### **SECURITIESAND EXCHANGE COMMISSION**

**Washington,D. C. 20549**

 

----

 

**FORM 10-Q**

 

**QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES**

**EXCHANGE ACT OF 1934**

 

**ForQuarter Ended September 30, 2002**

 

----

 

**CommissionFile Number 0-16018**

 

**ABINGTONBANCORP, INC.**

(Exact name ofRegistrant 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 checkmark whether the Registrant (1) has filed all reports required to be filed bySection 13 of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes  ý   No  o

 

Indicate thenumber of shares outstanding of each of the Registrant’s classes of commonstock, as of the latest practicable date: 3,715,272 shares as of November 5,2002.

 

 

----

 

 

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

 

 

2

----

**ABINGTONBANCORP, INC**.

**FORM10-Q**

 

**INDEX**

 
| Part I         | Financial Information                                                                                                               |
|----------------|-------------------------------------------------------------------------------------------------------------------------------------|
|           |                                                                                                                                |
| Item 1.        | Financial Statements                                                                                                                |
|           |                                                                                                                                |
|           | Consolidated Balance Sheets  as of September 30, 2002 (Unaudited) and December 31, 2001                                             |
|           |                                                                                                                                |
|           | Consolidated  Statements of Operations (Unaudited) for the Three and Nine Months Ended  September 30, 2002 and 2001                 |
|           |                                                                                                                                |
|           | Consolidated  Statements of Changes in Stockholders’ Equity (Unaudited) for the Nine Months  Ended September 30, 2002 and 2001 |
|           |                                                                                                                                |
|           | Consolidated  Statements of Comprehensive Income (Unaudited) for the Three and Nine Months  Ended September 30, 2002 and 2001       |
|           |                                                                                                                                |
|           | Consolidated  Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30,  2002 and 2001                           |
|           |                                                                                                                                |
|           | 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                                                                         |
|           |                                                                                                                                |
| 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 |

 

 

3

----

 

Part I       Financial Information

Item 1.    Financial Statements

 

ABINGTONBANCORP, INC.

CONSOLIDATED BALANCE SHEETS

 
|                                                                                                                                |   | **(unaudited)**         |    |                   |   |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|------------------------|--------|
|                                                                                                                                |   | **September 30,  2002** |    | **December 31,  2001** |   |
|                                                                                                                                |   | **(In Thousands)**      |    |
| ASSETS                                                                                                                              |   |                    |    |                   |   |
| Cash and due from banks                                                                                                             |   | $                       | 40,376  |                   | $      | 21,706 |   |
| Short-term investments                                                                                                              |   | 22,244                  |    | 32,870                 |   |
| Total cash and cash  equivalents                                                                                                    |   | 62,620                  |    | 54,576                 |   |
|                                                                                                                                |   |                    |    |                   |   |
| Loans held for sale                                                                                                                 |   | 27,661                  |    | 22,705                 |   |
|                                                                                                                                |   |                    |    |                   |   |
| Securities available for  sale - at market value                                                                                    |   | 404,687                 |    | 277,627                |   |
|                                                                                                                                |   |                    |    |                   |   |
| Loans                                                                                                                               |   | 399,503                 |    | 386,329                |   |
| Less: allowance for loan  loss                                                                                                      |   | (6,222                  | )       | (5,482                 | )      |
| Loans, net                                                                                                                          |   | 393,281                 |    | 380,847                |   |
|                                                                                                                                |   |                    |    |                   |   |
| Federal Home Loan Bank  stock, at cost                                                                                              |   | 14,042                  |    | 12,910                 |   |
| Banking premises and  equipment, net.                                                                                               |   | 13,609                  |    | 8,784                  |   |
| Other real estate owned,  net                                                                                                       |   | —                  |    | —                 |   |
| Goodwill intangible                                                                                                                 |   | 5,552                   |    | 1,395                  |   |
| Core deposit intangible                                                                                                             |   | 4,832                   |    | 864                    |   |
| Other assets                                                                                                                        |   | 11,554                  |    | 10,410                 |   |
|                                                                                                                                |   |                    |    |                   |   |
|                                                                                                                                |   | $                       | 937,838 |                   | $      | 770,118 |   |
|                                                                                                                                |   |                    |    |                   |   |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                          |   |                    |    |                   |   |
| Deposits                                                                                                                            |   | $                       | 648,175 |                   | $      | 497,459 |   |
| Short-term borrowings                                                                                                               |   | 7,575                   |    | 8,049                  |   |
| Long-term debt                                                                                                                      |   | 187,590                 |    | 193,500                |   |
| Accrued taxes and expenses                                                                                                          |   | 8,284                   |    | 4,100                  |   |
| Other liabilities                                                                                                                   |   | 16,393                  |    | 15,696                 |   |
| Total liabilities                                                                                                                   |   | 868,017                 |    | 718,804                |   |
| Guranteed preferred  beneficial interest in the Company’s junior subordinated debentures                                       |   | 12,219                  |    | 12,163                 |   |
|                                                                                                                                |   |                    |    |                   |   |
| Commitments and contingencies                                                                                                       |   |                    |    |                   |   |
| Serial preferred stock,  $.10 par value, 3,000,000  shares authorized; none issued                                                  |   | —                  |    | —                 |   |
| Common stock, $.10 par  value, 12,000,000  shares authorized; 5,520,000 and 4,925,000  shares issued in 2002 and 2001, respectively |   | 552                     |    | 492                    |   |
| Additional paid-in capital                                                                                                          |   | 33,873                  |    | 23,081                 |   |
| Retained earnings                                                                                                                   |   | 35,774                  |    | 31,403                 |   |
|                                                                                                                                |   | 70,199                  |    | 54,976                 |   |
| Treasury stock 1,807,000  shares in 2002 and 2001, at cost                                                                          |   | (17,584                 | )       | (17,584                | )      |
| Compensation plans                                                                                                                  |   | 120                     |    | 120                    |   |
| Other accumulated  comprehensive income —                                                                                      |   |                    |    |                   |   |
| Net unrealized gain on  available for sale securities, net of taxes                                                                 |   | 4,867                   |    | 1,639                  |   |
| Total Stockholder’ equity                                                                                                      |   | 57,602                  |    | 39,151                 |   |
|                                                                                                                                |   | $                       | 937,838 |                   | $      | 770,118 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

4

----

 

ABINGTON BANCORP, INC.

CONSOLIDATED STATEMENTS ofOPERATIONS

(UNAUDITED)

 
|                                                                                               |   | **For  the Three Months Ended  September 30,** |   | **For  the Nine Months Ended  September 30,** |   |
|----------------------------------------------------------------------------------------------------|--------|------------------------------------------------|--------|-----------------------------------------------|--------|
|                                                                                               |   | **2002**                                       |   | **2001**                                      |   | **2002** |   | **2001** |   |
|                                                                                               |   | **(In  thousands, except per share data)**     |   |
| Interest and dividend  income:                                                                     |   |                                           |   |                                          |   |   |   |   |   |
| Interest  and fees on loans                                                                        |   | $                                              | 6,053  |                                          | $      | 7,488 |   | $ | 18,742 |   | $ | 21,895 |   |
| Interest  on mortgage-backed investments                                                           |   | 5,059                                          |   | 4,298                                         |   | 14,304 |   | 11,927 |   |
| Interest  on bonds and obligations                                                                 |   | 419                                            |   | 858                                           |   | 1,553 |   | 3,528 |   |
| Dividend  income                                                                                   |   | 128                                            |   | 221                                           |   | 410 |   | 777 |   |
| Interest  on short-term investments                                                                |   | 49                                             |   | 19                                            |   | 299 |   | 49 |   |
| Total interest and dividend  income                                                                |   | 11,708                                         |   | 12,884                                        |   | 35,308 |   | 38,176 |   |
| Interest expense:                                                                                  |   |                                           |   |                                          |   |   |   |   |   |
| Interest on deposits                                                                               |   | 2,540                                          |   | 3,588                                         |   | 8,224 |   | 11,207 |   |
| Interest on short-term  borrowings                                                                 |   | 55                                             |   | 266                                           |   | 141 |   | 1,158 |   |
| Interest on long-term debt                                                                         |   | 2,214                                          |   | 3,031                                         |   | 8,126 |   | 8,792 |   |
| Total interest expense                                                                             |   | 4,809                                          |   | 6,885                                         |   | 16,491 |   | 21,157 |   |
|                                                                                               |   |                                           |   |                                          |   |   |   |   |   |
| Net interest income                                                                                |   | 6,899                                          |   | 5,999                                         |   | 18,817 |   | 17,019 |   |
| Provision for possible loan  losses                                                                |   | 100                                            |   | 510                                           |   | 75 |   | 840 |   |
| Net interest income, after  provision for possible loan losses                                     |   | 6,799                                          |   | 5,489                                         |   | 18,742 |   | 16,179 |   |
|                                                                                               |   |                                           |   |                                          |   |   |   |   |   |
| Non-interest income:                                                                               |   |                                           |   |                                          |   |   |   |   |   |
| Customer service fees                                                                              |   | 2,143                                          |   | 1,963                                         |   | 6,283 |   | 5,635 |   |
| Gain (loss) on securities,  net                                                                    |   | (328                                           | )      | 16                                            |   | (241 | ) | (47 | ) |
| Gain on sales of mortgage  loans, net                                                              |   | 785                                            |   | 642                                           |   | 2,552 |   | 2,006 |   |
| Gain on sales of real  estate, net                                                                 |   | 85                                             |   | —                                        |   | 85 |   | — |   |
| Other                                                                                              |   | 159                                            |   | 131                                           |   | 402 |   | 515 |   |
| Total non-interest income                                                                          |   | 2,844                                          |   | 2,752                                         |   | 9,081 |   | 8,109 |   |
|                                                                                               |   |                                           |   |                                          |   |   |   |   |   |
| Non-interest expense:                                                                              |   |                                           |   |                                          |   |   |   |   |   |
| Salaries and employee  benefits                                                                    |   | 3,451                                          |   | 3,082                                         |   | 10,036 |   | 9,389 |   |
| Occupancy and equipment  expense                                                                   |   | 1,098                                          |   | 826                                           |   | 2,736 |   | 2,515 |   |
| Trust preferred securities  expense                                                                |   | 280                                            |   | 280                                           |   | 840 |   | 840 |   |
| Other non-interest expenses                                                                        |   | 2,071                                          |   | 2,063                                         |   | 5,616 |   | 5,610 |   |
| Total non-interest expense                                                                         |   | 6,900                                          |   | 6,251                                         |   | 19,228 |   | 18,354 |   |
|                                                                                               |   |                                           |   |                                          |   |   |   |   |   |
| Income before provision for income taxes and cumulative effect of change in  accounting principles |   | 2,743                                          |   | 1,990                                         |   | 8,595 |   | 5,934 |   |
| Provision for income taxes                                                                         |   | 1,050                                          |   | 753                                           |   | 3,210 |   | 2,149 |   |
| Net income before  cumulative effect of change in accounting principle                             |   | 1,693                                          |   | 1,237                                         |   | 5,385 |   | 3,785 |   |
| Cumulative effect of change  in accounting principle, net of tax                                   |   | —                                         |   | —                                        |   | — |   | (298 | ) |
| Net income                                                                                         |   | $                                              | 1,693  |                                          | $      | 1,237 |   | $ | 5,385 |   | $ | 3,487 |   |
|                                                                                               |   |                                           |   |                                          |   |   |   |   |   |
| Earnings Per Share:                                                                                |   |                                           |   |                                          |   |   |   |   |   |
| Basic -                                                                                            |   |                                           |   |                                          |   |   |   |   |   |
| Income before cumulative  effect of change in accounting principle                                 |   | $                                              | 0.51   |                                          | $      | 0.40 |   | $ | 1.67 |   | $ | 1.23 |   |
| Cumulative effect of change  in accounting principle                                               |   | —                                         |   | —                                        |   | — |   | $ | (0.10 | ) |
| Net income                                                                                         |   | $                                              | 0.51   |                                          | $      | 0.40 |   | $ | 1.67 |   | $ | 1.13 |   |
| Weighted average common  shares                                                                    |   | 3,293,000                                      |   | 3,111,000                                     |   | 3,221,000 |   | 3,099,000 |   |
| Diluted -                                                                                          |   |                                           |   |                                          |   |   |   |   |   |
| Income before cumulative  effect of change in accounting principle                                 |   | $                                              | 0.49   |                                          | $      | 0.38 |   | $ | 1.60 |   | $ | 1.17 |   |
| Cumulative effect of change  in accounting principle                                               |   | —                                         |   | —                                        |   | — |   | $ | (0.09 | ) |
| Net income                                                                                         |   | $                                              | 0.49   |                                          | $      | 0.38 |   | $ | 1.60 |   | $ | 1.08 |   |
| Weighted average common  shares                                                                    |   | 3,458,000                                      |   | 3,262,000                                     |   | 3,363,000 |   | 3,235,000 |   |
| Dividends per share                                                                                |   | $                                              | 0.10   |                                          | $      | 0.10 |   | $ | 0.30 |   | $ | 0.30 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

5

----

 

ABINGTON BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’EQUITY

 

Period Ended September 30, 2002 and 2001

(unaudited)

 
|                                                                        |   | **Common  Stock** |   | **Additional  Paid-in  Capital** |   | **Retained  Earnings** |   | **Treasury  Stock** |   | **Net  Unrealized  Gain  (Loss) on  Available  for Sale  Securities** |   | **Compensation  Plans** |   | **Total** |   |
|-----------------------------------------------------------------------------|--------|-------------------|--------|----------------------------------|--------|------------------------|--------|---------------------|--------|-----------------------------------------------------------------------|--------|-------------------------|--------|-----------|--------|
| Balance at December 31,  2001                                               |   | $                 | 492    |                             | $      | 23,081                 |   | $                   | 31,403 |                                                                  | $      | (17,584                 | )      | $         | 1,639  |   | $ | 120 |   | $ | 39,151 |   |
| Net income                                                                  |   | —            |   | —                           |   | 5,385                  |   | —              |   | —                                                                |   | —                  |   | 5,385     |   |
| Issuance of stock                                                           |   | 60                |   | 10,792                           |   | —                 |   | —              |   | —                                                                |   | —                  |   | 10,852    |   |
| Increase in unrealized gain  on available for sale securities, net of taxes |   | —            |   | —                           |   | —                 |   | —              |   | 3,228                                                                 |   | —                  |   | 3,228     |   |
| Dividends declared ($0.30  per share)                                       |   | —            |   | —                           |   | (1,014                 | )      | —              |   | —                                                                |   | —                  |   | (1,014    | )      |
| Balance at September 30,  2002                                              |   | $                 | 552    |                             | $      | 33,873                 |   | $                   | 35,774 |                                                                  | $      | (17,584                 | )      | $         | 4,867  |   | $ | 120 |   | $ | 57,602 |   |
|                                                                        |   |              |   |                             |   |                   |   |                |   |                                                                  |   |                    |   |      |   |
| Balance at December 31,  2000                                               |   | $                 | 488    |                             | $      | 22,915                 |   | $                   | 29,570 |                                                                  | $      | (17,584                 | )      | $         | (1,195 | ) | $ | 111 |   | $ | 34,305 |   |
| Net income                                                                  |   | —            |   | —                           |   | 3,487                  |   | —              |   | —                                                                |   | —                  |   | 3,487     |   |
| Issuance of stock                                                           |   | 4                 |   | 102                              |   | —                 |   | —              |   | —                                                                |   | —                  |   | 106       |   |
| Change in obligation  related to directors deferred stock plan              |   | —            |   | —                           |   | —                 |   | —              |   | —                                                                |   | 5                       |   | 5         |   |
| Increase in unrealized gain  on available for sale securities, net of taxes |   | —            |   | —                           |   | —                 |   | —              |   | 4,483                                                                 |   | —                  |   | 4,483     |   |
| Dividends declared ($0.30  per share)                                       |   | —            |   | —                           |   | (933                   | )      | —              |   | —                                                                |   | —                  |   | (933      | )      |
| Balance at September 30, 2001                                               |   | $                 | 492    |                             | $      | 23,017                 |   | $                   | 32,124 |                                                                  | $      | (17,584                 | )      | $         | 3,288  |   | $ | 116 |   | $ | 41,453 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

6

----

 

ABINGTON BANCORP, INC.

