347          480           276                                                 --------     --------     --------     --------     ---------                 Total non-performing loans(1)      2,893          227          462        1,250         1,426                                                 --------     --------     --------     --------     ---------       Real estate owned, net                          --           --           --           --            --                 Total non-performing assets     $  2,893     $    227     $    462     $  1,250     $   1,426                                                 ========     ========     ========     ========     =========       Total non-performing loans as a          percentage of loans                       0.54%        0.06%        0.13%        0.34%         0.41%                                                 ========     ========     ========     ========     =========       Total non-performing loans as a          percentage of total assets                0.34%        0.03%        0.08%        0.23%         0.30%                                                 ========     ========     ========     ========     =========       Total non-performing assets as a          percentage of total assets                0.34%        0.03%        0.08%        0.23%         0.30%                                                 ========     ========     ========     ========     =========  - ------------------ (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                                         15   and to assess the overall collection probability for the loan portfolio. Our evaluation process includes, among other things, an analysis of delinquency trends, non-performing loan trends, the level of charge-offs and recoveries, prior loss experience, total loans outstanding, the volume of loan originations, the type, size and geographic concentration of our loans, the value of collateral securing the loan, the borrower's ability to repay and repayment performance, the number of loans requiring heightened management oversight, local economic conditions and industry experience. In addition, in establishing the allowance for loan losses, we have implemented a nine point internal rating system for all loans originated by the Commercial Lending Department. At the time of origination, each loan, other than single-family residential mortgage loans, home equity lines and consumer loans, is assigned a rating based on the assumed risk elements of the loan. Such risk ratings are periodically reviewed by management and revised as deemed appropriate. The establishment of the allowance for loan losses is significantly affected by management judgment and uncertainties and there is a likelihood that different amounts would be reported under different conditions or assumptions. Various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require it to make additional provisions for estimated loan losses based upon judgments different from those of management. As of December 31, 2005, our allowance for loan losses was 0.27% of total loans receivable.  In the five-year period ended December 31, 2005, our loan charge-offs have been relatively minimal and three borrowers and their affiliates were responsible for 87.6% of such charge-offs. During the year ended December 31, 2004, we charged-off $99,000 of one- to four-family residential mortgage loans. Such loans were all to one borrower and previously had been deemed impaired. During the year ended December 31, 2003, we charged-off $671,000 of commercial real estate and multi-family residential mortgage loans to this borrower. As of December 31, 2004, all loans to this borrower had been charged-off.  We will continue to monitor and modify our allowances for loan losses as conditions dictate. No assurances can be given that our level of allowance for loan losses will cover all of the inherent losses on our loans or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions used by management to determine the current level of the allowance for loan losses.          The following table shows changes in our allowance for loan losses during the periods presented.                                                              At or For the Year Ended December 31,                                          -----------------------------------------------------------------                                              2005         2004         2003         2002         2001                                          ------------ ------------ ------------ ------------ -------------                                                             (Dollars in Thousands)       Total loans outstanding at end of period    $589,896     $445,622     $400,247     $401,453      $358,883 Average loans outstanding                    469,076      384,990      361,548      366,246       341,112 Allowance for loan losses, beginning of   period                                       1,413        1,456        1,813        1,590         1,344 Provision for loan losses                         25           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                        70           32           89           --             2                                             --------     --------     --------     --------     ---------     Total charge-offs                             70          147          760          298           415                                             --------     --------     --------     --------     --------- Recoveries on loans previously   charged off                                     87           59           28           21            33                                             --------     --------     --------     --------     --------- Allowance for loan losses, end of period    $  1,455     $  1,413     $  1,456     $  1,813     $   1,590                                             ========     ========     ========     ========     ========= Allowance for loan losses as a percent   of non-performing loans                     50.29%      622.03%      315.15%      145.04%       111.50%                                             ========     ========     ========     ========     ========= Ratio of net charge-offs during the   period to average loans outstanding   during the period                              n/a        0.02%        0.21%        0.08%         0.12%                                             ========     ========     ========     ========     =========                                           16   The following table shows how our allowance for loan losses is allocated by type of loan at each of the dates indicated.                                                                   December 31,                                   ----------------------------------------------------------------------                                            2005                    2004                    2003                                   ----------------------  ----------------------  ----------------------                                                  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       $  647      54.88%      $  657      54.69%      $  625      55.95% Commercial real estate and   multi-family residential               230      12.99          458      16.75          224      16.00 Construction                             333      22.51          106      18.68           68      16.71 Home equity lines of credit               82       6.96           70       7.19           51       7.79 Commercial business                      110       1.86           85       1.92          104       2.60 Consumer non-real estate                  52       0.80           34       0.77           38       0.95 Unallocated                                1         --            3         --          346         --                                       ------    -------       ------    -------       ------    -------   Total                               $1,455     100.00%      $1,413     100.00%      $1,456     100.00%                                       ======    =======       ======    =======       ======    =======  (Continued)                                                     December 31,                                   ----------------------------------------------                                            2002                    2001                                   ----------------------  ----------------------                                                  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       $  694      61.70%      $  856      74.41% Commercial real estate and   multi-family residential               636      15.29          505      13.10 Construction                              49      12.58           16       4.10 Home equity lines of credit               55       6.38           52       5.30 Commercial business                      114       2.83           81       2.25 Consumer non-real estate                  49       1.22           30       0.84 Unallocated                              216         --           50         --                                       ------    -------       ------    -------   Total                               $1,813     100.00%      $1,590     100.00%                                       ======    =======       ======    =======   The allowance consists of specific and general components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.                                            17   INVESTMENT ACTIVITIES  GENERAL. We invest in securities pursuant to our Investment Policy, which has been approved by our board of directors. The Investment Policy designates our President and three Senior Vice Presidents as the Investment Committee. The Investment Committee is authorized by the board to make the bank's investments consistent with the Investment Policy. The board of directors of Abington Bank reviews all investment activity on a monthly basis.  Our investment policy is designed primarily to manage the interest rate sensitivity of our assets and liabilities, to generate a favorable return without incurring undue interest rate and credit risk, to complement our lending activities and to provide and maintain liquidity. We also use a leveraged investment strategy for the purpose of enhancing returns. Pursuant to this strategy, we have utilized borrowings from the Federal Home Loan Bank of Pittsburgh ("FHLB") to purchase additional investment securities. We attempt to match the advances with the securities purchased in order to obtain a favorable difference, or "spread," between the interest paid on the advance against the yield received on the security purchased.  At December 31, 2005, our investment and mortgage-backed securities amounted to $246.6 million in the aggregate or 29.2% of total assets at such date. The largest component of our securities portfolio in recent periods has been mortgage-backed securities, which amounted to $147.4 million or 59.8% of the securities portfolio at December 31, 2005. In addition, we invest in U.S. government and agency obligations, municipal securities, corporate debt obligations and other securities. The majority of our agency debt securities have call provisions which provide the agency with the ability to call the securities at specified dates.  Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, our securities are classified as available for sale, held to maturity, or trading, at the time of acquisition. Securities classified as held to maturity must be purchased with the intent and ability to hold that security until its final maturity and can be sold prior to maturity only under rare circumstances. Held to maturity securities are accounted for based upon the amortized cost of the security. Available for sale securities can be sold at any time based upon needs or market conditions. Available for sale securities are accounted for at fair value, with unrealized gains and losses on these securities, net of income tax provisions, reflected in retained earnings as accumulated other comprehensive income. At December 31, 2005, we had $158.8 million of securities classified as available for sale, $87.8 million of securities classified as held to maturity and no securities classified as trading account.  We do not purchase mortgage-backed derivative instruments that would be characterized "high-risk" under Federal banking regulations at the time of purchase, nor do we purchase corporate obligations which are not rated investment grade or better.  Our mortgage-backed securities consist primarily of mortgage pass-through certificates issued by the Government National Mortgage Association ("GNMA" or "Ginnie Mae"), Fannie Mae or Freddie Mac. Our mortgage-backed securities also include collateralized mortgage obligations ("CMOs") issued by such agencies and certain AAA rated private issuers. At December 31, 2005, $24.7 million of our mortgage-backed securities were CMOs. At December 31, 2005, $128.6 million or 87.3% of our mortgage-backed securities were issued by the GNMA, FNMA or FHLMC. The remaining $18.8 million of our mortgage-backed securities were issued by certain AAA rated private issuers.  Investments in mortgage-backed securities involve a risk that actual prepayments will be greater than estimated prepayments over the life of the security, which may require adjustments to the amortization of                                         18   any premium or accretion of any discount relating to such instruments thereby changing the net yield on such securities. There is also reinvestment risk associated with the cash flows from such securities or in the event such securities are redeemed by the issuer. In addition, the market value of such securities may be adversely affected by changes in interest rates.  Ginnie Mae is a government agency within the Department of Housing and Urban Development which was created to help finance government-assisted housing programs. Ginnie Mae securities are backed by loans insured by the Federal Housing Administration or guaranteed by the Veterans Administration. The timely payment of principal and interest on Ginnie Mae securities is guaranteed by Ginnie Mae and backed by the full faith and credit of the U.S. Government. Freddie Mac is a private corporation chartered by the U.S. Government. Freddie Mac issues participation certificates backed principally by conventional mortgage loans. Freddie Mac guarantees the timely payment of interest and the ultimate return of principal on participation certificates. Fannie Mae is a private corporation chartered by the U.S. Congress with a mandate to establish a secondary market for mortgage loans. Fannie Mae guarantees the timely payment of principal and interest on Fannie Mae securities. Freddie Mac and Fannie Mae securities are not backed by the full faith and credit of the U.S. Government, but because Freddie Mac and Fannie Mae are U.S. Government-sponsored enterprises, these securities are considered to be among the highest quality investments with minimal credit risks.  Collateralized mortgage obligations are typically issued by a special-purpose entity, in our case, of government agencies, which may be organized in a variety of legal forms, such as a trust, a corporation, or a partnership. Substantially all of the collateralized mortgage obligations held in our portfolio consist of senior sequential tranches. By purchasing senior sequential tranches, management attempts to ensure the cash flow associated with such an investment.  The following table sets forth certain information relating to our investment and mortgage-backed securities portfolios and our investment in FHLB stock at the dates indicated.                                                                         December 31,                                           -------------------------------------------------------------------                                                   2005                   2004                  2003                                           ---------------------  ---------------------  ---------------------                                           Amortized    Market    Amortized    Market    Amortized    Market                                              Cost       Value       Cost       Value       Cost       Value                                           ---------   ---------  ---------   ---------  ---------   ---------                                                                 (Dollars in Thousands)                Mortgage-backed securities         $149,623    $145,449   $165,005    $164,350   $120,917    $121,104         U.S. government and agency           obligations                        74,991      73,120     71,489      70,393     72,988      72,429         Corporate bonds                         999         998      1,000       1,012      1,501       1,538         Municipal obligations                20,576      20,497     10,400      10,520        180         189         Investment certificates of            1,183       1,183      1,282       1,282      1,579       1,579         deposit         Mutual funds                          3,422       3,347      3,395       3,292      3,330       3,250         FHLB stock                           11,061      11,061     10,450      10,450     10,039      10,039         Other                                    --          --          3           1          3           1                                            --------    --------   --------    --------   --------    --------           Total investment and             mortgage-backed securities     $261,855    $255,655   $263,024    $261,300   $210,537    $210,129                                            ========    ========   ========    ========   ========    ========                                            19   The following table sets forth the amount of investment securities which mature during each of the periods indicated and the weighted average yields for each range of maturities at December 31, 2005. No tax-exempt yields have been adjusted to a tax-equivalent basis.                                                            Amounts at December 31, 2005 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                    $22,500         2.29%       $40,500       3.35%   $ 9,991         4.00%   $  2,000      6.50%    Corporate bonds 500                6.98          499           5.31         --         --           --          --        --    Municipal obligations               180         3.90             --         --         --           --      20,396      4.18    Mortgage-backed securities           21         5.50         54,212       3.78        262         4.39      95,128      4.67 Investment certificates of    deposit                             884         3.97            299       4.20         --           --          --        --                                    -------                     -------               -------                 --------     Total                          $24,085         2.46%       $95,510       3.61%   $10,253         4.01%   $117,524      4.61%                                    =======                     =======               =======                 ========   SOURCES OF FUNDS  GENERAL. Deposits, loan repayments and prepayments, proceeds from sales of loans, cash flows generated from operations and Federal Home Loan Bank advances are the primary sources of our funds for use in lending, investing and for other general purposes.  DEPOSITS. We offer a variety of deposit accounts with a range of interest rates and terms. Our deposits consist of checking, both interest-bearing and non-interest-bearing, money market, savings and certificate of deposit accounts. At December 31, 2005, 42.9% of the funds deposited with Abington Bank were in core deposits, which are deposits other than certificates of deposit.  The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition. Our deposits are obtained predominantly from the areas where our branch offices are located. We have historically relied primarily on customer service and long-standing relationships with customers to attract and retain these deposits; however, market interest rates and rates offered by competing financial institutions significantly affect our ability to attract and retain deposits. Abington Bank uses traditional means of advertising its deposit products, including broadcast and print media and generally does not solicit deposits from outside its market area.  We do not actively solicit certificate accounts in excess of $100,000, known as "jumbo CDs," or use brokers to obtain deposits. Our jumbo CDs amounted to $140.4 million and $64.9 million, respectively, at December 31, 2005 and 2004, of which $76.0 million and $25.0 million, respectively, were scheduled to mature in 12 months. At December 31, 2005, the weighted average remaining maturity of our certificate of deposit accounts was 17.0 months.                                         20   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,                                       -------------------------------------------------------------------------                                                2005                     2004                     2003                                       -----------------------  -----------------------  -----------------------                                         Amount        %         Amount         %          Amount         %                                       ---------- ------------  ---------- ------------  ---------- ------------                                                                 (Dollars in Thousands)             Certificate accounts:        1.00% - 1.99%                    $     71        0.01%    $ 32,923        8.12%    $ 52,112       14.37%        2.00% - 2.99%                      29,675        5.92       38,636        9.53       29,555        8.15        3.00% - 3.99%                      83,256       16.61       60,106       14.83       28,871        7.96        4.00% - 4.99%                     127,144       25.37       19,691        4.86       16,005        8.16        5.00% - 5.99%                      31,521        6.29       29,078        7.18       34,289        9.45        6.00% - 6.99%                      14,454        2.88        2,337        0.58        5,681        1.57        7.00%  or more                         --          --           --          --           --          --         Total certificate accounts        286,121       57.08      182,771       45.10      166,513       45.91                                         --------      ------     --------      ------     --------      ------      Transaction accounts:        Savings and money market          115,909       23.13      125,204       30.89      107,565       29.66        Checking:          Interest bearing                 55,820       11.14       59,719       14.73       50,733       13.99          Non-interest bearing             43,333        8.65       37,596        9.28       37,855       10.44                                         --------      ------     --------      ------     --------      ------          Total transaction            accounts                      215,062       42.92      222,519       54.90      196,153       54.09                                         --------      ------     --------      ------     --------      ------          Total deposits                 $501,183      100.00%    $405,290      100.00%    $362,666      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,                               --------------------------------------------------------------------------------------------------                                             2005                             2004                             2003                               -------------------------------- -------------------------------- --------------------------------                                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       $125,834    $ 1,412       1.12%  $120,748    $ 1,065       0.88%  $107,291    $ 1,068       1.00% Checking                         52,282         66       0.13     52,804         44       0.08     46,433         51       0.11 Certificates of   deposit                       236,962      8,391       3.54    175,492      5,452       3.11    169,058      5,703       3.37                                --------    -------              --------    -------              --------    ------- Total interest-bearing   deposits                      415,078      9,869       2.38    349,044      6,561       1.88    322,782      6,822       2.11                                ========    =======     ======   ========    =======     ======   ========    =======    =======   Total deposits               $460,939    $ 9,869       2.14%  $394,905    $ 6,561       1.66%  $359,230    $ 6,822       1.90%                                ========    =======     ======   ========    =======     ======   ========    =======    =======   The following table shows our savings flows during the periods indicated.                                                  Year Ended December 31,                                        ----------------------------------------                                            2005          2004          2003                                        ------------  ------------  ------------                                                     (In Thousands)       Total deposits                     $3,536,390    $3,387,865    $3,016,200      Total withdrawals                   3,449,453     3,351,887     3,004,934       Interest credited                       8,956         6,646         7,064                                         ----------    ----------    ----------         Total increase in deposits       $   95,893    $   42,624    $   18,330                                         ==========    ==========    ==========                                          21   The following table presents, by various interest rate categories and maturities, the amount of our certificates of deposit at December 31, 2005.                                                        Balance at December 31, 2005                                             Maturing in the 12 Months Ending December 31,                                     ----------------------------------------------------------      Certificates of Deposit           2006        2007        2008     Thereafter     Total      --------------------------     ----------  ----------  ----------  ----------  ----------                                                              (In Thousands)            Less than 2.00%                 $     71    $     --    $     --    $     --     $     71      2.00% - 2.99%                     27,216         890       1,206         363       29,675      3.00% - 3.99%                     59,224      15,542       5,032       3,458       83,256      4.00% - 4.99%                     57,866      49,299         359      19,620      127,144      5.00% - 5.99%                      3,309      23,721         220       4,271       31,521      6.00% or more                     13,471         507         412          64       14,454                                      --------    --------    --------    --------     --------        Total certificate accounts    $161,157    $ 89,959    $  7,229    $ 27,776     $286,121                                      ========    ========    ========    ========     ========   The following table shows the maturities of our certificates of deposit of $100,000 or more at December 31, 2005, by time remaining to maturity.                                       At December 31, 2005      -----------------------------------------------------------------------------                                                                       Weighted                   Quarter Ending:                    Amount         Average Rate      ------------------------------------------   ------------    ----------------                                                         (Dollars in Thousands)         March 31, 2006                                 $ 22,544             3.67%      June 30, 2006                                    19,251             4.18      September 30, 2006                               28,018             4.86      December 31, 2006                                 6,161             3.56      After December 31, 2006                          64,405             4.67                                                     --------        Total certificates of deposit with          balances of $100,000 or more               $140,379             4.43%                                                     ========             ====   BORROWINGS. We utilize advances from the Federal Home Loan Bank of Pittsburgh as an alternative to retail deposits to fund our operations as part of our operating strategy. These FHLB advances are collateralized primarily by certain of our mortgage loans and mortgage-backed securities and secondarily by our investment in capital stock of the Federal Home Loan Bank of Pittsburgh. FHLB advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the Federal Home Loan Bank of Pittsburgh will advance to member institutions, including Abington Bank, fluctuates from time to time in accordance with the policies of the Federal Home Loan Bank. At December 31, 2005, we had $201.5 million in outstanding FHLB advances and $314.5 million of additional FHLB advances available. Approximately $88.0 million of our FHLB advances at December 31, 2005 were part of our matched funding program whereby we use such advances to purchase securities. Our current policy permits us to utilize up to $100.0 million of advances to match-fund securities. Given the proper interest rate environment, it is likely that we would increase this limit to permit additional FHLB advances for such match-funding purposes.  In addition to FHLB advances, our borrowings include securities sold under agreements to repurchase (repurchase agreements). Repurchase agreements are contracts for the sale of securities owned or                                         22   borrowed by Abington Bank, with an agreement to repurchase those securities at an agreed upon price and date. We use repurchase agreements as an investment vehicle for our commercial sweep checking product. We enter into securities repurchase agreements with our commercial checking account customers under a sweep account arrangement. Account balances are swept on a daily basis into mortgage-backed securities purchases from us, which we agree to repurchase as the checking account is drawn upon by the customer. At December 31, 2005, our securities repurchase agreements amounted to $16.1 million and all of such borrowings were short-term, having maturities of one year or less. The average balance of our securities sold under repurchase agreements for the year ended December 31, 2005 was $20.2 million.  The following table shows certain information regarding our borrowings at or for the dates indicated:                                                                At or For the Year                                                             Ended December 31,                                                 -----------------------------------------                                                      2005         2004           2003                                                 ------------- ------------- -------------                                                            (Dollars in Thousands)          FHLB advances:         Average balance outstanding                 $192,189      $169,699      $148,090         Maximum amount outstanding at any           month-end during the period                212,580       185,588       173,732         Balance outstanding at end of           period                                     201,445       170,666       173,732         Average interest rate during the           period                                      4.510%        4.357%        4.673%         Weighted average interest rate at           end of period                               4.506%        4.422%        4.180%       Other borrowed money:         Average balance outstanding                 $ 20,198      $ 17,703      $ 15,241         Maximum amount outstanding at any           month-end during the period                 25,038        27,686        21,722         Balance outstanding at end of           period                                      16,114        12,866         8,681         Average interest rate during the           period                                      2.287%        0.817%        0.612%         Weighted average interest rate at           end of period                               3.883%        1.785%        0.516%   At December 31, 2005, $27.7 million of our borrowings were short-term (maturities of one year or less). Such short-term borrowings had a weighted average interest rate of 3.82% at December 31, 2005.  EMPLOYEES  At December 31, 2005, we had 108 full-time employees, and 26 part-time employees. None of such employees are represented by a collective bargaining group, and we believe that our relationship with our employees is excellent.                             SUPERVISION AND REGULATION  GENERAL  Abington Bank, as a Pennsylvania-chartered savings bank with deposits insured by the Savings Association Insurance Fund administered by the Federal Deposit Insurance Corporation, is subject to extensive regulation and examination by the Pennsylvania Department of Banking and by the Federal Deposit Insurance Corporation. The federal and state laws and regulations applicable to banks regulate, among other things, the scope of their business, their investments, the reserves required to be kept against deposits, the timing of the availability of deposited funds and the nature and amount of and collateral for certain loans. This regulatory structure also gives the federal and state banking agencies extensive discretion in connection with their supervisory and enforcement activities and examination policies,                                         23   including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. The laws and regulations governing Abington Bank generally have been promulgated to protect depositors and not for the purpose of protecting shareholders.  Federal law provides the federal banking regulators, including the Federal Deposit Insurance Corporation and the Federal Reserve Board, with substantial enforcement powers. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders, and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities. Any change in such regulation, whether by the Pennsylvania Department of Banking, the Federal Deposit Insurance Corporation, the Federal Reserve Board or the United States Congress, could have a material impact on us and our operations.  Abington Community Bancorp and Abington Mutual Holding Company are registered as bank holding companies under the Bank Holding Company Act and Abington Community Bancorp and Abington Mutual Holding Company are subject to regulation and supervision by the Federal Reserve Board and by the Pennsylvania Department of Banking. Abington Community Bancorp and Abington Mutual Holding Company are also required to file annually a report of its operations with, and are subject to examination by, the Federal Reserve Board and the Pennsylvania Department of Banking. This regulation and oversight is generally intended to ensure that Abington Community Bancorp and Abington Mutual Holding Company limit their activities to those allowed by law and that they operate in a safe and sound manner without endangering the financial health of Abington Bank.  REGULATION OF ABINGTON COMMUNITY BANCORP AND ABINGTON MUTUAL HOLDING COMPANY  BANK HOLDING COMPANY ACT ACTIVITIES AND OTHER LIMITATIONS. Under the Bank Holding Company Act, Abington Community Bancorp and Abington Mutual Holding Company must obtain the prior approval of the Federal Reserve Board before they may acquire control of another bank or bank holding company, merge or consolidate with another bank holding company, acquire all or substantially all of the assets of another bank or bank holding company, or acquire direct or indirect ownership or control of any voting shares of any bank or bank holding company if, after such acquisition, Abington Community Bancorp and Abington Mutual Holding Company would directly or indirectly own or control more than 5% of such shares.  Federal statutes impose restrictions on the ability of a bank holding company and its nonbank subsidiaries to obtain extensions of credit from its subsidiary bank, on the subsidiary bank's investments in the stock or securities of the holding company, and on the subsidiary bank's taking of the holding company's stock or securities as collateral for loans to any borrower. A bank holding company and its subsidiaries are also prevented from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property, or furnishing of services by the subsidiary bank.  A bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the policy of the Federal Reserve Board that a bank holding company should stand ready to use available resources to provide adequate capital to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board regulations, or both.                                         24   NON-BANKING ACTIVITIES. The business activities of Abington Community Bancorp and Abington Mutual Holding Company, as bank holding companies, are restricted by the Bank Holding Company Act. Under the Bank Holding Company Act and the Federal Reserve Board's bank holding company regulations, bank holding companies may only engage in, or acquire or control voting securities or assets of a company engaged in:          o       banking or managing or controlling banks and other subsidiaries                 authorized under the Bank Holding Company Act; and          o       any Bank Holding Company Act activity the Federal Reserve Board                 has determined to be so closely related that it is incidental to                 banking or managing or controlling banks.  The Federal Reserve Board has by regulation determined that certain activities are closely related to banking including operating a mortgage company, finance company, credit card company, factoring company, trust company or savings association; performing certain data processing operations; providing limited securities brokerage services; acting as an investment or financial advisor; acting as an insurance agent for certain types of credit-related insurance; leasing personal property on a full-payout, non-operating basis; providing tax planning and preparation services; operating a collection agency; and providing certain courier services. However, as discussed below, certain other activities are permissible for a bank holding company that becomes a financial holding company.  FINANCIAL MODERNIZATION. The Gramm-Leach-Bliley Act permits greater affiliation among banks, securities firms, insurance companies, and other companies under a new type of financial services company known as a "financial holding company." A financial holding company essentially is a bank holding company with significantly expanded powers. Financial holding companies are authorized by statute to engage in a number of financial activities previously impermissible for bank holding companies, including securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; and merchant banking activities. The Gramm-Leach-Bliley Act also permits the Federal Reserve Board and the Treasury Department to authorize additional activities for financial holding companies if they are "financial in nature" or "incidental" to financial activities. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized, well managed, and has at least a "satisfactory" Community Reinvestment Act rating. A financial holding company must provide notice to the Federal Reserve Board within 30 days after commencing activities previously determined by statute or by the Federal Reserve Board and Department of the Treasury to be permissible. Abington Community Bancorp and Abington Mutual Holding Company have not submitted notices to the Federal Reserve Board of their intent to be deemed financial holding companies. However, they are not precluded from submitting a notice in the future should they wish to engage in activities only permitted to financial holding companies.  REGULATORY CAPITAL REQUIREMENTS. The Federal Reserve Board has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the Bank Holding Company Act. The Federal Reserve Board's capital adequacy guidelines for Abington Community Bancorp, on a consolidated basis, are similar to those imposed on Abington Bank by the Federal Deposit Insurance Corporation. See "-Regulation of Abington Bank - Regulatory Capital Requirements." At December 31, 2005, Abington Community Bancorp met all applicable regulatory capital requirements.  RESTRICTIONS ON DIVIDENDS. Abington Community Bancorp's ability to declare and pay dividends may depend in part on dividends received from Abington Bank. The Pennsylvania Banking Code regulates the distribution of dividends by savings banks and states, in part, that dividends may be declared and paid out                                         25   of accumulated net earnings, provided that the bank continues to meet its surplus requirements. In addition, dividends may not be declared or paid if Abington Bank is in default in payment of any assessment due the Federal Deposit Insurance Corporation.  A Federal Reserve Board policy statement on the payment of cash dividends states that a bank holding company should pay cash dividends only to the extent that the holding company's net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company's capital needs, asset quality and overall financial condition. The Federal Reserve Board also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the federal prompt corrective action regulations, the Federal Reserve Board may prohibit a bank holding company from paying any dividends if the holding company's bank subsidiary is classified as "undercapitalized." See "-Regulation of Abington Bank - Prompt Corrective Action," below.  SARBANES-OXLEY ACT OF 2002. On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002 implementing legislative reforms intended to address corporate and accounting fraud. In addition to the establishment of a new accounting oversight board which is empowered to enforce auditing, quality control and independence standards, the Sarbanes-Oxley Act restricts provision of both auditing and consulting services by accounting firms. To ensure auditor independence, any non-audit services being provided to an audit client require pre-approval by the company's audit committee members. In addition, the audit partners must be rotated. The Sarbanes-Oxley Act requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willfully violate this certification requirement. In addition, under the Sarbanes-Oxley Act, attorneys are required to report evidence of a material violation of the securities laws or a breach of fiduciary duty by a company to its chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to the audit committee or other similar committee of the board of directors or the board itself.  Longer prison terms were legislated for corporate executives who violate federal securities laws, the period during which certain types of suits can be brought against a company or its officers has been extended, and bonuses issued to top executives prior to restatement of a company's financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirement plan "blackout" periods, and loans to company executives are restricted. In addition, a provision directs that civil penalties levied by the SEC as a result of any judicial or administrative action under the Sarbanes-Oxley Act be deposited to a fund for the benefit of harmed investors. The Federal Accounts for Investor Restitution (FAIR) provision also requires the SEC to develop methods of improving collection rates. The legislation accelerates the time frame for disclosures by public companies for any material changes in their financial condition or operations and certain other events. Directors and executive officers must also provide information for most changes in ownership in a company's securities within two business days of the change.  