**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 EndedJune 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 1934during the preceding 12 months (or for such shorter period that the Registrantwas required 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: 3,869,051 shares asof August 8, 2003.

 

 

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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 historical factmay 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-looking statements.The Company disclaims any intent or obligation to update publicly any of theforward-looking statements herein, whether in response to new information,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 June 30, 2003 and  December 31, 2002 |
|                 |   |
|                 | Unaudited Consolidated Statements of  Operations for the Three and Six Months Ended June 30, 2003 and 2002 |
|                 |   |
|                 | Unaudited Consolidated Statements of  Changes in Stockholders’ Equity for the Six Months Ended June 30, 2003 and  2002 |
|                 |   |
|                 | Unaudited Consolidated Statements of  Comprehensive Income for the Six Months Ended June 30, 2003 and 2002 |
|                 |   |
|                 | Unaudited Consolidated Statements of Cash  Flows for the Six Months Ended June 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 |
|                 |   |
| 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 June 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 auditor, PricewaterhouseCoopers LLP, which replaced Arthur AndersenLLP 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 six months ended June 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)automation of investment portfolio accounting (previously processed on a manualbasis), (b) improved reconcilement procedures and yield analyses, (c) theutilization of third party resources and advisory services and, (d) additionaltraining and oversight of personnel within the accounting division along withthe addition of three senior accounting officers with significant experience inbank accounting matters and internal controls.

 

Following is an unauditedsummary of the effect of restatement on the Company’s consolidated financialstatements at or for the periods reflected:

 

 
|                                               |   | **Selected Balance Sheet Data  At June 30, 2002** |    |
|----------------------------------------------------|--------|---------------------------------------------------|---------|
| **(Dollars in  thousands)**                        |   | **As Previously  Reported**                       |    | **As  Restated** |   |
| Securities available for sale at market value      |   | $                                                 | 380,064 |   | $ | 379,218 |   |
| Other assets                                       |   | 6,991                                             |    | 5,919 |   |
| Total assets                                       |   | 798,491                                           |    | 796,573 |   |
| Accrued taxes and expenses                    |   | 4,846                                             |    | 4,225 |   |
| Other liabilities                                  |   | 1,176                                             |    | 963 |   |
| Retained earnings                                  |   | 34,451                                            |    | 33,266 |   |
| Other accumulated comprehensive income, net of tax |   | 4,277                                             |    | 4,378 |   |
| Total stockholders’ equity                    |   | 45,122                                            |    | 44,038 |   |
|                                                    |        |                                                   |         |  |  |  |  |

 

3

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|                                                      |   | **Selected Income Statement Data**    |   |
|-----------------------------------------------------------|--------|---------------------------------------|--------|
|                                                      |   | **Three Months Ended  June 30, 2002** |   | **Six Months Ended  June 30, 2002** |   |
| **(Dollars  in thousands,****except per share data****)** |   | **Previously  Reported**              |   | **Restated** |   | **Previously  Reported** |   | **Restated** |   |
| Interest and fees on loans                                |   | $                                     | 6,070  |   | $ | 6,018 |   | $ | 12,688 |   | $ | 12,451 |   |
| Interest on mortgage-backed securities                    |   | 5,021                                 |   | 4,799 |   | 9,245 |   | 9,248 |   |
| Salaries and employee benefits                            |   | 3,434                                 |   | 3,389 |   | 6,585 |   | 6,619 |   |
| Other non-interest expense                                |   | 1,806                                 |   | 1,780 |   | 3,545 |   | 3,493 |   |
| Provision for income taxes                                |   | 1,030                                 |   | 958 |   | 2,160 |   | 2,083 |   |
| Net income                                                |   | 1,718                                 |   | 1,587 |   | 3,692 |   | 3,553 |   |
| Net income per share:                                     |   |                                  |   |   |   |   |   |   |   |
| Basic                                                     |   | $                                     | 0.54   |   | $ | 0.50 |   | $ | 1.16 |   | $ | 1.12 |   |
| Diluted                                                   |   | $                                     | 0.51   |   | $ | 0.48 |   | $ | 1.11 |   | $ | 1.08 |   |

 
|                                                                                         |   | **Selected  Cash Flow Data (a)(b)  Six Months Ended June 30, 2002** |    |
|----------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------|---------|
| **(Dollars in thousands)**                                                                   |   | **Previously  Reported**                                            |    | **Restated** |   |
| Net income                                                                                   |   | $                                                                   | 3,692   |   | $ | 3,553 |   |
|                                                                                         |   |                                                                |    |   |   |
| Adjustments to reconcile net income to net  cash provided by (used in) operating activities: |   |                                                                |    |   |   |
| Amortization, accretion and depreciation,  net                                               |   | 1,025                                                               |    | 1,043 |   |
| Other, net                                                                                   |   | (15,882                                                             | )       | (15,735 | ) |
| Net cash provided by operating activities                                                    |   | 1,655                                                               |    | 1,681 |   |
|                                                                                         |   |                                                                |    |   |   |
| Cash flows from investing activities:                                                        |   |                                                                |    |   |   |
| Proceeds from principal payments on, and  maturities of, available for sale securities       |   | 41,920                                                              |    | 41,894 |   |
| Net cash provided (used) by investing  activities                                            |   | (59,684                                                             | )       | (59,710 | ) |
|                                                                                         |   |                                                                |    |   |   |
| Net (decrease) in cash and cash equivalents                                                  |   | $                                                                   | (22,255 | ) | $ | (22,255 | ) |

 

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(a)          The previously reported amounts for net cashprovided by (used in) operating activities and investing activities have beenadjusted for the effect of the restatement.

(b)         As indicated, there has been no change in thenet increase in cash and cash equivalents as a result of the restatement.

 

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RISKS RELATING TO ARTHUR ANDERSEN LLP

 

Arthur Andersen LLP previously audited the Company’s financialstatements at December 31, 2001 and for the three years then ended.  As previously indicated, the Company hasrestated its financial statements at and for the year ended December 31, 2001and has revised the related Notes to Financial Statements as appropriate.  As discussed in Item 9 of the Company’sAnnual Report on Form 10-K for the year ended December 31, 2002, as filed withthe United States Securities and Exchange Commission, the Company changedindependent accountants on July 1, 2002. The Company’s financial statements asof and for the year ended December 31, 2001, as restated, have been audited byPricewaterhouseCoopers LLP whose report thereon is included as Item 8 of theCompany’s Annual Report on Form 10-K for the year ended December 31, 2002.Arthur Andersen LLP has not reissued its previous report on the Company’sfinancial statements, which previous report is included in Item 8 thereof, norhas it furnished an updated consent with respect to the incorporation byreference of such financial statements into the Company’s registrationstatements on Form S-8 and Form S-3D. Arthur Andersen LLP did not participatein the preparation or review of the Company’s Annual Report on Form 10-K forthe year ended December 31, 2002. Arthur Andersen LLP was convicted in Federalcourt of obstruction of justice on June 15, 2002, and has ceased practicebefore the Securities and Exchange Commission. You may have no effective remedyagainst Arthur Andersen LLP in connection with any material misstatement oromission in the company’s financial statements at and for the year endedDecember 31, 2000 or related disclosure, particularly in the event that ArthurAndersen LLP ceases to exist or becomes insolvent as a result of the convictionor other proceedings against Arthur Andersen LLP.

 

5

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

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

 

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

 
| **(Dollar amounts in thousands)**                                                                                                 |   | **June 30,  2003** |       | **December 31,  2002** |       |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|------------------------|------------|
| **ASSETS**                                                                                                                        |   |               | ** ** |                   | ** ** |
| Cash and due from banks                                                                                                           |   | $                  | 32,954     |                   | $          | 31,238 |   |
| Short-term investments                                                                                                            |   | 2,640              |       | 77,878                 |       |
| Total cash and cash equivalents                                                                                                   |   | 35,594             |       | 109,116                |       |
|                                                                                                                              |   |               |       |                   |       |
| Loans held for sale                                                                                                               |   | 19,602             |       | 35,629                 |       |
| Securities available for sale - at market value                                                                                   |   | 437,793            |       | 352,339                |       |
| Loans                                                                                                                             |   | 415,172            |       | 361,434                |       |
| Less:  Allowance for possible  loan loss                                                                                     |   | (4,264             | )          | (4,212                 | )          |
| Loans, net                                                                                                                        |   | 410,908            |       | 357,222                |       |
|                                                                                                                              |   |               |       |                   |       |
| Federal Home Loan Bank stock, at cost                                                                                             |   | 14,042             |       | 14,042                 |       |
| Banking premises and equipment, net                                                                                               |   | 13,038             |       | 13,364                 |       |
| Goodwill                                                                                                                          |   | 5,762              |       | 5,768                  |       |
| Intangible assets                                                                                                                 |   | 4,316              |       | 4,615                  |       |
| Bank-owned life insurance - contract value                                                                                        |   | 3,946              |       | 3,863                  |       |
| Other assets                                                                                                                      |   | 5,599              |       | 7,262                  |       |
|                                                                                                                              |   | $                  | 950,600    |                   | $          | 903,220 |   |
|                                                                                                                              |   |               |       |                   |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                     |   |               |       |                   |       |
| Deposits                                                                                                                          |   | $                  | 663,961    |                   | $          | 646,628 |   |
| Short-term borrowings                                                                                                             |   | 56,588             |       | 11,006                 |       |
| Long-term debt                                                                                                                    |   | 150,933            |       | 167,009                |       |
| Accrued taxes and expenses                                                                                                        |   | 5,554              |       | 6,789                  |       |
| Other liabilities                                                                                                                 |   | 2,859              |       | 1,770                  |       |
| Total liabilities                                                                                                                 |   | 879,895            |       | 833,202                |       |
|                                                                                                                              |   |               |       |                   |       |
| Guaranteed preferred beneficial interest in the Company’s junior  subordinated debentures                                    |   | 12,276             |       | 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;  5,630,000 and 5,553,000 shares issued in 2003 and 2002, respectively |   | 563                |       | 555                    |       |
| Additional paid-in capital                                                                                                        |   | 35,221             |       | 34,340                 |       |
| Retained earnings                                                                                                                 |   | 36,198             |       | 35,106                 |       |
|                                                                                                                              |   | 71,982             |       | 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                      |   | 4,256              |       | 5,243                  |       |
| Total stockholders’ equity                                                                                                   |   | 58,429             |       | 57,780                 |       |
|                                                                                                                              |   | $                  | 950,600    |                   | $          | 903,220 |   |

 

Seeaccompanying notes to unaudited consolidated financial statements.