CONSOLIDATED STATEMENTS of COMPREHENSIVE INCOME

(UNAUDITED)

 
|                                                                                                                      |   | **Three Months Ended  September 30,** |       | **Nine Months Ended  September 30,** |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|------------|--------------------------------------|--------|
|                                                                                                                      |   | **2002**                              |       | **2001**                             |   | **2002** |   | **2001** |   |
|                                                                                                                      |   | **(In  thousands)**                   | ** ** |
| Net income, as reported                                                                                                   |   | $                                     | 1,693      |                                 | $      | 1,237 |   | $ | 5,385 |   | $ | 3,487 |   |
| Change in unrealized  gains(losses) on available  for sale securities, net of taxes                                       |   | 376                                   |       | 4,877                                |   | 3,071 |   | 4,452 |   |
| Less: Reclassification  adjustment for available for sale securities gains (losses) included in net  income, net of taxes |   | (214                                  | )          | 10                                   |   | (157 | ) | (31 | ) |
| Comprehensive income (loss)                                                                                               |   | $                                     | 2,283      |                                 | $      | 6,104 |   | $ | 8,613 |   | $ | 7,970 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

7

----

 

ABINGTON BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 
|                                                                                            |   | **Nine Months Ended  September 30,** |    |
|-------------------------------------------------------------------------------------------------|--------|--------------------------------------|---------|
|                                                                                            |   | **2002**                             |    | **2001** |   |
|                                                                                            |   | **(in thousands)**                   |    |
| Cash flows from operating activities:                                                           |   |                                 |    |   |   |
| Net income                                                                                      |   | $                                    | 5,385   |   | $ | 3,487 |   |
| Adjustment to reconcile net income to net cash  provided (used) by operating activities         |   |                                 |    |   |   |
| Provision for loan losses                                                                       |   | 75                                   |    | 840 |   |
| Gain on sales of real estate                                                                    |   | (85                                  | )  | — |   |
| Amortization, accretion and depreciation, net                                                   |   | 1,607                                |    | 1,254 |   |
| (Gain) loss on sales of securities, net                                                         |   | 241                                  |    | 47 |   |
| Loans originated for sale in the secondary market                                               |   | (162,669                             | )  | (126,264 | ) |
| Proceeds from sales of loans                                                                    |   | 168,462                              |    | 122,556 |   |
| Gain on sales of mortgage loans, net                                                            |   | (2,552                               | )  | (2,006 | ) |
| Other, net                                                                                      |   | (3,292                               | )  | 25,856 |   |
| Net cash provided (used) by operating activities                                                |   | 7,172                                |    | 25,770 |   |
|                                                                                            |   |                                 |    |   |   |
| Cash flows from investing activities:                                                           |   |                                 |    |   |   |
| Net cash received (paid) for Massachusetts Fincorp                                              |   | 4,493                                |    | — |   |
| Proceeds from sales of available for sale securities                                            |   | 18,176                               |    | 95,140 |   |
| Proceeds from principal payments on and maturities  of available for sale securities            |   | 79,146                               |    | 82,674 |   |
| Purchase of available for sale securities                                                       |   | (192,572                             | )  | (167,634 | ) |
| Loans (originated/purchased) paid, net                                                          |   | 62,727                               |    | (45,767 | ) |
| Purchases of FHLB sotck                                                                         |   | —                               |    | — |   |
| Purchase of banking premises and equipment and  improvements to other real estate owned         |   | (1,731                               | )  | (1,325 | ) |
| Proceeds from sales of banking premises and  equipment                                          |   | 215                                  |    | — |   |
| Proceeds from sales of other real estate owned                                                  |   | —                               |    | — |   |
| Net cash provided by (used for) investing activities                                            |   | (29,546                              | )       | (36,912 | ) |
|                                                                                            |   |                                 |    |   |   |
| Cash flows from financing activities:                                                           |   |                                 |    |   |   |
| Net increase in deposits                                                                        |   | 50,414                               |    | 32,159 |   |
| Net increase (decrease) in borrowings with original  maturities of three months or less         |   | (474                                 | )       | (31,305 | ) |
| Proceeds from short-term borrowings with maturities  in excess of three months                  |   | —                               |    | — |   |
| Principal payments issuance of short-term borrowings  with maturities in excess of three months |   | —                               |    | (10,000 | ) |
| Proceeds from issuance of long-term debt                                                        |   | 35,000                               |    | 75,000 |   |
| Principal payments on long-term debt                                                            |   | (54,001                              | )       | (38,067 | ) |
| Proceeds from exercise of stock options                                                         |   | 433                                  |    | 106 |   |
| Purchase of treasury stock                                                                      |   | —                               |    | — |   |
| Cash paid for dividends                                                                         |   | (954                                 | )  | (902 | ) |
| Net cash provided by (used for) financing activities                                            |   | 30,418                               |    | 26,991 |   |
|                                                                                            |   |                                 |    |   |   |
| Net increase (decrease) in cash and cash equivalents                                            |   | 8,044                                |    | 15,849 |   |
| Cash and cash equivalents at beginning of period                                                |   | 54,576                               |    | 27,609 |   |
|                                                                                            |   |                                 |    |   |   |
| Cash and cash equivalents at end of period                                                      |   | $                                    | 62,620  |   | $ | 43,458 |   |
|                                                                                            |   |                                 |    |   |   |
| Supplemental cash flow information                                                              |   |                                 |    |   |   |
| Interest paid on deposits                                                                       |   | $                                    | 8,183   |   | $ | 11,206 |   |
| Interest paid on borrowed funds                                                                 |   | 8,518                                |    | 9,984 |   |
| Income taxes paid                                                                               |   | 4,429                                |    | 2,173 |   |
| Transfer of loans to other real estate owned, net                                               |   | —                               |    | 355 |   |
|                                                                                            |   |                                 |    |   |   |
| Acquisition:                                                                                    |   |                                 |    |   |   |
| Liabilities assumed                                                                             |   | $                                    | 121,195 |   | — |   |
| Equity proceeds                                                                                 |   | 9,469                                |    | — |   |
| Less: assets purchased                                                                          |   | 117,814                              |    | — |   |
| Premium paid                                                                                    |   | 8,357                                |    | — |   |
|                                                                                            |   | $                                    | 4,493   |   | $ | — |   |

 

See accompanyingnotes to unaudited consolidated financial statements.

 

8

----

 

ABINGTON BANCORP,INC.

Notes to Unaudited Consolidated Financial Statements

September 30, 2002

 

A.            SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES

 

Theconsolidated financial statements include the accounts of Abington Bancorp,Inc. (the “Company”), a Massachusetts Corporation and its wholly-ownedsubsidiaries, Abington Savings Bank (the “Bank”) and Abington Bancorp CapitalTrust. The Bank also includes its wholly-owned subsidiaries, AbingtonSecurities Corporation, Mass Securities Corporation, and Mass SEC Corp. II,which invest primarily in obligations of the United States Government and itsagencies and equity securities;  OldColony Mortgage Corporation, which originates and sells residential mortgagesto investors on a servicing released basis; 70 Quincy Ave. LLC, which owns andoperates a building in Quincy, which is also used as a bank branch; and HoltPark Place Development Corporation and Norroway Pond Development Corporation,each typically owning properties being marketed for sale.

 

Theaccompanying consolidated financial statements as of September 30, 2002 and forthe three and nine month periods ended September 30, 2002 and 2001 have beenprepared by the Company without audit, and reflect all adjustments which, inthe opinion of management, are necessary to reflect a fair statement of theresults of the interim periods presented.

 

Certaininformation and footnote disclosures normally included in the annualconsolidated financial statements which are prepared in accordance withaccounting principles generally accepted in the United States have beencondensed or omitted. Accordingly, the Company believes that although thedisclosures are adequate to make the information presented not misleading,these consolidated financial statements should be read in conjunction with thefootnotes contained in the Company’s consolidated financial statements as ofand for the year ended December 31, 2001, which are included in the Company’sAnnual Report on Form 10-K. Interim results are not necessarily indicative ofresults to be expected for the entire year. All significant intercompanybalances and transactions have been eliminated in consolidation.

 

B.            ACQUISITION OF MASSACHUSETTSFINCORP, INC.

 

OnSeptember 13, 2002, the Company completed its acquisition of MassachusettsFincorp, Inc. (MAFN), the parent company of The Massachusetts Co-operative Bankwith three branches in the Greater Boston area, for $30.00 per share in cashand stock for a total purchase price of $15.8 million, exclusive of transactioncosts.  The consideration paid by theCompany was 60% in Company common stock and 40% cash.  The transaction qualifies as a tax-free reorganization forfederal income tax purposes.

 

Thefollowing table summarizes the allocation of purchase price to assets andliabilities acquired on September 13, 2002:

 

|                           |   | **(dollars in thousands)** |    |
|--------------------------------|--------|----------------------------|---------|
| Cash and cash equivalents      |   | $                          | 4,493   |   |
| Securities                     |   | 26,869                     |    |
| Loans                          |   | 84,172                     |    |
| Less: allowance for loan  loss |   | (739                       | )       |
| Loans, net                     |   | 83,433                     |    |
| FHLB Stock                     |   | 1,142                      |    |
| Fixed assets                   |   | 4,537                      |    |
| Goodwill intangible            |   | 4,157                      |    |
| Core deposit intangible        |   | 4,200                      |    |
| Other assets                   |   | 1,833                      |    |
|                           |   | $                          | 130,664 |   |
| Deposits                       |   | 100,302                    |    |
| Borrowed funds                 |   | 15,092                     |    |
| Accrued and other  liabilities |   | 5,801                      |    |
| Equity                         |   | 9,469                      |    |
|                           |   | $                          | 130,664 |   |

 

9

----

 

TheCompany’s pro forma summarized results of operations for the three and ninemonths ended September 30, 2002 and 2001, assuming MAFN had been acquired as ofJanuary 1, 2002 and 2001, are as follows:

 

|                                                         |   | **Three  Months Ended  September 30,**     |   | **Nine  Months Ended  September 30,** |   |
|--------------------------------------------------------------|--------|--------------------------------------------|--------|---------------------------------------|--------|
|                                                         |   | **2002**                                   |   | **2001**                              |   | **2002** |   | **2001** |   |
|                                                         |   | **(In  thousands, except per share data)** |   |
| Interest income                                              |   | $                                          | 13,113 |                                  | $      | 14,802 |   | $ | 40,279 |   | $ | 44,002 |   |
| Interest expense                                             |   | 5,135                                      |   | 7,682                                 |   | 17,750 |   | 23,792 |   |
| Net interest income                                          |   | 7,978                                      |   | 7,120                                 |   | 22,529 |   | 20,210 |   |
| Provision for loan losses                                    |   | 139                                        |   | 499                                   |   | 90 |   | 757 |   |
| Non-interest income                                          |   | 2,929                                      |   | 3,040                                 |   | 9,828 |   | 8,812 |   |
| Non-interest expense                                         |   | 8,259                                      |   | 7,369                                 |   | 23,134 |   | 21,588 |   |
| Income before taxes                                          |   | 2,509                                      |   | 2,292                                 |   | 9,133 |   | 6,676 |   |
| Provision for income taxes                                   |   | 950                                        |   | 862                                   |   | 3,412 |   | 2,417 |   |
| Net income before  cumulative effect of change in accounting |   | 1,559                                      |   | 1,430                                 |   | 5,721 |   | 4,259 |   |
| Cumulative effect of change  in accounting                   |   | —                                     |   | —                                |   | — |   | (298 | ) |
| Net income                                                   |   | 1,559                                      |   | 1,430                                 |   | 5,721 |   | 3,961 |   |
| Earnings per share - basic                                   |   | $                                          | 0.42   |                                  | $      | 0.39 |   | $ | 1.55 |   | $ | 1.10 |   |
| Earnings per share -  diluted                                |   | $                                          | 0.40   |                                  | $      | 0.37 |   | $ | 1.47 |   | $ | 1.05 |   |

 

Theunaudited pro forma combined condensed consolidated statements of operationgive effect to the acquisition as if it had occurred on January 1, 2001 andJanuary 1, 2002, respectively.  Theresults presented are not necessarily indicative of the results of operationsthat would have resulted had the merger been consummated at the beginning ofeach of the periods indicated, nor is it necessarily indicative of the resultsof operations anticipated in future periods. It is anticipated that the Company will achieve various cost savings,revenue enhancements and other operating synergies in future periods.  For the purposes of preparing the pro formastatement of operations, the Company has not taken into account any adjustmentson a pro rata basis or otherwise to reflect anticipated cost savings, revenueenhancements or operating synergies. There have been, however, pro forma adjustments to interest income toreflect lower levels of income due to the liquidation of investments to fundthe cash portion of the transaction as well as a pro-rata amortization relatedto the purchase accounting adjustments to adjust loans, investment securities,fixed assets, time deposits and borrowings to fair value as of September 13,2002.  There is also a pro rataadjustment reflected to show a proportionate share of amortization of the coredeposit intangible.  The core depositintangible has been estimated at $4.2 million and is being amortized over aten-year life on a straight-line basis. These results also include certain costs incurred by MAFN totaling$163,600 and $430,000 in the three and nine months ended September 30, 2002,which were related to the Company’s acquisition of MAFN.  These charges reduced diluted earnings pershare by $0.03 and $0.07 for the three and nine month periods ended September30, 2002, respectively.

 

C.            DIVIDEND DECLARATION

 

InSeptember 2002, the Board of Directors of Abington Bancorp, Inc. declared acash dividend of $.10 per share to holders of its common stock  payable on October 24, 2002 to stockholdersof record as of the close of business as of October 10, 2002.