The Sarbanes-Oxley Act also increases the oversight of, and codifies certain requirements relating to audit committees of public companies and how they interact with the company's "registered public accounting firm" (RPAF). Audit Committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the issuer. In addition, companies must disclose whether at least one member of the committee is a "financial expert," as such term is defined by the SEC, and if not, why not. Under the Sarbanes-Oxley Act, a RPAF is prohibited from performing statutorily mandated audit services for a company if such company's chief executive officer, chief financial officer, comptroller, chief accounting officer or any person serving in equivalent positions has been employed by such firm and participated in the audit of such company during the one-year period preceding the audit initiation date. The Sarbanes-Oxley Act also prohibits any officer or director of a                                         26   company or any other person acting under their direction from taking any action to fraudulently influence, coerce, manipulate or mislead any independent public or certified accountant engaged in the audit of the company's financial statements for the purpose of rendering the financial statement's materially misleading. The Sarbanes-Oxley Act also will require inclusion of an internal control report and assessment by management in the annual report to shareholders (which, in the Company's case, is expected to be required for its fiscal year ending December 31, 2006). The Sarbanes-Oxley Act requires the RPAF that issues the audit report to attest to and report on management's assessment of the company's internal controls. In addition, the Sarbanes-Oxley Act requires that each financial report required to be prepared in accordance with, or reconciled to, generally accepted accounting principles and filed with the SEC reflect all material correcting adjustments that are identified by a RPAF in accordance with generally accepted accounting principles and the rules and regulations of the SEC.  RESTRICTIONS APPLICABLE TO MUTUAL HOLDING COMPANIES. Under authority of Section 115.1 of the Pennsylvania Banking Code of 1965, as amended ("Banking Code"), and a policy statement issued by the Pennsylvania Department of Banking, the Department is authorized to approve the reorganization of a state chartered savings bank to a mutual holding company, provided the savings bank has a CAMEL composite rating of one or two under the Uniform Financial Institutions Rating System. While regulations governing the formation of Pennsylvania-chartered mutual holding companies have not been adopted, the policy statement and form of application issued by the Department provide the means by which such applications will be processed and approved.  Pursuant to Pennsylvania law, a mutual holding company may engage only in the following activities:          o       Investing in the stock of one or more financial institution                 subsidiaries.          o       Acquiring one or more additional financial institution                 subsidiaries into a subsidiary of the holding company.          o       Merging with or acquiring another holding company, one of whose                 subsidiaries is a financial institution subsidiary.          o       Investing in a corporation the capital stock of which is                 available for purchase by a savings bank under federal law or                 under the Pennsylvania Banking Code.          o       Engaging in such activities as are permitted, by statute or                 regulation, to a holding company of a federally chartered                 insured mutual institution under federal law.          o       Engaging in such other activities as may be permitted by the                 Pennsylvania Department of Banking.  If a mutual holding company acquires or merges with another holding company, the holding company acquired or the holding company resulting from such merger or acquisition may only invest in assets and engage in activities listed above, and has a period of two years to cease any non-conforming activities and divest of any non-conforming investments.  The mutual holding company will be subject to such regulations as the Pennsylvania Department of Banking may prescribe. No mutual holding company regulations have been issued to date by the Department.                                         27   REGULATION OF ABINGTON BANK  PENNSYLVANIA SAVINGS BANK LAW. The Pennsylvania Banking Code contains detailed provisions governing the organization, location of offices, rights and responsibilities of directors, officers, and employees, as well as corporate powers, savings and investment operations and other aspects of Abington Bank and its affairs. The code delegates extensive rule-making power and administrative discretion to the Pennsylvania Department of Banking so that the supervision and regulation of state-chartered savings banks may be flexible and readily responsive to changes in economic conditions and in savings and lending practices.  The Pennsylvania Banking Code also provides that state-chartered savings banks may engage in any activity permissible for a federal savings association, subject to regulation by the Pennsylvania Department of Banking. The Federal Deposit Insurance Act, however, prohibits Abington Bank from making new investments, loans, or becoming involved in activities as principal and equity investments which are not permitted for national banks unless:          o       the Federal Deposit Insurance Corporation determines the                 activity or investment does not pose a significant risk of loss                 to the Savings Association Insurance Fund; and          o       Abington Bank meets all applicable capital requirements.  Accordingly, the additional operating authority provided to Abington Bank by the Pennsylvania Banking Code is significantly restricted by the Federal Deposit Insurance Act.  INSURANCE OF ACCOUNTS. The deposits of Abington Bank are insured to the maximum extent permitted by the Savings Association Insurance Fund, which is administered by the Federal Deposit Insurance Corporation, and are backed by the full faith and credit of the U.S. Government. As insurer, the Federal Deposit Insurance Corporation is authorized to conduct examinations of, and to require reporting by, insured institutions. It also may prohibit any insured institution from engaging in any activity the Federal Deposit Insurance Corporation determines by regulation or order to pose a serious threat to the Federal Deposit Insurance Corporation. The Federal Deposit Insurance Corporation also has the authority to initiate enforcement actions against savings institutions.  Under current Federal Deposit Insurance Corporation regulations, Savings Association Insurance Fund- insured institutions are assigned to one of three capital groups which are based solely on the level of an institution's capital. Assessment rates are then tied to the level of an institution's supervisory concern based on risk classifications derived from the capital groups. Rates during the last six months of 2005 ranged from zero for well capitalized, healthy institutions, such as Abington Bank, to 27 basis points for undercapitalized institutions with substantial supervisory concerns.  In addition, all institutions with deposits insured by the Federal Deposit Insurance Corporation are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, a mixed-ownership government corporation established to recapitalize the predecessor to the Savings Association Insurance Fund. These assessments will continue until the Financing Corporation bonds mature in 2019.  The Federal Deposit Insurance Corporation may terminate the deposit insurance of any insured depository institution, including Abington Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the Federal Deposit Insurance Corporation. It also may suspend deposit insurance temporarily during the                                         28   hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the Federal Deposit Insurance Corporation. Management is aware of no existing circumstances which would result in termination of Abington Bank's deposit insurance.  DEPOSIT INSURANCE REFORM. On February 8, 2006, President Bush signed into law legislation that merges the Bank Insurance Fund ("BIF") and the SAIF, eliminates any disparities in bank and thrift risk-based premium assessments, reduces the administrative burden of maintaining and operating two separate funds and establishes certain new insurance coverage limits and a mechanism for possible periodic increases. The legislation also gives the FDIC greater discretion to identify the relative risks all institutions present to the deposit insurance fund and set risk-based premiums.  Major provisions in the legislation include: maintaining basic deposit and municipal account insurance coverage at $100,000 but providing for a new basic insurance coverage for retirement accounts of $250,000. Insurance coverage for basic deposit and retirement accounts could be increased for inflation every five years in $10,000 increments beginning in 2011; providing the FDIC with the ability to set the designated reserve ratio within a range of between 1.15 percent and 1.50 percent, rather than maintaining 1.25 percent at all times regardless of prevailing economic conditions; providing a one-time assessment credit of $4.7 billion to banks and savings associations in existence on December 31, 1996. The institutions qualifying for the credit may use it to offset future premiums with certain limitations; requiring the payment of dividends of 100% of the amount that the insurance fund exceeds 1.5% of the estimated insured deposits and the payment of 50% of the amount that the insurance fund exceeds 1.35% of the estimated insured deposits. (when the reserve is greater than 1.35% but no more than 1.5%); the merger of the SAIF and BIF must occur no later than July 1, 2006. Other provisions will become effective within 90 days of the publication date of the final FDIC regulations implementing the legislation.  REGULATORY CAPITAL REQUIREMENTS. The Federal Deposit Insurance Corporation has promulgated capital adequacy requirements for state-chartered banks that, like Abington Bank, are not members of the Federal Reserve Board System. The capital regulations establish a minimum 3% Tier 1 leverage capital requirement for the most highly rated state-chartered, non-member banks, with an additional cushion of at least 100 to 200 basis points for all other state-chartered, non-member banks, which effectively increases the minimum Tier 1 leverage ratio for such other banks to 4% to 5% or more. Under the Federal Deposit Insurance Corporation's regulations, the highest-rated banks are those that the Federal Deposit Insurance Corporation determines are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in general, which are considered a strong banking organization, rated composite 1 under the Uniform Financial Institutions Rating System. Tier 1, or leverage capital, is defined as the sum of common shareholders' equity, including retained earnings, noncumulative perpetual preferred stock and related surplus, and minority interests in consolidated subsidiaries, minus all intangible assets other than certain purchased mortgage servicing rights and purchased credit card relationships.  The Federal Deposit Insurance Corporation's regulations also require that state-chartered, non-member banks meet a risk-based capital standard. The risk-based capital standard requires the maintenance of total capital, defined as Tier 1 capital and supplementary (Tier 2) capital, to risk weighted assets of 8%. In determining the amount of risk-weighted assets, all assets, plus certain off balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the Federal Deposit Insurance Corporation believes are inherent in the type of asset or item. The components of Tier 1 capital for the risk-based standards are the same as those for the leverage capital requirement. The components of supplementary (Tier 2) capital include cumulative perpetual preferred stock, mandatory subordinated debt, perpetual                                         29   subordinated debt, intermediate-term preferred stock, up to 45% of unrealized gains on equity securities and a portion of a bank's allowance for loan losses. Allowance for loan losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital that may be included in total capital is limited to 100% of Tier 1 capital.  A bank that has less than the minimum leverage capital requirement is subject to various capital plan and activities restriction requirements. The Federal Deposit Insurance Corporation's regulations also provide that any insured depository institution with a ratio of Tier 1 capital to total assets that is less than 2.0% is deemed to be operating in an unsafe or unsound condition pursuant to Section 8(a) of the Federal Deposit Insurance Act and could be subject to potential termination of deposit insurance.  Abington Bank is also subject to minimum capital requirements imposed by the Pennsylvania Department of Banking on Pennsylvania chartered depository institutions. Under the Pennsylvania Department of Banking's capital regulations, a Pennsylvania bank or savings association must maintain a minimum leverage ratio of Tier 1 capital, as defined under the Federal Deposit Insurance Corporation's capital regulations, to total assets of 4%. In addition, the Pennsylvania Department of Banking has the supervisory discretion to require a higher leverage ratio for any institution or association based on inadequate or substandard performance in any of a number of areas. The Pennsylvania Department of Banking incorporates the same Federal Deposit Insurance Corporation risk-based capital requirements in its regulations. As of December 31, 2005, Abington Bank was in compliance with all applicable regulatory capital requirements and was deemed to be a "well-capitalized" institution.  AFFILIATE TRANSACTION RESTRICTIONS. Federal laws strictly limit the ability of banks to engage in transactions with their affiliates, including their bank holding companies. Such transactions between a subsidiary bank and its parent company or the nonbank subsidiaries of the bank holding company are limited to 10% of a bank subsidiary's capital and surplus and, with respect to such parent company and all such nonbank subsidiaries, to an aggregate of 20% of the bank subsidiary's capital and surplus. Further, loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts. Federal law also requires that all transactions between a bank and its affiliates be on terms as favorable to the bank as transactions with non-affiliates.  FEDERAL HOME LOAN BANK SYSTEM. Abington Bank is a member of the Federal Home Loan Bank of Pittsburgh, which is one of 12 regional Federal Home Loan Banks. Each Federal Home Loan Bank serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the Federal Home Loan Bank System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the Federal Home Loan Bank.  As a member, Abington Bank is required to purchase and maintain stock in the Federal Home Loan Bank of Pittsburgh in an amount equal to the greater of 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 5% of its outstanding advances from the Federal Home Loan Bank. At December 31, 2005, Abington Bank was in compliance with this requirement.  FEDERAL RESERVE BOARD SYSTEM. The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts, which are primarily checking and NOW accounts, and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy the liquidity requirements that are imposed by the Pennsylvania Department of Banking. At December 31, 2005, Abington Bank was in compliance with these reserve requirements.                                         30                                       TAXATION  FEDERAL TAXATION  GENERAL. Abington Community Bancorp, Abington Mutual Holding Company and Abington Bank are subject to federal income taxation in the same general manner as other corporations with some exceptions listed below. The following discussion of federal, state and local income taxation is only intended to summarize certain pertinent income tax matters and is not a comprehensive description of the applicable tax rules.  METHOD OF ACCOUNTING. For federal income tax purposes, Abington Bank reports income and expenses on the accrual method of accounting and files its federal income tax return on a calendar year basis.  BAD DEBT RESERVES. The Small Business Job Protection Act of 1996 eliminated the use of the reserve method of accounting for bad debt reserves by savings associations, effective for taxable years beginning after 1995. Prior to that time, Abington Bank was permitted to establish a reserve for bad debts and to make additions to the reserve. These additions could, within specified formula limits, be deducted in arriving at taxable income. As a result of the Small Business Job Protection Act of 1996, savings associations must use the specific charge-off method in computing their bad debt deduction beginning with their 1996 federal tax return. In addition, federal legislation required the recapture over a six year period of the excess of tax bad debt reserves at December 31, 1995 over those established as of December 31, 1987.  TAXABLE DISTRIBUTIONS AND RECAPTURE. Prior to the Small Business Job Protection Act of 1996, bad debt reserves created prior to January 1, 1988 were subject to recapture into taxable income if Abington Bank failed to meet certain thrift asset and definitional tests. New federal legislation eliminated these savings association related recapture rules. However, under current law, pre-1988 reserves remain subject to recapture should Abington Bank make certain non-dividend distributions or cease to maintain a bank charter.  At December 31, 2005, Abington Bank's total federal pre-1988 reserve was approximately $3.2 million. The reserve reflects the cumulative effects of federal tax deductions by Abington Bank for which no federal income tax provisions have been made.  ALTERNATIVE MINIMUM TAX. The Internal Revenue Code imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences. The alternative minimum tax is payable to the extent such alternative minimum tax income is in excess of the regular income tax. Net operating losses, of which Abington Bank has none, can offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. Abington Bank has not been subject to the alternative minimum tax or any such amounts available as credits for carryover.  CORPORATE DIVIDENDS-RECEIVED DEDUCTION. Abington Community Bancorp may exclude from its income 100% of dividends received from Abington Bank as a member of the same affiliated group of corporations. The corporate dividends received deduction is 80% in the case of dividends received from corporations which a corporate recipient owns less than 80%, but at least 20% of the distribution corporation. Corporations which own less than 20% of the stock of a corporation distributing a dividend may deduct only 70% of dividends received.                                         31   STATE AND LOCAL TAXATION  PENNSYLVANIA TAXATION. Abington Community Bancorp is subject to the Pennsylvania Corporate Net Income Tax, Capital Stock and Franchise Tax. The Corporation Net Income Tax rate for 2005 is 9.99% and is imposed on unconsolidated taxable income for federal purposes with certain adjustments. In general, the Capital Stock and Franchise Tax is a property tax imposed on a corporation's capital stock value at a statutorily defined rate, such value being determined in accordance with a fixed formula based upon average net income and net worth.  Abington Bank is subject to tax under the Pennsylvania Mutual Thrift Institutions Tax Act, as amended to include thrift institutions having capital stock. Pursuant to the Mutual Thrift Institutions Tax, the tax rate is 11.5%. The Mutual Thrift Institutions Tax exempts Abington Bank from other taxes imposed by the Commonwealth of Pennsylvania for state income tax purposes and from all local taxation imposed by political subdivisions, except taxes on real estate and real estate transfers. The Mutual Thrift Institutions Tax is a tax upon net earnings, determined in accordance with generally accepted accounting principles with certain adjustments. The Mutual Thrift Institutions Tax, in computing income according to generally accepted accounting principles, allows for the deduction of interest earned on state and federal obligations, while disallowing a percentage of a thrift's interest expense deduction in the proportion of interest income on those securities to the overall interest income of Abington Bank. Net operating losses, if any, thereafter can be carried forward three years for Mutual Thrift Institutions Tax purposes.
MARKET RATES OF INTEREST HAVE HURT PROFITABILITY  Market rates of interest are beginning to rise from historically low levels. Many institutions, including Abington Bank, have experienced a narrowing or "compression" of their net interest spread, which is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. Abington Bank's net interest spread was 2.27% for the year ended December 31, 2005 compared to 2.30% and 2.50% for the years ended December 31, 2004 and 2003, respectively. Abington Bank's net interest margin, which is net interest income as a percentage of average interest-earning assets, was 2.78% for the year ended December 31, 2005 compared to 2.67% and 2.88% for the years ended December 31, 2004 and 2003, respectively. In addition, a sudden increase in market rates of interest could adversely affect our net portfolio value. In the event of an immediate and sustained 200 basis point increase in interest rates, Abington Bank's net portfolio value, which is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts, would decrease by $8.2 million or 6.90%. Under the same circumstances, our net interest income would be expected to decrease by $336,000 or 1.43%.  COMPETITION FOR LOW-COST CORE DEPOSITS IS INCREASING  As a result of rising interest rates in recent periods, deposit customers have transferred significant amounts of their deposits from low-cost "core deposits" such as checking and savings accounts to certificates of deposits, also known as time deposits. For the year ended December 31, 2005 core deposits comprised 42.9% of our average total deposits compared to 49.7% and 47.6% for the years ended December 31, 2004 and 2003, respectively. This has been a result of the increased rates now available on those products relative to other deposit products. As more customers invest in time deposits and as competition for low-cost core deposits increases, the average rate Abington Bank pays on its deposits will likely increase. This will have the effect of narrowing our net interest spread and net interest margin. The                                         32   average rate we paid on our interest-bearing deposits was 2.38% for the year ended December 31, 2005 compared to 1.88% and 2.11% for the years ended December 31, 2004 and 2003, respectively.  OUR LOANS ARE CONCENTRATED TO BORROWERS IN OUR MARKET AREA  At December 31, 2005, the preponderance of our total loans were to individuals and/or secured by properties located in our market area of Montgomery and Bucks Counties in Pennsylvania. We have relatively few loans outside of our market. As a result, we may have a greater risk of loan defaults and losses in the event of an economic downturn in our market area such as a decline in local property values.  OUR PORTFOLIO OF LOANS WITH A HIGHER RISK OF LOSS IS INCREASING  In recent years, we have increased our originations of construction loans and commercial real estate and multi-family residential real estate loans. These loans have a higher risk of default and loss than single-family residential mortgage loans. The aggregate of construction loans and commercial real estate and multi-family residential loans has increased from $61.7 million or 17.2 % of our total loan portfolio at December 31, 2001 to $209.4 million or 35.5% of the total loan portfolio at December 31, 2005. At the same time, the percentage of the loan portfolio comprised of single-family residential mortgage loans has decreased. Our single-family residential mortgage loans amounted to $267.0 million or 74.4% of our total loan portfolio at December 31, 2001 compared to $323.7 million or 54.9% at December 31, 2005. Construction loans and commercial real estate and multi-family residential real estate loans all generally have a higher risk of loss than single-family residential mortgage loans because repayment of the loans often depends on the successful operation of a business or the underlying property. As of December 31, 2005, our non-performing loans increased to $2.9 million compared to $227,000 at December 31, 2004. This increase was due to one construction loan which has not performed in accordance with its terms.  ABINGTON MUTUAL HOLDING COMPANY OWNS A MAJORITY OF OUR OUTSTANDING COMMON STOCK AND CAN CONTROL THE RESULT OF MOST MATTERS PUT TO A VOTE OF SHAREHOLDERS  Abington Mutual Holding Company owns 55% of our outstanding shares of common stock, and, through its board of directors, is able to exercise voting control over most matters put to a vote of our shareholders. The same directors and officers who manage Abington Community Bancorp and Abington Bank also manage Abington Mutual Holding Company. No assurances can be given that Abington Mutual Holding Company will not take action which the minority shareholders believe to be contrary to their interests. For example, Abington Mutual Holding Company could approve the implementation of stock benefit plans, prevent a sale or merger transaction or defeat a candidate for our board of directors or other proposals put forth by the minority shareholders. Moreover, Abington Mutual Holding Company's ownership of more than a majority of the outstanding shares of our common stock is likely to perpetuate existing management and directors.  OUR RESULTS OF OPERATIONS ARE SIGNIFICANTLY DEPENDENT ON ECONOMIC CONDITIONS AND RELATED UNCERTAINTIES  Banking is affected, directly and indirectly, by domestic and international economic and political conditions and by governmental monetary and fiscal policies. Conditions such as inflation, recession, unemployment, volatile interest rates, real estate values, government monetary policy, international conflicts, the actions of terrorists and other factors beyond our control may adversely affect our results of operations. Changes in interest rates, in particular, could adversely affect our net interest income and have a number of other adverse effects on our operations, as discussed the first risk factor above. Adverse economic conditions also could result in an increase in loan delinquencies, foreclosures and nonperforming assets and a decrease in the value of the property or other collateral which secures our                                         33   loans, all of which could adversely affect our results of operations. We are particularly sensitive to changes in economic conditions and related uncertainties in the Delaware Valley because we derive substantially all of our loans, deposits and other business from the greater Philadelphia region in eastern Pennsylvania and contiguous counties in New Jersey and Delaware. Accordingly, we remain subject to the risks associated with prolonged declines in national or local economies.  OUR ALLOWANCE FOR LOSSES ON LOANS MAY NOT BE ADEQUATE TO COVER PROBABLE LOSSES  We have established an allowance for loan losses which we believe is adequate to offset probable losses on our existing loans. There can be no assurance that any future declines in real estate market conditions, general economic conditions or changes in regulatory policies will not require us to increase our allowance for loan losses, which would adversely affect our results of operations. Our allowance for loan losses amounted to 50.3% of non-performing loans at December 31, 2005.  WE ARE SUBJECT TO EXTENSIVE REGULATION WHICH COULD ADVERSELY AFFECT OUR BUSINESS AND OPERATIONS  We are subject to extensive federal and state governmental supervision and regulation, which are intended primarily for the protection of depositors. In addition, we are subject to changes in federal and state laws, as well as changes in regulations, governmental policies and accounting principles. The effects of any such potential changes cannot be predicted but could adversely affect our business and operations in the future.
Not applicable.
We currently conduct business from our main office, seven full-service banking offices and four limited service offices. The following table sets forth the net book value of the land, building and leasehold improvements and certain other information with respect to our offices at December 31, 2005.                                                                                          Net Book                                                                   Date of Lease        Value       Amount of              Description/Address                  Leased/Owned      Expiration      of Property     Deposits - ----------------------------------------------  ---------------- ---------------  ---------------  ----------                                                                                           (In Thousands) Main Office                                          Owned             N/A             $1,300        $141,645 180 Old York Road Jenkintown, PA 19046  Loan Processing Office                               Owned             N/A                963             n/a 179 Washington Lane Jenkintown, PA 19046  Glenside Branch                                   Bldg. Owned         12/31/19            456          80,525 273 Keswick Avenue                                Ground Lease Glenside, PA 19038  Abington Branch                                      Leased            1/31/19            171          56,102 990 Old York Road Abington, PA 19001                                           34                                                                                          Net Book                                                                   Date of Lease        Value       Amount of              Description/Address                  Leased/Owned      Expiration      of Property     Deposits - ----------------------------------------------  ---------------- ---------------  ---------------  ----------  Willow Grove Branch                                  Owned             N/A              1,422          70,321 275 Moreland Road Willow Grove, PA 19090  Horsham Branch                                       Leased            5/31/08            226          36,036 Rt 611 & County Line Road Horsham, PA 19044  Huntingdon Valley Branch                             Leased           12/31/13            133          25,760 667 Welsh Road Huntingdon Valley, PA 19006  Fort Washington Branch                               Leased            8/15/08            140          25,039 101 Fort Washington Avenue Fort Washington, PA 19034  Montgomeryville Branch                               Leased            3/31/11             57          23,798 521 Stump Road North Wales, PA 19454  Rydal Park Limited Service Office                    Leased            5/21/08             --           8,917 1515 The Fairway Rydal, PA 19046  Centennial Station Limited Service Office            Leased            7/31/08              5           3,068 12106-B Centennial Station Warminster, PA 18974  Regency Towers Limited Service Office                Leased           10/31/08             40           4,357 1003 Easton Road Willow Grove, PA 19090  Ann's Choice Limited Service Office                  Leased            7/31/08              2          25,561 10000 Ann's Choice Way Warminster, PA 18974
As of December 31, 2005, we were not, and we presently are not, involved in any legal proceedings of a material nature. From time to time, we are a party to legal proceedings incidental to our business to enforce our security interest in collateral pledged to secure loans made by Abington Bank.
Not applicable.                                          35   PART II
(a)     Abington Community Bancorp, Inc. common stock trades on the Nasdaq         National Market under the trading symbol "ABBC." At the close of         business on December 31, 2005, there were 1,600 shareholders of record.          Company common shares were first sold in Abington Community Bancorp's         initial public offering as a part of Abington Bank's mutual holding         company reorganization on December 16, 2004 at the offering price of         $10.00 per share. The Company's common stock began trading on Nasdaq on         December 17, 2004.          The following table sets forth the high and low closing stock prices of         the Company's common stock as reported by the Nasdaq stock market during         the periods presented.                                              YEAR ENDED DECEMBER 31,                                 -------------------------------------------                                         2005                  2004                                 --------------------- ---------------------                                     High       Low        High       Low             First Quarter         $ 13.75     $ 12.79       n/a        n/a            Second Quarter        $ 13.15     $ 10.30       n/a        n/a            Third Quarter         $ 13.09     $ 11.65       n/a        n/a            Fourth Quarter        $ 13.65     $ 11.90   $ 13.70     $ 13.01          The following table summarizes the cash dividends per share of common         stock paid by the Company during the periods indicated.                                     YEAR ENDED DECEMBER 31,                                 ---------------------------                                     2005          2004                                 ------------- -------------             First Quarter               n/a           n/a            Second Quarter           $ 0.05           n/a            Third Quarter            $ 0.05           n/a            Fourth Quarter           $ 0.05           n/a           The Company did not sell any of its equity securities during 2005 that         were not registered under the Securities Act of 1933.          For information regarding the Company's equity compensation plans see         Item 12.  (b)     Not applicable.  (c)     PURCHASES OF EQUITY SECURITIES          The Company did not make any repurchases of its common stock during the         fourth quarter of 2005.                                         36
The selected consolidated financial and other data of Abington Community Bancorp, Inc. set forth below does not purport to be complete and should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including the Consolidated Financial Statements and related Notes, appearing elsewhere herein.                                                                           At December 31,                                              ------------------------------------------------------------------                                                  2005          2004          2003         2002         2001                                              ------------  ------------  ------------  -----------  -----------                                                                    (Dollars in Thousands)       SELECTED FINANCIAL AND OTHER DATA: Total assets                                     $844,072      $717,978      $604,439     $535,797     $476,646 Cash and cash equivalents                          27,714        33,296        19,696       51,702       36,689 Investment securities and FHLB stock:   Held-to-maturity                                 20,396        10,220            --           --           --   Available-for-sale                               89,890        86,614        89,023       50,351       35,237 Mortgage-backed securities:   Held-to-maturity                                 67,411        81,704        43,009       10,060           --   Available-for-sale                               79,943        83,028        78,213       41,251       45,663 Loans receivable, net                             529,487       412,656       364,620      371,024      348,912 Deposits                                          501,183       405,290       362,666      344,336      309,059 FHLB advances                                     201,445       170,666       173,732      122,761      107,251 Other borrowings                                   16,114        12,866         8,681       11,937        9,749 Stockholders' equity                              117,231       123,055        53,234       50,591       45,388  Banking offices                                        12            12            12            9            9                                                                   Year Ended December 31,                                              ------------------------------------------------------------------                                                  2005          2004          2003         2002         2001                                              ------------  ------------  ------------  -----------  -----------                                                        (Dollars in Thousands, except per share data) SELECTED OPERATING DATA: Total interest income                             $40,011       $30,849       $29,997      $31,797      $32,345 Total interest expense                             18,999        14,209        13,898       14,583       16,792                                                   -------       -------       -------      -------      ------- Net interest income                                21,012        16,640        16,099       17,214       15,553 Provision for loan losses                              25            45           375          500          628                                                   -------       -------       -------      -------      -------   Net interest income after provision       for loan losses                              20,987        16,595        15,724       16,714       14,925 Total non-interest income                           2,798         2,243         1,859          741        1,072 Total non-interest expense                         14,976        12,015        11,472       10,611        9,470                                                   -------       -------       -------      -------      ------- Income before income taxes                          8,809         6,823         6,111        6,844        6,527 Income taxes                                        2,507         2,268         2,021        2,467        2,328                                                   -------       -------       -------      -------      ------- Net income                                        $ 6,302       $ 4,555       $ 4,090      $ 4,377      $ 4,199                                                   =======       =======       =======      =======      ======= Basic earnings per share                          $  0.41       n/a (1)           n/a          n/a          n/a Diluted earnings per share                        $  0.41       n/a (1)           n/a          n/a          n/a                                           37                                                                           At or For the                                                                   Year Ended December 31,                                              ------------------------------------------------------------------                                                  2005          2004          2003         2002         2001                                              ------------  ------------  ------------  -----------  -----------       SELECTED OPERATING RATIOS(2): Average yield on interest-earning assets            5.30%         4.95%         5.36%        6.47%        7.25% Average rate on interest-bearing liabilities                                         3.03          2.65          2.86         3.44         4.37 Average interest rate spread(3)                     2.27          2.30          2.50         3.03         2.88 Net interest margin(3)                              2.78          2.67          2.88         3.50         3.49 Average interest-earning assets to average   interest-bearing liabilities                    120.28        116.08        115.11       116.12       116.07 Net interest income after provision   for loan losses to non-interest expense         140.14        138.12        137.06       157.52       157.60 Total non-interest expense to average   assets                                            1.88          1.85          1.97         2.09         2.06 Efficiency ratio(4)                                62.90         63.63         63.88        59.10        56.96 Return on average assets                            0.79          0.70          0.70         0.86         0.91 Return on average equity                            5.27          7.52          7.85         9.11         9.71 Average equity to average assets                   15.02          9.30          8.94         9.46         9.42                                                                          At or For the                                                                   Year Ended December 31,                                              ------------------------------------------------------------------                                                  2005          2004          2003         2002         2001                                              ------------  ------------  ------------  -----------  ----------- ASSET QUALITY RATIOS(5): Non-performing loans as a percent of   total loans receivable(6)                         0.54%         0.05%         0.12%        0.31%        0.40% Non-performing assets as a percent of   total assets(6)                                   0.34          0.03          0.08         0.23         0.30 Allowance for loan losses as a percent of   non-performing loans                             50.29        622.03        315.15       145.04       111.50 Net (recoveries)/charge-offs to average   loans receivable                                  0.02          0.02          0.21         0.08         0.12  CAPITAL RATIOS(7): Tier 1 leverage ratio                              10.46%        12.73%         8.81%        9.33%        9.50% Tier 1 risk-based capital ratio                    16.93         21.24         15.12        14.64        15.33 Total risk-based capital ratio                     17.21         21.57         15.53        15.18        15.88  - ------------------  (1)     Due to the timing of the Bank's reorganization into the mutual holding         company form and the completion of the Company's initial public offering         on December 16, 2004, earnings per share for the period from December         16, 2004 to December 31, 2004 is not considered meaningful and is not         shown.  (2)     With the exception of end of period ratios, all ratios are based on         average monthly balances during the indicated periods.  (3)     Average interest rate spread represents the difference between the         average yield on interest-earning assets and the average rate paid on         interest-bearing liabilities, and net interest margin represents net         interest income as a percentage of average interest-earning assets.  (4)     The efficiency ratio represents the ratio of non-interest expense         divided by the sum of net interest income and non-interest income.  (5)     Asset quality ratios are end of period ratios, except for net         charge-offs to average loans receivable.                                         38   (6)     Non-performing assets consist of non-performing loans and real estate         owned. Non-performing loans consist of all accruing loans 90 days or         more past due and all non-accruing loans. It is our policy to cease         accruing interest on all loans 90 days or more past due. Real estate         owned consists of real estate acquired through foreclosure and real         estate acquired by acceptance of a deed-in-lieu of foreclosure.  (7)     Capital ratios are end of period ratios and are calculated for Abington         Bank per regulatory requirements.
