**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**





**FORM
      10-K**


(Mark
      One)


x
            Annual
                Report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934
              For
                the fiscal year ended**December
                31, 2006**.


**OR**


o
            Transition
                Report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934
              For
                the transition period from ____________ to
                ____________.





**Commission
      File Number 000-51077**





**Abington
                Community Bancorp, Inc.**(Exact
                Name of Registrant as specified in its charter)





**Pennsylvania**
            
            **02-0724068**(State
                or other jurisdiction of
              incorporation
                or organization)
            
            (I.R.S.
                Employer Identification No.)





**180
                Old York Road, Jenkintown, Pennsylvania**
            
            **19046**(Address
                of principal executive offices)
            
            (Zip
                Code)





Registrant’s
      telephone number, including area code: **215-886-8280**





Securities
      registered pursuant to Section 12 (b) of the Exchange Act:




**Title
                of Each Class**
            
            **Name
                of Each Exchange on Which Registered**Common
                Stock (par value $0.01 per share)
            
            The
                Nasdaq Stock Market, LLC





Securities
      registered pursuant to Section 12 (g) of the Exchange Act: NONE





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. o Yes 
        xNo


Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.


oYes  xNo





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15 (d) of the Securities Exchange Act during the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.  Yes x No o





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K. x





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):


Large
      accelerated filer o Accelerated
      filer o Non-accelerated
      filer x




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act). Yes o No
x





The
      aggregate market value of the shares of common stock of the Registrant issued
      and outstanding on June 30, 2006, which excludes 10,292,617 shares held by
      all
      directors, officers and affiliates of the Registrant as a group (including
      8,728,500 shares held by Abington Mutual Holding Company), was approximately
      $74.9 million. This figure is based on the closing price of $14.98 per share
      of
      the Registrant's common stock on June 30, 2006, the last business day of the
      Registrant's second fiscal quarter.





The
      number of shares of the Issuer's common stock, par value $0.01 per share,
      outstanding as of March 9, 2007 was 15,288,154.





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Portions
      of the Registrant’s definitive proxy statement for the 2007 Annual Meeting of
      Shareholders are incorporated by reference into Part III, Items 10-14 of this
      Form 10-K.












**ABINGTON
      COMMUNITY BANCORP, INC.**




**TABLE
      OF CONTENTS**







**Page**PART
                IITEM
                1.
            Business
            1ITEM
                1A.
            Risk
                Factors
            32ITEM
                1B.
            Unresolved
                Staff Comments
            35ITEM
                2.
            Properties
            35ITEM
                3.
            Legal
                Proceedings
            36ITEM
                4.
            Submission
                of Matters to a Vote of Security Holders
            36PART
                IIITEM
                5.
            Market
                for Registrant’s Common Stock, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            37ITEM
                6.
            Selected
                Financial Data
            38ITEM
                7.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            40ITEM
                7A.
            Quantitative
                and Qualitative Disclosures About Market Risk
            60ITEM
                8.
            Financial
                Statements and Supplementary Data
            66ITEM
                9.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            108ITEM
                9A.
            Controls
                and Procedures
            108ITEM
                9B.
            Other
                Information
            108PART
                IIIITEM
                10.
            Directors,
                Executive Officers and Corporate Governance
            108ITEM
                11.
            Executive
                Compensation
            108ITEM
                12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            108ITEM
                13.
            Certain
                Relationships and Related Transactions and Director
                Independence
            109ITEM
                14.
            Principal
                Accounting Fees and Services
            109PART
                IVITEM
                15.
            Exhibits,
                Financial Statement Schedules
            109SIGNATURES
            112










**PART
      I**





**ITEM
      1. BUSINESS**





**General**





Abington
      Community Bancorp, Inc. (the “Company”) is a Pennsylvania corporation which was
      organized to be a mid-tier holding company for Abington Savings Bank. Abington
      Savings Bank is a Pennsylvania-chartered, FDIC-insured savings bank which
      conducts business under the name “Abington Bank” (the “Bank” or “Abington
      Bank”). The Bank is a wholly owned subsidiary of the Company. The Company’s
      results of operations are primarily dependent on the results of the Bank and
      the
      Bank’s wholly owned subsidiaries, ASB Investment Co., Keswick Services II and
      its wholly owned subsidiaries, and Abington Corp. As of December 31, 2006,
      the
      Company, on a consolidated basis, had total assets of $925.2 million, total
      deposits of $587.0 million, and total stockholders’ equity of $114.1 million.





The
      Company was formed when the Bank reorganized from a mutual savings bank to
      a
      mutual holding company structure in December 2004. Abington Mutual Holding
      Company, a Pennsylvania corporation, is the mutual holding company parent of
      the
      Company. Abington Mutual Holding Company owns approximately 57% of the Company’s
      outstanding common stock. On November 30, 2006, the Company announced that
      the
      Company, the Bank and Abington Mutual Holding Company had adopted a plan to
      convert from the mutual holding company structure to a full stock-form holding
      company structure. For further information, see Note 20 in the Notes to the
      Consolidated Financial Statements in Item 8 herein.




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, nine other full-service branch offices
      and
      five limited service branch offices. In addition, we maintain a loan processing
      office in Jenkintown, Pennsylvania. Eleven of our banking offices are located
      in
      Montgomery County, Pennsylvania, three are in neighboring Bucks County,
      Pennsylvania and one is in Delaware County, Pennsylvania. The Bank plans to
      open
      two additional branch offices in 2007 - one in Montgomery County and one in
      Bucks County. Both branch offices are expected to open in mid-2007. 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. Four 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:




·
              statements
                  of goals, intentions and
                  expectations;
 
 ·
              statements
                  regarding prospects and business strategy;
 
 ·
              statements
                  regarding asset quality and market risk;
                  and
 
 ·
              estimates
                  of future costs, benefits and
                  results.


These
      forward-looking statements are subject to significant risks, assumptions and
      uncertainties, including, among other things, the factors discussed under the
      heading “Risk Factors” in Item 1A herein that could affect the actual outcome of
      future events and the following factors:




·
            general economic conditions, either nationally or
              in our
              market area, that are worse than expected;  ·
            changes in the interest rate environment that reduce
              our
              interest margins or reduce the fair value of financial
              instruments;  ·
            increased competitive pressures among financial
              services
              companies;  ·
            changes in consumer spending, borrowing and savings
              habits;  ·
            legislative or regulatory changes that adversely
              affect
              our business;  ·
            adverse changes in the securities
              markets;  ·
            our ability to successfully manage our
              growth;  ·
            changes in accounting policies and practices, as
              may be
              adopted by the bank regulatory agencies, the SEC or the Financial
              Accounting Standards Board; and  ·
            our ability to successfully implement our branch
              expansion strategy, enter into new markets and/or expand product offerings
              successfully and take advantage of growth
              opportunities.




2




Any
      of
      the forward-looking statements that we make in the this Form 10-K and in other
      public statements we make may turn out to be wrong because of inaccurate
      assumptions we might make, because or the factors illustrated above or because
      of other factors that we cannot foresee.





Because
      of these and other uncertainties, our actual future results may be materially
      different from the results indicated by these forward-looking statements and
      you
      should not rely on such statements.





**Market
      Area and Competition**





Our
      market area is located in Montgomery, Bucks and Delaware Counties, Pennsylvania,
      which are suburbs of Philadelphia. In addition, particularly with respect to
      commercial and construction lending, we also make loans in Philadelphia and
      Chester Counties, Pennsylvania and contiguous counties in New Jersey and
      Delaware. This area is referred to as the Delaware Valley region.





We
      face
      significant competition in originating loans and attracting deposits. This
      competition stems primarily from commercial banks, other savings banks and
      savings associations and mortgage-banking companies. Within our market area,
      more than 50 other banks, savings institutions and credit unions are operating.
      Many of the financial service providers operating in our market area are
      significantly larger and have greater financial resources than us. We face
      additional competition for deposits from short-term money market funds and
      other
      corporate and government securities funds, mutual funds and from other
      non-depository financial institutions such as brokerage firms and insurance
      companies.





**Lending
      Activities**




**General.** At
      December 31, 2006, our net loan portfolio totaled $605.1 million or 65.4% 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
                31,2006
            
            2005
            
            2004
            
            2003
            
            2002Amount
            
            %
            
            Amount
            
            %
            
            Amount
            
            %
            
            Amount
            
            %
            
            Amount
            
            %(Dollars
                in Thousands)Real
                estate loans:One-
                to four-family residential
            
            $
            375,744
            
            
            57.55
            %
            $
            323,710
            
            
            54.88
            %
            $
            243,705
            
            
            54.69
            %
            $
            223,963
            
            
            55.95
            %
            $
            247,159
            
            
            61.70
            %Commercial
                  real estate and multi-family residential
            
            
            92,428
            
            
            14.16
            
            
            76,647
            
            
            12.99
            
            
            74,642
            
            
            16.75
            
            
            64,029
            
            
            16.00
            
            
            61,247
            
            
            15.29Construction
            
            
            134,976
            
            
            20.67
            
            
            132,789
            
            
            22.51
            
            
            83,253
            
            
            18.68
            
            
            66,875
            
            
            16.71
            
            
            50,401
            
            
            12.58Home
                equity lines of credit
            
            
            33,953
            
            
            5.20
            
            
            41,063
            
            
            6.96
            
            
            32,049
            
            
            7.19
            
            
            31,185
            
            
            7.79
            
            
            25,571
            
            
            6.38Total
                real estate loans
            
            
            637,101
            
            
            97.58
            
            
            574,209
            
            
            97.34
            
            
            433,649
            
            
            97.31
            
            
            386,052
            
            
            96.45
            
            
            384,378
            
            
            95.95Commercial
                business loans
            
            
            11,416
            
            
            1.75
            
            
            10,975
            
            
            1.86
            
            
            8,540
            
            
            1.92
            
            
            10,403
            
            
            2.60
            
            
            11,353
            
            
            2.83Consumer
                non-real estate loans
            
            
            4,400
            
            
            0.67
            
            
            4,712
            
            
            0.80
            
            
            3,433
            
            
            0.77
            
            
            3,792
            
            
            0.95
            
            
            4,877
            
            
            1.22Total
                non-real estate loans
            
            
            15,816
            
            
            2.42
            
            
            15,687
            
            
            2.66
            
            
            11,973
            
            
            2.69
            
            
            14,195
            
            
            3.55
            
            
            16,230
            
            
            4.05Total
                loans
            
            
            652,917
            
            
            100.00
            %
            
            589,896
            
            
            100.00
            %
            
            445,622
            
            
            100.00
            %
            
            400,247
            
            
            100.00
            %
            
            400,608
            
            
            100.00
            %Less:Undisbursed
                  portion of construction loans in process
            
            
            45,338
            
            
            
            
            
            57,690
            
            
            
            
            
            30,131
            
            
            
            
            
            32,699
            
            
            
            
            
            25,880Deferred
                loan fees, net
            
            
            913
            
            
            
            
            
            1,264
            
            
            
            
            
            1,423
            
            
            
            
            
            1,472
            
            
            
            
            
            1,891Allowance
                for loan losses
            
            
            1,603
            
            
            
            
            
            1,455
            
            
            
            
            
            1,413
            
            
            
            
            
            1,456
            
            
            
            
            
            1,813Net
                loans
            
            $
            605,063
            
            
            
            
            $
            529,487
            
            
            
            
            $
            412,655
            
            
            
            
            $
            364,620
            
            
            
            
            $
            371,024




4


**Contractual
      Terms to Final Maturities** .
      The
      following table shows the scheduled contractual maturities of our loans as
      of
      December 31, 2006, 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.





One-
                to
              Four-Family
              Residential
            
            Commercial
              Real
                Estate and
              Multi-Family
                Residential
            
            Construction
            
            **Home
                Equity**
              **Lines
                of**
              **Credit**
            
            **Commercial**
              **Business**
              **Loans**
            
            **Consumer**
            
            **Total**(In
                Thousands)Amounts
                due after December 31, 2006 in:One
                year or less
            
            $
            13,266
            
            $
            32,007
            
            $
            79,412
            
            $
            33,953
            
            $
            7,593
            
            $
            198
            
            $
            166,429After
                one year through two years
            
            
            2,768
            
            
            4,813
            
            
            39,032
            
            
            —
            
            
            290
            
            
            453
            
            
            47,356After
                two years through three years
            
            
            3,777
            
            
            115
            
            
            6,044
            
            
            —
            
            
            950
            
            
            1,868
            
            
            12,754After
                three years through five years
            
            
            9,042
            
            
            756
            
            
            6,989
            
            
            —
            
            
            2,583
            
            
            1,648
            
            
            21,018After
                five years through ten years
            
            
            31,891
            
            
            11,402
            
            
            3,499
            
            
            —
            
            
            —
            
            
            76
            
            
            46,868After
                ten years through fifteen years
            
            
            89,565
            
            
            10,981
            
            
            —
            
            
            —
            
            
            —
            
            
            107
            
            
            100,653After
                fifteen years
            
            
            225,435
            
            
            32,354
            
            
            —
            
            
            —
            
            
            —
            
            
            50
            
            
            257,839Total
            
            $
            375,744
            
            $
            92,428
            
            $
            134,976
            
            $
            33,953
            
            $
            11,416
            
            $
            4,400
            
            $
            652,917




The
      following table shows the amount of our loans at December 31, 2006, which are
      due after December 31, 2007, and indicates whether they have fixed-rates of
      interest or rates which are floating or adjustable.





Fixed-Rate
            
            Floating
                or
              Adjustable-Rate
            
            Total
                at
              December
                31, 2006(In
                Thousands)One-
                to four-family residential
            
            $
            296,873
            
            $
            65,605
            
            $
            362,478Commercial
                real estate andmulti-family
                residential
            
            
            43,727
            
            
            16,694
            
            
            60,421Construction
            
            
            —
            
            
            55,564
            
            
            55,564Home
                equity lines of credit
            
            
            —
            
            
            —
            
            
            —Commercial
                business loans
            
            
            3,459
            
            
            364
            
            
            3,823Consumer
                non-real estate
            
            
            3,575
            
            
            627
            
            
            4,202Total
            
            $
            347,634
            
            $
            138,854
            
            $
            486,488





**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 $2.0 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 $2.0 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 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. We purchased an aggregate of $30.3 million and of loan
      participation interests from other financial institutions during the year ended
      December 31, 2006.





On
      occasion, we have sold residential mortgage loans into the market, but we did
      not sell any residential mortgage loans during 2006, 2005 or 2004. Depending
      on
      market conditions, we may 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, 2006, 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
      $14.0 million at December 31, 2006. During the year ended December 31, 2006,
      we
      sold $3.0 million in loan participation interests to other institutions.




6


The
      following table shows our total loans originated, purchased, sold and repaid
      during the periods indicated.





Year
                Ended December 31,2006
            
            2005
            
            2004(In
                Thousands)Loan
                originations:One-
                to four-family residential
            
            $
            91,963
            
            $
            100,321
            
            $
            64,593Commercial
                real estate andmulti-family
                residential
            
            
            13,551
            
            
            30,734
            
            
            23,996Construction
            
            
            38,163
            
            
            94,857
            
            
            51,159Home
                equity lines of credit
            
            
            7,558
            
            
            12,836
            
            
            13,196Commercial
                business
            
            
            20,157
            
            
            14,729
            
            
            11,607Consumer
                non-real estate
            
            
            322
            
            
            561
            
            
            1,389Total
                loan originations
            
            
            171,714
            
            
            254,038
            
            
            165,940Loans
                purchased:Whole
                loans
            
            
            —
            
            
            11,508
            
            
            —Participation
                interests
            
            
            30,289
            
            
            18,100
            
            
            15,300Total
                loans purchased
            
            
            30,289
            
            
            29,608
            
            
            15,300Loans
                sold:Whole
                loans
            
            
            —
            
            
            —
            
            
            —Participation
                interests
            
            
            (3,000
            )
            
            (8,281
            )
            
            —Total
                loans sold
            
            
            (3,000
            )
            
            (8,281
            )
            
            —Loan
                principal repayments
            
            
            (135,981
            )
            
            (131,091
            )
            
            (135,866
            )Total
                loans sold and principal repayments
            
            
            (138,981
            )
            
            (139,372
            )
            
            (135,866
            )Increase
                or (decrease) due to other items,net
                (1)
            
            
            12,554
            
            
            (27,442
            )
            
            2,661Net
                increase in loan portfolio
            
            $
            75,576
            
            $
            116,832
            
            $
            48,035





(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, 2006, $375.7 million of our total loan portfolio consisted of
      single-family residential mortgage loans. Due primarily to increased mortgage
      loan prepayments, primarily as a result of refinance activity in the relatively
      low interest rate environment in recent years, 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 61.7% at December 31, 2002 to 57.6% at December 31,
      2006.





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, 30 or
      40
      years. We also currently offer adjustable rate mortgage (“ARM”) loans. We began
      offering ARM loans in 2005 after not offering single-family ARM loans for more
      than 10 years through the end of 2004. The temporary discontinuation of our
      ARM
      loans was a result of our evaluation of local market conditions. At December
      31,
      2006, $4.7 million, or 1.2%, of our one- to four-family residential loan
      portfolio consisted of ARM loans.





7




We
      underwrite one- to four-family residential first 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 will concurrently
      originate first mortgage loans with loan-to-value ratios of up to 80% together
      with a home equity loan, resulting in a combined loan-to-value ratio of up
      to
      90%, which relieves our borrower from the cost of obtaining private mortgage
      insurance. 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 $38.1 million at December 31, 2006. 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, 2006, our commercial real estate and multi-family residential
      loans
      amounted to $92.4 million or 14.2% of our total loan portfolio. In recent years,
      we have increased our portfolio of commercial real estate and multi-family
      residential loans. In addition to commercial real estate loans, we offer lines
      of credit for commercial uses. In most cases, our commercial lines of credit
      are
      secured by commercial real estate. At December 31, 2006, the unused portion
      of
      our commercial lines of credit was $46.8 million.





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. In
      addition, many of our commercial real estate loans are not fully amortizing
      and
      require significant balloon payments upon maturity. Such balloon payments may
      require the borrower to either sell or refinance the underlying property in
      order to make the balloon payment. At December 31, 2006, we had three commercial
      loans with a carrying value of $1.3 million that were considered non-performing.
      These three loans, which are to one borrower, were over 90 days delinquent
      at
      December 31, 2006 and were classified as non-accrual. These were our only
      delinquent commercial real estate loans or multi-family residential real estate
      loans at such date. We have obtained a confessed judgment against the borrower,
      which provides us with additional collateral securing the loans. We also
      obtained current appraisals of the underlying collateral properties, which
      support the full value of the loans. Based on the value of the properties,
      as
      well as the additional collateral available, we do not expect to incur any
      losses on the loans to this borrower. At December 31, 2005 and 2004 none of
      our
      commercial real estate and multi-family residential mortgage loans were either
      delinquent for more than 30 days or considered non-performing. No commercial
      real estate and multi-family residential real estate loans were charged-off
      in
      2006 or 2005. We charged-off $99,000 in commercial real estate and multi-family
      residential real estate loans in the year ended December 31, 2004.





8




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. We generally
      originate these types of loans to borrowers with whom we are familiar and which
      have demonstrated historical results. 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. After the loan is made, we periodically monitor the operation of the
      business or project and the physical condition of the property.





**Construction
      Lending.** 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, 2006,
      our
      construction loans amounted to $135.0 million, or 20.7% of our total loan
      portfolio. This amount includes $45.3 million of undisbursed loans in process.
      Our construction loan portfolio has grown appreciably over the past four years.
      At December 31, 2002, our construction loans amounted to $50.4 million, or
      12.6%
      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
      limited, 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 throughout the Delaware Valley region.





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. Our
      construction loans require us to advance funds based upon our security interest
      in the project, which is of uncertain value until the construction is completed.
      In addition, at the time we commit to make a construction loan, it is uncertain
      whether the costs estimated for the project will be sufficient to cover actual
      construction costs. If there are cost overruns, additional financing may be
      necessary to complete the project. Compared to single-family residential
      mortgage loans, it is relatively more difficult to evaluate accurately the
      total
      funds necessary to complete the project and the ultimate loan-to-value ratio.
      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, 2006, we had two construction loans
      with an aggregate carrying value of $1.1 million that were considered
      non-performing. These two loans, which are to one borrower, were over 90 days
      delinquent at December 31, 2006 and are classified as non-accrual. These were
      our only delinquent construction loans at such date. We
      have
      obtained a confessed judgment against the borrower, which provides us with
      additional collateral securing the loans. We also obtained current appraisals
      of
      the underlying collateral properties, which support the full value of the loans.
      Based on the value of the properties, as well as the additional collateral
      available, we do not expect to incur any losses on the loans to this borrower.
      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.
      The outstanding balance of this loan, including all past due interest and costs,
      was paid in full in April 2006. At December 31, 2004 we had no construction
      loans that were considered non-performing. We have not charged-off any
      construction loans in more than five years.





**Home
      Equity Lines.** At
      December 31, 2006, the outstanding balance of our home equity lines of credit
      amounted to $34.0 million or 5.2% of our net loan portfolio. The unused portion
      of home equity lines was $22.4 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 $11.4 million or 1.8% of the total loan
      portfolio at December 31, 2006. 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.





10




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. Repayment of our commercial business
      loans is often dependent on the cash flows of the borrower, which may be
      unpredictable, and the collateral securing these loans may fluctuate in value.
      Credit support provided by the borrower for most of these loans and the
      probability of repayment is based on the liquidation of the pledged collateral
      and enforcement of a personal guarantee, if any exists. As a result, in the
      case
      of loans secured by accounts receivable, the availability of funds for the
      repayment of these loans may be substantially dependent on the ability of the
      borrower to collect amounts due from its customers. The collateral securing
      other loans, such as inventory or equipment, may depreciate over time, may
      be
      difficult to appraise and may fluctuate in value based on the success of the
      business.





**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, 2006, $4.4 million, or 0.7% of the total loan portfolio consisted
      of these types of loans.





Consumer
      loans generally have higher interest rates and shorter terms than residential
      loans, however, they have additional credit risk due to the type of collateral
      securing the loan or in some cases the absence of collateral. In the years
      ended
      December 31, 2006, 2005 and 2004 we charged-off $56,000, $70,000 and $32,000
      of
      consumer loans, respectively. The 2006 and 2005 charge-offs include $54,000
      and
      $60,000, respectively, 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 $2.0 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 $2.0 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
      regular reviews of the credit quality of our loan portfolio.





11




When
      a
      borrower fails to make a scheduled payment, we attempt to cure the deficiency
      by
      making personal contact with the borrower. Initial contacts are generally made
      15 days after the date the payment is due. In most cases, deficiencies are
      promptly resolved. If the delinquency continues, late charges are assessed
      and
      additional efforts are made to collect the deficiency. All loans delinquent
      60
      days or more are reported to the Board of Directors of Abington
      Bank.





On
      loans
      where the collection of principal or interest payments is doubtful, the accrual
      of interest income ceases (“non-accrual” loans). On single-family residential
      mortgage loans 120 days or more past due and all other loans 90 days or more
      past due, as to principal and interest payments, our policy, with certain
      limited exceptions, is to discontinue accruing additional interest and reverse
      any interest currently accrued. On occasion, this action may be taken earlier
      if
      the financial condition of the borrower raises significant concern with regard
      to his/her ability to service the debt in accordance with the terms of the
      loan
      agreement. Interest income is not accrued on these loans until the borrower’s
      financial condition and payment record demonstrate an ability to service the
      debt.





Real
      estate which is acquired as a result of foreclosure is classified as real estate
      owned until sold. Real estate owned is recorded at the lower of cost or fair
      value less estimated selling costs. Costs associated with acquiring and
      improving a foreclosed property are usually capitalized to the extent that
      the
      carrying value does not exceed fair value less estimated selling costs. Holding
      costs are charged to expense. Gains and losses on the sale of real estate owned
      are charged to operations, as incurred.





We
      account for our impaired loans under generally accepted accounting principles.
      An impaired loan generally is one for which it is probable, based on current
      information, that the lender will not collect all the amounts due under the
      contractual terms of the loan. Large groups of smaller balance, homogeneous
      loans are collectively evaluated for impairment. Loans collectively evaluated
      for impairment include smaller balance commercial real estate loans, residential
      real estate loans and consumer loans. These loans are evaluated as a group
      because they have similar characteristics and performance experience. Larger
      commercial real estate, construction and commercial business loans are
      individually evaluated for impairment. At December 31, 2006 and 2005, the
      Company had $2.3 million and $2.9 million of loans, respectively, that were
      determined to be impaired. The impaired loans at December 31, 2006 included
      two
      construction and three commercial real estate loans to one borrower. No reserve
      for these loans is included in the Company’s allowance for loan losses at
      December 31, 2006 as the value of the underlying collateral properties support
      the full value of the loans. The impaired loan at December 31, 2005 was a
      construction loan to one borrower, and a reserve on this loan is included in
      the
      Company’s allowance for loan losses at December 31, 2005. The outstanding
      balance of this loan, including all past due interest and costs, was paid in
      full in April 2006.





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.




12




When
      an
      insured institution classifies one or more assets, or portions thereof, as
      “special mention,” “substandard” or “doubtful,” it is required that a general
      valuation allowance for loan losses be established for loan losses in an amount
      deemed prudent by management. General valuation allowances represent loss
      allowances which have been established to recognize the inherent losses
      associated with lending activities, but which, unlike specific allowances,
      have
      not been allocated to particular problem assets. When an insured institution
      classifies one or more assets, or portions thereof, as “loss,” it is required
      either to establish a specific allowance for losses equal to 100% of the amount
      of the asset so classified or to charge off such amount.





A
      savings
      institution’s determination as to the classification of its assets and the
      amount of its valuation allowances is subject to review by federal and state
      bank regulators which can order the establishment of additional general or
      specific loss allowances. The federal banking agencies, have adopted an
      interagency policy statement on the allowance for loan and lease losses. The
      policy statement provides guidance for financial institutions on both the
      responsibilities of management for the assessment and establishment of
      allowances and guidance for banking agency examiners to use in determining
      the
      adequacy of general valuation guidelines. Generally, the policy statement
      recommends that institutions have effective systems and controls to identify,
      monitor and address asset quality problems; that management analyze all
      significant factors that affect the collectibility of the portfolio in a
      reasonable manner; and that management establish acceptable allowance evaluation
      processes that meet the objectives set forth in the policy statement. In July
      2001, the SEC issued Staff Accounting Bulletin (“SAB”) No. 102, “Selected Loan
      Loss Allowance Methodology and Documentation Issues.” The guidance contained in
      the SAB focuses on the documentation the SEC staff normally expects registrants
      to prepare and maintain in support of the allowance for loan and lease losses.
      Concurrent with the SEC’s issuance of SAB No. 102, the federal banking agencies,
      represented by the Federal Financial Institutions Examination Council (“FFIEC”),
      issued an interagency policy statement entitled “Allowance for Loan and Lease
      Losses Methodologies and Documentation for Banks and Savings Institutions”
(Policy Statement). The SAB and Policy Statement were the result of an agreement
      between the SEC and the federal banking agencies in March 1999 to provide
      guidance on allowance for loan and lease losses methodologies and supporting
      documentation. Our allowance for loan losses includes a portion which is
      allocated to non-classified loans by type of loan, based primarily upon our
      periodic reviews of the risk elements within the various categories of loans.
      Our management believes that, based on information currently available, its
      allowance for loan losses is maintained at a level which covers all known and
      inherent losses that are both probable and reasonably estimable at each
      reporting date. However, actual losses are dependent upon future events and,
      as
      such, further additions to the level of allowances for loan losses may become
      necessary.




13




**Delinquent
        Loans.** The following table shows the delinquencies in our loan
        portfolio as of the dates indicated.




December
                  31, 2006
              
              December
                  31, 2005
              
              December
                  31, 200430-89
                Days
                  Overdue
              
              90
                  or More Days
                Overdue
              
              30-89
                Days
                  Overdue
              
              90
                  or More Days
                Overdue
              
              30-89
                Days
                  Overdue
              
              90
                  or More Days
                OverdueNumber
                of
                  Loans
              
              Principal
                Balance
              
              Number
                of
                  Loans
              
              Principal
                Balance
              
              Number
                of
                  Loans
              
              Principal
                Balance
              
              Number
                of
                  Loans
              
              Principal
                Balance
              
              Number
                of
                  Loans
              
              Principal
                Balance
              
              Number
                of
                  Loans
              
              Principal
                Balance(Dollars
                  in Thousands)One-
                  to four-familyresidential
              
              
              10
              
              $
              447
              
              
              4
              
              $
              210
              
              
              15
              
              $
              608
              
              
              1
              
              $
              8
              
              
              6
              
              $
              460
              
              
              3
              
              $
              227Commercial
                  real estate andmulti-family
                  residential
              
              
              —
              
              
              —
              
              
              3
              
              
              1,270
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Construction
              
              
              —
              
              
              —
              
              
              2
              
              
              1,077
              
              
              1
              
              
              2,885
              
              
              —
              
              
              —
              
              
              1
              
              
              2,900
              
              
              —
              
              
              —Commercial
                  business
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Home
                  equity lines of credit
              
              
              2
              
              
              84
              
              
              —
              
              
              —
              
              
              2
              
              
              89
              
              
              —
              
              
              —
              
              
              2
              
              
              314
              
              
              —
              
              
              —Consumer
                  non- real estate
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              3
              
              
              4
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Total
                  delinquent loans
              
              
              12
              
              $
              531
              
              
              9
              
              $
              2,557
              
              
              21
              
              $
              3,586
              
              
              1
              
              $
              8
              
              
              9
              
              $
              3,674
              
              
              3
              
              $
              227Delinquent
                  loans to totalnet
                  loans
              
              
              
              
              
              0.09
              %
              
              
              
              
              0.42
              %
              
              
              
              
              0.68
              %
              
              
              
              
              —
              %
              
              
              
              
              0.89
              %
              
              
              
              
              0.06
              %Delinquent
                  loans to totalloans
              
              
              
              
              
              0.08
              %
              
              
              
              
              0.39
              %
              
              
              
              
              0.61
              %
              
              
              
              
              —
              %
              
              
              
              
              0.82
              %
              
              
              
              
              0.05
              %




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, 2006, 2005 and 2004, 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 $68,000,
      $20,000 and $5,000, 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
                31,2006
            
            2005
            
            2004
            
            2003
            
            2002(Dollars
                in Thousands)Non-accruing
                loans:One-
                to four-family residential
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            99
            
            $
            —Commercial
                real estate andmulti-family
                residential
            
            
            1,270
            
            
            —
            
            
            —
            
            
            —
            
            
            671Construction
            
            
            1,077
            
            
            2,885
            
            
            —
            
            
            —
            
            
            —Commercial
                business
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Home
                equity lines of credit
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            99Consumer
                non-real estate
            
            
            —
            
            
            —
            
            
            —
            
            
            16
            
            
            —Total
                non-accruing loans
            
            
            2,347
            
            
            2,885
            
            
            —
            
            
            115
            
            
            770Accruing
                loans 90 days or more past due:One-
                to four-family residential
            
            
            210
            
            
            8
            
            
            227
            
            
            222
            
            
            424Multi-family
                residential andcommercial
                real estate
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Construction
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Commercial
                business
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Home
                equity lines of credit
            
            
            —
            
            
            —
            
            
            —
            
            
            109
            
            
            —Consumer
                non-real estate
            
            
            —
            
            
            —
            
            
            —
            
            
            16
            
            
            56Total
                accruing loans 90 days or morepast
                due
            
            
            210
            
            
            8
            
            
            227
            
            
            347
            
            
            480Total
                non-performing loans(1)
            
            
            2,557
            
            
            2,893
            
            
            227
            
            
            462
            
            
            1,250Real
                estate owned, net
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Total
                non-performing assets
            
            $
            2,557
            
            $
            2,893
            
            $
            227
            
            $
            462
            
            $
            1,250Total
                non-performing loans as a percentageof
                loans
            
            
            0.42
            %
            
            0.54
            %
            
            0.06
            %
            
            0.13
            %
            
            0.34
            %Total
                non-performing loans as a percentageof
                total assets
            
            
            0.28
            %
            
            0.34
            %
            
            0.03
            %
            
            0.08
            %
            
            0.23
            %Total
                non-performing assets as a percentageof
                total assets
            
            
            0.28
            %
            
            0.34
            %
            
            0.03
            %
            
            0.08
            %
            
            0.23
            %







(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
      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.