 

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**ABINGTON BANCORP, INCCONSOLIDATED STATEMENTS OFOPERATIONS(Unaudited)**

 
|                                                      |   | **Three  Months Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|-----------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
| **(Dollar  amounts in thousands, except per share data)** |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
|                                                      |   |                             |   | **(Restated)**                 |   |   |   | **(Restated)** |   |
| Interest and dividend  income:                            |   |                             |   |                           |   |   |   |   |   |
| Interest and fees on loans                                |   | $                                | 6,175  |                           | $      | 6,018 |   | $ | 12,340 |   | $ | 12,451 |   |
| Interest on mortgage-backed  securities                   |   | 3,892                            |   | 4,799                          |   | 7,561 |   | 9,248 |   |
| Interest on bonds and  obligations                        |   | 355                              |   | 560                            |   | 739 |   | 1,135 |   |
| Dividend income                                           |   | 111                              |   | 125                            |   | 347 |   | 282 |   |
| Interest on short-term  investments                       |   | 15                               |   | 128                            |   | 171 |   | 250 |   |
| Total interest and dividend  income                       |   | 10,548                           |   | 11,630                         |   | 21,158 |   | 23,366 |   |
|                                                      |   |                             |   |                           |   |   |   |   |   |
| Interese expense:                                         |   |                             |   |                           |   |   |   |   |   |
| Interest on deposits                                      |   | 2,248                            |   | 2,697                          |   | 4,579 |   | 5,685 |   |
| Interest on short-term  borrowings                        |   | 310                              |   | 50                             |   | 383 |   | 86 |   |
| Interest on long-term debt                                |   | 1,856                            |   | 3,016                          |   | 3,749 |   | 5,911 |   |
| Total interest expense                                    |   | 4,414                            |   | 5,763                          |   | 8,711 |   | 11,682 |   |
|                                                      |   |                             |   |                           |   |   |   |   |   |
| Net interest income                                       |   | 6,134                            |   | 5,867                          |   | 12,447 |   | 11,684 |   |
| Provision for loan losses                                 |   | 375                              |   | (25                            | )      | 375 |   | (25 | ) |
| Net interest income after  provision for loan losses      |   | 5,759                            |   | 5,892                          |   | 12,072 |   | 11,709 |   |
|                                                      |   |                             |   |                           |   |   |   |   |   |
| Non-interest income                                       |   |                             |   |                           |   |   |   |   |   |
| Loan servicing fees                                       |   | 26                               |   | 38                             |   | 57 |   | 82 |   |
| Customer service fees                                     |   | 2,836                            |   | 2,072                          |   | 4,941 |   | 4,058 |   |
| Gain on sales of  securities, net                         |   | 57                               |   | 52                             |   | 698 |   | 87 |   |
| Gain on sales of mortgage  loans, net                     |   | 1,817                            |   | 643                            |   | 3,205 |   | 1,767 |   |
| Net gain on sales of other  real estate owned             |   | —                           |   | —                         |   | 33 |   | — |   |
| Other                                                     |   | 333                              |   | 103                            |   | 451 |   | 243 |   |
| Total noninterest income                                  |   | 5,069                            |   | 2,908                          |   | 9,385 |   | 6,237 |   |
|                                                      |   |                             |   |                           |   |   |   |   |   |
| Non-interest expense:                                     |   |                             |   |                           |   |   |   |   |   |
| Salaries and employee  benefits                           |   | 4,981                            |   | 3,389                          |   | 9,463 |   | 6,619 |   |
| Occupancy and equipment  expenses                         |   | 1,140                            |   | 806                            |   | 2,355 |   | 1,638 |   |
| Trust preferred securities  expense                       |   | 280                              |   | 280                            |   | 560 |   | 560 |   |
| Other non-interest expense                                |   | 2,954                            |   | 1,780                          |   | 5,762 |   | 3,493 |   |
| Total non-interest expense                                |   | 9,355                            |   | 6,255                          |   | 18,140 |   | 12,310 |   |
|                                                      |   |                             |   |                           |   |   |   |   |   |
| Income before income taxes                                |   | 1,473                            |   | 2,545                          |   | 3,317 |   | 5,636 |   |
| Provision for income taxes                                |   | 746                              |   | 958                            |   | 1,388 |   | 2,083 |   |
| Net income                                                |   | $                                | 727    |                           | $      | 1,587 |   | $ | 1,929 |   | $ | 3,553 |   |
|                                                      |   |                             |   |                           |   |   |   |   |   |
| Basic earnings per share                                  |   | $                                | 0.19   |                           | $      | 0.50 |   | $ | 0.51 |   | $ | 1.12 |   |
| Diluted earnings per share                                |   | $                                | 0.18   |                           | $      | 0.48 |   | $ | 0.49 |   | $ | 1.08 |   |
| Dividends declared                                        |   | $                                | 0.22   |                           | $      | 0.10 |   | $ | 0.22 |   | $ | 0.20 |   |
|                                                      |   |                             |   |                           |   |   |   |   |   |
| Weighted average common  shares outstanding               |   | 3,798,000                        |   | 3,191,000                      |   | 3,779,000 |   | 3,186,000 |   |
| Weighted average dilutive  options                        |   | 172,000                          |   | 135,000                        |   | 180,000 |   | 116,000 |   |
| Diluted weighted average  common shares                   |   | 3,970,000                        |   | 3,326,000                      |   | 3,959,000 |   | 3,302,000 |   |

 

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** |   |
|----------------------------------------------------------------------------------------------|--------|-------------------|--------|----------------------------------|--------|------------------------|--------|---------------------|--------|--------------------------------------------------------------------------|--------|-------------------------|--------|-----------|--------|
| Balance at December 31, 2002                                                                 |   | $                 | 555    |                             | $      | 34,340                 |   | $                   | 35,106 |                                                                     | $      | (17,584                 | )      | $         | 5,243  |   | $ | 120 |   | $ | 57,780 |   |
| Net income                                                                                   |   | —            |   | —                           |   | 1,929                  |   | —              |   | —                                                                   |   | —                  |   | 1,929     |   |
| Exercise of stock options                                                                    |   | 8                 |   | 881                              |   | —                 |   | —              |   | —                                                                   |   | —                  |   | 889       |   |
| Unearned compensation                                                                        |   | —            |   | —                           |   | —                 |   | —              |   | —                                                                   |   | (345                    | )      | (345      | )      |
| Change in unrealized gain (losses) on available for sale securities, net  of tax             |   | —            |   | —                           |   | —                 |   | —              |   | (987                                                                     | )      | —                  |   | (987      | )      |
| Dividends declared ($0.22 per share)                                                         |   | —            |   | —                           |   | (837                   | )      | —              |   | —                                                                   |   | —                  |   | (837      | )      |
| Balance at June 30, 2003                                                                     |   | $                 | 563    |                             | $      | 35,221                 |   | $                   | 36,198 |                                                                     | $      | (17,584                 | )      | $         | 4,256  |   | $ | (225 | ) | $ | 58,429 |   |
|                                                                                         |   |              |   |                             |   |                   |   |                |   |                                                                     |   |                    |   |      |   |
| Balance at December 31, 2001 (restated)                                                      |   | $                 | 492    |                             | $      | 23,081                 |   | $                   | 30,358 |                                                                     | $      | (17,584                 | )      | $         | 1,752  |   | $ | 120 |   | $ | 38,219 |   |
| Net income (restated)                                                                        |   | —            |   | —                           |   | 3,553                  |   | —              |   | —                                                                   |   | —                  |   | 3,553     |   |
| Exercise of stock options                                                                    |   | 8                 |   | 277                              |   | —                 |   | —              |   | —                                                                   |   | —                  |   | 285       |   |
| Change in unrealized gains (losses) on available for sale securities,  net of tax (restated) |   | —            |   | —                           |   | —                 |   | —              |   | 2,626                                                                    |   | —                  |   | 2,626     |   |
| Dividends declared ($0.20 per share)                                                         |   | —            |   | —                           |   | (645                   | )      | —              |   | —                                                                   |   | —                  |   | (645      | )      |
| Balance at June 30, 2002 (restated)                                                          |   | $                 | 500    |                             | $      | 23,358                 |   | $                   | 33,266 |                                                                     | $      | (17,584                 | )      | $         | 4,378  |   | $ | 120 |   | $ | 44,038 |   |

 

Seeaccompanying notes to unaudited consolidated financial statements.

 

8

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

 
|                                                                                                           |   | **Six Months Ended June 30,** |   |
|----------------------------------------------------------------------------------------------------------------|--------|-------------------------------|--------|
| **(Dollar amounts in thousands)**                                                                              |   | **2003**                      |   | **2002** |   |
|                                                                                                           |   |                          |   | **(Restated)** |   |
| Net income, as reported                                                                                        |   | $                             | 1,929  |   | $ | 3,553 |   |
|                                                                                                           |   |                          |   |   |   |
| Change in unrealized losses  on available for sale securities, net of tax                                      |   | (533                          | )      | 2,683 |   |
|                                                                                                           |   |                          |   |   |   |
| Less: Reclassification  adjustment for available for sale securities gains included in net income,  net of tax |   | 454                           |   | 57 |   |
|                                                                                                           |   |                          |   |   |   |
| Comprehensive income (loss)                                                                                    |   | $                             | 942    |   | $ | 6,179 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

