**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D. C.20549**

 

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**FORM 10-Q**

 

**QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For Quarter EndedSeptember 30, 2003**

 

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**Commission File Number 0-16018**

 

**ABINGTON BANCORP, INC.**

(Exact name of Registrant as specified in its charter)

 

| **Massachusetts**                                               |   | **04-3334127**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  identification No.) |
|                                                            |   |                                  |
| **97 Libbey Parkway, Weymouth, Massachusetts**                  |   | **02189**                             |
| (Address of principal executive offices)                        |   | (Zip Code)                            |
|                                                            |   |                                  |
| **(781) 682-6400**                                              |   |                                  |
| (Registrant’s telephone number, including  area code)      |   |                                  |

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes  ý  No  o

 

Indicate by check mark whether the Registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  ý

 

Indicate the number of shares outstanding of each of the Registrant’sclasses of common stock, as of the latest practicable date: 3,923,071 shares asof November 12, 2003.

 

 

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**Cautionary StatementRegarding Forward-Looking Information**

 

Certain statements in this Form10-Q constitute “forward-looking statements” within the meaning of Section 27Aof the Securities Act and Section 21E of the Exchange Act. Further, anystatements contained in this Form 10-Q that are not statements of historicalfact may be deemed to be forward-looking statements.  Without limiting the foregoing, the words “expect,” “anticipate,”“plan,” “believe,” “seek,” “estimate,” “internal” and similar words areintended to identify expressions that may be forward-looking statements.Forward-looking statements involve certain risks and uncertainties, and actualresults may differ materially from those contemplated by such statements. Forexample, actual results may be adversely affected by the followingpossibilities: (1) competitive pressure among depository institutions mayincrease; (2) changes in interest rates may reduce banking interest margins;(3) general economic conditions and real estate values may be less favorablethan contemplated; and (4) adverse legislation or regulatory requirements maybe adopted.  Many of such factors arebeyond the Company’s ability to control or predict. Readers of this Form 10-Qare accordingly cautioned not to place undue reliance on forward-lookingstatements. The Company disclaims any intent or obligation to update publiclyany of the forward-looking statements herein, whether in response to newinformation, future events or otherwise.

 

1

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**ABINGTONBANCORP, INC**.

**FORM10-Q**

 

**INDEX**

 
| Explanatory Note     |
|----------------------|
|                 |
| Part I               | Financial Information |
|                 |   |
| Item 1.              | Financial Statements |
|                 |   |
|                 | Unaudited Consolidated Balance Sheets as of September 30, 2003 and  December 31, 2002 |
|                 |   |
|                 | Unaudited Consolidated Statements of  Operations for the Three and Nine Months Ended September 30, 2003 and 2002 |
|                 |   |
|                 | Unaudited Consolidated Statements of  Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2003  and 2002 |
|                 |   |
|                 | Unaudited Consolidated Statements of  Comprehensive Income for the Nine Months Ended September 30, 2003 and 2002 |
|                 |   |
|                 | Unaudited Consolidated Statements of Cash  Flows for the Nine Months Ended September 30, 2003 and 2002 |
|                 |   |
|                 | Notes to Unaudited Consolidated Financial  Statements |
|                 |   |
| Item 2.              | Management’s Discussion and Analysis of  Consolidated Financial Condition and Results of Operations |
|                 |   |
| Item 3.              | Quantitative and Qualitative Disclosures  About Market Risk |
|                 |   |
| Item 4               | Controls and Procedures |
|                 |   |
| Part II              | Other Information |
|                 |   |
| Item 1.              | Legal Proceedings |
|                 |   |
| Item 2.              | Change in Securities and Use of Proceeds |
|                 |   |
| Item 3.              | Defaults Upon Senior Securities |
|                 |   |
| Item 4.              | Submission of Matters to a Vote of Security  Holders |
|                 |   |
| Item 5.              | Other Information |
|                 |   |
| Item 6.              | Exhibits and Reports on Form 8-K |
|                 |
| Signature  Page      |
|                 |
| Certifications  |

 

2

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**ABINGTON BANCORP, INC.**

**FORM 10-Q**

**For the Quarter Ended September 30, 2003**

 

**EXPLANATORY NOTE**

 

Based on the findings of aninternal accounting review initiated by the Company during the first quarter of2003, the Company reported that it would revise its previously announced 2002financial results and would restate its previously issued 2001 financialstatements.  The revisions andrestatement were necessary to correct accounting errors related to theacceleration of prepayments on mortgage-backed investment securities, errors inrecording payments received on various investment securities and certainadjustments related to accruals for income and expense.

 

During its internal accountingreview, the Company identified a number of accounting errors recorded by theCompany’s former controller, including underlying prepayment assumptions usedin the calculation of interest income in 2002 that did not adequately reflectthe actual prepayment rates received on a portion of its mortgage-backedsecurities (MBS) portfolio and that certain payments received on a portion ofits MBS portfolio were not properly applied. It was further determined, based upon the results of the preliminaryreview, that it would be necessary to revise the Company’s previously announcedfinancial results for 2002 and restate the Company’s financial statements for2001.  The Company engaged itsindependent accountant, PricewaterhouseCoopers LLP, which replaced ArthurAndersen LLP in mid-2002, to undertake a re-audit of the year 2001.  Restated financial statements for the year2001 are included in the Company's Form 10-K for the year ended December 31,2002 and the 2002 financial information contained in this Form 10-Q for thequarter and nine months ended September 30, 2002 has been revised.

 

Following the discovery ofthese accounting errors, the Company initiated a number of improvements in itsdisclosure controls and procedures as well as its internal controls.  Most of these improvements were designed toreduce the opportunity for human error, which was the primary cause of each ofthe identified errors.  Managementimplemented several changes in the process of recording transactions andrelated recordkeeping in those areas where errors occurred, including (a) automationof investment portfolio accounting (previously processed on a manual basis),(b) improved reconcilement procedures and yield analyses, (c) the utilizationof third party resources and advisory services and, (d) additional training andoversight of personnel within the accounting division along with the additionof three senior accounting officers with significant experience in bankaccounting matters and internal controls.

 

3

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Following is a summary of theeffect of restatement on the Company’s unaudited consolidated financialstatements at or for the periods presented:

 
|                                                |   |   |   | **Selected  Balance Sheet Data** |    |
|-----------------------------------------------------|--------|--------|--------|----------------------------------|---------|
|                                                |   |   |   | **At  September  30, 2002** |    |
|                                                |   |   |   | **As  Previously**               |    | **As** |   |
| **(Dollars in thousands)**                          |   |   |   | **Reported**                     |    | **Restated** |   |
| Securities  available for sale at market value      |   |   |   | $                                | 404,687 |   | $ | 403,560 |   |
| Other assets                                        |   |   |   | 11,554                           |    | 10,621 |   |
| Total assets                                        |   |   |   | 937,838                          |    | 935,778 |   |
| Accrued  taxes and expenses                         |   |   |   | 8,284                            |    | 7,652 |   |
| Other  liabilities                                  |   |   |   | 16,393                           |    | 15,981 |   |
| Total  liabilities                                  |   |   |   | 868,017                          |    | 866,973 |   |
| Retained  earnings                                  |   |   |   | 35,774                           |    | 34,389 |   |
| Other  accumulated comprehensive income, net of tax |   |   |   | 4,867                            |    | 5,236 |   |
| Total  stockholders’ equity                    |   |   |   | 57,602                           |    | 56,586 |   |
|                                                     |        |        |        |                                  |         |  |  |  |  |

 
|                                   |   | **Summary  Income Data** |   |
|----------------------------------------|--------|--------------------------|--------|
|                                   |   | **Three  Months Ended**  |   | **Nine  Months Ended** |   |
|                                   |   | **September  30, 2002**  |   | **September  30, 2002** |   |
| **(Dollars  in thousands,**            |   | **As  Previously**       |   | **As** |   | **As  Previously** |   |   |   |
| **except per  share data)**            |   | **Reported**             |   | **Restated** |   | **Reported** |   | **Restated** |   |
|                                   |   |                     |   |   |   |   |   |   |   |
| Interest and fees on loans             |   | $                        | 6,053  |   | $ | 6,218 |   | $ | 18,742 |   | $ | 18,670 |   |
| Interest on mortgage-backed securities |   | 5,059                    |   | 4,513 |   | 14,304 |   | 13,761 |   |
| Salaries and employee benefits         |   | 3,451                    |   | 3,406 |   | 10,036 |   | 10,025 |   |
| Other non-interest expense             |   | 2,071                    |   | 2,045 |   | 5,616 |   | 5,538 |   |
| Provision for income taxes             |   | 1,050                    |   | 940 |   | 3,210 |   | 3,023 |   |
| Net income                             |   | 1,693                    |   | 1,493 |   | 5,385 |   | 5,046 |   |
| Net income per share:                  |   |                     |   |   |   |   |   |   |   |
| Basic                                  |   | $                        | 0.51   |   | $ | 0.44 |   | $ | 1.67 |   | $ | 1.55 |   |
| Diluted                                |   | $                        | 0.49   |   | $ | 0.42 |   | $ | 1.60 |   | $ | 1.50 |   |

 
|                                                                                 |   | **Selected  Cash Flow Data (a)(b)**       |   |
|--------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                                 |   | **Nine  Months Ended September 30, 2002** |   |
|                                                                                 |   | **As  Previously**                        |   | **As** |   |
| **(Dollars  in thousands)**                                                          |   | **Reported**                              |   | **Restated** |   |
|                                                                                 |   |                                      |   |   |   |
| Net income                                                                           |   | $                                         | 5,385  |   | $ | 5,046 |   |
|                                                                                 |   |                                      |   |   |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:   |   |                                      |   |   |   |
| Amortization, accretion and depreciation,  net                                       |   | 1,607                                     |   | 2,122 |   |
| Other, net                                                                           |   | (3,292                                    | )      | (3,638 | ) |
| Net cash provided by operating activities                                            |   | 7,172                                     |   | 7,002 |   |
|                                                                                 |   |                                      |   |   |   |
| Cash flows from investing activities:                                                |   |                                      |   |   |   |
| Proceeds from principal payments on and  maturities of available for sale securities |   | 79,146                                    |   | 79,316 |   |
| Net cash provided (used) by Investing  activities                                    |   | (29,546                                   | )      | (29,376 | ) |
|                                                                                 |   |                                      |   |   |   |
| Net increase in cash and cash equivalents                                            |   | $                                         | 8,044  |   | $ | 8,044 |   |

 

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(a)   Thepreviously reported amounts for net cash provided by (used in) operatingactivities and investing activities have been adjusted for the effect of therestatement.

(b)   Asindicated, there has been no change in the net increase in cash and cashequivalents as a result of the restatement.

 

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**Part I****                 FinancialInformati****on**

**Item 1.****           FinancialStatements**

 

**ABINGTON BANCORP, INCCONSOLIDATED BALANCE SHEETS(Unaudited)**

 
| **(Dollar amounts in thousands)**                                                                                                |   | **September 30,  2003** |    | **December 31,  2002** |       |
|----------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|------------------------|------------|
| **ASSETS**                                                                                                                       |   |                    |    |                   | ** ** |
| Cash and due from banks                                                                                                          |   | $                       | 26,964  |                   | $          | 31,238 |   |
| Short-term investments                                                                                                           |   | 57,174                  |    | 77,878                 |       |
| Total cash and cash equivalents                                                                                                  |   | 84,138                  |    | 109,116                |       |
|                                                                                                                             |   |                    |    |                   |       |
| Loans held for sale                                                                                                              |   | 15,055                  |    | 35,629                 |       |
| Securities available for sale - at market value                                                                                  |   | 296,484                 |    | 352,339                |       |
| Loans                                                                                                                            |   | 386,372                 |    | 361,434                |       |
| Less:  Allowance for loan  losses                                                                                           |   | (4,238                  | )       | (4,212                 | )          |
| Loans, net                                                                                                                       |   | 382,134                 |    | 357,222                |       |
|                                                                                                                             |   |                    |    |                   |       |
| Federal Home Loan Bank stock, at cost                                                                                            |   | 14,042                  |    | 14,042                 |       |
| Banking premises and equipment, net                                                                                              |   | 12,160                  |    | 13,364                 |       |
| Goodwill                                                                                                                         |   | 5,771                   |    | 5,768                  |       |
| Intangible assets                                                                                                                |   | 4,167                   |    | 4,615                  |       |
| Other assets                                                                                                                     |   | 8,850                   |    | 11,125                 |       |
|                                                                                                                             |   | $                       | 822,801 |                   | $          | 903,220 |   |
|                                                                                                                             |   |                    |    |                   |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                    |   |                    |    |                   |       |
| Deposits                                                                                                                         |   | $                       | 656,680 |                   | $          | 646,628 |   |
| Short-term borrowings                                                                                                            |   | 12,489                  |    | 11,006                 |       |
| Long-term debt                                                                                                                   |   | 79,136                  |    | 167,009                |       |
| Accrued taxes and expenses                                                                                                       |   | 3,295                   |    | 6,789                  |       |
| Other liabilities                                                                                                                |   | 2,110                   |    | 1,770                  |       |
| Total liabilities                                                                                                                |   | 753,710                 |    | 833,202                |       |
|                                                                                                                             |   |                    |    |                   |       |
| Company obligated mandatorily redeemable securities                                                                              |   | 12,295                  |    | 12,238                 |       |
|                                                                                                                             |   |                    |    |                   |       |
| Commitments and contingencies                                                                                                    |   |                    |    |                   |       |
| Stockholders’ equity:                                                                                                       |   |                    |    |                   |       |
| Serial preferred stock, $.10 par value, 3,000,000 shares authorized;  none issued                                                |   | —                  |    | —                 |       |
| Common stock, $.10 par value, 12,000,000 shares authorized; 5,714,000and 5,553,000 shares issued in  2003 and 2002, respectively |   | 571                     |    | 555                    |       |
| Additional paid-in capital                                                                                                       |   | 36,715                  |    | 34,340                 |       |
| Retained earnings                                                                                                                |   | 36,153                  |    | 35,106                 |       |
|                                                                                                                             |   | 73,439                  |    | 70,001                 |       |
| Treasury stock, 1,807,000 shares, at cost                                                                                        |   | (17,584                 | )       | (17,584                | )          |
| Compensation plans                                                                                                               |   | (225                    | )       | 120                    |       |
| Other accumulated comprehensive income - net unrealized gain on  available for sale securities, net of taxes                     |   | 1,166                   |    | 5,243                  |       |
| Total stockholders’ equity                                                                                                  |   | 56,796                  |    | 57,780                 |       |
|                                                                                                                             |   | $                       | 822,801 |                   | $          | 903,220 |   |

 

Seeaccompanying notes to unaudited consolidated financial statements.