 

10

----

 

D.            STOCK REPURCHASE PROGRAM

 

SinceMarch 1997, the Company has repurchased 932,000 shares of its common stock at atotal cost of $13,882,000.  The stockwas repurchased pursuant to three separate authorizations by the Board ofDirectors – on March 27, 1997, February 24, 1998 and March 25, 1999 - for management to repurchase, in each case, up to 10% ofthe Company’s outstanding common stock. The Board delegated to the discretion of senior management the authorityto determine the timing of the repurchases and the prices at which the stockwould be repurchased.  There areapproximately 109,000 shares available for repurchase under the current plan.

 

E.             EARNINGS PER SHARE

 

Theprimary difference between basic and fully diluted average common sharesoutstanding for the periods presented relates to options issued to officers anddirectors which are not anti-dilutive. The calculation of common stock equivalentsfor fully diluted per share computations excludes options, which have anexercise price in excess of the average closing price of the Company’s stockfor the period presented. The following table shows the computation of averagecommon share and common share equivalents for the purposes of earnings pershare calculations:

 

|                                   |   | **For  the Three Months Ended  September 30,** |   | **For  the Nine Months Ended  September 30,** |   |
|----------------------------------------|--------|------------------------------------------------|--------|-----------------------------------------------|--------|
|                                   |   | **2002**                                       |   | **2001**                                      |   | **2002** |   | **2001** |   |
|                                   |   |                                           |   |                                          |   |   |   |   |   |
| Average Common Shares  Outstanding     |   | 3,293,000                                      |   | 3,111,000                                     |   | 3,221,000 |   | 3,099,000 |   |
| Weighted Average Dilutive  Options     |   | 165,000                                        |   | 151,000                                       |   | 142,000 |   | 136,000 |   |
| Fully Diluted Weighted  Average Shares |   | 3,458,000                                      |   | 3,262,000                                     |   | 3,363,000 |   | 3,235,000 |   |

 

Asa result of the acquisition of MAFN, approximately 510,500 shares of Companycommon stock were issued and the majority of previously outstanding options topurchase the stock of MAFN were converted, using the formula presented in themerger agreement, to 78,206 options to acquire shares of the Company common stockat prices ranging from $7.13 to $8.84. These shares and share equivalents were included in the calculationsshown above on a weighted average basis commencing September 13, 2002.  The total common shares outstanding,excluding share equivalents on a fully diluted basis, at September 30, 2002were approximately 3,917,000.

 

11

----

 

F.             BUSINESS SEGMENTS

 

September 30, 2002:

 
|                                |   | **Community  Banking** |    | **Mortgage  Banking** |   | **Other** |   | **Elimination** |   | **Total** |   |
|-------------------------------------|--------|------------------------|---------|-----------------------|--------|-----------|--------|-----------------|--------|-----------|--------|
|                                |   |                   |    |                  |   |      |   |            |   |      |   |
| Securities                          |   | $                      | 404,687 |                  | $      | —    |   | $               | — |      | $      | — |   | $ | 404,687 |   |
| Net loans                           |   | 420,942                |    | 27,661                |   | —    |   | (27,661         | )      | 420,942   |   |
| Net assets                          |   | 939,885                |    | 31,074                |   | 64,531    |   | (97,652         | )      | 937,838   |   |
| Total deposits                      |   | 651,296                |    | —                |   | —    |   | (3,121          | )      | 648,175   |   |
| Total borrowings                    |   | 195,165                |    | 27,661                |   | —    |   | (27,661         | )      | 195,165   |   |
| Total liabilities                   |   | 870,364                |    | 28,435                |   | —    |   | (30,782         | )      | 868,017   |   |
|                                |   |                   |    |                  |   |      |   |            |   |      |   |
| Three months ended:                 |   |                   |    |                  |   |      |   |            |   |      |   |
|                                |   |                   |    |                  |   |      |   |            |   |      |   |
| Total interest income               |   | $                      | 11,626  |                  | $      | 186       |   | $               | 8      |      | $      | (112 | ) | $ | 11,708 |   |
| Total interest expense              |   | 4,809                  |    | 112                   |   | —    |   | (112            | )      | 4,809     |   |
| Net interest income                 |   | 6,817                  |    | 74                    |   | 8         |   | —          |   | 6,899     |   |
| Provision for possible loan  losses |   | 100                    |    | —                |   | —    |   | —          |   | 100       |   |
| Total non-interest income           |   | 2,060                  |    | 783                   |   | —    |   | 1               |   | 2,844     |   |
| Total non-interest expense          |   | 6,033                  |    | 587                   |   | 280       |   | —          |   | 6,900     |   |
| Net income (loss)                   |   | 1,710                  |    | 162                   |   | (180      | )      | 1               |   | 1,693     |   |
|                                |   |                   |    |                  |   |      |   |            |   |      |   |
| Nine months ended:                  |   |                   |    |                  |   |      |   |            |   |      |   |
|                                |   |                   |    |                  |   |      |   |            |   |      |   |
| Total interest income               |   | $                      | 35,065  |                  | $      | 515       |   | $               | 20     |      | $      | (292 | ) | $ | 35,308 |   |
| Total interest expense              |   | 16,491                 |    | 292                   |   | —    |   | (292            | )      | 16,491    |   |
| Net interest income                 |   | 18,574                 |    | 223                   |   | 20        |   | —          |   | 18,817    |   |
| Provision for possible loan  losses |   | 75                     |    | —                |   | —    |   | —          |   | 75        |   |
| Total non-interest income           |   | 6,529                  |    | 2,567                 |   | —    |   | (15             | )      | 9,081     |   |
| Total non-interest expense          |   | 16,581                 |    | 1,807                 |   | 840       |   | —          |   | 19,228    |   |
| Net income (loss)                   |   | 5,306                  |    | 588                   |   | (509      | )      | —          |   | 5,385     |   |

 

12

----

 

September 30, 2001:

 
|                                |   | **Community  Banking** |    | **Mortgage  Banking** |   | **Other** |   | **Elimination** |   | **Total** |   |
|-------------------------------------|--------|------------------------|---------|-----------------------|--------|-----------|--------|-----------------|--------|-----------|--------|
|                                |   |                   |    |                  |   |      |   |            |   |      |   |
| Securities                          |   | $                      | 287,825 |                  | $      | —    |   | $               | — |      | $      | — |   | $ | 287,825 |   |
| Net loans                           |   | 424,383                |    | 9,492                 |   | —    |   | (9,451          | )      | 424,424   |   |
| Net assets                          |   | 792,234                |    | 11,600                |   | 51,397    |   | (63,601         | )      | 791,630   |   |
| Total deposits                      |   | 489,314                |    | —                |   | —    |   | (2,408          | )      | 486,906   |   |
| Total borrowings                    |   | 217,760                |    | 9,451                 |   | —    |   | (9,451          | )      | 217,760   |   |
| Total liabilities                   |   | 739,496                |    | 9,893                 |   | 175       |   | (11,858         | )      | 737,706   |   |
|                                |   |                   |    |                  |   |      |   |            |   |      |   |
| Three months ended:                 |   |                   |    |                  |   |      |   |            |   |      |   |
|                                |   |                   |    |                  |   |      |   |            |   |      |   |
| Total interest income               |   | $                      | 12,873  |                  | $      | 143       |   | $               | 2      |      | $      | (134 | ) | $ | 12,884 |   |
| Total interest expense              |   | 6,909                  |    | 110                   |   | —    |   | (134            | )      | 6,885     |   |
| Net interest income                 |   | 5,964                  |    | 33                    |   | 2         |   | —          |   | 5,999     |   |
| Provision for possible loan  losses |   | 510                    |    | —                |   | —    |   | —          |   | 510       |   |
| Total non-interest income.          |   | 2,109                  |    | 653                   |   | —    |   | (10             | )      | 2,752     |   |
| Total non-interest expense          |   | 5,496                  |    | 475                   |   | 280       |   | —          |   | 6,251     |   |
| Net income (loss)                   |   | 1,316                  |    | 114                   |   | (186      | )      | (7              | )      | 1,237     |   |
|                                |   |                   |    |                  |   |      |   |            |   |      |   |
| Nine months ended:                  |   |                   |    |                  |   |      |   |            |   |      |   |
|                                |   |                   |    |                  |   |      |   |            |   |      |   |
| Total interest income               |   | $                      | 38,192  |                  | $      | 454       |   | $               | 14     |      | $      | (484 | ) | $ | 38,176 |   |
| Total interest expense              |   | 21,231                 |    | 410                   |   | —    |   | (484            | )      | 21,157    |   |
| Net interest income                 |   | 16,961                 |    | 44                    |   | 14        |   | —          |   | 17,019    |   |
| Provision for possible loan  losses |   | 840                    |    | —                |   | —    |   | —          |   | 840       |   |
| Total non-interest income           |   | 6,102                  |    | 2,017                 |   | —    |   | (10             | )      | 8,109     |   |
| Total non-interest expense          |   | 16,083                 |    | 1,431                 |   | 840       |   | —          |   | 18,354    |   |
| Net income (loss)                   |   | 3,701                  |    | 340                   |   | (547      | )      | (7              | )      | 3,487     |   |

 

13

----

 

G.            PENSION PLAN TERMINATION

 

Aspart of a program to redesign the Company’s employee retirement benefits, theBoard of Directors voted to freeze the Company’s defined benefit pension plan(the “Plan”) effective as of October 31, 2000 and to terminate the Planeffective on December 31, 2001.  Inconnection therewith, the company amended the Plan to improve the benefitformula for current employees and to permit payment of lump sums from the Plan.

 

Aspart of the redesign of retirement benefits effective January 2001, the Companycontributes to the 401(k) of each eligible plan participant an amount equal to3% of the employees’ W-2 compensation, regardless of whether the employeeseparately makes contribution to the 401(k) plan.

 

Duringthe first quarter of 2002, the Company settled the remaining obligations of theterminated pension plan.  This resultedin a gain on settlement of $537,000 (approximately $349,000, net of applicabletaxes) which is netted against salaries and benefits expense.

 

H.                                    LOANS

 

Theportfolio of loans consisted of the following:

 

|                                 |   | **September 30,********2002** |    | **December 31,********2001** |   | **September 30,********2001** |   |
|--------------------------------------|--------|-------------------------------|---------|------------------------------|--------|-------------------------------|--------|
|                                 |   | **(In thousands)**            |    |
| Residential                          |   | $                             | 243,432 |                         | $      | 275,514                       |   | $ | 296,489 |   |
| Home equity                          |   | 34,015                        |    | 28,301                       |   | 28,095                        |   |
| Commercial real estate               |   | 128,455                       |    | 83,874                       |   | 82,385                        |   |
| Commercial                           |   | 13,054                        |    | 13,994                       |   | 14,729                        |   |
| Other                                |   | 8,208                         |    | 7,351                        |   | 7,379                         |   |
| Total loans and loans held  for sale |   | $                             | 427,164 |                         | $      | 409,034                       |   | $ | 429,077 |   |

 

I.                                         DEPOSITS

 

Depositsconsisted of the following:

 

|                       |   | **September 30,********2002** |    | **December 31,********2001** |   | **September 30,********2001** |   |
|----------------------------|--------|-------------------------------|---------|------------------------------|--------|-------------------------------|--------|
|                       |   | **(In thousands)**            |    |                         |   |                          |   |
| DDA’s                 |   | $                             | 93,515  |                         | $      | 66,344                        |   | $ | 69,394 |   |
| NOW’s                 |   | 104,320                       |    | 79,659                       |   | 76,575                        |   |
| Savings & money market |   | 262,603                       |    | 163,798                      |   | 151,234                       |   |
| Core deposits              |   | 460,438                       |    | 309,801                      |   | 297,203                       |   |
| Time deposits              |   | 187,737                       |    | 187,658                      |   | 189,703                       |   |
| Total deposits             |   | $                             | 648,175 |                         | $      | 497,459                       |   | $ | 486,906 |   |

 

14

----

 

Item 2.    Management’sDiscussion and Analysis of Consolidated Financial Condition and Results ofOperations

 

GENERAL

 

The Company’sresults of operations depend primarily on its net interest income afterprovision for possible loan losses, its revenue from other banking services andnon-interest expenses.  The Company’snet interest income depends upon the net interest rate spread between the yieldon the Company’s loan and investment portfolios and the cost of funds,consisting primarily of interest expense on deposits and Federal Home Loan Bankadvances.  The interest rate spread isaffected by the match between the maturities or repricing intervals of theCompany’s assets and liabilities, the mix and composition of interest sensitiveassets and liabilities, economic factors influencing general interest rates,loan prepayment speeds, loan demand and savings flows, as well as the effect ofcompetition for deposits and loans.  TheCompany’s net interest income is also affected by the performance of its loanportfolio, amortization or accretion of premiums or discounts on purchasedloans and mortgage–backed securities, and the level of non-earning assets.  Revenues from loan fees and other bankingservices depend upon the volume of new transactions and the market level ofprices for competitive products and services. Non-interest expenses depend upon the efficiency of the Company’sinternal operations and general market and economic conditions.

 

ACQUISITION OFMASSACHUSETTS FINCORP, INC.

 

On September 13,2002, the Company completed its acquisition of Massachusetts Fincorp, Inc.(MAFN) in a transaction accounted for under the purchase method ofaccounting.  Accordingly, theconsolidated assets and liabilities of MAFN are included in the Company’sconsolidated balance sheet at September 30, 2002, and the results of operationsof MAFN were included for the period from September 14, 2002 to September 30,2002.  As such, there are no results ofoperations of MAFN shown in 2001 nor for periods prior to September 14, 2002 inthe accompanying consolidated statement of operations.  Additionally, for purposes of describing thevariances in the average balance of interest earning assets and interestbearing deposits and liabilities, there is no reference made related to theeffect of MAFN balances as they did not have a material impact on the averagebalances for the three and nine months ended September 30, 2002.

 

INTEREST RATEENVIRONMENT

 

The volatileinterest rate environment which has existed since January 1, 2001 throughSeptember 30, 2002 has had a significant impact on the pricing of the Company’sassets and liabilities.