9

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

 
|                                                                                    |   | **Six Months Ended June 30,** |   |
|-----------------------------------------------------------------------------------------|--------|-------------------------------|--------|
| **(Dollar amounts in thousands)**                                                       |   | **2003**                      |   | **2002** |   |
|                                                                                    |   |                          |   | **(Restated)** |   |
| Cash flows from operating  activities:                                                  |   |                          |   |   |   |
| Net income                                                                              |   | $                             | 1,929  |   | $ | 3,553 |   |
|                                                                                    |   |                          |   |   |   |
| Adjustments to reconcile  net income to net cash provided by operating activities:      |   |                          |   |   |   |
| Provision for loan losses                                                               |   | 375                           |   | (25 | ) |
| Amortization, accretion and  depreciation, net                                          |   | 3,032                         |   | 1,043 |   |
| Net gain on sale of other  real estate owned                                            |   | (33                           | )      | — |   |
| Gain on sales of  securities, net                                                       |   | (698                          | )      | (87 | ) |
| Loans originated for sale  in the secondary market                                      |   | (272,945                      | )      | (95,478 | ) |
| Proceeds from sales of  loans                                                           |   | 292,177                       |   | 110,177 |   |
| Gain on sales of mortgage  loans, net                                                   |   | (3,205                        | )      | (1,767 | ) |
| Other, net                                                                              |   | 1,049                         |   | (15,735 | ) |
| Net cash provided by  operating activities                                              |   | 21,681                        |   | 1,681 |   |
|                                                                                    |   |                          |   |   |   |
| Cash flows from investing  activities:                                                  |   |                          |   |   |   |
|                                                                                    |   |                          |   |   |   |
| Proceeds from sales of  available for sale securities                                   |   | 32,778                        |   | 17,528 |   |
| Proceeds from principal  payments on and maturities of available for sale securities    |   | 154,728                       |   | 41,894 |   |
| Purchase of available for  sale securities                                              |   | (274,779                      | )      | (157,513 | ) |
| Loans  (originated/purchased) repaid                                                    |   | (54,455                       | )      | 38,986 |   |
| Purchase of banking  premises and equipment and improvements to other real estate owned |   | (690                          | )      | (605 | ) |
| Proceeds from sales of  other real estate owned                                         |   | 33                            |   | — |   |
| Net cash used by investing  activities                                                  |   | (142,385                      | )      | (59,710 | ) |
|                                                                                    |   |                          |   |   |   |
| Cash flows from financing  activities:                                                  |   |                          |   |   |   |
| Net increase in deposits                                                                |   | 17,475                        |   | 53,925 |   |
| Net increase in borrowings  with original maturities of three months or less            |   | 45,582                        |   | 1,214 |   |
| Proceeds from issuance of  long-term debt                                               |   | 10,000                        |   | 35,000 |   |
| Principal payments on  long-term debt                                                   |   | (26,004                       | )      | (54,000 | ) |
| Proceeds from exercise of  stock options                                                |   | 889                           |   | 285 |   |
| Purchase of unearned ESOP  stock                                                        |   | (345                          | )      | — |   |
| Cash dividends paid                                                                     |   | (415                          | )      | (650 | ) |
| Net cash provided by  financing activities                                              |   | 47,182                        |   | 35,774 |   |
| Net (decrease) in cash and  cash equivalents                                            |   | (73,522                       | )      | (22,255 | ) |
| Cash and cash equivalents  at beginning of period                                       |   | 109,116                       |   | 54,576 |   |
| Cash and cash equivalents  at end of period                                             |   | $                             | 35,594 |   | $ | 32,321 |   |
|                                                                                    |   |                          |   |   |   |
| Supplemental cash flow  information:                                                    |   |                          |   |   |   |
| Interest paid on deposits                                                               |   | $                             | 4,588  |   | $ | 5,615 |   |
| Interest paid on borrowed  funds                                                        |   | 4,182                         |   | 6,233 |   |
| Income taxes paid, net                                                                  |   | 539                           |   | 2,568 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

10

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ABINGTONBANCORP, INC.NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTSJune 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 the Bank.

 

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 generally acceptedaccounting 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 six 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.  See “Management’s Discussion and Analysis ofConsolidated Financial Condition and Results of Operation — RECENT DEVELOPMENTS.”

 

The results of operations forthe three and six months ended June 30, 2002 presented herein represent theCompany’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 June  30, 2002**            |    |
|                                                |   | **As  Previously**               |    | **As** |   |
| **(Dollars  in thousands**                          |   | **Reported**                     |    | **Restated** |   |
| Securities available for sale at market  value      |   | $                                | 380,064 |   | $ | 379,218 |   |
| Other assets                                        |   | 6,991                            |    | 5,919 |   |
| Total assets                                        |   | 798,491                          |    | 796,573 |   |
| Accrued taxes and expenses                          |   | 4,846                            |    | 4,225 |   |
| Other liabilities                                   |   | 1,176                            |    | 963 |   |
| Retained earnings                                   |   | 34,451                           |    | 33,266 |   |
| Other accumulated comprehensive income, net  of tax |   | 4,277                            |    | 4,378 |   |
| Total stockholders’ equity                     |   | 45,122                           |    | 44,038 |   |
|                                                     |        |                                  |         |  |  |  |  |

 
|                                   |   | **Summary  Income Data** |   |
|----------------------------------------|--------|--------------------------|--------|
|                                   |   | **Three  Months Ended**  |   | **Six Months  Ended** |   |
|                                   |   | **June 30,  2002**       |   | **June 30,  2002** |   |
| **(Dollars  in thousands,**            |   | **As  Previously**       |   | **As** |   | **As  Previously** |   |   |   |
| **except per  share data)**            |   | **Reported**             |   | **Restated** |   | **Reported** |   | **Restated** |   |
|                                   |   |                     |   |   |   |   |   |   |   |
| Interest and fees on loans             |   | $                        | 6,070  |   | $ | 6,018 |   | $ | 12,688 |   | $ | 12,451 |   |
| Interest on mortgage-backed securities |   | 5,021                    |   | 4,799 |   | 9,245 |   | 9,248 |   |
| Salaries and employee benefits         |   | 3,434                    |   | 3,389 |   | 6,585 |   | 6,619 |   |
| Other non-interest expense             |   | 1,806                    |   | 1,780 |   | 3,545 |   | 3,493 |   |
| Provision for income taxes             |   | 1,030                    |   | 958 |   | 2,160 |   | 2,083 |   |
| Net income                             |   | 1,718                    |   | 1,587 |   | 3,692 |   | 3,553 |   |
| Net income per share:                  |   |                     |   |   |   |   |   |   |   |
| Basic                                  |   | $                        | 0.54   |   | $ | 0.50 |   | $ | 1.16 |   | $ | 1.12 |   |
| Diluted                                |   | $                        | 0.51   |   | $ | 0.48 |   | $ | 1.11 |   | $ | 1.08 |   |

 

 
|                                                                                 |   | **Selected  Cash Flow Data (a)(b)** |    |
|--------------------------------------------------------------------------------------|--------|-------------------------------------|---------|
|                                                                                 |   | **Six Months  Ended June 30, 2002** |    |
|                                                                                 |   | **As  Previously**                  |    | **As** |   |
| **(Dollars  in thousands)**                                                          |   | **Reported**                        |    | **Restated** |   |
|                                                                                 |   |                                |    |   |   |
| Net income                                                                           |   | $                                   | 3,692   |   | $ | 3,553 |   |
|                                                                                 |   |                                |    |   |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:   |   |                                |    |   |   |
| Amortization, accretion and depreciation,  net                                       |   | 1,025                               |    | 1,043 |   |
| Other, net                                                                           |   | (15,882                             | )       | (15,735 | ) |
| Net cash provided by operating activities                                            |   | 1,655                               |    | 1,681 |   |
|                                                                                 |   |                                |    |   |   |
| Cash flows from investing activities:                                                |   |                                |    |   |   |
| Proceeds from principal payments on and  maturities of available for sale securities |   | 41,920                              |    | 41,894 |   |
| Net cash provided (used) by Investing  activities                                    |   | (59,684                             | )       | (59,710 | ) |
|                                                                                 |   |                                |    |   |   |
| Net increase (decrease) in cash and cash  equivalents                                |   | $                                   | (22,255 | ) | $ | (22,255 | ) |

----

| (a) |   | The previously  reported amounts for net cash provided by (used in) operating activities and  investing activities have been adjusted for the effect of the restatement. |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b) |   | As  indicated, there has been no change in the net increase in cash and cash  equivalents as a result of the restatement.                                                |

 

11

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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.

 

D)                                   STOCK REPURCHASEPROGRAM

 

As of June 30, 2003, the Company had repurchased 932,600 shares of itscommon stock at a total cost of $13.9 million. The stock was purchased pursuant to three separate authorizations by theCompany’s Board of Directors.  The Boardof Directors delegated to senior management the authority to determine thetiming and pricing of the repurchases. There remain approximately 109,000 shares approved for repurchase underthe 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.  At June 30, 2003, theaverage closing price of the Company's common stock exceeded the exercise priceof all outstanding options.  Thefollowing table shows the calculation of average common share and common shareequivalents for the purposes of earnings per share calculations:

 
|                                       |   | **Three  Months Ended  June 30** |   | **Six Months  Ended  June 30** |   |
|--------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
| **(In  thousands, except per share data)** |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
|                                       |   |                             |   | **(Restated)**                 |   |   |   | **(Restated)** |   |
|                                       |   |                             |   |                           |   |   |   |   |   |
| Average common shares outstanding          |   | 3,798                            |   | 3,191                          |   | 3,779 |   | 3,186 |   |
| Weighted average dilutive options          |   | 172                              |   | 135                            |   | 180 |   | 116 |   |
| Fully diluted weighted average shares      |   | 3,970                            |   | 3,326                          |   | 3,959 |   | 3,302 |   |
|                                       |   |                             |   |                           |   |   |   |   |   |
| Net income                                 |   | $                                | 727    |                           | $      | 1,587 |   | $ | 1,929 |   | $ | 3,553 |   |
|                                       |   |                             |   |                           |   |   |   |   |   |
| Basic earnings per share:                  |   |                             |   |                           |   |   |   |   |   |
| Net income per share                       |   | $                                | 0.19   |                           | $      | 0.50 |   | $ | 0.51 |   | $ | 1.12 |   |
|                                       |   |                             |   |                           |   |   |   |   |   |
| Fully diluted earnings per share:          |   |                             |   |                           |   |   |   |   |   |
| Net income per share                       |   | $                                | 0.18   |                           | $      | 0.48 |   | $ | 0.49 |   | $ | 1.08 |   |

 

12

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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.