 

5

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**ABINGTON BANCORP, INCCONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**

 
|                                                             |   | **Three  Months Ended September 30,** |   | **Nine Months  Ended September 30,** |    |
|------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|---------|
| **(Dollar  amounts in thousands, except per share data)**        |   | **2003**                              |   | **2002**                             |    | **2003** |   | **2002** |   |
|                                                             |   |                                  |   | **(Restated)**                       |    |   |   | **(Restated)** |   |
| Interest and dividend  income:                                   |   |                                  |   |                                 |    |   |   |   |   |
| Interest and fees on loans                                       |   | $                                     | 5,793  |                                 | $       | 6,218 |   | $ | 18,132 |   | $ | 18,670 |   |
| Interest on mortgage-backed  securities                          |   | 3,102                                 |   | 4,513                                |    | 10,664 |   | 13,761 |   |
| Interest on bonds and  obligations                               |   | 233                                   |   | 419                                  |    | 971 |   | 1,553 |   |
| Dividend income                                                  |   | 108                                   |   | 128                                  |    | 455 |   | 410 |   |
| Interest on short-term  investments                              |   | 100                                   |   | 49                                   |    | 272 |   | 299 |   |
| Total interest and dividend  income                              |   | 9,336                                 |   | 11,327                               |    | 30,494 |   | 34,693 |   |
|                                                             |   |                                  |   |                                 |    |   |   |   |   |
| Interese expense:                                                |   |                                  |   |                                 |    |   |   |   |   |
| Interest on deposits                                             |   | 1,876                                 |   | 2,540                                |    | 6,455 |   | 8,224 |   |
| Interest on short-term  borrowings                               |   | 117                                   |   | 55                                   |    | 433 |   | 141 |   |
| Interest on long-term debt                                       |   | 1,482                                 |   | 2,214                                |    | 5,300 |   | 8,126 |   |
| Total interest expense                                           |   | 3,475                                 |   | 4,809                                |    | 12,188 |   | 16,491 |   |
|                                                             |   |                                  |   |                                 |    | — |   |   |   |
| Net interest income                                              |   | 5,861                                 |   | 6,518                                |    | 18,306 |   | 18,202 |   |
| Provision for loan losses                                        |   | —                                |   | 100                                  |    | 375 |   | 75 |   |
| Net interest income after  provision for loan losses             |   | 5,861                                 |   | 6,418                                |    | 17,931 |   | 18,127 |   |
|                                                             |   |                                  |   |                                 |    |   |   |   |   |
| Non-interest income                                              |   |                                  |   |                                 |    |   |   |   |   |
| Customer service fees                                            |   | 2,806                                 |   | 2,143                                |    | 7,804 |   | 6,283 |   |
| Gain (loss) on sales of  securities, net                         |   | 221                                   |   | (328                                 | )  | 919 |   | (241 | ) |
| Gain on sales of mortgage  loans, net                            |   | 1,886                                 |   | 785                                  |    | 5,091 |   | 2,552 |   |
| Other                                                            |   | 388                                   |   | 244                                  |    | 872 |   | 487 |   |
| Total noninterest income                                         |   | 5,301                                 |   | 2,844                                |    | 14,686 |   | 9,081 |   |
|                                                             |   |                                  |   |                                 |    |   |   |   |   |
| Non-interest expense:                                            |   |                                  |   |                                 |    |   |   |   |   |
| Salaries and employee  benefits                                  |   | 4,683                                 |   | 3,406                                |    | 14,146 |   | 10,025 |   |
| Occupancy and equipment  expenses                                |   | 1,203                                 |   | 1,098                                |    | 3,558 |   | 2,736 |   |
| Payments on Company  obligated mandatorily redeemable securities |   | 280                                   |   | 280                                  |    | 840 |   | 840 |   |
| Prepayment penalty on  borrowed funds                            |   | 1,722                                 |   | —                               |    | 1,722 |   |  — |   |
| Other non-interest expense                                       |   | 2,757                                 |   | 2,045                                |    | 8,517 |   | 5,538 |   |
| Total non-interest expense                                       |   | 10,645                                |   | 6,829                                |    | 28,783 |   | 19,139 |   |
|                                                             |   |                                  |   |                                 |    |   |   |   |   |
| Income before income taxes                                       |   | 517                                   |   | 2,433                                |    | 3,834 |   | 8,069 |   |
| Provision for income taxes                                       |   | 132                                   |   | 940                                  |    | 1,520 |   | 3,023 |   |
| Net income                                                       |   | $                                     | 385    |                                 | $       | 1,493 |   | $ | 2,314 |   | $ | 5,046 |   |
|                                                             |   |                                  |   |                                 |    |   |   |   |   |
| Basic earnings per share                                         |   | $                                     | 0.10   |                                 | $       | 0.44 |   | $ | 0.61 |   | $ | 1.55 |   |
| Diluted earnings per share                                       |   | $                                     | 0.09   |                                 | $       | 0.42 |   | $ | 0.58 |   | $ | 1.50 |   |
| Dividends declared                                               |   | $                                     | 0.11   |                                 | $       | 0.10 |   | $ | 0.33 |   | $ | 0.30 |   |
|                                                             |   |                                  |   |                                 |    |   |   |   |   |
| Weighted average common  shares outstanding                      |   | 3,888,000                             |   | 3,374,000                            |    | 3,817,000 |   | 3,249,000 |   |
| Weighted average dilutive  options                               |   | 191,000                               |   | 145,000                              |    | 184,000 |   | 125,000 |   |
| Diluted weighted average  common shares                          |   | 4,079,000                             |   | 3,519,000                            |    | 4,001,000 |   | 3,374,000 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

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ABINGTON BANCORP, INC.CONSOLIDATED STATEMENTS OF CHANGESIN STOCKHOLDERS’ EQUITY(Unaudited)

 
| **(Dollar  amounts in thousands)**                                                |   | **Common  Stock** |   | **Additional  Paid-in  Capital** |   | **Retained  Earnings** |   | **Treasury  Stock** |   | **Net  Unrealized  Gain or  (Loss) on  Available  for Sale  Securities** |   | **Compensation  Plans** |   | **Total** |   |
|-----------------------------------------------------------------------------------|--------|-------------------|--------|----------------------------------|--------|------------------------|--------|---------------------|--------|--------------------------------------------------------------------------|--------|-------------------------|--------|-----------|--------|
| **Nine Months Ended September 30, 2003:**                                         |   |              |   |                             |   |                   |   |                |   |                                                                     |   |                    |   |      |   |   |   |   |   |   |   |   |
| Balance at December 31, 2002                                                      |   | $                 | 555    |                             | $      | 34,340                 |   | $                   | 35,106 |                                                                     | $      | (17,584                 | )      | $         | 5,243  |   | $ | 120 |   | $ | 57,780 |   |
| Net income                                                                        |   | —            |   | —                           |   | 2,314                  |   | —              |   | —                                                                   |   | —                  |   | 2,314     |   |
| Exercise of stock options                                                         |   | 16                |   | 2,375                            |   | —                 |   | —              |   | —                                                                   |   | —                  |   | 2,391     |   |
| Unearned compensation                                                             |   | —            |   | —                           |   | —                 |   | —              |   | —                                                                   |   | (345                    | )      | (345      | )      |
| Change in unrealized gain (losses) on available for sale securities,  net of tax  |   | —            |   | —                           |   | —                 |   | —              |   | (4,077                                                                   | )      | —                  |   | (4,077    | )      |
| Dividends declared ($0.33 per share)                                              |   | —            |   | —                           |   | (1,267                 | )      | —              |   | —                                                                   |   | —                  |   | (1,267    | )      |
| Balance at September 30, 2003                                                     |   | $                 | 571    |                             | $      | 36,715                 |   | $                   | 36,153 |                                                                     | $      | (17,584                 | )      | $         | 1,166  |   | $ | (225 | ) | $ | 56,796 |   |
|                                                                              |   |              |   |                             |   |                   |   |                |   |                                                                     |   |                    |   |      |   |
| **Nine Months Ended September 30, 2002 (Restated):**                              |   |              |   |                             |   |                   |   |                |   |                                                                     |   |                    |   |      |   |   |   |   |   |   |   |   |
| Balance at December 31, 2001                                                      |   | $                 | 492    |                             | $      | 23,081                 |   | $                   | 30,358 |                                                                     | $      | (17,584                 | )      | $         | 1,752  |   | $ | 120 |   | $ | 38,219 |   |
| Net income                                                                        |   | —            |   | —                           |   | 5,046                  |   | —              |   | —                                                                   |   | —                  |   | 5,046     |   |
| Issuance of stock for MAFN acquisition                                            |   | 51                |   | 10,368                           |   | —                 |   | —              |   | —                                                                   |   | —                  |   | 10,419    |   |
| Exercise of stock options                                                         |   | 9                 |   | 424                              |   | —                 |   | —              |   | —                                                                   |   | —                  |   | 433       |   |
| Change in unrealized gains (losses) on available for sale securities,  net of tax |   | —            |   | —                           |   | —                 |   | —              |   | 3,484                                                                    |   | —                  |   | 3,484     |   |
| Dividends declared ($0.30 per share)                                              |   | —            |   | —                           |   | (1,015                 | )      | —              |   | —                                                                   |   | —                  |   | (1,015    | )      |
| Balance at September 30, 2002                                                     |   | $                 | 552    |                             | $      | 33,873                 |   | $                   | 34,389 |                                                                     | $      | (17,584                 | )      | $         | 5,236  |   | $ | 120 |   | $ | 56,586 |   |

 

Seeaccompanying notes to unaudited consolidated financial statements.

 

7

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ABINGTON BANCORP, INC.CONSOLIDATED STATEMENTS ofCOMPREHENSIVE INCOME (LOSS)(Unaudited)

 
|                                                                                                           |   | **Nine Months Ended September 30,** |   |
|----------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|
| **(Dollar amounts in thousands)**                                                                              |   | **2003**                            |   | **2002** |   |
|                                                                                                           |   |                                |   | **(Restated)** |   |
| Net income, as reported                                                                                        |   | $                                   | 2,314  |   | $ | 5,046 |   |
|                                                                                                           |   |                                |   |   |   |
| Change in unrealized losses  on available for sale securities, net of tax                                      |   | (3,480                              | )      | 3,328 |   |
|                                                                                                           |   |                                |   |   |   |
| Less: Reclassification  adjustment for available for sale securities gains included in net income,  net of tax |   | 597                                 |   | (156 | ) |
|                                                                                                           |   |                                |   |   |   |
| Comprehensive (loss) income                                                                                    |   | $                                   | (1,763 | ) | $ | 8,530 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

8

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ABINGTONBANCORP, INC.CONSOLIDATED STATEMENTS OF CASH FLOW(Unaudited)

 
|                                                                                    |   | **Nine Months Ended September 30,** |   |
|-----------------------------------------------------------------------------------------|--------|-------------------------------------|--------|
| **(Dollar amounts in thousands)**                                                       |   | **2003**                            |   | **2002** |   |
|                                                                                    |   |                                |   | **(Restated)** |   |
| Cash flows from operating  activities:                                                  |   |                                |   |   |   |
| Net income                                                                              |   | $                                   | 2,314  |   | $ | 5,046 |   |
|                                                                                    |   |                                |   |   |   |
| Adjustments to reconcile  net income to net cash provided by operating activities:      |   |                                |   |   |   |
| Provision for loan losses                                                               |   | 375                                 |   | 75 |   |
| Amortization, accretion and  depreciation, net                                          |   | 4,476                               |   | 2,122 |   |
| Net (gain) on sale of other  real estate owned                                          |   | —                              |   | (85 | ) |
| (Gain) loss on sales of  securities, net                                                |   | (919                                | )      | 241 |   |
| Gain on sale of bank  premises and equipment                                            |   | (33                                 | )      | — |   |
| Loans originated for sale  in the secondary market                                      |   | (420,483                            | )      | (162,669 | ) |
| Proceeds from sales of  loans                                                           |   | 446,148                             |   | 168,462 |   |
| Gain on sales of mortgage  loans, net                                                   |   | (5,091                              | )      | (2,552 | ) |
| Other, net                                                                              |   | 1,824                               |   | (3,638 | ) |
| Net cash provided by  operating activities                                              |   | 28,611                              |   | 7,002 |   |
|                                                                                    |   |                                |   |   |   |
| Cash flows from investing  activities:                                                  |   |                                |   |   |   |
|                                                                                    |   |                                |   |   |   |
| Cash received from MAFN                                                                 |   | —                              |   | 4,493 |   |
| Proceeds from sales of  available for sale securities                                   |   | 142,292                             |   | 18,176 |   |
| Proceeds from principal  payments on and maturities of available for sale securities    |   | 220,254                             |   | 79,316 |   |
| Purchase of available for  sale securities                                              |   | (314,287                            | )      | (192,572 | ) |
| Loans  (originated/purchased) repaid                                                    |   | (25,879                             | )      | 62,727 |   |
| Purchase of banking  premises and equipment and improvements to other real estate owned |   | (793                                | )      | (1,731 | ) |
| Proceeds from sale of banks  premises and equipment                                     |   | 33                                  |   | 215 |   |
| Proceeds from sales of  other real estate owned                                         |   | —                              |   | — |   |
| Net cash provided (used) by  investing activities                                       |   | 21,620                              |   | (29,376 | ) |
|                                                                                    |   |                                |   |   |   |
| Cash flows from financing  activities:                                                  |   |                                |   |   |   |
| Net increase in deposits                                                                |   | 10,252                              |   | 50,414 |   |
| Net increase (decrease) in  borrowings with original maturities of three months or less |   | 1,483                               |   | (474 | ) |
| Proceeds from issuance of  long-term debt                                               |   | 10,000                              |   | 35,000 |   |
| Principal payments on  long-term debt                                                   |   | (97,426                             | )      | (54,001 | ) |
| Proceeds from exercise of  stock options                                                |   | 2,094                               |   | 433 |   |
| Purchase of unearned ESOP  stock                                                        |   | (345                                | )      | — |   |
| Cash dividends paid                                                                     |   | (1,267                              | )      | (954 | ) |
| Net cash (used) provided by  financing activities                                       |   | (75,209                             | )      | 30,418 |   |
| Net increase in cash and  cash equivalents                                              |   | 24,978                              |   | 8,044 |   |
| Cash and cash equivalents  at beginning of period                                       |   | 109,116                             |   | 54,576 |   |
| Cash and cash equivalents  at end of period                                             |   | $                                   | 84,138 |   | $ | 62,620 |   |
|                                                                                    |   |                                |   |   |   |
| Supplemental cash flow  information:                                                    |   |                                |   |   |   |
| Interest paid on deposits                                                               |   | $                                   | 6,509  |   | $ | 8,183 |   |
| Interest paid on borrowed  funds                                                        |   | 6,343                               |   | 8,518 |   |
| Income taxes paid, net                                                                  |   | 834                                 |   | 4,429 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

9

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ABINGTON BANCORP,INC.NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTSSeptember 30, 2003

 

A)                                  BASIS OF PRESENTATION

 

The consolidated financial statements include the accounts of AbingtonBancorp, Inc. (a Massachusetts Corporation) and its wholly-owned subsidiaries,Abington Savings Bank (the “Bank”) and Abington Bancorp Capital Trust(collectively, the “Company”).  TheBank’s subsidiaries include three Massachusetts securities corporations,Abington Securities Corporation, Mass Securities Corporation and Mass SEC CorpII; Old Colony Mortgage Corporation, which originates and sells residentialmortgages to investors on a servicing released basis; Holt Park PlaceDevelopment Corporation and Norroway Pond Development Corporation, eachtypically owning properties being marketed for sale; and 70 Quincy Ave. LLC,which owns and operates property partially occupied by a branch of theBank.  