 

|   |   | **Prime********Rate** |   | **1-year FHLB********Advance  Rate** |   | **3-year********Treasury** |   | **5-year********Treasury** |   | **10-year********Treasury** |   |
|--------|--------|-----------------------|--------|--------------------------------------|--------|----------------------------|--------|----------------------------|--------|-----------------------------|--------|
|   |   |                  |   |                                 |   |                       |   |                       |   |                        |   |
| Jan-01 |   | 9.50                  |   | 5.17                                 |   | 4.77                       |   | 4.86                       |   | 5.16                        |   |
| Jun-01 |   | 6.75                  |   | 4.20                                 |   | 4.35                       |   | 4.81                       |   | 5.28                        |   |
| Dec-01 |   | 4.75                  |   | 2.62                                 |   | 3.62                       |   | 4.39                       |   | 5.09                        |   |
| Jun-02 |   | 4.75                  |   | 2.42                                 |   | 3.49                       |   | 4.19                       |   | 4.93                        |   |
| Sep-02 |   | 4.75                  |   | 1.78                                 |   | 2.32                       |   | 2.94                       |   | 3.87                        |   |

 

Many of theCompany’s earning assets are comprised of residential mortgages, directlythrough loans and indirectly through mortgage-backed securities.  These mortgage-related assets, whichcomprise roughly 69.8% or $602,000,000 of total earning assets as of September30, 2002 and 73.0% or $577,866,000 of total earning assets as of September 30,2001 are generally priced off of the 3, 5 and 10-year treasury rate at the timeof purchase or origination (for the typical maturities that the Company prefersfor its own earning assets).

 

The Company’sdeposit pricing is driven by market competition as noted in “Liquidity andCapital Resources.”  The trends indeposit pricing over the past two years have not been as volatile as the stagesin the Federal Reserve’s inter-bank borrowing rates noted earlier; however,they have generally been on a consistent downward trend over this period.

 

The Company’sborrowings, which are primarily with the FHLB, are generally LIBOR-based andgenerally vary in terms ranging from overnight to three years in originalmaturities.  While LIBOR rate changesover the past two years were not exactly the same as the Federal Reserveinter-bank borrowing rate, the trend in these rates and the pricing of theCompany’s borrowings were consistent with the relative movements in thoserates.

 

15

----

 

NET INTERESTINCOME

 

Net interestincome is affected by the mix and volume of assets and liabilities, themovement and level of interest rates and interest spread, which is thedifference between the average yield received on earning assets and the averagerate paid on deposits and borrowings. The Company’s net interest rate spreadwas 3.63% and 3.34%  for the quarter andnine months ended September 30, 2002, respectively and 3.28% and 3.17% for thequarter and nine months ended September 30, 2001, respectively.  The interest rate spread was positivelyaffected in the aforementioned period in 2002 as compared to the correspondingperiods in 2001 generally due to a steeper yield curve which has resulted incosts of funding dropping at a faster rate than available yields on earningsassets.  Please see later discussion in“Management’s Discussion and Analysis” for more detailed explanations of theinterest rate environment.

 

The level ofnonaccrual (impaired) loans and other real estate owned can have an impact onnet interest income but balances in these categories have generally beenimmaterial in 2002 and 2001.  AtSeptember 30, 2002, the Company had $4,007,000 in non-accrual loans, and noother real estate owned, compared to $3,881,000 in non-accrual loans and noother real estate owned as of December 31, 2001 and $589,000 in non-accrualloans and $355,000 in other real estate owned as of September 30, 2001.

 

16

----

 

The table below presents the components of interest income and expensefor the major categories of assets and liabilities for the periods indicated:

 
|                                     |   | **Three Months Ended********September  30,** |   | **Nine Months Ended********September  30,** |   |
|------------------------------------------|--------|----------------------------------------------|--------|---------------------------------------------|--------|
|                                     |   | **2002**                                     |   | **2001**                                    |   | **2002** |   | **2001** |   |
|                                     |   | **(In thousands)**                           |   |
| Interest and dividend  income:           |   |                                         |   |                                        |   |   |   |   |   |
| Interest  and fees on loans              |   | $                                            | 6,053  |                                        | $      | 7,488 |   | $ | 18,742 |   | $ | 21,895 |   |
| Interest  on mortgage-backed investments |   | 5,059                                        |   | 4,298                                       |   | 14,304 |   | 11,927 |   |
| Interest  on bonds and obligations       |   | 419                                          |   | 858                                         |   | 1,553 |   | 3,528 |   |
| Dividend  income                         |   | 128                                          |   | 221                                         |   | 410 |   | 777 |   |
| Interest  on short-term investments      |   | 49                                           |   | 19                                          |   | 299 |   | 49 |   |
| Total interest and dividend  income      |   | $                                            | 11,708 |                                        | $      | 12,884 |   | $ | 35,308 |   | $ | 38,176 |   |
|                                     |   |                                         |   |                                        |   |   |   |   |   |
| Interest expense:                        |   |                                         |   |                                        |   |   |   |   |   |
| Interest on deposits                     |   | $                                            | 2,540  |                                        | $      | 3,588 |   | $ | 8,224 |   | $ | 11,207 |   |
| Interest on short-term  borrowings       |   | 55                                           |   | 266                                         |   | 141 |   | 1,158 |   |
| Interest on long-term debt               |   | 2,214                                        |   | 3,031                                       |   | 8,126 |   | 8,792 |   |
| Total interest expense                   |   | 4,809                                        |   | 6,885                                       |   | 16,491 |   | 21,157 |   |
| Net interest income                      |   | $                                            | 6,899  |                                        | $      | 5,999 |   | $ | 18,817 |   | $ | 17,019 |   |

 

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

 
|                                    |   | **Three Months Ended********September  30,** |   | **Nine Months Ended********September  30,** |   |
|-----------------------------------------|--------|----------------------------------------------|--------|---------------------------------------------|--------|
|                                    |   | **2002**                                     |   | **2001**                                    |   | **2002** |   | **2001** |   |
|                                    |   | **(In thousands)**                           |   |
| Weighted average yield  earned on:      |   |                                         |   |                                        |   |   |   |   |   |
| Loans                                   |   | 6.87                                         | %      | 7.74                                        | %      | 7.02 | % | 7.73 | % |
| Mortgage-backed investments             |   | 6.09                                         |   | 6.48                                        |   | 6.25 |   | 6.64 |   |
| Bonds and obligations                   |   | 3.28                                         |   | 6.80                                        |   | 3.55 |   | 7.30 |   |
| Marketable and other equity  securities |   | 3.39                                         |   | 4.60                                        |   | 3.54 |   | 4.85 |   |
|                                    |   |                                         |   |                                        |   |   |   |   |   |
| Weighted average yield  earned on:      |   |                                         |   |                                        |   |   |   |   |   |
| interest-earning assets                 |   | 6.19                                         |   | 7.13                                        |   | 6.31 |   | 7.23 |   |
|                                    |   |                                         |   |                                        |   |   |   |   |   |
| Weighted average rate paid  on:         |   |                                         |   |                                        |   |   |   |   |   |
| NOW and non-interest NOW  deposits      |   | 0.23                                         |   | 0.29                                        |   | 0.27 |   | 0.35 |   |
| Savings deposits                        |   | 1.67                                         |   | 2.22                                        |   | 1.87 |   | 2.20 |   |
| Time deposits                           |   | 3.67                                         |   | 5.61                                        |   | 4.06 |   | 5.84 |   |
| Total deposits                          |   | 1.81                                         |   | 3.02                                        |   | 2.08 |   | 3.20 |   |
| Short-term borrowings                   |   | 1.83                                         |   | 3.59                                        |   | 1.98 |   | 4.67 |   |
| Long-term debt                          |   | 5.01                                         |   | 5.77                                        |   | 5.36 |   | 6.00 |   |
|                                    |   |                                         |   |                                        |   |   |   |   |   |
| Weighted average rate paid  on:         |   |                                         |   |                                        |   |   |   |   |   |
| Deposits and borrowings                 |   | 2.56                                         |   | 3.85                                        |   | 2.97 |   | 4.06 |   |
|                                    |   |                                         |   |                                        |   |   |   |   |   |
| Net interest rate spread                |   | 3.63                                         | %      | 3.28                                        | %      | 3.34 | % | 3.17 | % |

 

17

----

 

RATE/VOLUMEANALYSIS

 

The followingtables present, for the periods indicated, the change in interest income andthe change in interest expense attributable to the change in interest rates andthe change in the volume of earning assets and interest-bearing liabilities.The change attributable to both volume and rate has been allocatedproportionately to the change due to volume and the change due to rate.

 
|                                |   | **Three Months Ended September 30**          |   |
|-------------------------------------|--------|----------------------------------------------|--------|
|                                |   | **2002 vs. 2001********Increase/(decrease)** |   |
|                                |   | **Due to**                                   |   |
|                                |   | **Volume**                                   |   | **Rate** |   | **Total** |   |
| Interest and dividend  income:      |   |                                         |   |   |   |   |   |
| Loans                               |   | $                                            | (1,084 | ) | $ | (351 | ) | $ | (1,435 | ) |
| Mortgage-backed investments         |   | 1,213                                        |   | (452 | ) | 761 |   |
| Bonds and obligations               |   | (178                                         | )      | (261 | ) | (439 | ) |
| Equity securities                   |   | (73                                          | )      | (20 | ) | (93 | ) |
| Short-term investments              |   | 44                                           |   | (14 | ) | 30 |   |
| Total interest and dividend  income |   | $                                            | (78    | ) | $ | (1,098 | ) | $ | (1,176 | ) |
|                                |   |                                         |   |   |   |   |   |
| Interest expense:                   |   |                                         |   |   |   |   |   |
| NOW deposits                        |   | 28                                           |   | (37 | ) | (9 | ) |
| Savings deposits                    |   | 555                                          |   | (362 | ) | 193 |   |
| Time deposits                       |   | (832                                         | )      | (400 | ) | (1,232 | ) |
| Short-term borrowings               |   | (175                                         | )      | (36 | ) | (211 | ) |
| Long-term debt                      |   | (677                                         | )      | (140 | ) | (817 | ) |
| Total interest expense              |   | (1,101                                       | )      | (975 | ) | (2,076 | ) |
| Net interest income                 |   | $                                            | 1,023  |   | $ | (123 | ) | $ | 900 |   |

 

18

----

 
|                                |   | **Nine Months Ended September 30**           |   |
|-------------------------------------|--------|----------------------------------------------|--------|
|                                |   | **2002 vs. 2001********Increase/(decrease)** |   |
|                                |   | **Due to**                                   |   |
|                                |   | **Volume**                                   |   | **Rate** |   | **Total** |   |
| Interest and dividend  income:      |   |                                         |   |   |   |   |   |
| Loans                               |   | $                                            | (1,430 | ) | $ | (1,723 | ) | $ | (3,153 | ) |
| Mortgage-backed investments         |   | 3,253                                        |   | (876 | ) | 2,377 |   |
| Bonds and obligations               |   | (878                                         | )      | (1,097 | ) | (1,975 | ) |
| Equity securities                   |   | (212                                         | )      | (155 | ) | (367 | ) |
| Short-term investments              |   | 298                                          |   | (48 | ) | 250 |   |
| Total interest and dividend  income |   | $                                            | 1,031  |   | $ | (3,899 | ) | $ | (2,868 | ) |
|                                |   |                                         |   |   |   |   |   |
| Interest expense:                   |   |                                         |   |   |   |   |   |
| NOW deposits                        |   | 63                                           |   | (96 | ) | (33 | ) |
| Savings deposits                    |   | 1,129                                        |   | (453 | ) | 676 |   |
| Time deposits                       |   | (1,558                                       | )      | (2,068 | ) | (3,626 | ) |
| Short-term borrowings               |   | (634                                         | )      | (383 | ) | (1,017 | ) |
| Long-term debt                      |   | 364                                          |   | (1,030 | ) | (666 | ) |
| Total interest expense              |   | (636                                         | )      | (4,030 | ) | (4,666 | ) |
| Net interest income                 |   | $                                            | 1,667  |   | $ | 131 |   | $ | 1,798 |   |

 

19

----

 

COMPARISONOF THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001

 

GENERAL.Net income for the quarter ended September 30, 2002 was $1,693,000 or $0.49 perdiluted share compared to net income of $1,237,000 or $0.38 per diluted sharein the corresponding period of 2001, a net increase of $456,000 or 36.9% in netincome or 28.9% in diluted earnings per share. The overall increase in netincome was mainly attributable to increases in net interest income, customerservice fees and decreases in provisions for possible loan losses partiallyoffset by increases in non-interest expenses and provisions for income taxesand decreases in gains on securities, net.

 

INTERESTAND DIVIDEND INCOME. Interest and dividend income decreased $1,176,000 or 9.1%during the three-month period ended September 30, 2002, as compared to the sameperiod in 2001. The decrease was attributable to decreases in the yield onearning assets partially offset by increases in average balance of earningassets.  The balance of average earningassets for the three-month period ended September 30, 2002 was approximately$757,796,000 as compared to $722,864,000 for the same period in 2001, anoverall increase of $34,932,000 or 4.8%.

 

Theincrease in earning assets was primarily driven by increases in averagemortgage-backed investments and short-term investments offset primarily bydecreases in loans.  Averagemortgage-backed investments and short-term investments were $332,504,000 and$12,794,000, respectively, for the quarter ended September 30, 2002 as comparedto $265,222,000 and $2,928,000 respectively, for the same period in 2001. Thesebalances when combined increased $77,148,000 or 28.8%.  The yield on mortgage backed and short terminvestments decreased to 6.09% and 1.53%, respectively in the three monthsended September 30, 2002 as compared to 6.48% and 2.60%, respectively, in thesame period of 2001. These yields decreased primarily due to the declining interestrate environment, which existed for most of 2001. From January 2001 to December2001, the Federal Reserve Board decreased rates 475 basis points.

 

Theaverage balance of loans decreased to $352,747,000 for the three months endedSeptember 30, 2002 from $386,730,000 for the same period in 2001, a decline of$33,983,000 or 8.8%. These balances declined as a result of fewer residentialloans being purchased and/or originated and held for the Company’s loanportfolio in late 2001 and thus far in 2002. The yield on loans decreased to 6.86% in the third quarter of 2002 ascompared to 7.74% for the same period in 2001. This was generally due to thelower rate environment which existed for most of 2001, which impacted new loanoriginations and also loan payoffs-refinances of loans held in portfolio withhigher interest rates.

 

INTERESTEXPENSE. Interest expense for the quarter ended September 30, 2002 decreased$2,076,000 or 30.2% compared to the same period in 2001, generally due todecreases in the rates paid on deposits and borrowed funds and overallreductions in the level of borrowed funds as a result of core depositgrowth.  The average balance of depositsrose to $562,516,000 for the third quarter of 2002 as compared to $475,319,000for the third quarter of 2001 for an increase of 18.3%.  The average balances of core deposits rose42.4% or $121,268,000 to $406,976,000 for the three months ended September 30,2002 as compared to $285,708,000 for the same period in 2001.  This was due to the Company’s continuedsuccess in attracting core deposits and also due to a shift from time depositsto money markets (which are included in core deposits) over this same timeperiod.  Time deposits decreased 18.0%in the third quarter of 2002 to $155,540,000 as compared to $189,611,000 forthe same period in 2001, generally due to the lower interest rate environmentand customers’ desire to invest in instruments with shorter terms such as moneymarkets noted above.  The Company will continueto closely manage its cost of deposits by continuing to seek methods ofacquiring new core deposits and maintaining its current core deposits whileprudently adding time deposits at reasonable rates in comparison to localmarkets and other funding alternatives, including borrowings.  The average balances of borrowed fundsdeclined during the third quarter of 2002 as compared to 2001, from$188,803,000 to $239,855,000, a decrease of 21.3%.  Borrowings levels were reduced as a result of the Company’s successin attracting deposits over the past year.