 

13

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|                                                      |   | **Community  Banking** |   | **Mortgage  Banking** |   | **Other** |   | **Eliminations** |   | **Total** |   |
|-----------------------------------------------------------|--------|------------------------|--------|-----------------------|--------|-----------|--------|------------------|--------|-----------|--------|
| **For the three months  ended  June 30, 2003**            |   |                   |   |                  |   |      |   |             |   |      |   |
| Net interest income                                       |   | $                      | 6,029  |                  | $      | 103       |   | $                | 2      |      | $      | — |   | $ | 6,134 |   |
| Provision for loan losses                                 |   | 375                    |   | —                |   | —    |   | —           |   | 375       |   |
| Noninterest income                                        |   | 2,922                  |   | 2,147                 |   | —    |   | (43              | )      | 5,026     |   |
| Noninterest expense                                       |   | 7,863                  |   | 1,212                 |   | 280       |   | (43              | )      | 9,312     |   |
| Net income                                                |   | 385                    |   | 619                   |   | (277      | )      | —           |   | 727       |   |
| Total assets                                              |   | 1,000,458              |   | 23,988                |   | 80,843    |   | (154,689         | )      | 950,600   |   |
|                                                      |   |                   |   |                  |   |      |   |             |   |      |   |
| **For the three months  ended  June 30, 2002 (restated)** |   |                   |   |                  |   |      |   |             |   |      |   |
| Net interest income                                       |   | $                      | 5,803  |                  | $      | 57        |   | $                | 7      |      | $      | — |   | $ | 5,867 |   |
| Provision for loan losses                                 |   | (25                    | )      | —                |   | —    |   | —           |   | (25       | )      |
| Noninterest income                                        |   | 2,253                  |   | 655                   |   | —    |   | —           |   | 2,908     |   |
| Noninterest expense                                       |   | 5,519                  |   | 456                   |   | 280       |   | —           |   | 6,255     |   |
| Net income                                                |   | 1,613                  |   | 154                   |   | (180      | )      | —           |   | 1,587     |   |
| Total assets                                              |   | 729,839                |   | 12,771                |   | 53,963    |   | (68,105          | )      | 728,468   |   |
|                                                      |   |                   |   |                  |   |      |   |             |   |      |   |
| **For the six months ended  June 30, 2003**               |   |                   |   |                  |   |      |   |             |   |      |   |
| Net interest income                                       |   | $                      | 12,236 |                  | $      | 205       |   | $                | 6      |      | $      | — |   | $ | 12,447 |   |
| Provision for loan losses                                 |   | 375                    |   | —                |   | —    |   | —           |   | 375       |   |
| Noninterest income                                        |   | 5,695                  |   | 3,690                 |   | —    |   | (85              | )      | 9,300     |   |
| Noninterest expense                                       |   | 15,445                 |   | 2,135                 |   | 560       |   | (85              | )      | 18,055    |   |
| Net income                                                |   | 1,319                  |   | 1,050                 |   | (440      | )      | —           |   | 1,929     |   |
| Total assets                                              |   | 1,000,458              |   | 23,988                |   | 80,843    |   | (154,689         | )      | 950,600   |   |
|                                                      |   |                   |   |                  |   |      |   |             |   |      |   |
| **For the six months ended  June 30, 2002 (restated)**    |   |                   |   |                  |   |      |   |             |   |      |   |
| Net interest income                                       |   | $                      | 11,523 |                  | $      | 149       |   | $                | 12     |      | $      | — |   | $ | 11,684 |   |
| Provision for loan losses                                 |   | (25                    | )      | —                |   | —    |   | —           |   | (25       | )      |
| Noninterest income                                        |   | 4,454                  |   | 1,783                 |   | —    |   | —           |   | 6,237     |   |
| Noninterest expense                                       |   | 10,641                 |   | 1,109                 |   | 560       |   | —           |   | 12,310    |   |
| Net income                                                |   | 3,390                  |   | 492                   |   | (329      | )      | —           |   | 3,553     |   |
| Total assets                                              |   | 729,839                |   | 12,771                |   | 53,963    |   | (68,105          | )      | 728,468   |   |

 

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 in salariesand 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 

 

14

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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 June 30,** |   | **Six Months Ended June 30,** |   |
|-------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                                                                                                                          |   | **2003**                        |   | **2002**                      |   | **2003** |   | **2002** |   |
|                                                                                                                          |   |                            |   | **(Restated)**                |   |   |   | **(Restated)** |   |
| Net income                                                                                                                    |   | $                               | 727    |                          | $      | 1,587 |   | $ | 1,929 |   | $ | 3,553 |   |
| Add: Stock-based compensation expenses  reported in net income, net of taxes                                                  |   |                            | 14     |                          |   | 1 |   |   | 14 |   |   | 1 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value-based method for all awards,  net of tax |   | 20                              |   | 8                             |   | 20 |   | 16 |   |
| Proforma net income                                                                                                           |   | $                               | 721    |                          | $      | 1,580 |   | $ | 1,923 |   | $ | 3,538 |   |
|                                                                                                                          |   |                            |   |                          |   |   |   |   |   |
| Earnings per share:                                                                                                           |   |                            |   |                          |   |   |   |   |   |
| Basic:                                                                                                                        |   |                            |   |                          |   |   |   |   |   |
| As reported                                                                                                                   |   | $                               | 0.19   |                          | $      | 0.50 |   | $ | 0.51 |   | $ | 1.12 |   |
| Pro forma                                                                                                                     |   | 0.19                            |   | 0.50                          |   | 0.51 |   | 1.11 |   |
| Diluted:                                                                                                                      |   |                            |   |                          |   |   |   |   |   |
| As reported                                                                                                                   |   | $                               | 0.18   |                          | $      | 0.48 |   | $ | 0.49 |   | $ | 1.08 |   |
| Pro forma                                                                                                                     |   | 0.18                            |   | 0.48                          |   | 0.49 |   | 1.07 |   |

 

I)                                        LOANSAND DEPOSITS

 

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

 
| **(Dollars  in thousands)**         |   | **June 30,  2003** |    | **December  31,  2002** |   | **June 30,  2002** |   |
|-------------------------------------|--------|--------------------|---------|-------------------------|--------|--------------------|--------|
|                                |   |               |    |                    |   | **(Restated)**     |   |
| Loans and loans held for sale:      |   |               |    |                    |   |               |   |
| Residential                         |   | $                  | 266,233 |                    | $      | 233,503            |   | $ | 233,344 |   |
| Home equity                         |   | 38,679             |    | 33,702                  |   | 30,522             |   |
| Commercial real estate              |   | 112,827            |    | 112,374                 |   | 71,853             |   |
| Other                               |   | 17,035             |    | 17,484                  |   | 21,343             |   |
| Total loans and loans held for sale |   | $                  | 434,774 |                    | $      | 397,063            |   | $ | 357,062 |   |
|                                |   |               |    |                    |   |               |   |
| Deposits                            |   |               |    |                    |   |               |   |
| Demand                              |   | $                  | 97,928  |                    | $      | 90,960             |   | $ | 75,585 |   |
| NOW                                 |   | 115,958            |    | 105,047                 |   | 89,725             |   |
| Savings and money market            |   | 272,437            |    | 260,480                 |   | 239,216            |   |
| Core deposits                       |   | 486,323            |    | 456,487                 |   | 404,526            |   |
| Time                                |   | 177,638            |    | 190,141                 |   | 146,858            |   |
| Total deposits                      |   | $                  | 663,961 |                    | $      | 646,628            |   | $ | 551,384 |   |

 

**Item2.****           Management’s Discussionand Analysis of Consolidated Financial Condition and Results of Operation**

 

The following discussion should be read in conjunction with thefinancial statements, notes and tables included in the Company’s Annual Reporton Form 10-K for the fiscal year ended December 31, 2002 filed with theSecurities and Exchange Commission.  Thediscussion contains certain forward-looking information regarding the future performanceof the Company.  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” of thisForm 10-Q for a further discussion.

 

15

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RECENT DEVELOPMENTS

 

Based on the findings of an internal accounting review initiated by theCompany during the first quarter of 2003, the Company reported that it wouldrevise its previously announced 2002 financial results and would restate itspreviously issued 2001 financial statements. The revisions and restatement were necessary to correct accountingerrors related to the amortization/accretion of premiums/discounts onmortgage-backed investment securities due to the acceleration of prepayments,errors in recording payments received on various investment securities,interest income on mortgage loans and certain adjustments related to accrualsfor income and expense.  See“EXPLANATORY NOTE” preceding Part I of this Quarterly Report on Form 10-Q andPart I, Item 4 - “Controls and Procedures.”

 

During the internal accounting review, the Company identified a numberof accounting errors recorded by the Company’s former controller, includingunderlying prepayment assumptions used in the calculation of interest income in2002 that did not adequately reflect the actual prepayment rates received on aportion of its mortgage-backed securities (MBS) portfolio, and that certainpayments received on a portion of its MBS portfolio were not properlyapplied.  It was further determined,based upon the results of the preliminary review, that it would be necessary torevise the Company’s previously announced financial results for 2002 andrestate 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 six months ended June 30, 2002, have been revised.  In addition, certain 2002 financialinformation contained in this discussion and analysis of financial conditionand results of operation has been changed where appropriate.

 

In April 2003, shortly after the Company announced its intention torestate its financial statements, it was informed by the staff of the UnitedStates Securities and Exchange Commission (“SEC”) that the SEC was conductingan informal inquiry with respect to certain of the matters reflected in theannouncement.  The Company hascooperated fully with the inquiry.

 

On April 16, 2003, the Company received a letter from Nasdaq indicatingthat Nasdaq had not received the Company’s Annual Report on Form 10-K for theyear ended December 31, 2002 and had commenced the standard delisting processfor companies that have delayed filing required periodic reports with theexchange.  Effective April 18, 2003, thecompany’s trading symbol “ABBK” was listed as “ABBKE” to denote the Company’sfiling delinquency.  In addition, thesymbol of Abington Bancorp Capital Trust – 8.25% Cumulative Trust PreferredSecurities was changed from “ABBKP” to “APKPE.”  On April 21, 2003, the Company announced that it would request ahearing before a Nasdaq Listing Qualifications Panel to discuss the standarddelisting process.  Such hearing wasscheduled for May 16, 2003.  Upon the filingof its Annual Report on Form 10-K for the year ended December 31, 2002, and itsForm 10-Q for the quarter ended March 31, 2003, the Company satisfied therequirements for continued Nasdaq listing, the trading symbols, “ABBK” and“ABBKP” were reinstated and the hearing was cancelled.