 

The accompanying consolidated financial statements have been preparedby the Company, without audit, in accordance with the instructions to Form 10-Qand do not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements.  These statements should be read inconjunction with the consolidated financial statements and notes theretoincluded in the Company’s most recent Annual Report on Form 10-K for the yearended December 31, 2002, filed with the U. S. Securities and ExchangeCommission.

 

In the opinion of management, all adjustments considered necessary fora fair presentation of the financial statements, consisting primarily of normalrecurring accruals, have been included. Operating results for the three and nine month periods presented are notnecessarily indicative of the results to be expected for the year or any otherinterim period.

 

B)                                    RESTATEMENT

 

Based on the findings of aninternal accounting review initiated by the Company during the first quarter of2003, the Company reported that it would revise its previously announced 2002financial results and would restate its previously issued 2001 financialstatements.  The revisions andrestatement were necessary to correct accounting errors related to theamortization/accretion of premiums/discounts on mortgage-backed investmentsecurities due to the acceleration of prepayments, errors in the recording ofpayments received on various investment securities, interest income on mortgageloans and certain adjustments related to accruals for income and expense. 

 

The results of operations forthe three and nine months ended September 30, 2002 presented herein representthe Company’s unaudited results for the periods as restated.

 

Following is a summary of theeffect of restatement on the Company’s unaudited consolidated financialstatements at or for the periods presented:

 
|                                                |   | **Selected  Balance Sheet Data** |    |
|-----------------------------------------------------|--------|----------------------------------|---------|
|                                                |   | **At  September  30, 2002** |    |
|                                                |   | **As Previously**                |    | **As** |   |
| **(Dollars in thousands**                           |   | **Reported**                     |    | **Restated** |   |
| Securities  available for sale at market value      |   | $                                | 404,687 |   | $ | 403,560 |   |
| Other assets                                        |   | 11,554                           |    | 10,621 |   |
| Total assets                                        |   | 937,838                          |    | 935,778 |   |
| Accrued  taxes and expenses                         |   | 8,284                            |    | 7,652 |   |
| Other  liabilities                                  |   | 16,393                           |    | 15,981 |   |
| Total  liabilities                                  |   | 868,017                          |    | 866,973 |   |
| Retained  earnings                                  |   | 35,774                           |    | 34,389 |   |
| Other  accumulated comprehensive income, net of tax |   | 4,867                            |    | 5,236 |   |
| Total  stockholders’ equity                    |   | 57,602                           |    | 56,586 |   |
|                                                     |        |                                  |         |  |  |  |  |

 
|                                   |   | **Summary  Income Data** |   |
|----------------------------------------|--------|--------------------------|--------|
|                                   |   | **Three  Months Ended**  |   | **Nine  Months Ended** |   |
|                                   |   | **September  30, 2002**  |   | **September  30, 2002** |   |
| **(Dollars  in thousands,**            |   | **As  Previously**       |   | **As** |   | **As  Previously** |   |   |   |
| **except per share data)**             |   | **Reported**             |   | **Restated** |   | **Reported** |   | **Restated** |   |
|                                   |   |                     |   |   |   |   |   |   |   |
| Interest and fees on loans             |   | $                        | 6,053  |   | $ | 6,218 |   | $ | 18,742 |   | $ | 18,670 |   |
| Interest on mortgage-backed securities |   | 5,059                    |   | 4,513 |   | 14,304 |   | 13,761 |   |
| Salaries and employee benefits         |   | 3,451                    |   | 3,406 |   | 10,036 |   | 10,025 |   |
| Other non-interest expense             |   | 2,071                    |   | 2,045 |   | 5,616 |   | 5,538 |   |
| Provision for income taxes             |   | 1,050                    |   | 940 |   | 3,210 |   | 3,023 |   |
| Net income                             |   | 1,693                    |   | 1,493 |   | 5,385 |   | 5,046 |   |
| Net income per share:                  |   |                     |   |   |   |   |   |   |   |
| Basic                                  |   | $                        | 0.51   |   | $ | 0.44 |   | $ | 1.67 |   | $ | 1.55 |   |
| Diluted                                |   | $                        | 0.49   |   | $ | 0.42 |   | $ | 1.60 |   | $ | 1.50 |   |

 
|                                                                                 |   | **Selected  Cash Flow Data (a)(b)**       |   |
|--------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                                 |   | **Nine  Months Ended September 30, 2002** |   |
|                                                                                 |   | **As Previously**                         |   | **As** |   |
| **(Dollars in thousands)**                                                           |   | **Reported**                              |   | **Restated** |   |
|                                                                                 |   |                                      |   |   |   |
| Net income                                                                           |   | $                                         | 5,385  |   | $ | 5,046 |   |
|                                                                                 |   |                                      |   |   |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:   |   |                                      |   |   |   |
| Amortization, accretion and depreciation,  net                                       |   | 1,607                                     |   | 2,122 |   |
| Other, net                                                                           |   | (3,292                                    | )      | (3,638 | ) |
| Net cash provided by operating activities                                            |   | 7,172                                     |   | 7,002 |   |
|                                                                                 |   |                                      |   |   |   |
| Cash flows from investing activities:                                                |   |                                      |   |   |   |
| Proceeds from principal payments on and  maturities of available for sale securities |   | 79,146                                    |   | 79,316 |   |
| Net cash provided (used) by Investing  activities                                    |   | (29,546                                   | )      | (29,376 | ) |
|                                                                                 |   |                                      |   |   |   |
| Net increase in cash and cash equivalents                                            |   | $                                         | 8,044  |   | $ | 8,044 |   |

 

----

(a)   Thepreviously reported amounts for net cash provided by (used in) operatingactivities and investing activities have been adjusted for the effect of therestatement.

(b)   Asindicated, there has been no change in the net increase in cash and cashequivalents as a result of the restatement.

 

10

----

 

C)                                    ACQUISITION

 

On September 13, 2002, the Company completed the acquisition ofMassachusetts Fincorp, Inc. (MAFN), the parent company of The MassachusettsCo-operative Bank.  The transaction wasaccounted for under the purchase method of accounting.  Accordingly, the acquired assets andliabilities of MAFN and its results of operations are included in the Company’sfinancial statements for reporting periods subsequent to September 13, 2002.

 

During the third quarter of 2003, certain unresolved items from theacquisition were quantified that affected the carrying value of goodwill withinthe balance sheet.  Real estate acquiredin the transaction, initially recorded at estimated values, was written down toappraised value as of September 13, 2002 thereby increasing the balance ofgoodwill.  Other adjustments wererecorded related to unresolved MAFN stock based incentive plan accruals andvaluations as of the acquisition date which decreased the carrying value ofgoodwill.  Management does not believethat the net affect of these adjustments is material as goodwill increased froma balance of $5.768 million at December 31, 2002 to $5.771 million at September30, 2003.

 

D)                                   STOCK REPURCHASEPROGRAM

 

As of September 30, 2003, the Company had repurchased 932,600 shares ofits common stock at a total cost of $13.9 million.  The stock was purchased pursuant to three separate authorizationsby the Company’s Board of Directors. The Board of Directors delegated to senior management the authority todetermine the timing and pricing of the repurchases.  There remain approximately 109,000 shares approved for repurchaseunder the current authorization.

 

E)                                     EARNINGS PER SHARE

 

Basic earnings per share iscomputed by dividing net income available to common shareholders by theweighted average number of common shares outstanding for the period.  Diluted earnings per share reflects thedilution that could occur if securities of other contracts to issue commonstock were exercised or converted into common stock.  The calculation of common stock equivalents for fully diluted pershare computations excludes options which have an exercise price in excess ofthe average closing price of the Company’s common stock for the periodpresented.  For the three and nine monthperiods ended September 30, 2003, the average closing price of the Company'scommon stock exceeded the exercise price of all outstanding options.  The following table shows the calculation ofaverage common share and common share equivalents for the purposes of earningsper share calculations:

 
|                                       |   | **Three  Months Ended  September 30** |   | **Nine  Months Ended  September 30** |   |
|--------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
| **(In  thousands, except per share data)** |   | **2003**                              |   | **2002**                             |   | **2003** |   | **2002** |   |
|                                       |   |                                  |   | **(Restated)**                       |   |   |   | **(Restated)** |   |
|                                       |   |                                  |   |                                 |   |   |   |   |   |
| Average common shares outstanding          |   | 3,888                                 |   | 3,374                                |   | 3,817 |   | 3,249 |   |
| Weighted average dilutive options          |   | 191                                   |   | 145                                  |   | 184 |   | 125 |   |
| Fully diluted weighted average shares      |   | 4,079                                 |   | 3,519                                |   | 4,001 |   | 3,374 |   |
|                                       |   |                                  |   |                                 |   |   |   |   |   |
| Net income                                 |   | $                                     | 385    |                                 | $      | 1,493 |   | $ | 2,314 |   | $ | 5,046 |   |
|                                       |   |                                  |   |                                 |   |   |   |   |   |
| Basic earnings per share:                  |   |                                  |   |                                 |   |   |   |   |   |
| Net income per share                       |   | $                                     | 0.10   |                                 | $      | 0.44 |   | $ | 0.61 |   | $ | 1.55 |   |
|                                       |   |                                  |   |                                 |   |   |   |   |   |
| Fully diluted earnings per share:          |   |                                  |   |                                 |   |   |   |   |   |
| Net income per share                       |   | $                                     | 0.09   |                                 | $      | 0.42 |   | $ | 0.58 |   | $ | 1.50 |   |

 

11

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F)                                     BUSINESSSEGMENTS

 

SFAS No. 131, *Disclosures about Segments of an Enterprise andRelated Information,* requires certain financial and supplementaryinformation to be disclosed on an annual and interim basis for each reportablesegment of an enterprise.  Historically,the Company has identified its reportable business segments as CommunityBanking and Mortgage Banking based on products and services provided to thecustomers.  Non-reportable operatingsegments of the Company’s operations which do not have similar characteristicsto the community banking or mortgage banking operations and do not meet thequantitative thresholds requiring disclosure are included in the Other categoryin the disclosure of the business segments below.  These non-reportable segments include the activity of the ParentCompany and Abington Bancorp Capital Trust.

 

12

----

 
|                                                           |   | **Community  Banking** |   | **Mortgage  Banking** |   | **Other** |   | **Eliminations** |   | **Total** |   |
|----------------------------------------------------------------|--------|------------------------|--------|-----------------------|--------|-----------|--------|------------------|--------|-----------|--------|
| **For the three months  ended  September 30, 2003**            |   |                   |   |                  |   |      |   |             |   |      |   |
| Net interest income                                            |   | $                      | 5,742  |                  | $      | 115       |   | $                | 4      |      | $      | — |   | $ | 5,861 |   |
| Provision for loan losses                                      |   | —                 |   | —                |   | —    |   | —           |   | —    |   |
| Noninterest income                                             |   | 3,342                  |   | 2,001                 |   | —    |   | (42              | )      | 5,301     |   |
| Noninterest expense                                            |   | 9,152                  |   | 1,217                 |   | 318       |   | (42              | )      | 10,645    |   |
| Net income                                                     |   | (29                    | )      | 539                   |   | (125      | )      | —           |   | 385       |   |
| Total assets                                                   |   | 891,211                |   | 21,607                |   | 82,547    |   | (172,564         | )      | 822,801   |   |
|                                                           |   |                   |   |                  |   |      |   |             |   |      |   |
| **For the three months  ended  September 30, 2002 (restated)** |   |                   |   |                  |   |      |   |             |   |      |   |
| Net interest income                                            |   | $                      | 6,436  |                  | $      | 74        |   | $                | 8      |      | $      | — |   | $ | 6,518 |   |
| Provision for loan losses                                      |   | 100                    |   | —                |   | —    |   | —           |   | 100       |   |
| Noninterest income                                             |   | 2,060                  |   | 783                   |   | —    |   | 1                |   | 2,844     |   |
| Noninterest expense                                            |   | 5,962                  |   | 587                   |   | 280       |   | —           |   | 6,829     |   |
| Net income                                                     |   | 1,510                  |   | 162                   |   | (180      | )      | 1                |   | 1,493     |   |
| Total assets                                                   |   | 937,825                |   | 31,074                |   | 64,531    |   | (97,652          | )      | 935,778   |   |
|                                                           |   |                   |   |                  |   |      |   |             |   |      |   |
| **For the nine months ended  September 30, 2003**              |   |                   |   |                  |   |      |   |             |   |      |   |
| Net interest income                                            |   | $                      | 17,976 |                  | $      | 320       |   | $                | 10     |      | $      | — |   | $ | 18,306 |   |
| Provision for loan losses                                      |   | 375                    |   | —                |   | —    |   | —           |   | 375       |   |
| Noninterest income                                             |   | 9,122                  |   | 5,691                 |   | —    |   | (127             | )      | 14,686    |   |
| Noninterest expense                                            |   | 24,683                 |   | 3,349                 |   | 878       |   | (127             | )      | 28,783    |   |
| Net income                                                     |   | 1,290                  |   | 1,589                 |   | (565      | )      | —           |   | 2,314     |   |
| Total assets                                                   |   | 891,211                |   | 21,607                |   | 82,547    |   | (172,564         | )      | 822,801   |   |
|                                                           |   |                   |   |                  |   |      |   |             |   |      |   |
| **For the nine months ended  September 30, 2002 (restated)**   |   |                   |   |                  |   |      |   |             |   |      |   |
| Net interest income                                            |   | $                      | 17,959 |                  | $      | 223       |   | $                | 20     |      | $      | — |   | $ | 18,202 |   |
| Provision for loan losses                                      |   | 75                     |   | —                |   | —    |   | —           |   | 75        |   |
| Noninterest income                                             |   | 6,529                  |   | 2,567                 |   | —    |   | (15              | )      | 9,081     |   |
| Noninterest expense                                            |   | 16,492                 |   | 1,807                 |   | 840       |   | —           |   | 19,139    |   |
| Net income                                                     |   | 4,967                  |   | 588                   |   | (509      | )      | —           |   | 5,046     |   |
| Total assets                                                   |   | 937,825                |   | 31,074                |   | 64,531    |   | (97,652          | )      | 935,778   |   |

 

G)                                    PENSIONPLAN TERMINATION

 

The Board of Directors voted to freeze the Company’s defined benefitpension plan (the “Plan”) and to terminate the Plan effective December 31,2001.  In connection therewith, theCompany amended the Plan to improve the benefit formula of current employeesand to permit payment of lump sums from the Plan.  Termination of the Plan resulted in a gain on settlement of$376,000 ($244,000, net of related taxes) which was recorded as a reduction insalaries and benefits expense in the quarter ended March 31, 2002.  As part of a redesign of retirementbenefits, the Company contributes 3% of each employee’s W-2 compensation to theCompany’s 401(k) program.