15


**Allowance
      for Loan Losses.** The
      allowance for loan losses is established through a provision for loan losses.
      We
      maintain the allowance at a level believed to cover all known and inherent
      losses in the portfolio that are both probable and reasonable to estimate at
      each reporting date. Management reviews the allowance for loan losses on no
      less
      than a quarterly basis in order to identify those inherent losses and to assess
      the overall collection probability for the loan portfolio. Our evaluation
      process includes, among other things, an analysis of delinquency trends,
      non-performing loan trends, the level of charge-offs and recoveries, prior
      loss
      experience, total loans outstanding, the volume of loan originations, the type,
      size and geographic concentration of our loans, the value of collateral securing
      the loan, the borrower’s ability to repay and repayment performance, the number
      of loans requiring heightened management oversight, local economic conditions
      and industry experience. In addition, in establishing the allowance for loan
      losses, we have implemented a nine point internal rating system for all loans
      originated by the Commercial Lending Department. At the time of origination,
      each loan, other than single-family residential mortgage loans, home equity
      lines and consumer loans, is assigned a rating based on the assumed risk
      elements of the loan. Such risk ratings are periodically reviewed by management
      and revised as deemed appropriate. The establishment of the allowance for loan
      losses is significantly affected by management judgment and uncertainties and
      there is a likelihood that different amounts would be reported under different
      conditions or assumptions. Various regulatory agencies, as an integral part
      of
      their examination process, periodically review our allowance for loan losses.
      Such agencies may require us to make additional provisions for estimated loan
      losses based upon judgments different from those of management. As of December
      31, 2006, our allowance for loan losses was 0.26% of total loans
      receivable.





In
      the
      five-year period ended December 31, 2006, our loan charge-offs have been
      relatively minimal and one borrower and his affiliates were responsible for
      80.2% 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 the one aforementioned 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,**
            ********
            ****
            **2006**
            ****
            **2005**
            ****
            **2004**
            ****
            **2003**
            ****
            **2002**(Dollars
                in Thousands)Total
                loans outstanding at end of period
            
            $
            652,917
            
            $
            589,896
            
            $
            445,622
            
            $
            400,247
            
            $
            401,453Average
                loans outstanding
            
            
            570,850
            
            
            469,076
            
            
            384,990
            
            
            361,548
            
            
            366,246Allowance
                for loan losses, beginning of period
            
            $
            1,455
            
            $
            1,413
            
            $
            1,456
            
            $
            1,813
            
            $
            1,590Provision
                for loan losses
            
            
            186
            
            
            25
            
            
            45
            
            
            375
            
            
            500Charge-offs:One-
                to four-family residential
            
            
            —
            
            
            —
            
            
            16
            
            
            —
            
            
            —Commercial
                real estate andmulti-family
                residential
            
            
            —
            
            
            —
            
            
            —
            
            
            671
            
            
            298Construction
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Commercial
                business
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Home
                equity lines of credit
            
            
            —
            
            
            —
            
            
            99
            
            
            —
            
            
            —Consumer
                non-real estate
            
            
            56
            
            
            70
            
            
            32
            
            
            89
            
            
            —Total
                charge-offs
            
            
            56
            
            
            70
            
            
            147
            
            
            760
            
            
            298Recoveries
                on loans previously charged off
            
            
            18
            
            
            87
            
            
            59
            
            
            28
            
            
            21Allowance
                for loan losses, end of period
            
            $
            1,603
            
            $
            1,455
            
            $
            1,413
            
            $
            1,456
            
            $
            1,813Allowance
                for loan losses as a percent ofnon-performing
                loans
            
            
            62.69
            %
            
            50.29
            %
            
            622.03
            %
            
            315.15
            %
            
            145.04
            %Ratio
                of net charge-offs during the period toaverage
                loans outstanding during the period
            
            
            0.01
            %
            
            n/a
            
            
            0.02
            %
            
            0.21
            %
            
            0.08
            %





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,**
            ********
            ****
            **2006**
            ****
            **2005**
            ****
            **2004**
            ****
            **2003**
            ****
            **2002**
            ********
            ****
            **Amount**
              **of**
              **Allowance**
            ****
            **Loan**
              **Category**
              **as
                a %**
              **of
                Total**
              **Loans**
            ****
            **Amount**
              **of**
              **Allowance**
            ****
            **Loan**
              **Category**
              **as
                a %**
              **of
                Total**
              **Loans**
            ****
            **Amount**
              **of**
              **Allowance**
            ****
            **Loan**
              **Category**
              **as
                a %**
              **of
                Total**
              **Loans**
            ****
            **Amount**
              **of**
              **Allowance**
            ****
            **Loan**
              **Category**
              **as
                a %**
              **of
                Total**
              **Loans**
            ****
            **Amount**
              **of**
              **Allowance**
            ****
            **Loan**
              **Category**
              **as
                a %**
              **of
                Total**
              **Loans**(Dollars
                in Thousands)One-
                to four-family residential
            
            $
            378
            
            
            57.55
            %
            $
            647
            
            
            54.88
            %
            $
            657
            
            
            54.69
            %
            $
            625
            
            
            55.95
            %
            $
            694
            
            
            61.70
            %Commercial
                real estate andmulti-family
                residential
            
            
            507
            
            
            14.16
            
            
            230
            
            
            12.99
            
            
            458
            
            
            16.75
            
            
            224
            
            
            16.00
            
            
            636
            
            
            15.29Construction
            
            
            486
            
            
            20.67
            
            
            333
            
            
            22.51
            
            
            106
            
            
            18.68
            
            
            68
            
            
            16.71
            
            
            49
            
            
            12.58Home
                equity lines of credit
            
            
            68
            
            
            5.20
            
            
            82
            
            
            6.96
            
            
            70
            
            
            7.19
            
            
            51
            
            
            7.79
            
            
            55
            
            
            6.38Commercial
                business
            
            
            114
            
            
            1.75
            
            
            110
            
            
            1.86
            
            
            85
            
            
            1.92
            
            
            104
            
            
            2.60
            
            
            114
            
            
            2.83Consumer
                non-real estate
            
            
            48
            
            
            0.67
            
            
            52
            
            
            0.80
            
            
            34
            
            
            0.77
            
            
            38
            
            
            0.95
            
            
            49
            
            
            1.22Unallocated
            
            
            2
            
            
            —
            
            
            1
            
            
            —
            
            
            3
            
            
            —
            
            
            346
            
            
            —
            
            
            216
            
            
            —Total
            
            $
            1,603
            
            
            100.00
            %
            $
            1,455
            
            
            100.00
            %
            $
            1,413
            
            
            100.00
            %
            $
            1,456
            
            
            100.00
            %
            $
            1,813
            
            
            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, 2006, our investment and mortgage-backed securities amounted to
      $229.0 million in the aggregate or 24.8% of total assets at such date. The
      largest component of our securities portfolio in recent periods has been
      mortgage-backed securities, which had a carrying value of $134.2 million or
      58.6% of the securities portfolio at December 31, 2006. 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, 2006, we had $152.5 million of securities classified
      as
      available for sale, $76.5 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, 2006, $19.6 million of our
      mortgage-backed securities were CMOs. At December 31, 2006, $119.4 million
      or
      89.0% of our mortgage-backed securities were issued by the GNMA, FNMA or FHLMC.
      The remaining $14.7 million of our mortgage-backed securities were issued by
      certain AAA-rated private issuers.





18


Investments
      in mortgage-backed securities involve a risk that actual prepayments will be
      greater than estimated prepayments over the life of the security, which may
      require adjustments to the amortization of any premium or accretion of any
      discount relating to such instruments thereby changing the net yield on such
      securities. There is also reinvestment risk associated with the cash flows
      from
      such securities or in the event such securities are redeemed by the issuer.
      In
      addition, the market value of such securities may be adversely affected by
      changes in interest rates.





Ginnie
      Mae is a government agency within the Department of Housing and Urban
      Development which was created to help finance government-assisted housing
      programs. Ginnie Mae securities are backed by loans insured by the Federal
      Housing Administration or guaranteed by the Veterans Administration. The timely
      payment of principal and interest on Ginnie Mae securities is guaranteed by
      Ginnie Mae and backed by the full faith and credit of the U.S. Government.
      Freddie Mac is a private corporation chartered by the U.S. Government. Freddie
      Mac issues participation certificates backed principally by conventional
      mortgage loans. Freddie Mac guarantees the timely payment of interest and the
      ultimate return of principal on participation certificates. Fannie Mae is a
      private corporation chartered by the U.S. Congress with a mandate to establish
      a
      secondary market for mortgage loans. Fannie Mae guarantees the timely payment
      of
      principal and interest on Fannie Mae securities. Freddie Mac and Fannie Mae
      securities are not backed by the full faith and credit of the U.S. Government,
      but because Freddie Mac and Fannie Mae are U.S. Government-sponsored
      enterprises, these securities are considered to be among the highest quality
      investments with minimal credit risks.





Collateralized
      mortgage obligations are typically issued by a special-purpose entity, in our
      case, of government agencies or selected AAA-rated private issuers, 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,******
              ****
              ****
              **2006**
              ****
              ****
              **2005**
              ****
              ****
              **2004**
              ********
              ****
              ****
              **Amortized**
                **Cost**
              ****
              ****
              **Fair**
                **Value**
              ****
              ****
              **Amortized**
                **Cost**
              ****
              ****
              **Fair**
                **Value**
              ****
              ****
              **Amortized**
                **Cost**
              ****
              ****
              **Fair**
                **Value**(In
                  Thousands)Mortgage-backed
                  securities
              
              $
              135,975
              
              $
              131,980
              
              $
              149,623
              
              $
              145,449
              
              $
              165,005
              
              $
              164,350U.S.
                  government and agency obligations
              
              
              71,492
              
              
              70,230
              
              
              74,991
              
              
              73,120
              
              
              71,489
              
              
              70,393Corporate
                  bonds
              
              
              500
              
              
              500
              
              
              999
              
              
              998
              
              
              1,000
              
              
              1,012Municipal
                  obligations
              
              
              20,396
              
              
              20,317
              
              
              20,576
              
              
              20,497
              
              
              10,400
              
              
              10,520Investment
                  certificates of deposit
              
              
              785
              
              
              785
              
              
              1,183
              
              
              1,183
              
              
              1,282
              
              
              1,282Mutual
                  funds
              
              
              3,058
              
              
              2,978
              
              
              3,422
              
              
              3,347
              
              
              3,395
              
              
              3,292FHLB
                  stock
              
              
              11,241
              
              
              11,241
              
              
              11,061
              
              
              11,061
              
              
              10,450
              
              
              10,450Other
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              3
              
              
              1Total
                  investment andmortgage-backed
                  securities
              
              $
              243,447
              
              $
              238,031
              
              $
              261,855
              
              $
              255,655
              
              $
              263,024
              
              $
              261,300




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, 2006. No tax-exempt yields have been
      adjusted to a tax-equivalent basis.





**Amounts
                at December 31, 2006 Which Mature In****One
                Year**
              **or
                Less**
            ****
            **Weighted**
              **Average**
              **Yield**
            ****
            **Over
                One**
              **Year**
              **Through**
              **Five
                Years**
            ****
            **Weighted**
              **Average**
              **Yield**
            ****
            **Over
                Five**
              **Through**
              **Ten
                Years**
            ****
            **Weighted**
              **Average**
              **Yield**
            ****
            **Over**
              **Ten**
              **Years**
            ****
            **Weighted**
              **Average**
              **Yield**(Dollars
                in Thousands)Bonds
                and other debtsecurities:U.S.
                government andagency
                obligations
            
            $
            16,500
            
            
            3.01
            %
            $
            43,000
            
            
            4.65
            %
            $
            9,992
            
            
            4.00
            %
            $
            2,000
            
            
            6.50
            %Corporate
                bonds
            
            
            —
            
            
            —
            
            
            500
            
            
            5.96
            
            
            —
            
            
            —
            
            
            —
            
            
            —Municipal
                obligations
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            20,393
            
            
            4.18Mortgage-backedsecurities
            
            
            1,355
            
            
            4.51
            
            
            55,239
            
            
            3.93
            
            
            13
            
            
            9.00
            
            
            79,368
            
            
            4.68Investment
                certificatesof
                deposit
            
            
            299
            
            
            4.46
            
            
            486
            
            
            5.13
            
            
            —
            
            
            —
            
            
            —
            
            
            —Total
            
            $
            18,154
            
            
            3.15
            %
            $
            99,225
            
            
            4.26
            %
            $
            10,005
            
            
            4.01
            %
            $
            101,761
            
            
            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, 2006, 33.7% 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.





Typically
      we do not actively solicit certificate accounts in excess of $100,000, known
      as
“jumbo CDs.” During 2006, we obtained a limited amount of jumbo CDs through the
      use of a broker. We had not previously utilized such deposits, known as
“brokered deposits,” as a funding tool. At December 31, 2006, $10.8 million of
      our deposits were brokered deposits, all of which were jumbo CDs. Our jumbo
      CDs
      amounted to $227.3 million and $140.4 million, respectively, at December 31,
      2006 and 2005, of which $150.7 million and $76.0 million, respectively, were
      scheduled to mature in 12 months. At December 31, 2006, the weighted average
      remaining maturity of our certificate of deposit accounts was 13.3 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
                31,2006
            
            2005
            
            2004Amount
            
            %
            
            Amount
            
            %
            
            Amount
            
            %(Dollars
                in Thousands)Certificate
                accounts:1.00%
                - 1.99%
            
            $
            6
            
            
            —
            %
            $
            71
            
            
            0.01
            %
            $
            32,923
            
            
            8.12
            %2.00%
                - 2.99%
            
            
            9,164
            
            
            1.56
            
            
            29,675
            
            
            5.92
            
            
            38,636
            
            
            9.533.00%
                - 3.99%
            
            
            36,535
            
            
            6.22
            
            
            83,256
            
            
            16.61
            
            
            60,106
            
            
            14.834.00%
                - 4.99%
            
            
            43,758
            
            
            7.45
            
            
            127,144
            
            
            25.37
            
            
            19,691
            
            
            4.865.00%
                - 5.99%
            
            
            298,252
            
            
            50.81
            
            
            31,521
            
            
            6.29
            
            
            29,078
            
            
            7.186.00%
                - 6.99%
            
            
            1,030
            
            
            0.18
            
            
            14,454
            
            
            2.88
            
            
            2,337
            
            
            0.587.00%
                or more
            
            
            228
            
            
            0.08
            
            
            —
            
            
            —
            
            
            —
            
            
            —Total
                certificate accounts
            
            
            388,973
            
            
            66.26
            
            
            286,121
            
            
            57.08
            
            
            182,771
            
            
            45.10Transaction
                accounts:Savings
                and money market
            
            
            93,315
            
            
            15.90
            
            
            115,909
            
            
            23.13
            
            
            125,204
            
            
            30.89Checking:Interest
                bearing
            
            
            59,528
            
            
            10.14
            
            
            55,820
            
            
            11.14
            
            
            59,719
            
            
            14.73Non-interest
                bearing
            
            
            45,186
            
            
            7.70
            
            
            43,333
            
            
            8.65
            
            
            37,596
            
            
            9.28Total
                transaction accounts
            
            
            198,029
            
            
            33.74
            
            
            215,062
            
            
            42.92
            
            
            222,519
            
            
            54.90Total
                deposits
            
            $
            587,002
            
            
            100.00
            %
            $
            501,183
            
            
            100.00
            %
            $
            405,290
            
            
            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 31,2006
            
            2005
            
            2004Average
                Balance
            
            Interest
              Expense
            
            Average
                Rate Paid
            
            Average
                Balance
            
            Interest
              Expense
            
            Average
                Rate Paid
            
            Average
                Balance
            
            Interest
              Expense
            
            Average
                Rate Paid(Dollars
                in Thousands)Savings
                and moneymarket
            
            $
            101,755
            
            $
            1,129
            
            
            1.11
            %
            $
            125,834
            
            $
            1,412
            
            
            1.12
            %
            $
            120,748
            
            $
            1,065
            
            
            0.88
            %Checking
            
            
            53,676
            
            
            11
            
            
            0.02
            
            
            52,282
            
            
            66
            
            
            0.13
            
            
            52,804
            
            
            44
            
            
            0.08Certificates
                of deposit
            
            
            339,712
            
            
            15,634
            
            
            4.60
            
            
            236,962
            
            
            8,391
            
            
            3.54
            
            
            175,492
            
            
            5,452
            
            
            3.11Total
                interest-bearingdeposits
            
            
            495,143
            
            
            16,774
            
            
            3.39
            
            
            415,078
            
            
            9,869
            
            
            2.38
            
            
            349,044
            
            
            6,561
            
            
            1.88Total
                deposits
            
            $
            537,334
            
            $
            16,774
            
            
            3.12
            %
            $
            460,939
            
            $
            9,869
            
            
            2.14
            %
            $
            394,905
            
            $
            6,561
            
            
            1.66
            %





The
      following table shows our savings flows during the periods
      indicated.





Year
                Ended December 31,2006
            
            2005
            
            2004(In
                Thousands)Total
                deposits
            
            $
            3,423,345
            
            $
            3,536,390
            
            $
            3,387,865Total
                withdrawals
            
            
            3,353,643
            
            
            3,449,453
            
            
            3,351,887Interest
                credited
            
            
            16,117
            
            
            8,956
            
            
            6,646Total
                increase in deposits
            
            $
            85,819
            
            $
            95,893
            
            $
            42,624




21




The
      following table presents, by various interest rate categories and maturities,
      the amount of our certificates of deposit at December 31, 2006.





Balance
                at December 31, 2006
              Maturing
                in the 12 Months Ending December 31,Certificates
                of Deposit
            
            2007
            
            2008
            
            2009
            
            Thereafter
            
            Total(In
                Thousands)Less
                than 2.00%
            
            $
            6
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            62.00%
                - 2.99%
            
            
            8,202
            
            
            583
            
            
            346
            
            
            33
            
            
            9,1643.00%
                - 3.99%
            
            
            24,132
            
            
            8,337
            
            
            3,067
            
            
            999
            
            
            36,5354.00%
                - 4.99%
            
            
            22,198
            
            
            3,484
            
            
            3,858
            
            
            14,218
            
            
            43,7585.00%
                - 5.99%
            
            
            205,342
            
            
            83,115
            
            
            387
            
            
            9,408
            
            
            298,2526.00%
                - 6.99%
            
            
            537
            
            
            425
            
            
            —
            
            
            68
            
            
            1,0307.00%
                or more
            
            
            228
            
            
            —
            
            
            —
            
            
            —
            
            
            228Total
                certificate accounts
            
            $
            260,645
            
            $
            95,944
            
            $
            7,658
            
            $
            24,726
            
            $
            388,973





The
      following table shows the maturities of our certificates of deposit of $100,000
      or more at December 31, 2006, by time remaining to maturity.




At
                December 31, 2006Quarter
                Ending:
            
            Amount
            
            Weighted
              Average
                Rate(Dollars
                in Thousands)March
                31, 2007
            
            $
            45,143
            
            
            5.07
            %June
                30, 2007
            
            
            55,951
            
            
            5.25September
                30, 2007
            
            
            27,433
            
            
            5.31December
                31, 2007
            
            
            22,206
            
            
            5.39After
                December 31, 2007
            
            
            76,596
            
            
            5.29Total
                certificates of deposit withbalances
                of $100,000 or more
            
            $
            227,329
            
            
            5.25
            %




**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, 2006, we had $196.3 million in
      outstanding FHLB advances and $372.8 million of additional FHLB advances
      available. Approximately $73.5 million of our FHLB advances at December 31,
      2006
      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.





22




In
      addition to FHLB advances, our borrowings include securities sold under
      agreements to repurchase (repurchase agreements). Repurchase agreements are
      contracts for the sale of securities owned or borrowed by Abington Bank, with
      an
      agreement to repurchase those securities at an agreed upon price and date.
      We
      use repurchase agreements as an investment vehicle for our commercial sweep
      checking product. We enter into securities repurchase agreements with our
      commercial checking account customers under a sweep account arrangement. Account
      balances are swept on a daily basis into mortgage-backed securities purchases
      from us, which we agree to repurchase as the checking account is drawn upon
      by
      the customer. At December 31, 2006, our securities repurchase agreements
      amounted to $17.8 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, 2006 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 31,2006
            
            2005
            
            2004(Dollars
                in Thousands)FHLB
                advances:Average
                balance outstanding
            
            $
            201,810
            
            $
            192,189
            
            $
            169,699Maximum
                amount outstanding at anymonth-end
                during the period
            
            
            211,735
            
            
            212,580
            
            
            185,588Balance
                outstanding at end of period
            
            
            196,293
            
            
            201,445
            
            
            170,666Average
                interest rate during the period
            
            
            4.78
            %
            
            4.51
            %
            
            4.36
            %Weighted
                average interest rate at endof
                period
            
            
            4.87
            %
            
            4.51
            %
            
            4.42
            %Other
                borrowed money:Average
                balance outstanding
            
            $
            20,155
            
            $
            20,198
            
            $
            17,703Maximum
                amount outstanding at anymonth-end during the period
            
            
            25,665
            
            
            25,038
            
            
            27,686Balance
                outstanding at end of period
            
            
            17,781
            
            
            16,114
            
            
            12,866Average
                interest rate during the period
            
            
            4.16
            %
            
            2.29
            %
            
            0.82
            %Weighted
                average interest rate at end ofperiod
            
            
            4.90
            %
            
            3.88
            %
            
            1.79
            %





At
      December 31, 2006, $51.5 million of our borrowings were short-term (maturities
      of one year or less). Such short-term borrowings had a weighted average interest
      rate of 4.87% at December 31, 2006.





**Employees**





At
      December 31, 2006, we had **** 114
      full-time employees, and 34 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
      Deposit Insurance Fund administered by the Federal Deposit Insurance
      Corporation, is subject to extensive regulation and examination by the
      Pennsylvania Department of Banking and by the Federal Deposit Insurance
      Corporation. The federal and state laws and regulations applicable to banks
      regulate, among other things, the scope of their business, their investments,
      the reserves required to be kept against deposits, the timing of the
      availability of deposited funds and the nature and amount of and collateral
      for
      certain loans. This regulatory structure also gives the federal and state
      banking agencies extensive discretion in connection with their supervisory
      and
      enforcement activities and examination policies, including policies with respect
      to the classification of assets and the establishment of adequate loan loss
      reserves for regulatory purposes. The laws and regulations governing Abington
      Bank generally have been promulgated to protect depositors and not for the
      purpose of protecting shareholders.





23




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:





·
            banking
                or managing or controlling banks and other subsidiaries authorized
                under
                the Bank Holding Company Act; and





·
            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, 2006, Abington Community
      Bancorp met all applicable regulatory capital requirements.





25






**Restrictions
      on Dividends.** Abington
      Community Bancorp’s ability to declare and pay dividends may depend in part on
      dividends received from Abington Bank. The Pennsylvania Banking Code regulates
      the distribution of dividends by savings banks and states, in part, that
      dividends may be declared and paid out of accumulated net earnings, provided
      that the bank continues to meet its surplus requirements. In addition, dividends
      may not be declared or paid if Abington Bank is in default in payment of any
      assessment due the Federal Deposit Insurance Corporation.





A
      Federal
      Reserve Board policy statement on the payment of cash dividends states that
      a
      bank holding company should pay cash dividends only to the extent that the
      holding company’s net income for the past year is sufficient to cover both the
      cash dividends and a rate of earnings retention that is consistent with the
      holding company’s capital needs, asset quality and overall financial condition.
      The Federal Reserve Board also indicated that it would be inappropriate for
      a
      company experiencing serious financial problems to borrow funds to pay
      dividends. Furthermore, under the federal prompt corrective action regulations,
      the Federal Reserve Board may prohibit a bank holding company from paying any
      dividends if the holding company’s bank subsidiary is classified as
“undercapitalized.” See “-Regulation of Abington Bank - Prompt Corrective
      Action,” below.





**The
      Sarbanes-Oxley Act of 2002** .
      As a
      public company, Abington Community Bancorp is subject to the Sarbanes-Oxley
      Act
      of 2002, which implements a broad range of corporate governance and accounting
      measures for public companies designed to promote honesty and transparency
      in
      corporate America and better protect investors from corporate wrongdoing. The
      Sarbanes-Oxley Act’s principal legislation and the derivative regulation and
      rule-making promulgated by the SEC includes:





·
            the
                creation of an independent accounting oversight
                board;





·
            auditor
                independence provisions that restrict non-audit services that accountants
                may provide to their audit clients;





·
              additional
                  corporate governance and responsibility measures, including the
                  requirement that the chief executive officer and chief financial
                  officer
                  certify financial statements;





·
            a
                requirement that companies establish and maintain a system of internal
                control over financial reporting and that a company’s management provide
                an annual report regarding its assessment of the effectiveness of
                such
                internal control over financial reporting to the company’s independent
                accountants and that such accountants provide an attestation report
                with
                respect to management’s assessment of the effectiveness of the company’s
                internal control over financial reporting (we expect to prepare an
                annual
                report regarding our assessment of the effectiveness of our internal
                control over financial reporting and receive the related attestation
                report for the year ending December 31,
                2007);





·
            the
                forfeiture of bonuses or other incentive-based compensation and profits
                from the sale of an issuer’s securities by directors and senior officers
                in the twelve month period following initial publication of any financial
                statements that later require
                restatement;





·
            an
                increase in the oversight of, and enhancement of certain requirements
                relating to audit committees of public companies and how they interact
                with the company’s independent
                auditors;





·
            the
                requirement that audit committee members must be independent and
                are
                absolutely barred from accepting consulting, advisory or other
                compensatory fees from the issuer;




26




·
            the
                requirement that companies 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;





·
            expanded
                disclosure requirements for corporate insiders, including accelerated
                reporting of stock transactions by insiders and a prohibition on
                insider
                trading during pension blackout
                periods;





·
            a
                prohibition on personal loans to directors and officers, except certain
                loans made by insured financial
                institutions;





·
            disclosure
                of a code of ethics and the requirement of filing of a Form 8-K for
                a
                change or waiver of such code;





·
            mandatory
                disclosure by analysts of potential conflicts of interest;
                and





·
            a
                range of enhanced penalties for fraud and other
                violations.





**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:





·
            Investing
                in the stock of one or more financial institution
                subsidiaries.





·
            Acquiring
                one or more additional financial institution subsidiaries into a
                subsidiary of the holding company.





·
            Merging
                with or acquiring another holding company, one of whose subsidiaries
                is a
                financial institution subsidiary.





·
            Investing
                in a corporation the capital stock of which is available for purchase
                by a
                savings bank under federal law or under the Banking
                Code.





·
            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.





·
            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.





27




The
      mutual holding company will be subject to such regulations as the Pennsylvania
      Department of Banking may prescribe. No mutual holding company regulations
      have
      been issued to date by the Department.





**Regulation
      of Abington Bank**





**Pennsylvania
      Savings Bank Law.** The
      Pennsylvania Banking Code contains detailed provisions governing the
      organization, location of offices, rights and responsibilities of directors,
      officers, and employees, as well as corporate powers, savings and investment
      operations and other aspects of Abington Bank and its affairs. The code
      delegates extensive rule-making power and administrative discretion to the
      Pennsylvania Department of Banking so that the supervision and regulation of
      state-chartered savings banks may be flexible and readily responsive to changes
      in economic conditions and in savings and lending practices.





The
      Pennsylvania Banking Code also provides that state-chartered savings banks
      may
      engage in any activity permissible for a federal savings association, subject
      to
      regulation by the Pennsylvania Department of Banking. The Federal Deposit
      Insurance Act, however, prohibits Abington Bank from making new investments,
      loans, or becoming involved in activities as principal and equity investments
      which are not permitted for national banks unless:





·
            the
                Federal Deposit Insurance Corporation determines the activity or
                investment does not pose a significant risk of loss to the Deposit
                Insurance Fund; and





·
            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
      Deposit Insurance Fund, which is administered by the Federal Deposit Insurance
      Corporation, and is 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
      regulations effective January 1, 2007, the FDIC adopted a new risk-based premium
      system that provides for quarterly assessments based on an insured institution's
      ranking in one of four risk categories based upon supervisory and capital
      evaluations. Well-capitalized institutions (generally those with CAMELS
      composite ratings of 1 or 2) are grouped in Risk Category I and assessed for
      deposit insurance at an annual rate of between five and seven basis points.
      The
      assessment rate for an individual institution is determined according to a
      formula based on a weighted average of the institution's individual CAMEL
      component ratings plus either five financial ratios or, in the case of an
      institution with assets of $10.0 billion or more, the average ratings of its
      long-term debt. Institutions in Risk Categories II, III and IV are assessed
      at
      annual rates of 10, 28 and 43 basis points, respectively.