 

The continued consolidation andappropriate balance sheet classification of trust preferred securities iscurrently under review by the Financial Accounting Standards Board.  Although the Federal Reserve Board has issuedinterim guidance that continues to recognize trust preferred securities as acomponent of Tier 1 capital, it is possible that a change in accountingguidance may result in these securities qualifying for Tier 2 capital ratherthan Tier 1 capital.  It is expectedthat FASB and the accounting industry will make final rules by the end ofSeptember 2003, the period in which the rules must be implemented.

 

OVERVIEW

 

Net income for the quarter ended June 30, 2003 was $727 thousand, or$0.18 per diluted share, compared with the restated $1.6 million, or $0.48 perdiluted share, for the same period of 2002. This quarter’s earnings include the operations of the formerMassachusetts Fincorp, Inc. (MAFN) acquired in September of 2002 under thepurchase method of accounting.  Underthe purchase method of accounting, the results of operations of MAFN areincluded from the date of acquisition forward and are excluded from theCompany’s operating results in the quarter ended June 30, 2002.  Net interest income increased by $267thousand or 4.6% over the second quarter of 2002.  This resulted from a combination of additional volumes of earningassets and interest bearing liabilities acquired in the MAFN transaction.  In addition, the Company recorded growth inboth investment securities and loans.  A$375 thousand provision for loan losses was recorded in the second quarter of2003 compared with a $25 thousand credit in the second quarter of lastyear.  Net charge-offs during thequarter were $303 thousand. Non-interest income improved by $2.2 million during the current quarterover the second quarter of 2002.  Thiswas due to growth in fee based services and products and the addition of theMAFN customer base.  Gains from the saleof loans increased by $1.2 million over the prior year quarter representingover one-half of the increase. Non-interest expense increased by $3.1 million or 49.6% over the firstquarter of 2002.  Increases in personnelcosts, occupancy and data processing expense all reflect the addition ofbranches and processing volumes acquired in the MAFN transaction.  In addition, the Company accruedapproximately $250 thousand for legal and accounting costs associated with therevision of 2002 operating results and the re-audit of 2001.

 

FINANCIAL CONDITION

 

Total assets increased by approximately $47.4 million or 5.2% to $950.6million from the $903.2 million reported for 

 

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December 31, 2002.  Thisreflects a net increase in available-for-sale securities of $85.4 million and a$53.7 million increase in loans.  Thisincrease includes growth within the commercial real estate portfolio and thepurchase of residential mortgage loan pools from third parties coupled with theretention of residential mortgage loans originated by the Company’s indirectsubsidiary, Old Colony Mortgage Corp. (OCM). Loans held for sale, originated by OCM, were $19.6 million at June 30,2003 compared with $35.6 million at December 31, 2002.  Short-term investments and funds solddecreased by $75.2 million.  The growthin investment securities and portfolio loans was funded by a combination ofcash flow provided by a reduction in funds sold, a reduction in loans held forsale, and borrowings from the Federal Home Loan Bank.

 

Total deposits during the quarter increased by $17.4 million or 2.7% to$664.0 million from the $646.6 million reported at December 31, 2002.  Certificates of deposit declined by $12.5million from year-end to $177.6 million at June 30, 2003 as maturing higheryielding certificates have migrated from the time deposit category to the moreliquid money market account. Transaction accounts (primarily demand deposits and NOW accounts)increased by $17.9 million from year-end. Savings and money market accounts grew by $11.9 million since year-end2002.  Balances reflect the current rateenvironment and uncertainty in the stock market as reflected in the stabilityof core retail and commercial accounts.

 

Short-term borrowings totaled $56.6 million at quarter end compared to$11.0 million at December 31, 2002, reflecting increased borrowings incurred toprovide short-term funding for asset purchases during the quarter.  It is expected that these borrowings will berepaid by cash flow from investing activities. Longer term borrowings from the Federal Home Loan Bank at June 30, 2003were $150.9 million.

 

Stockholders’ equity was $58.4 million at June 30, 2003, as compared to$57.8 million at December 31, 2002.  Theincrease in stockholders’ equity is primarily due to growth in retainedearnings.

 

The return on average equity and average assets was 5.02 percent and0.30 percent, respectively, this quarter compared with 15.56 percent and 0.77percent for the comparable restated 2002 quarter.

 

NET INTEREST INCOME

 

Net interest income is the difference between interest earned onearning assets such as loans and investments and interest paid on interestbearing liabilities such as deposits and borrowings.  Net interest income is affected by the mix and volume of assetsand liabilities, changes in interest rates and the interest rate spread.  Additional factors affecting net interestincome in a lower rate environment are accelerated prepayments of higheryielding investment securities coupled with loan origination and refinancingsat lower available yields.

 

Net interest income increased by $267 thousand for the three monthsended June 30, 2003 compared to the comparable period of 2002.

 

Interest and dividend income decreased by $1.1 million during the threemonth period ended June 30, 2003 compared to the second quarter of 2002, aslower available earning asset yields were partially offset by increases in thevolume of average earning assets.  Theincreased earning asset volume resulted from a combination of assets acquiredin the MAFN acquisition, increases in the portfolio of investment securitiesand a combination of internal loan growth and asset purchases.  The yield on earning assets decreased to4.75% in the three months ended June 30, 2003 as compared to 6.19% for the sameperiod of 2002.

 

Interest expense for the quarter ended June 30, 2003 decreased by $1.3million compared to the second quarter of 2002, generally due to lower ratespaid on deposits and borrowed funds. Interest expense also reflects a shift in mix as higher cost maturingtime deposits were transferred to the more liquid lower cost money marketaccounts.  Deposit liabilities increasedby $17.3 million during the 2003 second quarter over the comparable prior yearquarter.  Transaction accounts (demandand NOW accounts) grew by approximately $17.9 million while non-transactionaccounts (savings, money market and time deposits) increased by $11.9 million,with declines in certificates of deposit offset by growth in money marketaccounts.  Rates paid on borrowed fundsalso declined during the current quarter from the prior year quarter asmaturities were rolled over at lower short-term rates.

 

The table below presents the components of interest income and interestexpense for the major categories of assets and liabilities for the periodsindicated.

 

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|                                                  |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|-------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
| **(Dollars in  thousands)**                           |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
|                                                  |   |                              |   | **(restated)**                  |   |   |   | **(restated)** |   |
| Interest and dividend income:                         |   |                              |   |                            |   |   |   |   |   |
| Interest and fees on loans                            |   | $                                 | 6,175  |                            | $      | 6,018 |   | $ | 12,340 |   | $ | 12,451 |   |
| Interest on mortgage-backed investments               |   | 3,892                             |   | 4,799                           |   | 7,561 |   | 9,248 |   |
| Interest and dividends on bonds and other obligations |   | 466                               |   | 685                             |   | 1,086 |   | 1,417 |   |
| Interest on short-term investments                    |   | 15                                |   | 128                             |   | 171 |   | 250 |   |
| Total interest and dividend income                    |   | $                                 | 10,548 |                            | $      | 11,630 |   | $ | 21,158 |   | $ | 23,366 |   |
|                                                  |   |                              |   |                            |   |   |   |   |   |
| Interest expense:                                     |   |                              |   |                            |   |   |   |   |   |
| Interest on deposits                                  |   | $                                 | 2,248  |                            | $      | 2,697 |   | $ | 4,579 |   | $ | 5,685 |   |
| Interest on short-term borrowings                     |   | 310                               |   | 50                              |   | 383 |   | 86 |   |
| Interest on long-term borrowings                      |   | 1,856                             |   | 3,016                           |   | 3,749 |   | 5,911 |   |
| Total interest expense                                |   | $                                 | 4,414  |                            | $      | 5,763 |   | $ | 8,711 |   | $ | 11,682 |   |

 

A breakdown of the components of the Company’s net interest rate spreadis a follows:

 
|                                                     |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|----------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                     |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
|                                                     |   |                              |   | **(restated)**                  |   |   |   | **(restated)** |   |
| Weighted average yield earned on:                        |   |                              |   |                            |   |   |   |   |   |
| Loans                                                    |   | 6.31                              | %      | 6.94                            | %      | 6.63 | % | 7.01 | % |
| Mortgage-backed investments                              |   | 3.53                              |   | 6.08                            |   | 3.87 |   | 6.41 |   |
| Bonds and obligations                                    |   | 3.25                              |   | 4.81                            |   | 3.05 |   | 4.61 |   |
| Short-term investments                                   |   | 0.63                              |   | 1.87                            |   | 0.74 |   | 1.91 |   |
| Equity securities                                        |   | 3.09                              |   | 3.28                            |   | 4.86 |   | 3.65 |   |
| Weighted average yield earned on interest-earning assets |   | 4.69                              |   | 6.19                            |   | 4.85 |   | 6.36 |   |
|                                                     |   |                              |   |                            |   |   |   |   |   |
| Weighted average rate paid on:                           |   |                              |   |                            |   |   |   |   |   |
| Total deposits                                           |   | 1.39                              |   | 2.07                            |   | 1.43 |   | 2.24 |   |
| Short-term borrowings                                    |   | 1.30                              |   | 2.23                            |   | 1.30 |   | 2.12 |   |
| Long-term debt                                           |   | 4.59                              |   | 5.44                            |   | 4.59 |   | 5.55 |   |
|                                                     |   |                              |   |                            |   |   |   |   |   |
| Weighted average rate paid on deposits and borrowings    |   | 1.96                              |   | 3.07                            |   | 2.02 |   | 3.21 |   |
|                                                     |   |                              |   |                            |   |   |   |   |   |
| Interest rate spread                                     |   | 2.73                              |   | 3.12                            |   | 2.83 |   | 3.15 |   |
|                                                     |   |                              |   |                            |   |   |   |   |   |
| Net interest margin                                      |   | 2.73                              |   | 3.12                            |   | 2.85 |   | 3.18 |   |

 

Rate/Volume Analysis

 

The following table presents, for the periods indicated, the change ininterest income and the change in interest expense attributable to the changein interest rates and the change in the volume of earning assets andinterest-bearing liabilities.  Thechange attributable to both volume and rate has been allocated proportionatelyto the change due to volume and the change due to rate.