OVERVIEW--The Company was formed by the Bank in connection with the Bank's reorganization into the mutual holding company form and commenced operations in December 2004. The Company's results of operations are primarily dependent on the results of the Bank, which is a wholly owned subsidiary of the Company. The Bank's results of operations depend to a large extent on net interest income, which is the difference between the income earned on its loan and investment portfolios and the cost of funds, which is the interest paid on deposits and borrowings. Results of operations are also affected by our provisions for loan losses, losses on derivative instruments, service charges and other non-interest income and non-interest expense. Non-interest expense principally consists of salaries and employee benefits, office occupancy and equipment expense, data processing expense, advertising and promotions and other expense. Our results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially impact our financial condition and results of operations. The Bank is subject to regulation by the Federal Deposit Insurance Corporation ("FDIC") and the Pennsylvania Department of Banking. The Bank's executive offices and loan processing office are in Jenkintown, Pennsylvania, with seven other branches and four limited service facilities located in nearby Montgomery County neighborhoods. The Bank is principally engaged in the business of accepting customer deposits and investing these funds in loans, primarily residential mortgages.  We had net income of $6.3 million for the year ended December 31, 2005, our first full year as a public company, representing an increase of $1.7 million or 38.4% over net income of $4.6 million for the year ended December 31, 2004. Earnings per share was $0.41 for the year ended December 31, 2005. Our net interest income improved by $4.4 million or 26.3% to $21.0 million for 2005 from $16.6 million for 2004. The improvement was primarily a result of an increase in the average balances of our interest earning assets, most notably loans, combined with increases in the average yields on those assets. These increases were partially offset by increases in the average balances of our interest bearing liabilities and the rates paid on those liabilities. The Company's total assets increased $126.1 million or 17.6% to $844.1 million at December 31, 2005 compared to $718.0 million at December 31, 2004. The primary reason for the increase in total assets in 2005 was a $116.8 million or 28.3% increase in net loans receivable to $529.5 million. Our total deposits increased $95.9 million or 23.7% to $501.2 million at December 31, 2005 from $405.3 million at December 31, 2004, primarily as a result of a $103.4 million increase in certificate accounts. The shift towards higher-rate certificates of deposits was a result of the increased rates available on those products relative to other deposit products in the current interest rate environment. The Company continues to remain focused on maintaining and growing its base of core deposits over the long term. The upcoming opening of three new branches is expected to contribute towards this goal.                                         39   CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES--In reviewing and understanding financial information for Abington Community Bancorp, Inc., you are encouraged to read and understand the significant accounting policies used in preparing our consolidated financial statements. These policies are described in Note 1 of the notes to our consolidated financial statements included in Item 8 of this Form 10-K. The accounting and financial reporting policies of Abington Community Bancorp, Inc. conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The preparation of the Company's consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Management evaluates these estimates and assumptions on an ongoing basis including those related to the allowance for loan losses and deferred income taxes. Management bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances. These form the bases for making judgments on the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.  ALLOWANCE FOR LOAN LOSSES--The allowance for loan losses is increased by charges to income through the provision for loan losses and decreased by charge-offs (net of recoveries). The allowance is maintained at a level that management considers adequate to provide for losses based upon evaluation of the known and inherent risks in the loan portfolio. Management's periodic evaluation of the adequacy of the allowance is based on the Company's past loan loss experience, the volume and composition of lending conducted by the Company, adverse situations that may affect a borrower's ability to repay, the estimated value of any underlying collateral, current economic conditions and other factors affecting the known and inherent risk in the portfolio. This evaluation is inherently subjective as it requires material estimates including, among others, the amount and timing of expected future cash flows on impacted loans, exposure at default, value of collateral, and estimated losses on our commercial and residential loan portfolios. All of these estimates may be susceptible to significant change.  The allowance consists of specific allowances for impaired loans, a general allowance on all classified loans which are not impaired and a general allowance on the remainder of the portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.  We establish an allowance on certain impaired loans for the amount by which the discounted cash flows, observable market price or fair value of collateral if the loan is collateral dependent is lower than the carrying value of the loan. A loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. An insignificant delay or insignificant shortfall in amount of payments does not necessarily result in the loan being identified as impaired.  We establish a general valuation allowance on classified loans which are not impaired. We segregate these loans by category and assign allowance percentages to each category based on inherent losses associated with each type of lending and consideration that these loans, in the aggregate, represent an above-average credit risk and that more of these loans will prove to be uncollectible compared to loans in the general portfolio. The categories used by the Company include "Doubtful," "Substandard" and "Special Mention." Classification of a loan within such categories is based on identified weaknesses that increase the credit risk of the loan.  We establish a general allowance on non-classified loans to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem loans. This general valuation allowance is determined by segregating the loans by loan category and                                         40   assigning allowance percentages based on our historical loss experience, delinquency trends, and management's evaluation of the collectibility of the loan portfolio.  The allowance is adjusted for significant factors that, in management's judgment, affect the collectibility of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary lending areas, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, loss experience in particular segments of the portfolio, duration of the current business cycle, and bank regulatory examination results. The applied loss factors are reevaluated each reporting period to ensure their relevance in the current economic environment.  While management uses the best information available to make loan loss allowance valuations, adjustments to the allowance may be necessary based on changes in economic and other conditions, changes in the composition of the loan portfolio or changes in accounting guidance. In times of economic slowdown, either regional or national, the risk inherent in the loan portfolio could increase resulting in the need for additional provisions to the allowance for loan losses in future periods. An increase could also be necessitated by an increase in the size of the loan portfolio or in any of its components even though the credit quality of the overall portfolio may be improving. Historically, our estimates of the allowance for loan loss have approximated actual losses incurred. In addition, the Pennsylvania Department of Banking and the FDIC, as an integral part of their examination processes, periodically review our allowance for loan losses. The Pennsylvania Department of Banking or the FDIC may require the recognition of adjustment to the allowance for loan losses based on their judgment of information available to them at the time of their examinations. To the extent that actual outcomes differ from management's estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods.  INCOME TAXES--Management makes estimates and judgments to calculate some of our tax liabilities and determine the recoverability of some of our deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenues and expenses. Management also estimates a reserve for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. These estimates and judgments are inherently subjective. Historically, our estimates and judgments to calculate our deferred tax accounts have not required significant revision from management's initial estimates.  In evaluating our ability to recover deferred tax assets, management considers all available positive and negative evidence, including our past operating results, recent cumulative losses and our forecast of future taxable income. In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction is estimated future taxable income may require us to record an additional valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.  RECENT ACCOUNTING PRONOUNCEMENTS--In May 2005, the FASB issued SFAS No. 154, ACCOUNTING CHANGES AND ERROR CORRECTIONS- A REPLACEMENT OF APB OPINION NO. 20 AND FASB STATEMENT NO. 3. SFAS No. 154 replaces APB Opinion No. 20, ACCOUNTING CHANGES, and FASB Statement No. 3, REPORTING ACCOUNTING CHANGES IN INTERIM FINANCIAL STATEMENTS, and changes the accounting and reporting requirements for a change in accounting principle. SFAS No. 154 applies to all voluntary changes in an accounting principle, as well as to changes required by a new accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS No. 154 is                                         41   effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005 and requires retrospective application to prior periods' financial statements for most voluntary changes in an accounting principle, unless it is impracticable to do so. The Company adopted this guidance on January 1, 2006. The adoption did not have a material effect on the Company's financial position or results of operations.  On November 3, 2005, the FASB issued FASB Staff Position ("FSP'") Nos. FAS 115-1 and FAS 124-1, THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS. This FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. This FSP nullifies certain requirements of EITF Issue 03-1, THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS, and supersedes EITF Topic No. D-44, RECOGNITION OF OTHER-THAN-TEMPORARY IMPAIRMENT UPON THE PLANNED SALE OF A SECURITY WHOSE COST EXCEEDS FAIR VALUE. The guidance in this FSP amends FASB Statement No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. The FSP is effective for reporting periods beginning after December 15, 2005. The Company adopted this guidance on January 1, 2006. The adoption did not have a material effect on the Company's financial position or results of operations.  On December 19, 2005, the FASB issued FSP 94-6-1, TERMS OF LOAN PRODUCTS THAT MAY GIVE RISE TO A CONCENTRATION OF CREDIT RISK. FSP 94-6-1 addresses whether, under existing guidance, nontraditional loan products represent a concentration of credit risk and what disclosures are required for entities that originate, hold, guarantee, service, or invest in loan products whose terms may give rise to a concentration of credit risk. Nontraditional loan products expose the originator, holder, investor, guarantor, or servicer to higher credit risk than traditional loan products. Typical features of nontraditional loan products may include high loan-to-value ratios and interest or principal repayments that are less than the repayments for fully amortizing loans of an equivalent term. FSP 94-6-1 was effective upon its issuance and it did not have a material impact on the Company's financial position or disclosures.  In February 2006, the FASB issued SFAS No. 155, ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS. This statement amends FASB Statements No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, and No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES. This statement resolves issues addressed in Statement 133 Implementation Issue No. D1, APPLICATION OF STATEMENT 133 TO BENEFICIAL INTEREST IN SECURITIZED FINANCIAL ASSETS. This Statement is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. The Company is continuing to evaluate the impact of this pronouncement and does not expect that the guidance will have a material effect on the Company's financial position or results of operations.  In March 2006, the FASB issued SFAS No. 156, ACCOUNTING FOR SERVICING OF FINANCIAL ASSET- AN AMENDMENT OF FASB STATEMENT NO. 140. This statement amends SFAS No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This statement requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. It also permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. This Company plans to adopt this statement effective January 1, 2007. The Company is continuing to evaluate the impact of this pronouncement and does not expect that the guidance will have a material effect on the Company's financial position or results of operations.                                         42   COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2005 AND DECEMBER 31, 2004  The Company's total assets increased $126.1 million or 17.6% to $844.1 million at December 31, 2005 compared to $718.0 million at December 31, 2004. The primary reason for the increase in total assets in 2005 was a $116.8 million or 28.3% increase in net loans receivable to $529.5 million. All categories of loans increased, with the largest growth occurring in one- to four-family residential loans and construction loans. Growing the Company's loan portfolio through new loan originations, loan purchases and loan participations has been a key element of the Company's long-term plan to leverage its capital. Our investment securities, both held-to-maturity and available-for-sale, increased by an aggregate of $12.8 million or 14.9% to an aggregate of $99.2 million at December 31, 2005 compared to an aggregate of $86.4 million at December 31, 2004. This increase was primarily the result of the purchase of approximately $10.2 million of municipal bonds. The tax-exempt income generated by these bonds has contributed to the reduction of the Company's effective tax rate. Our mortgage-backed securities, both held-to-maturity and available-for-sale, decreased by an aggregate of $17.4 million or 10.5% to an aggregate of $147.4 million at December 31, 2005 compared to an aggregate of $164.7 million at December 31, 2004. During 2005, purchases of approximately $29.3 million of both available-for-sale and held-to-maturity mortgage-backed securities were offset by approximately $44.5 million in repayments of such securities. The excess repayments were primarily invested in new loan originations. Our cash and cash equivalents decreased $5.6 million or 16.8% to $27.7 million at December 31, 2005 compared to $33.3 million at December 31, 2004. This decrease was also due primarily to investments in new loan originations. Additionally, the Company purchased $15.0 million of bank owned life insurance ("BOLI") during the first quarter of 2005, which is reflected in the Company's balance sheet at its cash surrender value. The BOLI is intended to fund various benefit programs of the Company.  Our total deposits increased $95.9 million or 23.7% to $501.2 million at December 31, 2005 from $405.3 million at December 31, 2004 as a result of a $103.4 million increase in certificate accounts and a $1.8 million increase in checking accounts that were partially offset by a decrease in savings and money market accounts. The shift towards higher-rate certificates of deposits was a result of the increased rates available on those products relative to other deposit products in the current interest rate environment. The Company continues to remain focused on maintaining and growing its base of core deposits over the long term. The upcoming opening of three new branches is expected to contribute towards this goal. Our advances from the Federal Home Loan Bank ("FHLB") increased $30.8 million or 18.0% during 2005 to $201.4 million at December 31, 2005 compared to $170.7 million at December 31, 2004. We utilize advances from the FHLB as an alternative to retail deposits in order to fund operations and additional asset growth. The $3.2 million increase in other borrowed money to $16.1 million at December 31, 2005 compared to $12.9 million at December 31, 2004 reflects an increase in the amount of securities repurchase agreements entered into with certain commercial checking account customers.  Our stockholders' equity decreased $5.8 million to $117.2 million at December 31, 2005 compared to $123.1 million at December 31, 2004. The decrease was primarily due to the purchase of approximately 419,000 shares of the Company's common stock for an aggregate of $5.3 million by the Company's employee stock ownership plan ("ESOP") and the purchase of approximately 286,000 shares of the Company's common stock for an aggregate of $3.7 million by the Company's 2005 Recognition and Retention Plan ("RRP"). The payment of the Company's quarterly cash dividends of $0.05 per share in June, September and December reduced retained earnings by an aggregate of $2.3 million. Additionally, our accumulated other comprehensive loss increased $1.8 million. These decreases to stockholders' equity were partially offset by our net income for 2005, resulting in a net increase in retained earnings of $4.0 million.                                         43   LIQUIDITY AND CAPITAL RESOURCES  Our primary sources of funds are from deposits, amortization of loans, loan prepayments and pay-offs, mortgage-backed securities and other investments, and other funds provided from operations. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing investment securities are relatively predictable sources of funds, deposit flows and loan prepayments can be greatly influenced by general interest rates, economic conditions and competition. We also maintain excess funds in short-term, interest-bearing assets that provide additional liquidity. At December 31, 2005, our cash and cash equivalents amounted to $27.7 million. In addition, at such date we had $24.1 million in investment securities scheduled to mature within the next 12 months. Our available for sale investment and mortgage-backed securities amounted to an aggregate of $158.8 million at December 31, 2005.  We use our liquidity to fund existing and future loan commitments, to fund maturing certificates of deposit and demand deposit withdrawals, to invest in other interest-earning assets, and to meet operating expenses. At December 31, 2005, we had certificates of deposit maturing within the next 12 months amounting to $161.2 million. Based upon historical experience, we anticipate that a significant portion of the maturing certificates of deposit will be redeposited with us. For years ended December 31, 2005 and 2004, the average balance of our outstanding FHLB advances was $192.2 million and $169.7 million, respectively. At December 31, 2005, we had $201.4 million in outstanding FHLB advances and we had $314.5 million in additional FHLB advances available to us.  In addition to cash flow from loan and securities payments and prepayments as well as from sales of available for sale securities, we have significant borrowing capacity available to fund liquidity needs. We have increased our utilization of borrowings in recent years as a cost efficient addition to deposits as a source of funds. Our borrowings consist primarily of advances from the Federal Home Loan Bank of Pittsburgh, of which we are a member. Under terms of the collateral agreement with the Federal Home Loan Bank, we pledge substantially all of our residential mortgage loans and mortgage-backed securities as well as all of our stock in the Federal Home Loan Bank as collateral for such advances.  Our stockholders' equity amounted to $117.2 million at December 31, 2005, a decrease of $5.8 million from stockholders' equity of $123.1 million at December 31, 2004. Our stockholders' equity includes $69.3 million in net proceeds from the Company's initial public offering completed on December 16, 2004. A substantial amount of the net proceeds that had been initially invested conservatively in instruments that yield a market rate have been redeployed into loans. As part of our long-term strategic plan to leverage our capital through retail deposit and loan growth, we anticipate opening three additional branches within the next twelve months. Stockholders' equity was impacted during 2005 by the purchase of shares of our common stock by our ESOP and RRP. As noted above, our ESOP purchased approximately 419,000 shares of the Company's common stock in the open market for an aggregate of $5.3 million and our RRP purchased approximately 286,000 shares of the Company's common stock for an aggregate of $3.7 million during 2005. Additionally, during 2005 the Company began its policy of paying quarterly cash dividends. We paid quarterly cash dividends of $0.05 per share in June, September and December 2005 and such dividend payments in 2005 amounted to approximately $2.3 million in the aggregate. We recently commenced our first stock repurchase program. Through this program, which was announced on January 31, 2006, the Company will repurchase up to 10% of its outstanding shares held by persons other than Abington Mutual Holding Company, or 714,150 shares. The shares may be purchased in the open market or in privately negotiated transactions from time to time depending upon market conditions and other factors over a one-year period. We believe that the stock repurchase program will benefit our shareholders by improving the Company's return on equity and earnings per share and, at the same time, aid us in managing our strong capital position. The stock repurchase program reflects our                                         44   commitment to manage our capital in a manner which should enhance shareholder value while permitting us to prudently grow and diversify our business.  The following table summarizes the Company's and the Bank's capital ratios as of the dates indicated and compares them to current regulatory requirements.                                                    Actual Ratios At                                                ----------------                                                  December 31,                                                  ------------         Regulatory    To Be Well                                                2005         2004        Minimum     Capitalized                                             -----------  -----------  -----------  -------------           CAPITAL RATIOS:      Tier 1 leverage ratio         The Company                            14.28%       17.67%        4.00%          N/A         The Bank                               10.46        12.73         4.00          5.00%      Tier 1 risk-based capital ratio         The Company                            16.94        29.62         4.00           N/A         The Bank                               16.93        21.24         4.00          6.00      Total risk-based capital ratio         The Company                            23.47        29.96         8.00           N/A         The Bank                               17.21        21.57         8.00         10.00   DERIVATIVE FINANCIAL INSTRUMENTS  A derivative financial instrument includes futures, forwards, interest rate swaps, option contracts, and other financial instruments with similar characteristics. On occasion during the three years ended December 31, 2005, we have used interest rate caps and swap agreements to manage our exposure to fluctuations in interest rates on a portion of our fixed-rate loans and variable rate deposits. We used interest rate swap agreements to hedge interest rate risk resulting from our portfolio of interest-earning loans and interest-bearing deposit liabilities. We do not hold any derivative financial instruments for trading purposes.  At December 31, 2005, the Company was not party to any cap or swap agreements as our final swap agreements expired in December 2005. At December 31, 2004 the Company was party to two swap agreements with terms expiring in June 2005, and December 2005. Under the June 2005 agreement, the Company either received or paid, on a quarterly basis, the amount by which the ten-year Constant Maturity Treasury ("CMT") exceeded or fell below 5.57% on the notional amount of $15 million. This agreement effectively changed a portion of the Company's fixed rate mortgage portfolio to a variable rate of interest. Under the December 2005, agreement, the Company either received or paid on a quarterly basis, the amount by which the three month LIBOR exceeded or fell below 2.59% on the notional amount of $15 million. This agreement effectively changed the Company's variable rate money market accounts to a fixed rate of interest.  The swaps did not qualify as hedges under SFAS No. 133. As such, the fair value of the interest rate swaps were reflected as a liability in the accompanying consolidated statements of financial condition with the offset recorded in loss on derivative instruments, net in the consolidated statements of income. The fair value of the swap agreements was negative $85,000 at December 31, 2004.  Amounts paid or received under the cap or swap agreement are recognized in gain (loss) on derivative instruments, net in the Company's consolidated statements of income during the period in which they accrue. During the year ended December 31, 2005, the Company received $13,000 from the contra parties under the agreements. During the years ended December 31, 2004, and 2003, the Company paid $641,000 and $770,000, respectively, to the contra parties under the agreements. In addition, the unrealized gains                                         45   on derivatives recognized in gain (loss) on derivative instruments, net in the Company's consolidated statements of income were $85,000, $501,000 and $363,000 for the years ended December 31, 2005, 2004, and 2003, respectively.  SHARE-BASED COMPENSATION  In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123R (revised 2004), SHARE-BASED PAYMENT, which revises SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, and supersedes Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. This Statement requires an entity to recognize the cost of employee services received in share-based payment transactions and measure the cost on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. The provisions of SFAS No. 123R were adopted by the Company as of July 1, 2005.  In March 2005, the Securities and Exchange Commission (the "SEC") issued Staff Accounting Bulletin ("SAB") No. 107 which expressed the views of the SEC regarding the interaction between SFAS No. 123R and certain SEC rules and regulations. SAB No. 107 provides guidance related to the valuation of share-based payment arrangements for public companies, including assumptions such as expected volatility and expected term.  At December 31, 2005, the Company has two stock-based compensation plans, the 2005 Recognition and Retention Plan and the 2005 Stock Option Plan. Share awards were first issued under these plans in July 2005. See Note 14 in the Notes to the Consolidated Financial Statements in Item 8 herein for a further description of these plans.  During the year ended December 31, 2005, we recognized $333,000 in compensation expense related to the amortization of RRP shares, compared to no such expense in 2004. As of December 31, 2005, approximately $3.1 million in additional compensation expense will be recognized over the remaining lives of the RRP awards. At December 31, 2005, the weighted average remaining lives of the RRP awards is approximately 4.5 years.  During the year ended December 31, 2005, approximately $181,000 was recognized in compensation expense for the Option Plan. At December 31, 2005, approximately $1.7 million in additional compensation expense for awarded options remained unrecognized. The weighted average period over which this expense will be recognized is approximately 4.5 years.  The Company also has an employee stock ownership plan ("ESOP"). See Note 14 in the Notes to the Consolidated Financial Statements in Item 8 herein for a further description of this plan. Shares awarded under the ESOP are accounted for in accordance with AICPA Statement of Position ("SOP") 93-6, EMPLOYERS' ACCOUNTING FOR EMPLOYEE STOCK OWNERSHIP PLANS. As ESOP shares are committed to be released and allocated among participants, the Company recognizes compensation expense equal to the average market price of the shares over the period earned. We recognized $475,000 in compensation expense due to the ESOP in the year ended December 31, 2005 compared to no ESOP expense in 2004.  COMMITMENTS AND OFF-BALANCE SHEET ARRANGEMENTS  We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend                                         46   credit and the unused portions of lines of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. Commitments to extend credit and lines of credit are not recorded as an asset or liability by us until the instrument is exercised. At December 31, 2005 and 2004, we had no commitments to originate loans for sale.  Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the customer. The amount and type of collateral required varies, but may include accounts receivable, inventory, equipment, real estate and income-producing commercial properties. At December 31, 2005 and 2004, commitments to originate loans and commitments under unused lines of credit, including undisbursed portions of construction loans in process, for which the Bank is obligated amounted to approximately $125.2 million and $92.4 million, respectively.  Letters of credit are conditional commitments issued by the Bank guaranteeing payments of drafts in accordance with the terms of the letter of credit agreements. Commercial letters of credit are used primarily to facilitate trade or commerce and are also issued to support public and private borrowing arrangements, bond financings and similar transactions. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Collateral may be required to support letters of credit based upon management's evaluation of the creditworthiness of each customer. The credit risk involved in issuing letters of credit is substantially the same as that involved in extending loan facilities to customers. Most letters of credit expire within one year. At December 31, 2005 and December 31, 2004, the Bank had letters of credit outstanding of approximately $14.1 million and $11.3 million, respectively, of which $12.5 million and $10.5 million, respectively, were standby letters of credit. At December 31, 2005 and 2004, the uncollateralized portion of the letters of credit extended by the Bank was approximately $169,000 and $215,000, respectively, of which $97,000 and $99,000, respectively, was for standby letters of credit.  The Bank is also subject to various pending claims and contingent liabilities arising in the normal course of business, which are not reflected in the unaudited consolidated financial statements. Management considers that the aggregate liability, if any, resulting from such matters will not be material.  Among the Bank's contingent liabilities are exposures to limited recourse arrangements with respect to the Bank's sales of whole loans and participation interests. At December 31, 2005, the exposure, which represent a portion of credit risk associated with the sold interests, amounted to $185,000. The exposure is for the life of the related loans and payable, on our proportional share, as losses are incurred.  We anticipate that we will continue to have sufficient funds and alternative funding sources to meet our current commitments.                                          47   The following tables summarize our outstanding commitments to originate loans and to advance additional amounts pursuant to outstanding letters of credit, lines of credit and under our construction loans at December 31, 2005.                                                                    Amount of Commitment Expiration - Per Period                                                          ----------------------------------------------------------                                          Total Amount         To             1-3           4-5           After 5                                           Committed         1 Year          Years         Years           Years                                        ----------------  -------------  -------------  -------------  -------------                                                                        (In Thousands)       Letters of credit                           $ 14,101         $ 13,448       $    648       $     --       $      5 Recourse obligations on loans sold               185               --             --             --            185 Commitments to originate loans                 3,597            3,597             --             --             -- Unused portion of home equity    lines of credit                            22,252               --             --             --         22,252 Unused portion of commercial    lines of credit                            41,701           41,701             --             --             -- Undisbursed portion of    construction loans in process              57,690           18,655         39,035             --             --                                             --------         --------       --------       --------       --------       Total commitments                     $139,526         $ 77,401       $ 39,683       $     --       $ 22,442                                             ========         ========       ========       ========       ========   The following tables summarize our contractual cash obligations at December 31, 2005.                                                                          Payments Due By Period                                                          ----------------------------------------------                                                              To          1-3        4-5        After 5                                               Total        1 Year       Years      Years        Years                                           -------------  ----------  ----------  ----------  ----------                                                                    (In Thousands)       Certificates of deposit                      $286,121     $161,157    $ 97,188    $ 14,272    $ 13,504                                              --------     --------    --------    --------    -------- FHLB advances                                 201,445       11,616      78,809      58,065      52,955 Repurchase agreements                          16,114       16,114          --          --          --                                              --------     --------    --------    --------    --------    Total debt                                 217,559       27,730      78,809      58,065      52,955                                              --------     --------    --------    --------    -------- Operating lease obligations                     4,832          564       1,113         862       2,293                                              --------     --------    --------    --------    --------    Total contractual obligations             $508,512     $189,451    $177,110    $ 73,199    $ 68,752                                              ========     ========    ========    ========    ========   COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004  GENERAL. We had net income of $6.3 million for the year ended December 31, 2005, representing an increase of $1.7 million or 38.4% over net income of $4.6 million for the year ended December 31, 2004. Earnings per share was $0.41 for the year ended December 31, 2005. Our net interest income improved by $4.4 million or 26.3% to $21.0 million for 2005 from $16.6 million for 2004. The improvement was primarily a result of an increase in the average balances of our interest earning assets, most notably loans, combined with increases in the average yields on those assets. These increases were partially offset by increases in the average balances of our interest bearing liabilities and the rates paid on those liabilities. Overall, our net interest margin improved 11 basis points to 2.78% for 2005 from 2.67% for 2004, although our average interest rate spread decreased slightly to 2.27% for 2005 from 2.30% for 2004. Our non-interest income improved $555,000 or 24.7% to $2.8 million for 2005 from $2.2 million for 2004. The increase was due primarily to an improvement in our gain (loss) on derivative instruments, net and income on bank owned life insurance, which was purchased in 2005. Our non-interest expense also                                         48   increased, growing $3.0 million or 24.6% to $15.0 million for 2005 from $12.0 million for 2004. The increase was due primarily to increases salaries and employee benefits expense, occupancy expense, professional services expense and advertising and promotions expense.  