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 a predecessor to the Deposit Insurance
      Fund. These assessments will continue until the Financing Corporation bonds
      mature in 2019.





28




The
      Federal Deposit Insurance Corporation may terminate the deposit insurance of
      any
      insured depository institution, including Abington Bank, if it determines after
      a hearing that the institution has engaged or is engaging in unsafe or unsound
      practices, is in an unsafe or unsound condition to continue operations, or
      has
      violated any applicable law, regulation, order or any condition imposed by
      an
      agreement with the Federal Deposit Insurance Corporation. It also may suspend
      deposit insurance temporarily during the hearing process for the permanent
      termination of insurance, if the institution has no tangible capital. If
      insurance of accounts is terminated, the accounts at the institution at the
      time
      of the termination, less subsequent withdrawals, shall continue to be insured
      for a period of six months to two years, as determined by the Federal Deposit
      Insurance Corporation. Management is aware of no existing circumstances which
      would result in termination of Abington Bank’s deposit insurance.





**Regulatory
      Capital Requirements.** The
      Federal Deposit Insurance Corporation has promulgated capital adequacy
      requirements for state-chartered banks that, like Abington Bank, are not members
      of the Federal Reserve Board System. The capital regulations establish a minimum
      3% Tier 1 leverage capital requirement for the most highly rated
      state-chartered, non-member banks, with an additional cushion of at least 100
      to
      200 basis points for all other state-chartered, non-member banks, which
      effectively increases the minimum Tier 1 leverage ratio for such other banks
      to
      4% to 5% or more. Under the Federal Deposit Insurance Corporation’s regulations,
      the highest-rated banks are those that the Federal Deposit Insurance Corporation
      determines are not anticipating or experiencing significant growth and have
      well
      diversified risk, including no undue interest rate risk exposure, excellent
      asset quality, high liquidity, good earnings and, in general, which are
      considered a strong banking organization, rated composite 1 under the Uniform
      Financial Institutions Rating System. Tier 1, or leverage capital, is defined
      as
      the sum of common shareholders’ equity, including retained earnings,
      noncumulative perpetual preferred stock and related surplus, and minority
      interests in consolidated subsidiaries, minus all intangible assets other than
      certain purchased mortgage servicing rights and purchased credit card
      relationships.





The
      Federal Deposit Insurance Corporation’s regulations also require that
      state-chartered, non-member banks meet a risk-based capital standard. The
      risk-based capital standard requires the maintenance of total capital, defined
      as Tier 1 capital and supplementary (Tier 2) capital, to risk weighted assets
      of
      8%. In determining the amount of risk-weighted assets, all assets, plus certain
      off balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based
      on the risks the Federal Deposit Insurance Corporation believes are inherent
      in
      the type of asset or item. The components of Tier 1 capital for the risk-based
      standards are the same as those for the leverage capital requirement. The
      components of supplementary (Tier 2) capital include cumulative perpetual
      preferred stock, mandatory subordinated debt, perpetual subordinated debt,
      intermediate-term preferred stock, up to 45% of unrealized gains on equity
      securities and a portion of a bank’s allowance for loan losses. Allowance for
      loan losses includable in supplementary capital is limited to a maximum of
      1.25%
      of risk-weighted assets. Overall, the amount of supplementary capital that
      may
      be included in total capital is limited to 100% of Tier 1 capital.





A
      bank
      that has less than the minimum leverage capital requirement is subject to
      various capital plan and activities restriction requirements. The Federal
      Deposit Insurance Corporation’s regulations also provide that any insured
      depository institution with a ratio of Tier 1 capital to total assets that
      is
      less than 2.0% is deemed to be operating in an unsafe or unsound condition
      pursuant to Section 8(a) of the Federal Deposit Insurance Act and could be
      subject to potential termination of deposit insurance.





Abington
      Bank is also subject to minimum capital requirements imposed by the Pennsylvania
      Department of Banking on Pennsylvania chartered depository institutions. Under
      the Pennsylvania Department of Banking’s capital regulations, a Pennsylvania
      bank or savings association must maintain a minimum leverage ratio of Tier
      1
      capital, as defined under the Federal Deposit Insurance Corporation’s capital
      regulations, to total assets of 4%. In addition, the Pennsylvania Department
      of
      Banking has the supervisory discretion to require a higher leverage ratio for
      any institution or association based on inadequate or substandard performance
      in
      any of a number of areas. The Pennsylvania Department of Banking incorporates
      the same Federal Deposit Insurance Corporation risk-based capital requirements
      in its regulations. As of December 31, 2006, Abington Bank was in compliance
      with all applicable regulatory capital requirements and was deemed to be a
      “well-capitalized” institution.





29




**Affiliate
      Transaction Restrictions.** Federal
      laws strictly limit the ability of banks to engage in certain transactions
      with
      their affiliates, including their bank holding companies. Transactions deemed
      to
      be a “covered transaction” under Section 23A of the Federal Reserve Act and
      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, covered transactions that are loans and extensions of credit
      generally are required to be secured by eligible collateral in specified
      amounts. Federal law also requires that covered transactions and certain other
      transactions listed in Section 23B of the Federal Reserve Act 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, 2006, 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, 2006,
      Abington Bank was in compliance with these reserve requirements.





**TAXATION**





**Federal
      Taxation**





**General** .
      Abington Community Bancorp, Abington Mutual Holding Company and Abington Bank
      are subject to federal income taxation in the same general manner as other
      corporations with some exceptions listed below. The following discussion of
      federal, state and local income taxation is only intended to summarize certain
      pertinent income tax matters and is not a comprehensive description of the
      applicable tax rules.





30




**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, 2006, 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 distributing corporation. Corporations which own
      less than 20% of the stock of a corporation distributing a dividend may deduct
      only 70% of dividends received.





**State
      and Local Taxation**





**Pennsylvania
      Taxation** .
      Abington Community Bancorp is subject to the Pennsylvania Corporate Net Income
      Tax, Capital Stock and Franchise Tax. The Corporation Net Income Tax rate for
      2006 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.





31





**ITEM
      1A. RISK FACTORS**





**Market
      Rates of Interest Have Hurt Profitability**





Market
      rates of interest have risen 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 2.13% for the year ended
      December 31, 2006 compared to 2.27% and 2.30% for the years ended December
      31,
      2005 and 2004, respectively. Abington Bank’s net interest margin, which is net
      interest income as a percentage of average interest-earning assets, was 2.68%
      for the year ended December 31, 2006 compared to 2.78% and 2.67% for the years
      ended December 31, 2005 and 2004, respectively. In a period of rising interest
      rates, like the last two years, the interest income earned on our assets may
      not
      increase as rapidly as the interest expense paid on our liabilities. In
      addition, increases 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 $23.2 million or 18.46%. Under the same
      circumstances, our net interest income would be expected to decrease by $1.6
      million or 6.62%.





**Competition
      for 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, 2006 core deposits comprised
      36.8% of our average total deposits compared to 47.9% and 55.6% for the years
      ended December 31, 2005 and 2004, respectively. At December 31, 2006, $389.0
      million, or 66.3% of our total deposits were certificates of deposits, and
      of
      that amount $227.3 million or 58.4% of our total certificates of deposit, were
      “jumbo” certificates of $100,000 or more. Our balances of certificates of
      deposit have increased as a result of, among other factors, the increased rates
      now available on those products relative to other deposit products or other
      investments in the current interest rate environment. The inflow of jumbo
      certificates of deposit and the retention of these deposits upon maturity are
      particularly sensitive to general interest rates and money market conditions,
      making “jumbo” certificates of deposits traditionally a more volatile source of
      funding than our checking, savings and money market deposit accounts. 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, which could aversely affect our profitability. The average
      rate
      we paid on our interest-bearing deposits was 3.39% for the year ended December
      31, 2006 compared to 2.38% and 1.88% for the years ended December 31, 2005
      and
      2004, respectively.





32


**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 $111.6 million or 27.9 % of our total
      loan
      portfolio at December 31, 2002 to $227.4 million or 34.8% of the total loan
      portfolio at December 31, 2006. 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 $247.2 million or
      61.7%
      of our total loan portfolio at December 31, 2002 compared to $375.7 million
      or
      57.6% at December 31, 2006. 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. At December 31, 2006 and 2005, the Company had $2.3 million and $2.9
      million, respectively, of commercial real estate and multi-family residential
      loans and construction loans that were considered non-performing. These loans
      were deemed to be impaired and placed on non-accrual status. The impaired loans
      at December 31, 2006 were comprised of two construction and three commercial
      real estate loans to one borrower. The impaired loan at December 31, 2005 was
      a
      construction loan to one borrower.





**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 approximately 57% of our outstanding shares of
      common stock, and, through its board of directors, is able to exercise voting
      control over most matters put to a vote of our shareholders. The same directors
      and officers who manage Abington Community Bancorp and Abington Bank also manage
      Abington Mutual Holding Company. No assurances can be given that Abington Mutual
      Holding Company will not take action which the minority shareholders believe
      to
      be contrary to their interests. For example, Abington Mutual Holding Company
      could approve the implementation of stock benefit plans, prevent a sale or
      merger transaction or defeat a candidate for our board of directors or other
      proposals put forth by the minority shareholders. Moreover, Abington Mutual
      Holding Company's ownership of more than a majority of the outstanding shares
      of
      our common stock is likely to perpetuate existing management and directors.





**Our
      Results of Operations are Significantly Dependent on Economic Conditions and
      Related Uncertainties**





Banking
      is affected, directly and indirectly, by domestic and international economic
      and
      political conditions and by governmental monetary and fiscal policies.
      Conditions such as inflation, recession, unemployment, volatile interest rates,
      real estate values, government monetary policy, international conflicts, the
      actions of terrorists and other factors beyond our control may adversely affect
      our results of operations. Changes in interest rates, in particular, could
      adversely affect our net interest income and have a number of other adverse
      effects on our operations, as discussed the first risk factor above. Adverse
      economic conditions also could result in an increase in loan delinquencies,
      foreclosures and nonperforming assets and a decrease in the value of the
      property or other collateral which secures our loans, all of which could
      adversely affect our results of operations. We are particularly sensitive to
      changes in economic conditions and related uncertainties in the Delaware Valley
      because we derive substantially all of our loans, deposits and other business
      from the greater Philadelphia region in eastern Pennsylvania and contiguous
      counties in New Jersey and Delaware. Accordingly, we remain subject to the
      risks
      associated with prolonged declines in national or local economies.





33


**Our
      Allowance for Losses on Loans May Not Be Adequate to Cover Probable
      Losses**





We
      have
      established an allowance for loan losses based upon various assumptions and
      judgments about the collectibility of our loan portfolio which we believe is
      adequate to offset probable losses on our existing loans. Since we must use
      assumptions regarding individual loans and the economy, our current allowance
      for loan losses may not be sufficient to cover actual loan losses, and increases
      in the allowance may become necessary in the future. 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. We may also need to significantly increase our provision for loan
      losses, particularly if one or more of our larger loans or credit relationships
      becomes delinquent. In addition, federal regulators periodically review our
      allowance for loan losses and may require us to increase our provision for
      loan
      losses or recognize loan charge-offs. Our allowance for loan losses amounted
      to
      62.7% of non-performing loans at December 31, 2006.





**Our
      Loans are Concentrated to Borrowers In Our Market Area**





At
      December 31, 2006, the preponderance of our total loans were to individuals
      and/or secured by properties located in our market area of the Delaware Valley
      region. We have relatively few loans outside of our market. As a result, we
      have
      a greater risk of loan defaults and losses in the event of an economic downturn
      in our market area as adverse economic changes may have a negative effect on
      the
      ability of our borrowers to make timely repayment of their loans. Additionally,
      a decline in local property values could adversely affect the value of property
      used as collateral. If we are required to liquidate a significant amount of
      collateral during a period of reduced real estate values to satisfy the debt,
      our earnings and capital could be adversely affected.





**The
      Building of Market Share Through our Branching Strategy Could Cause our Expenses
      to Increase Faster than Revenues**





We
      intend
      to continue to build market share through our branching strategy. We are
      planning four new branches that we intend to open within the next 24 months.
      There are costs involved in opening branches and new branches generally require
      a period of time to generate sufficient revenues to offset their costs,
      especially in areas in which we do not have an established presence.
      Accordingly, any new branch may negatively impact our earnings for some period
      of time until the branch reaches certain economies of scale. Our expenses could
      be further increased if we encounter delays in the opening of any of our new
      branches. Finally, we have no assurance our new branches will be successful
      even
      after they have been established.





**We
      are Dependent Upon the Services of Our Management Team**





Our
      future success and profitability depend upon the management and banking
      abilities of our senior executives. We believe that our future results will
      also
      depend in part upon our attracting and retaining highly skilled and qualified
      management. We are especially dependent on a limited number of key management
      personnel. The loss of our chief executive officer or other senior executive
      officers could have a material adverse impact on our operations because other
      officers may not have the experience and expertise to readily replace these
      individuals. Competition for such personnel is intense, and we cannot assure
      you
      that we will be successful in attracting or retaining such personnel. Changes
      in
      key personnel and their responsibilities may be disruptive to our business
      and
      could have a material adverse effect on our business, financial condition and
      results of operations.





34




**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.





**Strong
      Competition Within our Market Area May Limit our Growth and
      Profitability**





Competition
      in the banking and financial services industry is intense. In our market area,
      we compete with numerous commercial banks, savings institutions, mortgage
      brokerage firms, credit unions, finance companies, mutual funds, insurance
      companies, and brokerage and investment banking firms operatin locally and
      elsewhere.




**ITEM
      1B. UNRESOLVED STAFF COMMENTS**





Not
      applicable.




**ITEM
      2. PROPERTIES**





We
      currently conduct business from our main office, nine full-service banking
      offices and five limited service offices. We also maintain a loan processing
      office. The following table sets forth the net book value of the land, building
      and leasehold improvements and certain other information with respect to our
      offices at December 31, 2006.





Description/Address
                (1)
            
            Leased/Owned
            
            Date
                of Lease Expiration
            
            Net
                Book Value
              of
                Property
            
            Amount
                of
              Deposits(In
                Thousands)Main
                Office
              180
                Old York Road
              Jenkintown,
                PA 19046
            
            
            Owned
            
            
            N/A
            
            $
            1,249
            
            $
            176,831Loan
                Processing Office
              179
                Washington Lane
              Jenkintown,
                PA 19046
            
            
            Owned
            
            
            N/A
            
            
            965
            
            
            n/aGlenside
                Branch
              273
                Keswick Avenue
              Glenside,
                PA 19038
            
            
            Bldg.
                Owned
              Ground
                Leased
            
            
            12/31/19
            
            
            435
            
            
            77,907Abington
                Branch
              990
                Old York Road
              Abington,
                PA 19001
            
            
            Leased
            
            
            1/31/19
            
            
            215
            
            
            56,499Willow
                Grove Branch
              275
                Moreland Road
              Willow
                Grove, PA 19090
            
            
            Owned
            
            
            N/A
            
            
            1,410
            
            
            71,688Horsham
                Branch
              Rt
                611 & County Line Road
              Horsham,
                PA 19044
            
            
            Leased
            
            
            5/31/08
            
            
            197
            
            
            41,696




35




Description/Address
                  (1)
              
              Leased/Owned
              
              Date
                  of Lease Expiration
              
              Net
                  Book Value
                of
                  Property
              
              Amount
                  of
                Deposits


Huntingdon
                Valley Branch
              667
                Welsh Road
              Huntingdon
                Valley, PA 19006
            
            
            Leased
            
            
            12/31/13
            
            $
            125
            
            $
            30,080Fort
                Washington Branch
              101
                Fort Washington Avenue
              Fort
                Washington, PA 19034
            
            
            Leased
            
            
            8/15/08
            
            
            117
            
            
            29,531Montgomeryville
                Branch
              521
                Stump Road
              North
                Wales, PA 19454
            
            
            Leased
            
            
            3/31/11
            
            
            55
            
            
            32,199Warrington
                Branch (2)
              1111
                Easton Road
              Warrington,
                PA 18976
            
            
            Leased
            
            
            6/30/15
            
            
            1,028
            
            
            5,606Rydal
                Park Limited Service Office
              1515
                The Fairway
              Rydal,
                PA 19046
            
            
            Leased
            
            
            5/21/08
            
            
            —
            
            
            10,562Centennial
                Station Limited Service Office
              12106-B
                Centennial Station
              Warminster,
                PA 18974
            
            
            Leased
            
            
            7/31/08
            
            
            3
            
            
            4,762Regency
                Towers Limited Service Office
              1003
                Easton Road
              Willow
                Grove, PA 19090
            
            
            Leased
            
            
            10/31/08
            
            
            36
            
            
            6,266Ann’s
                Choice Limited Service Office
              10000
                Ann’s Choice Way
              Warminster,
                PA 18974
            
            
            Leased
            
            
            7/31/08
            
            
            1
            
            
            40,697Maris
                Grove Limited Service Office (3)
              100
                Maris Grove Way
              Glen
                Mills, PA 19342
            
            
            Leased
            
            
            9/30/11
            
            
            5
            
            
            2,678





(1)
            We
                opened our fifteenth banking office in Lansdale, Pennsylvania in
                January
                2007, which is a leased office.


(2)
            Opened
                in April 2006


(3)
            Opened
                in October 2006




**ITEM
      3. LEGAL PROCEEDINGS**




As
      of
      December 31, 2006, we were not, and we presently are not, involved in any legal
      proceedings of a material nature. From time to time, we are a party to legal
      proceedings incidental to our business to enforce our security interest in
      collateral pledged to secure loans made by Abington Bank.




**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS**




Not
      applicable.




36




**PART
      II**





**ITEM
              5.**
            **MARKET
                FOR REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER
                PURCHASES OF EQUITY
                SECURITIES**





(a)
            Abington
                Community Bancorp, Inc. common stock trades on the Nasdaq Global
                Market
                under the trading symbol “ABBC.” At the close of business on December 31,
                2006, there were 1,508 shareholders of
                record.





The
      following table sets forth the high and low sales prices of the Company’s common
      stock as reported by the Nasdaq stock market during the periods
      presented.




**Year
                  Ended December 31,****2006**
              
              **2005****High**
              
              **Low**
              
              **High**
              
              **Low**First
                  Quarter
              
              $
              13.69
              
              $
              12.78
              
              $
              13.75
              
              $
              12.79Second
                  Quarter
              
              $
              15.72
              
              $
              13.25
              
              $
              13.15
              
              $
              10.30Third
                  Quarter
              
              $
              15.45
              
              $
              14.10
              
              $
              13.09
              
              $
              11.65Fourth
                  Quarter
              
              $
              19.74
              
              $
              14.87
              
              $
              13.65
              
              $
              11.90




The
      following table summarizes the cash dividends per share of common stock paid
      by
      the Company during the periods indicated.




**Year
                  Ended December 31,****2006**
              
              **2005**First
                  Quarter
              
              $
              0.05
              
              
              n/aSecond
                  Quarter
              
              $
              0.06
              
              $
              0.05Third
                  Quarter
              
              $
              0.06
              
              $
              0.05Fourth
                  Quarter
              
              $
              0.06
              
              $
              0.05


The
      Company did not sell any of its equity securities during 2006 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.




37


(c)
            **Purchases
                of Equity Securities**





The
      Company’s repurchases of its common stock made during the quarter are set forth
      in the following table.








**Period**
            
            **Total**
              **Number
                of**
              **Shares**
              **Purchased**
            
            **Average
                Price Paid per Share**
            
            **Total
                Number of Shares**
              **Purchased
                as**
              **Part
                of Publicly**
              **Announced
                Plans**
              **or
                Programs**
            
            **Maximum
                Number of Shares that May Yet be Purchased Under the Plan or
                Programs(1)**October
                1 - October 31, 2006
            
            
            —
            
            
            —
            
            
            —
            
            
            132,360November
                1 - November 30, 2006
            
            
            —
            
            
            —
            
            
            —
            
            
            132,360December
                1 - December 31, 2006
            
            
            56
            
            
            19.29
            
            
            56
            
            
            132,304Total
            
            
            56
            
            $
            19.29
            
            
            56
            
            
            132,304





(1)
            On
                January 31, 2006, the Company announced a stock repurchase program
                to
                repurchase up to 10% of its outstanding shares held by persons other
                than
                Abington Mutual Holding Company, or 714,150 shares. The repurchase
                program
                terminated as of January 31, 2007.




**ITEM
      6. SELECTED FINANCIAL DATA**





The
      selected consolidated financial and other data of Abington Community Bancorp,
      Inc. set forth below does not purport to be complete and should be read in
      conjunction with, and is qualified in its entirety by, the more detailed
      information, including the Consolidated Financial Statements and related Notes,
      appearing elsewhere herein.





**At
                December 31,**
            ********
            ****
            **2006**
            ****
            **2005**
            ****
            **2004**
            ****
            **2003**
            ****
            **2002**(Dollars
                in Thousands)**Selected
                Financial and Other Data:**Total
                assets
            
            $
            925,186
            
            $
            844,072
            
            $
            717,978
            
            $
            604,439
            
            $
            535,797Cash
                and cash equivalents
            
            
            44,565
            
            
            27,714
            
            
            33,296
            
            
            19,696
            
            
            51,702Investment
                securities and FHLB stock:Held-to-maturity
            
            
            20,393
            
            
            20,396
            
            
            10,220
            
            
            —
            
            
            —Available-for-sale
            
            
            85,730
            
            
            89,890
            
            
            86,614
            
            
            89,023
            
            
            50,351Mortgage-backed
                securities:Held-to-maturity
            
            
            56,144
            
            
            67,411
            
            
            81,704
            
            
            43,009
            
            
            10,060Available-for-sale
            
            
            78,023
            
            
            79,943
            
            
            83,028
            
            
            78,213
            
            
            41,251Loans
                receivable, net
            
            
            605,063
            
            
            529,487
            
            
            412,656
            
            
            364,620
            
            
            371,024Deposits
            
            
            587,002
            
            
            501,183
            
            
            405,290
            
            
            362,666
            
            
            344,336FHLB
                advances
            
            
            196,293
            
            
            201,445
            
            
            170,666
            
            
            173,732
            
            
            122,761Other
                borrowings
            
            
            17,781
            
            
            16,114
            
            
            12,866
            
            
            8,681
            
            
            11,937Stockholders’
                equity
            
            
            114,102
            
            
            117,231
            
            
            123,055
            
            
            53,234
            
            
            50,591Banking
                offices (1)
            
            
            14
            
            
            12
            
            
            12
            
            
            12
            
            
            9




38





**Year
                Ended December 31,**
            ********
            ****
            **2006**
            ****
            **2005**
            ****
            **2004**
            ****
            **2003**
            ****
            **2002**(Dollars
                in Thousands, except per share data)**Selected
                Operating Data:**Total
                interest income
            
            $
            49,818
            
            $
            40,011
            
            $
            30,849
            
            $
            29,997
            
            $
            31,797Total
                interest expense
            
            
            27,268
            
            
            18,999
            
            
            14,209
            
            
            13,898
            
            
            14,583Net
                interest income
            
            
            22,550
            
            
            21,012
            
            
            16,640
            
            
            16,099
            
            
            17,214Provision
                for loan losses
            
            
            186
            
            
            25
            
            
            45
            
            
            375
            
            
            500Net
                interest income after provision for loan losses
            
            
            22,364
            
            
            20,987
            
            
            16,595
            
            
            15,724
            
            
            16,714Total
                non-interest income
            
            
            2,876
            
            
            2,798
            
            
            2,243
            
            
            1,859
            
            
            741Total
                non-interest expense
            
            
            15,746
            
            
            14,976
            
            
            12,015
            
            
            11,472
            
            
            10,611Income
                before income taxes
            
            
            9,494
            
            
            8,809
            
            
            6,823
            
            
            6,111
            
            
            6,844Income
                taxes
            
            
            2,692
            
            
            2,507
            
            
            2,268
            
            
            2,021
            
            
            2,467Net
                income
            
            $
            6,802
            
            $
            6,302
            
            $
            4,555
            
            $
            4,090
            
            $
            4,377Basic
                earnings per share
            
            $
            0.46
            
            $
            0.41
            
            
            n/a
                (2
            )
            
            n/a
            
            
            n/aDiluted
                earnings per share
            
            $
            0.45
            
            $
            0.41
            
            
            n/a
                (2
            )
            
            n/a
            
            
            n/aCash
                dividends per share
            
            $
            0.23
            
            $
            0.15
            
            $
            —
            
            
            n/a
            
            
            n/a





**Year
                Ended December 31,**
            ********
            ****
            **2006**
            ****
            **2005**
            ****
            **2004**
            ****
            **2003**
            ****
            **2002****Selected
                Operating Ratios**(3):Average
                yield on interest-earning assets
            
            
            5.93
            %
            
            5.30
            %
            
            4.95
            %
            
            5.36
            %
            
            6.47
            %Average
                rate on interest-bearing liabilities
            
            
            3.80
            
            
            3.03
            
            
            2.65
            
            
            2.86
            
            
            3.44Average
                interest rate spread(4)
            
            
            2.13
            
            
            2.27
            
            
            2.30
            
            
            2.50
            
            
            3.03Net
                interest margin(4)
            
            
            2.68
            
            
            2.78
            
            
            2.67
            
            
            2.88
            
            
            3.50Average
                interest-earning assets to average
              interest-bearing
                liabilities
            
            
            117.21
            
            
            120.28
            
            
            116.08
            
            
            115.11
            
            
            116.12Net
                interest income after provision
              for
                loan losses to non-interest expense
            
            
            142.03
            
            
            140.14
            
            
            138.12
            
            
            137.06
            
            
            157.52Total
                non-interest expense to average assets
            
            
            1.78
            
            
            1.88
            
            
            1.85
            
            
            1.97
            
            
            2.09Efficiency
                ratio(5)
            
            
            61.93
            
            
            62.90
            
            
            63.63
            
            
            63.88
            
            
            59.10Return
                on average assets
            
            
            0.77
            
            
            0.79
            
            
            0.70
            
            
            0.70
            
            
            0.86Return
                on average equity
            
            
            5.94
            
            
            5.27
            
            
            7.52
            
            
            7.85
            
            
            9.11Average
                equity to average assets
            
            
            12.94
            
            
            15.02
            
            
            9.30
            
            
            8.94
            
            
            9.46





**At
                or For the**
              **Year
                Ended December 31,**
            ********
            ****
            **2006**
            ****
            **2005**
            ****
            **2004**
            ****
            **2003**
            ****
            **2002****Asset
                Quality Ratios**(6):Non-performing
                loans as a percent of total loans receivable(7)
            
            
            0.42
            %
            
            0.54
            %
            
            0.05
            %
            
            0.12
            %
            
            0.31
            %Non-performing
                assets as a percent of  total assets(7)
            
            
            0.28
            
            
            0.34
            
            
            0.03
            
            
            0.08
            
            
            0.23Allowance
                for loan losses as a percent of non-performing loans
            
            
            62.69
            
            
            50.29
            
            
            622.03
            
            
            315.15
            
            
            145.04Net
                charge-offs/(recoveries) to average loans receivable
            
            
            0.01
            
            
            (0.00
            )
            
            0.02
            
            
            0.21
            
            
            0.08**Capital
                Ratios**(8):Tier
                1 leverage ratio
            
            
            10.54
            %
            
            10.46
            %
            
            12.73
            %
            
            8.81
            %
            
            9.33
            %Tier
                1 risk-based capital ratio
            
            
            16.49
            
            
            16.93
            
            
            21.24
            
            
            15.12
            
            
            14.64Total
                risk-based capital ratio
            
            
            16.77
            
            
            17.21
            
            
            21.57
            
            
            15.53
            
            
            15.18




39







(1)
            We
                opened our fifteenth banking office in Lansdale, Pennsylvania in
                January
                2007




(2)
            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.





(3)
            With
                the exception of end of period ratios, all ratios are based on average
                monthly balances during the indicated
                periods.





(4)
            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.





(5)
            The
                efficiency ratio represents the ratio of non-interest expense divided
                by
                the sum of net interest income and non-interest
                income.





(6)
            Asset
                quality ratios are end of period ratios, except for net charge-offs
                to
                average loans receivable.




(7)
            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.





(8)
            Capital
                ratios are end of period ratios and are calculated for Abington Bank
                per
                regulatory requirements.




**ITEM
      7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND RESULTS OF OPERATIONS**




***Overview—*** The
      Company was formed by the Bank in connection with the Bank’s reorganization into
      the mutual holding company form and commenced operations in December 2004.
      The
      Company’s results of operations are primarily dependent on the results of the
      Bank, which is a wholly owned subsidiary of the Company. The Bank’s results of
      operations depend to a large extent on net interest income, which is the
      difference between the income earned on its loan and investment portfolios
      and
      the cost of funds, which is the interest paid on deposits and borrowings.
      Results of operations are also affected by our provisions for loan losses,
      service charges and other non-interest income and non-interest expense.
      Non-interest expense principally consists of salaries and employee benefits,
      office occupancy and equipment expense, professional services expense, data
      processing expense, advertising and promotions and other expense. Our results
      of
      operations are also significantly affected by general economic and competitive
      conditions, particularly changes in interest rates, government policies and
      actions of regulatory authorities. Future changes in applicable laws,
      regulations or government policies may materially impact our financial condition
      and results of operations. The Bank is subject to regulation by the Federal
      Deposit Insurance Corporation (“FDIC”) and the Pennsylvania Department of
      Banking. The Bank’s executive offices and loan processing office are in
      Jenkintown, Pennsylvania, with nine other branches and five limited service
      facilities located in nearby Montgomery, Bucks and Delaware County
      neighborhoods. The Bank is principally engaged in the business of accepting
      customer deposits and investing these funds in loans, primarily residential
      mortgages.




40


We
      had
      net income of $6.8 million for the year ended December 31, 2006, representing
      an
      increase of $500,000 or 7.9% over net income of $6.3 million for the year ended
      December 31, 2005. Diluted earnings per share increased to $0.45 for 2006 from
      $0.41 for 2005. Our net interest income improved by $1.5 million or 7.3% to
      $22.6 million for 2006 from $21.0 million for 2005. The improvement was
      primarily a result of an increase in the average balance of our loan portfolio
      combined with an increase in the average yield on those assets. This increase
      was partially offset by an increase in the average balance of and average rate
      paid on deposits. Our average interest rate spread and net interest margin
      for
      2006 decreased to 2.13% and 2.68%, respectively, from 2.27% and 2.78%,
      respectively, for 2005. The Company’s total assets increased $81.1 million, or
      9.6%, to $925.2 million at December 31, 2006 compared to $844.1 million at
      December 31, 2005. The primary reason for the increase in total assets during
      2006 was a $75.6 million or 14.3% increase in net loans receivable. Our total
      deposits increased $85.8 million or 17.1% to $587.0 million at December 31,
      2006
      compared to $501.2 million at December 31, 2005. The increase was due to an
      increase in certificate accounts of $102.9 million and checking accounts of
      $5.6
      million that was partially offset by a decrease in savings and money market
      accounts of $22.6 million. The Company continues to remain focused on
      maintaining and growing its base of core deposits over the long term. The recent
      opening of three new branches in 2006 and January 2007 and the anticipated
      opening of two additional branches by mid-2007 are expected to contribute
      towards this goal. Moreover, the Company will continue to support its overall
      growth through our recently announced second-step conversion and stock offering.