 

20

----

 

Theblended weighted average rate paid on deposits and borrowed funds was 2.56% forthe three months ended September 30, 2002 as compared to 3.85% for the sameperiod in 2001.  The overall weightedaverage rates paid on borrowed funds decreased to approximately 4.81% for thequarter ended September 30, 2002 from 5.50% in the third quarter of 2001.  This decrease is reflective of actions takenby the Federal Reserve Board in 2001. The results for the third quarter of 2002 were also favorably influencedby the payoff of a $50 million two-year FHLB advance with a rate of 7.12%,which matured June 27, 2002.  Thisborrowing was paid off with the excess cash flow from the Company’s loan andinvestment portfolios from the second quarter of 2002.  It is anticipated, given the current rateenvironment, that the rates paid on borrowed funds could decline further infuture quarters as borrowings are refinanced as they reach maturity.  The Company will continue to evaluate theuse of borrowing 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 1.81% for the quarterended September 30, 2002 as compared to 3.02% for the same period in 2001. Theoverall cost of deposits has decreased in the third quarter of 2002 generallydue to the interest rate environment that existed in 2001 and also due to agreater concentration of core deposits in relation to total deposits in 2002 ascompared to 2001.

 

NON-INTERESTINCOME.  Total non-interest incomeincreased $92,000 or 3.3% in the third quarter of 2002 in comparison to thesame period in 2001.  Customer servicefees increased $180,000 or 9.2% to $2,143,000 for the quarter ended September30, 2002 from $1,963,000 for 2001, primarily due to growth in deposit accounts,primarily NOW and checking account portfolios, continued success in crossselling customers, debit card activity, and sales of mutual funds andannuities.  Gains on sales of mortgageloans were $785,000 for the third quarter of 2002 as compared to $642,000 forthe same period in 2001 for an increase of $143,000 or 22.3%.  Loan originations remained at record levelsin the third quarter of 2002 as a result of the historically low interest rateenvironment and resultant low mortgage rates, which accelerated already highlevels of refinancing activity, which existed in 2001.  The net gains on mortgage loans were basedon sales of loans of $58,500,000 and $37,431,000, for the three-month periodsended September 30, 2002 and 2001, respectively.  It is anticipated the results from mortgage banking activity willremain strong in the fourth quarter of 2002 given the level of applications inthe Company’s pipeline at September 30, 2002.

 

Realizedlosses on securities, net, were $328,000 for the third quarter of 2002 ascompared to a gain of $16,000 for 2001, for a decrease of $344,000.  The results for the third quarter of 2002are reflective of management’s decision to sell a portion of its remainingequity portfolio in the third quarter of 2002. This has left the Company with approximately $1 million in equity securities.  See “Liquidity and Capital Resources” forfurther discussion of investment portfolio strategies and risk management.

 

TheCompany also reflected a gain on the sale of bank-owned real estate of $85,000in the third quarter of 2002 for which there was no corresponding gain in thesame period in 2001.  This parcel ofreal estate was one of certain properties reevaluated by management in thefourth quarter of 2001 as part of the $635,000 write-down taken on bank realestate holdings to be sold.  The write-downtaken in the fourth quarter of 2001 reflected management’s expectation ofimpairment of these properties in light of market conditions and was based uponopinions of real estate professionals along with management’s analyses.  This property was located in Abington aswell as the other remaining holdings. The remaining book value of these properties is roughly $1,102,000 andare included in “banking premises and equipment, net” on the accompanyingconsolidated balance sheet.

 

21

----

 

NON-INTERESTEXPENSES.  Non-interest expenses for thequarter ended September 30, 2002 increased $649,000 or 10.4 % compared to thesame period in 2001.  Salaries andemployee benefits increased 12.0% or $369,000. The change in salaries expense from the third quarter of 2001 to thethird quarter of 2002 can be summarized as follows:

 

|                                         |   | **Increase/(Decrease)**    |   |
|----------------------------------------------|--------|----------------------------|--------|
|                                         |   | **(dollars in thousands)** |   |
| Mortgage Company Salaries  & Commissions |   | $                          | 47     |   |
| Mortgage-related Incentive  payout increases |   | 65                         |   |
| MAFN                                         |   | 75                         |   |
| Group insurance                              |   | 54                         |   |
| Salary increases                             |   | 115                        |   |
| Other                                        |   | 13                         |   |
|                                         |   | $                          | 369    |   |

 

Asnoted above, approximately $112,000 of the increase is related to increasedvolumes and revenues for mortgage banking as well as increased performance andprofit-related incentives.  There wasalso an increase of $75,000 related to the Company’s acquisition ofMassachusetts Fincorp, which became part of the Company at the close ofbusiness on September 13, 2002 for which there was no corresponding charge in2001.  Group insurance increases notedof $54,000 primarily reflect overall increases in the cost of employee healthinsurance in 2002 over 2001 levels. Merit increases and other salary adjustments noted of $115,000 reflectincreases based on performance as well as bringing salaries in line with marketlevels for similar positions in the industry. This amount also reflects the addition of various customer servicerelated positions during the past year.

 

Occupancyand equipment increased $272,000 or 32.9% in the third quarter of 2002 ascompared to 2001.  The two mostsignificant expense increases in 2002 over 2001 related to the added lease andoperating expense for the Company’s new corporate headquarters building in Weymouth(approximately 35,000 square feet). This added expense of roughly $259,000 in the third quarter of 2002 ascompared to 2001.  This facility housesnearly all of the Company’s non-branch personnel and has allowed the Company toconsolidate its non-branch employees into a single location from what hadpreviously been five locations (six including the headquarters of MAFN).  While this is an incremental addition tooverhead, Company management and the Board of Directors deemed it essential tothe ongoing maintenance of the Company’s operations and ability to effectivelyand efficiently service its customers. The tangible financial benefits of this decision will be seen in overalllower amounts to be spent on technology infrastructure, the termination of twocurrent leases upon their expiration in the fourth quarter of 2002 and thefirst quarter of 2003 and the reduction in occupancy costs to be realized asthe various properties in Abington are sold as noted earlier.  Additionally, approximately $33,000 ofoccupancy expense increases related to the acquisition of MAFN.  The remaining net decrease of $20,000primarily relates to lower levels of depreciation expense in 2002 as comparedto 2001.

 

Othernon-interest expenses increased approximately $8,000 or 0.4% in the thirdquarter of 2002 as compared to 2001. This increase was comprised of the following:

 

|                                                                    |   | **Increase/(Decrease)**    |   |
|-------------------------------------------------------------------------|--------|----------------------------|--------|
|                                                                    |   | **(dollars in thousands)** |   |
| Change in accounting for  goodwill                                      |   | $                          | (93    | ) |
| MAFN-related operating  costs and core deposit  intangible amortization |   | 77                         |   |
| REF expenses increase                                                   |   | 31                         |   |
| Other, net                                                              |   | (7                         | )      |
| Net interest income                                                     |   | $                          | 8      |   |

 

22

----

 

Thechange in accounting for goodwill, which resulted in a reduction of expense of$93,000, relates to the cessation of amortization of goodwill as required bySFAS No. 142, “Goodwill and Other Intangible Assets,” which went into effect asof January 1, 2002.  Also, as required,management has and will continue to perform a formal assessment of theremaining intangible assets for impairment. There were no adjustments required for impairment based uponmanagement’s analyses as of September 30, 2002.  The MAFN incremental costs incurred in 2002 were related to thatacquisition, and as such, do not have a corresponding expense reflected in2001.  The noted increase in real estatein foreclosure workout expenses (REF) primarily relates to expenses associatedwith the ongoing workout of the large telecommunications credit discussed in“Liquidity and Capital Resources.”

 

PROVISIONFOR POSSIBLE LOAN LOSSES. The provision for possible loan losses for thequarters ended September 30, 2002 and 2001 were $100,000 and $ 510,000,respectively.  The levels of provisionin both periods are generally attributable to the continued number of assetquality factors and methodologies that management uses to measure and evaluatethe adequacy of loan loss reserve levels, which include delinquency rates,charge-offs, problem or “watched” assets and anticipated losses.  During 2001, the provision for possible loanlosses was  higher primarily due to asingle commercial credit, which was beginning to show signs of deterioration(see discussion of $3 million credit below). Credit quality overall has remained stable in 2002.  At September 30, 2002, the Company’snon-performing asset and delinquency statistics were higher than a year agoprimarily due to an impaired loan relationship (telecom), which was onnon-accrual at September 30, 2002 and December 31, 2001, which totaledapproximately $3 million for which there was a reserve allocation of $2 millionat both of these periods.  See“Liquidity and Capital Resources” for additional discussion of credit qualitystatistics and trends.  The resultinglevel of allowance for possible loan loss was approximately 1.46% of period endloans at September 30, 2002 as compared to 1.34% and 1.08% at December 31, andSeptember 30, 2001, respectively.

 

PROVISIONFOR INCOME TAXES. The Company’s effective income tax rate for the quarter endedSeptember 30, 2002 was 38.3% compared to 37.8% for the quarter ended September30, 2001. The lower effective tax rate in comparison to statutory rates forboth periods is reflective of income earned by certain non-bank subsidiarieswhich are taxed, for state tax purposes, at lower rates.  The 2001 effective rate was lower due to ahigher portion of the consolidated earnings being contributed by subsidiaries,which are taxed at lower rates for state purposes.

 

23

----

 

COMPARISONOF THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001

 

GENERAL.Net income for the nine months ended September 30, 2002 was $5,385,000 or $1.60per diluted share compared to net income of $3,487,000 or $ 1.08 per dilutedshare in the corresponding period of 2001, a net increase of $1,898,000 or 54.4%in net income or 48.1% in diluted earnings per share. The overall increase innet income was mainly attributable to increases in net interest income,customer service fees and gains on sales of mortgage loans, gain on pensionsettlement (presented as a net reduction in salaries and benefits expense) anddecreases in cumulative effect of change in accounting for cost of salesincentives and provisions for possible loan losses partially offset byincreases in non-interest expenses, losses on securities and provisions forincome taxes.

 

INTERESTAND DIVIDEND INCOME. Interest and dividend income decreased $2,868,000 or 7.5%during the nine-month period ended September 30, 2002, as compared to the sameperiod in 2001. The decrease was attributable to decreases in the yield onearning assets partially offset by increases in average balance of earningassets.  The balance of average earningassets for the nine-month period ended September 30, 2002 was approximately$745,972,000 as compared to $703,746,000 for the same period in 2001, anoverall increase of $42,226,000 or 6.0%.

 

Theincrease in earning assets was primarily driven by increases in averagemortgage-backed investments and short-term investments offset by decreases inloans, discussed below.  Average mortgage-backedinvestments and short-term investments were $304,937,000 and $21,568,000,respectively for the nine months ended September 30, 2002 as compared to$239,363,000 and $1,428,000, respectively for the same period in 2001. Thesebalances when combined increased $85,714,000 or 35.6%.  The yield on mortgage-backed and short-terminvestments decreased to 6.25% and 1.84%, respectively, in the nine monthsended September 30, 2002 as compared to 6.64% and 4.58%, respectively, in thesame period of 2001. These yields decreased primarily due to the declininginterest rate environment, which existed for most of 2001. From January 2001 toDecember 2001, the Federal Reserve Board decreased rates 475 basis points.

 

Theaverage balance of loans decreased to $356,045,000 for the nine months endedSeptember 30, 2002 from $377,730,000 for the same period in 2001, a decline of$21,685,000 or 5.7%. These balances declined as a result of fewer residentialloans being purchased and/or originated and held for the Company’s loanportfolio in late 2001 and thus far in 2002. The yield on loans decreased to 7.02% in the first nine months of 2002as compared to 7.73% for the same period in 2001. This was generally due to thelower rate environment that existed for most of 2001, which impacted new loanoriginations and also payoffs or increased levels of refinancings of loans withhigher interest rates.

 

INTERESTEXPENSE. Interest expense for the nine months ended September 30, 2002decreased $4,666,000 or 22.1% compared to the same period in 2001, generallydue to decreases in the rates paid in deposits and borrowed funds.  The average balances of core deposits roseto $367,597,000 for the first nine months of 2002 as compared to  $271,756,000 for the same period in 2001 foran increase of $95,841,000 or 35.3%. The average balances of total deposits rose $62,277,000 or 13.4% to$528,540,000 for the nine months ended September 30, 2002 as compared to thesame period in 2001.  This was due tothe Company’s continued success in attracting core deposits and also due to ashift from time deposits to money market accounts (which are included in coredeposits) over this same time period. Time deposits decreased 17.3% or $33,564,000 in the first nine months of2002 to $160,943,000 as compared to $194,507,000 for the same period in 2001,generally due to the lower interest rate environment and customers’ desire toinvest in instruments with shorter terms. The Company will continue to closely manage its cost of deposits bycontinuing to seek methods of acquiring new core deposits and maintaining itscurrent core deposits while prudently adding time deposits at reasonable ratesin comparison to local markets and other funding alternatives, includingborrowings.  The average balances of borrowedfunds declined during the first nine months of 2002 as compared to 2001, at$211,458,000 as compared to $228,307,000, a decrease of 7.4%.  Borrowings were lowered as a result of theCompany’s success in attracting deposits over the past year.

 

24

----

 

Theblended weighted average rate paid on deposits and borrowed funds was 2.97% forthe nine months ended September 30, 2002 as compared to 4.06% for the sameperiod in 2001.  The overall weightedaverage rates paid on borrowed funds decreased to approximately 5.21% for thenine months ended September 30, 2002 from 5.81% in the same period of2001.  This decrease is reflective ofactions taken by the Federal Reserve Board in 2001. The results for the thirdquarter of 2002 were also favorably influenced by the payoff of a $50 milliontwo-year FHLB advance with a rate of 7.12%, which matured June 27, 2002.  This borrowing was paid off with the excesscash flow from the Company’s loan and investment portfolios from the secondquarter.  It is anticipated, given thecurrent rate environment, that the rates paid on borrowed funds could declinefurther in future quarters as borrowings are refinanced as they reach maturity.  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 2.07% for the ninemonths ended September 30, 2002 as compared to 3.20% for the same period in2001. The overall cost of deposits has decreased in the first half of 2002generally due to the interest rate environment that existed in 2001 and alsodue to greater concentration of core deposits in relation to total deposits in2002 as compared to 2001.