INTEREST INCOME. Interest income was $40.0 million for the year ended December 31, 2005, an increase of $9.2 or 29.7% from $30.8 million of interest income for the year ended December 31, 2004. This increase in interest income was primarily a result of growth in the average balance of interest-earning assets, as well as increases in the average yields on those assets. The average balance of our interest-earning assets improved $99.0 million or 15.1% to $754.7 million for 2005 compared to $622.7 million for 2004. The average yield on our interest-earnings assets improved 35 basis points to 5.30% for 2005 compared to 4.95% for 2004. The most substantial growth was seen in our loan portfolio. The average balance of our loan portfolio increased $84.1 million or 21.8% to $469.1 million for 2005 from $385.0 million for 2004. Additionally, the average yield on our loan portfolio improved 31 basis points to 6.24% for 2005 compared to 5.93% for 2004. The average balance of our mortgage-backed securities in 2005 increased by $29.4 million over the 2004 average and the average balance of our investment securities increased by $12.5 million over the same periods. The average yields on such securities improved 17 and 49 basis points, respectively, from the prior year to 4.13% and 3.36%, respectively, for 2005. The asset growth has been a result of the Company's strategic plan to leverage the capital raised in its initial public offering, in part, through loan growth. A substantial amount of the net proceeds that had been initially invested conservatively in instruments that yielded a market rate have been redeployed into loans.  INTEREST EXPENSE. Interest expense increased $4.8 million or 33.7% to $19.0 million for the year ended December 31, 2005 compared to $14.2 million for the year ended December 31, 2004. The increase in interest expense for 2005 was the result of increases in the average balances of, and average rates paid on, all categories of interest-bearing liabilities. The average balance of our interest-bearing liabilities increased $91.0 million or 17.0% to $627.5 million for 2005 compared to $536.4 million for 2004. The average rate on our interest-bearing liabilities increased 38 basis points to 3.03% for 2005 compared to 2.65% for 2004. For 2005 compared to 2004, our average deposit balance grew by $66.0 million or 18.9%, due primarily to growth in higher-rate certificates of deposit. The average balance of our certificates of deposit increased $61.5 million or 35.0% to $237.0 million for 2005 compared to $175.5 million for 2004. The growth in certificates of deposit was a result of higher market rates of interest on certificates of deposit relative to other deposit products in the current interest rate environment. Over the long term, the Company continues to remain focused on maintaining and growing its base of core deposits. There is, however, significant competition for core deposits, and no assurance can be given that we will succeed in increasing the proportion of core deposits that we hold. The average balance of FHLB advances also increased for 2005 when compared to 2004. The average balance of our FHLB advances increased $22.5 million or 13.3% to $192.2 million for 2005 compared to $170.0 million for 2004. The average rate on our FHLB advances was relatively consistent, increasing only 7 basis points to 4.51% for 2005 compared to 4.44% for 2004.                                          49   AVERAGE BALANCES, NET INTEREST INCOME, AND YIELDS EARNED AND RATES PAID. The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. Tax-exempt income and yields have not been adjusted to a tax-equivalent basis. All average balances are based on monthly balances. Management does not believe that the monthly averages differ significantly from what the daily averages would be.                                                                            Years Ended December 31,                                             ----------------------------------------------------------------------------------                                                               2005                                      2004                                             ----------------------------------------  ----------------------------------------                                                Average                    Average        Average                    Average                                                Balance      Interest     Yield/Rate      Balance      Interest     Yield/Rate                                             ------------- ------------  ------------  ------------- ------------  ------------                                                                           (Dollars in Thousands)        Interest-earning assets:      Investment securities(1)                  $ 96,786      $ 3,250          3.36%       $ 84,320     $ 2,423          2.87%      Mortgage-backed securities                 166,309        6,869          4.13         136,864       5,421          3.96      Loans receivable(2)                        469,076       29,283          6.24         384,990      22,821          5.93      Other interest-earning assets               22,551          609          2.70          16,554         184          1.11                                                --------      -------                      --------     -------        Total interest-earning assets            754,722       40,011          5.30%        622,728      30,849          4.95%                                                              -------         -----                     -------         -----      Cash and non-interest bearing        balances                                  20,413                                     17,241      Other non-interest-earning assets           21,556                                     11,157                                                --------                                   --------        Total assets                            $796,691                                   $651,126                                                ========                                   ======== Interest-bearing liabilities:   Deposits:      Savings and money market accounts         $125,834        1,412          1.12%       $120,748       1,065          0.88%      Checking accounts                           52,282           66          0.13          52,804          44          0.08      Certificate accounts                       236,962        8,391          3.54         175,492       5,452          3.11                                                --------      -------                      --------     -------        Total deposits                           415,078        9,869          2.38         349,044       6,561          1.88   FHLB advances                                 192,189        8,668          4.51         169,699       7,532          4.44   Other borrowings                               20,198          462          2.29          17,703         116          0.66                                                --------      -------                      --------     -------      Total interest-bearing liabilities         627,465      $18,999          3.03%        536,446     $14,209          2.65%                                                              -------         -----                     -------         ----- Non-interest-bearing liabilities:      Non-interest-bearing demand        accounts                                  39,900                                     45,861      Real estate tax escrow accounts              2,263                                      2,204      Other liabilities                            7,406                                      6,028                                                --------                                   --------        Total liabilities                        677,034                                    590,539      Stockholders' equity                       119,657                                     60,587                                                --------                                   --------        Total liabilities and          stockholders' equity                  $796,691                                   $651,126                                                ========                                   ========      Net interest-earning assets               $127,257                                   $ 86,282                                                ========                                   ========      Net interest income; average        Interest rate spread                                  $21,012          2.27%                    $16,640          2.30%                                                              =======         =====                     =======         =====      Net interest margin(3)                                                   2.78%                                     2.67%                                                                              =====                                     =====  - ------------------------ (1)     Investment securities for the 2005 period include 47 non-taxable         municipal bonds with an aggregate average balance of $16.3 million and         an average yield of 4.2%. Investment securities for the 2004 period         include 26 non-taxable municipal bonds with an aggregate average balance         of $3.4 million and an average yield of 4.3%. The tax-exempt income from         such securities has not been calculated on a tax equivalent basis. (2)     Includes nonaccrual loans during the respective periods. Calculated net         of deferred fees and discounts, loans in process and allowance for loan         losses. The impact of loan fee income is immaterial effect on this         analysis. (3)     Equals net interest income divided by average interest-earning assets.                                          50   RATE/VOLUME ANALYSIS. The following table shows the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities affected our interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate, which is the change in rate multiplied by prior year volume, and (2) changes in volume, which is the change in volume multiplied by prior year rate. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.                                                  2005 vs. 2004                                   ----------------------------------------                                     Increase (Decrease) Due to                                   ------------------------------                                                                    Total                                                         Rate/     Increase                                      Rate     Volume    Volume   (Decrease)                                   ---------  --------- --------- ---------                                             (Dollars in Thousands)      Interest income:        Investment securities(1)    $   409    $   358   $    60   $   827        Mortgage-backed         securities                     232      1,166        50     1,148        Loans receivable, net         1,213      4,984       265     6,462        Other interest-         earning assets                 263         67        95       425                                    -------    -------   -------   -------         Total interest-           earning assets             2,117      6,575       470     9,162                                    -------    -------   -------   -------      Interest expense:        Savings accounts                290         45        12       347        Checking accounts                22         --        --        22         Certificate accounts            762      1,910       267     2,939                                    -------    -------   -------   -------         Total deposits               1,074      1,955       279     3,308        FHLB advances                   122        998        16     1,136         Other borrowings                289         16        41       346                                    -------    -------   -------   -------         Total interest-           bearing liabilities        1,485      2,969       336     4,790                                    -------    -------   -------   -------      Increase in net interest        income                      $   632    $ 3,606   $   134   $ 4,372                                    =======    =======   =======   =======  - --------------- (1)     Investment securities for the 2005 period include 47 non-taxable         municipal bonds with an aggregate average balance of $16.3 million and         an average yield of 4.2%. Investment securities for the 2004 period         include 26 non-taxable municipal bonds with an aggregate average balance         of $3.4 million and an average yield of 4.3%. The tax-exempt income from         such securities has not been calculated on a tax equivalent basis.  PROVISION FOR LOAN LOSSES. We made a $25,000 provision to the allowance for loan losses for the year ended December 31, 2005 compared to a provision of $45,000 for the year ended December 31, 2004. The provision for loan losses is charged to expense as necessary to bring our allowance for loan losses to a sufficient level to cover known and inherent losses in the loan portfolio. The provision taken during 2005 was primarily the result of growth in the loan portfolio while the overall credit quality of the loan portfolio remained strong. At December 31, 2005, non-performing loans amounted to 0.54% of loans receivable and our allowance for loan losses amounted to 50.3% of non-performing loans. The balance of non-performing loans at December 31, 2005 consisted primarily of one loan, with a carrying value of $2.9 million, placed on non-accrual status in the fourth quarter. An allowance was reserved on this loan at December 31, 2005. During the first quarter of 2006, we agreed to allow the sale of a portion of the underlying collateral of the loan, with the proceeds paid to the Bank. Approximately $1.7 million in net proceeds was received, reducing the outstanding balance of the loan to $1.2 million. Based on the specific circumstances of this loan, including the estimated value of the remaining collateral, we do not expect to incur any significant loss.                                         51   NON-INTEREST INCOME. Our total non-interest income amounted to $2.8 million for the year ended December 31, 2005 compared to $2.2 million for year ended December 31, 2004. The increase was due primarily to $499,000 of income from BOLI purchased in March 2005 and a $98,000 gain on derivative instruments in 2005 compared to a loss of $141,000 in 2004. Our BOLI is expected to continue to generate positive income going forward and is intended to fund various benefit programs of the Company. The Company does not expect to generate any income from derivatives in 2006, as the Company is no longer party to any derivative agreements. Income from BOLI and the gain on derivative instruments in the year ended December 31, 2005, was partially offset by a $73,000 impairment charge on investment securities recognized in 2005 with no comparable charge in 2004, a $67,000 decrease in service charges and a $31,000 decrease in other non-interest income. The impairment charge taken during 2005 was the result of management's periodic evaluations of its investment portfolio and the determination that the fair value of certain securities would not recover to their cost. Although market values of the Company's investments fluctuate as market conditions change, management believes that the overall credit quality of its investment portfolio is strong. The decrease in service charges in 2005 when compared to 2004 was due primarily to a $61,000 decrease in fees generated by our overdraft protection program due to a decrease in the volume of customer overdrafts. The decrease in other non-interest income is due to decreases in various categories of income.  NON-INTEREST EXPENSE. Our total non-interest expense for the year ended December 31, 2005 amounted to $15.0 million, representing an increase of $3.0 million or 24.6% from the year ended December 31, 2004. The overall increase was due to increases in all categories of non-interest expense other than data processing expense, which decreased slightly. Salaries and employee benefits expense increased $1.6 million or 24.7% for 2005 compared to 2004. This increase was primarily due to additional expenses of $838,000 in the aggregate relating to the Company's ESOP, SOP and RRP, all of which began in 2005. The aggregate expense for these plans is expected to increase in 2006 to approximately $1.3 million in the aggregate. The remainder of the increase in salaries and employee benefits expense was due to growth in the total number of employees, normal merit increases in salaries, and higher benefit costs. We anticipate additional increases in salaries and employee benefits in 2006 due to additional staffing needs, further merit increases in salary, and continued rising benefit costs. Our occupancy expense increased approximately $480,000 or 41.2% in 2005 compared to 2004, due in part to the leases entered into for three new branches. We do not expect to experience a significant increase in occupancy expense in 2006. Professional services expense increased approximately $382,000 or 75.1% due primarily to increased audit and professional fees as the result of becoming a public reporting entity. Such professional fees are expected to continue to be a significant expense in 2006. Other non-interest expense increased approximately $374,000 or 25.8% due primarily to additional expense of $151,000 for SOP and RRP awards to directors combined with smaller increases in various other categories of other non-interest expense. The aggregate expense for these plans for directors is expected to increase in 2006 to approximately $300,000.  INCOME TAX EXPENSE. Income tax expense for the year ended December 31, 2005 amounted to $2.5 million compared to $2.3 million for the year ended December 31, 2004. The fluctuations in income tax expense from year to year is the result of an increase in our pre-tax income partially offset by an improvement in our effective tax rate. Our effective tax rate decreased to 28.5% for 2005 from 33.2% for 2004. The improved tax rate was primarily a result of increased investment in tax-exempt municipal securities and BOLI income, which is also tax exempt.                                         52   COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003  GENERAL. We had net income of $4.6 million for the year ended December 31, 2004, representing an increase of $465,000 or 11.4% over net income of $4.1 million for the year ended December 31, 2003. Our net interest income improved by $541,000 or 3.4% to $16.6 million for the year ended December 31, 2004 from $16.1 million for the year ended December 31, 2003. Our results in the 2004 period reflect, in part, increases in the amount of interest-earning assets, which have offset, in whole or in part, the narrowing or compression of our net interest margins in 2004 compared to 2003. Our net interest margin decreased by 21 basis points to 2.67% for the year ended December 31, 2004 compared to 2.88% for the year ended December 31, 2003 while our net interest spread decreased to 2.30% for the year ended December 31, 2004 compared to 2.50% for the year ended December 31, 2003. In addition, non-interest income improved $383,000 or 20.6% to $2.2 million for the year ended December 31, 2004 compared to $1.9 million for the year ended December 31, 2003. This improvement was due to an increase in service charge income and a decrease in the net loss on derivative instruments. Partially offsetting these increases in income was a $543,000 or 4.7% increase in non-interest expense to $12.0 million for the year ended December 31, 2004 compared to $11.5 million for the year ended December 31, 2003, primarily due to increases in salaries and employee benefits expense, the largest component of non-interest expense, professional services expense and data processing expense  INTEREST INCOME. Interest income was $30.8 million for the year ended December 31, 2004, an increase of $852,000 or 2.8% from $30.0 million of interest income for the year ended December 31, 2003. The increase in interest income was primarily due to increases in interest income on investments and mortgage-backed securities. Both the average yield and average balance of investment securities increased in 2004 compared to 2003. The average yield of investment securities increased to 2.87% for 2004 from 2.67% for 2003 while the average balance of investment securities increased to $84.3 million in 2004 from $78.4 million in 2003. A slight decrease in the average yield of mortgage-backed securities to 3.96% in 2004 from 4.09% in 2003 was more than offset by a $44.8 million or 48.6% increase in the average balance. A decrease in the average yield on loans receivable to 5.93% in 2004 compared to 6.59% in 2003 offset a $23.4 million increase in the average balance of such assets.  INTEREST EXPENSE. Interest expense increased $310,000 or 2.2% to $14.2 million for the year ended December 31, 2004 compared to $13.9 million for the prior year. The increase was due primarily to increases in the average balances of FHLB advances and other borrowings. The average balance of FHLB advances increased $21.6 million or 14.6% to $169.7 million in 2004 from $148.1 million in 2003. The increase in the average balance more than offset a decrease in the average cost to 4.44% in 2004 from 4.73% in 2003. The average balance of other borrowings increased $2.5 million or 16.2% to $17.7 million in 2004 from $15.2 million in 2003. The increase in the average balance of other borrowings was accompanied by an increase in the average cost of other borrowings to 0.66% in 2004 from 0.45% in 2003. Interest expense on deposits decreased $261,000 or 3.8% to $6.6 million in 2004 from $6.8 million in 2003 due to a decrease in the average cost to 1.88% in 2004 from 2.11% in 2003. The decrease in cost was partially offset by an increase in the average balance of deposits to $349.0 million for 2004 compared to $322.8 million for 2003.                                         53   AVERAGE BALANCES, NET INTEREST INCOME, AND YIELDS EARNED AND RATES PAID. The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. Tax-exempt income and yields have not been adjusted to a tax-equivalent basis. All average balances are based on monthly balances. Management does not believe that the monthly averages differ significantly from what the daily averages would be.                                                                            Years Ended December 31,                                             ----------------------------------------------------------------------------------                                                               2004                                      2003                                             ----------------------------------------  ----------------------------------------                                                Average                    Average        Average                    Average                                                Balance      Interest     Yield/Rate      Balance      Interest     Yield/Rate                                             ------------- ------------  ------------  ------------- ------------  ------------                                                                           (Dollars in Thousands)        Interest-earning assets:      Investment securities(1)                  $ 84,320       $2,423          2.87%       $ 78,351     $ 2,090          2.67%      Mortgage-backed securities                 136,864        5,421          3.96          92,108       3,770          4.09      Loans receivable(2)                        384,990       22,821          5.93         361,548      23,828          6.59      Other interest-earning assets               16,554          184          1.11          27,566         309          1.12                                                --------      -------                      --------     -------        Total interest-earning assets            622,728       30,849          4.95%        559,573      29,997          5.36%                                                              -------         -----                     -------         -----      Cash and non-interest bearing        balances                                  17,241                                     12,069      Other non-interest-earning assets           11,157                                     11,338                                                --------                                   --------        Total assets                            $651,126                                   $582,980                                                ========                                   ======== Interest-bearing liabilities:   Deposits:      Savings and money market accounts         $120,748        1,065          0.88%       $107,291       1,068          1.00%      Checking accounts                           52,804           44          0.08          46,433          51          0.11      Certificate accounts                       175,492        5,452          3.11         169,058       5,703          3.37                                                --------      -------                      --------     -------        Total deposits                           349,044        6,561          1.88         322,782       6,822          2.11   FHLB advances                                 169,699        7,532          4.44         148,090       7,008          4.73   Other borrowings                               17,703          116          0.66          15,241          68          0.45                                                --------      -------                      --------     -------      Total interest-bearing liabilities         536,446      $14,209          2.65%        486,113     $13,898          2.86%                                                              -------         -----                     -------         ----- Non-interest-bearing liabilities:      Non-interest-bearing demand        accounts                                  45,861                                     36,449      Real estate tax escrow accounts              2,204                                      2,093      Other liabilities                            6,028                                      6,194                                                --------                                   --------        Total liabilities                        590,539                                    530,849      Stockholders' equity                        60,587                                     52,131                                                --------                                   --------        Total liabilities and          stockholders' equity                  $651,126                                   $582,980                                                ========                                   ========      Net interest-earning assets               $ 86,282                                   $ 73,460                                                ========                                   ========      Net interest income; average        Interest rate spread                                  $16,640          2.30%                    $16,099          2.50%                                                              =======         =====                     =======         =====      Net interest margin(3)                                                   2.67%                                     2.88%                                                                              =====                                     =====  - -------------------- (4)     Investment securities for the 2004 period include 26 non-taxable         municipal bonds with an aggregate average balance of $3.4 million and an         average yield of 4.3%. Investment securities for the 2003 period include         one non-taxable municipal bond in the amount of $180,000 and a yield of         3.9%. The tax-exempt income from such securities has not been calculated         on a tax equivalent basis. (5)     Includes nonaccrual loans during the respective periods. Calculated net         of deferred fees and discounts, loans in process and allowance for loan         losses. The impact of loan fee income is immaterial effect on this         analysis. (6)     Equals net interest income divided by average interest-earning assets.                                          54   RATE/VOLUME ANALYSIS. The following table shows the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities affected our interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate, which is the change in rate multiplied by prior year volume, and (2) changes in volume, which is the change in volume multiplied by prior year rate. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.                                                  2004 vs. 2003                                   ----------------------------------------                                     Increase (Decrease) Due to                                   ------------------------------                                                                    Total                                                         Rate/     Increase                                      Rate     Volume    Volume   (Decrease)                                   ---------  --------- --------- ---------                                             (Dollars in Thousands)      Interest income:        Investment securities(1)    $   161    $   159   $    13   $  333        Mortgage-backed          securities                   (122)     1,832       (59)   1,651        Loans receivable, net        (2,397)     1,545      (155)  (1,007)        Other interest-          earning assets                 (3)      (123)        1     (125)                                    -------    -------   -------   -------          Total interest-            earning assets           (2,361)     3,413      (200)      852                                    -------    -------   -------   -------      Interest expense:        Savings accounts               (122)       134       (15)       (3)        Checking accounts               (12)         7        (2)       (7)        Certificate accounts           (451)       217       (17)     (251)                                    -------    -------   -------   -------          Total deposits               (585)       358       (34)     (261)        FHLB advances                  (435)     1,023       (64)      524        Other borrowings                 32         11         5        48                                    -------    -------   -------   -------          Total interest-            bearing liabilities        (988)     1,392       (93)      311                                    -------    -------   -------   -------      Increase (decrease) in        net interest income        $(1,373)    $ 2,021   $  (107)  $   541                                   =======     =======   =======   =======  - --------------- (1)     Investment securities for the 2004 period include 26 non-taxable         municipal bonds with an aggregate average balance of $3.4 million and an         average yield of 4.3%. Investment securities for the 2003 period include         one non-taxable municipal bond in the amount of $180,000 and a yield of         3.9%. The tax-exempt income from such securities has not been calculated         on a tax equivalent basis.  PROVISION FOR LOAN LOSSES. For the year ended December 31, 2004 our provision for loan losses was $45,000 compared to $375,000 for the year ended December 31, 2003. The provision for loan losses is charged to expense as necessary to bring our allowance for loan losses to a sufficient level to cover known and inherent losses in the loan portfolio. At December 31, 2004 we had $227,000 of non-performing assets and our allowance for loan losses amounted to $1.4 million. Our non-performing loans as a percentage of total loans receivable was 0.06% at December 31, 2004 and 0.13% at December 31, 2003. For the year ended December 31, 2004 our net loan charge-offs amounted to $88,000. Net loan charge-offs amounted to $733,000 for the year ended December 31, 2003 of which $671,000 related to one borrower.  NON-INTEREST INCOME. Total non-interest income increased $383,000 or 20.6% to $2.2 million for the year ended December 31, 2004 compared to $1.9 million for the year ended December 31, 2003. Contributing to the increase was a $318,000 or 20.8% increase in service charge income, particularly fees earned on our overdraft protection program which we began offering in May 2003. Our loss on derivative instruments improved to $141,000 for the year ended December 31, 2004 compared to $407,000 for the                                         55   year ended December 31, 2003. These changes were somewhat offset as $190,000 of combined gains on sales of loans and property that were recognized in 2003 did not recur in 2004.  NON-INTEREST EXPENSE. Our total non-interest expense for the year ended December 31, 2004 amounted to $12.0 million representing an increase of $543,000 from the year ended December 31, 2003. The increase for the year ended December 31, 2004 when compared to the prior year was due primarily to increases in salaries and employee benefits expense, the largest component of non-interest expense, and data processing expense. The $453,000 or 7.6% increase in salaries and employee benefits expense to $6.4 million in 2004 from $6.0 million in 2003 was due primarily to normal merit increases in salaries and an increase in staffing levels. Our professional services expense increased $186,000 or 57.5% due primarily to increased audit and professional fees as the result of becoming a public reporting entity. Our data processing expense increased $116,000 or 10.0% to $1.3 million in 2004 from $1.2 million in 2003 as a result of increased deposits and deposit activity. The increase in deposit activity result in an increase in our data processing expense as data processing expense is dependent in part on the number of deposit transactions that are processed. These increases were partially offset by decreases of $131,000 and $64,000 in ATM expense and advertising and promotions expense, respectively. The decrease in ATM expense was due to certain savings negotiated during a contract renewal in 2004. The decrease in advertising and promotions was due to higher expenditures in 2003 to promote the opening of new branches in that year.  INCOME TAX EXPENSE. Income tax expense for the year ended December 31, 2004 amounted to $2.3 million, compared to $2.0 million for the year ended December 31, 2003. The increase in income tax expense was due primarily to the increase in our pre-tax income. Our effective income tax rate remained relatively consistent at 33.2% and 33.1% for the years ended December 31, 2004 and 2003, respectively.