***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 onsolidated financial
      statements. 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.




41


We
      establish an allowance on certain impaired loans for the amount by which the
      discounted cash flows, observable market price or fair value of collateral,
      if
      the loan is collateral dependent, is lower than the carrying value of the loan.
      A loan is considered to be impaired when, based upon current information and
      events, it is probable that the Company will be unable to collect all amounts
      due according to the contractual terms of the loan. An insignificant delay
      or
      insignificant shortfall in amount of payments does not necessarily result in
      the
      loan being identified as impaired.




We
      establish a general valuation allowance on classified loans which are not
      impaired. We segregate these loans by category and assign allowance percentages
      to each category based on inherent losses associated with each type of lending
      and consideration that these loans, in the aggregate, represent an above-average
      credit risk and that more of these loans will prove to be uncollectible compared
      to loans in the general portfolio. The categories used by the Company include
      “Doubtful,” “Substandard” and “Special Mention.” Classification of a loan within
      such categories is based on identified weaknesses that increase the credit
      risk
      of the loan.




We
      establish a general allowance on non-classified loans to recognize the inherent
      losses associated with lending activities, but which, unlike specific
      allowances, have not been allocated to particular problem loans. This general
      valuation allowance is determined by segregating the loans by loan category
      and
      assigning allowance percentages based on our historical loss experience,
      delinquency trends, and management’s evaluation of the collectibility of the
      loan portfolio.




The
      allowance is adjusted for significant factors that, in management’s judgment,
      affect the collectibility of the portfolio as of the evaluation date. These
      significant factors may include changes in lending policies and procedures,
      changes in existing general economic and business conditions affecting our
      primary lending areas, credit quality trends, collateral value, loan volumes
      and
      concentrations, seasoning of the loan portfolio, loss experience in particular
      segments of the portfolio, duration of the current business cycle, and bank
      regulatory examination results. The applied loss factors are reevaluated each
      reporting period to ensure their relevance in the current economic
      environment.




While
      management uses the best information available to make loan loss allowance
      valuations, adjustments to the allowance may be necessary based on changes
      in
      economic and other conditions, changes in the composition of the loan portfolio
      or changes in accounting guidance. In times of economic slowdown, either
      regional or national, the risk inherent in the loan portfolio could increase
      resulting in the need for additional provisions to the allowance for loan losses
      in future periods. An increase could also be necessitated by an increase in
      the
      size of the loan portfolio or in any of its components even though the credit
      quality of the overall portfolio may be improving. Historically, our estimates
      of the allowance for loan losses have approximated actual losses incurred.
      In
      addition, the Pennsylvania Department of Banking and the FDIC, as an integral
      part of their examination processes, periodically review our allowance for
      loan
      losses. The Pennsylvania Department of Banking or the FDIC may require the
      recognition of adjustment to the allowance for loan losses based on their
      judgment of information available to them at the time of their examinations.
      To
      the extent that actual outcomes differ from management’s estimates, additional
      provisions to the allowance for loan losses may be required that would adversely
      impact earnings in future periods.




***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.




42




***Income
      Taxes—*** Management
      makes estimates and judgments to calculate some of our tax liabilities and
      determine the recoverability of some of our deferred tax assets, which arise
      from temporary differences between the tax and financial statement recognition
      of revenues and expenses. Management also estimates a reserve for deferred
      tax
      assets if, based on the available evidence, it is more likely than not that
      some
      portion or all of the recorded deferred tax assets will not be realized in
      future periods. These estimates and judgments are inherently subjective.
      Historically, our estimates and judgments to calculate our deferred tax accounts
      have not required significant revision from management’s initial
      estimates.




In
      evaluating our ability to recover deferred tax assets, management considers
      all
      available positive and negative evidence, including our past operating results
      and our forecast of future taxable income. In determining future taxable income,
      management makes assumptions for the amount of taxable income, the reversal
      of
      temporary differences and the implementation of feasible and prudent tax
      planning strategies. These assumptions require us to make judgments about our
      future taxable income and are consistent with the plans and estimates we use
      to
      manage our business. Any reduction in estimated future taxable income may
      require us to record a valuation allowance against our deferred tax assets.
      An
      increase in the valuation allowance would result in additional income tax
      expense in the period and could have a significant impact on our future
      earnings.




***Recent
      Accounting Pronouncements*** —In
      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 adopted this guidance on January 1, 2007. The adoption did
      not
      have any 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. The
      Company adopted this statement effective January 1, 2007. The adoption did
      not
      have a material effect on the Company’s financial position or results of
      operations.




In
      July
      2006, the FASB issued FASB Interpretation (“FIN”) No. 48, *Accounting
      for Uncertainty in Income Taxes* .  This
      Interpretation clarifies the accounting for uncertainty in income taxes
      recognized in an enterprise’s financial statements in accordance with SFAS No.
      109, *Accounting
      for Income Taxes.* This
      Interpretation prescribes a recognition threshold and measurement attribute
      for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. This Interpretation also provides guidance
      on derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition. This Interpretation is effective for fiscal
      years beginning after December 15, 2006.  The Company adopted this
      Interpretation on January 1, 2007.  The adoption did not have any effect on
      the Company's financial position or results of operations.




43




In
      September 2006, the FASB ratified the consensus reached by the Emerging Issues
      Task Force (“EITF”) in Issue 06-4, *Accounting
      for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
      Split-Dollar Life Insurance Arrangements* .
      EITF
      06-4 applies to life insurance arrangements that provide an employee with a
      specified benefit that is not limited to the employee’s active service period,
      including certain bank-owned life insurance (“BOLI”) policies. EITF 06-4
      requires an employer to recognize a liability and related compensation costs
      for
      future benefits that extend to postretirement periods. EITF 06-4 is effective
      for fiscal years beginning after December 15, 2007, with earlier application
      permitted. The Company is continuing to evaluate the impact of this consensus,
      which will require the Company to recognize an additional liability and
      compensation expense related to our BOLI policies.




In
      September 2006, the FASB ratified the consensus reached by the EITF in Issue
      06-5, *Accounting
      for Purchases of Life Insurance - Determining the Amount That Could Be Realized
      in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases
      of
      Life Insurance* .
      Technical Bulletin No. 85-4 states that an entity should report as an asset
      in
      the statement of financial position the amount that could be realized under
      the
      insurance contract. EITF 06-5 clarifies certain factors that should be
      considered in the determination of the amount that could be realized. EITF
      06-5
      is effective for fiscal years beginning after December 15, 2006, with earlier
      application permitted under certain circumstances. The Company is continuing
      to
      evaluate the impact of this consensus, but does not expect that the guidance
      will have a material effect on the Company’s consolidated financial position or
      results of operations.




In
      September 2006, the FASB issued FASB Statement No. 157, *Fair
      Value Measurements* ,
      which
      defines fair value, establishes a framework for measuring fair value under
      GAAP,
      and expands disclosures about fair value measurements. FASB Statement
      No. 157 applies to other accounting pronouncements that require or permit
      fair value measurements. The new guidance is effective for financial statements
      issued for fiscal years beginning after November 15, 2007, and for interim
      periods within those fiscal years. We are currently evaluating the potential
      impact, if any, of the adoption of FASB Statement No. 157 on our
      consolidated financial position or results of operations.




In
      September 2006, the FASB issued SFAS No. 158, *Employers’
      Accounting for Defined Benefit Pension and Other Postretirement Plans - an
      amendment of FASB Statements No. 87, 88, 106, and 132(R)* .
      This
      statement which amends SFAS No. 87 and SFAS No. 106 to require recognition
      of
      the overfunded or underfunded status of pension and other postretirement benefit
      plans on the balance sheet. Under SFAS No. 158, gains and losses, prior service
      costs and credits, and any remaining transition amounts under SFAS No. 87 and
      SFAS No. 106 that have not yet been recognized through net periodic benefit
      cost
      will be recognized in accumulated other comprehensive income, net of tax
      effects, until they are amortized as a component of net periodic cost. The
      measurement date — the date at which the benefit obligation and plan assets are
      measured — is required to be the company’s fiscal year end. SFAS No. 158 is
      effective for publicly-held companies for fiscal years ending after
      December 15, 2006, except for the measurement date provisions, which are
      effective for fiscal years ending after December 15, 2008. The Company
      adopted SFAS No. 158 as of December 31, 2006.




44


The
      Company maintains a nonqualified, unfunded, defined benefit pension plan for
      the
      Board of Directors and certain officers that is more fully described in Note
      14
      of the notes to the Company’s consolidated financial statements included in Item
      8 of this Form 10-K. The incremental effect of applying SFAS No. 158 to this
      plan on individual line items in the consolidated statement of financial
      condition as of December 31, 2006 is as follows:




**Before
                  Application**
                **of
                  SFAS No. 158**
              
              **Adjustments**
              
              **After
                  Application of**
                **SFAS
                  No. 158**Deferred
                  tax asset
              
              $
              2,536,432
              
              $
              272,284
              
              $
              2,808,716Total
                  assets
              
              
              924,913,998
              
              
              272,284
              
              
              925,186,282Accounts
                  payable and accrued expenses
              
              
              4,078,549
              
              
              800,836
              
              
              4,879,385Total
                  liabilities
              
              
              810,283,222
              
              
              800,836
              
              
              811,084,058Accumulated
                  other comprehensive loss
              
              
              (2,081,848
              )
              
              (528,552
              )
              
              (2,610,400
              )Total
                  stockholders’ equity
              
              
              114,630,776
              
              
              (528,552
              )
              
              114,102,224




In
      September 2006, the SEC issued SAB No. 108, *Considering
      the Effects of Prior Year Misstatements When Quantifying Misstatements in
      Current Year Financial Statements* .
      SAB No.
      108 provides interpretive guidance on how the effects of the carryover or
      reversal of prior year misstatements should be considered in quantifying a
      potential current year misstatement. Prior to SAB No. 108, companies might
      evaluate the materiality of financial-statement misstatements using either
      the
      income statement or balance sheet approach, with the income statement approach  focusing
      on new misstatements added in the current year, and the balance sheet approach
      focusing on the cumulative amount of misstatement present in a company’s balance
      sheet. Misstatements that would be material under one approach could be viewed
      as immaterial under another approach, and not be corrected. SAB No. 108 now
      requires that companies view financial statement misstatements as material
      if
      they are material according to either the income statement or balance sheet
      approach. The Company adopted SAB No. 108 as of December 31, 2006, and such
      adoption had no impact on our reported financial position or results of
      operations.




In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* .
      This
      statement permits entities to choose to measure many financial instruments
      and
      certain other items at fair value. An entity shall report unrealized gains
      and
      losses on items for which the fair value option has been elected in earnings
      at
      each subsequent reporting date. This statement is effective as of the beginning
      of an entity’s first fiscal year that begins after November 15, 2007. Early
      adoption is permitted as of the beginning of a fiscal year that begins on or
      before November 15, 2007, provided the entity also elects to apply the
      provisions of SFAS No.157. We are currently evaluating the potential impact,
      if
      any, of the adoption of FASB Statement No. 159 on our consolidated
      financial position or results of operations.




**COMPARISON
      OF FINANCIAL CONDITION AT DECEMBER 31, 2006 AND DECEMBER 31,
      2005**




The
      Company’s total assets increased $81.1 million, or 9.6%, to $925.2 million at
      December 31, 2006 compared to $844.1 million at December 31, 2005. The primary
      reason for the increase in total assets during 2006 was a $75.6 million or
      14.3%
      increase in net loans receivable. The largest loan growth occurred in one-
      to
      four-family residential loans, which increased $52.0 million or 16.1% and
      multi-family residential and commercial loans, which increased $15.8 million
      or
      20.6%. Additionally, construction loans increased $2.2 million or 1.6%. These
      increases were partially offset by a $7.1 million decrease in home equity lines
      of credit. Also contributing to the overall increase in assets during 2006
      was
      an increase in property and equipment, net, of $2.4 million or 36.8%, primarily
      as a result of increased investment in our new branches. The first of these
      branches opened in April 2006 in Warrington, Pennsylvania, and was followed
      by
      the opening of another branch in Concordville, Pennsylvania in October 2006.
      An
      additional branch in Lansdale, Pennsylvania opened in January 2007, and will
      be
      followed by the opening of two more branches in Springhouse and Chalfont,
      Pennsylvania by mid-2007. These increases in assets in 2006 were somewhat offset
      by a decrease in investment and mortgage-backed securities of $17.5 million
      in
      the aggregate, which occurred as a portion of the cash proceeds received on
      maturing and repaying securities were reinvested into new loans.





45




Our
      total
      deposits increased $85.8 million or 17.1% to $587.0 million at December 31,
      2006
      compared to $501.2 million at December 31, 2005. The increase was due to an
      increase in certificate accounts of $102.9 million and checking accounts of
      $5.6
      million that was partially offset by a decrease in savings and money market
      accounts of $22.6 million. The shift towards higher-rate certificates of deposit
      was a result of the increased rates available on those products relative to
      other deposit products and other investments in the current interest rate
      environment.





Our
      stockholders’ equity decreased $3.1 million to $114.1 million at December 31,
      2006 compared to $117.2 million at December 31, 2005. The decrease was primarily
      due to the purchase of approximately 582,000 shares of the Company’s common
      stock for an aggregate of $8.3 million as part of the Company’s stock repurchase
      program announced in January 2006. The payment of the Company’s quarterly cash
      dividends of $0.05 per share in March 2006 and $0.06 per share in June,
      September and December 2006 reduced retained earnings by $3.4 million, but
      this
      was offset by our $6.8 million of net income for 2006, resulting in a net
      increase to retained earnings of $3.4 million.




**LIQUIDITY
      AND CAPITAL RESOURCES**





Our
      primary sources of funds are from deposits, amortization of loans, loan
      prepayments and pay-offs, mortgage-backed securities and other investments,
      and
      other funds provided from operations. While scheduled payments from the
      amortization of loans and mortgage-backed securities and maturing investment
      securities are relatively predictable sources of funds, deposit flows and loan
      prepayments can be greatly influenced by general interest rates, economic
      conditions and competition. We also maintain excess funds in short-term,
      interest-bearing assets that provide additional liquidity. At December 31,
      2006,
      our cash and cash equivalents amounted to $44.6 million. In addition, at that
      date we had $16.8 million in investment securities scheduled to mature within
      the next 12 months. Our available for sale investment and mortgage-backed
      securities amounted to an aggregate of $152.5 million at December 31,
      2006.





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, 2006,
      we had certificates of deposit maturing within the next 12 months of $260.6
      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, 2006 and 2005, the average balance of our outstanding
      Federal Home Loan Bank (“FHLB”) advances was $201.8 million and $192.2 million,
      respectively. At December 31, 2006, we had $196.3 million in outstanding FHLB
      advances and we had $372.8 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.





46




Our
      stockholders’ equity amounted to $114.1 million at December 31, 2006, a decrease
      of $3.1 million from stockholders’ equity of $117.2 million at December 31,
      2005. The decrease was primarily due to the purchase of approximately 582,000
      shares of the Company’s common stock for an aggregate of $8.3 million as part of
      the Company’s stock repurchase program announced in January 2006. We believe
      that the stock repurchase program benefits our shareholders by improving the
      Company’s return on equity and earnings per share and, at the same time, aids us
      in managing our strong capital position. Our quarterly stock dividend was
      increased in the second quarter of 2006 from $0.05 per share to $0.06 per share
      or an aggregate of $3.4 million for the year ended December 31, 2006.
      Approximately one half of our net income of $6.8 million for 2006 was paid
      out
      in dividends to shareholders, resulting in a net increase to our retained
      earnings of $3.4 million. Our long-term plan is to leverage our capital through
      retail deposit and loan growth. Towards this goal, we opened three new branches
      in 2006 and January 2007, and we anticipate the opening of two additional
      branches by mid-2007. We look forward to continuing our growth as we undertake
      our recently announced second-step conversion. The capital we will raise through
      this conversion and stock offering will increase the liquidity in our common
      stock and support our future growth. For further information on our second-step
      conversion see Note 20 in the Notes to the Consolidated Financial Statements
      in
      Item 8 herein.





The
      following table summarizes the Company’s and the Bank’s regulatory capital
      ratios as of the dates indicated and compares them to current regulatory
      requirements.




Actual
                Ratios At
              December
                31,
            
            Regulatory
                Minimum
            
            To
                Be Well Capitalized2006
            
            2005**Capital
                Ratios**:Tier
                1 leverage ratioThe
                Company
            
            
            12.80
            %
            
            14.28
            %
            
            4.00
            %
            
            N/AThe
                Bank
            
            
            10.54
            
            
            10.46
            
            
            4.00
            
            
            5.00
            %Tier
                1 risk-based capital ratioThe
                Company
            
            
            20.01
            
            
            23.19
            
            
            4.00
            
            
            N/AThe
                Bank
            
            
            16.49
            
            
            16.93
            
            
            4.00
            
            
            6.00Total
                risk-based capital ratioThe
                Company
            
            
            20.29
            
            
            23.47
            
            
            8.00
            
            
            N/AThe
                Bank
            
            
            16.77
            
            
            17.21
            
            
            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, 2006, 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.





47




At
      December 31, 2006 and 2005, the Company was not party to any cap or swap
      agreements. The Company was previously party to two swap agreements with terms
      expiring in June 2005 and December 2005, respectively.




The
      swaps
      we held in 2005 and 2004 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
      consolidated statements of financial condition when in existence with the offset
      recorded in loss on derivative instruments, net in the consolidated statements
      of income. Amounts paid or received under the cap or swap agreement were
      recognized in gain (loss) on derivative instruments, net in the Company’s
      consolidated statements of income during the period in which they accrued.
      During the year ended December 31, 2005, the Company received $13,000 from
      the
      contra parties under the agreements. During the year ended December 31, 2004,
      the Company paid $641,000 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 and $501,000 for the years ended December 31, 2005 and 2004,
      respectively. No interest was received from or paid to the contra party during,
      and no unrealized gains or losses were recognized for, the year ended December
      31, 2006.




**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.




The
      Company has two stock-based compensation plans, the 2005 Recognition and
      Retention Plan (the “RRP”) and the 2005 Stock Option Plan. Share awards were
      first issued under these plans in July 2005.




The
      estimated fair value of options granted to executive officers during 2005 was
      $3.07 per share. No options were granted to executive officers during 2006.
      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,****2006**
              
              **2005**Dividend
                  yield
              
              
              n/a
              
              
              1.67
              %Expected
                  volatility
              
              
              n/a
              
              
              23.62
              %Risk-free
                  interest rate
              
              
              n/a
              
              
              3.98
                  - 4.05
              %Expected
                  life of options
              
              
              n/a
              
              
              6
                  -
                  7 years




During
      the years ended December 31, 2006 and 2005, approximately $370,000 and $181,000,
      respectively, was recognized in compensation expense for the Option Plan. At
      December 31, 2006, approximately $1.4 million in additional compensation expense
      for awarded options remained unrecognized. At December 31, 2006, the weighted
      average period over which this expense is scheduled to be recognized is
      approximately 3.5 years.





48




During
      the years ended December 31, 2006 and 2005, we recognized approximately $680,000
      and $333,000, respectively, in compensation expense related to the amortization
      of RRP shares. No expense was recognized in 2004. As of December 31, 2006,
      approximately $2.4 million in additional compensation expense is scheduled
      to be
      recognized over the remaining lives of the RRP awards. At December 31, 2006,
      the
      weighted average remaining lives of the RRP awards was approximately 3.5
      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 approximately $563,000 and $475,000
      in compensation expense due to the ESOP in the years ended December 31, 2006
      and
      2005, respectively.





For
      a
      further discussion of these plans, see Note 14 in the Notes to the Consolidated
      Financial Statements elsewhere herein.





**COMMITMENTS
      AND OFF-BALANCE SHEET ARRANGEMENTS**





We
      are a
      party to financial instruments with off-balance sheet risk in the normal course
      of business to meet the financing needs of our customers. These financial
      instruments include commitments to extend credit and the unused portions of
      lines of credit. These instruments involve, to varying degrees, elements of
      credit and interest rate risk in excess of the amount recognized in the
      consolidated statements of financial condition. Commitments to extend credit
      and
      lines of credit are not recorded as an asset or liability by us until the
      instrument is exercised. At December 31, 2006 and 2005, we had no commitments
      to
      originate loans for sale.





Commitments
      to extend credit are agreements to lend to a customer as long as there is no
      violation of any condition established in the loan agreement. Commitments
      generally have fixed expiration dates or other termination clauses and may
      require payment of a fee. Since many of the commitments are expected to expire
      without being drawn upon, the total commitment amounts do not necessarily
      represent future cash requirements. The Bank evaluates each customer's
      creditworthiness on a case-by-case basis. The amount of collateral obtained,
      if
      deemed necessary by the Bank upon extension of credit, is based on management's
      credit evaluation of the customer. The amount and type of collateral required
      varies, but may include accounts receivable, inventory, equipment, real estate
      and income-producing commercial properties. At December 31, 2006 and 2005,
      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 $118.1 million and $125.2 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, 2006 and December 31, 2005, the Bank
      had
      letters of credit outstanding of approximately $16.3 million and $14.1 million,
      respectively, of which $14.8 million and $12.5 million, respectively, were
      standby letters of credit. At December 31, 2006 and 2005, the uncollateralized
      portion of the letters of credit extended by the Bank was approximately $97,000
      and $169,000, respectively, of which $97,000 was for standby letters of credit
      in both years.





49




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, 2006, the exposure, which represents a portion of credit risk
      associated with the sold interests, amounted to $185,000. The exposure is for
      the life of the related loans and payable, on our proportional share, as losses
      are incurred.




We
      anticipate that we will continue to have sufficient funds and alternative
      funding sources to meet our current commitments.





The
      following tables summarize our outstanding commitments to originate loans and
      to
      advance additional amounts pursuant to outstanding letters of credit, lines
      of
      credit and under our construction loans at December 31, 2006.





Amount
                of Commitment Expiration - Per PeriodTotal
                Amounts
              Committed
            
            To
              One
                Year
            
            After
                One
              to
                Three
              Years
            
            After
                Three
              to
                Five
              Years
            
            After
                Five
              Years(In
                Thousands)Letters
                of credit
            
            $
            16,327
            
            $
            15,328
            
            $
            994
            
            $
            —
            
            $
            5Recourse
                obligations on loans sold
            
            
            185
            
            
            —
            
            
            —
            
            
            —
            
            
            185Commitments
                to originate loans
            
            
            3,622
            
            
            3,622
            
            
            —
            
            
            —
            
            
            —Unused
                portion of home equitylines
                of credit
            
            
            22,382
            
            
            —
            
            
            —
            
            
            —
            
            
            22,382Unused
                portion of commerciallines
                of credit
            
            
            46,762
            
            
            46,762
            
            
            —
            
            
            —
            
            
            —Undisbursed
                portion ofconstruction
                loans in process
            
            
            45,338
            
            
            27,617
            
            
            17,721
            
            
            —
            
            
            —Total
                commitments
            
            $
            134,616
            
            $
            93,329
            
            $
            18,715
            
            $
            —
            
            $
            22,572




50


The
      following tables summarize our contractual cash obligations at December 31,
      2006.





Payments
                Due By PeriodTotal
            
            To
              One
                Year
            
            After
                One
              to
                Three
              Years
            
            After
                Three
              to
                Five
              Years
            
            After
                Five
              Years(In
                Thousands)Certificates
                of deposit
            
            $
            388,973
            
            $
            260,645
            
            $
            103,603
            
            $
            10,637
            
            $
            14,088FHLB
                advances
            
            
            196,293
            
            
            33,681
            
            
            52,622
            
            
            84,558
            
            
            25,432Repurchase
                agreements
            
            
            17,781
            
            
            17,781
            
            
            —
            
            
            —
            
            
            —Total
                debt
            
            
            214,074
            
            
            51,462
            
            
            52,622
            
            
            84,558
            
            
            25,432Operating
                lease obligations
            
            
            6,965
            
            
            713
            
            
            1,242
            
            
            1,145
            
            
            3,865Total
                contractual obligations
            
            $
            610,012
            
            $
            312,820
            
            $
            157,467
            
            $
            96,340
            
            $
            43,385




**COMPARISON
      OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND
      2005**





**General.** We
      had
      net income of $6.8 million for the year ended December 31, 2006, representing
      an
      increase of $500,000 or 7.9% over net income of $6.3 million for the year ended
      December 31, 2005. Diluted earnings per share increased to $0.45 for 2006 from
      $0.41 for 2005. Our net interest income improved by $1.5 million or 7.3% to
      $22.6 million for 2006 from $21.0 million for 2005. The improvement was
      primarily a result of an increase in the average balance of our loan portfolio
      combined with an increase in the average yield on those assets. This increase
      was partially offset by an increase in the average balance of and average rate
      paid on deposits. Our average interest rate spread and net interest margin
      for
      2006 decreased to 2.13% and 2.68%, respectively, from 2.27% and 2.78%,
      respectively, for 2005. Our non-interest income improved $78,000 or 2.8% to
      $2.9
      million for 2006 from $2.8 million for 2005. Our non-interest expense also
      increased, growing $771,000 or 5.1% to $15.7 million for 2006 from $15.0 million
      for 2005.





**Interest
      Income.** Interest
      income was $49.8 million for the year ended December 31, 2006, an increase
      of
      $9.8 million or 24.5% from $40.0 million of interest income for the year ended
      December 31, 2005. The average balance of our interest-bearing assets increased
      $85.8 million or 11.4% to $840.5 million for 2006 compared to $754.7 million
      for
      2005. The average yield on our interest-bearing assets increased 63 basis points
      to 5.93% for 2006 compared to 5.30% for 2005. The increase in interest income
      in
      2006 was primarily a result of growth in the average balance of our loan
      portfolio. The average balance of our loan portfolio increased $101.8 million
      or
      21.7% to $570.9 million for the year ended December 31, 2006 from $469.1 million
      for the year ended December 31, 2005. Additionally, the average yield on our
      loan portfolio increased 53 basis points to 6.77% for 2006 from 6.24% for 2005.
      The asset growth has been a result of the Company’s strategic plan to leverage
      our capital through loan growth. The growth of the loan portfolio was partially
      offset by a $22.6 million or 13.6% decrease in the average balance of our
      mortgage-backed securities to $143.7 million for 2006 from $166.3 million for
      2005.





51




**Interest
      Expense.** Interest
      expense increased $8.3 million or 43.5% to $27.3 million for the year ended
      December 31, 2006 compared to $19.0 million for the year ended December 31,
      2005. The increase in interest expense for 2006 was primarily the result of
      increases in the average balance of, and average rate paid on, deposits. During
      the year ended December 31, 2006 compared to the year ended December 31, 2005,
      our average deposit balance grew by $80.1 million or 19.3%, primarily due to
      growth in higher-rate certificates of deposit. The average balance of our
      certificates of deposit increased $102.8 million or 43.4% to $339.7 million
      for
      2006 from $237.0 million for 2005. The growth in certificates of deposit was
      a
      result of higher market rates of interest on certificates of deposit relative
      to
      other deposit products and other investments in the current interest rate
      environment. The average rate we paid on our certificate of deposits increased
      106 basis points to 4.60% for 2006 from 3.54% for 2005. As a result of the
      increase in our certificates of deposit as a proportion of our total deposits,
      as well as the rising interest rate environment, the average rate we paid on
      all
      of our deposits increased 101 basis points to 3.39% for 2006 from 2.38% for
      2005.  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. In fact, our core deposits have
      decreased as a percentage of total deposits during the past three years. Also
      contributing to the increase in interest expense in 2006 compared to 2005 was
      a
      $9.6 million or 5.6% increase in the average balance of our FHLB advances to
      $201.8 million for 2006 compared to $192.2 million for 2005. The average rate
      on
      our FHLB advances increased 27 basis points to 4.78% for 2006 from 4.51% for
      2005.




52


**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 31,2006
            
            2005Average
              Balance
            
            **Interest**
            ****
            **Average**
              **Yield/Rate**
            ****
            **Average**
              **Balance**
            ****
            **Interest**
            ****
            **Average**
              **Yield/Rate**(Dollars
                in Thousands)Interest-earning
                assets:Investment
                securities(1)
            
            $
            100,211
            
            $
            4,005
            
            
            4.00
            %
            $
            96,786
            
            $
            3,250
            
            
            3.36
            %Mortgage-backed
                securities
            
            
            143,664
            
            
            6,031
            
            
            4.20
            
            
            166,309
            
            
            6,869
            
            
            4.13Loans
                receivable(2)
            
            
            570,850
            
            
            38,633
            
            
            6.77
            
            
            469,076
            
            
            29,283
            
            
            6.24Other
                interest-earning
                assets
            
            
            25,809
            
            
            1,149
            
            
            4.45
            
            
            22,551
            
            
            609
            
            
            2.70Total
                interest-earning
                assets
            
            
            840,534
            
            
            49,818
            
            
            5.93
            %
            
            754,722
            
            
            40,011
            
            
            5.30
            %Cash
                and non-interest bearing
              balances
            
            
            19,095
            
            
            
            
            
            
            
            
            20,413Other
                non-interest-earning
                assets
            
            
            25,617
            
            
            
            
            
            
            
            
            21,556Total
                assets
            
            $
            885,246
            
            
            
            
            
            
            
            $
            796,691Interest-bearing
                liabilities:Deposits:Savings
                and money market
                accounts
            
            $
            101,755
            
            
            1,129
            
            
            1.11
            %
            $
            125,834
            
            
            1,412
            
            
            1.12
            %Checking
                accounts
            
            
            53,676
            
            
            11
            
            
            0.02
            
            
            52,282
            
            
            66
            
            
            0.13Certificate
                accounts
            
            
            339,712
            
            
            15,634
            
            
            4.60
            
            
            236,962
            
            
            8,391
            
            
            3.54Total
                deposits
            
            
            495,143
            
            
            16,774
            
            
            3.39
            
            
            415,078
            
            
            9,869
            
            
            2.38FHLB
                advances
            
            
            201,810
            
            
            9,656
            
            
            4.78
            
            
            192,189
            
            
            8,668
            
            
            4.51Other
                borrowings
            
            
            20,155
            
            
            838
            
            
            4.16
            
            
            20,198
            
            
            462
            
            
            2.29Total
                interest-bearing liabilities
            
            
            717,108
            
            $
            27,268
            
            
            3.80
            %
            
            627,465
            
            $
            18,999
            
            
            3.03
            %Non-interest-bearing
                liabilities:Non-interest-bearing
                demand
              accounts
            
            
            42,191
            
            
            
            
            
            
            
            
            39,900Real
                estate tax escrow
                accounts
            
            
            2,528
            
            
            
            
            
            
            
            
            2,263Other
                liabilities
            
            
            8,831
            
            
            
            
            
            
            
            
            7,406Total
                liabilities
            
            
            770,658
            
            
            
            
            
            
            
            
            677,034Stockholders’
equity
            
            
            114,588
            
            
            
            
            
            
            
            
            119,657Total
                liabilities and stockholders’
              equity
            
            $
            885,246
            
            
            
            
            
            
            
            $
            796,691Net
                interest-earning
                assets
            
            $
            123,426
            
            
            
            
            
            
            
            $
            127,257Net
                interest income; average
              Interest
                rate spread
            
            
            
            
            $
            22,550
            
            
            2.13
            %
            
            
            
            $
            21,012
            
            
            2.27
            %Net
                interest margin(3)
            
            
            
            
            
            
            
            
            2.68
            %
            
            
            
            
            
            
            
            2.78
            %





(1)
            Investment
                securities for the 2006 period include 47 non-taxable municipal bonds
                with
                an aggregate average balance of $20.4 million and an average yield
                of
                4.2%. 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%. The tax-exempt income from such securities
                has not
                been calculated on a tax equivalent
                basis.