 

H)                                   STOCKBASED COMPENSATION

 

The Company accounts for stock options under the provisions ofAccounting Principles Board Opinion (“APB”) No. 25, “Accounting for StockIssued to Employees,” under which no compensation expense is recognized whenthe stock options are granted.

 

In December 2002, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards No. 148, “Accounting forStock-Based Compensation – Transition and Disclosure,” (“SFAS No. 148”).  SFAS No. 148 amends SFAS No. 123,“Accounting for Stock-Based Compensation,” to provide alternative methods oftransition for a 

 

13

----

 

voluntary change to the fair value based methods of accounting forstock-based employee compensation.  Inaddition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 torequire more prominent disclosure about the method of accounting for stockbased compensation and the effect of the method on reported results.

 

The Company continues to follow the intrinsic value method ofaccounting as prescribed by APB No. 25. The following table presents the effects on net income and earnings pershare if the Company had applied the fair value recognition provisions of SFASNo. 123 to stock-based employee compensation.

 

|                                                                                                                          |   | **Three Months Ended September 30,** |   | **Nine Months Ended September 30,** |   |
|-------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                                                                                                                          |   | **2003**                             |   | **2002**                            |   | **2003** |   | **2002** |   |
|                                                                                                                          |   |                                 |   | **(Restated)**                      |   |   |   | **(Restated)** |   |
| Net income                                                                                                                    |   | $                                    | 385    |                                | $      | 1,493 |   | $ | 2,314 |   | $ | 5,046 |   |
| Add: Stock-based compensation expenses  reported in net income, net of taxes                                                  |   |                                 | — |                                |   | 16 |   |   | 14 |   |   | 18 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value-based method for all awards,  net of tax |   | 6                                    |   | 65                                  |   | 26 |   | 82 |   |
| Proforma net income                                                                                                           |   | $                                    | 379    |                                | $      | 1,444 |   | $ | 2,302 |   | $ | 4,982 |   |
|                                                                                                                          |   |                                 |   |                                |   |   |   |   |   |
| Earnings per share:                                                                                                           |   |                                 |   |                                |   |   |   |   |   |
| Basic:                                                                                                                        |   |                                 |   |                                |   |   |   |   |   |
| As reported                                                                                                                   |   | $                                    | 0.10   |                                | $      | 0.44 |   | $ | 0.61 |   | $ | 1.55 |   |
| Pro forma                                                                                                                     |   | 0.10                                 |   | 0.43                                |   | 0.61 |   | 1.53 |   |
| Diluted:                                                                                                                      |   |                                 |   |                                |   |   |   |   |   |
| As reported                                                                                                                   |   | $                                    | 0.09   |                                | $      | 0.42 |   | $ | 0.58 |   | $ | 1.50 |   |
| Pro forma                                                                                                                     |   | 0.09                                 |   | 0.41                                |   | 0.58 |   | 1.48 |   |

 

I)                                        LOANSAND DEPOSITS

 

Following is a summary of the Company’s consolidated loans and depositsas of the dates shown:

 
| **(Dollars  in thousands)**         |   | **September  30,  2003** |    | **December  31,  2002** |   | **September  30,  2002** |   |
|-------------------------------------|--------|--------------------------|---------|-------------------------|--------|--------------------------|--------|
|                                |   |                     |    |                    |   | **(Restated)**           |   |
| Loans and loans held for sale:      |   |                     |    |                    |   |                     |   |
| Residential                         |   | $                        | 229,056 |                    | $      | 233,503                  |   | $ | 243,432 |   |
| Home equity                         |   | 43,617                   |    | 33,702                  |   | 34,015                   |   |
| Commercial real estate              |   | 111,228                  |    | 112,374                 |   | 128,455                  |   |
| Other                               |   | 17,526                   |    | 17,484                  |   | 21,262                   |   |
| Total loans and loans held for sale |   | $                        | 401,427 |                    | $      | 397,063                  |   | $ | 427,164 |   |
|                                |   |                     |    |                    |   |                     |   |
| Deposits                            |   |                     |    |                    |   |                     |   |
| Demand                              |   | $                        | 95,842  |                    | $      | 90,960                   |   | $ | 93,515 |   |
| NOW                                 |   | 108,686                  |    | 105,047                 |   | 104,320                  |   |
| Savings and money market            |   | 282,531                  |    | 260,480                 |   | 262,603                  |   |
| Core deposits                       |   | 487,059                  |    | 456,487                 |   | 460,438                  |   |
| Time                                |   | 169,621                  |    | 190,141                 |   | 187,737                  |   |
| Total deposits                      |   | $                        | 656,680 |                    | $      | 646,628                  |   | $ | 648,175 |   |

 

J)       SUBSEQUENT EVENT

 

On October 21, 2003, theCompany and Seacoast Financial Services Corporation (SCFS), New Bedford,Massachusetts, jointly announced the execution of a definitive agreementwhereby SCFS will acquire the Company. Each share of Company common stock will be exchanged for either $34 pershare in cash, or 1.4468 shares of SCFS common stock, subject to certainelection and allocation procedures intended to ensure that 75% of the Company’scommon shares will be exchanged for SCFS common stock and 25% for cash.  The transaction is expected  to be completed during the second quarter of2004, or sooner, subject to the approval of Company shareholders and regulatorsof both companies.

 

K)      ACCOUNTINGPRONOUNCEMENT

 

In May 2003, the FASB issuedSFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity.”  The Statement establishes standards for how an issuer classifiesand measures certain financial instruments with characteristics of bothliabilities and equity.  SFAS No. 150became effective during the third quarter of 2003 and required that an issuerclassify financial instruments, such as the Company’s manditorily redeemablesecurities, as a liability and the related payments thereon as interestexpense.  On November 7, 2003, the FASBissued Staff Position 150-3 which deferred the application of severalprovisions of SFAS No. 150.  StaffPosition 150-3 notes FASB Board plans to reconsider implementation issues and,perhaps, classification or measurement guidance of SFAS No. 150 during thedeferral period.  On October 23, 2003,the Company reported its operating results for the three and nine month periodsended September 30, 2003 under the earlier provisions of SFAS No. 150.  The accompanying financial statements havebeen presented consistent with prior periods, reflecting a deferral of theprovisions of SFAS No. 150 pursuant to the guidance contained in Staff Position150-3.  There is no affect on net incomein any of the periods presented as a result of the application or deferral ofSFAS No. 150.

 

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**Item 2.      Management’s Discussion and Analysis ofConsolidated Financial Condition and Results of Operation.**

 

The following discussion shouldbe read in conjunction with the financial statements, notes and tables includedin the Company’s Annual Report on Form 10-K for the fiscal year ended December31, 2002 filed with the Securities and Exchange Commission.  The discussion contains certainforward-looking information regarding the future performance of theCompany.  All forward-lookinginformation is inherently uncertain and actual results may differ materiallyfrom the assumptions, estimates or expectations reflected or contained in theforward-looking information.  Pleaserefer to “Cautionary Statement Regarding Forward-Looking Information” locatedon page 1 of this form 10-Q for a further discussion.

 

RECENT DEVELOPMENTS

 

On October 21, 2003, AbingtonBancorp, Inc. and Seacoast Financial Services Corporation (SCFS), New Bedford,Massachusetts, jointly announced the execution of a definitive agreementwhereby SCFS will acquire Abington Bancorp, Inc.  Each share of Abington common stock will be exchanged for either$34 per share in cash, or 1.4468 shares of SCFS common stock, subject tocertain election and allocation procedures intended to ensure that 75% ofAbington’s shares will be exchanged for SCFS common stock and 25% forcash.  The transaction is expected to becompleted during the second quarter of 2004, or sooner, subject to the approvalof Abington’s shareholders and regulators of both companies.

 

During the quarter endedSeptember 30, 2003, the Company announced a balance sheet restructuring programto improve earnings, strengthen capital ratios and reduce interest rate andprice risk.  The program was completedby quarter end and included the sale of $75 million of higher risk and $22million of smaller denomination mortgage-backed securities.  Proceeds from these sales were used toreduce approximately $72 million of longer-term, higher-cost Federal Home LoanBank (FHLB) borrowings.  In connectionwith this program, the Company recorded approximately $1.72 million in chargesrelated to the prepayment of the FHLB borrowings.  The Company repaid an additional $46 million of short-term FHLBdebt during the quarter and sold an additional $12 million of mortgage-backedsecurities.  All of these activitiesaffected the Company's net income for the three and nine month periods of 2003,in comparison to prior periods.

 

Based on the findings of aninternal accounting review initiated by the Company during the first quarter of2003, the Company announced that it would revise its previously released 2002financial results and would restate its previously issued 2001 financialstatements.  The revisions andrestatement were necessary to correct accounting errors related to theamortization/accretion of premiums/discounts on mortgage-backed investmentsecurities due to the acceleration of prepayments, errors in recording paymentsreceived on various investment securities, interest income on mortgage loansand certain adjustments related to accruals for income and expense.  See “EXPLANATORY NOTE” preceding Part I ofthis Quarterly Report on Form 10-Q and Part I, Item 4 — “Controls andProcedures.”

 

During the internal accountingreview, the Company identified a number of accounting errors recorded by thecompany’s former controller, including underlying prepayment assumptions usedin the calculation of interest income in 2002 that did not adequately

 

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reflect the actual prepaymentrates received on a portion of its mortgage-backed securities (MBS) portfolio,and that certain payments received on a portion of its MBS portfolio were notproperly applied.  It was furtherdetermined, based upon the results of the preliminary review, that it would benecessary to revise the Company’s previously announced financial results for2002 and restate the Company’s financial statements for 2001.  The Company engaged its independent auditor,PricewaterhouseCoopers LLP, which replaced Arthur Andersen LLP in mid-2002, toundertake a re-audit of the year 2001. As a result of these revisions, the financial statements and notesthereto contained in this quarterly report on Form 10-Q as of and for the threeand nine months ended September 30, 2002, have been revised.  In addition, certain 2002 financial informationcontained in this discussion and analysis of financial condition and results ofoperation has been changed where appropriate.

 

In April 2003, shortly afterthe Company announced its intention to restate its financial statements, it wasinformed by the staff of the United States Securities and Exchange Commission(“SEC”) that the SEC was conducting an informal inquiry with respect to certainof the matters reflected in the announcement. Additional information was requested by the SEC during the quarter endedSeptember 30, 2003 and the Company has cooperated fully with that request.

 

In May 2003, the FASB issuedSFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity.”  The Statement establishes standards for how an issuer classifiesand measures certain financial instruments with characteristics of bothliabilities and equity.  SFAS No. 150became effective during the third quarter of 2003 and required that an issuerclassify financial instruments, such as the Company’s manditorily redeemablesecurities, as a liability and the related payments thereon as interestexpense.  On November 7, 2003, the FASBissued Staff Position 150-3 which deferred the application of severalprovisions of SFAS No. 150.  StaffPosition 150-3 notes FASB Board plans to reconsider implementation issues and,perhaps, classification or measurement guidance of SFAS No. 150 during thedeferral period.  On October 23, 2003,the Company reported its operating results for the three and nine month periodsended September 30, 2003 under the earlier provisions of SFAS No. 150.  The accompanying financial statements havebeen presented consistent with prior periods, reflecting a deferral of theprovisions of SFAS No. 150 pursuant to the guidance contained in Staff Position150-3.  There is no affect on net incomein any of the periods presented as a result of the application or deferral ofSFAS No. 150.

 

In January 2003, the FinancialAccounting Standards Board (FASB) issued Interpretation No. 46, “Consolidationof Variable Interest Entities” (FIN 46). FIN 46 addresses the manner in which a company consolidates itsinterests in variable interest entities. As written, FIN 46 would de-consolidate the Trust that holds parentcompany debt and move the debt directly to the parent company balance sheet,thereby removing the minority interest line item that represents preferredshares in the trust.  When issued, thesesecurities qualified for Tier 1 capital treatment by the Federal Reserve.  On July 2, 2003, the Federal Reserve issuedinterim guidance that continues to recognize trust preferred securities as acomponent of Tier 1 capital.  It ispossible that changes prescribed by FIN 46 may result in these securitiesqualifying as Tier 2 capital rather than Tier 1 capital.  In October 2003, the FASB agreed to deferthe effective date of FIN 46 for variable interests held by public companies inall entities that were acquired before February 1, 2003.  This deferral is to allow time for certain implementationissues to be addressed through the issuance of potential modification to theInterpretation.  The deferral revisedthe effective date for consolidation of these entities to the period endedDecember 31, 2003.  Based on the currentrules, the Company does not believe the implementation of the Interpretationwill have a material impact on the Company’s financial position or results ofoperations.

 

OVERVIEW

 

Net income for the quarter was$385 thousand, or $0.09 per diluted share, somewhat better than the projectedbreak-even quarter announced on September 4, 2003 due to higher thananticipated securities gains, lower penalties associated with debt prepaymentand other miscellaneous income received during the quarter.  These results compare with the restated $1.5million, or $0.42 per diluted share, earned in the same period of 2002.

 

Results for the 2003 periodsinclude the operations of the former Massachusetts Fincorp, Inc. (MAFN),acquired by Abington Bancorp, Inc. in September of 2002 under the

 

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purchase method ofaccounting.  Under this method, theresults of MAFN are excluded from the Company’s balance sheet and operatingresults through the date of acquisition, September 13, 2002.

 

Net income for the 2002 periodshas been restated to reflect a number of previously announced accountingadjustments, primarily related to the Company’s investment portfolio.  See “EXPLANATORY NOTE” preceding Part I ofthis Quarterly Report on Form 10-Q for a discussion of these adjustments.