ASSET/LIABILITY MANAGEMENT AND MARKET RISK. Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from the interest rate risk which is inherent in our lending and deposit taking activities. To that end, management actively monitors and manages interest rate risk exposure. In addition to market risk, our primary risk is credit risk on our loan portfolio. We attempt to manage credit risk through our loan underwriting and oversight policies.  The principal objective of our interest rate risk management function is to evaluate the interest rate risk embedded in certain balance sheet accounts, determine the level of risk appropriate given our business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the risk consistent with approved guidelines. We seek to manage our exposure to risks from changes in interest rates while at the same time trying to improve our net interest spread. We monitor interest rate risk as such risk relates to our operating strategies. We have established an Asset/Liability Committee at Abington Bank, which is comprised of our President and Chief Executive Officer, three Senior Vice Presidents and two Vice Presidents of Lending, and which is responsible for reviewing our asset/liability policies and interest rate risk position. The Asset/Liability Committee meets on a regular basis. The extent of the movement of interest rates is an uncertainty that could have a negative impact on future earnings.                                         56    In recent years, we primarily have utilized the following strategies in our efforts to manage interest rate risk:          o       we have increased our originations of shorter term loans and/or                 loans with adjustable rates of interest, particularly                 construction loans, commercial real estate and multi-family                 residential mortgage loans and home equity lines of credit;          o       we have attempted to match fund a portion of our securities                 portfolio with borrowings having similar expected lives;          o       we have attempted, where possible, to extend the maturities of                 our deposits and borrowings; and          o       we have invested in securities with relatively short anticipated                 lives, generally three to five years, and increased our holding                 of liquid assets.  GAP ANALYSIS. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring a bank's interest rate sensitivity "gap." An asset and liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to affect adversely net interest income while a positive gap would tend to result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to affect adversely net interest income. Our current asset/liability policy provides that our one-year interest rate gap as a percentage of total assets should not exceed positive or negative 20%. This policy was adopted by our management and Board based upon their judgment that it established an appropriate benchmark for the level of interest-rate risk, expressed in terms of the one-year gap, for the Bank. In the event our one-year gap position were to approach or exceed the 20% policy limit, we would review the composition of our assets and liabilities in order to determine what steps might appropriately be taken, such as selling certain securities or loans or repaying certain borrowings, in order to maintain our one-year gap in accordance with the policy. Alternatively, depending on the then-current economic scenario, we could determine to make an exception to our policy or we could determine to revise our policy. In recent periods, our one-year gap position was well within our policy. Our one-year cumulative gap was a negative 4.09% at December 31, 2005, compared to a positive 0.57% at December 31, 2004. We have become more liability sensitive in 2005 mainly as a result of increases in our short-term repricing deposits, primarily short-term certificates of deposit. Partially for this reason, we continue to remain focused on maintaining and growing our base of core deposits, which are less interest-rate sensitive. Part of the reason that we determined several years ago to increase our originations of commercial real estate and multi-family residential real estate loans, construction loans, home equity lines and commercial business loans, all of which generally have shorter terms to maturity than single-family residential mortgage loans and are more likely to have floating or adjustable rates of interest, was, in part, to increase the amount of our interest rate sensitive assets in the one- to three-year time horizon. By increasing the amount of our interest rate sensitive assets in the one-to three-year time horizon, we felt that we better positioned ourselves to benefit from a rising interest rate environment because the average interest rates on our loans would increase as general market rates of interest were increasing.                                          57   The following table sets forth the amounts of our interest-earning assets and interest-bearing liabilities outstanding December 31, 2005, which we expect, based upon certain assumptions, to reprice or mature in each of the future time periods shown (the "GAP Table"). Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities at December 31, 2005, on the basis of contractual maturities, anticipated prepayments, and scheduled rate adjustments within a three-month period and subsequent selected time intervals. The loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and anticipated prepayments of adjustable-rate loans and fixed-rate loans, and as a result of contractual rate adjustments on adjustable-rate loans. Annual prepayment rates for adjustable-rate and fixed-rate single-family and multi-family mortgage loans are assumed to range from 10% to 26%. The annual prepayment rate for mortgage-backed securities is assumed to range from 9% to 63%. Money market deposit accounts, savings accounts and interest-bearing checking accounts are assumed to have annual rates of withdrawal, or "decay rates," of 16%, 12.5% and 0%, respectively.                                          58                                                          More than     More than      More than                                         6 Months     6 Months        1 Year         3 Years      More than                                         or Less      to 1 Year     to 3 Years     to 5 Years      5 Years     Total Amount                                        ----------   -----------   ------------   ------------   -----------   ------------                                                                     (Dollars in Thousands)        Interest-earning assets(1):   Loans receivable(2)                  $  204,836   $    38,976   $    114,630   $     68,077   $   104,423   $    530,942   Mortgage-backed securities               28,061        22,783         53,815         22,227        22,134        149,020   Investment securities                    14,530        12,997         31,799          9,500        32,345        101,171   Other interest-earning assets            19,315            --             --             --            --         19,315                                        ----------   -----------   ------------   ------------   -----------   ------------     Total interest-earning assets         266,742        74,756        200,244         99,804       158,902        800,448                                        ==========   ===========   ============   ============   ===========   ============ Interest-bearing liabilities:   Savings and money market accounts    $   17,365   $    17,365   $     43,561   $     20,042   $    17,576   $    115,909   Checking accounts                            --            --             --             --        55,820         55,820   Certificate accounts                    107,973        87,931         62,441         14,271        13,505        286,121   FHLB advances                           118,062        11,172         42,498          6,793        22,920        201,445    Other borrowed money                     16,114            --             --             --            --         16,114                                        ----------   -----------   ------------   ------------   -----------   ------------     Total interest-bearing       liabilities                         259,514       116,468        148,500         41,106       109,821        675,409                                        ==========   ===========   ============   ============   ===========   ============  Interest-earning assets less   interest-bearing liabilities         $    7,228   $   (41,712)  $     51,744   $     58,698   $    49,081   $    125,039                                        ==========   ===========   ============   ============   ===========   ============  Cumulative interest-rate   sensitivity gap(3)                   $    7,228   $   (34,484)  $     17,260   $     75,958   $   125,039                                        ==========   ===========   ============   ============   ===========  Cumulative interest-rate gap as a   percentage of total assets at   December 31, 2005                          0.86%        (4.09)%         2.04%          9.00%        14.81%                                        ==========   ===========   ============   ============   ===========  Cumulative interest-earning assets   as a percentage of cumulative   interest-bearing liabilities at   December 31, 2005                        102.79%        90.83%        103.29%        113.43%       118.51%                                        ==========   ===========   ============   ============   ===========  - --------------------- (1)     Interest-earning assets are included in the period in which the balances         are expected to be redeployed and/or repriced as a result of anticipated         prepayments, scheduled rate adjustments and contractual maturities.  (2)     For purposes of the gap analysis, loans receivable includes         non-performing loans net of the allowance for loan losses, undisbursed         loan funds, unamortized discounts and deferred loan fees.  (3)     Interest-rate sensitivity gap represents the difference between net         interest-earning assets and interest-bearing liabilities.                                          59   Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates both on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to service their adjustable-rate loans may decrease in the event of an interest rate increase.  NET PORTFOLIO VALUE AND NET INTEREST INCOME ANALYSIS. Our interest rate sensitivity also is monitored by management through the use of models which generate estimates of the change in its net portfolio value ("NPV") and net interest income ("NII") over a range of interest rate scenarios. NPV is the present value of expected cash flows from assets, liabilities, and off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario. The following table sets forth our NPV as of December 31, 2005 and reflects the changes to NPV as a result of immediate and sustained changes in interest rates as indicated.          Change in                                                                         NPV as % of Portfolio    Interest Rates                       Net Portfolio Value                               Value of Assets   In Basis Points     -------------------------------------------------------  -------------------------------------     (Rate Shock)           Amount            $ Change           % Change           NPV Ratio            Change - --------------------  -----------------  -----------------  -----------------  -----------------  ------------------                                                           (Dollars in Thousands)             200bp                $110,389          $ (8,184)           (6.90)%             13.78%              (36)bp       100                   114,755            (3,818)           (3.22)              14.01               (13)      Static                 118,573                --               --               14.14                --      (100)                  118,449              (124)           (0.10)              13.83               (31)      (200)                  107,478           (10,971)           (9.26)              12.43              (170)   In addition to modeling changes in NPV, we also analyze potential changes to NII for a twelve-month period under rising and falling interest rate scenarios. The following table shows our NII model as of December 31, 2005.       Change in    Interest Rates   In Basis Points     (Rate Shock)        Net Interest Income       $ Change         % Change - --------------------  -----------------------  ---------------  ---------------                              (Dollars in Thousands)       200bp                 $23,225               $  (336)           (1.43)%       100                    23,692                   131             0.56      Static                  23,561                    --               --      (100)                   22,792                  (769)           (3.26)      (200)                   21,388                (2,173)           (9.22)  The above table indicates that as of December 31, 2005, in the event of an immediate and sustained 200 basis point increase in interest rates, Abington Bank's net interest income for the 12 months ending December 31, 2006 would be expected to decrease by $336,000 or 1.43% to $23.2 million.  As is the case with the GAP Table, certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV and NII require the making of certain                                          60   assumptions which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the models presented assume that the composition of our interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the NPV measurements and net interest income models provide an indication of interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on net interest income and will differ from actual results.                                          61
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  To the Board of Directors and Stockholders of   Abington Community Bancorp, Inc. and subsidiaries: Jenkintown, Pennsylvania  We have audited the accompanying consolidated statements of financial condition of Abington Community Bancorp, Inc. and subsidiaries (the "Company") as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders' equity and comprehensive income and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Abington Community Bancorp, Inc. and subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.  /s/ Deloitte & Touche LLP  Philadelphia, Pennsylvania March 22, 2006                                          62     ABINGTON COMMUNITY BANCORP, INC.  CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - -------------------------------------------------------------------------------------------------------------------------                                                                                December 31, 2005       December 31, 2004                                                                             ---------------------   ---------------------    ASSETS  Cash and due from banks                                                     $          19,460,237   $          24,867,784 Interest-bearing bank balances                                                          8,254,004               8,428,048                                                                             ---------------------   ---------------------       Total cash and cash equivalents                                                  27,714,241              33,295,832 Investment securities held to maturity (estimated fair   value--2005, $20,316,775; 2004, $10,336,485)                                         20,395,593              10,219,764 Investment securities available for sale (amortized cost--   2005, $80,775,605; 2004, $77,348,884)                                                78,828,696              76,163,951 Mortgage-backed securities held to maturity (estimated fair   value--2005, $65,505,255; 2004, $81,322,041)                                         67,410,735              81,703,737 Mortgage-backed securities available for sale (amortized cost--   2005, $82,212,270; 2004, $83,300,963)                                                79,943,379              83,027,943 Loans receivable, net of allowance for loan losses    (2005, $1,454,510; 2004, $1,412,697)                                               529,487,209             412,655,664 Accrued interest receivable                                                             3,475,350               2,710,162 Federal Home Loan Bank stock--at cost                                                  11,061,200              10,450,100 Cash surrender value - bank owned life insurance                                       15,498,958                       - Property and equipment, net                                                             6,510,144               5,533,085 Deferred tax asset                                                                      2,648,200               1,313,068 Prepaid expenses and other assets                                                       1,098,106                 905,074                                                                             ---------------------   ---------------------  TOTAL ASSETS                                                                $         844,071,811   $         717,978,380                                                                             =====================   =====================  LIABILITIES AND STOCKHOLDERS' EQUITY  LIABILITIES:   Deposits:     Noninterest-bearing                                                     $          43,333,286   $          37,596,228     Interest-bearing                                                                  457,849,738             367,693,829                                                                             ---------------------   ---------------------       Total deposits                                                                  501,183,024             405,290,057   Advances from Federal Home Loan Bank                                                201,444,952             170,666,374   Other borrowed money                                                                 16,113,949              12,865,521   Accrued interest payable                                                              1,909,234                 910,040   Advances from borrowers for taxes and insurance                                       2,384,314               2,047,151   Accounts payable and accrued expenses                                                 3,805,571               3,144,536                                                                             ---------------------   ---------------------             Total liabilities                                                          726,841,044             594,923,679                                                                             ---------------------   ---------------------  COMMITMENTS AND CONTINGENCIES  STOCKHOLDERS' EQUITY   Preferred stock, $0.01 par value, 10,000,000 shares authorized,     none issued                                                                                 -                       -   Common stock, $0.01 par value, 40,000,000 shares authorized,     issued and outstanding: 15,870,000 in 2005 and 2004                                   158,700                 158,700   Additional paid-in capital                                                           69,234,964              69,096,936   Unallocated common stock held by:     Employee Stock Ownership Plan (ESOP)                                               (6,880,236)             (2,046,137)     Recognition & Retention Plan Trust (RRP)                                           (3,339,413)                      -     Deferred compensation plans trust                                                  (1,050,000)             (1,074,200)   Retained earnings                                                                    61,889,180              57,881,651   Accumulated other comprehensive loss                                                 (2,782,428)               (962,249)                                                                             ---------------------   ---------------------             Total stockholders' equity                                                 117,230,767             123,054,701                                                                             ---------------------   ---------------------  TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                  $         844,071,811   $         717,978,380                                                                             =====================   =====================   See notes to consolidated financial statements.                                          63     ABINGTON COMMUNITY BANCORP, INC.  CONSOLIDATED STATEMENTS OF INCOME - ------------------------------------------------------------------------------------------------------------------------                                                                                 Year Ended December 31,                                                               ----------------------------------------------------------                                                                      2005                2004                2003                                                               ------------------  ------------------  ------------------     INTEREST INCOME:   Interest and fees on loans                                  $       29,282,683  $       22,820,635  $       23,827,902   Interest and dividends on investment and     mortgage-backed securities       Taxable                                                         10,041,615           7,878,515           6,161,818       Tax-exempt                                                         686,357             149,477               7,020                                                               ------------------  ------------------  ------------------             Total interest income                                      40,010,655          30,848,627          29,996,740  INTEREST EXPENSE:   Interest on deposits                                                 9,868,820           6,561,036           6,822,294   Interest on Federal Home Loan Bank advances                          8,668,118           7,531,886           7,008,352   Interest on other borrowed money                                       461,892             115,618              67,494                                                               ------------------  ------------------  ------------------             Total interest expense                                     18,998,830          14,208,540          13,898,140                                                               ------------------  ------------------  ------------------  NET INTEREST INCOME                                                   21,011,825          16,640,087          16,098,600  PROVISION FOR LOAN LOSSES                                                 25,000              45,000             375,000                                                               ------------------  ------------------  ------------------  NET INTEREST INCOME AFTER   PROVISION FOR LOAN LOSSES                                           20,986,825          16,595,087          15,723,600                                                               ------------------  ------------------  ------------------  NON-INTEREST INCOME:   Service charges                                                      1,779,684           1,846,622           1,528,524   Rental income                                                           39,272              52,327              55,667   Gain (loss) on derivative instruments, net                              98,286            (140,813)           (406,710)   Income on bank owned life insurance                                    498,958                   -                   -   Gain on sale of property                                                     -                   -             146,268   Gain on sale of loans                                                        -                   -              44,036   Impairment charge on investment securities                             (72,500)                  -                   -   Other income                                                           454,147             484,682             492,048                                                               ------------------  ------------------  ------------------             Total non-interest income                                   2,797,847           2,242,818           1,859,833                                                               ------------------  ------------------  ------------------  NON-INTEREST EXPENSES:   Salaries and employee benefits                                       8,010,642           6,424,232           5,971,415   Occupancy                                                            1,643,621           1,163,667           1,157,090   Depreciation                                                           519,345             496,477             539,454   Professional services                                                  890,550             508,640             322,875   Data processing                                                      1,207,013           1,283,362           1,166,936   ATM expense                                                            333,692             291,962             422,463   Deposit insurance premium                                              123,775             113,318             107,565   Advertising and promotions                                             425,259             285,532             349,448   Other                                                                1,821,520           1,448,015           1,434,973                                                               ------------------  ------------------  ------------------             Total non-interest expenses                                14,975,417          12,015,205          11,472,219                                                               ------------------  ------------------  ------------------  INCOME BEFORE INCOME TAXES                                             8,809,255           6,822,700           6,111,214                                                               ------------------  ------------------  ------------------  PROVISION FOR INCOME TAXES                                             2,506,924           2,267,429           2,021,192                                                               ------------------  ------------------  ------------------  NET INCOME                                                    $        6,302,331  $        4,555,271  $        4,090,022                                                               ==================  ==================  ==================  BASIC EARNINGS PER COMMON SHARE                               $             0.41         n/a (1)              n/a DILUTED EARNINGS PER COMMON SHARE                             $             0.41         n/a (1)              n/a  BASIC AVERAGE COMMON SHARES OUTSTANDING:                              15,290,391         n/a (1)              n/a DILUTED AVERAGE COMMON SHARES OUTSTANDING:                            15,377,049         n/a (1)              n/a  - --------------------------------------------------------------------------------------------------------------------------- (1)     Due to the timing of the Bank's reorganization into the mutual holding company form and the completion of the         Company's initial public offering on December 16, 2004, earnings per share for the period from December 16, 2004         to December 31, 2004 is not considered meaningful and is not shown. See notes to consolidated financial statements.                                          64     ABINGTON COMMUNITY BANCORP, INC.  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME - -----------------------------------------------------------------------------------------------------------------------------------                                                                Common                                                               Stock                                                              Acquired                   Accumulated                                              Additional        by                         Other           Total                                   Common      Paid-in        Benefit       Retained    Comprehensive   Stockholders'  Comprehensive                                   Stock       Capital         Plans        Earnings        Loss           Equity         Income                                 ----------  ------------  -------------  ------------  -------------   -------------  -------------         BALANCE--JANUARY 1, 2003        $        -  $          -  $           -  $ 49,336,358  $   1,255,023   $  50,591,381  Comprehensive income:   Net income                             -             -              -     4,090,022              -       4,090,022  $   4,090,022   Net unrealized holding loss     on available for sale     securities arising during     the period, net of tax     benefit of $745,494 (1)              -             -              -             -     (1,447,135)     (1,447,135)    (1,447,135)                                 ----------  ------------  -------------  ------------  -------------   -------------  -------------  Comprehensive income                                                                                                  $   2,642,887                                                                                                                       =============  BALANCE--DECEMBER 31, 2003               -             -              -    53,426,380       (192,112)     53,234,268  Comprehensive income:   Net income                             -             -              -     4,555,271              -       4,555,271  $   4,555,271   Net unrealized holding loss     on available for sale     securities arising during     the period, net of tax     benefit of $396,923 (1)              -             -              -             -       (770,137)       (770,137)      (770,137)                                                                                                                       -------------  Comprehensive income                                                                                                  $   3,785,134                                                                                                                       ============= Capitalization of mutual   holding company                        -             -              -      (100,000)             -        (100,000) Issuance of common stock           158,700    69,096,936              -             -              -      69,255,636 Common stock acquired by ESOP            -             -     (2,046,137)            -              -      (2,046,137) Common stock acquired by   deferrd compensation plans   trust                                  -             -     (1,074,200)            -              -      (1,074,200)                                 ----------  ------------  -------------  ------------  -------------   -------------  BALANCE--DECEMBER 31, 2004         158,700    69,096,936     (3,120,337)   57,881,651       (962,249)    123,054,701  Comprehensive income:   Net income                             -             -              -     6,302,331              -       6,302,331  $   6,302,331   Net unrealized holding loss     on available for sale     securities arising during     the period, net of tax     benefit of $937,668 (1)              -             -              -              -    (1,820,179)     (1,820,179)    (1,820,179)                                                                                                                       -------------   Comprehensive income   Cash dividends paid                    -             -              -    (2,294,802)             -      (2,294,802) $   4,482,152                                                                                                                       =============   Stock options expense                  -       180,785              -             -              -         180,785   Shares released from deferred     compensation plans trust             -             -         24,200             -              -          24,200   Amortization of RRP shares             -       (25,962)       359,155             -              -         333,193   ESOP shares committed to be     released                             -       (16,795)       491,447             -              -         474,652   Common stock acquired by RRP           -             -     (3,698,568)            -              -      (3,698,568)   Common stock acquired by ESOP          -             -     (5,325,546)            -              -      (5,325,546)                                 ----------  ------------  -------------  ------------  -------------   -------------  BALANCE--DECEMBER 31, 2005      $  158,700  $ 69,234,964  $ (11,269,649) $ 61,889,180  $  (2,782,428)  $ 117,230,767                                 ==========  ============  =============  ============  =============   =============    (1)  Disclosure of reclassication amount, net of tax, for:                            YEAR ENDED                                                                                      DECEMBER 31,                                                                     ----------------------------------------------                                                                          2005            2004            2003                                                                     --------------  --------------  --------------  Net unrealized depreciation arising during the year                 $   (1,868,029) $     (770,137) $   (1,447,135) Plus: reclassification adjustment for net losses included in   net income, net of tax benefit of $24,650 in 2005                         47,850               -               -                                                                     --------------  --------------  --------------  Net unrealized loss on securities                                   $   (1,820,179) $     (770,137) $   (1,447,135)                                                                     ==============  ==============  ==============  See notes to consolidated financial statements.                                          65     ABINGTON COMMUNITY BANCORP, INC.  CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------------------------------------------------------                                                                                        Year Ended December 31,                                                                       ----------------------------------------------------------                                                                              2005                2004                2003                                                                       ------------------  ------------------  ------------------     OPERATING ACTIVITIES:   Net income                                                          $        6,302,331  $        4,555,271  $        4,090,022   Adjustments to reconcile net income to net cash     provided by operating activities:     Provision for loan losses                                                     25,000              45,000             375,000     Depreciation                                                                 519,345             496,477             539,454     Share-based compensation expense                                             988,630                   -                   -     Unrealized gain on derivative instruments                                    (85,000)           (500,500)           (363,462)     Impairment charge on investment securities                                    72,500                   -                   -     Gain on sale of property and loans                                                 -                   -            (190,304)     Deferred income tax (benefit) expense                                       (397,464)            146,326              38,914     Amortization of:       Deferred loan fees                                                      (1,127,360)           (891,877)         (1,562,388)       Premiums and discounts, net                                                261,581             342,307             171,940     Income from bank owned life insurance                                       (498,958)                  -                   -     Changes in assets and liabilities which (used) provided cash:       Accrued interest receivable                                               (765,188)           (323,321)           (279,209)       Prepaid expenses and other assets                                         (193,032)           (276,643)             (2,175)       Accrued interest payable                                                   999,194             (33,909)           (194,411)       Accounts payable and accrued expenses                                      770,235             598,309             659,629                                                                       ------------------  ------------------  ------------------             Net cash provided by operating activities                           6,871,814           4,157,440           3,283,010                                                                       ------------------  ------------------  ------------------  INVESTING ACTIVITIES:   Principal collected on loans                                               139,389,188         135,777,456         184,360,172   Disbursements for loans                                                   (255,118,373)       (182,966,622)       (174,769,108)   Purchases of:     Mortgage-backed securities held to maturity                               (8,774,897)        (47,862,570)        (37,289,373)     Mortgage-backed securities available for sale                            (20,553,403)        (35,222,233)        (61,942,717)     Investments held to maturity                                             (10,178,366)        (10,220,792)                  -     Investments available for sale                                            (4,097,475)        (34,263,462)       (109,356,340)     Federal Home Loan Bank stock                                              (5,719,100)         (2,911,021)         (3,892,340)     Property and equipment                                                    (1,496,404)           (229,494)           (456,760)     Bank owned life insurance                                                (15,000,000)                  -                   -   Proceeds from:     Maturities of mortgage-backed securities available for sale                1,211,522             221,147           5,406,638     Maturities of investments available for sale                                 599,000          36,495,000          72,574,172     Principal repayments of mortgage-backed securities       held to maturity                                                        22,864,351           8,989,832           4,268,486     Principal repayments of mortgage-backed securities       available for sale                                                      20,374,332          29,444,915          18,398,879     Sale of real estate                                                                -                   -             626,334     Redemption of Federal Home Loan Bank stock                                 5,108,000           2,500,221             885,940                                                                       ------------------  ------------------  ------------------             Net cash used in investing activities                            (131,391,625)       (100,247,623)       (101,186,017)                                                                       ------------------  ------------------  ------------------  FINANCING ACTIVITIES:   Net (decrease) increase in demand deposits and savings accounts             (7,456,352)         26,366,205          25,284,368   Net increase (decrease) in certificate accounts                            103,349,319          16,257,680          (6,954,670)   Net increase (decrease) in other borrowed money                              3,248,428           4,184,605          (3,256,189)   Advances from Federal Home Loan Bank                                       517,801,820         352,275,000          61,024,379   Repayments of advances from Federal Home Loan Bank                        (487,023,242)       (355,340,249)        (10,053,408)   Net increase (decrease) in advances from borrowers     for taxes and insurance                                                      337,163             (88,150)           (147,554)   Proceeds from stock issuance, net of conversion costs and     acquisition of stock for deferred compensation plans trust                         -          68,181,436                   -   Capitalization of mutual holding company                                             -            (100,000)                  -   Acquisition of stock for ESOP and RRP                                       (9,024,114)         (2,046,137)                  -   Payment of cash dividend                                                    (2,294,802)                  -                   -                                                                       ------------------  ------------------  ------------------               Net cash provided by financing activities                       118,938,220         109,690,390          65,896,926                                                                       ------------------  ------------------  ------------------  NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                          (5,581,591)         13,600,207         (32,006,081)  CASH AND CASH EQUIVALENTS--Beginning of year                                  33,295,832          19,695,625          51,701,706                                                                       ------------------  ------------------  ------------------  CASH AND CASH EQUIVALENTS--End of year                                $       27,714,241  $       33,295,832  $       19,695,625                                                                       ==================  ==================  ==================  SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:   Cash paid during the year for:     Interest on deposits and other borrowings                         $       17,999,636  $       14,242,449  $       13,956,551                                                                       ==================  ==================  ==================      Income taxes                                                      $        3,000,000  $        2,350,000  $        1,931,135                                                                       ==================  ==================  ==================    Release of stock from deferred compensation plans trust             $           24,200  $                -  $                -                                                                       ==================  ==================  ==================    Noncash transfer of real estate investment to loans receivable      $                -  $                -  $        1,955,322                                                                       ==================  ==================  ==================  See notes to consolidated financial statements.                                          66   ABINGTON COMMUNITY BANCORP, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 - --------------------------------------------------------------------------------  1.      NATURE OF OPERATIONS          Abington Community Bancorp, Inc. (the "Company") is a Pennsylvania         corporation, which was organized to be a mid-tier holding company for         Abington Savings Bank. Abington Savings Bank is a         Pennsylvania-chartered, FDIC-insured savings bank, which conducts         business under the name "Abington Bank" (the "Bank" or "Abington Bank").         The Company was organized in conjunction with the Bank's reorganization         from the mutual savings bank to the mutual holding company structure in         December 2004. Abington Mutual Holding Company, a Pennsylvania         corporation, is the mutual holding company parent of the Company.         Abington Mutual Holding Company owns 55% of the Company's outstanding         common stock and must continue to own at least a majority of the voting         stock of the Company. The Bank is a wholly owned subsidiary of the         Company. The Company's results of operations are primarily dependent on         the results of the Bank and the Bank's wholly owned subsidiaries, ASB         Investment Co., Keswick Services II and its wholly owned subsidiaries,         and Abington Corp. The consolidated financial statements include the         accounts of the Company and its wholly owned subsidiaries. All         significant intercompany balances and transactions have been eliminated.          The Bank's executive offices are in Jenkintown, Pennsylvania, with seven         other branches and four limited service facilities located in nearby         Montgomery County and Bucks County neighborhoods. The Bank is         principally engaged in the business of accepting customer deposits and         investing these funds in loans that include residential mortgage,         commercial, consumer and construction loans. The principal business of         ASB Investment Co. is to hold certain investment securities for the         Bank. Keswick Services II and its subsidiaries manage the Bank's real         estate, including real estate rentals. Abington Corp. is a dormant         subsidiary.  2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES          PRINCIPLES OF CONSOLIDATION--All significant intercompany transactions         and balances have been eliminated.          USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS--The         preparation of financial statements in conformity with accounting         principles generally accepted in the United States of America requires         management to make estimates and assumptions that affect the reported         amounts of assets and liabilities and disclosure of contingent assets         and liabilities at the date of the financial statements and the reported         amounts of income and expenses during the reporting period. Actual         results could differ from those estimates. The Company's most         significant estimates are the allowance for loan losses and deferred         income taxes.          CASH AND CASH EQUIVALENTS--For purposes of the consolidated statements         of cash flows, cash and cash equivalents include cash and         interest-bearing deposits with banks, commercial paper and liquid money         market funds with original maturities of three months or less.                                          67           INVESTMENT AND MORTGAGE-BACKED SECURITIES--Debt and equity securities         are classified and accounted for as follows:          HELD TO MATURITY--Debt securities that management has the positive         intent and ability to hold until maturity are classified as held to         maturity and are carried at their remaining unpaid principal balances,         net of unamortized premiums or unaccreted discounts. Premiums are         amortized and discounts are accreted using the interest method over the         estimated remaining term of the underlying security.          