(2)
            Includes
                non-accrual loans during the respective periods. Calculated net of
                deferred fees and discounts, loans in process and allowance for loan
                losses. The impact of loan fee income has an immaterial effect on
                this
                analysis.





(3)
            Equals
                net interest income divided by average interest-earning
                assets.




53




**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.





**2006
                vs. 2005**
            ********
            ****
            **Increase
                (Decrease) Due to**
            ****
            ****
            ********
            ****
            **Rate**
            ****
            **Volume**
            ****
            **Rate/**
              **Volume**
            ****
            **Total
                Increase**
              **(Decrease)**(Dollars
                in Thousands)Interest
                income:Investment
                securities(1)
            
            $
            618
            
            $
            115
            
            $
            22
            
            $
            755Mortgage-backed
              securities
            
            
            113
            
            
            (935
            )
            
            (16
            )
            
            (838
            )Loans
                receivable,
                net
            
            
            2,462
            
            
            6,353
            
            
            535
            
            
            9,350Other
                interest-
              earning
                assets
            
            
            395
            
            
            88
            
            
            57
            
            
            540Total
                interest-
              earning
                assets
            
            
            3,588
            
            
            5,621
            
            
            598
            
            
            9,807Interest
                expense:Savings
                accounts
            
            
            (16
            )
            
            (270
            )
            
            3
            
            
            (283
            )Checking
                accounts
            
            
            (55
            )
            
            2
            
            
            (2
            )
            
            (55
            )Certificate
                accounts
            
            
            2,514
            
            
            3,638
            
            
            1,091
            
            
            7,243Total
                deposits
            
            
            2,443
            
            
            3,370
            
            
            1,092
            
            
            6,905FHLB
                advances
            
            
            528
            
            
            434
            
            
            26
            
            
            988Other
                borrowings
            
            
            378
            
            
            (1
            )
            
            (1
            )
            
            376Total
                interest-
              bearing
                liabilities
            
            
            3,349
            
            
            3,803
            
            
            1,117
            
            
            8,269Increase
                in net interest
              income
            
            $
            239
            
            $
            1,818
            
            $
            (519
            )
            $
            1,538







(1)
                Investment
                    securities for the 2006 period include 47 non-taxable municipal
                    bonds with
                    an aggregate averagebalance
                    of $20.4 million and an average yield of 4.2%. Investment securities
                    for
                    the 2005 period include 47non-taxable
                    municipal bonds with an aggregate average balance of $16.3 million
                    and an
                    average yield of 4.2%.The
                    tax-exempt income from such securities has not been calculated
                    on a tax
                    equivalent basis.





**Provision
      for Loan Losses.** We made
      a $186,000 provision for loan losses for the year ended December 31, 2006
      compared to a provision of $25,000 for the year ended December 31, 2005. 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 2006 was primarily
      the
      result of growth in the loan portfolio. At December 31, 2006, we held
      an aggregate of $2.3 million of loans to one borrower, consisting of
      construction and commercial real estate loans, that were placed on non-accrual
      status in the fourth quarter and were determined to be impaired. The loans
      were
      placed on nonaccrual status as certain loans had become over 90 days delinquent.
      We have obtained a confessed judgment against the borrower, which provides
      us
      with additional collateral securing the loans. We also obtained current
      appraisals of the underlying collateral properties, which support the full
      value
      of the loans. Based on the value of the properties, as well as the additional
      collateral available, we do not expect to incur any losses on the loans to
      this
      borrower.  As
      such,
      no allowance for loan losses was established for these loans as a result of
      our
      measurement of impaired loans at December 31, 2006.At December 31, 2006,
      non-performing loans amounted to 0.42% of loans receivable and our allowance
      for
      loan losses amounted to 62.69% of non-performing loans.





54


**Non-interest
      Income.** Our
      total non-interest income amounted to $2.9 million for the year ended December
      31, 2006 compared to $2.8 million for year ended December 31, 2005, an increase
      of $78,000 or 2.8%. This increase was due in part to a $186,000 increase in
      income on bank owned life insurance (“BOLI”). Our BOLI is expected to continue
      to generate positive income going forward and is intended to fund various
      employee benefit programs of the Company. Additionally, non-interest income
      improved due to the fact that no impairment charge was recorded on our
      investment securities in 2006 whereas a $73,000 impairment charge on investment
      securities was recorded in 2005. The impaired securities were sold for a loss
      in
      the first quarter of 2006. 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 and further impairment charges are not
      expected in 2007. The increases in income in bank owned life insurance and
      impairment charge on investment securities were partially offset by a $98,000
      decrease in the gain on derivative instruments, net, as our final swap agreement
      expired in December 2005, as well as a $60,000 decrease in service charge
      income.





**Non-interest
      Expense.** Our
      total non-interest expense for the year ended December 31, 2006 amounted to
      $15.7 million, representing an increase of $771,000 or 5.1% from the year ended
      December 31, 2005. Decreases in occupancy expense and professional services
      expense were offset by increases in other expense categories. The largest
      increases in expense for 2006 compared to 2005 were in salaries and employee
      benefits expense, depreciation expense, data processing expense and other
      non-interest expense. The decrease in professional services expense of $224,000
      for 2006 compared to 2005 was primarily the result of decreased audit
      fees.  No such decrease is expected for 2007. Salaries and employee
      benefits expense increased $662,000 or 8.3% for the year ended December 31,
      2006
      compared to the year ended December 31, 2005. This increase was primarily due
      to
      additional expenses of $379,000 in the aggregate relating to the Company’s 2005
      Stock Option Plan (“SOP”) and 2005 Recognition and Retention Plan (“RRP”), both
      of which began in the third quarter of 2005. The aggregate expense for these
      plans is expected to remain relatively consistent in 2007, but is anticipated
      to
      increase in future years in light of our plans to implement new stock option
      and
      stock recognition and retention plans. The remainder of the increase in salaries
      and employee benefits expense was primarily due to growth in the total number
      of
      employees from 134 total employees at December 31, 2005 to 148 total employees
      at December 31, 2006, primarily due to the opening of additional branch offices.
      In addition, salaries and employee benefits expense increased due to normal
      merit increases in salaries, higher health and insurance benefit costs, and
      an
      increase in the expense for our ESOP, partially offset by a decrease in the
      total year-end bonuses paid. 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. We also anticipate
      an
      increase in the expense for our ESOP which is based on the market price of
      our
      stock, in light of the additional shares to be purchased by the ESOP in the
      second-step conversion and offering. Depreciation expense for 2006 compared
      to
      2005 increased $152,000 or 29.3%. The increase for the full year was primarily
      due to our new branch office facilities. We expect a further increase in
      depreciation expense in 2007 as a result of these new branches and additional
      branches expected to open in 2007. Data processing expense for 2006 compared
      to
      2005 increased $79,000 or 6.5%, primarily due to the increase in our deposit
      and
      loan accounts and transactions and our additional branch offices. This expense
      is also expected to increase for 2007 as our deposit and loan activity increases
      and additional branch offices are added. Additional expenses of approximately
      $158,000 were recognized in other non-interest expense for SOP and RRP awards
      to
      directors in 2006, but were somewhat offset by decreases in various other
      categories of other non-interest expense. The aggregate expense for SOP and
      RRP
      awards to directors is expected to remain relatively consistent in 2007.





55


**Income
      Tax Expense.** Income
      tax expense for the year ended December 31, 2006 amounted to $2.7 million
      compared to $2.5 million for the year ended December 31, 2005. The fluctuation
      in income tax expense from year to year is primarily the result of an increase
      in our pre-tax income. Our effective tax rate improved slightly to 28.4% for
      the
      year ended December 31, 2006 from 28.5% for the year ended December 31, 2005.





**COMPARISON
      OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2005 AND
      2004**





**General.** We
      had
      net income of $6.3 million for the year ended December 31, 2005, representing
      an
      increase of $1.7 million or 38.4% over net income of $4.6 million for the year
      ended December 31, 2004. Earnings per share was $0.41 for the year ended
      December 31, 2005. Our net interest income improved by $4.4 million or 26.3%
      to
      $21.0 million for 2005 from $16.6 million for 2004. The improvement was
      primarily a result of an increase in the average balances of our interest
      earning assets, most notably loans, combined with increases in the average
      yields on those assets. These increases were partially offset by increases
      in
      the average balances of our interest bearing liabilities and the rates paid
      on
      those liabilities. Overall, our net interest margin improved 11 basis points
      to
      2.78% for 2005 from 2.67% for 2004, although our average interest rate spread
      decreased slightly to 2.27% for 2005 from 2.30% for 2004. Our non-interest
      income improved $555,000 or 24.7% to $2.8 million for 2005 from $2.2 million
      for
      2004. The increase was due primarily to an improvement in our gain (loss) on
      derivative instruments, net and income on bank owned life insurance, which
      was
      purchased in 2005. Our non-interest expense also increased, growing $3.0 million
      or 24.6% to $15.0 million for 2005 from $12.0 million for 2004. The increase
      was
      due primarily to increases in 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 million 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 $132.0 million or 21.2% 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 in 2005 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 our 2004 initial public offering, in part, through loan
      growth. A substantial amount of the net proceeds invested in securities and
      deposits that yielded a market rate were redeployed into loans throughout
      2005.




56




**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. 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.




57




**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**
              **Balance**
            ****
            **Interest**
            ****
            **Average**
              **Yield/Rate**
            ****
            **Average**
              **Balance**
            ****
            **Interest**
            ****
            **Average**
              **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
            
            
            3.96Loans
                receivable(2)
            
            
            469,076
            
            
            29,283
            
            
            6.24
            
            
            384,990
            
            
            22,821
            
            
            5.93Other
                interest-earning
                assets
            
            
            22,551
            
            
            609
            
            
            2.70
            
            
            16,554
            
            
            184
            
            
            1.11Total
                interest-earning
                assets
            
            
            754,722
            
            
            40,011
            
            
            5.30
            %
            
            622,728
            
            
            30,849
            
            
            4.95
            %Cash
                and non-interest bearing
              balances
            
            
            20,413
            
            
            
            
            
            
            
            
            17,241Other
                non-interest-earning
                assets
            
            
            21,556
            
            
            
            
            
            
            
            
            11,157Total
                assets
            
            $
            796,691
            
            
            
            
            
            
            
            $
            651,126Interest-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
            
            
            0.08Certificate
                accounts
            
            
            236,962
            
            
            8,391
            
            
            3.54
            
            
            175,492
            
            
            5,452
            
            
            3.11Total
                deposits
            
            
            415,078
            
            
            9,869
            
            
            2.38
            
            
            349,044
            
            
            6,561
            
            
            1.88FHLB
                advances
            
            
            192,189
            
            
            8,668
            
            
            4.51
            
            
            169,699
            
            
            7,532
            
            
            4.44Other
                borrowings
            
            
            20,198
            
            
            462
            
            
            2.29
            
            
            17,703
            
            
            116
            
            
            0.66Total
                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
            
            
            
            
            
            
            
            
            45,861Real
                estate tax escrow
                accounts
            
            
            2,263
            
            
            
            
            
            
            
            
            2,204Other
                liabilities
            
            
            7,406
            
            
            
            
            
            
            
            
            6,028Total
                liabilities
            
            
            677,034
            
            
            
            
            
            
            
            
            590,539Stockholders’
equity
            
            
            119,657
            
            
            
            
            
            
            
            
            60,587Total
                liabilities and stockholders’
              equity
            
            $
            796,691
            
            
            
            
            
            
            
            $
            651,126Net
                interest-earning
                assets
            
            $
            127,257
            
            
            
            
            
            
            
            $
            86,282Net
                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
                non-accrual loans during the respective periods. Calculated net of
                deferred fees and discounts, loans in process and allowance for loan
                losses. The impact of loan fee income has an immaterial effect on
                this
                analysis.





(3)
            Equals
                net interest income divided by average interest-earning
                assets.





58


**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**
            ****
            ****
            ********
            ****
            **Rate**
            ****
            **Volume**
            ****
            **Rate/**
              **Volume**
            ****
            **Total
                Increase**
              **(Decrease)**(Dollars
                in Thousands)Interest
                income:Investment
                securities(1)
            
            $
            409
            
            $
            358
            
            $
            60
            
            $
            827Mortgage-backed
              securities
            
            
            232
            
            
            1,166
            
            
            50
            
            
            1,448Loans
                receivable,
                net
            
            
            1,213
            
            
            4,984
            
            
            265
            
            
            6,462Other
                interest-
              earning
                assets
            
            
            263
            
            
            67
            
            
            95
            
            
            425Total
                interest-
              earning
                assets
            
            
            2,117
            
            
            6,575
            
            
            470
            
            
            9,162Interest
                expense:Savings
                accounts
            
            
            290
            
            
            45
            
            
            12
            
            
            347Checking
                accounts
            
            
            22
            
            
            —
            
            
            —
            
            
            22Certificate
                accounts
            
            
            762
            
            
            1,910
            
            
            267
            
            
            2,939Total
                deposits
            
            
            1,074
            
            
            1,955
            
            
            279
            
            
            3,308FHLB
                advances
            
            
            122
            
            
            998
            
            
            16
            
            
            1,136Other
                borrowings
            
            
            289
            
            
            16
            
            
            41
            
            
            346Total
                interest-
              bearing
                liabilities
            
            
            1,485
            
            
            2,969
            
            
            336
            
            
            4,790Increase
                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 averagebalance
                of $16.3 million and an average yield of 4.2%. Investment securities
                for
                the 2004 period include 26non-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 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 taken during 2005 was primarily the result of growth in the loan
      portfolio. 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. The outstanding balance of this loan, including all past
      due interest and costs, was paid in full in April 2006.





**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. 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 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 in 2005 compared to 2004 was due to decreases in
      various categories of income.





59




**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 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. 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.
      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. 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.





**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.




**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET** **RISK**





**Asset/Liability
      Management and Market Risk.** Market
      risk is the risk of loss from adverse changes in market prices and rates. Our
      market risk arises primarily from the interest rate risk which is inherent
      in
      our lending and deposit taking activities. To that end, management actively
      monitors and manages interest rate risk exposure. In addition to market risk,
      our primary risk is credit risk on our loan portfolio. We attempt to manage
      credit risk through our loan underwriting and oversight policies.





The
      principal objective of our interest rate risk management function is to evaluate
      the interest rate risk embedded in certain balance sheet accounts, determine
      the
      level of risk appropriate given our business strategy, operating environment,
      capital and liquidity requirements and performance objectives, and manage the
      risk consistent with approved guidelines. We seek to manage our exposure to
      risks from changes in interest rates while at the same time trying to improve
      our net interest spread. We monitor interest rate risk as such risk relates
      to
      our operating strategies. We have established an Asset/Liability Committee
      at
      Abington Bank, which is comprised of our President and Chief Executive Officer,
      three Senior Vice Presidents and two Vice Presidents of Lending, and which
      is
      responsible for reviewing our asset/liability policies and interest rate risk
      position. The Asset/Liability Committee meets on a regular basis. The extent
      of
      the movement of interest rates is an uncertainty that could have a negative
      impact on future earnings.




60





In
      recent
      years, we primarily have utilized the following strategies in our efforts to
      manage interest rate risk:




·
            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;





·
            we
                have attempted to match fund a portion of our securities portfolio
                with
                borrowings having similar expected
                lives;





·
            we
                have attempted, where possible, to extend the maturities of our deposits
                and borrowings; and





·
            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 14.70% at December 31, 2006, compared to a negative 4.09% at
      December 31, 2005. We have become more liability sensitive in 2006 mainly as
      a
      result of increases in our short-term 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.





61




The
      following table sets forth the amounts of our interest-earning assets and
      interest-bearing liabilities outstanding December 31, 2006, 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, 2006, 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.





62





6
                Months
              or
                Less
            
            More
                than
              6
                Months
              to
                1 Year
            
            More
                than
              1
                Year
              to
                3 Years
            
            More
                than
              3
                Years
              to
                5 Years
            
            More
                than
              5
                Years
            
            Total
              Amount(Dollars
                in Thousands)Interest-earning
                assets(1):Loans
                receivable(2)
            
            $
            240,883
            
            $
            45,261
            
            $
            128,763
            
            $
            73,126
            
            $
            119,546
            
            $
            607,579Mortgage-backedsecurities
            
            
            24,690
            
            
            19,335
            
            
            48,168
            
            
            21,045
            
            
            22,525
            
            
            135,763Investment
                securities
            
            
            13,757
            
            
            6,100
            
            
            25,986
            
            
            18,000
            
            
            32,356
            
            
            96,199Other
                interest-earningassets
            
            
            33,670
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            33,670Total
                interest-earningassets
            
            
            313,000
            
            
            70,696
            
            
            202,917
            
            
            112,171
            
            
            174,427
            
            
            873,211Interest-bearing
                liabilities:Savings
                and money market accounts
            
            $
            13,913
            
            $
            13,913
            
            $
            35,108
            
            $
            16,154
            
            $
            14,227
            
            $
            93,315Checking
                accounts
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            59,527
            
            
            59,527Certificate
                accounts
            
            
            276,096
            
            
            70,330
            
            
            17,823
            
            
            10,636
            
            
            14,088
            
            
            388,973FHLB
                advances
            
            
            118,056
            
            
            9,605
            
            
            37,062
            
            
            11,409
            
            
            20,161
            
            
            196,293Other
                borrowed money
            
            
            17,781
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            17,781Total
                interest-bearingliabilities
            
            
            425,846
            
            
            93,848
            
            
            89,993
            
            
            38,199
            
            
            108,003
            
            
            755,889Interest-earning
                assets lessinterest-bearing
                liabilities
            
            $
            (112,846
            )
            $
            (23,152
            )
            $
            112,924
            
            $
            73,972
            
            $
            66,424
            
            $
            117,322Cumulative
                interest-ratesensitivity
                gap(3)
            
            $
            (112,846
            )
            $
            (135,998
            )
            $
            (23,074
            )
            $
            50,898
            
            $
            117,322Cumulative
                interest-rate gap as a percentage of total assets at December 31,
                2006
            
            
            (12.20
            )%
            
            (14.70
            )%
            
            (2.49
            )%
            
            5.50
            %
            
            12.68
            %Cumulative
                interest-earning assets as a percentage of cumulative interest-bearing
                liabilities at December 31, 2006
            
            
            73.50
            %
            
            73.83
            %
            
            96.22
            %
            
            107.86
            %
            
            115.52
            %







(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.
  63


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, 2006
      and reflects the changes to NPV as a result of immediate and sustained changes
      in interest rates as indicated.





Change
                in
              Interest
                Rates
            
            Net
                Portfolio Value
            
            NPV
                as % of Portfolio
              Value
                of AssetsIn
                Basis Points
              (Rate
                Shock)
            
            Amount
            
            $
                Change
            
            %
                Change
            
            NPV
                Ratio
            
            Change(Dollars
                in Thousands)200bp
            
            $
            102,537
            
            $
            (23,209
            )
            
            (18.46
            )%
            
            11.75
            %
            
            (239)bp100
            
            
            115,600
            
            
            (10,146
            )
            
            (8.07
            )
            
            12.86
            
            
            (128
            )Static
            
            
            125,746
            
            
            —
            
            
            —
            
            
            13.61
            
            
            —(100)
            
            
            121,608
            
            
            (4,138
            )
            
            (3.29
            )
            
            12.98
            
            
            (115
            )(200)
            
            
            106,949
            
            
            (18,797
            )
            
            (14.95
            )
            
            11.38
            
            
            (276
            )





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, 2006.





Change
                in Interest Rates in
              Basis
                Points (Rate Shock)
            
            Net
                Interest Income
            
            $
                Change
            
            %
                Change(Dollars
                in Thousands)200bp
            
            $
            22,063
            
            $
            (1,564
            )
            
            (6.62
            )%100
            
            
            22,959
            
            
            (668
            )
            
            (2.83
            )Static
            
            
            23,627
            
            
            —
            
            
            —(100)
            
            
            23,212
            
            
            (415
            )
            
            (1.76
            )(200)
            
            
            18,869
            
            
            (4,758
            )
            
            (20.14
            )





The
      above
      table indicates that as of December 31, 2006, 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, 2007 would be expected
      to
      decrease by $1.6 million or 6.62% to $22.1 million.


64


As
      is the
      case with the GAP Table, certain shortcomings are inherent in the methodology
      used in the above interest rate risk measurements. Modeling changes in NPV
      and
      NII require the making of certain assumptions which may or may not reflect
      the
      manner in which actual yields and costs respond to changes in market interest
      rates. In this regard, the models presented assume that the composition of
      our
      interest sensitive assets and liabilities existing at the beginning of a period
      remains constant over the period being measured and also assumes that a
      particular change in interest rates is reflected uniformly across the yield
      curve regardless of the duration to maturity or repricing of specific assets
      and
      liabilities. Accordingly, although the NPV measurements and net interest income
      models provide an indication of interest rate risk exposure at a particular
      point in time, such measurements are not intended to and do not provide a
      precise forecast of the effect of changes in market interest rates on net
      interest income and will differ from actual results.




65




**ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
      DATA**





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors and Stockholders of


Abington
      Community Bancorp, Inc. and subsidiaries:


Jenkintown,
      Pennsylvania





We
      have
      audited the accompanying consolidated statement of financial condition of
      Abington Community Bancorp, Inc. and subsidiaries (the “Company”) as of December
      31, 2006, and the related consolidated statements of income, stockholders’
equity and cash flows for the year then ended. These consolidated financial
      statements are the responsibility of the Company’s management. Our
      responsibility is to express an opinion on these consolidated financial
      statements based on our audit. The financial statements for the years ended
      December 31, 2005 and 2004 were audited by other auditors whose report,
      dated March 22, 2006, expressed an unqualified opinion on those
      statements.




We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether 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 audit 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 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 audit provides a reasonable basis
      for our opinion.




In
      our
      opinion, the 2006 consolidated financial statements referred to above present
      fairly, in all material respects, the financial position of Abington Community
      Bancorp, Inc. and subsidiaries as of December 31, 2006, and the results of
      their
      operations and their cash flows for the year then ended in conformity with
      accounting principles generally accepted in the United States of
      America.




As
      discussed in Note 14 to the consolidated financial statements, the Company
      changed its method of accounting for its defined benefit pension plan in
      2006.




/s/
      BEARD
      MILLER COMPANY LLP





Beard
      Miller Company LLP


Harrisburg,
      Pennsylvania


March 
      5, 2007




66




**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 statement of financial condition of
      Abington Community Bancorp, Inc. and subsidiaries (the “Company”) as of December
      31, 2005, and the related consolidated statements of income, stockholders'
      equity and cash flows for each of the two 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 the results of their operations and
      their
      cash flows for each of the two 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


(March
      5,
      2007 as to Note 20)




67







**ABINGTON
      COMMUNITY BANCORP, INC.**




**CONSOLIDATED
      STATEMENTS OF FINANCIAL CONDITION**




**December
                31, 2006**
            
            **December
                31, 2005****ASSETS**Cash
                and due from banks
            
            $
            22,136,438
            
            $
            19,460,237Interest-bearing
                bank balances
            
            
            22,428,814
            
            
            8,254,004Total
                cash and cash equivalents
            
            
            44,565,252
            
            
            27,714,241Investment
                securities held to maturity (estimated fairvalue—2006,
                $20,429,576; 2005, $20,316,775)
            
            
            20,393,430
            
            
            20,395,593Investment
                securities available for sale (amortized cost—2006,
                $75,834,898; 2005, $80,775,605)
            
            
            74,489,055
            
            
            78,828,696Mortgage-backed
                securities held to maturity (estimated fairvalue—2006,
                $53,957,015; 2005, $65,505,255)
            
            
            56,143,619
            
            
            67,410,735Mortgage-backed
                securities available for sale (amortized cost—2006,
                $79,831,266; 2005, $82,212,270)
            
            
            78,022,794
            
            
            79,943,379Loans
                receivable, net of allowance for loan losses(2006,
                $1,602,613; 2005, $1,454,510)
            
            
            605,062,980
            
            
            529,487,209Accrued
                interest receivable
            
            
            4,365,535
            
            
            3,475,350Federal
                Home Loan Bank stock—at cost
            
            
            11,240,700
            
            
            11,061,200Cash
                surrender value - bank owned life insurance
            
            
            16,184,256
            
            
            15,498,958Property
                and equipment, net
            
            
            8,908,910
            
            
            6,510,144Deferred
                tax asset
            
            
            2,808,716
            
            
            2,648,200Prepaid
                expenses and other assets
            
            
            3,001,035
            
            
            1,098,106TOTAL
                ASSETS
            
            $
            925,186,282
            
            $
            844,071,811**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**LIABILITIES:Deposits:Noninterest-bearing
            
            $
            45,186,397
            
            $
            43,333,286Interest-bearing
            
            
            541,815,163
            
            
            457,849,738Total
                deposits
            
            
            587,001,560
            
            
            501,183,024Advances
                from Federal Home Loan Bank
            
            
            196,293,273
            
            
            201,444,952Other
                borrowed money
            
            
            17,781,260
            
            
            16,113,949Accrued
                interest payable
            
            
            2,504,270
            
            
            1,909,234Advances
                from borrowers for taxes and insurance
            
            
            2,624,310
            
            
            2,384,314Accounts
                payable and accrued expenses
            
            
            4,879,385
            
            
            3,805,571Total
                liabilities
            
            
            811,084,058
            
            
            726,841,044COMMITMENTS
                AND CONTINGENCIESSTOCKHOLDERS’
                EQUITYPreferred
                stock, $0.01 par value, 10,000,000 shares authorized,none
                issued
            
            
            —
            
            
            —Common
                stock, $0.01 par value, 40,000,000 shares authorized,issued:
                15,870,000 in 2006 and 2005; outstanding:15,288,154
                in 2006 and 15,870,000 in 2005
            
            
            158,700
            
            
            158,700Additional
                paid-in capital
            
            
            69,674,243
            
            
            69,234,964Treasury
                stock—at cost, 581,546 shares
            
            
            (8,317,848
            )
            
            —Unallocated
                common stock held by:Employee
                Stock Ownership Plan (ESOP)
            
            
            (6,388,788
            )
            
            (6,880,236
            )Recognition
                & Retention Plan Trust (RRP)
            
            
            (2,606,781
            )
            
            (3,339,413
            )Deferred
                compensation plans trust
            
            
            (1,059,116
            )
            
            (1,050,000
            )Retained
                earnings
            
            
            65,252,214
            
            
            61,889,180Accumulated
                other comprehensive loss
            
            
            (2,610,400
            )
            
            (2,782,428
            )Total
                stockholders’ equity
            
            
            114,102,224
            
            
            117,230,767TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            925,186,282
            
            $
            844,071,811




See
        notes
        to consolidated financial statements.