 

Net interest income for thequarter ended September 30, 2003 decreased by $657 thousand, or 10.1%, comparedto the third quarter of 2002.  Thisresulted from a combination of additional volumes of average earning assets andinterest bearing liabilities and lower net interest margins throughout2003.  No provision for loan losses wasrecorded during the third quarter of 2003 as asset quality and loan growthremained stable.  Net charge-offs forthe quarter were limited to $26 thousand. A $100 thousand provision for loan losses was recorded during the thirdquarter of 2002.  Non-interest incomeimproved by $2.46 million quarter over the third quarter of 2002.  This was due to a growth in income earnedfrom fee-based services and products and the addition of the MAFN customerbase.  Gains from the sale of loansincreased by $1.1 million over the prior year quarter and represented nearlyone-half of the non-interest income increase. Also included in non-interest income for the third quarter of 2003 arerealized securities gains of $221 thousand compared with realized securitieslosses of $328 thousand recorded during the quarter ended September 30,2002.   Non-interest expense increasedby $3.82 million, or 55.9%, over the third quarter of 2002.  Increases in personnel costs, occupancy anddata processing expense all reflect the addition of branches and processingvolumes acquired in the MAFN acquisition and increased commissions related tohigher volumes of mortgage-banking activity which contributed to thecorresponding increase in gains on sales of loans.  Also included in the third quarter of 2003 are $1.72 million incharges incurred with the prepayment of FHLB borrowings.

 

FINANCIAL CONDITION

 

Total assets at quarter endwere $822.8 million, a decrease of approximately $80.4 million, or 8.9%, fromthe $903.2 million reported at December 31, 2002.  This reflects a decrease in available-for-sale securities of$55.9 million and a $24.9 increase in portfolio loans.  The loan growth includes activity within thecommercial real estate portfolio, an increase in home equity loans and acombination of purchased residential mortgage loan pools from third partiescoupled with the retention of selected residential real estate loans originatedby the Company’s indirect subsidiary, Old Colony Mortgage Corporation(OCM).  Loans held for sale, originatedby OCM, were $15.1 million at September 30, 2003 compared with $35.6 million atDecember 31, 2002.  Short-terminvestments and funds sold decreased by $20.7 million.  The $55.9 million decrease in investmentsecurities resulted from a combination of cash flow provided by maturities,scheduled and accelerated prepayment activity and portfolio sales, net ofpurchases during the period.

 

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Total deposits at quarter endincreased by $10.1 million, or 1.6%, to $656.7 million from the 646.6 millionreported at December 31, 2002. Certificates of deposit declined by $20.5 million from year-end to$169.6 million at September 30, 2003 as maturing higher-rate certificatesmigrated either out of the Company or from the time deposit category to moreliquid money-market accounts. Transaction accounts (primarily demand deposits and NOW accounts)increased by $8.5 million from year-end. Savings and money market accounts grew by $88.1 million since year-end2002.

 

Short-term borrowings totaled$12.5 million at quarter-end compared to $11.0 million at December 31,2002.  Short-term borrowings of $46million outstanding at the beginning of the 2003 third quarter were fullyrepaid by quarter end.  Longer-term FHLBborrowings of $167.0 million at year end 2002, and $150.9 million at June 30,2003, were reduced to $79.1 million at September 30, 2003.

 

Stockholders’ equity was $56.8million at September 30, 2003, as compared with $57.8 million at December 31,2002.  The change in stockholders’equity results from a combination of retained earnings and cash received fromthe exercise of stock options, reduced by dividends declared and a net decreasein net unrealized gains on available-for-sale securities, net of taxes.

 

The return on average equityand average assets was 2.67 percent and 0.17 percent, respectively, for thequarter ended September 30, 2003 compared with 12.00 percent and 0.71 percent,respectively, for the comparable restated 2002 quarter.

 

NET INTEREST INCOME

 

Net interest income is thedifference between interest earned on earning assets (primarily loans andinvestments) and interest paid on interest bearing liabilities (primarilyinterest bearing deposits and borrowings). Net interest income is influenced by the mix and volume of earningassets and interest bearing liabilities, changes in interest rates and theinterest rate spread.  Additionalfactors affecting net interest income in a lower rate environment areaccelerated prepayments on higher yielding investment securities and loans,which increases the amount of any related premium amortization, and thereinvestment of related cash flow at lower available yields.

 

Net interest income decreasedby $657 thousand for the three months ended September 30, 2003 over thecomparable period of 2002.

 

Interest and dividend incomedecreased by $2.0 million during the three month period ended September 30,2003 compared to the third quarter of 2002. While average earning assets were higher during the 2003 quarter,interest and dividend income decreased due to lower available earning assetyields.  The yield on earning assetsdecreased to 4.39% for the third quarter of 2003 compared with 5.94% for the2002 period.

 

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Interest expense for quarterended September 30, 2003 decreased by $1.3 million compared to the thirdquarter of 2002, generally due to lower rates paid on deposits and borrowedfunds, and a reduction in outstanding borrowings.  The decrease in interest expense also reflects a shift in mix ashigher cost term certificates declined while balances in lower cost moneymarket and savings accounts increased. Deposit liabilities at September 30, 2003 were $8.5 million higher thancomparable prior year quarter and have grown by $10.1 million since year-end2002.  Transaction accounts (demand andNOW accounts) grew by approximately $6.7 million over the prior year quarterwhile non-transaction accounts (savings, money market and time accounts)increased by $1.8 million, with declines in time certificates more than offsetby growth in money market and savings accounts.  Rates paid on borrowed funds also declined during the currentquarter as maturties were rolled-over at lower shorter-term rates.

 

The table below presents thecomponents of interest income and interest expense for the major categories ofassets and liabilities for the periods indicated.

 

 
|                                                   |   | **Three  Months Ended** |   | **Nine  Months Ended** |   |
|--------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                                                   |   | **September  30,**      |   | **September  30,**     |   |
| **(Dollars  in thousands)**                            |   | **2003**                |   | **2002**               |   | **2003** |   | **2002** |   |
| Interest and dividend income:                          |   |                    |   |                   |   |   |   |   |   |
| Interest and fees on loans                             |   | $                       | 5,793  |                   | $      | 6,218 |   | $ | 18,132 |   | $ | 18,670 |   |
| Interest on mortgage-backed investments                |   | 3,102                   |   | 4,513                  |   | 10,664 |   | 13,671 |   |
| Interest and dividends on bonds  and other obligations |   | 233                     |   | 419                    |   | 971 |   | 1,533 |   |
| Interest on short-term investments                     |   | 208                     |   | 177                    |   | 727 |   | 709 |   |
| Total interest and dividend income                     |   | $                       | 9,336  |                   | $      | 11,327 |   | $ | 30,494 |   | $ | 34,693 |   |
|                                                   |   |                    |   |                   |   |   |   |   |   |
| Interest expense:                                      |   |                    |   |                   |   |   |   |   |   |
| Interest on deposits                                   |   | $                       | 1,876  |                   | $      | 2,540 |   | $ | 6,455 |   | $ | 8,224 |   |
| Interest on short-term borrowings                      |   | 50                      |   | 55                     |   | 433 |   | 141 |   |
| Interest on long-term borrowings                       |   | 1,549                   |   | 2,214                  |   | 5,300 |   | 8,126 |   |
| Total interest expense                                 |   | $                       | 3,475  |                   | $      | 4,809 |   | $ | 12,188 |   | $ | 16,491 |   |

 

A breakdown of thecomponents of the Company’s interest rate spread and net interest margin is asfollows:

 
|                                          |   | **Three  Months Ended** |    | **Nine  Months Ended** |   |
|-----------------------------------------------|--------|-------------------------|---------|------------------------|--------|
|                                          |   | **September  30,**      |    | **September  30,**     |   |
|                                          |   | **2003**                |    | **2002**               |   | **2003** |   | **2002** |   |
| Average yield earned on:                      |   |                    |    |                   |   |   |   |   |   |
| Loans                                         |   | 5.77                    | %  | 7.00                   | %      | 6.26 | % | 7.01 | % |
| Mortgage-backed investments                   |   | 4.01                    |    | 5.39                   |   | 3.93 |   | 6.03 |   |
| Bonds and obligations                         |   | 2.63                    |    | 3.71                   |   | 2.94 |   | 4.33 |   |
| Short-term investments                        |   | 0.45                    |    | 1.59                   |   | 0.58 |   | 1.85 |   |
| Equity securities                             |   | 2.98                    |    | 3.36                   |   | 4.23 |   | 3.55 |   |
| Average yield on interest-earning assets      |   | 4.39                    | %  | 5.94                   | %      | 4.68 | %  | 6.22 | % |
|                                          |   |                    |    |                   |   |   |   |   |   |
| Average rate paid on:                         |   |                    |    |                   |   |   |   |   |   |
| Total deposits                                |   | 1.13                    | %       | 1.79                   | %      | 1.33 | % | 2.08 | % |
| Short-term borrowings                         |   | 0.99                    |    | 1.81                   |   | 1.68 |   | 1.99 |   |
| Long-term debt                                |   | 4.64                    |    | 4.97                   |   | 4.61 |   | 5.38 |   |
| Average rate paid on deposits and  borrowings |   | 1.70                    | %       | 2.54                   | %      | 1.95 | % | 2.98 | % |
|                                          |   |                    |    |                   |   |   |   |   |   |
| Interest rate spread                          |   | 2.69                    | %       | 3.40                   | %      | 2.73 | % | 3.24 | % |
|                                          |   |                    |    |                   |   |   |   |   |   |
| Net interest margin                           |   | 2.76                    | %       | 3.42                   | %      | 2.81 | % | 3.26 | % |

 

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# Rate/VolumeAnalysis

 

The following table presents,for the periods indicated, the change in interest income and the change ininterest expense attributable to the change in interest rates and the change inthe volume of earning assets and interest bearing liabilities.  The change attributable to both volume andrate has been allocated proportionately to the change due to volume and thechange due to rate.

 
|                               |   | **Three  Months Ended September 30,** |   |
|------------------------------------|--------|---------------------------------------|--------|
|                               |   | **2003  versus 2002**                 |   |
|                               |   | **Increase  (decrease)**              |   |
|                               |   | **Due to**                            |   | **Due to** |   |   |   |
| **(Dollars  in thousands)**        |   | **Volume**                            |   | **Rate** |   | **Total** |   |
| Interest and dividend income:      |   |                                  |   |   |   |   |   |
| Loans                              |   | $                                     | 747    |   | $ | (1,172 | ) | $ | (425 | ) |
| Mortgage-backed securities         |   | (324                                  | )      | (1,087 | ) | (1,411 | ) |
| Bonds and obligations              |   | (79                                   | )      | (107 | ) | (186 | ) |
| Short-term and other investments   |   | 103                                   |   | (72 | ) | 31 |   |
| Total interest and dividend income |   | 447                                   |   | (2,438 | ) | (1,991 | ) |
|                               |   |                                  |   |   |   |   |   |
| Interest  expense:                 |   |                                  |   |   |   |   |   |
| Total deposits                     |   | 307                                   |   | (971 | ) | (664 | ) |
| Short-term borrowings              |   | 27                                    |   | (32 | ) | (5 | ) |
| Long-term debt                     |   | (526                                  | )      | (139 | ) | (665 | ) |
| Total  interest expense            |   | (192                                  | )      | (1,142 | ) | (1,334 | ) |
|                               |   |                                  |   |   |   |   |   |
| Net interest  income               |   | $                                     | 639    |   | $ | (1,296 | ) | $ | (657 | ) |

 
|                               |   | **Nine  Months Ended September 30,** |    |
|------------------------------------|--------|--------------------------------------|---------|
|                               |   | **2003  versus 2002**                |    |
|                               |   | **Increase  (decrease)**             |    |
|                               |   | **Due to**                           |    | **Due to** |   |   |   |
| **Dollars in  thousands**          |   | **Volume**                           |    | **Rate** |   | **Total** |   |
| Interest and dividend income:      |   | $                                    |    |   | $ |   |   | $ |   |   |
| Loans                              |   | 1,565                                |    | (2,103 | ) | (538 | ) |
| Mortgage-backed securities         |   | 2,288                                |    | (5,385 | ) | (3,097 | ) |
| Bonds and obligations              |   | (116                                 | )       | (466 | ) | (582 | ) |
| Short-term and other investments   |   | 254                                  |    | (236 | ) | 18 |   |
| Total interest and dividend income |   | 3,990                                |    | (8,189 | ) | (4,199 | ) |
|                               |   |                                 |    |   |   |   |   |
| Interest expense:                  |   |                                 |    |   |   |   |   |
| Total deposits                     |   | 1,313                                |    | (3,082 | ) | (1,769 | ) |
| Short-term borrowings              |   | 317                                  |    | (25 | ) | 292 |   |
| Long-term debt                     |   | (1,764                               | )       | (1,061 | ) | (2,825 | ) |
| Total interest expense             |   | (134                                 | )  | (4,168 | ) | (4,302 | ) |
|                               |   |                                 |    |   |   |   |   |
| Net interest income                |   | $                                    | 4,124   |   | $ | (4,021 | ) | $ | 103 |   |

 

 

# PROVISION FOR LOAN LOSSES

 

The provision for loan lossesand the level of the allowance are evaluated regularly by management and theBoard of Directors.  The provisionsresult from the Company’s

 

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internal loan review,historical loan loss experience, trends in delinquent and non-accrual loans,known and inherent risks in the nature and volume of the portfolio, adversesituations which may affect the borrower’s ability to repay, collateral values,an estimate of potential loss exposure on significant credits, concentrationsof credit and economic conditions based on facts then known.

 

While management uses availableinformation to assess probable losses on loans, future additions to theallowance may be necessary based on increases in non-performing loans, changesin economic conditions or for other reasons. In addition, regulatory agencies and independent third party consultantsreview the adequacy of the Company’s allowance for loan losses and may requireor suggest that the Company provide additions to the allowance based on theirassessment, which may differ from management’s.

 

The Company recorded noprovision for loan losses in the third quarter of 2003 and a $100 thousandprovision in the third quarter of 2002. The provision for the respective periods are generally attributable tothe asset quality factors discussed above and methodologies that managementuses to measure and evaluate the adequacy of the allowance, which includedelinquency rates, charge-offs, and problem or watched assets.  Net charge-offs of $26 thousand wererecorded during the current quarter. See “Credit Quality and Allowance for Loan Losses” for additionaldiscussion of credit quality.

 

NON-INTEREST INCOME

 

Non-interest income increased$2.5 million or 86.4% for the three months ended September 30, 2003 over thethird quarter of 2002.  Customer servicefees, consisting of deposit service charges, ATM and debit card fees increased by$663 thousand in the third quarter of 2003 over 2002.  Income from the sale of mutual funds and annuities remainedsluggish under the prevailing rate environment and market conditions.  Gains on sales of mortgage loans increasedby $1.1 million in the quarter ended September 30, 2003 over 2002 due tocontinued high volumes of residential mortgage refinancing activity in theCompany’s mortgage-banking subsidiary. Realized securities gains of $221 thousand were recorded during thequarter compared with realized losses of $328 thousand during the third quarterof 2002.