AVAILABLE FOR SALE--Debt and equity securities that will be held for         indefinite periods of time, including securities that may be sold in         response to changes in market interest or prepayment rates, needs for         liquidity, and changes in the availability of and in the yield of         alternative investments, are classified as available for sale. These         assets are carried at fair value. Fair value is determined using         published quotes as of the close of business. Unrealized gains and         losses are excluded from earnings and are reported net of tax as a         separate component of stockholders' equity until realized. Realized         gains and losses on the sale of investment and mortgage-backed         securities are reported in the consolidated statements of income and         determined using the adjusted cost of the specific security sold.          OTHER-THAN-TEMPORARY IMPAIRMENT OF SECURITIES--Securities are evaluated         on at least a quarterly basis, and more frequently when market         conditions warrant such an evaluation, to determine whether a decline in         their value is other-than-temporary. To determine whether a loss in         value is other-than-temporary, management utilizes criteria such as the         reasons underlying the decline, the magnitude and duration of the         decline and the intent and ability of the Company to retain its         investment in the security for a period of time sufficient to allow for         an anticipated recovery in the fair value. The term         "other-than-temporary" is not intended to indicate that the decline is         permanent, but indicates that the prospects for a near-term recovery of         value is not necessarily favorable, or that there is a lack of evidence         to support a realizable value equal to or greater than the carrying         value of the investment. Once a decline in value is determined to be         other-than-temporary, the value of the security is reduced and a         corresponding charge to earnings is recognized. During the year ended         December 31, 2005, the Company recognized an impairment charge of         approximately $73,000 to write-down the carrying values of two         securities. No impairment charge was recognized during the years ended         December 31, 2004 and 2003.          ALLOWANCE FOR LOAN LOSSES--The allowance for loan losses is increased by         charges to income through the provision for loan losses and decreased by         charge-offs (net of recoveries). The allowance is maintained at a level         that management considers adequate to provide for losses based upon         evaluation of the known and inherent risks in the loan portfolio.         Management's periodic evaluation of the adequacy of the allowance is         based on the Company's past loan loss experience, the volume and         composition of lending conducted by the Company, adverse situations that         may affect a borrower's ability to repay, the estimated value of any         underlying collateral, current economic conditions and other factors         affecting the known and inherent risk in the portfolio.          The allowance consists of specific allowances for impaired loans, a         general allowance on all classified loans which are not impaired and a         general allowance on the remainder of the portfolio. Although we         determine the amount of each element of the allowance separately, the         entire allowance for loan losses is available for the entire portfolio.         The allowance on impaired loans is established for the amount by which         the discounted cash flows, observable market price or fair value of         collateral if the loan is collateral dependent is lower than the         carrying value of the loan. The general valuation allowance on         classified loans which are not impaired relates to loans that are         classified as either doubtful, substandard or special mention. Such         classifications are based on identified weaknesses that increase the         credit risk of the loan. The general allowance on non-classified loans         is established to                                          68           recognize the inherent losses associated with lending activities, but         which, unlike specific allowances, have not been allocated to particular         problem loans. This allowance is based on historical loss experience         adjusted for qualitative factors.          The Company measures impaired loans based on the present value of         expected future cash flows discounted at the loan's effective interest         rate, the loan's observable market price, or the fair value of the         collateral if the loan is collateral dependent. Impairment losses are         included in the provision for loan losses.          DERIVATIVE FINANCIAL INSTRUMENTS--The Company recognizes all derivatives         as either assets or liabilities in the statements of financial condition         and measures those instruments at fair value. The accounting for changes         in the fair value of a derivative depends on the intended use of the         derivative and the resulting designation.          The Company previously entered into interest rate cap and swap         agreements in order to manage its exposure to fluctuations in interest         rates on a portion of its fixed rate loans and variable rate deposits.         The agreements did not qualify for hedge accounting under Statement of         Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR         DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. Gains and losses in the         fair value of the cap and swap agreements, as well as amounts paid or         received under the agreements, are recognized in a separate line item,         gain (loss) on derivative instruments, net, included in non-interest         income in the Company's consolidated statements of income during the         period in which they accrue. The Company does not hold any derivative         financial instruments for trading purposes.          LOANS HELD FOR SALE AND LOANS SOLD--The Company originates mortgage         loans held for investment and for sale. At origination, the mortgage         loan is identified as either held for sale or for investment. Mortgage         loans held for sale are carried at the lower of cost or forward         committed contracts (which approximates market), determined on a net         aggregate basis. The Company had no loans classified as held for sale at         December 31, 2005 or 2004.          The Company assesses the retained interest in the servicing asset or         liability associated with the sold loans based on the relative fair         values. The servicing asset or liability is amortized in proportion to         and over the period during which estimated net servicing income or net         servicing loss, as appropriate, will be received. Assessment of the fair         value of the retained interest is performed on a continual basis. At         December 31, 2005 and 2004, mortgage servicing rights of $61,000 and         $72,000, respectively, were included in other assets. No valuation         allowance was deemed necessary for any of the periods presented.          Amortization of the servicing asset totaled $11,000, $19,000 and $43,000         for the years ended December 31, 2005, 2004 and 2003, respectively.          REAL ESTATE OWNED--Real estate properties acquired through foreclosure         are initially recorded at fair value at the date of foreclosure,         establishing a new cost basis. After foreclosure, valuations are         periodically performed by management and the real estate is carried at         the lower of cost or fair value less estimated costs to sell. Net         revenue and expenses from operations and additions to the valuation         allowance are included in gain or loss on foreclosed real estate.          REAL ESTATE INVESTMENT--Real estate investment is carried at lower of         cost, including cost of improvements, or fair value less cost to sell.         Costs relating to development and improvement of property are         capitalized, whereas costs relating to holding the property are         expensed.                                          69           PROPERTY AND EQUIPMENT--Property and equipment is recorded at cost.         Depreciation is computed using the straight-line method over the         expected useful lives of the related assets. The costs of maintenance         and repairs are expensed as they are incurred, and renewals and         betterments are capitalized.          BANK OWNED LIFE INSURANCE ("BOLI")-- In March 2005, the Company         purchased $15 million in Bank Owned Life Insurance as a mechanism for         funding various employee benefit costs. The Company is the beneficiary         of this policy that insures the lives of certain officers of its         subsidiaries. The Company has recognized the cash surrender value under         the insurance policy as an asset in the consolidated statements of         financial condition. Changes in the cash surrender value are recorded in         other non-interest income in the consolidated statements of income.          OTHER BORROWED MONEY--The Company enters into overnight repurchase         agreements with commercial checking account customers. These agreements         are treated as financings, and the obligations to repurchase securities         sold are reflected as a liability in the consolidated statements of         financial condition. Securities pledged as collateral under agreements         to repurchase are reflected as assets in the consolidated statements of         financial condition.          LOAN ORIGINATION AND COMMITMENT FEES--The Company defers loan         origination and commitment fees, net of certain direct loan origination         costs. The balance is accreted into income as a yield adjustment over         the life of the loan using the level-yield method.          INTEREST ON LOANS--The Company recognizes interest on loans on the         accrual basis. Income recognition is generally discontinued when a loan         becomes 90 days or more delinquent. Any interest previously accrued is         deducted from interest income. Such interest ultimately collected is         credited to income when collection of principal and interest is no         longer in doubt.          INCOME TAXES--Deferred income taxes are recognized for the tax         consequences of "temporary differences" by applying enacted statutory         tax rates applicable to future years to differences between the         financial statement carrying amounts and the tax bases of existing         assets and liabilities. The effect on deferred taxes of a change in tax         rates is recognized in income in the period that includes the enactment         date.          COMPREHENSIVE INCOME--The Company presents as a component of         comprehensive income the amounts from transactions and other events         which currently are excluded from the consolidated statements of income         and are recorded directly to stockholders' equity. These amounts consist         of unrealized holding gains (losses) on available for sale securities.          UNALLOCATED COMMON STOCK--Stock held in treasury by the Company,         including unallocated stock held by certain benefit plans, is accounted         for using the cost method which treats stock held in treasury as a         reduction to total shareholders' equity.          SHARE-BASED COMPENSATION--In December 2004, the Financial Accounting         Standards Board ("FASB") issued SFAS No. 123R (revised 2004),         SHARE-BASED PAYMENT, which revises SFAS No. 123, ACCOUNTING FOR         STOCK-BASED COMPENSATION, and supersedes Accounting Principles Board         ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. This         Statement requires an entity to recognize the cost of employee services         received in share-based payment transactions and measure the cost on the         grant-date fair value of the award. That cost will be recognized over         the period during which an employee is required to provide service in         exchange for the award. The provisions of SFAS No. 123R were adopted by         the Company as of July 1, 2005.                                          70           In March 2005, the Securities and Exchange Commission (the "SEC") issued         Staff Accounting Bulletin ("SAB") No. 107 which expressed the views of         the SEC regarding the interaction between SFAS No. 123R and certain SEC         rules and regulations. SAB No. 107 provides guidance related to the         valuation of share-based payment arrangements for public companies,         including assumptions such as expected volatility and expected term.          At December 31, 2005, the Company has two stock-based compensation         plans, the 2005 Recognition and Retention Plan and the 2005 Stock Option         Plan. Share awards were first issued under these plans in July 2005.         These plans are more fully described in Note 14.          The Company also has an employee stock ownership plan ("ESOP"). This         plan is more fully described in Note 14. Shares awarded under the ESOP         are accounted for in accordance with AICPA Statement of Position ("SOP")         93-6, EMPLOYERS' ACCOUNTING FOR EMPLOYEE STOCK OWNERSHIP PLANS. As ESOP         shares are committed to be released and allocated among participants,         the Company recognizes compensation expense equal to the average market         price of the shares over the period earned. For purposes of computing         basic and diluted earnings per share, ESOP shares that have been         committed to be released are considered outstanding. ESOP shares that         have not been committed to be released are not considered outstanding.         Dividends paid on unallocated shares are used to pay debt service.          EARNINGS PER SHARE--Earnings per share ("EPS") consists of two separate         components, basic EPS and diluted EPS. Basic EPS is computed based on         the weighted average number of shares of common stock outstanding for         each period presented. Diluted EPS is calculated based on the weighted         average number of shares of common stock outstanding plus dilutive         common stock equivalents ("CSEs"). CSEs consist of shares that are         assumed to have been purchased with the proceeds from the exercise of         stock options, as well as unvested common stock awards. Common stock         equivalents which are considered antidilutive are not included for the         purposes of this calculation. At December 31, 2005, there were 643,250         antidilutive CSEs, representing 100% of the outstanding options.         Earnings per share were calculated as follows:                                                           YEAR ENDED DECEMBER 31, 2005                                                     -----------------------------------                                                           BASIC             DILUTED                                                     ----------------   ----------------            Net income                                  $      6,302,331   $      6,302,331         Weighted average shares outstanding               15,290,391         15,290,391         Effect of common share equivalents                         -             86,658                                                     ----------------   ----------------         Adjusted weighted average shares used in           earnings per  share computation                 15,290,391         15,377,049                                                     ----------------   ----------------           Earnings per share                          $           0.41   $           0.41                                                     ================   ================           Due to the timing of the Bank's reorganization into the mutual holding         company form and the completion of the Company's initial public offering         on December 16, 2004, earnings per share for the period from December         16, 2004 to December 31, 2004 is not considered meaningful and is not         shown.                                          71           RECENT ACCOUNTING PRONOUNCEMENTS--In May 2005, the FASB issued SFAS No.         154, ACCOUNTING CHANGES AND ERROR CORRECTIONS- A REPLACEMENT OF APB         OPINION NO. 20 AND FASB STATEMENT NO. 3. SFAS No. 154 replaces APB         Opinion No. 20, ACCOUNTING CHANGES, and FASB Statement No. 3, REPORTING         ACCOUNTING CHANGES IN INTERIM FINANCIAL STATEMENTS, and changes the         accounting and reporting requirements for a change in accounting         principle. SFAS No. 154 applies to all voluntary changes in an         accounting principle, as well as to changes required by a new accounting         pronouncement in the unusual instance that the pronouncement does not         include specific transition provisions. SFAS No. 154 is effective for         accounting changes and error corrections made in fiscal years beginning         after December 15, 2005 and requires retrospective application to prior         periods' financial statements for most voluntary changes in an         accounting principle, unless it is impracticable to do so. The Company         adopted this guidance on January 1, 2006. The adoption did not have a         material effect on the Company's financial position or results of         operations.          On November 3, 2005, the FASB issued FASB Staff Position ("FSP") Nos.         FAS 115-1 and FAS 124-1, THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT         AND ITS APPLICATION TO CERTAIN INVESTMENTS. This FSP addresses the         determination as to when an investment is considered impaired, whether         that impairment is other than temporary, and the measurement of an         impairment loss. This FSP also includes accounting considerations         subsequent to the recognition of an other-than-temporary impairment and         requires certain disclosures about unrealized losses that have not been         recognized as other-than-temporary impairments. This FSP nullifies         certain requirements of EITF Issue 03-1, THE MEANING OF         OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN         Investments, and supersedes EITF Topic No. D-44, RECOGNITION OF         OTHER-THAN-TEMPORARY IMPAIRMENT UPON THE PLANNED SALE OF A SECURITY         WHOSE COST EXCEEDS FAIR VALUE. The guidance in this FSP amends FASB         Statement No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY         SECURITIES. The FSP is effective for reporting periods beginning after         December 15, 2005. The Company adopted this guidance on January 1, 2006.         The adoption did not have a material effect on the Company's financial         position or results of operations.          On December 19, 2005, the FASB issued FSP 94-6-1, TERMS OF LOAN PRODUCTS         THAT MAY GIVE RISE TO A CONCENTRATION OF CREDIT RISK. FSP 94-6-1         addresses whether, under existing guidance, nontraditional loan products         represent a concentration of credit risk and what disclosures are         required for entities that originate, hold, guarantee, service, or         invest in loan products whose terms may give rise to a concentration of         credit risk. Nontraditional loan products expose the originator, holder,         investor, guarantor, or servicer to higher credit risk than traditional         loan products. Typical features of nontraditional loan products may         include high loan-to-value ratios and interest or principal repayments         that are less than the repayments for fully amortizing loans of an         equivalent term. FSP 94-6-1 was effective upon its issuance and it did         not have a material impact on the Company's financial position or         disclosures.          In February 2006, the FASB issued SFAS No. 155, ACCOUNTING FOR CERTAIN         HYBRID FINANCIAL INSTRUMENTS. This statement amends FASB Statements No.         133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, and         No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND         EXTINGUISHMENTS OF LIABILITIES. This statement resolves issues addressed         in Statement 133 Implementation Issue No. D1, APPLICATION OF STATEMENT         133 TO BENEFICIAL INTEREST IN SECURITIZED FINANCIAL ASSETS. This         Statement is effective for all financial instruments acquired or issued         after the beginning of an entity's first fiscal year that begins after         September 15, 2006. The Company is continuing to evaluate the impact of         this pronouncement and does not expect that the guidance will have a         material effect on the Company's financial position or results of         operations.          In March 2006, the FASB issued SFAS No. 156, ACCOUNTING FOR SERVICING OF         FINANCIAL ASSET- AN AMENDMENT OF FASB STATEMENT NO. 140. This statement         amends SFAS No. 140, ACCOUNTING FOR                                          72           TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF         LIABILITIES, with respect to the accounting for separately recognized         servicing assets and servicing liabilities. This statement requires that         all separately recognized servicing assets and servicing liabilities be         initially measured at fair value, if practicable. It also permits, but         does not require, the subsequent measurement of servicing assets and         servicing liabilities at fair value. This Company plans to adopt this         statement effective January 1, 2007. The Company is continuing to         evaluate the impact of this pronouncement and does not expect that the         guidance will have a material effect on the Company's financial position         or results of operations.          RECLASSIFICATIONS--Certain items in the 2004 and 2003 consolidated         financial statements have been reclassified to conform to the         presentation in the 2005 consolidated financial statements. Such         reclassifications did not have a material impact on the presentation of         the overall financial statements.  3.      RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANKS          The Bank is required to maintain average balances on hand or with the         Federal Reserve Bank. At December 31, 2005 and 2004, these reserve         balances amounted to $5.8 million and $13.3 million, respectively.  4.      INVESTMENT SECURITIES          The amortized cost and estimated fair value of investment securities are         summarized as follows:                                                                 HELD TO MATURITY                                                             December 31, 2005                                        ------------------------------------------------------------                                                            GROSS          GROSS         ESTIMATED                                          AMORTIZED      UNREALIZED      UNREALIZED        FAIR                                            COST            GAINS          LOSSES          VALUE                                        -------------  --------------  --------------  -------------              Debt securities:           Municipal bonds              $  20,395,593  $       57,765  $     (136,583) $  20,316,775                                        -------------  --------------  --------------  -------------              Total debt securities      $  20,395,593  $       57,765  $     (136,583) $  20,316,775                                        =============  ==============  ==============  =============                                          73                                                                AVAILABLE FOR SALE                                                             December 31, 2005                                        ------------------------------------------------------------                                                            GROSS          GROSS         ESTIMATED                                          AMORTIZED      UNREALIZED      UNREALIZED        FAIR                                            COST            GAINS          LOSSES          VALUE                                        -------------  --------------  --------------  -------------               Debt securities:           Agency bonds                 $  74,990,878  $       17,500  $   (1,888,453) $  73,119,925           Corporate bonds                    999,457               -          (1,412)       998,045           Municipal bonds                    180,000             275               -        180,275           Certificates of deposit          1,183,000               -               -      1,183,000                                        -------------  --------------  --------------  -------------              Total debt securities         77,353,335          17,775      (1,889,865)    75,481,245                                        -------------  --------------  --------------  -------------          Equity securities:           Common stock                            10             380               -            390           Mutual funds                     3,422,260               -         (75,199)     3,347,061                                        -------------  --------------  --------------  -------------              Total equity securities        3,422,270             380         (75,199)     3,347,451                                        -------------  --------------  --------------  -------------          Total                          $  80,775,605  $       18,155  $   (1,965,064) $  78,828,696                                        =============  ==============  ==============  =============                                                               HELD TO MATURITY                                                             December 31, 2004                                        ------------------------------------------------------------                                                            GROSS          GROSS         ESTIMATED                                          AMORTIZED      UNREALIZED      UNREALIZED        FAIR                                            COST            GAINS          LOSSES          VALUE                                        -------------  --------------  --------------  -------------          Debt securities:           Municipal bonds              $  10,219,764  $      116,721  $            -  $  10,336,485                                        -------------  --------------  --------------  -------------              Total debt securities      $  10,219,764  $      116,721  $            -  $  10,336,485                                        =============  ==============  ==============  =============                                          74                                                                AVAILABLE FOR SALE                                                             December 31, 2004                                        ------------------------------------------------------------                                                            GROSS          GROSS         ESTIMATED                                          AMORTIZED      UNREALIZED      UNREALIZED        FAIR                                            COST            GAINS          LOSSES          VALUE                                        -------------  --------------  --------------  -------------              Debt securities:           Agency bonds                 $  71,489,648  $       55,440  $   (1,152,448) $  70,392,640           Corporate bonds                    999,940          14,306          (1,951)     1,012,295           Municipal bonds                    180,000           3,960               -        183,960           Certificates of deposit          1,282,000               -               -      1,282,000                                        -------------  --------------  --------------  -------------              Total debt securities         73,951,588          73,706      (1,154,399)    72,870,895                                        -------------  --------------  --------------  -------------          Equity securities:           Common stock                         2,510             702          (2,500)           712           Mutual funds                     3,394,786               -        (102,442)     3,292,344                                        -------------  --------------  --------------  -------------              Total equity securities        3,397,296             702        (104,942)     3,293,056                                        -------------  --------------  --------------  -------------          Total                          $  77,348,884  $       74,408  $   (1,259,341) $  76,163,951                                        =============  ==============  ==============  =============           There were no sales of debt or equity securities during the years ended         December 31, 2005, 2004 and 2003.          During the year ended December 31, 2005, the Company recognized an         impairment charge of approximately $73,000 to write-down the carrying         values of two equity securities. The determination of impairment was         made based on an analysis of all the quantitative and qualitative         characteristics of the securities taken as whole, including the         magnitude and duration of the decline in value and the nature of the         investments. No impairment charge was recognized during the years ended         December 31, 2004 and 2003.          Included in debt securities are structured notes with federal agencies.         These structured notes consist of step-up bonds which provide the agency         with the right, but not the obligation, to call the bonds on the step-up         date.                                          75           The amortized cost and estimated fair value of debt securities by         contractual maturity are shown below. Expected maturities will differ         from contractual maturities because borrowers may have the right to call         or prepay obligations with or without call or prepayment penalties.                                                                            DECEMBER 31, 2005                                                 ----------------------------------------------------------------                                                       AVAILABLE FOR SALE                 HELD TO MATURITY                                                 ------------------------------    ------------------------------                                                                    ESTIMATED                         ESTIMATED                                                   AMORTIZED          FAIR           AMORTIZED          FAIR                                                     COST             VALUE            COST             VALUE                                                 -------------    -------------    -------------    -------------              Due in one year or less                 $  24,064,061    $  23,762,795    $           -    $           -         Due after one year through five years      41,298,396       40,247,850                -                -         Due after five years through ten years      9,990,878        9,453,100                -                -         Due after ten years                         2,000,000        2,017,500       20,395,593       20,316,775                                                 -------------    -------------    -------------    -------------          Total                                   $  77,353,335    $  75,481,245    $  20,395,593    $  20,316,775                                                 =============    =============    =============    =============           The table below sets forth investment securities which have unrealized         loss positions as of December 31, 2005:                                                           LESS THAN 12 MONTHS                  MORE THAN 12 MONTHS                                                  --------------------------------    --------------------------------                                                       GROSS           ESTIMATED           GROSS           ESTIMATED                                                    UNREALIZED           FAIR           UNREALIZED           FAIR                                                      LOSSES             VALUE            LOSSES             VALUE                                                  --------------    --------------    --------------    --------------              Securities held to maturity:           Municipal bonds                        $     (136,583)   $   11,922,095    $            -    $            -                                                  --------------    --------------    --------------    --------------              Total securities held to maturity          (136,583)       11,922,095                 -                 -                                                  --------------    --------------    --------------    --------------          Securities available for sale:           Government agency securities           $     (195,180)   $   13,304,820    $   (1,693,273)   $   57,797,605           Other securities                               (1,136)          498,925           (75,475)        3,345,896                                                  --------------    --------------    --------------    --------------              Total securities available for sale        (196,316)       13,803,745        (1,768,748)       61,143,501                                                  --------------    --------------    --------------    --------------          Total                                    $     (332,899)   $   25,725,840    $   (1,768,748)   $   61,143,501                                                  ==============    ==============    ==============    ==============                                          76           The table below sets forth investment securities which have unrealized         loss positions as of December 31, 2004:                                                           LESS THAN 12 MONTHS                  MORE THAN 12 MONTHS                                                  --------------------------------    --------------------------------                                                       GROSS           ESTIMATED           GROSS           ESTIMATED                                                    UNREALIZED           FAIR           UNREALIZED           FAIR                                                      LOSSES             VALUE            LOSSES             VALUE                                                  --------------    --------------    --------------    --------------              Securities available for sale:           Government agency securities           $     (392,850)   $   30,607,150    $     (759,598)   $   30,230,050           Other securities                               (1,951)          497,195          (104,942)        3,292,344                                                  --------------    --------------    --------------    --------------              Total securities available for sale        (394,801)       31,104,345          (864,540)       33,522,394                                                  --------------    --------------    --------------    --------------          Total                                    $     (394,801)   $   31,104,345    $     (864,540)   $   33,522,394                                                  ==============    ==============    ==============    ==============           On at least a quarterly basis, management of the Company formally         reviews the securities in its investment portfolio to identify any         securities that might have an other-than-temporary impairment. At         December 31, 2005, investment securities in a gross unrealized loss         position for twelve months or longer consist of 29 securities having an         aggregate depreciation of 2.8% from the Company's amortized cost basis.         Investment securities in a gross unrealized loss position for less than         twelve months at December 31, 2005, consist of 33 securities having an         aggregate depreciation of 1.3% from the Company's amortized cost basis.         Management has concluded that the unrealized losses above are temporary         in nature. They are not related to the underlying credit quality of the         issuers, and (with the exception of equity securities) they are on         securities that have contractual maturity dates. The principal and         interest payments on our debt securities have been made as scheduled,         and there is no evidence that the issuer will not continue to do so. The         future principal payments will be sufficient to recover the current         amortized cost of the securities. The unrealized losses above are         primarily related to market interest rates. The current declines in         market value are not significant, and management of the Company believes         that these values will recover as market interest rates move. The         Company has the intent and ability to hold these investments for the         time necessary to recover its cost.                                          77   5.      MORTGAGE-BACKED SECURITIES          The amortized cost and estimated fair value of mortgage-backed         securities are summarized as follows:                                                                HELD TO MATURITY                                                             DECEMBER 31, 2005                                        ------------------------------------------------------------                                                            GROSS          GROSS         ESTIMATED                                          AMORTIZED      UNREALIZED      UNREALIZED        FAIR                                            COST            GAINS          LOSSES          VALUE                                        -------------  --------------  --------------  -------------              FNMA pass-through           certificates                 $  28,447,912  $            -  $     (918,204) $  27,529,708         FHLMC pass-through           certificates                    20,209,129               -        (743,308)    19,465,821         Real estate mortgage           investment conduits             18,753,694          39,195        (283,163)    18,509,726                                        -------------  --------------  --------------  -------------                     Total               $  67,410,735  $       39,195  $   (1,944,675) $  65,505,255                                        =============  ==============  ==============  =============                                                               AVAILABLE FOR SALE                                                             DECEMBER 31, 2005                                        ------------------------------------------------------------                                                            GROSS          GROSS         ESTIMATED                                          AMORTIZED      UNREALIZED      UNREALIZED        FAIR                                            COST            GAINS          LOSSES          VALUE                                        -------------  --------------  --------------  -------------          GNMA pass-through           certificates                 $     583,131  $       17,217  $       (1,226) $     599,122         FNMA pass-through           certificates                    10,626,026          59,644        (151,016)    10,534,654         FHLMC pass-through           certificates                    64,913,936          76,092      (2,099,759)    62,890,269         Real estate mortgage           investment conduits              6,089,177           3,544        (173,387)     5,919,334                                        -------------  --------------  --------------  -------------                     Total               $  82,212,270  $      156,497  $   (2,425,388) $  79,943,379                                        =============  ==============  ==============  =============                                          78                                                                HELD TO MATURITY                                                             DECEMBER 31, 2004                                        ------------------------------------------------------------                                                            GROSS          GROSS         ESTIMATED                                          AMORTIZED      UNREALIZED      UNREALIZED        FAIR                                            COST            GAINS          LOSSES          VALUE                                        -------------  --------------  --------------  -------------              FNMA pass-through           certificates                 $  33,609,534  $      135,032  $     (409,512) $  33,335,054         FHLMC pass-through           certificates                    23,539,633          85,073        (216,836)    23,407,870         Real estate mortgage           investment conduits             24,554,570          28,116          (3,569)    24,579,117                                        -------------  --------------  --------------  -------------                     Total               $  81,703,737  $      248,221  $     (629,917) $  81,322,041                                        =============  ==============  ==============  =============                                                               AVAILABLE FOR SALE                                                             DECEMBER 31, 2004                                        ------------------------------------------------------------                                                            GROSS          GROSS         ESTIMATED                                          AMORTIZED      UNREALIZED      UNREALIZED        FAIR                                            COST            GAINS          LOSSES          VALUE                                        -------------  --------------  --------------  -------------          GNMA pass-through           certificates                 $     887,920  $       38,887  $            -  $     926,807         FNMA pass-through           certificates                    13,314,817         289,367         (30,370)    13,573,814         FHLMC pass-through           certificates                    59,823,297         420,808        (944,709)    59,299,396         Real estate mortgage           investment conduits              9,274,929           7,117         (54,120)     9,227,926                                        -------------  --------------  --------------  -------------                     Total               $  83,300,963  $      756,179  $   (1,029,199) $  83,027,943                                        =============  ==============  ==============  =============           There were no sales of mortgage-backed securities during the years ended         December 31, 2005, 2004 and 2003.          No impairment charge was recognized on mortgage-backed securities during         the years ended December 31, 2005, 2004 and 2003.                                          79           The table below sets forth mortgage-backed securities which have         unrealized loss positions as of December 31, 2005:                                                               LESS THAN 12 MONTHS                  MORE THAN 12 MONTHS                                                      --------------------------------    --------------------------------                                                           GROSS           ESTIMATED           GROSS           ESTIMATED                                                        UNREALIZED           FAIR           UNREALIZED           FAIR                                                          LOSSES             VALUE            LOSSES             VALUE                                                      --------------    --------------    --------------    --------------              Securities held to maturity:           FNMA pass-through certificates             $     (124,140)   $    9,309,491    $     (794,064)   $   18,220,217           FHLMC pass-through certificates                  (325,995)        9,889,436          (417,313)        9,576,385           Real estate mortgage investment conduits         (283,163)       11,509,933                 -                 -                                                      --------------    --------------    --------------    --------------                Total securities held to maturity            (733,298)       30,708,860        (1,211,377)       27,796,602                                                      --------------    --------------    --------------    --------------          Securities available for sale:           GNMA pass-through certificates             $       (1,226)   $      126,544    $            -    $            -           FNMA pass-through certificates                    (29,704)        4,311,626          (121,312)        3,527,004           FHLMC pass-through certificates                  (539,147)       26,123,727        (1,560,612)       33,299,429           Real estate mortgage investment conduits         (130,316)        4,144,716           (43,071)        1,669,510                                                      --------------    --------------    --------------    --------------               Total securities available for sale           (700,393)       34,706,613        (1,724,995)       38,495,943                                                      --------------    --------------    --------------    --------------          Total                                        $   (1,433,691)   $   65,415,473    $   (2,936,372)   $   66,292,545                                                      ==============    ==============    ==============    ==============                                          80           The table below sets forth mortgage-backed securities which have         unrealized loss positions as of December 31, 2004:                                                               LESS THAN 12 MONTHS                  MORE THAN 12 MONTHS                                                      --------------------------------    --------------------------------                                                           GROSS           ESTIMATED           GROSS           ESTIMATED                                                        UNREALIZED           FAIR           UNREALIZED           FAIR                                                          LOSSES             VALUE            LOSSES             VALUE                                                      --------------    --------------    --------------    --------------              Securities held to maturity:           FNMA pass-through             certificates                             $      (20,751)   $    7,643,729    $     (388,761)   $   15,249,573           FHLMC pass-through             certificates                                   (209,218)        9,637,313            (7,618)        1,919,570           Real estate mortgage             investment conduits                              (3,569)        4,992,416                 -                 -                                                      --------------    --------------    --------------    --------------                Total securities held to maturity            (233,538)       22,273,458          (396,379)       17,169,143                                                      --------------    --------------    --------------    --------------          Securities available for sale:           FNMA pass-through             certificates                             $      (21,656)   $    4,175,153    $       (8,714)   $      532,675           FHLMC pass-through             certificates                                   (136,048)       13,137,255          (808,661)       30,845,239           Real estate mortgage             investment conduits                             (41,400)        7,297,748           (12,720)        1,783,796                                                      --------------    --------------    --------------    --------------                Total securities available for sale          (199,104)       24,610,156          (830,095)       33,161,710                                                      --------------    --------------    --------------    --------------          Total                                        $     (432,642)   $   46,883,614    $   (1,226,474)   $   50,330,853                                                      ==============    ==============    ==============    ==============           On at least a quarterly basis, management of the Company formally         reviews the securities in its investment portfolio to identify any         securities that might have an other-than-temporary impairment. At         December 31, 2005, mortgage-backed securities in a gross unrealized loss         position for twelve months or longer consist of 30 securities having an         aggregate depreciation of 4.2% from the Company's amortized cost basis.         