68




**ABINGTON
        COMMUNITY BANCORP, INC.**


**CONSOLIDATED
        STATEMENTS OF INCOME**
  **Year
                  Ended December 31,****2006**
              
              **2005**
              
              **2004**INTEREST
                  INCOME:Interest
                  and fees on loans
              
              $
              38,633,459
              
              $
              29,282,683
              
              $
              22,820,635Interest
                  and dividends on investment andmortgage-backed
                  securitiesTaxable
              
              
              10,332,068
              
              
              10,041,615
              
              
              7,878,515Tax-exempt
              
              
              852,661
              
              
              686,357
              
              
              149,477Total
                  interest income
              
              
              49,818,188
              
              
              40,010,655
              
              
              30,848,627INTEREST
                  EXPENSE:Interest
                  on deposits
              
              
              16,773,531
              
              
              9,868,820
              
              
              6,561,036Interest
                  on Federal Home Loan Bank advances
              
              
              9,656,307
              
              
              8,668,118
              
              
              7,531,886Interest
                  on other borrowed money
              
              
              838,291
              
              
              461,892
              
              
              115,618Total
                  interest expense
              
              
              27,268,129
              
              
              18,998,830
              
              
              14,208,540NET
                  INTEREST INCOME
              
              
              22,550,059
              
              
              21,011,825
              
              
              16,640,087PROVISION
                  FOR LOAN LOSSES
              
              
              185,521
              
              
              25,000
              
              
              45,000NET
                  INTEREST INCOME AFTERPROVISION
                  FOR LOAN LOSSES
              
              
              22,364,538
              
              
              20,986,825
              
              
              16,595,087NON-INTEREST
                  INCOME:Service
                  charges
              
              
              1,719,437
              
              
              1,779,684
              
              
              1,846,622Rental
                  income
              
              
              33,056
              
              
              39,272
              
              
              52,327Gain
                  (loss) on derivative instruments, net
              
              
              —
              
              
              98,286
              
              
              (140,813
              )Income
                  on bank owned life insurance
              
              
              685,298
              
              
              498,958
              
              
              —Loss
                  on sale of investment securities
              
              
              (601
              )
              
              —
              
              
              —Impairment
                  charge on investment securities
              
              
              —
              
              
              (72,500
              )
              
              —Other
                  income
              
              
              438,956
              
              
              454,147
              
              
              484,682Total
                  non-interest income
              
              
              2,876,146
              
              
              2,797,847
              
              
              2,242,818NON-INTEREST
                  EXPENSES:Salaries
                  and employee benefits
              
              
              8,672,886
              
              
              8,010,642
              
              
              6,424,232Occupancy
              
              
              1,535,787
              
              
              1,643,621
              
              
              1,163,667Depreciation
              
              
              671,395
              
              
              519,345
              
              
              496,477Professional
                  services
              
              
              666,173
              
              
              890,550
              
              
              508,640Data
                  processing
              
              
              1,285,890
              
              
              1,207,013
              
              
              1,283,362ATM
                  expense
              
              
              325,797
              
              
              333,692
              
              
              291,962Deposit
                  insurance premium
              
              
              140,569
              
              
              123,775
              
              
              113,318Advertising
                  and promotions
              
              
              491,306
              
              
              425,259
              
              
              285,532Other
              
              
              1,956,457
              
              
              1,821,520
              
              
              1,448,015Total
                  non-interest expenses
              
              
              15,746,260
              
              
              14,975,417
              
              
              12,015,205INCOME
                  BEFORE INCOME TAXES
              
              
              9,494,424
              
              
              8,809,255
              
              
              6,822,700PROVISION
                  FOR INCOME TAXES
              
              
              2,692,176
              
              
              2,506,924
              
              
              2,267,429NET
                  INCOME
              
              $
              6,802,248
              
              $
              6,302,331
              
              $
              4,555,271BASIC
                  EARNINGS PER COMMON SHARE
              
              $
              0.46
              
              $
              0.41
              
              
              n/a
                  (1
              )DILUTED
                  EARNINGS PER COMMON SHARE
              
              $
              0.45
              
              $
              0.41
              
              
              n/a
                  (1
              )BASIC
                  AVERAGE COMMON SHARES OUTSTANDING:
              
              
              14,745,243
              
              
              15,290,391
              
              
              n/a
                  (1
              )DILUTED
                  AVERAGE COMMON SHARES OUTSTANDING:
              
              
              14,996,355
              
              
              15,377,049
              
              
              n/a
                  (1
              )
  (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.
  69


**ABINGTON
      COMMUNITY BANCORP, INC.**





**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY**





**Common
                Stock Shares**
            
            **Common
                Stock**
            
            **Additional
                Paid-in Capital**
            
            **Treasury
                Stock**
            
            **Common
                Stock Acquired**
              **by**
              **Benefit
                Plans**
            
            **Retained
                Earnings**
            
            **Accumulated
                Other Comprehensive Loss**
            
            **Total
                Stockholders’ Equity**BALANCE—JANUARY
                1, 2004
            
            
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            53,426,380
            
            $
            (192,112
            )
            $
            53,234,268Comprehensive
                income:Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            4,555,271
            
            
            —
            
            
            4,555,271Net
                  unrealized holding loss on available for sale securities arising
                  during
                  the period, net of tax benefit of $396,923
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (770,137
            )
            
            (770,137
            )Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,785,134Capitalization
                of mutualholding
                company
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (100,000
            )
            
            —
            
            
            (100,000
            )Issuance
                of common stock
            
            
            15,870,000
            
            
            158,700
            
            
            69,096,936
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            69,255,636Common
                  stock acquired by benefit plans
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (3,120,337
            )
            
            —
            
            
            —
            
            
            (3,120,337
            )BALANCE—DECEMBER
                      31, 2004
            
            
            15,870,000
            
            
            158,700
            
            
            69,096,936
            
            
            —
            
            
            (3,120,337
            )
            
            57,881,651
            
            
            (962,249
            )
            
            123,054,701Comprehensive
                income:Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            6,302,331
            
            
            —
            
            
            6,302,331Net
                unrealized holding loss on available for sale securities arising
                during
                the period, net of tax benefit of $937,668
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (1,820,179
            )
            
            (1,820,179
            )Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,482,152Cash
                        dividends declared, ($.15 per
                        share)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (2,294,802
            )
            
            —
            
            
            (2,294,802
            )Stock
                options expense
            
            
            —
            
            
            —
            
            
            180,785
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            180,785Common
                stock released from benefit plans
            
            
            —
            
            
            —
            
            
            (42,757
            )
            
            —
            
            
            874,802
            
            
            —
            
            
            —
            
            
            832,045Common
                stock acquired by benefit plans
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (9,024,114
            )
            
            —
            
            
            —
            
            
            (9,024,114
            )BALANCE—DECEMBER
                      31, 2005
            
            
            15,870,000
            
            
            158,700
            
            
            69,234,964
            
            
            —
            
            
            (11,269,649
            )
            
            61,889,180
            
            
            (2,782,428
            )
            
            117,230,767Comprehensive
                income:Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            6,802,248
            
            
            —
            
            
            6,802,248Net
                unrealized holding gain on available for sale securities arising
                during
                the period, net of tax expense of $360,905
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            700,580
            
            
            700,580Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            7,502,828Adjustment
                to initially apply FASB Statement No. 158, net of tax benefit of
                $272,284
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (528,552
            )
            
            (528,552
            )Treasury
                stock purchased
            
            
            —
            
            
            —
            
            
            —
            
            
            (8,317,848
            )
            
            —
            
            
            —
            
            
            —
            
            
            (8,317,848
            )Cash
                dividends declared, ($.23 per share)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (3,439,214
            )
            
            —
            
            
            (3,439,214
            )Stock
                options expense
            
            
            —
            
            
            —
            
            
            370,478
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            370,478Excess
                tax benefit on stock—based compensation
            
            
            —
            
            
            —
            
            
            49,189
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            49,189Common
                stock released from benefit plans
            
            
            —
            
            
            —
            
            
            19,612
            
            
            —
            
            
            1,224,840
            
            
            —
            
            
            —
            
            
            1,244,452Common
                stock acquired by benefit plans
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (9,876
            )
            
            —
            
            
            —
            
            
            (9,876
            )BALANCE—DECEMBER
                      31, 2006
            
            
            15,870,000
            
            $
            158,700
            
            $
            69,674,243
            
            $
            (8,317,848
            )
            $
            (10,054,685
            )
            $
            65,252,214
            
            $
            (2,610,400
            )
            $
            114,102,224




See
      notes
      to consolidated financial statements.




70




**ABINGTON
      COMMUNITY BANCORP, INC.**




**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**OPERATING
                ACTIVITIES:Net
                income
            
            
            $
            6,802,248
            
            $
            6,302,331
            
            $
            4,555,271Adjustments
                to reconcile net income to net cashprovided
                by operating activities:Provision
                for loan losses
            
            
            
            185,521
            
            
            25,000
            
            
            45,000Depreciation
            
            
            
            671,395
            
            
            519,345
            
            
            496,477Share-based
                compensation expense
            
            
            
            1,614,170
            
            
            988,630
            
            
            —Unrealized
                gain on derivative instruments
            
            
            
            —
            
            
            (85,000
            )
            
            (500,500
            )Impairment
                charge on investment securities
            
            
            
            —
            
            
            72,500
            
            
            —Loss
                on sale of investment securities
            
            
            
            601
            
            
            —
            
            
            —Deferred
                income tax (benefit) expense
            
            
            
            (249,137
            )
            
            (397,464
            )
            
            146,326Amortization
                of:Deferred
                loan fees
            
            
            
            (929,058
            )
            
            (1,127,360
            )
            
            (891,877
            )Premiums
                and discounts, net
            
            
            
            100,999
            
            
            261,581
            
            
            342,307Income
                from bank owned life insurance
            
            
            
            (685,298
            )
            
            (498,958
            )
            
            —Changes
                in assets and liabilities which (used) provided cash:Accrued
                interest receivable
            
            
            
            (890,185
            )
            
            (765,188
            )
            
            (323,321
            )Prepaid
                expenses and other assets
            
            
            
            97,071
            
            
            (193,032
            )
            
            (276,643
            )Accrued
                interest payable
            
            
            
            595,036
            
            
            999,194
            
            
            (33,909
            )Accounts
                payable and accrued expenses
            
            
            
            263,862
            
            
            770,235
            
            
            598,309Net
                cash provided by operating activities
            
            
            
            7,577,225
            
            
            6,871,814
            
            
            4,157,440INVESTING
                ACTIVITIES:Principal
                collected on loans
            
            
            
            138,944,098
            
            
            139,389,188
            
            
            135,777,456Disbursements
                for loans
            
            
            
            (213,776,332
            )
            
            (255,118,373
            )
            
            (182,966,622
            )Purchases
                of:Mortgage-backed
                securities held to maturity
            
            
            
            —
            
            
            (8,774,897
            )
            
            (47,862,570
            )Mortgage-backed
                securities available for sale
            
            
            
            (12,618,804
            )
            
            (20,553,403
            )
            
            (35,222,233
            )Investments
                held to maturity
            
            
            
            —
            
            
            (10,178,366
            )
            
            (10,220,792
            )Investments
                available for sale
            
            
            
            (26,136,163
            )
            
            (4,097,475
            )
            
            (34,263,462
            )Federal
                Home Loan Bank stock
            
            
            
            (3,333,599
            )
            
            (5,719,100
            )
            
            (2,911,021
            )Property
                and equipment
            
            
            
            (3,070,161
            )
            
            (1,496,404
            )
            
            (229,494
            )Bank
                owned life insurance
            
            
            
            —
            
            
            (15,000,000
            )
            
            —Proceeds
                from:Maturities
                of mortgage-backed securities available for sale
            
            
            
            —
            
            
            1,211,522
            
            
            221,147Sales
                and maturities of investments available for sale
            
            
            
            29,077,688
            
            
            599,000
            
            
            36,495,000Principal
                repayments of mortgage-backed securitiesheld
                to maturity
            
            
            
            11,144,060
            
            
            22,864,351
            
            
            8,989,832Principal
                repayments of mortgage-backed securitiesavailable
                for sale
            
            
            
            15,022,609
            
            
            20,374,332
            
            
            29,444,915Redemption
                of Federal Home Loan Bank stock
            
            
            
            3,154,099
            
            
            5,108,000
            
            
            2,500,221Net
                cash used in investing activities
            
            
            
            (61,592,505
            )
            
            (131,391,625
            )
            
            (100,247,623
            )FINANCING
                ACTIVITIES:Net
                (decrease) increase in demand deposits and savings
                accounts
            
            
            
            (17,033,871
            )
            
            (7,456,352
            )
            
            26,366,205Net
                increase in certificate accounts
            
            
            
            102,852,407
            
            
            103,349,319
            
            
            16,257,680Net
                increase in other borrowed money
            
            
            
            1,667,311
            
            
            3,248,428
            
            
            4,184,605Advances
                from Federal Home Loan Bank
            
            
            
            1,003,535,000
            
            
            517,801,820
            
            
            352,275,000Repayments
                of advances from Federal Home Loan Bank
            
            
            
            (1,008,686,679
            )
            
            (487,023,242
            )
            
            (355,340,249
            )Net
                increase (decrease) in advances from borrowersfor
                taxes and insurance
            
            
            
            239,996
            
            
            337,163
            
            
            (88,150
            )Proceeds
                from stock issuance, net of conversion costs andacquisition
                of stock for deferred compensation plans trust
            
            
            
            —
            
            
            —
            
            
            68,181,436Capitalization
                of mutual holding company
            
            
            
            —
            
            
            —
            
            
            (100,000
            )Excess
                tax benefit from stock-based compensation
            
            
            
            49,189
            
            
            —
            
            
            —Acquisition
                of stock for ESOP and RRP
            
            
            
            —
            
            
            (9,024,114
            )
            
            (2,046,137
            )Purchase
                of treasury stock
            
            
            
            (8,317,848
            )
            
            —
            
            
            —Payment
                of cash dividend
            
            
            
            (3,439,214
            )
            
            (2,294,802
            )
            
            —Net
                cash provided by financing activities
            
            
            
            70,866,291
            
            
            118,938,220
            
            
            109,690,390NET
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            
            16,851,011
            
            
            (5,581,591
            )
            
            13,600,207CASH
                AND CASH EQUIVALENTS—Beginning of year
            
            
            
            27,714,241
            
            
            33,295,832
            
            
            19,695,625CASH
                AND CASH EQUIVALENTS—End of year
            
            
            $
            44,565,252
            
            $
            27,714,241
            
            $
            33,295,832SUPPLEMENTAL
                DISCLOSURES OF CASH FLOW INFORMATION:Cash
                paid during the year for:Interest
                on deposits and other borrowings
            
            
            $
            26,673,093
            
            $
            17,999,636
            
            $
            14,242,449Income
                taxes
            
            
            $
            3,125,000
            
            $
            3,000,000
            
            $
            2,350,000Release
                of stock from deferred compensation plans trust
            
            
            $
            760
            
            $
            24,200
            
            $
            —




See
      notes
      to consolidated financial statements.




71


**ABINGTON
      COMMUNITY BANCORP, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**




**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
      approximately 57% of the Company’s outstanding common stock. 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
      Bank’s executive offices are in Jenkintown, Pennsylvania, with nine other
      branches and five limited service facilities located in nearby Montgomery,
      Bucks
      and Delaware County neighborhoods. The Bank is principally engaged in the
      business of accepting customer deposits and investing these funds in loans
      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.




On
      November 30, 2006, the Company announced that the Company, the Bank and Abington
      Mutual Holding Company had adopted a plan to convert from the mutual holding
      company structure to a full stock-form holding company structure. For further
      information, see Note 20.




**2.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING
                POLICIES**




***Principles
      of Consolidation—*** The
      consolidated financial statements include the accounts of the Company and its
      wholly owned subsidiaries. All significant intercompany transactions and
      balances have been eliminated.




***Use
      of Estimates in the Preparation of Financial
      Statements—*** The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of income and expenses during
      the reporting period. Actual results could differ from those estimates. The
      Company’s most significant estimates are the allowance for loan losses, the
      assessment of other-than-temporary impairment of investment and mortgage-backed
      securities and deferred income taxes.




***Cash
      and Cash Equivalents—*** For
      purposes of the consolidated statements of cash flows, cash and cash equivalents
      include cash and interest-bearing deposits with banks, commercial paper and
      liquid money market funds with original maturities of three months or
      less.




72




***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.
      No
      impairment charge was recognized during the years ended December 31, 2006 and
      2004. 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.




***Allowance
      for Loan Losses*** —The
      allowance for loan losses is increased by charges to income through the
      provision for loan losses and decreased by charge-offs (net of recoveries).
      The
      allowance is maintained at a level that management considers adequate to provide
      for losses based upon evaluation of the known and inherent risks in the loan
      portfolio. Management’s periodic evaluation of the adequacy of the allowance is
      based on the Company’s past loan loss experience, the volume and composition of
      lending conducted by the Company, adverse situations that may affect a
      borrower’s ability to repay, the estimated value of any underlying collateral,
      current economic conditions and other factors affecting the known and inherent
      risk in the portfolio.




The
      allowance consists of specific allowances for impaired loans, a general
      allowance on all classified loans which are not impaired and a general allowance
      on the remainder of the portfolio. Although we determine the amount of each
      element of the allowance separately, the entire allowance for loan losses is
      available for the entire portfolio. The allowance on impaired loans is
      established for the amount by which the discounted cash flows, observable market
      price or fair value of collateral if the loan is collateral dependent is lower
      than the carrying value of the loan. The general valuation allowance on
      classified loans which are not impaired relates to loans that are classified
      as
      either doubtful, substandard or special mention. Such classifications are based
      on identified weaknesses that increase the credit risk of the loan. The general
      allowance on non-classified loans is established to recognize the inherent
      losses associated with lending activities, but which, unlike specific
      allowances, have not been allocated to particular problem loans. This allowance
      is based on historical loss experience adjusted for qualitative factors.




73


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, 2006 or 2005.




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, 2006 and 2005, mortgage servicing rights
      of $55,000 and $61,000, respectively, were included in other assets. No
      valuation allowance was deemed necessary for any of the periods
      presented.




Amortization
      of the servicing asset totaled $6,000, $11,000 and $19,000 for the years ended
      December 31, 2006, 2005 and 2004, 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.




74




***Property*** **** ***and
      Equipment—*** Property
      and equipment is recorded at cost. Depreciation is computed using the
      straight-line method over the expected useful lives of the related assets,
      which
      range from 5 years for software, computer equipment and automobiles to 45 years
      for buildings. The costs of maintenance and repairs are expensed as they are
      incurred, and renewals and betterments are capitalized.




***Bank
      Owned Life Insurance (“BOLI”)*** —
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 these policies that insure the lives of certain officers of
      its
      subsidiaries. The Company has recognized the cash surrender value under the
      insurance policies as an asset in the consolidated statements of financial
      condition. Changes in the cash surrender value are recorded in non-interest
      income in the consolidated statements of income.




***Other
      Borrowed Money—*** The
      Company enters into overnight repurchase agreements with commercial checking
      account customers. These agreements are treated as financings, and the
      obligations to repurchase securities sold are reflected as a liability in the
      consolidated statements of financial condition. Securities pledged as collateral
      under agreements to repurchase are reflected as assets in the consolidated
      statements of financial condition.




***Loan
      Origination and Commitment Fees—*** The
      Company defers loan origination and commitment fees, net of certain direct
      loan
      origination costs. The balance is accreted into income as a yield adjustment
      over the life of the loan using the level-yield method.




***Interest
      on Loans*** —The
      Company recognizes interest on loans on the accrual basis. Income recognition
      is
      generally discontinued 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 and unrecognized deferred costs of the Company’s defined benefit
      pension plan.




75


The
      components of other comprehensive income (loss) are as follows:




**Year
                  Ended December 31,****2006**
              
              **2005**
              
              **2004**Net
                  unrealized gain (loss) on securities arisingduring
                  the year
              
              $
              700,183
              
              $
              (1,868,029
              )
              $
              (770,137
              )Plus:
                  reclassification adjustment for net lossesincluded
                  in net income, net of tax benefit of$204
                  in 2006 and $24,650 in 2005
              
              
              397
              
              
              47,850
              
              
              —Net
                  unrealized gain (loss) on securities
              
              $
              700,580
              
              $
              (1,820,179
              )
              $
              (770,137
              )




The
      components of accumulated other comprehensive loss are as follows:




**December
                  31,****2006**
              
              **2005**
              
              **2004**Net
                  unrealized loss on securities
              
              $
              (2,081,848
              )
              $
              (2,782,428
              )
              $
              (962,249
              )Unrecognized
                  deferred costs of defined benefit plan
              
              
              (528,552
              )
              
              —
              
              
              —Total
                  accumulated other comprehensive loss
              
              $
              (2,610,400
              )
              $
              (2,782,428
              )
              $
              (962,249
              )




***Treasury
      Stock and Unallocated Common Stock—*** Stock
      held in treasury by the Company, including unallocated stock held by certain
      benefit plans, is accounted for using the cost method which treats stock held
      in
      treasury as a reduction to total stockholders’ equity.




***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 based on the grant-date
      fair value of the award. That cost will be recognized over the period during
      which an employee is required to provide service in exchange for the award.
      The
      provisions of SFAS No. 123R were adopted by the Company as of July 1, 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.




76


***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. For the year ended December 31, 2006, there were no antidilutive
      CSEs. For the year ended 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,****2006**
              
              **2005****Basic**
              
              **Diluted**
              
              **Basic**
              
              **Diluted**Net
                  income
              
              $
              6,802,248
              
              $
              6,802,248
              
              $
              6,302,331
              
              $
              6,302,331Weighted
                  average shares outstanding
              
              
              14,745,243
              
              
              14,745,243
              
              
              15,290,391
              
              
              15,290,391Effect
                  of common share equivalents
              
              
              —
              
              
              251,112
              
              
              —
              
              
              86,658Adjusted
                  weighted average shares usedin
                  earnings per share computation
              
              
              14,745,243
              
              
              14,996,355
              
              
              15,290,391
              
              
              15,377,049Earnings
                  per share
              
              $
              0.46
              
              $
              0.45
              
              $
              0.41
              
              $
              0.41




***Recent
      Accounting Pronouncements*** —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 adopted this guidance on January 1, 2007. The adoption did
      not
      have any 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. The
      Company adopted this statement effective January 1, 2007. The adoption did
      not
      have a material effect on the Company’s financial position or results of
      operations.




In
      July
      2006, the FASB issued FASB Interpretation (“FIN”) No. 48, *Accounting
      for Uncertainty in Income Taxes* .  This
      Interpretation clarifies the accounting for uncertainty in income taxes
      recognized in an enterprise’s financial statements in accordance with SFAS No.
      109, *Accounting
      for Income Taxes.* This
      Interpretation prescribes a recognition threshold and measurement attribute
      for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. This Interpretation also provides guidance
      on derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition. This Interpretation is effective for fiscal
      years beginning after December 15, 2006. The Company adopted this
      Interpretation on January 1, 2007.  The adoption did not have any effect on
      the Company's financial position or results of operations.




77


In
      September 2006, the FASB ratified the consensus reached by the Emerging Issues
      Task Force (“EITF”) in Issue 06-4, *Accounting
      for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
      Split-Dollar Life Insurance Arrangements* .
      EITF
      06-4 applies to life insurance arrangements that provide an employee with a
      specified benefit that is not limited to the employee’s active service period,
      including certain bank-owned life insurance (“BOLI”) policies. EITF 06-4
      requires an employer to recognize a liability and related compensation costs
      for
      future benefits that extend to postretirement periods. EITF 06-4 is effective
      for fiscal years beginning after December 15, 2007, with earlier application
      permitted. The Company is continuing to evaluate the impact of this consensus,
      which will require the Company to recognize an additional liability and
      compensation expense related to our BOLI policies.




In
      September 2006, the FASB ratified the consensus reached by the EITF in Issue
      06-5, *Accounting
      for Purchases of Life Insurance - Determining the Amount That Could Be Realized
      in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases
      of
      Life Insurance* .
      Technical Bulletin No. 85-4 states that an entity should report as an asset
      in
      the statement of financial position the amount that could be realized under
      the
      insurance contract. EITF 06-5 clarifies certain factors that should be
      considered in the determination of the amount that could be realized. EITF
      06-5
      is effective for fiscal years beginning after December 15, 2006, with earlier
      application permitted under certain circumstances. The Company is continuing
      to
      evaluate the impact of this consensus, but does not expect that the guidance
      will have a material effect on the Company’s consolidated financial position or
      results of operations.




In
      September 2006, the FASB issued FASB Statement No. 157, *Fair
      Value Measurements* ,
      which
      defines fair value, establishes a framework for measuring fair value under
      GAAP,
      and expands disclosures about fair value measurements. FASB Statement
      No. 157 applies to other accounting pronouncements that require or permit
      fair value measurements. The new guidance is effective for financial statements
      issued for fiscal years beginning after November 15, 2007, and for interim
      periods within those fiscal years. We are currently evaluating the potential
      impact, if any, of the adoption of FASB Statement No. 157 on our
      consolidated financial position or results of operations.




In
      September 2006, the FASB issued SFAS No. 158, *Employers’
      Accounting for Defined Benefit Pension and Other Postretirement Plans - an
      amendment of FASB Statements No. 87, 88, 106, and 132(R)* .
      This
      statement which amends SFAS No. 87 and SFAS No. 106 to require recognition
      of
      the overfunded or underfunded status of pension and other postretirement benefit
      plans on the balance sheet. Under SFAS No. 158, gains and losses, prior service
      costs and credits, and any remaining transition amounts under SFAS No. 87 and
      SFAS No. 106 that have not yet been recognized through net periodic benefit
      cost
      will be recognized in accumulated other comprehensive income, net of tax
      effects, until they are amortized as a component of net periodic cost. The
      measurement date — the date at which the benefit obligation and plan assets are
      measured — is required to be the company’s fiscal year end. SFAS No. 158 is
      effective for publicly-held companies for fiscal years ending after
      December 15, 2006, except for the measurement date provisions, which are
      effective for fiscal years ending after December 15, 2008. The Company
      adopted SFAS No. 158 as of December 31, 2006.




78


The
      Company maintains a nonqualified, unfunded, defined benefit pension plan for
      the
      Board of Directors and certain officers that is more fully described in Note
      14.
      The incremental effect of applying SFAS No. 158 to this plan on individual
      line
      items in the consolidated statement of financial condition as of December 31,
      2006 is as follows:




**Before
                  Application of SFAS No. 158**
              
              **Adjustments**
              
              **After
                  Application of SFAS No. 158**Deferred
                  tax asset
              
              $
              2,536,432
              
              $
              272,284
              
              $
              2,808,716Total
                  assets
              
              
              924,913,998
              
              
              272,284
              
              
              925,186,282Accounts
                  payable and accrued expenses
              
              
              4,078,549
              
              
              800,836
              
              
              4,879,385Total
                  liabilities
              
              
              810,283,222
              
              
              800,836
              
              
              811,084,058Accumulated
                  other comprehensive loss
              
              
              (2,081,848
              )
              
              (528,552
              )
              
              (2,610,400
              )Total
                  stockholders' equity
              
              
              114,630,776
              
              
              (528,552
              )
              
              114,102,224




In
      September 2006, the SEC issued SAB No. 108, *Considering
      the Effects of Prior Year Misstatements When Quantifying Misstatements in
      Current Year Financial Statements* .
      SAB No.
      108 provides interpretive guidance on how the effects of the carryover or
      reversal of prior year misstatements should be considered in quantifying a
      potential current year misstatement. Prior to SAB No. 108, companies might
      evaluate the materiality of financial-statement misstatements using either
      the
      income statement or balance sheet approach, with the income statement approach  focusing
      on new misstatements added in the current year, and the balance sheet approach
      focusing on the cumulative amount of misstatement present in a company’s balance
      sheet. Misstatements that would be material under one approach could be viewed
      as immaterial under another approach, and not be corrected. SAB No. 108 now
      requires that companies view financial statement misstatements as material
      if
      they are material according to either the income statement or balance sheet
      approach. The Company adopted SAB No. 108 as of December 31, 2006, and such
      adoption had no impact on our reported financial position or results of
      operations.




In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* .
      This
      statement permits entities to choose to measure many financial instruments
      and
      certain other items at fair value. An entity shall report unrealized gains
      and
      losses on items for which the fair value option has been elected in earnings
      at
      each subsequent reporting date. This statement is effective as of the beginning
      of an entity’s first fiscal year that begins after November 15, 2007. Early
      adoption is permitted as of the beginning of a fiscal year that begins on or
      before November 15, 2007, provided the entity also elects to apply the
      provisions of SFAS No.157. We are currently evaluating the potential impact,
      if
      any, of the adoption of FASB Statement No. 159 on our consolidated
      financial position or results of operations.




***Reclassifications*** **—** Certain
      items in the 2005 and 2004 consolidated financial statements have been
      reclassified to conform to the presentation in the 2006 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, 2006 and 2005, these reserve balances amounted to $4.3
      million and $5.8 million, respectively.