 

NON-INTEREST EXPENSE

 

Non-interest expense for thequarter ended September 30, 2003 increased by $3.8 million, or 55.8%, over thecomparable 2002 quarter.  Salaries andemployee benefits increased by $1.3 million, or 37.5%.  This resulted from the addition of branchand operations personnel in connection with the MAFN acquisition in Septemberof 2002 and a continuation of higher commissions paid to loan originators andother mortgage subsidiary incentives throughout 2003 directly related toincreased volumes.  Occupancy andequipment costs rose by $105 thousand, or 9.6%, over the prior year quarter andincluded overhead associated with the MAFN branches and costs incurred in theoperation of the Company’s corporate headquarters, first occupied in late2002.  All other

 

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non-interest expense in the2003 quarter, excluding fees related to the prepayment of FHLB debt, increasedby $712, or 34.8%, over the prior year quarter and included general andadministrative costs associated with the MAFN branches, additional volumerelated data processing fees and increased marketing and advertisingcosts.  Prepayment fees associated withFHLB borrowings paid off during the 2003 quarter were $1.72 million.

 

PROVISION FOR INCOME TAXES

 

The Company’s effective incometax rate for the quarter ended September 30, 2003 was 25.5% compared to 38.6%for the quarter ended September 30, 2002. The effective tax rate assumes a federal statutory rate of 34% combinedwith a variable state tax rate for the bank and nonbank subsidiaries, net offederal benefit.  Pre-tax operatingprofits and losses of the Company, the bank and certain nonbank subsidiariesare taxed at different rates for state tax purposes that can affect theconsolidated income tax provision, subject to the proportionate contribution ofpre-tax profits or losses contributed by individual entities.

 

COMPARISON OF THE NINE MONTHSENDED SEPTEMBER 30, 2003 AND 2002

 

GENERAL.  Net income for the nine months endedSeptember 30, 2003 was $2.3 million, or $0.58 per diluted share, compared withrestated net income of $5.0 million, or $1.50 per diluted share, in thecorresponding period of 2002, a net decrease of $2.7 million, or 54.1%, in netincome and 61.3% in diluted earnings per share.  The Company’s interest income was adversely affected by thematurity and re-pricing of higher yielding earning assets, acceleratedprepayment on loans and investment securities and accelerated premiumamortization of investment portfolio premiums throughout the first nine monthsof 2003.  Non-interest income increasedby $5.6 million over the prior year reflecting growth in deposit service chargesand increased gains on both loan and investment sales.  Non-interest expense, however, increased by$9.6 million and included costs associated with additional volumes and accountactivity related to the September 2002 acquisition of MAFN; increased volumes,commissions and professional fees incurred in connection with mortgage bankingactivities; volume related data processing costs; increased expenditures formarketing and advertising, and costs associated with the 2002 financialstatement revision and re-audit of 2001 financial statements completed duringthe second quarter of 2003.  Alsoincluded in non-interest expense for the nine months ended September 30, 2003are $1.7 million in fees associated with the prepayment of approximately $72million of Federal Home Loan Bank borrowings.

 

INTEREST AND DIVIDENDINCOME.  Interest and dividend incomedecreased by $4.2 million, or 12.1% during the nine month period endedSeptember 30, 2003 as compared to the same period of 2002.  The decrease was attributable to decreasesin the yield on earning assets, partially offset by increases in the averagebalance of earning assets.  Averageearning assets for the nine month period ended September 30, 2003 wereapproximately $872 million as compared with $746 million for the same period of2002, an overall increase of $126 million, or 16.8%.

 

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The increase in earning assetswas driven by increases in the average balance of mortgage-backed securities,short-term investments and loans, especially during the first quarter of 2003where investments in mortgage-backed securities increased by approximately $156million from year end 2002.  Averagemortgage-backed securities and short-term investments were $362.7 million and $62.9million, respectively, for the nine months ended September 30, 2003 comparedwith $304.9 million and $21.6 million, respectively, for the same period of2002.  These balance, when combined ,increased by $99.1 million, or 30.4%. The yield on mortgage-backed and short-term investments decreased to3.93% and 0.58%, respectively, in the first nine months of 2003 compared withyields of 6.03% and 1.85%, respectively, for the comparable 2002 period.  The decrease in yields was primarily due tothe lower prevailing rate environment throughout 2003 coupled with acceleratedpremium amortization necessary to reflect higher prepayment activity.

 

The average balance of loansincreased to $387.4 million for the nine months ended September 30, 2003 from$356.0 million for the same period of 2002, an increase of $31.4 million, or8.8%.  These balances increased due tointernal growth and purchased loans in the residential mortgage portfolio plusgrowth in commercial real estate and home equity loans throughout the year.  The yield on loans decreased to 6.26% forthe first nine months of 2003 compared with 7.01% for the same period of2002.  This was generally due to thelower rate environment existing throughout 2003 which impacted new loanoriginations, payoffs and increased levels of residential mortgage refinancingsat lower rates.

 

INTEREST EXPENSE.  Interest expense for the nine months endedSeptember 30, 2003 decreased $4.3 million, or 26.1%, compared to the sameperiod of 2002, generally due to decreases in rates paid on deposits and borrowedfunds and a more favorable deposit mix. The average balances of core deposits (demand, NOW and savings) rose to$466.8 million over the first nine months of 2003 as compared to $367.6 millionthroughout the first nine months of 2002, an increase of $99.2 million, or27.0%.  Average total deposits for the2003 nine month period were $648.3 million, an increase of $119.7 million, or22.7% over the $528.5 million balance of total deposits throughout the firstnine months of 2002.  This was due tothe Company’s continued success in attracting core deposits and a shift in timedeposits to money marked and savings deposits. Time deposits increased $20.5 million in the nine month period endedSeptember 30, 2003 over 2002.  Alldeposit growth herein includes  thedeposits acquired in the September 2002 MAFN acquisition which addedapproximately $100 million to the deposit base.  The Company will continue to closely manage its cost of depositsby continuing to seek new deposit relationships and maintaining or expandingexisting deposit relationships at competitive rates.  The average balance of borrowed funds declined throughout the2003 period in relation to 2002. Longer-term borrowings declined from $202.0 million in 2002 to $153.8million in 2003 as maturing debt was rolled-over as lower cost short-termborrowings.  During the latter part ofthe third quarter of 2003, both short-term and long-term borrowings weresubstantially reduced.

 

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The average rate paid on totaldeposits and borrowed funds was 1.95% for the nine months ended September 30,2003, compared with 2.98% for the same period of 2002.  The average rate paid on total deposits was1.33% for the 2003 nine-month period compared with 2.08% throughout 2002.  The average cost of borrowed funds decreasedto 4.07% for the first nine months of 2003 from the 5.23% paid during2002.  The decrease in rates paid ondeposits and borrowed funds are due to the prevailing lower interest rateenvironment throughout the period coupled with changes in the mix of interestbearing liabilities.

 

NON-INTEREST INCOME.  Total non-interest income increased $5.6million, or 61.7%, in the first nine months of 2003 in comparison to the sameperiod of 2002.  Customer service feesincreased $1.5 million, or 24.2%, to $7.8 million for the nine months endedSeptember 30, 2003 from the $6.3 million reported in 2002.  The increase was due to an increase indeposit accounts, changes in fee schedules, continued success in cross sellingcustomers and debit card activity. Gains on sales of mortgage loans were $5.1 million for the first ninemonths of 2003, up $2.5 million over the comparable period of 2002.  This was due to a more favorable market forloan originations and refinancings during the 2003 period as compared to2002.  Realized securities gains were$919 thousand during the first nine months of 2003 compared with realizedsecurities losses of $241 thousand throughout the comparable 2002 period.  Other non-interest income increased by $385thousand over the prior year, primarily due to a $225 thousand insurancecompany distribution received during the 2003 third quarter and approximately$240 thousand of miscellaneous recoveries recorded during the second quarter of2003.

 

NON-INTEREST EXPENSE.  Non-interest expense for the nine monthsended September 30, 2003 increased $9.6 million, or 50.4%, over the same periodof 2002.  Salaries and employee benefitsincreased by $4.1, or 41.1%.  Thisincrease was a direct result of higher commissions paid to loan originators andother mortgage-banking incentives, the addition of personnel retained in theMAFN acquisition and general merit increases for continuing employees over theprior year.  Occupancy expenses increasedby $822 thousand, or 30.0% over 2002. This increase included branch additions from the MAFN acquisition andcosts associated with the relocation of the Company’s headquarters in the thirdquarter of 2002.  Other non-interestexpense increased by $3.0, or 53.8%, to $8.5 million over the $5.5 millionreported in 2002.  These increasesinclude acquisition related costs, volume related data processing costs,increased marketing and advertising expense, and legal, accounting and otherprofessional fees associated with the revision of 2002 and re-audit of 2001financial statements.  Also included asa component of non-interest expense is the third quarter charge of $1.7 millionfor fees related to the prepayment of $72 million of Federal Home Loan Bank borrowings.

 

PROVISION FOR LOAN LOSSES.  The provision for loan losses for the ninemonths ended September 30, 2003 was $375 thousand compared with a $75 thousandprovision during 2002.  The 2003provision is primarily related to the write-down of a single credit in theamount of $288 thousand during the second quarter coupled with loan growth and

 

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reserve allocations under theCompany’s reserve adequacy evaluation system. The 2002 provision is attributable to asset quality factors andmethodologies that management uses to measure and evaluate the adequacy of theloan loss reserve.  See “Credit Qualityand Allowance for Loan Losses” for an additional discussion of credit qualitystatistics and trends.  The level ofloan loss reserves was 1.10% of period end loans at September 30, 2003 and1.17% of total loans at December 31, 2002.

 

PROVISION FOR INCOMETAXES.  The Company’s effective incometax rate for the nine months ended September 30, 2003 was 39.6% compared to37.4% for the comparable quarter of 2002. The effective tax rate assumes a federal statutory rate of 34% combinedwith a variable state tax rate for the bank and nonbank subsidiaries, net offederal benefit.  Pre-tax operatingprofits and losses of the Company, the bank and certain nonbank subsidiariesare taxed at different rates for state tax purposes that can affect theconsolidated income tax provision, subject to the proportionate contribution ofpre-tax profits or losses contributed by each individual entity.

 

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CREDIT QUALITY AND ALLOWANCEFOR LOAN LOSSES

 

The Company regularly monitors its asset quality to determine the levelof its loan loss allowance through periodic credit reviews by members of theCompany’s Management Credit Committee. The Management Credit Committee, which reports to the Loan Committee ofthe Board of Directors, also works on the collection of non-accrual loans anddisposition of real estate acquired by foreclosure.  The allowance for loan losses is determined by the ManagementCredit Committee after consideration of several key factors including, withoutlimitation, potential risk in the current portfolio, levels and types ofnon-performing assets and delinquency, levels of potential problem loans, whichgenerally have varying degrees of loan collateral and repayment issues, andwatched asset reports.  Workout approachand financial conditions of borrowers are also key considerations to theevaluation of non-performing loans.

 

Non-performing assets were $2.3 million at September 30, 2003, comparedwith $2.0 million at December 31, 2002, an increase of $226 thousand.  The Company’s percentage of delinquent loansto total loans was 0.67% at September 30, 2003 and 1.13% at December 31,2002.  The following table presents anumber of credit quality trends:

 
| **(Dollars in thousands)**                         |   | **September****30,  2003** |   | **December  31,  2002** |   | **September  30,  2002** |   |
|----------------------------------------------------|--------|----------------------------|--------|-------------------------|--------|--------------------------|--------|
| Non-performing loans                               |   | $                          | 2,257  |                    | $      | 2,031                    |   | $ | 4,029 |   |
| Allowance for loan losses to non-performing  loans |   | 187.8                      | %      | 207.4                   | %      | 154.4                    | %      |
| Non-performing assets to total assets              |   | 0.27                       | %      | 0.22                    | %      | 0.43                     | %      |
| Allowance for loan losses to total loans           |   | 1.10                       | %      | 1.17                    | %      | 1.46                     | %      |
|                                                    |        |                            |        |                         |        |                          |        |  |  |  |

 

Non-performing loans are primarily comprised of loans that are morethan 90 days past due and still accruing interest and non-accrual loans.  Non-performing assets are comprised ofnon-performing loans and Other Real Estate Owned (OREO) acquired as a result offoreclosure.

 

The Company maintains its allowance for loan losses to absorb probablecredit losses within the existing portfolio. The reserve is increased when a loan loss provision is recorded in theincome statement.  When a loan, orportion thereof, is considered uncollectible, it is charged against theallowance.  Recoveries on amountspreviously charged-off are credited to income or to the allowance whencollected, as appropriate.  Following isan analysis of the allowance for possible loan losses for the three and ninemonth periods ended September 30, 2003 and 2002.

 

|                                        |   | **Three  Months Ended September 30,** |   | **Nine  Months Ended September 30,** |   |
|---------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
| **(Dollars in thousands)**                  |   | **2003**                              |   | **2002**                             |   | **2003** |   | **2002** |   |
| Balance at beginning of period              |   | $                                     | 4,264  |                                 | $      | 5,403 |   | $ | 4,212 |   | $ | 5,482 |   |
| Charge-offs                                 |   | 67                                    |   | 47                                   |   | 485 |   | 176 |   |
| Recoveries on loans previously charged-off  |   | 41                                    |   | 27                                   |   | 136 |   | 102 |   |
| Net charge-offs                             |   | 26                                    |   | 20                                   |   | 349 |   | 74 |   |
| Provision (credit) for possible loan losses |   | —                                |   | 100                                  |   | 375 |   | 75 |   |
| Reserves acquired from MAFN                 |   | —                                |   | 739                                  |   | — |   | 739 |   |
| Balance at end of period                    |   | $                                     | 4,238  |                                 | $      | 6,222 |   | $ | 4,238 |   | $ | 6,222 |   |

 

No portion of the allowance is restricted to any loan or group of loans,and the entire reserve is available to absorb future realized losses.  The amount and timing of realized losses andfuture reserve allocations may vary from current estimates.  An allocation of the allowance for loanlosses to each category of loans is presented below.

 

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| **(Dollars  in thousands)**     |   | **September  30,  2003** |   | **December  31,  2002** |   | **September  30,  2002** |   |
|---------------------------------|--------|--------------------------|--------|-------------------------|--------|--------------------------|--------|
| Residential real estate         |   | $                        | 847    |                    | $      | 804                      |   | $ | 865 |   |
| Commercial real estate          |   | 2,233                    |   | 2,008                   |   | 1,931                    |   |
| Construction                    |   | 260                      |   | 299                     |   | 423                      |   |
| Other commercial                |   | 175                      |   | 229                     |   | 2,426                    |   |
| Consumer                        |   | 283                      |   | 356                     |   | 248                      |   |
| Non-specific                    |   | 440                      |   | 516                     |   | 329                      |   |
| Total allowance for loan losses |   | $                        | 4,238  |                    | $      | 4,212                    |   | 6,222 |   |
|                                 |        |                          |        |                         |        |                          |        |  |  |  |

 

A portion of the allowance is not allocated to any specific segment ofthe loan portfolio.  This non-specificallowance is maintained for two primary purposes:  (a) market risk factors, such as the effects of economicvariability on the entire portfolio, and (b) unique portfolio risk factors thatare inherent characteristics of the loan portfolio.