Mortgage-backed securities in a gross unrealized loss position for less         than twelve months at December 31, 2005, consist of 21 securities having         an aggregate depreciation of 2.1% from the Company's amortized cost         basis. Management has concluded that the unrealized losses above are         temporary in nature. They are not related to the underlying credit         quality of the issuers, and they are on securities that have contractual         maturity dates. The principal and interest payments on our         mortgage-backed securities have been made as scheduled, and there is no         evidence that the issuer will not continue to do so. The future         principal payments will be sufficient to recover the current amortized         cost of the securities. The unrealized losses above are primarily         related to market interest rates. The current declines in market value         are not significant, and management of the Company believes that these         values will recover as market interest rates move. The Company has the         intent and ability to hold these investments for the time necessary to         recover its cost.                                          81   6.      DERIVATIVE FINANCIAL INSTRUMENTS          The Company previously entered into interest rate cap and swap         agreements in order to manage its exposure to fluctuations in interest         rates on a portion of its fixed rate loans and variable rate deposits.          At December 31, 2005, the Company is not party to any cap or swap         agreements. At December 31, 2004, the Company was party to two swap         agreements with terms expiring in June 2005, and December 2005. Under         the June 2005 agreement, the Company either received or paid, on a         quarterly basis, the amount by which the ten-year Constant Maturity         Treasury ("CMT") exceeded or fell below 5.57% on the notional amount of         $15 million. This agreement effectively changed a portion of the         Company's fixed rate mortgage portfolio to a variable rate of interest.         Under the December 2005, agreement, the Company either received or paid         on a quarterly basis, the amount by which the three month LIBOR exceeded         or fell below 2.59% on the notional amount of $15 million. This         agreement effectively changed the Company's variable rate money market         accounts to a fixed rate of interest.          The swaps did not qualify as hedges under SFAS No. 133. As such, the         fair value of the interest rate swaps were reflected as a liability in         the accompanying consolidated statements of financial condition with the         offset recorded in loss on derivative instruments, net in the         consolidated statements of income. The fair value of the swap agreements         was negative $85,000 at December 31, 2004.          Amounts paid or received under the cap or swap agreement are recognized         in gain (loss) on derivative instruments, net in the Company's         consolidated statements of income during the period in which they         accrue. During the year ended December 31, 2005, the Company received         $13,000 from the contra parties under the agreements. During the years         ended December 31, 2004, and 2003, the Company paid $641,000 and         $770,000, respectively, to the contra parties under the agreements. In         addition, the unrealized gains on derivatives recognized in gain (loss)         on derivative instruments, net in the Company's consolidated statements         of income were $85,000, $501,000 and $363,000 for the years ended         December 31, 2005, 2004, and 2003, respectively.          The Company was exposed to credit losses in the event of nonperformance         by the counterparties to its interest rate caps and swaps, but has no         off-balance-sheet credit risk of accounting loss. The counterparties         were able to fully satisfy their obligations under the contracts. The         Company did not obtain collateral or other security to support financial         instruments subject to credit risk but monitored the credit standing of         counterparties.                                          82   7.      LOANS RECEIVABLE--NET          Loans receivable consist of the following:                                                            DECEMBER 31,                                                  ------------------------------                                                       2005            2004                                                  --------------  --------------          One-to four-family residential           $  323,709,542  $  243,705,065         Multi-family residential and commercial      76,646,911      74,642,109         Construction                                132,789,343      83,253,027         Home equity lines of credit                  41,063,321      32,048,508         Commercial business loans                    10,974,955       8,539,781         Consumer non-real estate loans                4,711,519       3,433,536                                                  --------------  --------------             Total loans                              589,895,591     445,622,026          Less:           Construction loans in process             (57,690,327)    (30,130,703)           Deferred loan fees                         (1,263,545)     (1,422,962)           Allowance for loan loss                    (1,454,510)     (1,412,697)                                                  --------------  --------------          Loans receivable--net                    $  529,487,209  $  412,655,664                                                  ==============  ==============          Our one- to four-family residential loans also include some loans to         local businessmen for a commercial purpose, but which are secured by         liens on the borrower's residence.          The Bank has sold and is servicing for others loans in the amounts of         approximately $13,591,000 and $15,268,000 at December 31, 2005 and 2004,         respectively. These loan balances are excluded from the Company's         consolidated financial statements. At December 31, 2005 and 2004,         mortgage servicing rights of $61,000 and $72,000, respectively, were         included in other assets. No valuation allowance was deemed necessary         for any of the periods presented.          Certain officers and directors have loans with the Bank. The aggregate         dollar amount of these loans outstanding to related parties along with         an analysis of the activity is summarized as follows:                                                 YEAR ENDED DECEMBER 31,                                      ------------------------------------------                                          2005           2004           2003                                      ------------   ------------   ------------          Balance--beginning of year   $    927,514   $  1,241,595   $    861,985           Additions                        89,566        229,878        667,943           Repayments                     (122,640)      (543,959)      (288,333)                                      ------------   ------------   ------------          Balance--end of year         $    894,440   $    927,514   $  1,241,595                                      ============   ============   ============          The Bank grants loans primarily to customers in its local market area.         The ultimate repayment of these loans is dependent to a certain degree         on the local economy and real estate market.                                          83           Following is a summary of changes in the allowance for loan losses:                                                 YEAR ENDED DECEMBER 31,                                      ------------------------------------------                                          2005           2004           2003                                      ------------   ------------   ------------          Balance--beginning of year   $  1,412,697   $  1,455,889   $  1,813,450           Provision for loan losses        25,000         45,000        375,000           Charge-offs                     (69,774)      (146,736)      (760,145)           Recoveries                       86,587         58,544         27,584                                      ------------   ------------   ------------             Charge-offs/recoveries-               net                          16,813        (88,192)      (732,561)                                      ------------   ------------   ------------          Balance--end of year         $  1,454,510   $  1,412,697   $  1,455,889                                      ============   ============   ============          The provision for loan losses charged to expense is based upon past loan         and loss experience and an evaluation of losses in the current loan         portfolio, including the evaluation of impaired loans. A loan is         considered to be impaired when, based upon current information and         events, it is probable that the Company will be unable to collect all         amounts due according to the contractual terms of the loan. An         insignificant delay or insignificant shortfall in amount of payments         does not necessarily result in the loan being identified as impaired.         For this purpose, delays less than 90 days are considered to be         insignificant. During the periods presented, loan impairment was         evaluated based on the fair value of the loans' collateral. Impairment         losses are included in the provision for loan losses. Large groups of         smaller balance, homogeneous loans are collectively evaluated for         impairment, except for those loans restructured under a troubled debt         restructuring. Loans collectively evaluated for impairment include         smaller balance commercial real estate loans, residential real estate         loans and consumer loans. As of December 31, 2005, 2004 and 2003, the         recorded investment in loans that are considered to be impaired is as         follows:                                       ------------------------------------------                                          2005           2004           2003                                      ------------   ------------   ------------          Impaired collateral-           dependent loans            $  2,885,364   $          -   $     99,137          Average impaired loan           balance                    $     94,861   $     41,828   $    264,586          Interest income recognized           on impaired loans          $          -   $          -   $          -          As a result of the Company's measurement of impaired loans, an allowance         for probable loan losses of approximately $116,000 was established for         the $2.9 million of total impaired loans (which consisted of one         construction loan) at December 31, 2005. During the first quarter of         2006, we agreed to allow the sale of a portion of the underlying         collateral of the loan, with the proceeds paid to the Bank.         Approximately $1.7 million in net proceeds was received, reducing the         outstanding balance of the loan to $1.2 million. Based on the specific         circumstances of this loan, including the estimated value of the         remaining collateral, we do not expect to incur any significant loss on         this loan.          Nonaccrual loans (which consist of smaller balance, homogeneous loans)         at December 31, 2005, 2004 and 2003 amounted to approximately $2.9         million, $0, and $115,000, respectively. Commercial loans and commercial         real estate loans are placed on nonaccrual at the time the loan is 90         days delinquent unless the credit is well secured and in the process of         collection. Commercial loans are charged off when the loan is deemed         uncollectible. Residential real estate loans are typically placed on         nonaccrual only when the loan is 90 days delinquent and not well secured         and in the process of                                          84           collection. Other consumer loans are typically charged off at 90 days         delinquent. In all cases, loans must be placed on nonaccrual or charged         off at an earlier date if collection of principal or interest is         considered doubtful. Non-performing loans, which consist of non-accruing         loans plus accruing loans 90 days or more past due, at December 31,         2005, 2004 and 2003 amounted to approximately $2.9 million, $227,000 and         $462,000, respectively.          Interest payments on impaired loans and nonaccrual loans are typically         applied to principal unless the ability to collect the principal amount         is fully assured, in which case interest is recognized on the cash         basis. At December 31, 2005 and 2004, no cash basis interest income has         been recognized. Interest income foregone on nonaccrual loans was         $20,000, $5,000 and $16,000 for years ended December 31, 2005, 2004, and         2003, respectively.  8.      ACCRUED INTEREST RECEIVABLE          Accrued interest receivable consists of the following:                                                            DECEMBER 31,                                                  ------------------------------                                                       2005            2004                                                  --------------  --------------          Investments and interest-bearing           deposits                               $      730,677  $      603,207         Mortgage-backed securities                      538,723         593,241         Loans receivable                              2,205,950       1,513,714                                                  --------------  --------------          Total                                    $    3,475,350  $    2,710,162                                                  ==============  ==============  9.      PROPERTY AND EQUIPMENT          Property and equipment is summarized by major classifications as         follows:                                                            DECEMBER 31,                                                  ------------------------------                                                       2005            2004                                                  --------------  --------------          Properties and equipment:           Land and buildings                     $    4,220,125  $    3,818,178           Leasehold improvements                      3,102,688       2,640,527           Furniture and fixtures                      4,883,498       4,251,201                                                  --------------  --------------                     Total                             12,206,311      10,709,906         Accumulated depreciation                     (5,696,167)     (5,176,821)                                                  --------------  --------------          Total property and equipment, net of           accumulated depreciation               $    6,510,144  $    5,533,085                                                  ==============  ==============          Certain office facilities and equipment are leased under various         operating leases. The leases range in terms from 1 year to 14 years,         some of which include renewal options as well as specific provisions         relating to rent increases. Rent expense on those lease agreements that         contain incremental increases in rent is recognized on a straight-line         basis over the life of the lease. Rental expense under                                          85           operating leases was approximately $833,000, $427,000, and $405,000 for         the years ended December 31, 2005, 2004, and 2003, respectively.          Future minimum annual rental payments required under noncancelable         operating leases are as follows:                                                          DECEMBER 31,                                                            2005                                                       ---------------          2006                                          $       563,770         2007                                                  580,903         2008                                                  532,439         2009                                                  424,706         2010                                                  436,967         Thereafter                                          2,293,291                                                       ---------------                                                        $     4,832,076                                                       ===============  10.     DEPOSITS          Deposits consist of the following major classifications:                                                 DECEMBER 31,                            ---------------------------------------------------                                     2005                        2004                            ------------------------   ------------------------          Type of Account       Amount       Percent       Amount       Percent          Certificates        $286,120,697     57.1 %    $182,771,378     45.1 %         NOW and MMDA         119,572,302     23.9       117,782,800     29.1         Passbook and club     95,490,025     19.0       104,735,879     25.8                             ------------   ------      ------------   ------          Total               $501,183,024    100.0 %    $405,290,057    100.0 %                             ============   ======      ============   ======          The weighted average rate paid on deposits at December 31, 2005 and         2004, was 2.43% and 1.62%, respectively. Deposits in amounts greater         than $100,000 were approximately $140,379,000 and $64,924,000 at         December 31, 2005 and 2004, respectively, of which approximately         $75,973,000 and $24,983,000 were due in one year or less at December 31,         2005 and 2004, respectively.          A summary of certificates by maturities is as follows:                                                           DECEMBER 31,                                    ---------------------------------------------------                                             2005                        2004                                    ------------------------   ------------------------                                        Amount       Percent       Amount       Percent              One year or less            $161,157,332     56.3 %    $ 74,475,925     40.7 %         One through three years       97,187,051      34.0       85,353,319     46.7         Three through five years      14,272,219      5.0        10,567,336      5.8         Over five years               13,504,095      4.7        12,374,798      6.8                                     ------------   ------      ------------   ------          Total                       $286,120,697    100.0 %    $182,771,378    100.0 %                                     ============   ======      ============   ======                                          86   11.     ADVANCES FROM FEDERAL HOME LOAN BANK          Advances from Federal Home Loan Bank consist of the following:                                                   DECEMBER 31,                              ---------------------------------------------------                                        2005                      2004                              ------------------------- -------------------------                                              WEIGHTED                   WEIGHTED                                             INTEREST                   INTEREST         Maturing Period         Amount        Rate         Amount        Rate          1 to 12 months      $  11,616,290      3.74 %  $  10,200,000      2.62 %         13 to 24 months        29,836,998      4.03        4,384,533      2.49         25 to 36 months        48,972,133      4.14        9,532,595      4.07         37 to 48 months        16,012,531      4.57       51,966,104      4.12         49 to 60 months        42,051,697      5.53       18,183,739      4.45         Over 60 months         52,955,303      4.45       76,399,403      5.01                             -------------    ------    -------------    ------          Total               $ 201,444,952      4.51 %  $ 170,666,374      4.42 %                             =============    ======    =============    ======          The advances are collateralized by all of the Federal Home Loan Bank         stock and substantially all qualifying first mortgage loans and         mortgage-backed securities. The weighted average interest rate on FHLB         advances was 4.51% and 4.42% at December 31, 2005 and 2004,         respectively. The average balance outstanding was approximately $192.2         million and $169.7 million for the years ended December 31, 2005 and         2004 respectively. The maximum amount outstanding at any month-end was         $212.6 million and $185.6 million for the years ended December 31, 2005         and 2004, respectively.  12.     OTHER BORROWED MONEY          During the years ended December 31, 2005 and 2004, the Bank entered into         overnight repurchase agreements with commercial checking account         customers. At December 31, 2005 and 2004, the amounts outstanding were         $16.1 million and $12.9 million, respectively. Interest expense on         customer repurchase agreements was $462,000, $116,000, and $67,000 for         the years ended December 31, 2005, 2004 and 2003, respectively.         Collateral for customer repurchase agreements was mortgage-backed         securities. The market value of the collateral was approximately equal         to the amounts outstanding. The weighted average interest rate on other         borrowed money was 3.88% and 1.79% at December 31, 2005 and 2004,         respectively. The average balance outstanding was approximately $20.2         million and $17.7 million for the years ended December 31, 2005 and 2004         respectively. The maximum amount outstanding at any month-end was $25.0         million and $27.7 million for the years ended December 31, 2005 and         2004, respectively.                                          87   13.     INCOME TAXES          The income tax provision consists of the following:                                                         YEAR ENDED DECEMBER 31,                                         ------------------------------------------------                                              2005             2004             2003                                         --------------   --------------   --------------             Current:           Federal                       $    2,904,388   $    2,127,036   $    1,978,578           State                                      -           (5,933)           3,700                                         --------------   --------------   --------------                 Total current                 2,904,388        2,121,103        1,982,278         Deferred--Federal                     (397,464)         146,326           38,914                                         --------------   --------------   --------------          Total income tax provision      $    2,506,924   $    2,267,429   $    2,021,192                                         ==============   ==============   ==============           The following table presents a reconciliation between the reported         income tax expense and the income tax expense which would be computed by         applying the normal federal income tax rate of 34% to income before         income taxes:                                                         YEAR ENDED DECEMBER 31,                                         ------------------------------------------------                                              2005             2004             2003                                         --------------   --------------   --------------                                             Amount           Amount           Amount             At statutory rate               $    2,995,147   $    2,319,718   $    2,076,982         Adjustments resulting from:           State tax--net of federal             tax benefit                              -           (3,916)           2,442           Tax-exempt income                   (452,588)         (50,822)          (2,387)           Other                                (35,635)           2,449          (55,845)                                         --------------   --------------   --------------          Total                           $    2,506,924   $    2,267,429   $    2,021,192                                         ==============   ==============   ==============          Effective income tax rate                 28.5%            33.2%            33.1%                                         --------------   --------------   --------------                                          88           Items that gave rise to significant portions of the deferred tax         accounts are as follows:                                                            DECEMBER 31,                                                  ------------------------------                                                       2005            2004                                                  --------------  --------------          Deferred tax assets:           Allowance for loan losses              $      494,533  $      480,317           Deferred compensation                       1,136,056         839,320           Unrealized loss on securities             available-for-sale and cap             and swap contracts                        1,457,172         524,604           Other                                               -               -                                                  --------------  --------------                  Total deferred tax assets             3,087,761       1,844,241                                                  --------------  --------------          Deferred tax liabilities:           Property                                     (105,635)       (201,066)           Deferred loan fees                           (313,175)       (259,767)           Other                                         (20,751)        (70,340)                                                  --------------  --------------                  Total deferred tax liabilities         (439,561)       (531,173)                                                  --------------  --------------          Net deferred tax asset                   $    2,648,200  $    1,313,068                                                  ==============  ==============          The Bank uses the specific charge-off method for computing reserves for         bad debts. The bad debt deduction allowable under this method is         available to large banks with assets greater than $500 million.         Generally, this method allows the Bank to deduct an annual addition to         the reserve for bad debts equal to its net charge-offs. Retained         earnings at December 31, 2005 and 2004 include approximately $3,250,000         representing bad debt deductions for which no deferred income tax has         been provided. This amount represents the Bank's bad debt reserve as of         the base year and is not subject to recapture as long as the Bank         continues to carry on the business of banking.          A thrift institution required to change its method of computing reserve         for bad debts treats such change as a change in a method of accounting         determined solely with respect to the "applicable excess reserves" of         the institution. The amount of the applicable excess reserves is taken         into account ratably over a six-taxable year period, beginning with the         first taxable year beginning after December 31, 1995. The timing of this         recapture may be delayed for a two-year period provided certain         residential lending requirements are met. For financial reporting         purposes, the Bank has not incurred any additional tax expense. At         December 31, 2005, deferred taxes were provided on the difference         between the book reserve at December 31, 2005 and the applicable excess         reserve in the amount equal to the Bank's increase in the tax reserve         from December 31, 1987 to December 31, 2005. Retained earnings at         December 31, 2005 and 2004 includes approximately $3,250,000 of income         for which no deferred income taxes will need to be provided.                                          89   14.     PENSION AND PROFIT SHARING PLANS          DEFERRED COMPENSATION PLANS         The Company maintains an executive deferred compensation plan for         selected executive officers under which the Board of Directors may elect         to contribute a portion of the Company's net profits. In December 2005,         the Board of Directors elected to freeze this plan retroactive to         January 1, 2005, such that no further contributions will be made on         behalf of the executive officers under the plan. The Board of Directors         took this action upon its review of the total compensation programs         available to the Company's employees, including the increased benefits         available as a result of the mutual holding company reorganization         completed in December 2004 and the adoption of equity compensation plans         by the Company's shareholders in June 2005. The Company also maintains a         board of directors deferred compensation plan into which the Board of         Directors may elect to contribute a percentage of their board fees. The         expense relating to these plans was approximately $38,000, $159,000, and         $169,000 for the years ended December 31, 2005, 2004, and 2003,         respectively.          SUPPLEMENTAL RETIREMENT PLAN         The Company maintains a nonqualified, unfunded, defined benefit pension         plan for the Board of Directors and certain officers. The components of         the Company's net periodic cost for the plan is as follows:                                                                    YEAR ENDED DECEMBER 31,                                                    ------------------------------------------------                                                         2005             2004             2003                                                    --------------   --------------   --------------             Components of net periodic benefit cost:         Service cost                               $      107,755   $       99,056   $       97,232         Interest cost                                     131,324          116,503          104,710         Expected return on assets                               -                -                -         Amortization of prior service cost                121,925          121,925          121,925                                                    --------------   --------------   --------------          Net periodic pension cost                  $      361,004   $      337,484   $      323,867                                                    ==============   ==============   ==============          Weighted average assumptions:          Discount rate                                        5.55%           6.50%            6.50%         Rate of return on assets                              n/a             n/a              n/a         Rate of increase in future board           fees/salary levels                                 4.00%           4.00%            4.00%           401(K) PLAN         The Company also maintains a 401(k) retirement plan for substantially         all of its employees. Certain senior officers of the Bank have been         designated as Trustees of the 401(k) plan. The Company will match an         employee's contribution up to a maximum of 5% of the employee's annual         gross compensation. For the years ended December 31, 2004 and 2003, the         Company matched 200% of the employee's contribution. Beginning January         1, 2005, this match was reduced to 100% of the employee's contribution.         The Board of Directors took this action upon its review of the total         compensation programs available to the Company's employees, including         the increased benefits available as a result of the mutual holding         company reorganization completed in December 2004. The expense incurred         for this plan was approximately $181,000, $330,000, and $308,000 for the         years ended December 31, 2005, 2004, and 2003, respectively.                                          90           EMPLOYEE STOCK OWNERSHIP PLAN         In 2004, the Company established an employee stock ownership plan         ("ESOP") for substantially all of its full-time employees. Certain         senior officers of the Bank have been designated as Trustees of the         ESOP. Shares of the Company's common stock purchased by the ESOP are         held in a suspense account until released for allocation to         participants. Shares are expected to be released over a 15-year period.         Shares released are allocated to each eligible participant based on the         ratio of each such participant's base compensation to the total base         compensation of all eligible plan participants. As the unearned shares         are committed to be released and allocated among participants, the         Company recognizes compensation expense equal to the average market         price of the shares. As of December 31, 2005, 571,320 shares of the         Company's common stock had been purchased for approximately $7.4 million         by the ESOP. Of these shares, 418,820 shares were purchased in 2005 for         approximately $5.3 million. As of December 31, 2004, 152,500 shares of         the Company's common stock had been purchased for approximately $2.0         million by the ESOP. No additional purchases are expected to be made by         the ESOP under this plan. The average purchase price of the 571,320         shares held at December 31, 2005 was $12.90 per share. The fair value of         these shares December 31, 2005 was approximately $7.2 million. During         the year ended December 31, 2005, approximately 38,000 shares were         committed to be released to participants resulting in recognition of         approximately $475,000 in compensation expense. These shares were         subsequently released to participants' accounts in March 2006. During         the year ended December 31, 2004, no shares were committed to be         released and no expense was recognized.          RABBI TRUST         During 2004, the Company established a rabbi trust to fund certain         benefit plans. An officer of the Bank has been designated as Trustee of         the trust. Approximately 107,000 shares of the Company's common stock         were purchased for $1.1 million by this trust in December 2004 for the         benefit of certain officers and directors that acquired shares through         our deferred compensation plans. During the year ended December 31,         2005, approximately 2,000 shares of the Company's common stock held by         the trust were released to one eligible participant. As of December 31,         2005, the trust holds 105,000 shares of the Company's common stock as         well as an additional $274,000 in cash. The assets of the trust are         sufficient to cover the liabilities of the Company's executive deferred         compensation plan and board of directors deferred compensation plan.          RECOGNITION AND RETENTION PLAN         In June 2005, the shareholders of the Company approved the adoption of         the 2005 Recognition and Retention Plan (the "RRP"). Certain senior         officers of the Bank have been designated as Trustees of the RRP. The         RRP provides for the grant of shares of common stock of the Company to         certain officers, employees and directors of the Company. In order to         fund the RRP, the Recognition Plan Trust (the "Trust") purchased 285,660         shares of the Company's common stock in the open market for         approximately $3.7 million, an average price of $12.95 per share. The         Company made sufficient contributions to the Trust to fund these         purchases. No additional purchases are expected to be made by the Trust         under this plan. Pursuant to the terms of the plan, all 285,660 shares         acquired by the Trust were granted to certain officers, employees and         directors of the Company in July 2005. Approximately 3,000 forfeited         shares were reallocated in December 2005. RRP shares will generally vest         at the rate of 20% per year over five years.                                          91           A summary of the status of the shares under the RRP as of December 31,         2005 and changes during the year ended December 31, 2005 are presented         below:                                                                     YEAR ENDED DECEMBER 31, 2005                                                        ------------------------------------------------                                                                                   WEIGHTED AVERAGE                                                          NUMBER OF SHARES       GRANT DATE FAIR VALUE                                                        --------------------   -------------------------            Nonvested at the beginning of the year                            -   $                       -         Granted                                                     288,160                       12.02         Vested                                                            -                           -         Forfeited                                                    (2,500)                      12.01                                                        --------------------   -------------------------          Nonvested at the end of the year                            285,660   $                   12.02                                                        ====================   =========================           Compensation expense on RRP shares granted is recognized ratably over         the five year vesting period in an amount which totals the market price         of the Company's stock at the date of grant. During the year ended         December 31, 2005, approximately 28,000 shares were amortized to         expense, based on the proportional vesting of the awarded shares. During         year ended December 31, 2005, approximately $333,000 was recognized in         compensation expense for the plan. No tax benefit was recognized from         the plan during this period. As of December 31, 2005, approximately $3.1         million in additional compensation expense will be recognized over the         remaining lives of the RRP awards. At December 31, 2005, the weighted         average remaining lives of the RRP awards is approximately 4.5 years.          STOCK OPTIONS         In June 2005, the shareholders of the Company also approved the adoption         of the 2005 Stock Option Plan (the "Option Plan"). The Option Plan         authorizes the grant of stock options to officers, employees and         directors of the Company to acquire shares of common stock with an         exercise price equal to the fair market value of the common stock on the         grant date. Options will generally become vested and exercisable at the         rate of 20% per year over five years and are generally exercisable for a         period of ten years after the grant date. A total of 714,150 shares of         common stock have been reserved for future issuance pursuant to the         Option Plan of which 70,900 shares remain unawarded. Approximately 3,000         options forfeited during the year ended December 31, 2005 were granted         to other employees.          A summary of the status of the Company's stock options under the Option         Plan as of December 31, 2005 and changes during the year ended December         31, 2005 are presented below:                                                                     YEAR ENDED DECEMBER 31, 2005                                                        ------------------------------------------------                                                                                   WEIGHTED AVERAGE                                                          NUMBER OF SHARES       GRANT DATE FAIR VALUE                                                        --------------------   -------------------------            Outstanding at the beginning of the year                          -   $                       -         Granted                                                     646,100                       12.02         Exercised                                                         -                           -         Forfeited                                                    (2,850)                      12.01                                                        --------------------   -------------------------          Outstanding at the end of the year                          643,250   $                   12.02                                                        ====================   =========================          Exercisable at the end of the year                                -   $                       -                                                        ====================   =========================                                          92           The following table summarizes all stock options outstanding under the         Option Plan as of December 31, 2005:                                              OPTIONS OUTSTANDING                          OPTIONS EXERCISABLE                           ----------------------------------------------------  ---------------------------------                                               WEIGHTED       WEIGHTED AVERAGE                       WEIGHTED                             NUMBER OF         AVERAGE           REMAINING         NUMBER OF         AVERAGE         Exercise Price        SHARES       EXERCISE PRICE    CONTRACTUAL LIFE       SHARES       EXERCISE PRICE       ------------------  -------------  ------------------ ------------------  -------------  ------------------                                                                 (in years)                  $12.01            638,750       $      12.01                9.5               -       $          -              13.35              4,500              13.35                9.9               -                  -                             ---------       ------------       ------------       ---------       ------------              Total             643,250       $      12.02                9.5               -       $          -                             =========       ============       ============       =========       ============           The estimated fair value of options granted during 2005 was $2.88 per         share. The fair value was estimated on the date of grant in accordance         with SFAS No. 123R using the Black-Scholes Single Option Pricing Model         with the following weighted average assumptions used:                                                      YEAR ENDED                                                 DECEMBER 31, 2005                                               ---------------------          Dividend yield                                      1.67%         Expected volatility                                23.62%         Risk-free interest rate                      3.74 - 4.34%         Expected life of options                      3 - 7 years          The dividend yield was calculated based on the dividend amount and stock         price existing at the grant date taking into consideration expected         increases in the dividend and stock price over the lives of the options.         The actual dividend yield may differ from this assumption. The risk-free         interest rate used was based on the rates of treasury securities with         maturities equal to the expected lives of the options.          As this was the first option award provided to employees and directors         of the Company, management made certain assumptions regarding the         exercise behavior of recipients without the use of any prior exercise         behavior as a basis. Assumptions of exercise behavior were made on an         individual basis for directors and executive officers and general         assumptions were made for the remainder of employees. In making these         assumptions, management considered the age and financial status of         recipients in addition to other qualitative factors.          Given the relatively short time period for which the Company has had its         common stock outstanding to the public, it was determined that the         historical volatility of our stock price since our initial public         offering in December 2004 would not provide a reliable basis for         determining the expected volatility of our stock price over the expected         lives of our option awards. Accordingly, management determined that the         volatility used in the option pricing model should be based on the         volatilities of comparable companies. Management engaged a third party         to assist in performing the task of selecting comparable companies and         determining the volatility of their stock. The volatility used by the         Company was based on the average historical volatilities of these         comparable companies.          