 

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|                               |   | **Three  Months Ended June 30,**           |   |
|------------------------------------|--------|--------------------------------------------|--------|
|                               |   | **2003  versus 2002  Increase (decrease)** |   |
| **(Dollars  in thousands)**        |   | **Due to  Volume**                         |   | **Due to  Rate** |   | **Total** |   |
| Interest  and dividend income:     |   |                                       |   |   |   |   |   |
| Loans                              |   | $                                          | 733    |   | $ | (576 | ) | $ | 157 |   |
| Mortgage-backed securities         |   | 1,514                                      |   | (2,421 | ) | (907 | ) |
| Bonds and obligations              |   | (33                                        | )      | (172 | ) | (205 | ) |
| Short-term investments             |   | (63                                        | )      | (64 | ) | (127 | ) |
| Total interest and dividend income |   | 2,151                                      |   | (3,233 | ) | (1,082 | ) |
|                               |   |                                       |   |   |   |   |   |
| Interest expense:                  |   |                                       |   |   |   |   |   |
| Total deposits                     |   | 509                                        |   | (958 | ) | (449 | ) |
| Short-term borrowings              |   | 289                                        |   | (29 | ) | 260 |   |
| Long-term debt                     |   | (733                                       | )      | (427 | ) | (1,160 | ) |
| Total interest expense             |   | 65                                         |   | (1,414 | ) | (1,349 | ) |
|                               |   |                                       |   |   |   |   |   |
| Net interest income                |   | $                                          | 2,086  |   | $ | (1,819 | ) | $ | 267 |   |

 

 
|                               |   | **Six Months  Ended June 30**              |   |
|------------------------------------|--------|--------------------------------------------|--------|
|                               |   | **2003  versus 2002  Increase (Decrease)** |   |
| **(Dollars  in thousands)**        |   | **Due to  Volume**                         |   | **Due to  Rate** |   | **Total** |   |
| Interest and dividend income:      |   |                                       |   |   |   |   |   |
| Loans                              |   | $                                          | 587    |   | $ | (698 | ) | $ | (111 | ) |
| Mortgage-backed securities         |   | 2,665                                      |   | (4,352 | ) | (1,687 | ) |
| Bonds and obligations              |   | (15                                        | )      | (381 | ) | (396 | ) |
| Short-term and other investments   |   | 102                                        |   | (116 | ) | (14 | ) |
| Total interest and dividend income |   | $                                          | 3,339  |   | $ | (5,547 | ) | $ | (2,208 | ) |
|                               |   |                                       |   |   |   |   |   |
| Interest expense:                  |   |                                       |   |   |   |   |   |
| Total deposits                     |   | $                                          | 1,026  |   | $ | (2,133 | ) | $ | (1,107 | ) |
| Short-term borrowings              |   | 343                                        |   | (46 | ) | 297 |   |
| Long-term debt                     |   | (1,243                                     | )      | (918 | ) | (2,161 | ) |
| Total interest expense             |   | $                                          | 126    |   | $ | (3,097 | ) | $ | (2,971 | ) |
|                               |   |                                       |   |   |   |   |   |
| Net interest income                |   | $                                          | 3,213  |   | $ | (2,450 | ) | $ | 763 |   |

 

PROVISION FOR LOAN LOSSES

 

The provision for loan losses and the level of the allowance areevaluated periodically by management and the Board of Directors.  The provisions result from the Company’sinternal loan review, historical loan loss experience, trends in delinquent andnon-accrual loans, known and inherent risks in the nature and volume of theloan portfolio, adverse situations which may affect the borrower’s ability torepay, collateral values, an estimate of potential loss exposure on significantcredits, concentrations of credit and economic conditions based on facts thenknown.

 

While management uses available information to assess probable losseson loans, future additions to the allowance may be necessary based on increasesin non-performing loans, changes in economic conditions or for otherreasons.  In addition, regulatoryagencies and independent third party consultants review the adequacy of theCompany’s Allowance for Loan Losses and may require or suggest that the Companyprovide additions to the allowance based on their assessment, which may differfrom management’s.

 

The Company recorded a $375 thousand provision for loan losses in thesecond quarter of 2003 and a $25,000 credit in 2002.  The provision and credit for the respective periods are generallyattributable to the asset quality factors discussed above and methodologiesthat management uses to measure and evaluate the adequacy of the allowance,which include delinquency rates, charge-offs, problem or “watched” assets andanticipated losses.  Net charge-offs of$303 thousand were recorded in the current quarter primarily due to thewrite-down of a single credit in the amount of $288 thousand.  See “Credit Quality and Allowance for LoanLosses” for additional discussion of credit quality.

 

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NON-INTEREST INCOME

 

Total non-interest income increased $2.2 million or 74.3% for the threemonths ended June 30, 2003 over the second quarter of 2002.  Customer service fees, consisting of depositservice charges, ATM and debit card fees increased by $764 thousand between theperiods.  Income from the sale of mutualfunds and annuities declined slightly from the 2002 second quarter.  Gains on sales of mortgage loans increasedby $1.2 million in the quarter ended June 30, 2003.  Realized gains of $57 thousand were recorded from the sale ofinvestment securities with appreciated market value during the quarterrelatively unchanged from the $52 thousand recorded during the second quarterof 2002.

 

NON-INTEREST EXPENSE

 

Non-interest expense for the quarter ended June 30, 2003 increased by$3.1 million or 49.6% over the comparable 2002 quarter.  Salaries and employee benefits increased by$1.6 million or 47.0%.  This resultedfrom the addition of branch and operations personnel in connection with theMAFN acquisition during the third quarter of 2002 and the continuation ofhigher commissions paid to loan originators and other mortgage companysubsidiary incentives.  Occupancy andequipment costs rose by $334 thousand or 41.4% over the prior year quarterreflecting overhead associated with the acquired MAFN branches and costsincurred in the operation of the Company’s corporate headquarters, firstoccupied in late 2002.  All othernon-interest expense in the 2003 quarter increased by $1.2 million over theprior year and included general and administrative costs associated with theaddition of the MAFN branches, additional volume related data processing fees,increased marketing and advertising costs, and approximately $250 thousand inlegal and accounting fees associated with the revisions and re-audit ofhistorical financial statements.

 

PROVISION FOR INCOME TAXES

 

The Company’s effective income tax rate for the quarter ended June 30,2003 was 50.6% compared to 37.6% for the quarter ended June 30, 2002.  The higher effective tax rate in comparisonto statutory rates is reflective of income earned by certain non-banksubsidiaries, net of tax credit applied at lower effective tax rates.

 

COMPARISON OF THE SIXMONTHS ENDED JUNE 30, 2003 AND 2002

 

GENERAL. Net income forthe six months ended June 30, 2003 was $1.93 million, or $0.49 per dilutedshare, compared with restated net income of $3.55 million, or $1.08 per dilutedshare, in the corresponding period of 2002, a net decrease of $1.62 million, or45.7% in net income or 54.6% in diluted earnings per share.  Consistent with the second quarter results,the Company’s interest income was adversely affected by the maturity andre-pricing of higher yielding earning assets, accelerated prepayment on loansand investments securities and accelerated premium amortization of investmentportfolio premiums during the first half of 2003.  Non-interest income increased by $3.1 million over the prior yearreflecting growth in deposit services charges and a greater volume of mortgageloan sales.  Non-interest expense,however, increased by $5.8 million reflecting increased volumes and activityrelated to the September 2002 acquisition of the former Massachusetts Fincorp,Inc., accounted for as a purchase; increased volumes, commissions andprofessional fees incurred in connection with mortgage banking activities;volume related data processing costs; increased expenditures for marketing andadvertising, and costs associated with the 2002 financial statement revisionand 2001 re-audit completed during the second quarter of 2003.

 

INTEREST AND DIVIDENDINCOME. Interest and dividend income decreased $2.2 million or 16.5% during thesix month period ended June 30, 2003, as compared to the same period in 2002.The decrease was attributable to decreases in the yield on earning assetspartially offset by increases in average balance of earning assets.  The balance of average earning assets forthe six month period ended June 30, 2003 was approximately $879.3 million ascompared to $740.7 million for the same period in 2002, an overall increase of$138.6 million, or 18.7%.

 

The increase in earningassets was primarily driven by increases in average mortgage-backedinvestments, short-term investments and loans. Average mortgage-backed investments and short-term investments were$394.2 million and $46.4 million, respectively for the six months ended June30, 2003 as compared to $291.0 and $26.4 million, respectively, for the sameperiod in 2002. These balances when combined increased $123.2 million, or38.8%.  The yield on mortgage-backed andshort term investments decreased to 3.87% and 0.74%, respectively, in the sixmonths ended June 30, 2003 as compared to 6.41% and 1.91%, respectively, in thesame period of 2002. These yields decreased primarily due to the declininginterest rate environment which existed for most of 2003.

 

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The average balance ofloans increased to $375.4 million for the six months ended June 30, 2003 from$358.0 million for the same period in 2002, an increase of $17.3 million or3.9%. These balances increased as a result of residential mortgage loanspurchased and/or originated for the Company’s loan portfolio, coupled withgrowth in commercial real estate and home equity loans during 2003.  The yield on loans decreased to 6.63% in thefirst six months of 2003 as compared to 7.01% for the same period in 2002. Thiswas generally due to the lower rate environment which existed for most of 2003,which impacted new loan originations and also payoffs or  increased levels of refinancings of loanswith higher interest rates.

 

INTEREST EXPENSE.Interest expense for the six months ended June 30, 2003 decreased $3.0 million,or 25.4%, compared to the same period in 2002, generally due to decreases inthe rates paid in deposits and borrowed funds and a more favorable mix.  The average balances of core deposits(demand, NOW and savings deposits) rose to $458.3 million for the first sixmonths of 2003 as compared to  $347.6million for the same period in 2002 for an increase of $110.7 million, or31.8%.  The average balances of totaldeposits rose 25.9% for the six months ended June 30, 2003 as compared to thesame period in 2002.  This was due to theCompany’s continued success in attracting core deposits and also due to a shiftfrom time deposits to money market accounts (which are included in coredeposits) over this same time period. Time deposits increased $21.9 million in the first six months of 2003 ascompared to the same period in 2002, generally due to the lower interest rateenvironment and customers’ desire to invest in instruments with shorterterms.  All deposit growth hereinreflects the acquisition of Massachusetts Fincorp, Inc. in September of 2002which added approximately $100 million to the Company’s deposit base.  The Company will continue to closely manageits cost of deposits by continuing to seek methods of acquiring new coredeposits and maintaining its current core deposits while prudently adding timedeposits at reasonable rates in comparison to local markets and other fundingalternatives, including borrowings.  Theaverage balances of borrowed funds remained relatively flat during the firstsix months of 2003 as compared to 2002, at $224.3 million in 2003 and  $223.0 million in 2002.  Longer-term borrowings declined from $214.7million in 2002 to $164.7 million in 2003 as maturing debt was rolled-over aslower cost short-term borrowings.