79


**4.**
              **INVESTMENT
                  SECURITIES**
  The
        amortized cost and estimated fair value of investment securities are summarized
        as follows:
  **Held
                      to Maturity**
                    **December
                      31, 2006****Amortized**
                    **Cost**
                
                **Gross**
                      **Unrealized**
                      **Gains**
                
                **Gross**
                      **Unrealized**
                      **Losses**
                
                **Estimated**
                      **Fair**
                      **Value**Debt
                    securities:Municipal
                    bonds
                
                $
                20,393,430
                
                $
                66,540
                
                $
                (30,394
                )
                $
                20,429,576Total
                    debt securities
                
                $
                20,393,430
                
                $
                66,540
                
                $
                (30,394
                )
                $
                20,429,576
  **Available
                      for sale**
                    **December
                      31, 2006****Amortized**
                    **Cost**
                
                **Gross**
                      **Unrealized**
                      **Gains**
                
                **Gross**
                      **Unrealized**
                      **Losses**
                
                **Estimated**
                      **Fair**
                      **Value**Debt
                    securities:Agency
                    bonds
                
                $
                71,492,107
                
                $
                24,640
                
                $
                (1,286,913
                )
                $
                70,229,834Corporate
                      bonds andcommercial
                      paper
                
                
                499,646
                
                
                —
                
                
                (2,926
                )
                
                496,720Certificates
                    of deposit
                
                
                785,000
                
                
                —
                
                
                —
                
                
                785,000Total
                    debt securities
                
                
                72,776,753
                
                
                24,640
                
                
                (1,289,839
                )
                
                71,511,554Equity
                    securities:Common
                    stock
                
                
                10
                
                
                465
                
                
                —
                
                
                475Mutual
                    funds
                
                
                3,058,135
                
                
                —
                
                
                (81,109
                )
                
                2,977,026Total
                    equity securities
                
                
                3,058,145
                
                
                465
                
                
                (81,109
                )
                
                2,977,501Total
                
                $
                75,834,898
                
                $
                25,105
                
                $
                (1,370,948
                )
                $
                74,489,055
 
 80
  **Held
                          to Maturity**
                        **December
                          31, 2005****Amortized**
                    **Cost**
                
                **Gross**
                      **Unrealized**
                      **Gains**
                
                **Gross**
                      **Unrealized**
                      **Losses**
                
                **Estimated**
                      **Fair**
                      **Value**Debt
                    securities:Municipal
                    bonds
                
                $
                20,395,593
                
                $
                57,765
                
                $
                (136,583
                )
                $
                20,316,775Total
                    debt securities
                
                $
                20,395,593
                
                $
                57,765
                
                $
                (136,583
                )
                $
                20,316,775
  **Available
                        for sale**
                      **December
                        31, 2005****Amortized**
                    **Cost**
                
                **Gross**
                      **Unrealized**
                      **Gains**
                
                **Gross**
                      **Unrealized**
                      **Losses**
                
                **Estimated**
                      **Fair**
                      **Value**Debt
                    securities:Agency
                    bonds
                
                $
                74,990,878
                
                $
                17,500
                
                $
                (1,888,453
                )
                $
                73,119,925Corporate
                    bonds
                
                
                999,457
                
                
                —
                
                
                (1,412
                )
                
                998,045Municipal
                    bonds
                
                
                180,000
                
                
                275
                
                
                —
                
                
                180,275Certificates
                    of deposit
                
                
                1,183,000
                
                
                —
                
                
                —
                
                
                1,183,000Total
                    debt securities
                
                
                77,353,335
                
                
                17,775
                
                
                (1,889,865
                )
                
                75,481,245Equity
                    securities:Common
                    stock
                
                
                10
                
                
                380
                
                
                —
                
                
                390Mutual
                    funds
                
                
                3,422,260
                
                
                —
                
                
                (75,199
                )
                
                3,347,061Total
                    equity securities
                
                
                3,422,270
                
                
                380
                
                
                (75,199
                )
                
                3,347,451Total
                
                $
                80,775,605
                
                $
                18,155
                
                $
                (1,965,064
                )
                $
                78,828,696
  During
        the year ended December 31, 2006 a gross loss of approximately $600 was
        recognized on the sale of certain available for sale equity securities. Proceeds
        from this sale were approximately $500,000. There were no sales of debt or
        equity securities during the years ended December 31, 2005 and 2004.
  No
        impairment charge was recognized during the years ended December 31, 2006
        and
        2004. 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.
  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.
  81
  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, 2006****Available
                    for Sale**
                
                **Held
                    to Maturity****Amortized**
                    **Cost**
                
                **Estimated**
                      **Fair**
                      **Value**
                
                **Amortized**
                      **Cost**
                
                **Estimated**
                      **Fair**
                      **Value**Due
                    in one year or less
                
                $
                16,799,000
                
                $
                16,619,390
                
                $
                —
                
                $
                —Due
                    after one year through five years
                
                
                43,985,645
                
                
                43,472,144
                
                
                —
                
                
                —Due
                    after five years through ten years
                
                
                9,992,108
                
                
                9,421,900
                
                
                —
                
                
                —Due
                    after ten years
                
                
                2,000,000
                
                
                1,998,120
                
                
                20,393,430
                
                
                20,429,576Total
                
                $
                72,776,753
                
                $
                71,511,554
                
                $
                20,393,430
                
                $
                20,429,576
  The
        table
        below sets forth investment securities which have unrealized loss positions
        as
        of December 31, 2006:
  **Less
                    than 12 months**
                
                **More
                    than 12 months****Gross**
                        **Unrealized**
                        **Losses**
                
                **Estimated**
                      **Fair**
                      **Value**
                
                **Gross**
                      **Unrealized**
                      **Losses**
                
                **Estimated**
                      **Fair**
                      **Value**Securities
                    held to maturity:Municipal
                    bonds
                
                $
                (26,015
                )
                $
                5,877,674
                
                $
                (4,379
                )
                $
                501,090Total
                    securities held to maturity
                
                
                (26,015
                )
                
                5,877,674
                
                
                (4,379
                )
                
                501,090Securities
                    available for sale:Agency
                    bonds
                
                
                (3,120
                )
                
                3,996,880
                
                
                (1,283,793
                )
                
                54,208,315Other
                    securities
                
                
                —
                
                
                —
                
                
                (84,035
                )
                
                3,473,746Total
                    securities available for sale
                
                
                (3,120
                )
                
                3,996,880
                
                
                (1,367,828
                )
                
                57,682,061Total
                
                $
                (29,135
                )
                $
                9,874,554
                
                $
                (1,372,207
                )
                $
                58,183,151
  82
  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**
                        **Unrealized**
                        **Losses**
                
                **Estimated**
                        **Fair**
                        **Value**
                
                **Gross**
                      **Unrealized**
                      **Losses**
                
                **Estimated**
                      **Fair**
                      **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:Agency
                    bonds
                
                
                (195,180
                )
                
                13,304,820
                
                
                (1,693,273
                )
                
                57,797,605Other
                    securities
                
                
                (1,136
                )
                
                498,925
                
                
                (75,475
                )
                
                3,345,896Total
                    securities available for sale
                
                
                (196,316
                )
                
                13,803,745
                
                
                (1,768,748
                )
                
                61,143,501Total
                
                $
                (332,899
                )
                $
                25,725,840
                
                $
                (1,768,748
                )
                $
                61,143,501
 On
        at
        least a quarterly basis, management of the Company reviews the securities
        in its
        investment portfolio to identify any securities that might have an
        other-than-temporary impairment. At December 31, 2006, investment securities
        in
        a gross unrealized loss position for twelve months or longer consist of 27
        securities having an aggregate depreciation of 2.3% from the Company’s amortized
        cost basis. Investment securities in a gross unrealized loss position for
        less
        than twelve months at December 31, 2006, consist of 15 securities having
        an
        aggregate depreciation of 0.3% 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.
  83
  **5.**
              **MORTGAGE-BACKED
                  SECURITIES**
  The
        amortized cost and estimated fair value of mortgage-backed securities are
        summarized as follows:
  **Held
                        to Maturity**
                      **December
                        31, 2006****Amortized**
                    **Cost**
                
                **Gross**
                      **Unrealized**
                      **Gains**
                
                **Gross**
                      **Unrealized**
                      **Losses**
                
                **Estimated**
                      **Fair**
                      **Value**FNMA
                      pass-through certificates
                
                $
                24,298,423
                
                $
                —
                
                $
                (969,362
                )
                $
                23,329,061FHLMC
                      pass-through certificates
                
                
                17,103,783
                
                
                —
                
                
                (853,654
                )
                
                16,250,129Collateralized
                      mortgage obligations
                
                
                14,741,413
                
                
                28,704
                
                
                (392,292
                )
                
                14,377,825Total
                
                $
                56,143,619
                
                $
                28,704
                
                $
                (2,215,308
                )
                $
                53,957,015
  **Available
                      for sale**
                    **December
                      31, 2006****Amortized**
                    **Cost**
                
                **Gross**
                      **Unrealized**
                      **Gains**
                
                **Gross**
                      **Unrealized**
                      **Losses**
                
                **Estimated**
                      **Fair**
                      **Value**GNMA
                      pass-through certificates
                
                $
                424,074
                
                $
                10,308
                
                $
                (743
                )
                $
                433,639FNMA
                      pass-through certificates
                
                
                9,726,032
                
                
                37,334
                
                
                (184,091
                )
                
                9,579,275FHLMC
                      pass-through certificates
                
                
                64,665,295
                
                
                120,584
                
                
                (1,627,920
                )
                
                63,157,959Collateralized
                      mortgage obligations
                
                
                5,015,865
                
                
                3,346
                
                
                (167,290
                )
                
                4,851,921Total
                
                $
                79,831,266
                
                $
                171,572
                
                $
                (1,980,044
                )
                $
                78,022,794




84




**Held
                to Maturity**
              **December
                31, 2005****Amortized**
              **Cost**
            
            **Gross**
              **Unrealized**
              **Gains**
            
            **Gross**
              **Unrealized**
              **Losses**
            
            **Estimated**
              **Fair**
              **Value**FNMA
                pass-throughcertificates
            
            $
            28,447,912
            
            $
            —
            
            $
            (918,204
            )
            $
            27,529,708FHLMC
                pass-throughcertificates
            
            
            20,209,129
            
            
            —
            
            
            (743,308
            )
            
            19,465,821Collateralized
                mortgageobligations
            
            
            18,753,694
            
            
            39,195
            
            
            (283,163
            )
            
            18,509,726Total
            
            $
            67,410,735
            
            $
            39,195
            
            $
            (1,944,675
            )
            $
            65,505,255




**Available
                for sale**
              **December
                31, 2005****Amortized**
              **Cost**
            
            **Gross**
              **Unrealized**
              **Gains**
            
            **Gross**
              **Unrealized**
              **Losses**
            
            **Estimated**
              **Fair**
              **Value**GNMA
                pass-throughcertificates
            
            $
            583,131
            
            $
            17,217
            
            $
            (1,226
            )
            $
            599,122FNMA
                pass-throughcertificates
            
            
            10,626,026
            
            
            59,644
            
            
            (151,016
            )
            
            10,534,654FHLMC
                pass-throughcertificates
            
            
            64,913,936
            
            
            76,092
            
            
            (2,099,759
            )
            
            62,890,269Collateralized
                mortgageobligations
            
            
            6,089,177
            
            
            3,544
            
            
            (173,387
            )
            
            5,919,334Total
            
            $
            82,212,270
            
            $
            156,497
            
            $
            (2,425,388
            )
            $
            79,943,379





There
      were no sales of mortgage-backed securities during the years ended December
      31,
      2006, 2005 and 2004.




No
      impairment charge was recognized on mortgage-backed securities during the years
      ended December 31, 2006, 2005 and 2004.




85




The
      table
      below sets forth mortgage-backed securities which have unrealized loss positions
      as of December 31, 2006:




**Less
                than 12 months**
            
            **More
                than 12 months****Gross**
              **Unrealized**
              **Losses**
            
            **Estimated**
              **Fair**
              **Value**
            
            **Gross**
              **Unrealized**
              **Losses**
            
            **Estimated**
              **Fair**
              **Value**Securities
                held to maturity:FNMA
                pass-throughcertificates
            
            $
            —
            
            $
            —
            
            $
            (969,362
            )
            $
            23,329,063FHLMC
                pass-throughcertificates
            
            
            —
            
            
            —
            
            
            (853,654
            )
            
            16,250,129Collateralized
                mortgageobligations
            
            
            (111,660
            )
            
            3,871,654
            
            
            (280,632
            )
            
            9,839,646Total
                securities held to maturity
            
            
            (111,660
            )
            
            3,871,654
            
            
            (2,103,648
            )
            
            49,418,838Securities
                available for sale:GNMA
                pass-throughcertificates
            
            
            —
            
            
            —
            
            
            (743
            )
            
            80,548FNMA
                pass-throughcertificates
            
            
            (263
            )
            
            34,026
            
            
            (183,828
            )
            
            6,426,884FHLMC
                pass-throughcertificates
            
            
            (3,247
            )
            
            1,644,371
            
            
            (1,624,673
            )
            
            52,967,849Collateralized
                mortgageobligations
            
            
            —
            
            
            —
            
            
            (167,290
            )
            
            4,767,131Total
                securities available for sale
            
            
            (3,510
            )
            
            1,678,397
            
            
            (1,976,534
            )
            
            64,242,412Total
            
            $
            (115,170
            )
            $
            5,550,051
            
            $
            (4,080,182
            )
            $
            113,661,250





86




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**
              **Unrealized**
              **Losses**
            
            **Estimated**
              **Fair**
              **Value**
            
            **Gross**
              **Unrealized**
              **Losses**
            
            **Estimated**
              **Fair**
              **Value**Securities
                held to maturity:FNMA
                pass-throughcertificates
            
            $
            (124,140
            )
            $
            9,309,491
            
            $
            (794,064
            )
            $
            18,220,217FHLMC
                pass-throughcertificates
            
            
            (325,995
            )
            
            9,889,436
            
            
            (417,313
            )
            
            9,576,385Collateralized
                mortgageobligations
            
            
            (283,163
            )
            
            11,509,933
            
            
            —
            
            
            —Total
                securities held to maturity
            
            
            (733,298
            )
            
            30,708,860
            
            
            (1,211,377
            )
            
            27,796,602Securities
                available for sale:GNMA
                pass-throughcertificates
            
            
            (1,226
            )
            
            126,544
            
            
            —
            
            
            —FNMA
                pass-throughcertificates
            
            
            (29,704
            )
            
            4,311,626
            
            
            (121,312
            )
            
            3,527,004FHLMC
                pass-throughcertificates
            
            
            (539,147
            )
            
            26,123,727
            
            
            (1,560,612
            )
            
            33,299,429Collateralized
                mortgageobligations
            
            
            (130,316
            )
            
            4,144,716
            
            
            (43,071
            )
            
            1,669,510Total
                securities available for sale
            
            
            (700,393
            )
            
            34,706,613
            
            
            (1,724,995
            )
            
            38,495,943Total
            
            $
            (1,433,691
            )
            $
            65,415,473
            
            $
            (2,936,372
            )
            $
            66,292,545





On
      at
      least a quarterly basis, management of the Company reviews the securities in
      its
      investment portfolio to identify any securities that might have an
      other-than-temporary impairment. At December 31, 2006, mortgage-backed
      securities in a gross unrealized loss position for twelve months or longer
      consist of 47 securities having an aggregate depreciation of 3.5% from the
      Company’s amortized cost basis. Mortgage-backed securities in a gross unrealized
      loss position for less than twelve months at December 31, 2006, consist of
      6
      securities having an aggregate depreciation of 2.0% 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.




87


**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, 2006 and 2005, the Company was not party to any cap or swap
      agreements. The Company was previously party to two swap agreements with terms
      expiring in June 2005 and December 2005, respectively.




The
      swaps
      we held in 2005 and 2004 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
      consolidated statements of financial condition when in existence with the offset
      recorded in loss on derivative instruments, net in the consolidated statements
      of income. Amounts paid or received under the cap or swap agreement were
      recognized in gain (loss) on derivative instruments, net in the Company’s
      consolidated statements of income during the period in which they accrued.
      During the year ended December 31, 2005, the Company received $13,000 from
      the
      contra parties under the agreements. During the year ended December 31, 2004,
      the Company paid $641,000 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 and $501,000 for the years ended December 31, 2005 and 2004,
      respectively. No interest was received from or paid to the contra party during,
      and no unrealized gains or losses were recognized for, the year ended December
      31, 2006.




**7.**
            **LOANS
                RECEIVABLE—NET**




Loans
      receivable consist of the following:




**December
                31,****2006**
            
            **2005**One-to
                four-family residential
            
            $
            375,743,476
            
            $
            323,709,542Multi-family
                residential and commercial
            
            
            92,427,910
            
            
            76,646,911Construction
            
            
            134,976,214
            
            
            132,789,343Home
                equity lines of credit
            
            
            33,953,399
            
            
            41,063,321Commercial
                business loans
            
            
            11,416,252
            
            
            10,974,955Consumer
                non-real estate loans
            
            
            4,399,778
            
            
            4,711,519Total
                loans
            
            
            652,917,029
            
            
            589,895,591Less:Construction
                loans in process
            
            
            (45,338,523
            )
            
            (57,690,327
            )Deferred
                loan fees, net
            
            
            (912,913
            )
            
            (1,263,545
            )Allowance
                for loan losses
            
            
            (1,602,613
            )
            
            (1,454,510
            )Loans
                receivable—net
            
            $
            605,062,980
            
            $
            529,487,209





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.




88




The
      Bank
      has sold and is servicing for others loans in the amounts of approximately
      $14.8
      million and $13.6 million at December 31, 2006 and 2005, respectively.
      These loan balances are excluded from the Company’s consolidated financial
      statements. At December 31, 2006 and 2005, mortgage servicing rights of $55,000
      and $61,000, 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,****2006**
            
            **2005**
            
            **2004**Balance—beginning
                of year
            
            $
            894,440
            
            $
            927,514
            
            $
            1,241,595Additions
            
            
            1,423,510
            
            
            89,566
            
            
            229,878Repayments
            
            
            (222,198
            )
            
            (122,640
            )
            
            (543,959
            )Balance—end
                of year
            
            $
            2,095,752
            
            $
            894,440
            
            $
            927,514





The
      Bank
      grants loans primarily to customers in its local market area. The ultimate
      repayment of these loans is dependent to a certain degree on the local economy
      and real estate market.




Following
      is a summary of changes in the allowance for loan losses:




**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Balance—beginning
                of year
            
            $
            1,454,510
            
            $
            1,412,697
            
            $
            1,455,889Provision
                for loan losses
            
            
            185,521
            
            
            25,000
            
            
            45,000Charge-offs
            
            
            (55,460
            )
            
            (69,774
            )
            
            (146,736
            )Recoveries
            
            
            18,042
            
            
            86,587
            
            
            58,544Charge-offs/recoveries—net
            
            
            (37,418
            )
            
            16,813
            
            
            (88,192
            )Balance—end
                of year
            
            $
            1,602,613
            
            $
            1,454,510
            
            $
            1,412,697




89




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, 2006, 2005 and 2004, the recorded investment in loans
      that are considered to be impaired was as follows:




**2006**
            
            **2005**
            
            **2004**Impaired
                collateral-dependent loans
            
            $
            2,346,896
            
            $
            2,885,364
            
            $
            —Average
                impaired loan balance
            
            $
            709,639
            
            $
            94,861
            
            $
            41,828Interest
                income recognized onimpaired
                loans
            
            $
            65,955
            
            $
            —
            
            $
            —




As
      a
      result of the Company’s measurement of impaired loans, no allowance for loan
      losses was established for the $2.3 million of total impaired loans at December
      31, 2006. These loans represent three commercial and two construction loans
      made
      to one borrower. The loans were placed on non-accrual status as certain loans
      had become over 90 days delinquent. We have obtained a confessed judgment
      against the borrower, which provides us with additional collateral securing
      the
      loans. We also obtained current appraisals of the underlying collateral
      properties, which support the full value of the loans. Based on the value of
      the
      properties, as well as the additional collateral available, we do not expect
      to
      incur any losses on the loans to this borrower.




Non-accrual
      loans (which consist of smaller balance, homogeneous loans) at December 31,
      2006
      and 2005 amounted to approximately $2.3 million and $2.9 million, respectively.
      There were no non-accrual loans outstanding at December 31, 2004. Commercial
      loans and commercial real estate loans are placed on non-accrual at the time
      the
      loan is 90 days delinquent unless the credit is well secured and in the process
      of collection. Commercial loans are charged off when the loan is deemed
      uncollectible. Residential real estate loans are typically placed on non-accrual
      only when the loan is 90 days delinquent and not well secured and in the process
      of collection. Other consumer loans are typically charged off at 90 days
      delinquent. In all cases, loans must be placed on non-accrual 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, 2006, 2005 and 2004 amounted to
      approximately $2.6 million, $2.9 million, and $227,000,
      respectively.




Interest
      payments on impaired loans and non-accrual 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. For the year ended
      December 31, 2006, approximately $66,000 in cash basis interest income was
      recognized. For the years ended December 31, 2005 and 2004, no cash basis
      interest income was recognized. Interest income foregone on non-accrual loans
      was $68,000, $20,000 and $5,000 for years ended December 31, 2006, 2005, and
      2004, respectively.




**8.**
            **ACCRUED
                INTEREST RECEIVABLE**




Accrued
      interest receivable consists of the following:




**December
                31,****2006**
            
            **2005**Investments
                and interest-bearing deposits
            
            $
            1,003,718
            
            $
            730,677Mortgage-backed
                securities
            
            
            494,166
            
            
            538,723Loans
                receivable
            
            
            2,867,651
            
            
            2,205,950Total
            
            $
            4,365,535
            
            $
            3,475,350




90






**9.**
            **PROPERTY
                AND EQUIPMENT**




Property
      and equipment is summarized by major classifications as follows:




**December
                  31,****2006**
              
              **2005**Land
                  and buildings
              
              $
              5,224,716
              
              $
              4,220,125Leasehold
                  improvements
              
              
              4,616,435
              
              
              3,102,688Furniture
                  and fixtures
              
              
              5,435,321
              
              
              4,883,498Total
              
              
              15,276,472
              
              
              12,206,311Accumulated
                  depreciation
              
              
              (6,367,562
              )
              
              (5,696,167
              )Total
                  property and equipment, net ofaccumulated
                  depreciation
              
              $
              8,908,910
              
              $
              6,510,144




Certain
      office facilities and equipment are leased under various operating leases.
      The
      leases range in terms from 1 year to 20 years, some of which include renewal
      options as well as specific provisions relating to rent increases. Rent expense
      on those lease agreements that contain incremental increases in rent is
      recognized on a straight-line basis over the life of the lease. Rental expense
      under operating leases was approximately $604,000, $833,000, and $427,000 for
      the years ended December 31, 2006, 2005, and 2004, respectively.




Future
      minimum annual rental payments required under non-cancelable operating leases
      are as follows:




****December
                    31,******2006**2007
              
              $
              713,4002008
              
              
              670,6992009
              
              
              571,0582010
              
              
              589,2472011
              
              
              556,133Thereafter
              
              
              3,864,829$
              6,965,366




91




**10.**
            **DEPOSITS**




Deposits
      consist of the following major classifications:




**December
                  31,****2006**
              
              **2005****Type
                  of Account**
              
              **Amount**
              
              **Percent**
              
              **Amount**
              
              **Percent**Certificates
              
              $
              388,973,104
              
              
              66.3
              %
              $
              286,120,697
              
              
              57.1
              %NOW
                  and MMDA
              
              
              118,080,006
              
              
              20.1
              
              
              119,572,302
              
              
              23.9Passbook
                  and club
              
              
              79,948,450
              
              
              13.6
              
              
              95,490,025
              
              
              19.0Total
              
              $
              587,001,560
              
              
              100.0
              %
              $
              501,183,024
              
              
              100.0
              %




The
      weighted average rate paid on deposits at December 31, 2006 and 2005, was 3.43%
      and 2.43%, respectively. Deposits in amounts greater than $100,000 were
      approximately $227.3 million and $140.4 million at December 31, 2006 and 2005,
      respectively, of which approximately $150.7 million and $76.0 million were
      due
      in one year or less at December 31, 2006 and 2005, respectively.




A
      summary
      of certificates by maturities is as follows:




**December
                  31,****2006**
              
              **2005****Amount**
              
              **Percent**
              
              **Amount**
              
              **Percent**One
                  year or less
              
              $
              260,644,567
              
              
              67.0
              %
              $
              161,157,332
              
              
              56.3
              %One
                  through three years
              
              
              103,602,599
              
              
              26.7
              
              
              97,187,051
              
              
              34.0Three
                  through five years
              
              
              10,636,861
              
              
              2.7
              
              
              14,272,219
              
              
              5.0Over
                  five years
              
              
              14,089,077
              
              
              3.6
              
              
              13,504,095
              
              
              4.7Total
              
              $
              388,973,104
              
              
              100.0
              %
              $
              286,120,697
              
              
              100.0
              %




**11.**
            **ADVANCES
                FROM FEDERAL HOME LOAN
                BANK**




Advances
      from Federal Home Loan Bank consist of the following:




**December
                  31,****2006**
              
              **2005****Maturing
                  Period**
              
              **Amount**
              
              ****Weighted******Interest****Rate**
              
              **Amount**
              
              ****Weighted******Interest****Rate**1
                  to
                  12 months
              
              $
              33,680,860
              
              
              4.86
              %
              $
              11,616,290
              
              
              3.74
              %13
                  to 24 months
              
              
              40,860,721
              
              
              3.05
              
              
              29,836,998
              
              
              4.0325
                  to 36 months
              
              
              11,761,967
              
              
              4.68
              
              
              48,972,133
              
              
              4.1437
                  to 48 months
              
              
              40,207,115
              
              
              5.58
              
              
              16,012,531
              
              
              4.5749
                  to 60 months
              
              
              44,350,720
              
              
              5.24
              
              
              42,051,697
              
              
              5.53Over
                  60 months
              
              
              25,431,890
              
              
              4.47
              
              
              52,955,303
              
              
              4.45Total
              
              $
              196,293,273
              
              
              4.65
              %
              $
              201,444,952
              
              
              4.51
              %




92


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 4.65% and
      4.51% at December 31, 2006 and 2005, respectively. The average balance
      outstanding was approximately $201.8 million and $192.2 million for the years
      ended December 31, 2006 and 2005 respectively. The maximum amount outstanding
      at
      any month-end was $211.7 million and $212.6 million for the years ended December
      31, 2006 and 2005, respectively.




**12.**
            **OTHER
                BORROWED MONEY**




During
      the years ended December 31, 2006 and 2005, the Bank entered into overnight
      repurchase agreements with commercial checking account customers. At December
      31, 2006 and 2005, the amounts outstanding were $17.8 million and $16.1 million,
      respectively. Interest expense on customer repurchase agreements was $838,000,
      $462,000, and $116,000 for the years ended December 31, 2006, 2005 and 2004,
      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 4.90% and 3.88% at December 31, 2006 and 2005, respectively. The average
      balance outstanding was approximately $20.2 million for the years ended December
      31, 2006 and 2005 respectively. The maximum amount outstanding at any month-end
      was $25.7 million and $25.0 million for the years ended December 31, 2006 and
      2005, respectively.




**13.**
            **INCOME
                TAXES**




The
      income tax provision consists of the following:




**Year
                  Ended December 31,****2006**
              
              **2005**
              
              **2004**Current:Federal
              
              $
              2,941,313
              
              $
              2,904,388
              
              $
              2,127,036State
              
              
              —
              
              
              —
              
              
              (5,933
              )Total
                  current
              
              
              2,941,313
              
              
              2,904,388
              
              
              2,121,103Deferred—Federal
              
              
              (249,137
              )
              
              (397,464
              )
              
              146,326Total
                  income tax provision
              
              $
              2,692,176
              
              $
              2,506,924
              
              $
              2,267,429




93




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,****2006**
              
              **2005**
              
              **2004****Amount**
              
              **Amount**
              
              **Amount**At
                  statutory rate
              
              $
              3,228,104
              
              $
              2,995,147
              
              $
              2,319,718Adjustments
                  resulting from:State
                  tax—net of federal tax benefit
              
              
              —
              
              
              —
              
              
              (3,916
              )Tax-exempt
                  loan and investment income
              
              
              (411,350
              )
              
              (282,942
              )
              
              (50,822
              )Income
                  on bank owned life insurance
              
              
              (233,002
              )
              
              (169,646
              )
              
              —Other
              
              
              108,424
              
              
              (35,635
              )
              
              2,449Total
              
              $
              2,692,176
              
              $
              2,506,924
              
              $
              2,267,429Effective
                  income tax rate
              
              
              28.4
              %
              
              28.5
              %
              
              33.2
              %




Items
      that gave rise to significant portions of the deferred tax accounts are as
      follows:




**December
                  31,****2006**
              
              **2005**Deferred
                  tax assets:Allowance
                  for loan losses
              
              $
              544,888
              
              $
              494,533Deferred
                  compensation
              
              
              1,503,835
              
              
              1,136,056Write-down
                  of impaired investments
              
              
              —
              
              
              23,800Unrealized
                  loss on securities available-for-sale
              
              
              1,072,467
              
              
              1,433,372Property
                  and equipment
              
              
              19,157
              
              
              —Total
                  deferred tax assets
              
              
              3,140,347
              
              
              3,087,761Deferred
                  tax liabilities:Property
                  and equipment
              
              
              —
              
              
              (105,635
              )Deferred
                  loan fees
              
              
              (313,063
              )
              
              (313,175
              )Other
              
              
              (18,568
              )
              
              (20,751
              )Total
                  deferred tax liabilities
              
              
              (331,631
              )
              
              (439,561
              )Net
                  deferred tax asset
              
              $
              2,808,716
              
              $
              2,648,200




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, 2006 and 2005 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.




94


**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 $2,000, $38,000, and $159,000
      for the years ended December 31, 2006, 2005, and 2004, respectively. The
      liability for these plans at December 31, 2006 and 2005, was approximately
      $1.2
      million and $1.3 million, respectively.




**Supplemental
      Retirement Plan**




The
      Company maintains a nonqualified, unfunded, defined benefit pension plan for
      the
      Board of Directors and certain officers. The funded status of the plan is as
      follows:




**December
                  31,****2006**
              
              **2005**Fair
                  value of plan assets
              
              $
              —
              
              $
              —Benefit
                  obligations
              
              
              2,552,581
              
              
              2,448,220Funded
                  status
              
              $
              (2,552,581
              )
              $
              (2,448,220
              )Amounts
                  not yet recognized:Unrecognized
                  net loss
              
              
              —
              
              
              226,022Unrecognized
                  prior service cost
              
              
              —
              
              
              815,234Net
                  amount recognized
              
              $
              (2,552,581
              )
              $
              (1,406,964
              )


Amounts
      related to the plan have been recognized in the balance sheet in accumulated
      other comprehensive loss, net of tax, as follows:




**December
                  31,****2006**
              
              **2005**Amount
                  recognized in accumulatedother
                  comprehensive loss for:Net
                  actuarial loss
              
              $
              70,968
              
              $
              —Prior
                  service cost
              
              
              457,584
              
              
              —Total
                  recognized in accumulatedother
                  comprehensive loss
              
              $
              528,552
              
              $
              —




95






The
      components of net periodic pension cost and other changes in the amounts
      recognized in accumulated other comprehensive loss are as follows:




**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Components
                of net periodic pension cost:Service
                cost
            
            $
            128,874
            
            $
            107,755
            
            $
            99,056Interest
                cost
            
            
            130,132
            
            
            131,324
            
            
            116,503Expected
                return on assets
            
            
            —
            
            
            —
            
            
            —Amortization
                of prior service cost
            
            
            121,925
            
            
            121,925
            
            
            121,925Net
                periodic pension cost
            
            $
            380,931
            
            $
            361,004
            
            $
            337,484Other
                changes in plan assets and benefit obligations recognized in accumulated
                other comprehensive loss:SFAS
                No. 158 recognition of deferred costs, net of tax benefit of
                $272,284
            
            
            528,552
            
            
            —
            
            
            —Total
                recognized in accumulated other comprehensive income
            
            
            528,552
            
            
            —
            
            
            —Total
                recognized in net periodic pension cost and accumulated other
                comprehensive loss
            
            $
            909,483
            
            $
            361,004
            
            $
            337,484




The
      following weighted average assumptions were used in calculating the net periodic
      pension cost:




**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Discount
                rate
            
            
            5.55
            %
            
            5.55
            %
            
            6.50
            %Rate
                of return on assets
            
            
            n/a
            
            
            n/a
            
            
            n/aRate
                of increase in future board fees/salary levels
            
            
            4.00
            %
            
            4.00
            %
            
            4.00
            %




The
      estimated amounts that will be amortized from accumulated other comprehensive
      income into net periodic benefit cost in 2007 are as follows:




Prior
                service cost
            
            $
            121,925Total
                amount recognized
            
            $
            121,925




**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 year ended
      December 31, 2004, the Company matched 200% of the employee’s contribution.
      Beginning January 1, 2005, this match was reduced to 100% of the employee’s
      contribution. Beginning January 1, 2007, this match was again reduced, this
      time
      to 50% of the employee’s contribution. The Board of Directors took these actions
      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 anticipated
      benefits that will be available as a result of the second-step conversion in
      2007. The expense incurred for this plan was approximately $175,000, $181,000,
      and $330,000 for the years ended December 31, 2006, 2005, and 2004,
      respectively.




96




**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.
      Under this plan, the ESOP purchased 571,320 shares of the Company’s common stock
      for approximately $7.4 million or $12.90 per share on average. All purchases
      were completed by December 31, 2005. No additional shares were purchased in
      2006. At December 31, 2006, the ESOP held approximately 533,000 shares with
      a
      fair value of $10.2 million. Approximately 38,000 of these shares were
      committed-to-be-released. At December 31, 2006, the ESOP also held approximately
      38,000 allocated shares with a fair value of $731,000. During the years ended
      December 31, 2006 and 2005, approximately 38,000 shares were committed to be
      released to participants each year resulting in recognition of approximately
      $563,000 and $475,000 in compensation expense, respectively. These shares were
      subsequently released to participants’ accounts in the first quarter of 2007 and
      2006, respectively. 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 2006,
      the
      Company began a dividend reinvestment plan through which approximately 700
      shares of the Company’s common stock were purchased by participants. As of
      December 31, 2006, the trust holds approximately 106,000 shares of the Company’s
      common stock as well as an additional $92,000 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.
      An
      additional 2,000 forfeited shares were reallocated in November 2006. RRP shares
      will generally vest at the rate of 20% per year over five years.