 

NON-INTERESTINCOME.  Total non-interest incomeincreased $972,000 or 12.0% in the first nine months of 2002 in comparison tothe same period in 2001.  Customerservice fees increased $648,000 or 11.5% to $6,283,000 for the nine monthsended September 30, 2002 from $5,635,000 for 2001 primarily due to growth indeposit accounts, primarily NOW and checking account portfolios, continuedsuccess in cross selling customers, debit card activity, and sales of mutualfunds and annuities.  Gains on sales ofmortgage loans were $2,552,000 for the first nine months of 2002 from$2,006,000 for the comparable period in 2001, an increase of  $546,000 or 27.2%.  Loan originations were at record levels in 2002 with the lowestresidential mortgage rates in 40 years being reached on at least two differentoccasions in 2002.  Therefore, theorigination levels for 2002 exceeded the already high mortgage originationlevels from 2001 due to record levels of refinancing.  The gains on mortgage loan sales, net resulted from loan sales of$166,910,000 and $120,550,000 for the nine-month periods ended September 30,2002 and 2001, respectively.  It isanticipated that mortgage originations and gains will remain strong in thefourth quarter given the record level of applications in the Company’s pipelineat September 30, 2002.

 

Realizedlosses on securities, net, were $241,000 for the first nine months of 2002 ascompared to a loss of $47,000 for 2001 for an increase in losses of$194,000.  The net loss in the ninemonths ended September 30, 2002 was primarily the result of a loss of $328,000taken by management as the result of sales of portions of its equity portfolioin the third quarter of 2002.  This losswas offset, to a lesser degree, by net gains as the result of management’sdecision to sell the Company’s corporate bond portfolio in the second quarterof 2002.

 

TheCompany also reflected a gain on the sale of bank-owned real estate of $85,000in the third quarter of 2002 for which there was no corresponding gain in thesame period in 2001.  This parcel ofreal estate was one of the properties reevaluated by management in the fourthquarter of 2001 as part of the $635,000 write-down taken on bank real estateholdings to be sold.  The write-downtaken in the fourth quarter of 2001 reflected management’s expectation ofimpairment of these properties in light of market conditions and was based uponopinions of real estate professionals along with management’s analyses.  This property was located in Abington aswell as the other remaining holdings. The remaining properties have a book value of roughly $1,102,000 and areincluded in “banking premises and equipment, net” on the accompanyingconsolidated balance sheet.

 

25

----

 

NON-INTERESTEXPENSES.  Non-interest expenses for thenine months ended September 30, 2002 increased $874,000 or 4.8% compared to thesame period in 2001.  Salaries andemployee benefits increased 6.9% or $647,000 on a net basis.  This increase was actually $1,184,000 or12.6% excluding the one-time favorable impact of $537,000 which resulted fromthe Company’s settlement of its previously terminated pension plan.  The change in salaries expense from the ninemonths ended September 30, 2001 to the corresponding period in 2002 can besummarized as follows:

 

|                                                    |   | **Increase/(Decrease)**    |   |
|---------------------------------------------------------|--------|----------------------------|--------|
|                                                    |   | **(dollars in thousands)** |   |
| Mortgage Company Salaries & Commissions             |   | $                          | 188    |   |
| Mortgage-related incentive and profit sharing increases |   | 175                        |   |
| Other incentive and sales- based incentive payouts      |   | 150                        |   |
| MAFN                                                    |   | 75                         |   |
| Hanover Branch (opened July  2001)                      |   | 91                         |   |
| Group insurance                                         |   | 120                        |   |
| Salary  increases/adjustments/adds                      |   | 350                        |   |
| Pension settlements                                     |   | (537                       | )      |
| Other, net                                              |   | 35                         |   |
| Net interest income                                     |   | $                          | 647    |   |

 

Asnoted above, approximately $513,000 of the increase is attributable toincreased production volumes and revenues for mortgage banking as well asincreased performance and profit related incentives.  Of this increase, $75,000 is attributable to the Company’sacquisition of MAFN as of September 13, 2002 for which there was nocorresponding expense in 2001. Additionally, $91,000 of the increase in expense was attributable to theopening of the Hanover branch (July 2001) for which there was no salary expensein the first six months of 2001.  Groupinsurance increased roughly $120,000 in the nine months ended September 30,2002 as compared to the same period in 2001, which generally corresponded withmedical insurance rate increases from year to year.  Other salary related differences of $350,000 related to meritraises, adjustments and other net staff additions included in the nine monthsended September 30, 2002 as compared to the same period in 2001.  These increases are related to performanceas well as bringing salaries in line with market levels for similar positionsin the industry.  This amount, as noted,also reflects the addition of various customer service related positions duringthe past year (typically volume related).

 

Occupancyand equipment expenses increased $221,000 or 8.8% in the nine months endedSeptember 30, 2002 as compared to the same period in 2001.  This increase was primarily affected byincreases in expenses related to the added lease and operating expenses for theCompany’s new corporate headquarters building in Weymouth (approximately 35,000square feet), which was roughly $259,000 of expense incurred during the thirdquarter of 2002.  This facility housesnearly all of the Company’s non-branch personnel and has allowed the Company toconsolidate its non-branch personnel into a single location from what hadpreviously been five locations (six including the headquarters of MAFN).  While this is an incremental addition to overhead,Company management and the Board of Directors deemed it essential to theongoing maintenance of the Company’s operations and ability to effectively andefficiently service its customers.  Thetangible financial benefits of this decision will be seen in overall loweramounts to be spent on technology infrastructure, the termination of twocurrent leases upon their respective expiration in the fourth quarter of 2002and the first quarter of 2003 and the reduction in occupancy costs to berealized as the various properties in Abington are sold as noted earlier.  Additionally, approximately $33,000 of theoccupancy expense increase relates to the acquisition of MAFN and another$73,000 relates to the Hanover branch (opened July 2001).  These were offset, in part, by overallreductions in depreciation expense and other expenditures related to facilitiesand equipment maintenance of $144,000.

 

26

----

 

Othernon-interest expense increased approximately $6,000 or 1% for the nine monthsended September 30, 2002 as compared to the same period in 2001.  This increase was comprised of thefollowing:

 

|                                                                  |   | **Increase/(Decrease)**    |   |
|-----------------------------------------------------------------------|--------|----------------------------|--------|
|                                                                  |   | **(dollars in thousands)** |   |
| Change in accounting for  goodwill                                    |   | $                          | (252   | ) |
| MAFN-related operating costs and core deposit intangible amortization |   | 77                         |   |
| Statement rendering and  item processing and  EDP services            |   | 158                        |   |
| Other, net                                                            |   | 23                         |   |
| Net interest income                                                   |   | $                          | 6      |   |

 

Thechange in accounting for goodwill relates to the cessation of amortization ofgoodwill as required by SFAS No. 142, “Goodwill and Other Intangible Assets,”which went into effect as of January 1, 2002. Also, as required, management has and will continue to perform a formalassessment of the remaining intangible assets for impairment.  There were no adjustments required forimpairment based upon management’s analyses as of September 30, 2002.  The MAFN incremental costs incurred in 2002were related to that acquisition, and as such, do not have a correspondingexpense reflected in 2001.

 

PROVISIONFOR POSSIBLE LOAN LOSSES. The provision for possible loan losses for the ninemonths ended September 30, 2002 and 2001 were $75,000 and $840,000,respectively.  The provision in thefirst nine months of 2001 generally related to deterioration in the conditionof a single commercial credit as the economy began to soften in the localarea.  In 2002, the provision was theresult of management’s assessment of various asset quality factors, delinquencyrates, charge-offs, problem or “watched” assets and anticipated losses.  At September 30, 2002, the Company’snon-performing asset and delinquency statistics were higher than a year agoprimarily due to an impaired loan relationship (telecom), which was on nonaccrual at September 30, 2002 and December 31, 2001, which totaledapproximately $3.0 million for which there was approximately $2 million ofreserves specifically allocated to address exposures in this credit.  See “Liquidity and Capital Resources” foradditional discussion of credit quality statistics and trends.  The resulting level of loan loss reserveswere approximately 1.46% of period end loans at September 30, 2002 compared to1.34% and 1.08% at December 31, and September 30, 2001, respectively.

 

PROVISIONFOR INCOME TAXES. The Company’s effective income tax rate for nine months,September 30, 2002 was 37.3% compared to 36.3% for the nine months endedSeptember 30, 2001. The lower effective tax rate in comparison to statutoryrates for both periods is reflective of income earned by certain non-bank subsidiaries,which are taxed, for state tax purposes, at lower rates.  The 2001 effective rate was lower due to ahigher portion of the consolidated earnings being contributed by non-banksubsidiaries, which are taxed at lower rates for state purposes.

 

27

----

 

CUMULATIVEEFFECT OF CHANGE IN ACCOUNTING.  InDecember 2001, the Company elected to early adopt EITF 00-14 “ Accounting forCertain Sales Incentives.”  Thispronouncement provided additional guidance for the accounting for the cost ofincentives given to customers to open new deposit accounts with the Bank.  Under this guidance the cost of theincentives are charged to earnings on the date the account is opened.  This varies from the previous methodology usedby the Company, which was to defer this cost and amortize it to expense overthe expected life of the deposit account relationship.  The impact of the change in accounting isreflected on a net of tax basis as if it were applied at the beginning of theyear of adoption.  The cumulative effectof this change in accounting principle was to write off the unamortized portionof previously capitalized incentives as of January 1, 2001 totaling $298,000,net of tax.  This quarterly restatementdid not have a material impact on the quarterly results.  There was no cumulative effect of accountingchanges in 2002.

 

ASSET/LIABILITYMANAGEMENT/INTEREST RATE RISK

Theobjective of asset/liability management is to ensure that liquidity, capitaland market risk are prudently managed. Asset/liability management is governedby policies reviewed and approved annually by the Company’s Board of Directors(Board). The Board delegates responsibility for asset/liability management tothe corporate Asset/Liability Management Committee (ALCO). ALCO sets strategicdirectives that guide the day-to-day asset/liability management activities ofthe Company. ALCO also reviews and approves all major funding, capital andmarket risk-management programs. ALCO is comprised of members of management andexecutive management of the Company and the Bank.

 

Interestrate risk is the sensitivity of income to variations in interest rates overboth short-term and long-term time horizons. The primary objective of interestrate risk management is to control this risk within limits approved by theBoard and by ALCO. These limits and guidelines reflect the Company’s tolerancefor interest rate risk. The Company attempts to control interest rate risk byidentifying potential exposures and developing tactical plans to address suchpotential exposures. The Company quantifies its interest rate risk exposuresusing sophisticated simulation and valuation models, as well as a more simplegap analysis. The Company manages its interest rate exposures by generally usingon-balance sheet strategies, which is most easily accomplished through themanagement 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.

 

TheCompany uses simulation analysis to measure the exposure of net interest incometo changes in interest rates over a 1 to 5 year time horizon. Simulationanalysis involves projecting future interest income and expense from theCompany’s assets, liabilities, and off-balance sheet positions under variousinterest rate scenarios.

 

TheCompany’s limits on interest rate risk specify that if interest rates were toramp up or down 200 basis points over a 12 month period, estimated net interestincome for the next 12 months should decline by less than 10%. The followingtable reflects the Company’s estimated exposure, as a percentage of estimatednet interest income for the next 12 months, which does not materially differfrom the impact on net income, on the above basis:

 

| **Rate  Change********(Basis  Points)** |   | **Estimated Exposure as a********% of Net Interest  Income** |   |
|-----------------------------------------|--------|--------------------------------------------------------------|--------|
|                                    |   |                                                         |   |
| +200                                    |   | 2.9                                                          | %      |
| -200                                    |   | (0.5                                                         | )%     |

 

28

----

 

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.

 

The Company’s policy is to match, as well as possible, the interestrate sensitivities of its assets and liabilities.  Generally, residential mortgage loans currently originated by theCompany are 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 primarily1-year, 3-year, 5-year and 7-year adjustable rate mortgages and shorter term(generally 15-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.  Loans comprised approximately 47.7% of theaverage interest earning assets for the first nine months of 2002.  In the future, the Company intends tocontinue to be competitive in the residential mortgage market but plans toplace greater emphasis on home equity and commercial loans.  The Company also expects to become moreactive in pursuing wholesale opportunities to purchase loans.  During the first nine months of 2002 and2001, the Company acquired approximately $10,900,000 and $68,800,000,respectively, of residential first mortgages which are serviced by others.

 

TheCompany has also used mortgage-backed investments (typically with weightedaverage lives of five to seven years) as a vehicle for fixed and adjustablerate investments and as an overall asset/liability tool. These securities havebeen highly liquid given current levels of prepayments in the underlyingmortgage pools and, as a result, have provided the Company with greaterreinvestment flexibility.

 

Managementbelieves the current interest rate environment to be at the lower end of theinterest rate cycle.  As a result,management has been very selective in the types and terms of loans and investmentsthat are put on the Company’s balance sheet. As a result, the Company has shifted its investment strategy during thefourth quarter of 2001 and the first nine months of 2002 toward investmentsecurities with average lives closer to 2 to 4 years in order to put theCompany in a more favorable environment as rates eventually rise.  Most of the Company’s residential loanproduction has been sold in the secondary market as part of this strategy.

 

Duringthe first nine months of 2002, the Company continued to experience high levelsof prepayment activity in its mortgage-related assets (residential mortgagesand mortgage-backed securities) which comprise approximately 69.8% of theCompany’s balance sheet as of September 30, 2002.  At September 30, 2002, the Company had roughly $20,000,000 inshort-term or overnight investments which management used to payoff a$20,000,000 borrowing from the FHLB which had an interest rate of 6.56% at inOctober 2002.

 

Thelevel of the Company’s 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.  Management hasbeen aggressively promoting the Company’s core deposit products since the firstquarter of 1995, particularly checking and NOW accounts.  The success of this program has favorablyimpacted  the overall deposit growth todate, despite interest rate and general market pressures, and has helped theCompany to increase its customer base. However, given the historically low long-term economic interest rates,the Company and many of its peers have begun to see lower levels of growth intime deposits as compared to prior years as customers reflect their desire toremain liquid from current market conditions.

 

29

----

 

Managementbelieves that the markets for future time deposit growth, particularly withterms of 1 to 2 years, will remain highly competitive. Management will continueto evaluate future funding strategies and alternatives accordingly as well asto continue to focus its efforts on attracting core, retail depositrelationships.

 

TheCompany is also a voluntary member of the Federal Home Loan Bank (“FHLB”) ofBoston. This borrowing capacity assists the Company in managing itsasset/liability growth because, at times, the Company considers it moreadvantageous to borrow money from the FHLB of Boston than to raise moneythrough non-core deposits (i.e. certificates of deposit).  Borrowed funds totaled $195,165,000 atSeptember 30, 2002 compared to $201,549,000 at December 31, 2001.  These borrowings are primarily comprised ofFHLB of Boston advances and have primarily funded residential loan originationsand purchases as well as mortgage-backed investments and investment securities.

 

Also,the Company obtained funding in June 1998 through the issuance of TrustPreferred Securities which carry a higher interest rate than similar FHLBborrowings but at the same time are included as capital, without dilutingearnings per share and are tax deductible. See “Liquidity and CapitalResources” for further discussion.