 

The weighted averagerate paid on deposits and borrowed funds was 2.02% for the six months endedJune 30, 2003 as compared to 3.21% for the same period in 2002.  The weighted average rates paid on borrowedfunds decreased to approximately 3.72% for the six months ended June 30, 2003from 5.42% in the same period of 2002. It is anticipated, given the current rate environment, that the ratespaid on borrowed funds could decline further in future quarters as borrowingsare refinanced as they reach maturity or prepayment options are exercised.  The Company will continue to evaluate theuse of borrowings as an alternative funding source for asset growth in futureperiods. See “Asset/Liability Management” for further discussion of thecompetitive market for deposits and overall strategies for uses of borrowedfunds. The weighted average rates paid on deposits was 1.43% for the six monthsended June 30, 2003 as compared to 2.24% for the same period in 2002. Theoverall cost of deposits has decreased in the first half of 2003 generally dueto the prevailing interest rate environment.

 

NON-INTERESTINCOME.  Total non-interest incomeincreased $3.1 million or 50.4% in the first six months of  2003 in comparison to the same period in2002.  Customer service fees increased$858 thousand, or 20.7%, to $5.0 million for the six months ended June 30, 2003from the $4.1 million reported in 2002, reflecting growth in deposit accounts(primarily NOW and checking accounts), changes in fee schedules, continuedsuccess in cross selling customers and debit card activity.  Gains on sales of mortgage loans were $3.2million for the first six months of 2003, up $1.4 million over the comparableperiod of 2002.  This was generally dueto a more favorable market for loan originations and related higher volume ofloans being originated and sold in the first half of 2003 as compared to thesame period in 2002.  As the Company hasbeen selling loans generally on a servicing released basis since 1996, theportfolio of loans serviced for others has declined which has caused the continueddrop in loan servicing income.  Realizedsecurities gains were $698 thousand for the first six months of 2003 ascompared to gains of $87 thousand for 2002. Other non-interest income increased by $208 thousand over the prioryear, primarily as a result of miscellaneous recoveries during the secondquarter of 2003.

 

NON-INTERESTEXPENSE.  Non-interest expense for thesix months ended June 30, 2003 increased $5.8 million, or 47.3% over the sameperiod of 2002.  Salaries and employeebenefits increased $2.8 million, or 42.9%. This increase was primarily the result of higher commissions paid toloan originators and other mortgage company incentives, the addition ofpersonnel retained in the Massachusetts Fincorp, Inc. acquisition and generalmerit increases over the past year. Occupancy expenses increased $717 thousand or 43.7%.  This was a direct result of premises addedin the Massachusetts Fincorp, Inc. acquisition and costs associated with therelocation of the Company’s headquarters in the third quarter of 2002.  Other non-interest expenses also increasedfrom $3.5 million for the six month ended June 30, 2002 to $5.8 million for thefirst half of 2003, an increase of $2.3 million, or 64.9%.  These increases include acquisition relatedcosts, volume related data processing costs, increased marketing andadvertising expense, and legal, accounting and other professional feesassociated with the revision of 2002 and re-audit of 2001 financial statements.

 

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PROVISION FOR LOANLOSSES. The provision for loan losses for the six months ended June 30, 2003was $375 thousand compared with a $25 thousand credit in 2002.  The provision in the first six months of2003 generally related to the write-down of a single credit in the amount of$288 thousand coupled with loan growth and reserve allocations under theCompany’s reserve adequacy evaluation system. In 2002, the credit provision was related to achieving a better thananticipated resolution on an impaired loan and overall stability in theperformance in the remainder of the loan portfolios.  See “Credit Quality and Reserve for Loan Losses” for anadditional discussion of credit quality statistics and trends.  The level of loan loss reserves wereapproximately 1.03% of period end loans at June 30, 2003 compared to 1.17% oftotal loans at December 31, 2002.

 

PROVISION FOR INCOMETAXES. The Company’s effective income tax rate for the six months ended June30, 2003 was 41.8% compared to the 36.9% rate for the six months ended June 30,2002. The higher effective tax rate in comparison to statutory rates for thecurrent period is a direct result of tax provisions on mortgage-bankingearnings at a combined 40% combined federal and state tax rate, and theapplication of tax credits at a 35% rate within the Bank and parent company.

 

CREDIT QUALITY AND ALLOWANCE FOR 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 $2.5 million at June 30, 2003, compared with$2.0 million at December 31, 2002, an increase of $500 thousand.  The Company’s percentage of delinquent loansto total loans was 0.98% at June 30, 2003 and 1.13% at December 31, 2002.  The following table presents a number ofcredit quality trends:

 
| **(Dollars in thousands)**                         |   | **June 30,  2003** |   | **December  31,  2002** |   | **June 30,  2002** |   |
|----------------------------------------------------|--------|--------------------|--------|-------------------------|--------|--------------------|--------|
| Non-performing loans                               |   | $                  | 2,508  |                    | $      | 2,031              |   | $ | 3,346 |   |
| Allowance for loan losses to non-performing  loans |   | 170.0              | %      | 207.4                   | %      | 161.5              | %      |
| Non-performing assets to total assets              |   | 0.26               | %      | 0.22                    | %      | 0.37               | %      |
| Allowance for loan losses to total loans           |   | 1.03               | %      | 1.17                    | %      | 1.17               | %      |
|                                                    |        |                    |        |                         |        |                    |        |  |  |  |

 

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 sixmonth periods ended June 30, 2003 and 2002.

 

|                                        |   | **Three  Months Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|---------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
| **(Dollars in thousands)**                  |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
| Balance at beginning of period              |   | $                                | 4,192  |                           | $      | 5,472 |   | $ | 4,212 |   | $ | 5,482 |   |
| Charge-offs                                 |   | (346                             | )      | (75                            | )      | (418 | ) | (129 | ) |
| Recoveries on loans previously charged-off  |   | 43                               |   | 31                             |   | 95 |   | 75 |   |
| Net charge-offs                             |   | (303                             | )      | (44                            | )      | (323 | ) | (54 | ) |
| Provision (credit) for possible loan losses |   | 375                              |   | (25                            | )      | 375 |   | (25 | ) |
| Balance at end of period                    |   | $                                | 4,264  |                           | $      | 5,403 |   | $ | 4,264 |   | $ | 5,403 |   |

 

No portion of the allowance is restricted to any loan or group ofloans, and the entire reserve is available to absorb future realizedlosses.  The amount and timing ofrealized losses and future reserve allocations may vary from currentestimates.  An allocation of theallowance for loan losses to each category of loans is presented below.

 

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| **(Dollars  in thousands)**     |   | **June 30,  2003** |   | **December  31,  2002** |   | **June 30,  2002** |   |
|---------------------------------|--------|--------------------|--------|-------------------------|--------|--------------------|--------|
| Residential real estate         |   | $                  | 911    |                    | $      | 804                |   | $ | 775 |   |
| Commercial real estate          |   | 2,236              |   | 2,008                   |   | 1,398              |   |
| Construction                    |   | 206                |   | 299                     |   | 291                |   |
| Other commercial                |   | 175                |   | 229                     |   | 2,451              |   |
| Consumer                        |   | 283                |   | 356                     |   | 238                |   |
| Non-specific                    |   | 453                |   | 516                     |   | 250                |   |
| Total allowance for loan losses |   | $                  | 4,264  |                    | $      | 4,212              |   | 5,403 |   |
|                                 |        |                    |        |                         |        |                    |        |  |  |  |

 

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 unusually low interest rate environment at June 30, 2003,the Company 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                            |   | 4.28                                                   | %      |
| -100                            |   | (8.44                                                  | )%     |

 

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.

 

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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 half of 2003, the Companyacquired approximately $48.2 million of residential first mortgages, which areserviced 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 half of 2003, the Company continued to experience highlevels of prepayment activity in its mortgage-related assets (residentialmortgages and mortgage-backed securities) which comprise approximately 66.3% ofthe Company’s balance sheet as of June 30, 2003.  To the extent these prepayment levels continue, the Company’s netinterest spread will be negatively affected.

 

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 have begun 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 the Federal Home Loan Bank ofBoston (“FHLBB”).  The availableborrowing capacity from the FHLBB affords options to the Company in managingits asset/liability growth, since it may be advantageous to borrow money fromthe FHLBB than to raise money through non-core deposits (i.e. certificates ofdeposit).  Borrowed funds at June 30,2003 totaled $207.5 million compared to $178.0 million at December 31,2002.  These borrowings are primarilycomprised of FHLBB advances and have primarily funded residential loanoriginations and purchases as well as mortgage-backed investments andinvestment 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 noearlier than June, 2003, if certain conditions are met.  The ability to apply Tier 1 capitaltreatment, up to 25% of such capital, as well as the deductibility of intereston the subordinated debentures for tax purposes, provided the Company with acost effective way to raise funds and supplement regulatory capital.

 

The following table sets forth maturity and repricing informationrelating to interest sensitive assets and liabilities at June 30, 2003. Thebalance 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 on certaininvestments or borrowings in a most likely interest rate environment. Sinceregular passbook savings and NOW accounts are subject to immediate withdrawal,such accounts have been included in the “Other Savings Accounts” category andare assumed to mature within six months. This table does not includenon-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, assetsare tied to increases that are immediately impacted by interest rate movementswhile deposit rates are generally driven by market area and demand which tendto be less sensitive to general interest rate changes. In addition, othersavings accounts and money market accounts are substantially stable coredeposits, although subject to rate changes. A substantial core balance in thesetypes of accounts is anticipated to be maintained over time.