During the year ended December 31, 2005, approximately $181,000 was         recognized in compensation expense for the Option Plan. No tax benefit         was recognized from the plan during this period. At December 31, 2005,         approximately $1.7 million in additional compensation expense for         awarded options remained unrecognized. The weighted average period over         which this expense will be recognized is approximately 4.5 years.                                          93   15.     COMMITMENTS AND CONTINGENCIES          The Bank had approximately $3,597,000 in outstanding mortgage loan         commitments at December 31, 2005. The commitments are expected to be         funded within 90 days with $3,597,000 in fixed rates ranging from 5.50%         to 6.25%. These loans are not originated for resale. Also outstanding at         December 31, 2005 were unused lines of credit totaling approximately         $63,953,000.          The Bank had approximately $3,700,000 in outstanding mortgage loan         commitments at December 31, 2004. The commitments are expected to be         funded within 90 days with $3,700,000 in fixed rates ranging from 5.00%         to 6.25%. These loans are not originated for resale. Also outstanding at         December 31, 2004 were unused lines of credit totaling approximately         $58,585,000.          Letters of credit are conditional commitments issued by the Bank         guaranteeing payments of drafts in accordance with the terms of the         letter of credit agreements. Commercial letters of credit are used         primarily to facilitate trade or commerce and are also issued to support         public and private borrowing arrangements, bond financings and similar         transactions. Standby letters of credit are conditional commitments         issued by the Bank to guarantee the performance of a customer to a third         party. Collateral may be required to support letters of credit based         upon management's evaluation of the creditworthiness of each customer.         The credit risk involved in issuing letters of credit is substantially         the same as that involved in extending loan facilities to customers.         Most letters of credit expire within one year. At December 31, 2005 and         December 31, 2004, the Bank had letters of credit outstanding of         approximately $14.1 million and $11.3 million, respectively, of which         $12.5 million and $10.5 million, respectively, were standby letters of         credit. At December 31, 2005 and 2004, the uncollateralized portion of         the letters of credit extended by the Bank was approximately $169,000         and $215,000, respectively, of which $97,000 and $99,000, respectively,         was for standby letters of credit.          The Company is subject to various pending claims and contingent         liabilities arising in the normal course of business which are not         reflected in the accompanying consolidated financial statements.         Management considers that the aggregate liability, if any, resulting         from such matters will not be material.          Among the Company's contingent liabilities, are exposures to limited         recourse arrangements with respect to the sales of whole loans and         participation interests. At December 31, 2005, the exposure, which         represent a portion of credit risk associated with the sold interests,         amounted to $185,000. The exposure is for the life of the related loans         and payable, on our proportional share, as losses are incurred.  16.     REGULATORY CAPITAL REQUIREMENTS          The Company and the Bank are subject to various regulatory capital         requirements administered by federal and state banking agencies. Failure         to meet minimum capital requirements can initiate certain mandatory--and         possibly additional discretionary--actions by regulators, that, if         undertaken, could have a direct material effect on the Company's         consolidated financial statements. Under capital adequacy guidelines and         the regulatory framework for prompt corrective action, the Bank must         meet specific capital guidelines that involve quantitative measures of         the Bank's assets, liabilities and certain off-balance-sheet items as         calculated under regulatory accounting practices. The Company's and the         Bank's capital amounts and classification are also subject to         qualitative judgments by the regulators about components, risk         weightings and other factors.                                          94           Quantitative measures established by regulation to ensure capital         adequacy require the Bank to maintain minimum amounts and ratios (set         forth in the table below) of total and Tier I capital (as defined in the         regulations) to risk-weighted assets (as defined), and of Tier I capital         (as defined) to average assets (as defined). As of December 31, 2005,         the Company and the Bank meet all capital adequacy requirements to which         they are subject.          As of December 31, 2005 and 2004, the most recent notification from the         FDIC categorized the Bank as well capitalized under the regulatory         framework for prompt corrective action. To be categorized as well         capitalized, the Bank must maintain minimum Tier I risk-based, total         risk-based, and Tier I leverage ratios as set forth in the table. There         are no conditions or events since that notification that management         believes have changed the Bank' s category.          The Company's and the Bank's actual capital amounts and ratios are         presented in the table below:                                                                                               TO BE WELL CAPITALIZED                                                                        REQUIRED FOR            UNDER PROMPT                                                                      CAPITAL ADEQUACY        CORRECTIVE ACTION                                                  ACTUAL                   PURPOSES               PROVISIONS                                        -------------------------  -----------------------  ----------------------                                            AMOUNT       RATIO         AMOUNT      RATIO       AMOUNT      RATIO                As of December 31, 2005:         Total Capital           (to Risk Weighted Assets)             The Company                $ 121,387,000    23.47 %   $ 41,373,000     8.00 %       N/A         N/A             The Bank                      89,058,000    17.21       41,398,000     8.00    $ 51,748,000   10.00 %         Tier I Capital           (to Risk Weighted Assets)             The Company                  119,932,000    16.94       20,686,000     4.00         N/A         N/A             The Bank                      87,603,000    16.93       20,699,000     4.00      31,049,000    6.00         Tier I Capital           (to Average Assets)             The Company                  119,932,000    14.28       28,045,000     4.00         N/A         N/A             The Bank                      87,603,000    10.46       33,496,000     4.00      41,870,000    5.00          As of December 31, 2004:         Total Capital           (to Risk Weighted Assets)             The Company                $ 125,318,000    29.96 %   $ 33,460,000     8.00 %       N/A         N/A             The Bank                      90,690,000    21.57       33,631,000     8.00    $ 42,039,000   10.00 %         Tier I Capital           (to Risk Weighted Assets)             The Company                  123,905,000    29.62       16,730,000     4.00         N/A         N/A             The Bank                      89,277,000    21.24       16,816,000     4.00      25,223,000    6.00         Tier I Capital           (to Average Assets)             The Company                  123,905,000    17.67       28,596,000     4.00         N/A         N/A             The Bank                      89,277,000    12.73       28,045,000     4.00      35,057,000    5.00                                          95   17.     FAIR VALUE OF FINANCIAL INSTRUMENTS          The estimated fair value amounts have been determined by the Company         using available market information and appropriate valuation         methodologies. However, considerable judgment is necessarily required to         interpret market data to develop the estimates of fair value.         Accordingly, the estimates presented herein are not necessarily         indicative of the amounts the Company could realize in a current market         exchange. The use of different market assumptions and/or estimation         methodologies may have a material effect on the estimated fair value         amounts.                                                                  DECEMBER 31,                                          --------------------------------------------------------                                                    2005                         2004                                          ---------------------------  ---------------------------                                                          ESTIMATED                    ESTIMATED                                            CARRYING        FAIR         CARRYING         FAIR                                             AMOUNT         VALUE         AMOUNT         VALUE                                                (IN THOUSANDS)               (IN THOUSANDS)              Assets:           Cash and cash equivalents       $   27,714    $   27,714     $   33,296    $    33,296           Investment securities               99,224        99,145         86,384         86,500           Mortgage-backed securities         147,354       145,449        164,732        164,350           Loans receivable--net              529,487       512,873        412,656        410,388          Liabilities:           Deposits                        $  501,183    $  469,970     $  405,290    $   380,580           Advances from Federal             Home Loan Bank                   201,445       203,431        170,666        174,735           Other borrowed money                16,114        16,114         12,866         12,866           Interest rate swaps and caps             -             -             85             85           CASH AND CASH EQUIVALENTS--For cash and cash equivalents, the carrying         amount is a reasonable estimate of fair value.          INVESTMENT AND MORTGAGE-BACKED SECURITIES--The fair value of investment         securities and mortgage-backed securities is based on quoted market         prices, dealer quotes and prices obtained from independent pricing         services.          LOANS RECEIVABLE--The fair value of loans is estimated based on present         value using approximate current entry-value interest rates applicable to         each category of such financial instruments.          DEPOSITS--The fair value of NOW, money market deposits and passbook and         club accounts is the amount reported in the consolidated financial         statements. The fair value of time certificates is based on a present         value estimate using rates currently offered for deposits of similar         remaining maturity.          ADVANCES FROM FEDERAL HOME LOAN BANK--The fair value is the amount         payable on demand at the reporting date.          OTHER BORROWED MONEY--The fair value is considered to be equal to the         carrying amount due to the short-term nature of the instruments.          INTEREST RATE SWAPS AND CAPS--The fair value of the interest rate swaps         and caps are based on prices obtained from an independent pricing         service.                                          96           COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT--The majority of the         Bank's commitments to extend credit and letters of credit carry current         market interest rates if converted to loans. Because commitments to         extend credit and letters of credit are generally unassignable by either         the Bank or the borrower, they only have value to the Bank and the         borrower. The estimated fair value approximates the recorded deferred         fee amounts, which are not significant.          The fair value estimates presented herein are based on pertinent         information available to management as of December 31, 2005 and 2004.         Although management is not aware of any factors that would significantly         affect the estimated fair value amounts, such amounts have not been         comprehensively revalued for purposes of these financial statements         since December 31, 2005 and 2004 and, therefore, current estimates of         fair value may differ significantly from the amounts presented herein.  18.     ABINGTON COMMUNITY BANCORP, INC. (PARENT COMPANY ONLY)          Certain condensed financial information follows:             STATEMENTS OF FINANCIAL CONDITION         ---------------------------------------------------------------------------------------------------                                                                 December 31, 2005        December 31, 2004                                                              ---------------------    ---------------------            ASSETS          Cash and cash equivalents                            $          25,639,310    $          36,766,348         Investment in Abington Bank                                     84,901,681               88,426,883         Loans receivable                                                 7,007,751                        -         Other assets                                                         2,025                        -                                                              ---------------------    ---------------------          TOTAL ASSETS                                         $         117,550,767    $         125,193,231                                                              =====================    =====================          LIABILITIES AND STOCKHOLDERS' EQUITY          LIABILITIES:             Accounts payable and accrued expenses            $             320,000    $           2,138,530                                                              ---------------------    ---------------------                     Total liabilities                                       320,000                2,138,530                                                              ---------------------    ---------------------          STOCKHOLDERS' EQUITY           Preferred stock, $0.01 par value, 10,000,000             shares authorized, none issued           Common stock, $0.01 par value, 40,000,000             shares authorized, issued and outstanding:             15,870,000 in 2004                                             158,700                  158,700           Additional paid-in capital                                    69,234,964               69,096,936           Unallocated common stock held by:             Employee Stock Ownership Plan (ESOP)                        (6,880,236)              (2,046,137)             Recognition and Retention Plan Trust (RRP)                  (3,339,413)                       -             Deferred compensation plans trust                           (1,050,000)              (1,074,200)           Retained earnings                                             61,889,180               57,881,651           Accumulated other comprehensive loss                          (2,782,428)                (962,249)                                                              ---------------------    ---------------------                     Total stockholders' equity                          117,230,767              123,054,701                                                              ---------------------    ---------------------          TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY           $         117,550,767    $         125,193,231                                                              =====================    =====================                                          97           STATEMENT OF INCOME         ------------------------------------------------------------------------                                                                  Year Ended                                                                 December 31,                                                               ---------------                                                                     2005                                                               ---------------          INCOME:           Interest on loans                                   $       346,045                                                               ---------------                    Total income                                       346,045                                                               ---------------         EXPENSES:           Professional services                                       200,000           Other                                                       152,000                                                               ---------------                    Total expenses                                     352,000                                                               ---------------         INCOME BEFORE INCOME TAXES                                     (5,955)                                                               ---------------         EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY                6,306,261                                                               ---------------         PROVISION FOR INCOME TAXES                                     (2,025)                                                               ---------------         NET INCOME                                            $     6,302,331                                                               ===============           STATEMENT OF CASH FLOWS         ------------------------------------------------------------------------                                                                   Year Ended                                                                 December 31,                                                               ---------------                                                                     2005                                                               ---------------          OPERATING ACTIVITIES:           Net income                                          $     6,302,331           Adjustments to reconcile net income to net cash             provided by operating activities:             Undistributed income of subsidiary                     (6,306,261)             Changes in assets and liabilities which (used)               provided cash:               Other assets                                             (2,025)               Accounts payable and accrued expenses                   320,000                                                               ---------------                 Net cash provided by operating activities             314,045                                                               ---------------         INVESTING ACTIVITIES:           Principal collected on loans                                466,624           Disbursements for loans                                  (7,474,375)                                                               ---------------                 Net cash used in investing activities              (7,007,751)                                                               ---------------         FINANCING ACTIVITIES:           Repayments of liabilities                                (2,138,530)           Payment of cash dividend                                 (2,294,802)                                                               ---------------                 Net cash provided by financing activities          (4,433,332)                                                               ---------------          NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS      (11,127,038)         CASH AND CASH EQUIVALENTS--Beginning of period             36,766,348                                                               ---------------         CASH AND CASH EQUIVALENTS--End of period              $    25,639,310                                                               ===============          Since Abington Community Bancorp, Inc. was formed on December 16, 2004,         no condensed statements of income or cash flows are presented for the         period from December 16, 2004 to December 31, 2004 due to the         insignificant nature of the balances.                                          98   19.     CONVERSION AND REORGANIZATION TO MUTUAL HOLDING COMPANY          On April 21, 2004, the Board of Trustees approved a plan of         reorganization by which Abington Bank reorganized from a mutual savings         bank to a mutual holding company structure. Upon completion of the         reorganization on December 16, 2004, Abington Bank became a wholly owned         subsidiary of Abington Community Bancorp, Inc. Abington Mutual Holding         Company, a Pennsylvania corporation, became the mutual holding company         parent of Abington Community Bancorp, Inc. Abington Mutual Holding         Company owns 55% of Abington Community Bancorp, Inc.'s outstanding         common stock and must continue to own at least a majority of the voting         stock of Abington Community Bancorp, Inc. In addition to the shares of         Abington Community Bancorp, Inc. which it owns, Abington Mutual Holding         Company was capitalized with $100,000 in cash.          As part of the reorganization, approximately 45% of the outstanding         common stock was offered to the public. The purchase price was $10.00         per share. All investors (including trustees and officers of Abington         Bank) paid the same price per share in the offering. The Company sold         7,141,500 shares of stock to eligible depositors, generating $71.4         million in gross proceeds, and an additional 8,728,500 shares were         issued to Abington Mutual Holding Company. Net proceeds were         approximately $69.3 million after $2.2 million in conversion costs were         deducted. Half of the net proceeds from the offering, approximately         $34.6 million, were used by the Company to buy the common stock of the         Bank.          As part of the initial public offering, a rabbi trust, which was         established by the Bank to fund certain benefit plans, purchased         approximately 107,000 shares of the Company's common stock for $1.1         million for the benefit of certain officers and directors that acquired         shares through our deferred compensation plans.                                        ******                                          99   SUPPLEMENTARY DATA  SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)          The following table presents summarized quarterly data for each of the last two years.     Three Months Ended:                            DECEMBER 31,   SEPTEMBER 30,   JUNE 30,   MARCH 31,                                                ------------   -------------   --------   ---------                                                  (Dollars in thousands, except per share data)      2005 Total interest income                          $     11,039   $      10,399   $  9,666   $   8,907 Total interest expense                                5,564           5,050      4,433       3,952                                                ------------   -------------   --------   --------- Net interest income                                   5,475           5,349      5,233       4,955 Provision for loan losses                                 5              20         --          --                                                ------------   -------------   --------   ---------   Net interest income after provision for        loan losses                                    5,470           5,329      5,233       4,955 Total non-interest income                               688             769        762         579 Total non-interest expense                            4,053           3,900      3,538       3,485                                                ------------   -------------   --------   --------- Income before income taxes                            2,105           2,198      2,457       2,049 Income taxes                                            544             604        721         638                                                ------------   -------------   --------   --------- Net income                                     $      1,561   $       1,594   $  1,736   $   1,411                                                ============   =============   ========   ========= Basic earnings per share                                .10             .10        .11         .09 Diluted earnings per share                              .10             .10        .11         .09  2004 Total interest income                          $      8,426   $       7,761   $  7,339   $   7,323 Total interest expense                                3,803           3,601      3,441       3,364                                                ------------   -------------   --------   --------- Net interest income                                   4,623           4,160      3,898       3,959 Provision for loan losses                                --              --         --          45                                                ------------   -------------   --------   ---------   Net interest income after provision for        loan losses                                    4,623           4,160      3,898       3,914 Total non-interest income                               639             509        824         271 Total non-interest expense                            3,197           3,044      2,824       2,950                                                ------------   -------------   --------   --------- Income before income taxes                            2,065           1,625      1,898       1,235 Income taxes                                            656             571        631         410                                                ------------   -------------   --------   --------- Net income                                     $      1,409   $       1,054   $  1,267   $     825                                                ============   =============   ========   ========= Basic earnings per share                            n/a (1)             n/a        n/a         n/a Diluted earnings per share                          n/a (1)             n/a        n/a         n/a  - ------------------ (1)     Due to the timing of the Bank's reorganization into the mutual holding         company form and the completion of the Company's initial public offering         on December 16, 2004, earnings per share for the period from December         16, 2004 to December 31, 2004 is not considered meaningful and is not         shown.                                         100
Not applicable.
The Company's management evaluated, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and regulations and are operating in an effective manner. No change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934) occurred during the quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
Not applicable.                                      PART III
Incorporated by reference to "Information with Respect to Nominees for Director, Continuing Directors and Executive Officers" in our definitive proxy statement for the annual meeting of shareholders to be held in May 2006 (the "Proxy Statement"), which will be filed with the Securities and Exchange Commission on or before April 30, 2006.  Incorporated by reference to "Beneficial Ownership of Common Stock by Certain Beneficial Owners and Management - Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement.  The Company has adopted a Code of Conduct and Ethics that applies to its principal executive officer and principal financial officer, as well as other officers and employees of the Company and the Bank. A copy of the Code of Conduct and Ethics may be found on the Company's website at WWW.ABINGTONBANK.COM.
Incorporated by reference to "Management Compensation," "Report of the Compensation Committee" and "Performance Graph" in the Proxy Statement.                                         101
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information regarding security ownership of certain beneficial owners and management is incorporated by reference to "Beneficial Ownership of Common Stock by Certain Beneficial Owners and Management" in the Proxy Statement.  EQUITY COMPENSATION PLAN INFORMATION. The following table provides information as of December 31, 2005 with respect to shares of common stock that may be issued under our existing equity compensation plans, which consist of the 2005 Stock Option Plan and 2005 Recognition and Retention Plan, both of which were approved by our shareholders.                                                                                                  Number of securities                                                                                             remaining available for                                    Number of securities to be        Weighted-average     future issuance under equity                                      issued upon exercise of        exercise price of    compensation plans (excluding                                   outstanding options, warrants    outstanding options,     securities reflected in                                            and rights              warrants and rights            column (a))          Plan Category                         (a)                         (b)                        (c) - --------------------------------  ------------------------------  ---------------------  ------------------------------     Equity compensation plans    approved by security holders              928,910(1)                 $12.02(1)                  70,900 Equity compensation plans    not approved by security    holders                                        --                        --                         --                                              -------                    ------                     ------ Total                                        928,910                    $12.02                     70,900                                              =======                                               ======  - ------------------- (1)     Includes 285,660 shares subject to restricted stock grants which were         not vested as of December 31, 2005. The weighted-average exercise price         excludes such restricted stock grants.
Incorporated by reference to "Management Compensation - Indebtedness of Management and Related Party Transactions" in the Proxy Statement.
Incorporated by reference to "Ratification of Appointment of Independent Registered Public Accounting Firm" in the Proxy Statement.                                        PART IV
(A)     DOCUMENTS FILED AS PART OF THIS REPORT:          Financial Statements: The Consolidated Financial Statements of Abington         Community Bancorp, Inc. and the Report of Independent Registered Public         Accounting Firm thereon, as listed below, have been filed under "Item 8,         Financial Statements and Supplementary Data".          Report of Independent Registered Public Accounting Firm                                         102           Consolidated Statements of Financial Condition for the Years Ended         December 31, 2005 and 2004          Consolidated Statements of Income for the Years Ended December 31, 2005,         2004 and 2003          Consolidated Statements of Changes in Shareholders' Equity and         Comprehensive Income for the Years Ended December 31, 2005, 2004 and         2003          Consolidated Statements of Cash Flows for the Years Ended December 31,         2005, 2004 and 2003          Notes to Consolidated Financial Statements  (B)     LIST OF EXHIBITS      NO.            DESCRIPTION                                                                       LOCATION - -----------    -------------------------------------------------------------------------------   -----------------   3.1          Articles of Incorporation of Abington Community Bancorp, Inc.                                   (1)    3.2          Bylaws of Abington Community Bancorp, Inc.                                                      (1)    4.0          Form of Stock Certificate of Abington Community Bancorp, Inc.                                   (1)   10.1*         Employment Agreement between Abington Bank and Robert W. White                                  (1)   10.2*         Form of Draft Employment Agreement between Abington Bank and each of Edward                     (1)                W. Gormley, Frank Kovalcheck and Jack J. Sandoski   10.3*         Amended and Restated Board of Directors Deferred Compensation Plan                              (2)   10.4*         Amended and Restated Executive Deferred Compensation Plan                                       (2)   10.5*         Supplemental Executive Retirement Plan                                                          (2)   10.6*         Board of Trustees Retirement Plan                                                               (2)   10.7*         Abington Community Bancorp, Inc. 2005 Stock Option Plan                                         (3)   10.8*         Abington Community Bancorp, Inc. 2005 Recognition and Retention Plan and                        (3)                Trust Agreement   23.0          Consent of Deloitte & Touche LLP                                                     Filed Herewith   31.1          Rule 13(a)-14(a) Certification of the Chief Executive Officer                        Filed Herewith   31.2          Rule 13(a)-14(a) Certification of the Chief Financial Officer                        Filed Herewith   32.0          Section 1350 Certifications                                                          Filed Herewith  - ------------- *       Denotes a management contract or compensatory plan or arrangement  (1)     Incorporated by reference from Abington Community Bancorp's Registration         Statement on Form S-1 filed on June 10, 2004, as amended and declared         effective on October 21, 2004 (Registration No. 333-116370)                                         103   (2)     Incorporated by reference from the registrant's Annual Report on Form         10-K for the year ended December 31, 2004 as filed with the SEC on March         31, 2005 (File No. 0-51077).  (3)     Incorporated by reference from the registrant's Current Report on Form         8-K dated as of June 23, 2005 and filed with the SEC on June 27, 2005         (File No. 0-51077).          (C)     FINANCIAL STATEMENT SCHEDULES                  All schedules have been omitted as the required information is                 not applicable or is presented in the consolidated financial                 statements or related notes included in Item 8 hereof.                                         104                                      SIGNATURES  Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.                  ABINGTON COMMUNITY BANCORP, INC.                    By: /s/ Robert W. White                    -----------------------------------------                    Robert W. White                    Chairman, President and Chief Executive Officer  Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.                  NAME                                     TITLE                                 DATE - -----------------------------------     -------------------------------------        --------------------    /s/ Robert W. White                     Chairman of the Board, President and            March 27, 2006 - -----------------------------------     Chief Executive Officer Robert W. White   /s/ Jack J. Sandoski                    Senior Vice President and Chief                 March 27, 2006 - -----------------------------------     Financial Officer Jack J. Sandoski   /s/ Michael F. Czerwonka, III           Director                                        March 27, 2006 - ----------------------------------- Michael F. Czerwonka, III   /s/ A. Stuard Graham, Jr.               Director                                        March 27, 2006 - ----------------------------------- A. Stuard Graham, Jr.   /s/ Jane Margraff Kieser                Director                                        March 27, 2006 - ----------------------------------- Jane Margraff Kieser   /s/ Joseph B. McHugh                    Director                                        March 27, 2006 - ----------------------------------- Joseph B. McHugh   /s/ Robert John Pannepacker, Sr.        Director                                        March 27, 2006 - ----------------------------------- Robert John Pannepacker, Sr.                                          105    EX-23 2 tex23-9518.txt EX-23                                                                        EXHIBIT 23.0   CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  We consent to the incorporation by reference in Registration Statement Nos. 333-121336 and 333-130278 on Form S-8 of our report dated March 22, 2006, relating to the consolidated financial statements of Abington Community Bancorp, Inc. and subsidiaries, appearing in this Annual Report on Form 10-K of Abington Community Bancorp, Inc. for the year ended December 31, 2005.  /s/ Deloitte & Touche LLP  Philadelphia, Pennsylvania March 27, 2006    EX-31.1 3 tex31_1-9518.txt EX-31.1                                                                        EXHIBIT 31.1                                    CERTIFICATION  I, Robert W. White, certify that:  1.      I have reviewed this annual report on Form 10-K of Abington Community         Bancorp, Inc. (the "Registrant");  2.      Based on my knowledge, this report does not contain any untrue statement         of a material fact or omit to state a material fact necessary to make         the statements made, in light of the circumstances under which such         statements were made, not misleading with respect to the period covered         by this report;  3.      Based on my knowledge, the financial statements, and other financial         information included in this report, fairly present in all material         respects the financial condition, results of operations and cash flows         of the Registrant as of, and for, the periods presented in this report;  4.      The Registrant's other certifying officer(s) and I are responsible for         establishing and maintaining disclosure controls and procedures (as         defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the         Registrant and have:          (a)     Designed such disclosure controls and procedures, or caused such                 disclosure controls and procedures to be designed under our                 supervision, to ensure that material information relating to the                 Registrant, including its consolidated subsidiaries, is made                 known to us by others within those entities, particularly during                 the period in which this report is being prepared;          (b)     Evaluated the effectiveness of the Registrant's disclosure                 controls and procedures and presented in this report our                 conclusions about the effectiveness of the disclosure controls                 and procedures, as of the end of the period covered by this                 report based on such evaluation; and          (c)     Disclosed in this report any change in the Registrant's internal                 control over financial reporting that occurred during the                 Registrant's most recent fiscal quarter (the Registrant's fourth                 fiscal quarter in the case of an annual report) that has                 materially affected, or is reasonably likely to materially                 affect, the Registrant's internal control over financial                 reporting; and  5.      The Registrant's other certifying officer(s) and I have disclosed, based         on our most recent evaluation of internal control over financial         reporting, to the Registrant's auditors and the audit committee of         Registrant's board of directors (or persons performing the equivalent         functions):          (a)     All significant deficiencies and material weaknesses in the                 design or operation of internal control over financial reporting                 which are reasonably likely to adversely affect the Registrant's                 ability to record, process, summarize and report financial                 information; and          (b)     Any fraud, whether or not material, that involves management or                 other employees who have a significant role in the Registrant's                 internal control over financial reporting.     Date: March 27, 2006                            /s/ Robert W. White                                                 --------------------------------                                                 Robert W. White                                                 Chairman, President and                                                 Chief Executive Officer    EX-31.2 4 tex31_2-9518.txt EX-31.2                                                                        EXHIBIT 31.2                                    CERTIFICATION  I, Jack J. Sandoski, certify that:  1.      I have reviewed this annual report on Form 10-K of Abington Community         Bancorp, Inc. (the "Registrant");  2.      Based on my knowledge, this report does not contain any untrue statement         of a material fact or omit to state a material fact necessary to make         the statements made, in light of the circumstances under which such         statements were made, not misleading with respect to the period covered         by this report;  3.      Based on my knowledge, the financial statements, and other financial         information included in this report, fairly present in all material         respects the financial condition, results of operations and cash flows         of the Registrant as of, and for, the periods presented in this report;  4.      The Registrant's other certifying officer(s) and I are responsible for         establishing and maintaining disclosure controls and procedures (as         defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the         Registrant and have:          (a)     Designed such disclosure controls and procedures, or caused such                 disclosure controls and procedures to be designed under our                 supervision, to ensure that material information relating to the                 Registrant, including its consolidated subsidiaries, is made                 known to us by others within those entities, particularly during                 the period in which this report is being prepared;          (b)     Evaluated the effectiveness of the Registrant's disclosure                 controls and procedures and presented in this report our                 conclusions about the effectiveness of the disclosure controls                 and procedures, as of the end of the period covered by this                 report based on such evaluation; and          (c)     Disclosed in this report any change in the Registrant's internal                 control over financial reporting that occurred during the                 Registrant's most recent fiscal quarter (the Registrant's fourth                 fiscal quarter in the case of an annual report) that has                 materially affected, or is reasonably likely to materially                 affect, the Registrant's internal control over financial                 reporting; and  5.      The Registrant's other certifying officer(s) and I have disclosed, based         on our most recent evaluation of internal control over financial         reporting, to the Registrant's auditors and the audit committee of         Registrant's board of directors (or persons performing the equivalent         functions):          (a)     All significant deficiencies and material weaknesses in the                 design or operation of internal control over financial reporting                 which are reasonably likely to adversely affect the Registrant's                 ability to record, process, summarize and report financial                 information; and          (b)     Any fraud, whether or not material, that involves management or                 other employees who have a significant role in the Registrant's                 internal control over financial reporting.     Date: March 27, 2006                            /s/ Jack J. Sandoski                                                 --------------------------------                                                 Jack J. Sandoski                                                 Senior Vice President and                                                 Chief Financial Officer    EX-32 5 tex32-9518.txt EX-32                                                                        EXHIBIT 32.0                             CERTIFICATIONS PURSUANT TO                              18 U.S.C. SECTION 1350,                              AS ADOPTED PURSUANT TO                   SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002   In connection with the Annual Report of Abington Community Bancorp, Inc. (the "Company") on Form 10-K for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert W. White, Chairman, President and Chief Executive Officer, and Jack J. Sandoski, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:          (1)     The Report fully complies with the requirements of Section 13(a)                 or 15(d) of the Securities Exchange Act of 1934; and          (2)     The information contained in the Report fairly presents, in all                 material respects, the financial condition and results of                 operations of the Company.                                                   /s/ Robert W. White                                                 --------------------------------                                                 Robert W. White                                                 Chairman, President and                                                 Chief Executive Officer                                                 March 27, 2006                                                   /s/ Jack J. Sandoski                                                 --------------------------------                                                 Jack J. Sandoski                                                 Senior Vice President and                                                 Chief Financial Officer                                                 March 27, 2006   A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 OF THE SARBANES-OXLEY ACT HAS BEEN PROVIDED TO ABINGTON COMMUNITY BANCORP, INC. AND WILL BE RETAINED BY ABINGTON COMMUNITY BANCORP, INC. AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST.    -----END PRIVACY-ENHANCED MESSAGE-----