 

ASSET/LIABILITY MANAGEMENT AND INTEREST RATE RISK

 

The objective of asset/liability management is to ensure thatliquidity, capital and market risk are prudently managed. Asset/liabilitymanagement is governed by policies reviewed and approved annually by theCompany’s Board of Directors (Board). The Board delegates responsibility forasset/liability management to the corporate Asset/Liability ManagementCommittee (ALCO). ALCO sets strategic directives that guide the day-to-dayasset/liability management activities of the Company. ALCO also reviews andapproves all major funding, capital and market risk-management programs. ALCOis comprised of members of management and executive management of the Companyand the Bank.

 

Interest rate risk is the sensitivity of income to variations ininterest rates over both short-term and long-term time horizons. The primaryobjective of interest rate risk management is to control this risk withinlimits approved by the Board and by ALCO. These limits and guidelines reflectthe Company’s tolerance for interest rate risk. The Company attempts to controlinterest rate risk by identifying potential exposures and developing tacticalplans to address such potential exposures. The Company quantifies its interestrate risk exposures using simulation and valuation models, as well as a moresimple gap analysis. The Company manages its interest rate exposures bygenerally using on-balance sheet strategies, which is most easily accomplishedthrough the management of the durations and rate sensitivities of the Company’sinvestments, including mortgage-backed securities portfolios, and by extendingor shortening maturities of borrowed funds. Additionally, pricing strategies,asset sales and, in some cases, hedge strategies are also considered in theevaluation and management of interest rate risk exposures.

 

The Company uses simulation analysis to measure the exposure of netinterest income to changes in interest rates over a 1 to 5 year time horizon.Simulation analysis involves projecting future interest income and expense fromthe Company’s assets, liabilities, and off-balance sheet positions undervarious interest rate scenarios.

 

The Company’s limits on interest rate risk specify that if interestrates were to increase or decrease by 200 basis points over a 12 month period,estimated net interest income for the next 12 months should decline by lessthan 10%. Given the low interest rate environment at September 30, 2003, theCompany assumed a 100 basis point decline in interest rates rather than thenormal 200 basis points.

 

The following table reflects the Company’s estimated exposure, as apercentage of estimated net interest income for the next 12 months, based uponthe Company’s current methodology:

 

| **Rate Change  (Basis Points)** |   | **Estimated  Exposure as a  % of Net Interest Income** |   |
|---------------------------------|--------|--------------------------------------------------------|--------|
| +200                            |   | 2.77                                                   |   |
| -100                            |   | 1.49                                                   |   |

 

Interest rate gap analysis provides a static view of the maturity andrepricing characteristics of the on-balance sheet and off-balance sheetpositions. The interest rate gap analysis is prepared by scheduling all assets,liabilities and off-balance sheet positions according to scheduled repricing ormaturity.  Interest rate gap analysiscan be viewed as a short-hand complement to simulation and valuation analysis.

 

27

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The Company’s policy is to match, as well as possible, the interestrate sensitivities of its assets and liabilities.  Generally, residential mortgage loans originated by the Companyare sold in the secondary market. Residential mortgage loans that the Company currently originates fromtime to time or purchases for the Company’s own portfolio are primarily 1-year,3-year, 5-year and 7-year adjustable rate mortgages and shorter term (generally15-year or seasoned 30-year) fixed rate mortgages.

 

The Company also emphasizes loans with terms to maturity or repricingof five years or less, such as certain commercial mortgages, business loans,residential construction loans and home equity loans.

 

Management desires to expand its interest earning asset base in futureperiods primarily through growth in the Company’s loan portfolio.  The Company intends to continue to becompetitive in the residential mortgage market but plans to place greateremphasis on the origination of home equity and commercial loans.  During the first nine months of 2003, theCompany acquired approximately $48.2 million of residential first mortgages,which are serviced by others.

 

The Company has also used mortgage-backed investments (typically withweighted average lives of five to seven years) as a vehicle for fixed andadjustable rate investments and as an overall asset/liability tool. Thesesecurities have been highly liquid given current levels of prepayments in theunderlying mortgage pools.

 

Management believes the current interest rate environment is at thelower end of the interest rate cycle. As a result, management has been very selective in the types and termsof loans and investments that are added to the Company’s balance sheet.  The Company continues to purchase investmentsecurities of shorter duration in order to position the Company in a morefavorable environment as rates eventually rise.

 

During the first nine months of 2003, the Company continued to experiencehigh levels of prepayment activity in its mortgage-related assets (residentialmortgages and mortgage-backed securities) which comprise approximately 36.0% ofthe Company’s balance sheet as of September 30, 2003.  Prepayment speeds were slower during the third quarter of 2003which reduced premium amortization. Securities purchased during the quarterwere priced at a discount resulting in discount accretion.

 

The volume of liquid assets and the mix of its investments may vary,depending upon management’s judgment as to market trends, the quality ofspecific investment opportunities and the relative attractiveness of theirmaturities and yields.  Managementcontinues to aggressively promote the Company’s core deposit products,particularly checking and NOW accounts. The success of this promotion has favorably impacted the overall depositgrowth to date and has helped the Company to increase its customer base.  However, given the historically lowlong-term interest rates, the Company and many of its peers continue to see adecline in time deposits as customers reflect their desire to remain liquidunder current market conditions. Management will continue to evaluate future funding strategies andalternatives and to continue its focus on attracting core, retail depositrelationships.

 

The Company is a voluntary member of theFederal Home Loan Bank of Boston (“FHLBB”). The available borrowing capacity from the FHLBB affords options to theCompany in managing its asset/liability growth, since it may be advantageous toborrow money from the FHLBB than to raise money through non-core deposits (i.e.certificates of deposit).  FHLBBBorrowed funds at September 30, 2003 totaled $79.1 million compared to $167.0million at December 31, 2002.  Theseborrowings have primarily funded residential loan originations and purchases aswell as mortgage-backed investments and investment securities.

 

In June, 1998, the Company issued, through Abington Bancorp CapitalTrust (the “Trust”), 1,265,000 shares of 8.25% trust preferred securities, $10per share liquidation value, due June 2029, but callable by the Company afterJune, 2003, if certain conditions are met. The ability to apply Tier 1 capital treatment, up to 25% of suchcapital, as well as the deductibility of interest on the subordinateddebentures for tax purposes, provided the Company with a cost effective way toraise funds and supplement regulatory capital. Recent accountinginterpretations (FIN 46) may change the reporting requirements for thesesecurities affecting the current Tier 1 capital treatment by the FederalReserve.  Following the issuance of FIN46, on July 2, 2003, the Federal Reserve issued interim guidance that continuesto recognize trust preferred securities as a component of Tier 1 capital.  It is possible that the changes prescribedin FIN 46 may result in these securities qualifying as Tier 2 capital ratherthan Tier 1 capital.  Under suchcircumstances, the Company would continue to exceed all regulatory capitalrequirements and the Bank would remain “well capitalized.”

 

The following table sets forth maturity and repricing informationrelating to interest sensitive assets and liabilities at September 30, 2003.The balance of such accounts has been allocated among the various periods basedupon the terms and repricing intervals of the particular assets andliabilities. For example, fixed rate residential mortgage loans andmortgage-backed securities, regardless of “available for sale” classification,are shown in the table in the time periods corresponding to projected principalamortization computed based on their respective weighted average maturities andweighted average rates using prepayment data available from the secondarymortgage market.

 

Adjustable rate loans and securities are allocated to the period inwhich the rates would be next adjusted. The following table does not reflectpartial or full prepayment of certain types of loans and investment securitiesprior to scheduled contractual

 

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maturity. Additionally, all securities or borrowings which are callableat the option of the issuer or lender are reflected in the following tablebased upon the likelihood of call options being exercised by the issuer oncertain investments or borrowings in a most likely interest rate environment.Since regular passbook savings and NOW accounts are subject to immediatewithdrawal, such accounts have been included in the “Other Savings Accounts”category and are assumed to mature within six months. This table does notinclude non-interest bearing deposits.

 

While this table presents a cumulative negative gap position in the sixmonth to five year horizon, the Company considers its earning assets to be moresensitive to interest rate movements than its liabilities. In general, with theexception of certain fixed rate loans and investments, assets are tied toincreases that are immediately impacted by interest rate movements whiledeposit rates are generally driven by market area and demand which tend to beless sensitive to general interest rate changes. In addition, other savingsaccounts and money market accounts are substantially stable core deposits,although subject to rate changes. A substantial core balance in these types ofaccounts is anticipated to be maintained over time.

 

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At September 30, 2003

 

Repricing/Maturity Interval

 
|                                                                                               |   | **0-6 MOS** |    | **6-12 MOS** |   | **1-2 YRS** |   | **2-3 YRS** |   | **3-5 YRS** |   | **5 YRS** |   | **Total** |   |
|----------------------------------------------------------------------------------------------------|--------|-------------|---------|--------------|--------|-------------|--------|-------------|--------|-------------|--------|-----------|--------|-----------|--------|
|                                                                                               |   |        |    |         |   |        |   |        |   |        |   |      |   |      |   |
| Assets subject to interest rate adjustments:                                                       |   |        |    |         |   |        |   |        |   |        |   |      |   |      |   |
|                                                                                               |   |        |    |         |   |        |   |        |   |        |   |      |   |      |   |
| Short Term Investments                                                                             |   | $           | 57,174  |         | $      | —      |   | $           | — |        | $      | —    |   | $         | — |   | $ | — |   | $ | 57,174 |   |
|                                                                                               |   |        |    |         |   |        |   |        |   |        |   |      |   |      |   |
| Bonds & obligations                                                                            |   | —      |    | —       |   | 18,324      |   | 10,038      |   | —      |   | 2,253     |   | 30,615    |   |
|                                                                                               |   |        |    |         |   |        |   |        |   |        |   |      |   |      |   |
| Mortgage-backed investments                                                                        |   | —      |    | —       |   | —      |   | —      |   | —      |   | 263,483   |   | 263,483   |   |
|                                                                                               |   |        |    |         |   |        |   |        |   |        |   |      |   |      |   |
| Mortgage loans subject to rate review                                                              |   | 56,236      |    | 20,069       |   | 15,545      |   | 15,863      |   | 69,058      |   | 22,428    |   | 199,199   |   |
|                                                                                               |   |        |    |         |   |        |   |        |   |        |   |      |   |      |   |
| Fixed rate mortgage loans                                                                          |   | 21,237      |    | 8,767        |   | 10,546      |   | 17,431      |   | 24,999      |   | 99,485    |   | 182,465   |   |
|                                                                                               |   |        |    |         |   |        |   |        |   |        |   |      |   |      |   |
| Commercial & Other                                                                             |   | 8,602       |    | 1,289        |   | 2,011       |   | 1,209       |   | 1,557       |   | 5,095     |   | 19,763    |   |
|                                                                                               |   |        |    |         |   |        |   |        |   |        |   |      |   |      |   |
| Total                                                                                              |   | $           | 143,249 |         | $      | 30,125      |   | $           | 46,426 |        | $      | 44,541    |   | $         | 95,614 |   | $ | 392,744 |   | $ | 752,699 |   |
|                                                                                               |   |        |    |         |   |        |   |        |   |        |   |      |   |      |   |
| Liabilities subject to interest rate adjustments:                                                  |   |        |    |         |   |        |   |        |   |        |   |      |   |      |   |
| Money Market deposit accounts                                                                      |   | $           | 94,723  |         | $      | —      |   | $           | — |        | $      | —    |   | $         | — |   | $ | — |   | $ | 94,723 |   |
|                                                                                               |   |        |    |         |   |        |   |        |   |        |   |      |   |      |   |
| Savings deposits-term certificates                                                                 |   | 61,174      |    | 46,730       |   | 36,359      |   | 11,060      |   | 14,298      |   | —    |   | 169,621   |   |
|                                                                                               |   |        |    |         |   |        |   |        |   |        |   |      |   |      |   |
| Other savings accounts                                                                             |   | 392,336     |    | —       |   | —      |   | —      |   | —      |   | —    |   | 392,336   |   |
|                                                                                               |   |        |    |         |   |        |   |        |   |        |   |      |   |      |   |
| Borrowed funds                                                                                     |   | 12,489      |    | —       |   | 5,000       |   | 5,000       |   |        |   | 69,136    |   | 91,625    |   |
|                                                                                               |   |        |    |         |   |        |   |        |   |        |   |      |   |      |   |
|                                                                                               |   |        |    |         |   |        |   |        |   |        |   |      |   |      |   |
| Total                                                                                              |   | $           | 560,722 |         | $      | 46,730      |   | $           | 41,359 |        | $      | 16,060    |   | $         | 14,298 |   | $ | 69,136 |   | $ | 748,305 |   |
|                                                                                               |   |        |    |         |   |        |   |        |   |        |   |      |   |      |   |   |   |   |   |   |   |   |
| Guaranteed preferred beneficial interest in  junior subordinated debentures                        |   | $           | —  |         | $      | —      |   | $           | — |        | $      | —    |   | $         | — |   | $ | 12,650 |   | $ | 12,650 |   |
|                                                                                               |   |        |    |         |   |        |   |        |   |        |   |      |   |      |   |   |   |   |   |   |   |   |
|                                                                                               |   |        |    |         |   |        |   |        |   |        |   |      |   |      |   |
| **Excess (deficiency) of rate sensitive****assets  over rate sensitive liabilities**               |   | (417,473    | )       | (16,605      | )      | 5,067       |   | 28,481      |   | 81,316      |   | 310,958   |   | (8,256    | )      |
|                                                                                               |   |        |    |         |   |        |   |        |   |        |   |      |   |      |   |
| **Cumulative excess (deficiency) of rate****sensitive  assets over rate sensitive****liabilities** |   | (417,473    | )       | (434,078     | )      | (429,011    | )      | (400,530    | )      | (319,214)   |   | (8,256    | )      | —    |   |
|                                                                                               |   |        |    |         |   |        |   |        |   |        |   |      |   |      |   |
| **Rate sensitive assets as a percentage of****rate  sensitive liabilities (cumulative)**           |   | 25.5        | %       | 28.5         | %      | 33.9        | %      | 39.8        | %      | 53.0        | %      | 98.9      | %      |      |   |

 

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LIQUIDITY AND CAPITAL RESOURCES

 

Payments and prepayments on the Company’s loan and mortgage-backedinvestment portfolios, sales of fixed rate residential loans, increases indeposits, borrowed funds and maturities of various investments comprise the Company’sprimary sources of liquidity. The Company is also a voluntary member of theFHLB of Boston and, as such, is entitled to borrow an amount up to the value ofits qualified collateral that has not been pledged to outside sources.Qualified collateral generally consists of residential first mortgage loans,securities issued, insured or guaranteed by the U.S. Government, its agencies,or government sponsored entities, and funds on deposit at the FHLB of Boston.Short-term advances may be used for any sound business purpose, while long-termadvances may be used only for the purpose of providing funds to financehousing.