 

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At June 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                                                                             |   | $           | 2,640   |         | $      | —      |    | $           | — |        | $      | —    |   | $         | — |   | $ | — |   | $ | 2,640 |   |
|                                                                                               |   |        |    |         |   |        |    |        |   |        |   |      |   |      |   |
| Bonds & obligations                                                                            |   | 9,573       |    | 62           |   | 18,487      |    | 10,118      |   | 99          |   | 2,324     |   | 40,663    |   |
|                                                                                               |   |        |    |         |   |        |    |        |   |        |   |      |   |      |   |
| Mortgage-backed investments                                                                        |   | —      |    | —       |   | 111         |    | 80          |   | 773         |   | 467,563   |   | 468,527   |   |
|                                                                                               |   |        |    |         |   |        |    |        |   |        |   |      |   |      |   |
| Mortgage loans subject to rate review                                                              |   | 50,984      |    | 18,660       |   | 13,786      |    | 18,979      |   | 20,894      |   | 97,565    |   | 220,868   |   |
|                                                                                               |   |        |    |         |   |        |    |        |   |        |   |      |   |      |   |
| Fixed rate mortgage loans                                                                          |   | 27,525      |    | 5,860        |   | 6,618       |    | 11,523      |   | 19,370      |   | 123,173   |   | 194,069   |   |
|                                                                                               |   |        |    |         |   |        |    |        |   |        |   |      |   |      |   |
| Commercial & Other                                                                             |   | 8,886       |    | 1,098        |   | 2,051       |    | 1,840       |   | 1,479       |   | 4,483     |   | 19,837    |   |
|                                                                                               |   |        |    |         |   |        |    |        |   |        |   |      |   |      |   |
| Total                                                                                              |   | $           | 99,608  |         | $      | 25,680      |    | $           | 41,053 |        | $      | 42,540    |   | $         | 42,615 |   | $ | 695,108 |   | $ | 946,604 |   |
|                                                                                               |   |        |    |         |   |        |    |        |   |        |   |      |   |      |   |
| Liabilities subject to interest rate adjustments:                                                  |   |        |    |         |   |        |    |        |   |        |   |      |   |      |   |
| Money Market deposit accounts                                                                      |   | $           | 83,361  |         | $      | —      |    | $           | — |        | $      | —    |   | $         | — |   | $ | — |   | $ | 83,361 |   |
|                                                                                               |   |        |    |         |   |        |    |        |   |        |   |      |   |      |   |
| Savings deposits-term certificates                                                                 |   | 62,630      |    | 45,026       |   | 42,203      |    | 12,798      |   | 14,981      |   | —    |   | 177,638   |   |
|                                                                                               |   |        |    |         |   |        |    |        |   |        |   |      |   |      |   |
| Other savings accounts                                                                             |   | 402,962     |    | —       |   | —      |    | —      |   | —      |   | —    |   | 402,962   |   |
|                                                                                               |   |        |    |         |   |        |    |        |   |        |   |      |   |      |   |
| Borrowed funds                                                                                     |   | 69,088      |    | 35,000       |   | 10,000      |    | 12,000      |   | 6,500       |   | 74,933    |   | 207,521   |   |
|                                                                                               |   |        |    |         |   |        |    |        |   |        |   |      |   |      |   |
| Total                                                                                              |   | $           | 618,041 |         | $      | 80,026      |    | $           | 52,203 |        | $      | 24,798    |   | $         | 21,481 |   | $ | 74,933 |   | $ | 871,482 |   |
|                                                                                               |   |        |    |         |   |        |    |        |   |        |   |      |   |      |   |
| **Guaranteed preferred beneficial interest in  junior subordinated****debentures**                 |   | $           | —  |         | $      | —      |    | $           | — |        | $      | —    |   | $         | — |   | $ | 12,276 |   | $ | 12,276 |   |
|                                                                                               |   |        |    |         |   |        |    |        |   |        |   |      |   |      |   |
| **Excess (deficiency) of rate sensitive****assets  over rate sensitive liabilities**               |   | (518,433    | )       | (54,346      | )      | (11,150     | )  | 17,742      |   | 21,134      |   | 607,899   |   | 62,846    |   |
|                                                                                               |   |        |    |         |   |        |    |        |   |        |   |      |   |      |   |
| **Cumulative excess (deficiency) of rate****sensitive  assets over rate sensitive****liabilities** |   | (518,433    | )       | (572,779     | )      | (583,929    | )       | (566,187    | )      | (545,053    | )      | 62,846    |   | —    |   |
|                                                                                               |   |        |    |         |   |        |    |        |   |        |   |      |   |      |   |
| **Rate sensitive assets as a percentage of****rate  sensitive liabilities (cumulative)**           |   | 16.1        | %       | 17.9         | %      | 22.2        | %       | 27.0        | %      | 31.6        | %      | 107.1     | %      |      |   |

 

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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 theCompany’s primary sources of liquidity. The Company is also a voluntary memberof the FHLB of Boston and, as such, is entitled to borrow an amount up to thevalue of its 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 June 30, 2003, the Company had outstanding commitments to originateand sell residential mortgage loans in the secondary market amounting to $111.3million.  The Company also hasoutstanding commitments to grant advances under existing home equity lines ofcredit amounting to $27.2 million. Unadvanced commitments under outstanding commercial and constructionloans totaled $5.8 million as June 30, 2003. The Company believes it hasadequate sources of liquidity to fund these commitments.

 

The Company’s total stockholders’ equity was $58.4 million or 6.15% oftotal assets at June 30, 2003, compared with $57.8 million or 6.4% of totalassets at December 31, 2002.  Theincrease in total stockholders’ equity resulted from a combination of theissuance of stock from stock option exercises, the net change in the unrealizedgains on the market value of available for sale securities, and net income of$1.2 million, net of dividends paid and changes in unrealized gains onavailable for sale 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 June 30, 2003, allof these securities were included in Tier 1 capital.

 

At June 30, 2003, the Company had a Tier 1 risk-based capital ratio of13.68% and a total risk-based capital ratio of 14.71%.  The Bank had a Tier 1 risk-based capitalratio of 12.16% and a total risk-based capital ratio of 13.07%.  Also, at June 30, 2003, the Company and theBank had Tier 1 leverage capital ratios of 5.85% and 5.99%, respectively.  Management believes that, as of June 30,2003, the Company and the Bank meet all of their respective capital adequacyrequirements.

 

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.

 

PROPOSED ACCOUNTING PRONOUNCEMENTS

 

In April 2003, the Financial Accounting Standards Board issued SFAS No.149, “Amendment of Statement 133 on Derivative and Hedging Activities.” ThisStatement amends and clarifies financial accounting and reporting forderivative instruments, including certain derivative instruments embedded inother contracts and for hedging activities under SFAS No. 133. SFAS No. 149 iseffective for contracts entered into or modified after June 30, 2003, exceptfor certain contracts that relate to SFAS No. 133 Implementation Issues thathave been effective for fiscal quarters that began prior to June 15, 2003. TheCompany has not completed an analysis to determine the potential impact of thisstatement, but does not believe that it will have a material impact on theCompany’s financial position or results of operation.

 

In May, 2003, the FinancialAccounting Standards Board issued SFAS No. 150, “Accounting for CertainFinancial Instruments with Characteristics of both Liabilities andEquity.”  This Statement establishesstandards for how an issuer classifies and measures certain financialinstruments with characteristics of both liabilities and equity and iseffective at the beginning of the first interim period beginning after June 15,2003.  It requires that an issuerclassify a financial instrument that is within its scope as a liability (or anasset in some circumstances).  In May,1998, the Company formed a Delaware business trust, Abington Bancorp CapitalTrust (the “Trust”), solely to issue capital securities.  The securities issued by the Trust aremandatorily redeemable and represent obligations to transfer assets to redeemthe shares.  Accordingly, under SFAS No.150, those instruments will be classified as liabilities in the Company’sconsolidated financial statements and payments of accruals of amounts to bepaid to holders will be reported as interest expense upon the adoption of thisStatement during the third quarter of 2003. The adoption of this Statement will have no effect on net income, butwill result in a reclassification of expense from non-interest expense tointerest expense.

 

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 theCompany’s independent auditor in mid-2002) to undertake a re-audit of the yearended December 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.

 

Afterimplementing these improvements to the Company’s disclosure controls andprocedures and internal controls, and under the supervision and with theparticipation of the Company’s management, including James P. McDonough, itsChief Executive Officer, and James K. Hunt, its Chief Financial Officer, theCompany evaluated the effectiveness of the design and operation of theCompany’s disclosure controls and procedures as of the end of the period coveredby this report, based on the evaluation of those controls and procedures asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e).  Based on this evaluation, Mr. McDonough andMr. Hunt concluded that, as of the date of their most-recent evaluation, theCompany’s disclosure controls and procedures were effective.

 

Disclosurecontrols and procedures are our controls and other procedures that are designedto ensure that information required to be disclosed by us in the reports thatwe file or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed by us in the reports that we file under the ExchangeAct is accumulated and communicated to our management, including our ChiefExecutive Officer and Chief Financial Officer.

 

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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 of stockholdersor special meeting in lieu thereof, and until their respective successors areelected 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
| 2.1    |   | Plan of Reorganization and Acquisition dated as of 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    |   | Amended and Restated Agreement and Plan of Merger dated as of April  10, 2002 and Amended and Restated on May 23, 2002 (as of April 10, 2002)  among the Company, Abington Acquisition Corp., and Massachusetts Fincorp,  Inc., incorporated by reference to the Company’s S-4 filed on May 31, 2001. |
|   |   |                                                                                                                                                                                                                                                                                                            |
| 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                          |

 

30

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|   |   | 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. |
|   |   |                                                                                                                                                                                                                                                                                |
| *10.28 |   | Special Severance Agreement dated as of May  12, 2003 by and between the Bank and Robert M. Lallo, filed herewith.                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                |
| 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.                                                                                                                               |

 

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* Management contract or compensatory plan or arrangement

 

(b) Reports on Form 8-K.

 

May 16, 2003 –     related to first quarter ended March 31, 2003earnings release and filing of 2002 Annual Report

on Form 10-K

June 26, 2003 –     related to announcement of a quarterly dividenddeclaration

 

31

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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: August 14, 2003       | By:                    | /s/    | James P. McDonough |   |
|                        |                   |   | James P. McDonough |
|                        |                   |   | President and Chief Executive Officer |
|                        |                   |   |   |
|                        |                   |   |   |
| Date:  August 14, 2003 | By:                    | /s/    | James K. Hunt |   |
|                        |                   |   | James K. Hunt |
|                        |                   |   | Treasurer and Chief Financial Officer |
|                        |                   |   | (Principal Financial Officer) |
|                             |                        |        |  |  |  |

 

32

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