 

Thefollowing table sets forth maturity and repricing information relating tointerest sensitive assets and liabilities at September 30, 2002. The balance ofsuch accounts has been allocated among the various periods based upon the termsand repricing intervals of the particular assets and liabilities. For example,fixed rate residential mortgage loans and mortgage-backed securities,regardless of “available for sale” classification, are shown in the table inthe time periods corresponding to projected principal amortization computedbased on their respective weighted average maturities and weighted average ratesusing prepayment data available from the secondary mortgage market.

 

Adjustablerate loans and securities are allocated to the period in which the rates wouldbe next adjusted. The following table does not reflect partial or fullprepayment of certain types of loans and investment securities prior toscheduled contractual maturity. Additionally, all securities or borrowingswhich are callable at the option of the issuer or lender are reflected in thefollowing table based upon the likelihood of call options being exercised bythe issuer on certain investments or borrowings in a most likely interest rateenvironment. Since regular passbook savings and NOW accounts are subject toimmediate withdrawal, such accounts have been included in the “Other SavingsAccounts” category and are assumed to mature within six months. This table doesnot include non-interest bearing deposits.

 

Whilethis table presents a cumulative negative gap position in the six month to fiveyear horizon, the Company considers its earning assets to be more sensitive tointerest rate movements than its liabilities. In general, assets are tied toincreases that are immediately impacted by interest rate movements whiledeposit rates are generally driven by market area and demand which tend to beless sensitive to general interest rate changes. In addition, other savingsaccounts and money market accounts are substantially stable core deposits,although subject to rate changes. A substantial core balance in these type ofaccounts is anticipated to be maintained over time.

 

30

----

 

At September 30, 2002

 

Repricing/MaturityInterval

 
|                                                                                              |   | **0-6  MOS.**               |   | **6-12  MOS.** |   | **1-2  YRS.** |   | **2-3  YRS.** |   | **3-5  YRS.** |   | **OVER********5 YRS.** |   | **TOTAL** |   |
|---------------------------------------------------------------------------------------------------|--------|-----------------------------|--------|----------------|--------|---------------|--------|---------------|--------|---------------|--------|------------------------|--------|-----------|--------|
|                                                                                              |   | **(Dollars  in thousands)** |   |
| Assets subject to interest  rate adjustment:                                                      |   |                        |   |           |   |          |   |          |   |          |   |                   |   |      |   |
| Short-term investments                                                                            |   | 22,244                      |   | —         |   | —        |   | —        |   | —        |   | —                 |   | 22,244    |   |
| Bonds and obligations                                                                             |   | 6,007                       |   | 7,334          |   | 31,401        |   | —        |   | —        |   | 35                     |   | 44,777    |   |
| Mortgage-backed investments                                                                       |   | 109,208                     |   | 48,355         |   | 34,762        |   | 26,535        |   | 39,120        |   | 92,707                 |   | 350,687   |   |
| Mortgage loans subject to  rate review                                                            |   | 67,555                      |   | 18,543         |   | 16,348        |   | 10,281        |   | 14,543        |   | 2,845                  |   | 130,115   |   |
| Fixed rate mortgage loans                                                                         |   | 82,364                      |   | 24,840         |   | 35,352        |   | 29,078        |   | 71,191        |   | 32,962                 |   | 275,787   |   |
| Commercial and other loans                                                                        |   | 13,231                      |   | 2,205          |   | 1,618         |   | 1,205         |   | 1,483         |   | 1,520                  |   | 21,262    |   |
| Total                                                                                             |   | 300,609                     |   | 101,277        |   | 119,481       |   | 67,099        |   | 126,337       |   | 130,069                |   | 844,872   |   |
| Liabilities subject to  interest rate adjustment:                                                 |   |                        |   |           |   |          |   |          |   |          |   |                   |   |      |   |
| Money market deposit  accounts                                                                    |   | 88,643                      |   | —         |   | —        |   | —        |   | —        |   | —                 |   | 88,643    |   |
| Savings deposits-term  certificates                                                               |   | 76,007                      |   | 48,927         |   | 31,577        |   | 20,045        |   | 11,180        |   | —                 |   | 187,736   |   |
| Other savings accounts                                                                            |   | 278,281                     |   | —         |   | —        |   | —        |   | —        |   | —                 |   | 278,281   |   |
| Borrowed funds                                                                                    |   | 37,574                      |   | 16,000         |   | 52,500        |   | —        |   | 13,500        |   | 75,591                 |   | 195,165   |   |
| Total                                                                                             |   | 480,505                     |   | 64,927         |   | 84,077        |   | 20,045        |   | 24,680        |   | 75,591                 |   | 749,825   |   |
| Guaranteed preferred  beneficial interest in  junior subordinated debentures                      |   | —                      |   | —         |   | —        |   | —        |   | —        |   | 12,219                 |   | 12,219    |   |
| Excess (deficiency) of rate  sensitive assets over  rate sensitive liabilities                    |   | (179,895                    | )      | 36,350         |   | 35,404        |   | 47,054        |   | 101,657       |   | 42,259                 |   | —    |   |
| Cumulative excess  (deficiency) of rate sensitive assets  over rate sensitive liabilities(1) |   | (179,895                    | )      | (143,546       | )      | (108,142      | )      | (61,088       | )      | 40,569        |   | 82,828                 |   | 110.9     | %      |
| Rate sensitive assets as a  percent of rate sensitive liabilities (cumulative)               |   | 62.6                        | %      | 73.7           | %      | 82.8          | %      | 90.6          | %      | 106.0         | %      | 110.9                  | %      | —    |   |

 

31

----

 

LIQUIDITYAND CAPITAL RESOURCES

 

Paymentsand prepayments on the Company’s loan and mortgage-backed investmentportfolios, sales of fixed rate residential loans, increases in deposits,borrowed funds and maturities of various investments comprise the Company’sprimary sources of liquidity. The Company is also a voluntary member of theFHLB of Boston and, as such, is entitled to borrow an amount up to the value ofits qualified collateral that has not been pledged to outside sources.Qualified collateral generally consists of residential first mortgage loans,securities issued, insured or guaranteed by the U.S. Government or itsagencies, and funds on deposit at the FHLB of Boston. Short-term advances maybe used for any sound business purpose, while long-term advances may be usedonly for the purpose of providing funds to finance housing. At September 30, 2002,the Company had approximately $371,836,000 in unused borrowing capacity that iscontingent upon the purchase of additional FHLB of Boston stock. Use of thisborrowing capacity is also impacted by capital adequacy considerations.

 

TheCompany regularly monitors its asset quality to determine the level of its loanloss reserves through periodic credit reviews by members of the Company’sManagement Credit Committee. The Management Credit Committee, which reports tothe Executive Committee of the Company’s Board of Directors, also works on thecollection of non-accrual loans and disposition of real estate acquired byforeclosure. The allowance for possible loan losses is determined by theManagement Credit Committee after consideration of several key factors including,without limitation, potential risk in the current portfolio, levels and typesof non-performing assets and delinquency, levels of potential problem loans,which generally have varying degrees of loan collateral and repayment issues,on the watched asset reports.  Workoutapproach and financial condition of borrowers are also key considerations tothe evaluation of non-performing loans.

 

Non-performingassets were $4,029,000 at September 30, 2002, compared to $3,959,000 atDecember 31, 2001, an increase of $70,000 or 1.8%. The Company’s percentage ofdelinquent loans to total loans was 1.10% at September 30, 2002 and 1.16% atDecember 31, 2001 as performing assets and delinquent loans were adverselyaffected by primarily one impaired loan relationship (telecom) which was alsoon non-accrual as of those dates.  Thisrelationship totaled approximately $3.3 million at both September 30, 2002 andDecember 31, 2001.  This loan also had aportion of the allowance for loan losses specifically allocated to addresspotential identifiable loss exposures totaling $2.1 million and $1.9 million atSeptember 30, 2002 and December 31, 2001, respectively.  A table of key credit quality statistics isas follows:

 

|                                                 |   | **September 30,********2002** |   | **December 31,********2001** |   | **September 30,********2001** |   |
|------------------------------------------------------|--------|-------------------------------|--------|------------------------------|--------|-------------------------------|--------|
|                                                 |   |                          |   |                         |   |                          |   |
| Non-performing Assets                                |   | $                             | 4,029  |                         | $      | 3,959                         |   | $ | 946 |   |
| All Delinquent Loans as a  Percentage of Total Loans |   | 1.10                          | %      | 1.16                         | %      | 0.32                          | %      |
| Loan Loss Reserve to  Non-performing Loans           |   | 154.40                        | %      | 138.50                       | %      | 787.30                        | %      |
| Non-performing Assets to  Total Assets               |   | 0.43                          | %      | 0.51                         | %      | 0.12                          | %      |
| Loan Loss Reserve to Total  Loans                    |   | 1.46                          | %      | 1.34                         | %      | 1.08                          | %      |
|                                                      |        |                               |        |                              |        |                               |        |  |  |  |

 

Managementbelieves that while delinquency rates and non-performing assets remain atrelatively low levels, after excluding the one large impaired relationshipnoted above, these factors are at historic lows, and at some point in thefuture some degree of further economic slow down is possible which in turn mayresult in future increases in problem assets and loan loss provisions.  Management continues to monitor the overalleconomic environment and its potential effects on future credit quality on anongoing basis.

 

32

----

 

AtSeptember 30, 2002, the Company had outstanding commitments to originate andsell residential mortgage loans in the secondary market amounting to$101,393,000 and $27,661,000, respectively. The Company also has outstanding commitments to grant advances underexisting home equity lines of credit amounting to $22,765,000.  Unadvanced commitments under outstanding commercialand construction loans totaled $23,003,000 as of September 30, 2002. TheCompany believes it has adequate sources of liquidity to fund thesecommitments.

 

TheCompany’s total stockholders’ equity was $57,602,000 or 6.1% of total assets atSeptember 30, 2002, compared with $39,151,000 or 5.1% of total assets atDecember 31, 2001.  The increase intotal stockholders’ equity of approximately $18,451,000 or 47.1% primarilyresulted from the issuance of stock ($10,852,000), an increase in the unrealizedgain on the market value of available for sale securities, net of taxes($3,228,000) and earnings ($5,385,000) offset, in part, by dividends paid orpayable ($1,014,000).

 

TheCompany issued $12,650,000 or 8.25% Trust Preferred Securities in June 1998.  Under current regulatory guidelines, trustpreferred securities are allowed to represent up to approximately 25% of theCompany’s Tier 1 capital with any excess amounts available as Tier 2 capital.As of September 30, 2002, all of these securities were included in Tier 1capital.

 

Bankregulatory authorities have established a capital measurement tool called “Tier1” leverage capital. A 4.00% ratio of Tier 1 capital to assets now constitutesthe minimum capital standard for most banking organizations and a 5.00% Tier 1leverage capital ratio is required for a “well-capitalized” classification. AtSeptember 30,  2002, the Company’s Tier1 leverage capital ratio was approximately 5.81%. In addition, regulatoryauthorities have also implemented risk-based capital guidelines requiring aminimum ratio of Tier 1 capital to risk-weighted assets of 4.00% (6.00% for“well-capitalized”) and a minimum ratio of total capital to risk-weightedassets of 8.00% (10.00% for “well-capitalized”). At September 30, 2002, the Company’sTier 1 and total risk-based capital ratios were approximately 12.05% and13.35%, respectively.  The Company iscategorized as “well-capitalized” under the Federal Deposit InsuranceCorporation Improvement Act of 1991 (F.D.I.C.I.A.). The Bank is alsocategorized as “well-capitalized” as of September 30, 2002.

 

OnOctober 1, 2002, the Financial Accounting Standards Board released Statement ofFinancial Accounting Standard (“SFAS”) No. 147, entitled “Acquisitions ofCertain Financial Institutions.”  SFAS147 permits financial institutions to reclassify the intangible assetassociated with bank branch acquisitions to goodwill.  This new standard, when applied to the Company’s 1995 acquisitionof its Holbrook branch, will increase annual income by approximately $37,000pre-tax.  Diluted earnings per sharewill increase by approximately $0.01 per annum.  The Company’s goodwill will be periodically reviewed forimpairment, as required by the new standard.

 

TheCompany will adopt SFAS 147 in the fourth quarter.  As required by the new standard, the Company will restate 2002reported earnings to reflect the non-amortization of goodwill.  As a consequence, for the first nine monthsended September 30, 2002, diluted earnings per share restated will be $1.59, ascompared to $1.60 previously reported.

 

CRITICAL ACCOUNTINGPOLICIES

 

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 materially changed during the quarter that would warrantfurther disclosure under these releases.

 

PROPOSEDACCOUNTING PRONOUNCEMENTS

 

None.

 

33

----

 

Item 3.    Quantitative And Qualitative DisclosuresAbout Market Risk

 

See“Management’s Discussion and Analysis - Asset/Liability Management.”

 

Item 4.    Controlsand Procedures

 

(a)          Disclosure controls andprocedures.  Within 90 days beforefiling this report, we evaluated the effectiveness of the design and operationof our disclosure controls and procedures. Our disclosure controls and procedures are the controls and otherprocedures that we designed to ensure that we record, process, summarize andreport in a timely manner the information we must disclose in reports that wefile with or submit to the SEC.  JamesP. McDonough, our President and Chief Executive Officer, and Robert M. Lallo,our Executive Vice President and Chief Financial Officer, supervised and participatedin this evaluation.  Based on thisevaluation, Mr. McDonough and Mr. Lallo concluded that, as of the date of theirevaluation, our disclosure controls and procedures were effective.

 

(b)         Internal controls.  Since the date of the evaluation describedabove, there have not been any significant changes in our internal accountingcontrols or in other factors that could significantly affect those controls.

 

Part II.    Other Information

 

Item 1.    Legal Proceedings.

 

TheCompany is a defendant in various legal matters, none of which is believed bymanagement 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.

 

None

 

Item 5.    Other Information.