 

At September 30, 2003, the Company had outstanding commitments tooriginate and sell residential mortgage loans in the secondary market amountingto 46.5 million.  The Company also hasoutstanding commitments to grant advances under existing home equity lines ofcredit amounting to 30.4 million. Unadvanced commitments under outstanding commercial and constructionloans totaled 6.7 million as September 30, 2003. The Company believes ithas adequate sources of liquidity to fund these commitments.

 

The Company’s total stockholders’ equity was 56.8 million or 6.9% oftotal assets at September 30, 2003, compared with $57.8 million or 6.4% of totalassets at December 31, 2002.  The changeresults from a combination of net income and stock option exercises, net ofunearned compensation related to the Company's Employee Stock Ownership Planand a decrease in the market value of investment securities, net of tax.

 

The Company and the Bank are subject to various regulatory capitalrequirements administered by the Federal Reserve and the FDIC.  Failure to meet minimum capital requirementscan initiate certain mandatory – and possibly additional discretionary -actions by the regulators that, if undertaken, could have a direct materialeffect on the Company’s financial statements. Quantitative measures established by regulation to ensure capitaladequacy require the Company and its banking subsidiary to maintain minimumamounts and ratios of Total and Tier 1 capital to risk-weighted assets, and ofTier 1 capital to average assets (all as defined in the regulations).

 

As previously noted, the Company issued $12,650,000 or 8.25% TrustPreferred Securities in June 1998. Under current regulatory guidelines, trust preferred securities areallowed to represent up to approximately 25% of the Company’s Tier 1 capitalwith any excess amounts available as Tier 2 capital. As of September 30, 2003,all of these securities were included in Tier 1 capital.

 

At September 30, 2003, the Company had a Tier 1 risk-based capitalratio of 14.75% and a total risk-based capital ratio of 15.82%.  The Bank had a Tier 1 risk-based capitalratio of 13.62% and a total risk-based capital ratio of 14.64%.  Also, at September 30, 2003, the Company andthe Bank had Tier 1 leverage capital ratios of 6.17% and 6.43%,respectively.  Management believes that,as of September 30, 2003, the Company and the Bank meet all of their respectivecapital adequacy requirements.

 

CRITICAL ACCOUNTING POLICIES

 

We considered the disclosure requirements of FR-60 regarding CriticalAccounting Policies and FR-61 regarding liquidity and capital resources,certain trading activities and related party/certain other disclosures, andconcluded that nothing has 

 

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materially changed during the quarter that would warrant furtherdisclosure under these releases.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

In May 2003, the FASB issuedSFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity.”  The Statement establishes standards for how an issuer classifiesand measures certain financial instruments with characteristics of bothliabilities and equity.  SFAS No. 150became effective during the third quarter of 2003 and required that an issuerclassify financial instruments, such as the Company’s manditorily redeemablesecurities, as a liability and the related payments thereon as interestexpense.  On November 7, 2003, the FASBissued Staff Position 150-3 which deferred the application of severalprovisions of SFAS No. 150.  StaffPosition 150-3 notes Board plans to reconsider implementation issues and,perhaps, classification or measurement guidance of SFAS No. 150 during thedeferral period.  On October 23, 2003,the Company reported its operating results for the three and nine month periodsended September 30, 2003 under the earlier provisions of SFAS No. 150.  The accompanying financial statements havebeen presented consistent with prior periods, reflecting a deferral of theprovisions of SFAS No. 150 pursuant to the guidance contained in Staff Position150-3.  There is no affect on net incomein any of the periods presented as a result of the application or deferral ofSFAS No. 150.

 

In January 2003, the FinancialAccounting Standards Board (FASB) issued Interpretation No. 46, “Consolidationof Variable Interest Entities” (FIN 46). FIN 46 addresses the manner in which a company consolidates itsinterests in variable interest entities. As written, FIN 46 would de-consolidate the Trust that holds parentcompany debt and move the debt directly to the parent company balance sheet,thereby removing the minority interest line item that represents preferredshares in the trust.  When issued, thesesecurities qualified for Tier 1 capital treatment by the Federal Reserve.  On July 2, 2003, the Federal Reserve issuedinterim guidance that continues to recognize trust preferred securities as acomponent of Tier 1 capital.  It ispossible that changes prescribed by FIN 46 may result in these securitiesqualifying as Tier 2 capital rather than Tier 1 capital.  In October 2003, the FASB agreed to deferthe effective date of FIN 46 for variable interests held by public companies inall entities that were acquired before February 1, 2003.  This deferral is to allow time for certainimplementation issues to be addressed through the issuance of potentialmodification to the Interpretation.  Thedeferral revised the effective date for consolidation of these entities to theperiod ended December 31, 2003.  Basedon the current rules, the Company does not believe the implementation of theinterpretation will have a material impact on the Company’s financial positionor results of operations.

 

 

Item 3.    Quantitative And Qualitative Disclosures AboutMarket Risk

 

The required information is included in Item 2, Part I, of this reportunder the caption, “Management’s Discussion and Analysis of ConsolidatedFinancial Condition and Results of Operation – ASSET/ LIABILITY MANAGEMENT ANDINTEREST RATE RISK.”

 

Item 4.    Controls and Procedures

 

In March,2003, the Company strengthened its accounting function with the addition of anew corporate controller. The former controller was initially retained onstaff.  In the process of closing thebooks for the month of February, the new controller discovered some facts whichled her to conclude that certain accounting errors had been recorded by theformer controller which impacted historical financial results.  The errors initially identified were relatedto misapplied cash payments on mortgage-backed securities(MBS), inaccurateamortization of premiums on MBS, accrued interest receivable overstatements onMBS, and suspense accounts activity.

 

Managementpromptly notified the Audit Committee and its outside auditors,PricewaterhouseCoopers LLP, of the errors identified, initiated a comprehensivereview of the accounting records to determine the extent and magnitude of theaccounting errors, and withheld the filing of its Form 10-K for the year endedDecember 31, 2002 pending the results of this review.  Subsequent review identified an additional error related tointerest accruals on mortgage loans, and this error was deemed material to theCompany’s 2001 financial statements as well as to the first three quarters of2002.  As a result, the Company engagedPricewaterhouseCoopers LLP (which had replaced Arthur Andersen LLP as the Company’sindependent auditor in mid-2002) to undertake a re-audit of the year endedDecember 31, 2001.

 

Following thediscovery of these accounting errors, the Company initiated a number ofimprovements in its disclosure controls and procedures as well as its internalcontrols, including its internal control over financial reporting.  Most of these improvements were designed toreduce the opportunity for human error, which was the primary cause of each ofthe identified errors. For example, management has implemented several changesin the process of recording transactions and related recordkeeping in thoseareas where the errors occurred, including: (a) automation of investmentportfolio accounting (previously processed on a manual basis), (b) improvedreconcilement procedures and yield analyses, (c) the utilization of third 

 

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partyresources and advisory services and, (d) additional training and oversight ofpersonnel within the accounting division. In addition, the Company has retained the services of a new ChiefFinancial Officer and has further supplemented its accounting staff with theaddition of a senior accounting officer. Both of these individuals have significant experience in bank accountingmatters and internal controls.

 

After implementingthese improvements to the Company’s disclosure controls and procedures andinternal controls, and under the supervision and with the participation of theCompany’s management, including James P. McDonough, its Chief ExecutiveOfficer, and James K. Hunt, its Chief Financial Officer, the Company evaluatedthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures as of the end of the period covered by this report,based on the evaluation of those controls and procedures as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e). Based on this evaluation, Mr. McDonough and Mr. Hunt concluded that, asof the date of their most-recent evaluation, the Company’s disclosure controlsand procedures were effective.

 

The effectiveness of a system of disclosure controls and procedures issubject to various inherent limitations, including cost limitations, judgementsused in decision making, assumptions about the likelihood of future events, thesoundness of internal controls and fraud. Due to such inherent limitations, there can be no assurance that anysystem of disclosure controls and procedures will be successful in preventingall errors or fraud, or in making all material information known in a timelymanner to the appropriate levels of management.

 

There were no changes in our internal control over financial reportingidentified in connection with the evaluation required by Exchange Act Rules13a-15(d) and 15d-(15(d) that occurred during the fiscal quarter covered bythis report that have materially affected or are reasonably likely tomaterially affect our control over financial reporting.

 

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Part II.                    Other Information

 

Item 1.    Legal Proceedings.

 

The Company is a defendant in various legal matters, none of which isbelieved by management to be material to the consolidated financial statements.

 

Item 2.    Changes in Securities.

 

(a) Not applicable.

(b) Not applicable.

(c) Not applicable.

(d) Not applicable.

 

Item 3.    Defaults Upon Senior Securities.

 

None.

 

Item 4.    Submission of Matters to a Vote of SecurityHolders.

 

                The Annual Meeting of Stockholders was heldon July 31, 2003, for the purpose of electing a class of three directors for athree year term and approving the Company’s 2003 Stock Incentive Plan.  A total of 3,422,317 shares were representedin person or by proxy at the meeting representing 89.5% of the 3,822,868 sharesof common stock outstanding as of June 11, 2003, the record date for the AnnualMeeting.

 

Proposal 1 - To elect a classof three directors of the Company for a three year term:

 

The following directornominees were re-elected to hold office until the 2006 annual meeting ofstockholders or special meeting in lieu thereof, and until their respective successorsare elected and qualified.

 

|                |   | **Number of  Shares Voted** |   |
|---------------------|--------|-----------------------------|--------|
|                |   | **For**                     |   | **Abstain** |   |
| William F. Borhek   |   | 3,377,652                   |   | 44,665 |   |
| Ann M. Carter       |   | 3,378,721                   |   | 43,596 |   |
| Rodney D. Henrikson |   | 3,377,077                   |   | 45,240 |   |

 

Proposal 2 — To approve theAbington Bancorp, Inc. 2003 Stock Incentive Plan:

 

The Abington Bancorp, Inc. 2003Stock Incentive Plan was approved by the following Vote:

 

| **Shares For** |   | **Shares Against** |   | **Shares Withheld/Abstaining** |   |
|----------------|--------|--------------------|--------|--------------------------------|--------|
| 2,886,530      |   | 525,400            |   | 10,387                         |   |

 

Item 5.    Other Information.

 

None.

 

Item 6.             Exhibits and Reports on Form 8-K

 

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(a)Exhibits.

 
| 2.1    | Plan of Reorganization and Acquisition  dated as October 15, 1996 between the Company and Abington Savings Bank  incorporated by reference to the Registration Statement on Form 8-A,  effective January 13, 1997.                                                                      |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                    |
| 2.2    | Agreement and Plan of Merger dated as of  October 20, 2003 among the Company, Seacoast Financial Services Corporation  Coast Merger Sub Corporation, incorporated by reference to the Company's  Current Report on Form 8-K filed on October 27, 2003.                                  |
|   |                                                                                                                                                                                                                                                                                    |
| 3.1    | Articles of Organization of the Company  incorporated by reference to the Company's Registration Statement on Form  8-A, effective January 13, 1997.                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                    |
| 3.2    | By-Laws of the Company, incorporated by  reference to the Company's quarterly report on Form 10-Q for the first  quarter of 2000, filed on May 12, 2000.                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                    |
| 4.1    | Specimen stock certificate for the  Company's Common Stock incorporated by reference to the Company's  Registration Statement on Form 8-A, effective January 31, 1997.                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                    |
| 4.2    | Form of Indenture between Abington Bancorp,  Inc. and State Street Bank and Trust Company incorporated by reference to  Exhibit 4.1 of the Registration Statement on Form S-2 of the Company and  Abington Bancorp Capital Trust, filed on May 12, 1998.                                |
|   |                                                                                                                                                                                                                                                                                    |
| 4.3    | Form of Junior Subordinated Debenture  incorporated by reference to Exhibit 4.2 of the Registration Statement on  Form S-2 of the Company and Abington Bancorp Capital Trust, filed on May 12,  1998.                                                                                   |
|   |                                                                                                                                                                                                                                                                                    |
| 4.4    | Form of Amended and Restated Trust  Agreement by and among the Company, State Street Bank and Trust Company,  Wilmington Trust Company and the Administrative Trustees of the Trust  incorporated by reference to Exhibit 4.4 of the Registration Statement on  Form S-2 of the Company |
|   |                                                                                                                                                                                                                                                                                    |
|   | and Abington Bancorp Capital Trust, filed  on May 12, 1998.                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                    |
| 4.5    | Form of Preferred Securities Guarantee  Agreement by and between the Company and State Street Bank and Trust Company  incorporated by reference to Exhibit 4.6 of the Registration Statement on Form  S-2 of the Company and Abington Bancorp Capital Trust, filed on May 12, 1998.     |
|   |                                                                                                                                                                                                                                                                                    |
| 31.1   | Certification of Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                    |
| 31.2   | Certification of Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                    |
| 32.1   | Certification of Chief Executive Officer  and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002, furnished herewith.                                                                                                                                   |

 

(b) Reports on Form 8-K.

 
| July 24, 2003 –      |   | related to second quarter ended June 30, 2003 earnings release.           |
|---------------------------|--------|---------------------------------------------------------------------------|
| September 4, 2003 –  |   | related to press release announcing balance sheet restructuring  program. |
| September 25, 2003 – |   | related to press release announcing dividend declaration.                 |

 

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Company has duly caused this report to be signed on its behalf by theundersiged thereunto duly authorized.

 
|                          | ABINGTON BANCORP, INC. |   |
|-------------------------------|------------------------|--------|
|                          | (Company)              |   |
|                          |                   |
|                          |                   |   |
| Date: November 14, 2003       | By:                    | /s/    | James P. McDonough |   |
|                          |                   |   | James P. McDonough |
|                          |                   |   | President and Chief Executive Officer |
|                          |                   |   |   |
|                          |                   |   |   |
| Date:  November 14, 2003 | By:                    | /s/    | James K. Hunt |   |
|                          |                   |   | James K. Hunt |
|                          |                   |   | Treasurer and Chief Financial Officer |
|                          |                   |   | (Principal Financial Officer) |
|                               |                        |        |  |  |  |

 

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