97


A
      summary
      of the status of the shares under the RRP as of December 31, 2006 and 2005,
      and
      changes during the years ended December 31, 2006 and 2005 are presented
      below:




**Year
                Ended December 31,****2006**
            
            **2005****Number
                of shares**
            
            **Weighted**
              **average
                grant**
              **date
                fair value**
            
            **Number
                of shares**
            
            **Weighted**
              **average
                grant**
              **date
                fair value**Nonvested
                at the beginning of the year
            
            
            285,660
            
            $
            12.02
            
            
            —
            
            $
            —Granted
            
            
            2,000
            
            
            16.28
            
            
            288,160
            
            
            12.02Vested
            
            
            (56,732
            )
            
            12.02
            
            
            —
            
            
            —Forfeited
            
            
            (2,000
            )
            
            12.01
            
            
            (2,500
            )
            
            12.01Nonvested
                at the end of the year
            
            
            228,928
            
            $
            12.06
            
            
            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 years ended December 31, 2006 and 2005, approximately
      57,000 and 28,000 shares, respectively, were amortized to expense, based on
      the
      proportional vesting of the awarded shares. During years ended December 31,
      2006
      and 2005, approximately $680,000 and $333,000, respectively, was recognized
      in
      compensation expense for the plan. During the year ended December 31, 2006,
      a
      tax benefit of approximately $281,000 was recognized from the plan. No tax
      benefit was recognized from the plan during the year ended December 31, 2005.
      As
      of December 31, 2006, approximately $2.4 million in additional compensation
      expense is scheduled to be recognized over the remaining lives of the RRP
      awards. At December 31, 2006, the weighted average remaining lives of the RRP
      awards is approximately 3.5 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. As of December
      31,
      2006, a total of 714,150 shares of common stock have been reserved for future
      issuance pursuant to the Option Plan of which 48,100 shares remain available
      for
      grant.




98


A
      summary
      of the status of the Company’s stock options under the Option Plan as of
      December 31, 2006 and 2005, and changes during the years ended December 31,
      2006
      and 2005 are presented below:




**Year
                Ended December 31,****2006**
            
            **2005****Number
                of shares**
            
            **Weighted**
              **average**
              **exercise
                price**
            
            **Number
                of shares**
            
            **Weighted**
              **average**
              **exercise
                price**Outstanding
                at the beginning of the year
            
            
            643,250
            
            $
            12.02
            
            
            —
            
            $
            —Granted
            
            
            25,150
            
            
            16.28
            
            
            646,100
            
            
            12.02Exercised
            
            
            —
            
            
            —
            
            
            —
            
            
            —Forfeited
            
            
            (2,350
            )
            
            12.01
            
            
            (2,850
            )
            
            12.01Outstanding
                at the end of the year
            
            
            666,050
            
            $
            12.18
            
            
            643,250
            
            $
            12.02Exercisable
                at the end of the year
            
            
            128,180
            
            $
            12.02
            
            
            —
            
            $
            —




The
      following table summarizes all stock options outstanding under the Option Plan
      as of December 31, 2006:




**Options
                Outstanding**
            
            **Options
                Exercisable****Exercise
                Price**
            
            **Number
                of**
              **Shares**
            
            **Weighted**
              **Average**
              **Exercise
                Price**
            
            **Weighted
                Average**
              **Remaining**
              **Contractual
                Life**
            
            **Number
                of**
              **Shares**
            
            **Weighted**
              **Average**
              **Exercise
                Price**(in
                years)$12.01
            
            
            636,400
            
            $
            12.01
            
            
            8.5
            
            
            127,280
            
            $
            12.0113.35
            
            
            4,500
            
            
            13.35
            
            
            8.9
            
            
            900
            
            
            13.3516.28
            
            
            25,150
            
            
            16.28
            
            
            9.9
            
            
            —
            
            
            —Total
            
            
            666,050
            
            $
            12.18
            
            
            8.6
            
            
            128,180
            
            $
            12.02Intrinsic
                value
            
            $
            4,662,350
            
            
            
            
            
            
            
            $
            917,769




The
      estimated fair value of options granted during 2006 and 2005 was $4.30 and
      $2.88
      per share, respectively. 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,****2006**
            
            **2005**Dividend
                yield
            
            
            1.47
            %
            
            1.67
            %Expected
                volatility
            
            
            23.38
            %
            
            23.62
            %Risk-free
                interest rate
            
            
            4.14
                - 4.61
            %
            
            3.74
                - 4.34
            %Expected
                life of options
            
            
            6
                years
            
            
            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.




99




As
      these
      were the first option awards 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.




For
      our
      initial stock option awards granted in July 2005, it was determined that the
      historical volatility of our stock price would not provide a reliable basis
      for
      determining the expected future volatility of our stock price, due to the
      relatively short time period for which the Company had had its common stock
      outstanding to the public. Accordingly, management determined that the
      volatility used in the option pricing model at that time 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. For our stock
      options awarded in November 2006, a more extensive stock price history was
      available. Consequently, for these awards it was determined that the historical
      volatility would be the most reliable estimate of future stock
      volatility.




During
      the years ended December 31, 2006 and 2005, approximately $370,000 and $181,000,
      respectively, was recognized in compensation expense for the Option Plan. No
      tax
      benefit was recognized from the plan during either period. At December 31,
      2006,
      approximately $1.4 million in additional compensation expense for awarded
      options remained unrecognized. The weighted average period over which this
      expense is scheduled to be recognized is approximately 3.5 years.




**15.**
            **COMMITMENTS
                AND CONTINGENCIES**




The
      Bank
      had approximately $3.6 million in outstanding mortgage loan commitments at
      December 31, 2006. The commitments are expected to be funded within 90 days
      with
      $3.4 million in fixed rates ranging from 5.75% to 6.25%. These loans are not
      originated for resale. Also outstanding at December 31, 2006 were unused lines
      of credit totaling approximately $69.1 million.




The
      Bank
      had approximately $3.6 million in outstanding mortgage loan commitments at
      December 31, 2005. The commitments were funded within 90 days with $3.6 million
      in fixed rates ranging from 5.50% to 6.25%. These loans were not originated
      for
      resale. Also outstanding at December 31, 2005 were unused lines of credit
      totaling approximately $64.0 million.




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, 2006 and December 31, 2005, the Bank
      had
      letters of credit outstanding of approximately $16.3 million and $14.1 million,
      respectively, of which $14.8 million and $12.5 million, respectively, were
      standby letters of credit. At December 31, 2006 and 2005, the uncollateralized
      portion of the letters of credit extended by the Bank was approximately $97,000
      and $169,000, respectively, of which $97,000 was for standby letters of credit
      in both years. The current amount of the liability for guarantees under letters
      of credit is not material as of December 31, 2006 and 2005.




100




The
      Company is subject to various pending claims and contingent liabilities arising
      in the normal course of business which are not reflected in the accompanying
      consolidated financial statements. Management considers that the aggregate
      liability, if any, resulting from such matters will not be material to our
      financial position or results of operations.




Among
      the
      Company’s contingent liabilities, are exposures to limited recourse arrangements
      with respect to the sales of whole loans and participation interests. At
      December 31, 2006, the exposure, which represent a portion of credit risk
      associated with the sold interests, amounted to $185,000. The exposure is for
      the life of the related loans and payable, on our proportional share, as losses
      are incurred.




**16.**
            **REGULATORY
                CAPITAL REQUIREMENTS**




The
      Company and the Bank are subject to various regulatory capital requirements
      administered by federal and state banking agencies. Failure to meet minimum
      capital requirements can initiate certain mandatory—and possibly additional
      discretionary—actions by regulators, that, if undertaken, could have a direct
      material effect on the Company’s consolidated financial statements. Under
      capital adequacy guidelines and the regulatory framework for prompt corrective
      action, the Bank must meet specific capital guidelines that involve quantitative
      measures of the Bank’s assets, liabilities and certain off-balance-sheet items
      as calculated under regulatory accounting practices. The Company’s and the
      Bank’s capital amounts and classification are also subject to qualitative
      judgments by the regulators about components, risk weightings and other
      factors.




Quantitative
      measures established by regulation to ensure capital adequacy require the Bank
      to maintain minimum amounts and ratios (set forth in the table below) of total
      and Tier I capital (as defined in the regulations) to risk-weighted assets
      (as
      defined), and of Tier I capital (as defined) to average assets (as defined).
      As
      of December 31, 2006, the Company and the Bank met all capital adequacy
      requirements to which they were subject.




As
      of
      December 31, 2006 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.




101


The
      Company’s and the Bank’s actual capital amounts and ratios are presented in the
      table below:


**Actual**
              
              **Required
                      for**
                    **Capital
                      Adequacy**
                    **Purposes**
              
              **To
                        Be Well Capitalized**
                      **Under
                        Prompt**
                      **Corrective
                        Action**
                      **Provisions****Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio**As
                  of December 31, 2006:Total
                  Capital(to
                  Risk Weighted Assets)The
                  Company
              
              $
              118,228,000
              
              
              20.29
              %
              $
              46,616,000
              
              
              8.00
              %
              
              N/A
              
              
              N/AThe
                  Bank
              
              
              97,686,000
              
              
              16.77
              
              
              46,613,000
              
              
              8.00
              
              $
              58,266,000
              
              
              10.00
              %Tier
                  I Capital(to
                  Risk Weighted Assets)The
                  Company
              
              
              116,625,000
              
              
              20.01
              
              
              23,308,000
              
              
              4.00
              
              
              N/A
              
              
              N/AThe
                  Bank
              
              
              96,083,000
              
              
              16.49
              
              
              23,306,000
              
              
              4.00
              
              
              34,959,000
              
              
              6.00Tier
                  I Capital(to
                  Average Assets)The
                  Company
              
              
              116,625,000
              
              
              12.80
              
              
              36,452,000
              
              
              4.00
              
              
              N/A
              
              
              N/AThe
                  Bank
              
              
              96,083,000
              
              
              10.54
              
              
              36,469,000
              
              
              4.00
              
              
              45,587,000
              
              
              5.00As
                  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/AThe
                  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
              
              
              23.19
              
              
              20,686,000
              
              
              4.00
              
              
              N/A
              
              
              N/AThe
                  Bank
              
              
              87,603,000
              
              
              16.93
              
              
              20,699,000
              
              
              4.00
              
              
              31,049,000
              
              
              6.00Tier
                  I Capital(to
                  Average Assets)The
                  Company
              
              
              119,932,000
              
              
              14.28
              
              
              28,045,000
              
              
              4.00
              
              
              N/A
              
              
              N/AThe
                  Bank
              
              
              87,603,000
              
              
              10.46
              
              
              33,496,000
              
              
              4.00
              
              
              41,870,000
              
              
              5.00




102




**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,****2006**
              
              **2005****Carrying**
                  **Amount**
              
              **Estimated**
                    **Fair**
                    **Value**
              
              **Carrying**
                  **Amount**
              
              **Estimated**
                    **Fair**
                    **Value****(In
                  Thousands)**Assets:Cash
                  and cash equivalents
              
              $
              44,565
              
              $
              44,565
              
              $
              27,714
              
              $
              27,714Investment
                  securities
              
              
              94,882
              
              
              94,919
              
              
              99,224
              
              
              99,145Mortgage-backed
                  securities
              
              
              134,166
              
              
              131,980
              
              
              147,354
              
              
              145,449Loans
                  receivable—net
              
              
              605,063
              
              
              606,088
              
              
              529,487
              
              
              512,873FHLB
                  stock
              
              
              11,241
              
              
              11,241
              
              
              11,061
              
              
              11,061Accrued
                  interest receivable
              
              
              4,366
              
              
              4,366
              
              
              3,475
              
              
              3,475Liabilities:Deposits
              
              $
              587,002
              
              $
              557,384
              
              $
              501,183
              
              $
              469,970Advances
                  from FederalHome
                  Loan Bank
              
              
              196,293
              
              
              195,147
              
              
              201,445
              
              
              203,431Other
                  borrowed money
              
              
              17,781
              
              
              17,781
              
              
              16,114
              
              
              16,114Accrued
                  interest payable
              
              
              2,504
              
              
              2,504
              
              
              1,909
              
              
              1,909Off
                  balance sheet financialinstruments
              
              
              —
              
              
              —
              
              
              —
              
              
              —




***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.




***FHLB
      Stock—*** Although
      Federal Home Loan Bank (“FHLB”) Stock is an equity interest in FHLB, it is
      carried at cost because it does not have a readily determinable fair value
      as
      its ownership is restricted and it lacks a market. The estimated fair value
      approximates the carrying amount.





***Accrued
      Interest Receivable—*** The
      fair
      value is considered to be equal to the carrying amount due to the short-term
      nature of the assets.




***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.




103


***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.




***Accrued
      Interest Payable—*** The
      fair
      value is considered to be equal to the carrying amount due to the short-term
      nature of the liabilities.




***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, 2006 and 2005. 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, 2006 and 2005 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, 2006**
              
              **December
                  31, 2005****ASSETS**Cash
                  and cash equivalents
              
              $
              13,865,547
              
              $
              25,639,310Investment
                  in Abington Bank
              
              
              93,560,272
              
              
              84,901,681Loans
                  receivable
              
              
              6,658,888
              
              
              7,007,751Other
                  assets
              
              
              17,517
              
              
              2,025TOTAL
                  ASSETS
              
              $
              114,102,224
              
              $
              117,550,767**LIABILITIES
                  AND STOCKHOLDERS’
                  EQUITY**LIABILITIES:Accounts
                  payable and accrued expenses
              
              $
              —
              
              $
              320,000Total
                  liabilities
              
              
              —
              
              
              320,000STOCKHOLDERS’
                  EQUITYTotal
                  stockholders’ equity
              
              
              114,102,224
              
              
              117,230,767TOTAL
                  LIABILITIES AND STOCKHOLDERS’ EQUITY
              
              $
              114,102,224
              
              $
              117,550,767




104
 
  **STATEMENT
          OF INCOME**


**Year
                  Ended December 31,****2006**
              
              **2005**INCOME:Interest
                  on loans
              
              $
              361,113
              
              $
              346,045Total
                  income
              
              
              361,113
              
              
              346,045EXPENSES:Professional
                  services
              
              
              221,300
              
              
              200,000Other
              
              
              185,375
              
              
              152,000Total
                  expenses
              
              
              406,675
              
              
              352,000LOSS
                  BEFORE INCOME TAXES
              
              
              (45,562
              )
              
              (5,955
              )EQUITY
                  IN UNDISTRIBUTED NET INCOME OF SUBSIDIARY
              
              
              6,832,320
              
              
              6,306,261PROVISION
                  FOR INCOME TAXES (BENEFIT)
              
              
              (15,490
              )
              
              (2,025
              )NET
                  INCOME
              
              $
              6,802,248
              
              $
              6,302,331




**STATEMENT
        OF CASH FLOWS**


**Year
                  Ended December 31,****2006**
              
              **2005**OPERATING
                  ACTIVITIES:Net
                  income
              
              $
              6,802,248
              
              $
              6,302,331Adjustments
                  to reconcile net income to net cashprovided
                  by operating activities:Undistributed
                  income of subsidiary
              
              
              (6,832,320
              )
              
              (6,306,261
              )Changes
                  in assets and liabilities which (used) provided cash:Other
                  assets
              
              
              (15,492
              )
              
              (2,025
              )Accounts
                  payable and accrued expenses
              
              
              (320,000
              )
              
              320,000Net
                  cash (used in) provided by operating activities
              
              
              (365,564
              )
              
              314,045INVESTING
                  ACTIVITIES:Principal
                  collected on loans
              
              
              348,863
              
              
              466,624Disbursements
                  for loans
              
              
              —
              
              
              (7,474,375
              )Net
                  cash provided by (used in) investing activities
              
              
              348,863
              
              
              (7,007,751
              )FINANCING
                  ACTIVITIES:Repayments
                  of liabilities
              
              
              —
              
              
              (2,138,530
              )Purchases
                  of treasury stock
              
              
              (8,317,848
              )
              
              —Payment
                  of cash dividend
              
              
              (3,439,214
              )
              
              (2,294,802
              )Net
                  cash used in financing activities
              
              
              (11,757,062
              )
              
              (4,433,332
              )NET
                  (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
              
              
              (11,773,763
              )
              
              (11,127,038
              )CASH
                  AND CASH EQUIVALENTS—Beginning of period
              
              
              25,639,310
              
              
              36,766,348CASH
                  AND CASH EQUIVALENTS—End of period
              
              $
              13,865,547
              
              $
              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.




105


**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 originally owned 55% of Abington Community Bancorp, Inc.’s
        outstanding common stock and, as of December 31, 2006, owned approximately
        57%
        of Abington Community Bancorp, Inc.’s outstanding common stock. 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.




**20.**
            **CONVERSION
                AND REORGANIZATION TO STOCK HOLDING
                COMPANY**




On
        November 30, 2006, the Company announced that the Company, the Bank and Abington
        Mutual Holding Company had adopted a Plan of Conversion and Reorganization
        (the
“Plan of Conversion”), which will result in the Company’s and the Bank’s
        reorganization from the two-tier mutual holding company structure to the
        stock
        holding company structure. Pursuant to the Plan of Conversion, (i) Abington
        Mutual Holding Company and the Company will, pursuant to an election to be
        made
        by the Bank pursuant to Section 10(l) of the Home Owners’ Loan Act, become
        federally chartered savings and loan holding companies and immediately
        thereafter each will convert to a federal interim stock association and then
        merge with and into the Bank, with the Bank being the surviving entity, (ii)
        the
        Bank will merge with an interim subsidiary of a newly formed Pennsylvania
        corporation, Abington Bancorp, Inc. (the “New Holding Company”), (iii) the
        shares of common stock of the Company held by persons other than Abington
        Mutual
        Holding Company (whose shares will be canceled) will be converted into shares
        of
        common stock of the New Holding Company pursuant to an exchange ratio designed
        to preserve the percentage ownership interests of such persons, (iv) the
        Bank
        will issue all of its capital stock to the New Holding Company, and (v) the
        New
        Holding Company will offer and sell shares of the common stock to depositors
        of
        the Bank and others in the manner and subject to the priorities set forth
        in the
        Plan of Conversion.
 
 In
        connection with the conversion, shares of the Company’s common stock currently
        owned by Abington Mutual Holding Company will be canceled and new shares
        of
        common stock, representing the approximate 57% ownership interest of Abington
        Mutual Holding Company, will be offered for sale by the New Holding Company.
        Concurrent with the completion of the offering, the Company’s existing public
        stockholders will receive shares of the New Holding Company’s common stock for
        each share of the Company’s common stock they own at that date, based on an
        exchange ratio to ensure that they will own approximately the same percentage
        of
        the New Holding Company’s common stock as they owned of the Company’s common
        stock immediately prior to the conversion.


106




The
        transactions contemplated by the Plan of Conversion are subject to approval
        by
        the Company’s stockholders, depositors of the Bank and the OTS, the Pennsylvania
        Department of Banking and the Federal Deposit Insurance Corporation, Special
        meetings of the Company’s stockholders and the Bank’s depositors will be held to
        approve the plan, likely in the second quarter of 2007. If the conversion
        is
        completed, conversion costs will be netted against the offering proceeds.
        If the
        conversion is terminated, such costs will be expensed.


******





**SUPPLEMENTARY
      DATA**




**SUMMARIZED
      CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)**




The
      following table presents summarized consolidated 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)**2006**Total
                  interest income
              
              $
              13,257
              
              $
              13,075
              
              $
              12,208
              
              $
              11,278Total
                  interest expense
              
              
              7,664
              
              
              7,434
              
              
              6,438
              
              
              5,732Net
                  interest income
              
              
              5,593
              
              
              5,641
              
              
              5,770
              
              
              5,546Provision
                  for loan losses
              
              
              58
              
              
              120
              
              
              8
              
              
              —Net
                  interest income after provision for loan losses
              
              
              5,535
              
              
              5,521
              
              
              5,762
              
              
              5,546Total
                  non-interest income
              
              
              715
              
              
              715
              
              
              751
              
              
              695Total
                  non-interest expense
              
              
              4,079
              
              
              3,864
              
              
              4,011
              
              
              3,792Income
                  before income taxes
              
              
              2,171
              
              
              2,372
              
              
              2,502
              
              
              2,449Income
                  taxes
              
              
              593
              
              
              666
              
              
              731
              
              
              702Net
                  income
              
              $
              1,578
              
              $
              1,706
              
              $
              1,771
              
              $
              1,747Basic
                  earnings per share
              
              $
              .11
              
              $
              .12
              
              $
              .12
              
              $
              .12Diluted
                  earnings per share
              
              
              .11
              
              
              .12
              
              
              .12
              
              
              .11**2005**Total
                  interest income
              
              $
              11,039
              
              $
              10,399
              
              $
              9,666
              
              $
              8,907Total
                  interest expense
              
              
              5,564
              
              
              5,050
              
              
              4,433
              
              
              3,952Net
                  interest income
              
              
              5,475
              
              
              5,349
              
              
              5,233
              
              
              4,955Provision
                  for loan losses
              
              
              5
              
              
              20
              
              
              —
              
              
              —Net
                  interest income after provision for loan losses
              
              
              5,470
              
              
              5,329
              
              
              5,233
              
              
              4,955Total
                  non-interest income
              
              
              688
              
              
              769
              
              
              762
              
              
              579Total
                  non-interest expense
              
              
              4,053
              
              
              3,900
              
              
              3,538
              
              
              3,485Income
                  before income taxes
              
              
              2,105
              
              
              2,198
              
              
              2,457
              
              
              2,049Income
                  taxes
              
              
              544
              
              
              604
              
              
              721
              
              
              638Net
                  income
              
              $
              1,561
              
              $
              1,594
              
              $
              1,736
              
              $
              1,411Basic
                  earnings per share
              
              $
              .10
              
              $
              .10
              
              $
              .11
              
              $
              .09Diluted
                  earnings per share
              
              
              .10
              
              
              .10
              
              
              .11
              
              
              .09




107




**ITEM
                  9.**
                **CHANGES
                    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                    DISCLOSURE**
  Not
        Applicable.
 
 **ITEM
        9A. CONTROLS AND PROCEDURES**
  The
          Company's management evaluated, with the participation of the Company's
          Chief
          Executive Officer and Chief Financial Officer, the effectiveness of the
          Company's disclosure controls and procedures (as defined in Rules 13a-15(e)
          or
          15d-15(e) under the Securities Exchange Act of 1934) as of the end of the
          period
          covered by this report. Based on such evaluation, the Company's Chief Executive
          Officer and Chief Financial Officer have concluded that these disclosure
          controls and procedures are effective. 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, 2006 that has materially affected, or is reasonably likely
          to
          materially affect, the Company's internal control over financial
          reporting.
 **ITEM
        9B. OTHER INFORMATION**
 
 Not
        applicable.
  **PART
        III**
 
 **ITEM
        10. DIRECTORS,  EXECUTIVE OFFICERS AND CORPORATE
        GOVERNANCE**
 
 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 2007 (the “Proxy Statement”),
          which will be filed with the Securities and Exchange Commission on or before
          April 30, 2007.
 
 Incorporated
          by reference to “Beneficial Ownership of Common Stock by Certain Beneficial
          Owners and Management - Section 16(a) Beneficial Ownership Reporting Compliance”
in the Proxy Statement.
 
 The
          Company has adopted a Code of Conduct and Ethics that applies to its principal
          executive officer and principal financial officer, as well as other officers
          and
          employees of the Company and the Bank. A copy of the Code of Conduct and
          Ethics
          may be found on the Company’s website at *www.abingtonbank.com* .
 **ITEM
        11.**  **EXECUTIVE
        COMPENSATION**
 
 Incorporated
          by reference to “Management Compensation” and “Report of the Compensation
          Committee” in the Proxy Statement.
 **ITEM
                12.**
              **SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                  STOCKHOLDER MATTERS**
 
 *Security
          Ownership of Certain Beneficial Owners and Management.* Information
          regarding security ownership of certain beneficial owners and management
          is
          incorporated by reference to “Beneficial Ownership of Common Stock by Certain
          Beneficial Owners and Management” in the Proxy Statement.
 
 *Equity
          Compensation Plan Information.* The
          following table provides information as of December 31, 2006 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.
 108




**Plan
                  Category**
              ****
              **Number
                  of securities to be issued upon exercise of outstanding options,
                  warrants**
                **and
                  rights**
                **(a)**
              ****
              **Weighted-average**
                **exercise
                  price of**
                **outstanding
                  options,**
                **warrants
                  and rights**
                **(b)**
              ****
              **Number
                  of securities remaining available for future issuance under equity
                  compensation plans (excluding securities reflected in column (a))**
                **(c)**Equity
                  compensation plansapproved
                  by security holders
              
              
              894,978
              (1)
              $
              12.18
              (1)
              
              48,100Equity
                  compensation plansnot
                  approved by securityholders
              
              
              —
              
              
              —
              
              
              —Total
              
              
              894,978
              
              $
              12.18
              
              
              48,100





(1)
              Includes
                  228,928 shares subject to restricted stock grants which were not
                  vested as
                  of December 31, 2006. The weighted-average exercise price excludes
                  such
                  restricted stock grants.
  **ITEM
        13.**  **CERTAIN
        RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
        INDEPENDENCE**
 
 Incorporated
        by reference to “Management Compensation - Indebtedness of Management and
        Related Party Transactions” in the Proxy Statement.
 
 **ITEM
        14.**  **PRINCIPAL
        ACCOUNTING FEES AND SERVICES**
 
 Incorporated
        by reference to “Ratification of Appointment of Independent Registered Public
        Accounting Firm” in the Proxy Statement.
 
 
 **PART
        IV**
 
 **ITEM
        15.**  **EXHIBITS,
        FINANCIAL STATEMENT SCHEDULES**
 
 **(a)**
              **Documents
                  Filed as Part of this
                  Report:**
  Financial
          Statements: The Consolidated Financial Statements of Abington Community
          Bancorp,
          Inc. and the Reports of Independent Registered Public Accounting Firm thereon,
          as listed below, have been filed under "Item 8, Financial Statements and
          Supplementary Data".
  Reports
          of Independent Registered Public Accounting Firm
  Consolidated
        Statements of Financial Condition As of December 31, 2006 and 2005
 
 Consolidated
        Statements of Income for the Years Ended December 31, 2006, 2005 and
        2004
 
 Consolidated
        Statements of Stockholders’ Equity for the Years Ended December 31, 2006, 2005
        and 2004
 
 Consolidated
        Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and
        2004
 
 Notes
        to
        Consolidated Financial Statements
  109
  **(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 Bancorp, Inc. and Robert W. White, dated
                  December 29, 2006.
              
              (2)10.2*
              
              Amended
                  and Restated Employment Agreement between Abington Bank and Robert
                  W.
                  White, dated December 29, 2006.
              
              (2)10.3*
              
              Amended
                  and Restated Employment Agreement between Abington Bank and Edward
                  W.
                  Gormley, dated December 29, 2006.
              
              (2)10.4*
              
              Amended
                  and Restated Employment Agreement between Abington Bank and Frank
                  Kovalcheck, dated December 29, 2006.
              
              (2)10.5*
              
              Amended
                  and Restated Employment Agreement between Abington Bank and Jack
                  J.
                  Sandoski, dated December 29, 2006.
              
              (2)10.6*
              
              Amended
                  and Restated Board of Directors Deferred Compensation Plan
              
              (3)10.7*
              
              Amended
                  and Restated Executive Deferred Compensation Plan
              
              (3)10.8*
              
              Supplemental
                  Executive Retirement Plan
              
              (3)10.9*
              
              Board
                  of Trustees Retirement Plan
              
              (3)10.10*
              
              Abington
                  Community Bancorp, Inc. 2005 Stock Option Plan
              
              (4)10.11*
              
              Abington
                  Community Bancorp, Inc. 2005 Recognition and Retention Plan and
                  Trust
                  Agreement
              
              (4)10.12*
              
              Form
                  of Split Dollar Insurance Agreement by and between Abington Bank
                  and each
                  of Robert W. White, Edward W. Gormley, Frank Kovalcheck and Jack
                  J.
                  Sandoski
              
              Filed
                  Herewith23.0
              
              Consent
                  of Beard Miller Company LLP
              
              Filed
                  Herewith23.1
              
              Consent
                  of Deloitte & Touche LLP
              
              Filed
                  Herewith31.1
              
              Rule
                  13(a)-14(a) Certification of the Chief Executive Officer
              
              Filed
                  Herewith31.2
              
              Rule
                  13(a)-14(a) Certification of the Chief Financial Officer
              
              Filed
                  Herewith32.0
              
              Section
                  1350 Certifications
              
              Filed
                  Herewith
  
 *  Denotes
        a
        management contract or compensatory plan or arrangement
  110
 
 (1)
            Incorporated
                by reference from Abington Community Bancorp’s Registration statement of
                Form S-1 filed on June 10, 2004 (Registration No.
                333-116370) 
 (2)
            Incorporated
                by reference from Abington Community Bancorp’s Current Report on Form 8-K
                dated December 27, 2006 and filed on January 4. 2007 (File No.
                0-51077) 
 (3)
            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). 
 (4)
            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.
  111
  **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.
                WhiteRobert
                  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
                Robert
                  W. White
              
              Chairman
                  of the Board, President and Chief Executive Officer
              
              March
                  15, 2007/s/
                  Jack J. Sandoski
                
                Jack
                  J. Sandoski
              
              Senior
                  Vice President and Chief Financial Officer
              
              March
                  15, 2007/s/
                  Michael F. Czerwonka, III
                Michael
                  F. Czerwonka, III
              
              Director
              
              March
                  15, 2007/s/
                  A. Stuard Graham, Jr.
                A.
                  Stuard Graham, Jr.
              
              Director
              
              March
                  15, 2007/s/
                  Jane Margraff Kieser
                Jane
                  Margraff Kieser
              
              Director
              
              March
                  15, 2007/s/
                  Joseph B. McHugh
                Joseph
                  B. McHugh
              
              Director
              
              March
                  15, 2007/s/
                  Robert John Pannepacker, Sr.
                Robert
                  John Pannepacker, Sr.
              
              Director
              
              March
                  15, 2007
 
  112