Certificationunder Sarbanes-Oxley Act

 

Ourchief executive officer and chief financial officer have furnished to the SECthe certification

withrespect to this Report that is required by Section 906 of the Sarbanes-OxleyAct of 2002.

 
| 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. |

 

34

----

 
|   |     |   |                                                                                                                                                                                                                                                                                                                                                |
|--------|----------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 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  theCompany’s Registration Statement on  Form 8-A, effective January 31, 1997.                                                                                                                                                                    |
|   |     |   |                                                                                                                                                                                                                                                                                                                                                |
|   | 4.2      |   | Form  of Indenture between Abington Bancorp, Inc. and State Street Bank and Trust  Company incorporated by reference to Exhibit 4.1 of the Registration  Statement on Form S-2 of the Company and Abington Bancorp Capital Trust,  filed on May 12, 1998.                                                                                           |
|   |     |   |                                                                                                                                                                                                                                                                                                                                                |
|   | 4.3      |   | Form  of Junior Subordinated Debenture incorporated by reference to Exhibit 4.2 of  the Registration Statement on Form S-2 of the Company and Abington Bancorp  Capital Trust, filed on May 12, 1998.                                                                                                                                               |
|   |     |   |                                                                                                                                                                                                                                                                                                                                                |
|   | 4.4      |   | Form  of Amended and Restated Trust Agreement by and among the Company, State  Street Bank and Trust Company, Wilmington Trust Company and the  Administrative Trustees of the Trust incorporated by reference to Exhibit 4.4  of the Registration Statement on Form S-2 of the Company and Abington Bancorp  Capital Trust, filed on May 12, 1998. |
|   |     |   |                                                                                                                                                                                                                                                                                                                                                |
|   | 4.5      |   | Form  of Preferred Securities Guarantee Agreement by and between the Company and  State Street Bank and Trust Company incorporated by reference to Exhibit 4.6  of the Registration Statement on Form S-2 of the Company and Abington Bancorp  Capital Trust, filed on May 12, 1998.                                                                |
|   |     |   |                                                                                                                                                                                                                                                                                                                                                |
|   | *10.1(a) |   | Amended  and Restated Special Termination Agreement dated as of January 1997 among the  Company, the Bank and James P. McDonough incorporated by reference to the  Company’s Annual Report on Form 10-K for the year ended December 31, 1996  filed on March 31, 1997.                                                                         |
|   |     |   |                                                                                                                                                                                                                                                                                                                                                |
|   | *10.1(b) |   | Amendment  to Amended and Restated Special Termination Agreement, dated as of July 1,  1997 among the Company, the Bank and James P. McDonough, incorporated by  reference to the Company’s quarterly report on Form 10-Q for the second  quarter of 1997, filed on August 13, 1997.                                                           |
|   |     |   |                                                                                                                                                                                                                                                                                                                                                |
|   | *10.2    |   | Special  Termination Agreement dated as of November 2, 1998 among the Company, the  Bank and Kevin M. Tierney, incorporated by reference to the Company’s  quarterly report on Form 10-Q for the third quarter of 1998, filed on  November 12, 1998.                                                                                           |
|   |     |   |                                                                                                                                                                                                                                                                                                                                                |
|   | *10.3    |   | Special  Termination Agreement dated as of September 13, 2000 among the Company, the  Bank and Cynthia A. Mulligan, incorporated by reference to the Company’s  quarterly report on Form 10-Q for the third quarter of 2000, filed on  November 13, 2000.                                                                                      |
|   |     |   |                                                                                                                                                                                                                                                                                                                                                |
|   | *10.4(a) |   | Amended  and Restated Special Termination Agreement dated as of January 31, 1997 among  the Company, the Bank and Mario A. Berlinghieri incorporated by reference to  the Company’s Annual Report for the year ended December 31, 1996 on Form 10-K  filed on March 31, 1997.                                                                  |
|   |     |   |                                                                                                                                                                                                                                                                                                                                                |
|   | *10.4(b) |   | Amendment  to Amended and Restated Special Termination Agreement, dated as of July 1,  1997 among the Company, the Bank and Mario A. Berlinghieri, incorporated by  reference to the Company’s quarterly report on Form 10-Q for the second  quarter of 1997, filed on August 13, 1997.                                                        |
|   |     |   |                                                                                                                                                                                                                                                                                                                                                |
|   | *10.4(c) |   | Amendment  No. 2 to Amended and Restated Special Termination Agreement, dated as of  April 16, 1998, by and among the Company, the Bank and Mario A. Berlinghieri,  incorporated by reference to the Company’s quarterly report on Form 10-Q for  the first quarter of 1998, filed on May 8, 1998.                                             |
|   |     |   |                                                                                                                                                                                                                                                                                                                                                |
|   | *10.5    |   | Abington  Bancorp, Inc. Incentive and Nonqualified Stock Option Plan, as amended and  restated to reflect holding company formation incorporated by reference to  the Company’s Annual Report for the year ended December 31, 1996 on Form 10-K  filed on March 31, 1997.                                                                      |

 

 

35

----

 

 

 
|   |      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--------|-----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | *10.6     |   | Senior  Management Incentive Plan, incorporated by reference to the Company’s Annual  Report for the year ended December 31, 1999 on Form 10-K filed on March 28,  2000.                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | *10.7     |   | Revised  Long Term Performance Incentive Plan dated January 2000 incorporated by  reference to the Company’s Annual Report for the year ended December 31, 1999  on Form 10-K filed on March  28, 2000.                                                                                                                                                                                                                                                                                                                                                                                |
|   |      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | 10.8(a)   |   | Lease  for office space located at 538 Bedford Street, Abington, Massachusetts  (“lease”), used for the Bank’s principal and administrative offices dated  January 1, 1996 incorporated by reference to the Company’s Annual Report for  the year ended December 31, 1996 on Form 10-K filed on March 31, 1997.  Northeast Terminal Associates, Limited owns the property. Dennis E. Barry and  Joseph L. Barry, Jr., who beneficially own more than 5% of the Company’s  Common Stock, are the principal beneficial owners of Northeast Terminal  Associates, Limited. |
|   |      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | 10.8(b)   |   | Amendment  to Lease dated December 31, 1997, incorporated by reference to the Company’s  Annual Report for the year ended December 31, 1997 on Form 10-K filed on  March 25, 1998.                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | 10.9      |   | Dividend  Reinvestment and Stock Purchase Plan is incorporated by reference herein to  the Company’s Registration Statement on Form S-3, effective January 31, 1997.                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | *10.10    |   | Abington  Bancorp, Inc. 1997 Incentive and Nonqualified Stock Option Plan, incorporated  by reference herein to Appendix A to the Company’s proxy statement relating  to its special meeting in lieu of annual meeting held on June 17, 1997, filed  with the Commission on April 29, 1997.                                                                                                                                                                                                                                                                                                 |
|   |      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | *10.11(a) |   | Special  Termination Agreement dated as of July 1, 1997 among the Company, the Bank  and Robert M. Lallo, incorporated by reference to the Company’s quarterly  report on Form 10-Q for the second quarter of 1997, filed on August 13, 1997.                                                                                                                                                                                                                                                                                                                                               |
|   |      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | 10.11(b)  |   | Amendment  No. 1 to Special Termination   Agreement, dated April 16, 1998, by and among the Company, the Bank  and Robert M. Lallo, incorporated by reference to the Company’s quarterly  report on Form 10-Q for the first quarter of 1998, filed on May 8, 1998.                                                                                                                                                                                                                                                                                                                     |
|   |      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | *10.12    |   | Merger  Severance Benefit Program dated as of August 28, 1997, incorporated by  reference to the Company’s Quarterly Report on Form 10-Q for the third  quarter of 1997, filed on November 15, 1997.                                                                                                                                                                                                                                                                                                                                                                                        |
|   |      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | *10.13    |   | Supplemental  Executive Retirement Agreement between the Bank and James P. McDonough dated  as of August 23, 2001, incorporated by reference to the Company’s quarterly  report on Form 10-Q for the third quarter of 2001, filed on November 13,  2001.                                                                                                                                                                                                                                                                                                                                    |
|   |      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | *10.14    |   | Deferred  Stock Compensation Plan for Directors, effective July 1, 1998 incorporated by  reference to Appendix A to the Company’s proxy statement (schedule 14A) for  its 1998 Annual Meeting, filed with the Commission on April 13, 1998.                                                                                                                                                                                                                                                                                                                                                 |
|   |      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | *10.15    |   | Special  Termination Agreement dated as of February 7, 2000 among the Company, the  Bank and Jack B. Meehl, incorporated by reference to the Company’s Annual  Report for the year ended December 31, 1999 on Form 10-K filed on March 28,  2000.                                                                                                                                                                                                                                                                                                                                           |
|   |      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | *10.16    |   | Abington  Bancorp, Inc. 2000 Incentive and Nonqualified Stock Option Plan, incorporated  by reference herein to Appendix A to the Company’s proxy statement relating  to its annual meeting held on May 16, 2000, filed with the Commission on  April 13, 2000.                                                                                                                                                                                                                                                                                                                             |
|   |      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | *10.17    |   | Abington  Bancorp, Inc. Former Director Advisory Board Service Plan, included herein.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | *10.18    |   | Defined  Contribution Supplemental Executive Retirement Agreement between the Bank and  Kevin M. Tierney, Sr. dated July 26, 2001, incorporated by reference to the  Company’s quarterly report on Form 10-Q for the second quarter of 2001, filed  on August 10, 2001.                                                                                                                                                                                                                                                                                                                     |

 

 

36

----

 

 
|                      |                                                                                                                                                                                  |   |                                                                                                                                                                                                                                                                                                                                                                         |
|---------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      | *10.19                                                                                                                                                                                |   | Defined  Contribution Supplemental Executive Retirement Agreement between the Bank and  Robert M. Lallo dated July 26, 2001, incorporated by reference to the  Company’s quarterly report on Form 10-Q for the second quarter of 2001, filed  on August 10, 2001.                                                                                                       |
|                      |                                                                                                                                                                                  |   |                                                                                                                                                                                                                                                                                                                                                                         |
|                      | *10.20                                                                                                                                                                                |   | Payments  Agreement dated as of April 10, 2002 by and among the Company, Massachusetts  Fincorp, Inc. and The Massachusetts Co-operative Bank and Paul C. Green,  incorporated by reference to the Company’s Registration Statement on Form S-4  filed on May 31, 2002.                                                                                                 |
|                      |                                                                                                                                                                                  |   |                                                                                                                                                                                                                                                                                                                                                                         |
|                      | *10.21                                                                                                                                                                                |   | Payments  Agreement dated as of April 10, 2002 by and among the Company, Massachusetts  Fincorp, Inc. and The Massachusetts Co-operative Bank and Anthony A.  Paciulli, incorporated by reference to the Company’s Registration Statement  on Form S-4 filed on May 31, 2002.                                                                                           |
|                      |                                                                                                                                                                                  |   |                                                                                                                                                                                                                                                                                                                                                                         |
|                      | *10.22                                                                                                                                                                                |   | Consulting  Agreement dated as of April 10, 2002 between the Company and Paul C. Green,  incorporated by reference to the Company’s Registration Statement on Form S-4  filed on May 31, 2002.                                                                                                                                                                          |
|                      |                                                                                                                                                                                  |   |                                                                                                                                                                                                                                                                                                                                                                         |
|                      | *10.23                                                                                                                                                                                |   | Employment  Agreement dated as of April 10, 2002 by and between the Bank and Anthony A.  Paciulli, incorporated by reference to the Company’s Registration Statement  on Form S-4 filed on May 31, 2002.                                                                                                                                                                |
|                      |                                                                                                                                                                                  |   |                                                                                                                                                                                                                                                                                                                                                                         |
|                      | **10.24                                                                                                                                                                               |   | Lease  for office space located at Weymouth Woods Corporate Center 97 Libbey  Industrial Parkway, Weymouth, Massachusetts (“lease”), used for the Bank’s  principal and administrative offices dated March 29, 2002 incorporated by  reference to the Company’s quarterly report on Form 10-Q for the second  quarter of 2002, filed on August 14, 2002. |
|                      |                                                                                                                                                                                  |   |                                                                                                                                                                                                                                                                                                                                                                         |
|                      | *10.25                                                                                                                                                                                |   | Special  Termination Agreement dated as of October 1, 2002 by and between the Bank and  Donna L. Thaxter, included herein.                                                                                                                                                                                                                                                   |
|                      |                                                                                                                                                                                  |   |                                                                                                                                                                                                                                                                                                                                                                         |
|                      | *10.26                                                                                                                                                                                |   | Special  Termination Agreement dated as of October 24, 2002 by and between the Bank  and Julie Jenkins, included herein.                                                                                                                                                                                                                                                     |
|                      |                                                                                                                                                                                  |   |                                                                                                                                                                                                                                                                                                                                                                         |
|                      | 11.1                                                                                                                                                                                  |   | A  statement regarding the computation of earnings per share is included in Note  E to Unaudited Consolidated Financial Statements included in this Report.                                                                                                                                                                                                                  |
|                      |                                                                                                                                                                                  |   |                                                                                                                                                                                                                                                                                                                                                                         |
|                      | 99.1                                                                                                                                                                                  |   | Certification  required by Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                    |
|                      |                                                                                                                                                                                  |   |                                                                                                                                                                                                                                                                                                                                                                         |
| (b)  Reports on Form 8-K. |
|                      |                                                                                                                                                                                  |   |                                                                                                                                                                                                                                                                                                                                                                         |
|                      | The  Company filed a report on Form 8-K on July 1, 2002 to report that it had  dismissed Arthur Andersen LLP and engaged Pricewaterhouse Coopers LLP as its  independent accountants. |
|                           |                                                                                                                                                                                       |        |                                                                                                                                                                                                                                                                                                                                                                              |  |  |

 

----

*Management contract or compensatory plan or arrangement.

**Certain portions of this exhibit have been omitted pursuant to a request forconfidential treatment filed with the Securities and Exchange Commission.

 

37

----

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Company hasduly caused this report to be signed on its behalf by the undersiged thereuntoduly authorized.

 
|                    | ABINGTON  BANCORP, INC. |   |
|-------------------------|-------------------------|--------|
|                    | (Company)               |   |
|                    |                    |   |
|                    |                    |
| Date: November 14, 2002 | By:                     | /s/    | James P. McDonough |   |
|                    |                    |   | James  P. McDonough |
|                    |                    |   | President and Chief  Executive Officer |
|                    |                    |   |
|                    |                    |   |
| Date: November 14, 2002 | By:                     | /s/    | Robert M. Lallo |   |
|                    |                    |   | Robert M. Lallo |   |
|                    |                    |   | Treasurer and Chief  Financial Officer |   |
|                    |                    |   | (Principal Financial  Officer) |   |
|                    |                    |   |   |   |
|                    |                    |   |   |
|                    |                    |   |   |
|                    |                    |   |
|                         |                         |        |  |  |  |  |  |

 

38

----

 

**CERTIFICATIONS**

 

I,James P. McDonough, certify that:

 

1.     I have reviewed thisquarterly report on Form 10-Q of Abington Bancorp, Inc.;

2.               Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

3.               Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

4.               Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

5.               Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

6.               Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
|                    |   |   |
|-------------------------|--------|--------|
| Date: November 14, 2002 | By:    | /s/    | James P. McDonough |   |
|                    |   |   | James P. McDonough |
|                    |   |   | President  and Chief Executive Officer |

 

39

----

 

I,Robert M. Lallo, certify that:

 

1.               Ihave reviewed this quarterly report on Form 10-Q of Abington Bancorp;

2.               Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

3.               Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

4.               Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

5.               Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

6.               Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
|                          |   |   |
|-------------------------------|--------|--------|
| Date:  November 14, 2002 | By:    | /s/    | Robert M. Lallo |   |
|                          |   |   | Robert M. Lallo |
|                          |   |   | Executive  Vice President and  Chief Financial Officer |

 

40

----